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Tax Law Roundup

current law developments in U.S. taxation

Senate Finance Issues Economic and Community Development Tax Reform Paper

Posted on By Steven R. Schneider Posted in Legislative, Tax reform

The Senate Finance Committee issued a tax reform option paper on Economic and Community Development.  This is their sixth tax reform option paper.  An outline of the reform options are as follows:

1.         HOUSING

A.        Gradually repeal the mortgage interest deduction

B.        Limit the mortgage interest deduction

C.        Convert the mortgage interest deduction to an above-the-line deduction

D.        Convert the mortgage interest deduction to a credit

E.         Phase out exclusion for capital gains on sale of principal residence

F.         Make permanent the deduction for mortgage insurance premium payments

G.        Extend exclusion from income for cancellation of certain home mortgage debt

H.        Repeal the Low-Income Housing Tax Credit (LIHTC)

I.          Replace the LIHTC with an equivalent reduction in tax on rental income

J.          Reform or expand the LIHTC

K.        Create a non-refundable tax credit for low-income renters

2.         STATE AND LOCAL FINANCING

A.        Limit or eliminate the deduction for state and local taxes

B.        Permanently extend the deduction for state and local sales tax

C.        Repeal the tax exemption on all governmental and private activity bonds

D.        Modify existing tax-exempt bonds

E.         Create a new, permanent direct subsidy for bonds for financing governmental capital projects

F.         Replace the exclusion for interest on state and local bonds with a direct subsidy for the issuer or a non-refundable tax credit for the investor

3.         TRIBAL FINANCING

A.        Modify tribal tax-exempt bonds

B.        Exempt certain tribal activities from taxation

C.        Clarify the general welfare exclusion doctrine for certain benefits provided by tribes to members

D.        Make permanent or expand temporary provisions

E.         Conform the definition of Indian and reservation for tax purposes

F.         Modify the adoption tax credit to allow Tribal Governments to determine whether a child has special needs

4.         COMMUNITY DEVELOPMENT

A.        Repeal the New Markets Tax Credit

B.        Extend and modify the New Markets Tax Credit

C.        Modify or eliminate the Historic Preservation Tax Credit

D.        Create a permanent tax relief package for individuals and businesses in Presidentially-declared national disaster areas

5.         STATE AND LOCAL TAX UNIFORMITY

A.        Exercise Federal authority to establish uniform rules among the states

B.        Authorize states to require out-of-state vendors to collect sales tax

C.        Reform prohibitions on certain state or local taxes

Model Notices Released for Health Care Exchanges and COBRA

Posted on By Sonia Macias Steele and Wayne H. Miller Posted in COBRA, Health Care Reform

The government just announced the release of two new model notices for employers relating to the upcoming health care exchange requirements.

Health Care Exchange Notice

One of the requirements of the Affordable Care Act for employers is to provide all employees with a notice about the new health care exchanges.  The notice is required for all new hires starting October 1 of this year, and must be provided within 14 days of hire.  For existing employees, the notice must also be given later this year (the date is expected to be set for late summer or early fall), but may be given now.  To facilitate employer compliance, the Department of Labor has just published a new model notice.  The model notice requires designation of a contact person on page 1 and information about your current health plan on the second and third pages.  According to the instructions, you may fill out the notice on-line and then print it out for reproduction and distribution.  Distribution may be accomplished in the same manner as initial COBRA notices are sent out, including electronically (if the requirements imposed by the DOL for electronic delivery are satisfied).

COBRA Election Notice

On a related note, the DOL has also published a new model COBRA election notice that includes a notification about the new health care exchanges as a possible alternative to electing COBRA coverage.  As with your current COBRA election notice, you’ll need to fill in the required information, and then print it out for reproduction and delivery.  Alternatively, if you are using a service company to administer COBRA for your health plans, you may want to contact the company to make sure that the most recent COBRA election notice is being used.

Further information about both notices is available from the DOL website.

Senate Finance Issues International Tax Reform Paper

Posted on By Steven R. Schneider Posted in General, International, Legislative, Tax reform

The Senate Finance Committee issued a tax reform option paper on international competitiveness.  This marks their fifth tax reform option paper.  An outline of the reform options are as follows:

 

 

REFORM OPTIONS

 I. BASE EROSION AND DEFERRAL

1. Tighten anti-base-erosion rules and reform the treatment of non-subpart F earnings

2. Strengthen the subpart F rules

3. Repeal deferral for CFCs

4. Strengthen thin-capitalization rules to limit base erosion through excessive debt financing

5. Strengthen rules against U.S. base erosion by foreign companies

II. FOREIGN TAX CREDIT AND SOURCING RULES 

1.    Further limit cross-crediting

2. Improve the sourcing of income rules

III. OTHER INTERNATIONAL BUSINESS REFORMS

1.    Repeal DISC provision

2. Reform passive foreign investment company (PFIC) rules

3. Reform effectively connected income rules

IV. NON-RESIDENT U.S. CITIZENS  

1. Provide an election to citizens who are long-term nonresident citizens to be taxed as nonresident aliens if they meet certain conditions

2.  Repeal the foreign-earned income exclusion

Max and Dave Launch Tax Reform Website to Solicit Comments

Posted on By Steven R. Schneider Posted in Legislative, Tax reform

Senate Finance Committee Chairman Max Baucus (D-Mont.) and House Ways and Means Chairman Dave Camp (R-Mich.) teamed up to launch TaxReform.gov, a new website dedicated to obtaining input from the American public on tax reform.  The website is developed in partnership with the Joint Committee on Taxation, and will serve as a platform for the American public to weigh in on tax reform.  The website also includes a library of various tax reform proposals.  In the first 12 hours of the website’s launch they have received over 1,000 submissions of comments.  The website also includes a link to follow “Max and Dave” on Twitter at @simplertaxes.

IRS Finds Non-Grantor Trust Passive Under Section 469 – Trustee Cannot Count Non-Fiduciary Activities

Posted on By John Grumbacher Posted in Deductions, General

In TAM 201317010, the IRS held that a non-grantor trust can satisfy the passive activity material participation standard only through the activities of its trustees, acting in their fiduciary capacities as trustees of the trust.  The IRS rejected Texas district court holding in The Mattie K. Carter Trust, which held that the activities of all employees of a non-grantor trust, whether for the benefit of the trust or otherwise, counted to determine material participation.  Although a TAM is merely the IRS’s opinion, it is particularly significant in light of the benefits of material participation for avoiding the new 3.8% net investment income tax under Section 1411.  For a discussion of the impact of this tax on trusts click here.

The Section 469 passive activity loss rules were enacted in 1986, but no regulations have ever been issued that describe how a non-grantor trust may materially participate in an activity owned by the trust.  The IRS’s position in the TAM is that the quantitative standards for participation (500 hours or 100 hours for certain significant participation activities, for example) only apply to individuals holding interests in an activity and are not available to a non-grantor trust.  Relying on legislative history, the IRS concludes that a non-grantor trust can only prove material participation in an activity by showing that the trustees of the trust, acting in their fiduciary capacities with respect to the trust, participated in the activity on a regular, continuous and substantial basis.  S. Rep. No. 99-313, at 735.  For this purpose, the IRS insists that activities of any employee or agent of the non-grantor trust must be ignored.

In The Mattie K. Carter Trust, the Court concluded that such a limited reading of the material participation test belied common sense and that, as an entity, the non-grantor trust could operate only through the activities of its trustees, employees and agents, all of whose activities should be taken into account in determining whether the trust met the regular, continuous and substantial basis criteria.  In that case, the Court held, in the alternative, that the trustees’ level of involvement as fiduciaries met the IRS’ regular, continuous and substantial criteria.  Thus, even ignoring the activities of employees and agents, the Court held that the trustees’ actions alone were sufficient in that case to meet the material participation standard.

 

Marketplace Fairness Sales Tax Passes Another Hurdle in Senate

Posted on By Steven R. Schneider Posted in General, Legislative, Real Estate, Sales Tax

On April 25, in a key 63-30 procedural vote, the Senate passed S. 743 (Marketplace Fairness Act of 2013).  The final Senate vote is set for May 6.    As currently drafted, the legislation will allow states to collect sales/use tax on internet retailers with gross sales over $1 million.  The ICSC shopping center trade association notes that this legislation is designed to “to create a fair and level playing field for all retailers whether they sell online, in a mall, or on Main Street.”  The ICSC has a dedicated website with the latest updates.       

  Presuming it passes the Senate it is expected to face more resistance in the House where the parallel bill is H.R. 684.   Similar legislation was introduced in 2011, but this 2013 version has gone farther than ever before and has led to a significant battle between Ebay and the team of Amazon and the brick-and-mortar retailers.

UPDATE:  This passed the full Senate on May 6 in a 69-27 vote and now moves to the House, where the prospects are less clear.

Court Agrees Moving to USVI Was Acceptable Tax Planning

Posted on By Elizabeth M. Norman Posted in General, Tax Shelters

In a significant taxpayer win, the Third Circuit in the Vento case overturned the lower court decision and respected a taxpayer’s move to the U.S. Virgin Islands (USVI) for purposes of taxing income under the more favorable rules applicable to the USVI.  A significant aspect of the case is that the Third Circuit distinguished between tax avoidance and tax evasion (which would undermine an argument for residency), finding that “taxpayer’s sincere desire to change his residency in order to take advantage of lawful tax incentives does not undermine his claim of bona fide residency.”  Because the specific case dealt with pre-2004 law, the specific favorable residency ruling is limited to U.S. residents who establish bona fide USVI residency prior to 2004.  However, the more significant broader implications of the case are that a U.S. federal appellate court specifically found that a taxpayer’s lawful tax avoidance motives simply did not prevent their ability to take advantage of a favorable tax rule and “there is nothing unlawful or deceitful” about the taxpayer’s actions.

Senate Finance Issues Third Paper on Tax Reform – Families, Education, and Opportunities

Posted on By Steven R. Schneider Posted in Legislative, Tax reform

On April 18, the Senate Finance Committee issued its third paper on tax reform called “Families, Education, and Opportunities”.  This is the third installment of the Sen. Baucus tax reform project where he believes tax reform is “very much alive and doable.”  The report addresses the following specific concerns about the taxation of families and education today:  complexity; work disincentives generally; work disincentives for primary caregivers and secondary earners; marriage incentives and disincentives; low bang-for-the-buck for tax incentives; increasing cost of higher education; duplication with spending programs; and general fairness.

The full 15-page report discusses various options such as eliminating, simplifying, or consolidating existing expenditures relating to child care and working parents.  The report also discusses ways to reduce work disincentives created by phase-outs of tax expenditures and means-tested transfer programs. On the marriage front, the report discusses options to reduce marriage penalties and/or bonuses for all, create parity for non-traditional households, or simply provide targeted marriage penalty relief.  Finally the report discusses seven different areas to reform education-related expenditures, including repealing, expanding, consolidating, and/or simplifying existing expenditures.

UPDATE: 

On May 6 the JCT released a 568-page Report To The House Committee On Ways And Means On Present Law And Suggestions For Reform Submitted To The Tax Reform Working Groups (the Report). The Report summarizes current law, selected tax reform proposals, findings of the working groups, and various comments submitted.

Renewable Energy Production Tax Credit – IRS Guidance On When Construction Begins

Posted on By Steven R. Schneider Posted in Energy, Green, Procedure

Under 2012 legislation, a “qualified facility” is eligible to receive either a renewable electricity production tax credit or energy investment tax credit, if construction of such facility begins before January 1, 2014.  In new Notice 2013-29 the IRS provides guidelines and a safe harbor to determine when construction has begun on such a facility.  For purposes of sections 45(d) and 48(a)(5), qualified facilities include wind facilities, closed-loop biomass facilities, open-loop biomass facilities, geothermal facilities, landfill gas facilities, trash facilities, hydropower facilities, and marine and hydrokinetic facilities.

A taxpayer may establish the beginning of construction by either (1) starting physical work of a significant nature or (2) establish the beginning of construction by meeting the safe harbor provided in Notice 2013-29.  For example, in the case of a facility for the production of electricity from a wind turbine, on-site physical work of a significant nature (option 1) begins with the beginning of the excavation for the foundation, the setting of anchor bolts into the ground, or the pouring of the concrete pads of the foundation.  For the option 2 safe harbor construction of a facility will generally be considered as having begun before January 1, 2014, if (1) a taxpayer pays or incurs five percent or more of the total cost of the facility before January 1, 2014, and (2) thereafter, the taxpayer makes continuous efforts to advance towards completion of the facility (subject to limitations as provided under Notice 2013-29).

Senate Finance Issues Second Paper on Tax Reform – Business Investment and Innovation

Posted on By Steven R. Schneider Posted in General, Legislative, Tax reform

The Senate Finance Committee had quickly issued its second paper on tax reform called “Business Investment and Innovation.”  This is part of a broader project being led by Sen. Baucus on tax reform and follows on the heels of the prior paper on simplification.  The paper discusses options for reforming the rules regarding business investment, tax accounting, and innovation, with special attention to smaller businesses.  Specific broad principles for reform in this area include: simplify to reduce compliance cost; reducing differences in effective tax rates across industries and business activities; ensure that incentives are effective and efficient; and provide businesses with greater certainty in the tax rules.  The paper then discusses specific reform options and includes links to detailed underlying studies to the extent others have addressed the topic. 

A representative sample of suggested reform options are listed below:

  • Eliminate the requirement that smaller businesses depreciate and amortize investments
  • Revise the depreciation rules for tangible assets to more closely track their economic lives
  • Revise the amortization rules for intangible assets to more closely track the economic lives of intangible assets
  • Repeal the domestic production deduction (Section 199)
  • Allow the R&D credit to expire or make the R&D credit permanent, while simplifying and/or better targeting it
  • Repeal last-in, first-out (LIFO) inventory accounting
  • Repeal the lower of cost or market inventory rules
  • Repeal, tighten or simplify the like-kind exchange deferral rules
  • Match income and statutory accounting (life insurance companies)