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GOP State Officials Push High Court to Limit Congress’ Tax Power - John Woolley, Bloomberg ($):
Seventeen Republican attorneys general urged the US Supreme Court to conclude that Congress’ power to tax income doesn’t extend to unrealized gains.
The officials, led by West Virginia Attorney General Patrick Morrisey, filed an amicus brief Wednesday in the case of married couple Charles and Kathleen Moore, who argue Congress doesn’t hold the authority to tax them as shareholders of an Indian farming equipment company because the couple hadn’t realized their foreign earnings.
The Supreme Court accepted the case in June, sparking speculation from tax practitioners that a Moore victory could significantly disrupt the country’s international tax regime.
Revenue estimates:
How the Moore Supreme Court Case Could Reshape Taxation of Unrealized Income – Daniel Bunn, Alan Cole, William McBride, and Garrett Watson, Tax Foundation:
Background:
Prior to the Tax Cuts and Jobs Act (TCJA) of 2017, profits returning from a foreign jurisdiction to U.S. shareholders would face the 35 percent corporate tax rate (less any relevant foreign tax credits). This system had many downsides, including the fact that it encouraged U.S. companies to keep earnings…
[T]he TCJA imposed a deemed repatriation (§965)—a one-time inclusion of accumulated foreign earnings from the past 30 years, which had previously benefited from deferral. This was achieved by adding these deferred earnings to U.S. taxable income, essentially treating the earnings as if they were repatriated…
The policy provided a deduction that depended on how the earnings were used offshore. The structure of the deduction led to two different tax rates on foreign earnings: 15.5 percent applied to foreign earnings held in cash and 8 percent to other earnings held in illiquid assets.
The plaintiffs’ main claim is that the tax is unconstitutional because it applies to ‘unrealized’ income (in this case, foreign earnings that were not distributed to them) and that it applies retroactively to past earnings amounting to property, contravening the 16th Amendment and subsequent case law generally requiring that income be ‘clearly realized’ before it is taxed.
Money question:
If the Supreme Court strikes down the entirety of the deemed repatriation for corporate and noncorporate taxpayers, we estimate this would reduce revenue by about $346 billion over the next 10 years, including a refund of tax payments made from 2018 to 2023…
If the Supreme Court’s decision more narrowly strikes down the deemed repatriation tax for pass-through firms and individuals only, we estimate that this would reduce overall revenue collections by about $3.5 billion over the next 10 years inclusive of payments made since 2018.
Congressional tax leaders are closely monitoring this case:
Wyden Statement on Supreme Court Hearing Moore v. United States – Senate Finance Chairman Ron Wyden (D-Ore.):
If the Republicans on the Supreme Court take the petitioners’ side, they’d be handing a massive windfall to multinational corporations and could potentially lock in a right for billionaires to opt out of paying anything remotely close to a fair share in taxes.
Case timing:
Moore v. United States – Ballotpedia:
The Supreme Court will begin hearing cases for the term on October 2, 2023. The court's yearly term begins on the first Monday in October and lasts until the first Monday in October the following year. The court generally releases the majority of its decisions in mid-June.
This subject occupies a lot of blog space because it will likely be a really big deal no matter how the case is decided.
Senators Begin Early Bipartisan Tax Talks, Seek House GOP Buy-In - Samantha Handler, Bloomberg:
The leading lawmaker on the Senate Finance panel Thursday called for cooperation with House colleagues to push through a bipartisan tax package instead of one advanced by House Republicans in June.
Senate Finance Chair Ron Wyden (D-Ore.) said the House will need to show a willingness to come together on a compromise bill, not the GOP legislation that advanced out of the Ways and Means Committee early this summer.
Eide Bailly's coverage on that legislation is here.
The legislation that Senator Wyden is talking about would include R&D expensing, expand the 163(j)-interest deduction, and up Bonus Deprecation to 100%. Lawmakers have been trying to pass this bill for over a year and one hurdle continues to block it:
The challenge now is the same one that’s plagued bipartisan tax deal talks over the past year—how to balance the Democrats’ child tax credit with the expired business tax breaks, Wyden and other senators said in interviews at the Capitol this week.
When I was a reporter there were some lawmakers who would talk to the press when their discussions with fellow lawmakers were not going well. I can’t help but wonder if this is such a moment. Wyden spoke to the press and "called for cooperation with House colleagues," according to the article. If talks were copacetic, why publicly call for cooperation?
Capitol Hill Recap: They’re Back! – Jay Heflin, Eide Bailly:
Several tax insiders – including key lawmakers and staff who craft tax legislation as well as top tax lobbyists – are not optimistic that Congress will pass a large tax bill this year.
Of course, the trajectory for the tax bill could change. That's why folks constantly monitor Congress.
Manufacturing, Energy Security Next Focus of Tax-and-Climate Law - Caleb Harshberger, Bloomberg ($):
The next phase of the Inflation Reduction Act clean energy provisions will focus on boosting manufacturing and energy security, Treasury officials said Thursday.
By the end of the year, Treasury will issue guidance on advanced manufacturing credits for green energy components, credits for hydrogen and sustainable aviation fuels, and clarity on domestic and allied sourcing incentives for electric vehicle components—which are slated to take effect in 2024 for battery components and 2025 for critical minerals, Deputy Secretary of the Treasury Wally Adeyemo and Assistant Secretary for Tax Policy Lily Batchelder said in a call with reporters Thursday.
Related:
Spiraling Offshore Wind Costs Show Limits of Biden Inflation Act - Will Wade and Jennifer Dlouhy, Bloomberg ($):
The US offshore wind industry, banking on a big boost from the landmark Inflation Reduction Act, has found itself face-to-face with a major hurdle that’s been right there in the name all along: inflation.
In fact, the law might even be making it worse.
More than 10 gigawatts of offshore wind projects along the US East Coast — the equivalent of roughly 10 nuclear power reactors — are at serious risk as higher costs force developers to re-crunch the numbers for proposals originally modeled years ago, before a runup in interest rates and material costs. Orsted A/S, the Danish wind giant, said this week it’s prepared to walk away from projects unless it gets even more government aid. Other developers are already paying tens of millions in penalties to exit contracts they say no longer make financial sense.
And the hits keep coming:
Direct-Pay Provision Could Be Ripe for Abuse, Attorney Predicts – Fred Stokeld, Tax Notes ($). “The direct-pay election for energy credits enacted as part of the Inflation Reduction Act is likely to be of audit interest to the IRS and has the potential for abuse, one tax attorney predicted.”
‘I think anytime you sort of turn on the money-for-nothing tap, we’ll see people who will find some way to take in 10 times the money that they should get,’ John M. Colvin of Colvin + Hallett said September 7 on a webcast sponsored by American Law Institute Continuing Professional Education.
IRS, With AI Help, Readies Audits of Large Hedge Funds, Real Estate Partnerships – Richard Rubin, Wall Street Journal ($):
The Internal Revenue Service this month will begin auditing 75 large partnerships, including hedge funds and real-estate firms, as the tax agency tries to build its case for keeping what is left of a pot of money Congress gave it last year.
IRS Commissioner Danny Werfel said the agency used artificial intelligence to help select the companies, which it can’t name publicly. They average $10 billion in assets and will receive formal notice of the audits in the coming weeks.
The IRS press release is here.
Taxpayers Sold Bogus ERC Claims May Face Troubled Waters – Lauren Loricchio and Nathan Richman, Tax Notes ($):
The IRS has repeatedly warned taxpayers about ERC-related scams in which promoters ask for large upfront charges or fees that are contingent on the amount of the refund received by the employer. The promoters sometimes fail to inform employers that wage deductions claimed on their federal tax returns must be reduced by the credit amount.
Some claims are outright fraudulent, while others are merely inaccurate. For example, the Justice Department arrested a northern New Jersey return preparer in July on accusations that he had prepared over 1,300 false tax returns seeking $124 million in fraudulent ERCs.
IRS Must Update Flagged Danger Accounts Faster, Watchdog Says - Caleb Harshberger, Bloomberg ($). “The IRS should more quickly update the accounts of potentially dangerous taxpayers in response to agency employees’ reports of assaults or threats, the Treasury Inspector General for Tax Administration said in a report released Thursday.”
The report is here.
IRS Seeks Comments on Estate, Generation Skipping Tax Form – Tax Notes ($). “The IRS has requested comments on Form 706, ‘United States Estate (and Generation-Skipping Transfer) Tax Return,’ and Schedule R-1, which used to be part of Form 706. Comments are due by November 6.”
Treasury May See Limits In Getting Foreign Digital Asset Info – Natalie Olivo, Law360 Tax Authority ($). “The U.S. Treasury Department may face practical hurdles in enforcing its proposed digital asset reporting rules against foreign trading platforms, but joining the OECD's cross-border information exchange system — which could help Treasury obtain offshore data — could entail its own complications.”
From the “Don't Poke the Bear” file:
New Corporate Minimum Tax Ushers In Confusion and a Lobbying Blitz – Alan Rappeport, New York Times. “At his State of the Union address this year, President Biden celebrated the fact that his new climate and tax law would no longer allow some of America’s largest corporations to pay zero in federal taxes.”
‘Because of the law I signed, billion-dollar companies have to pay a minimum of 15 percent,’ Mr. Biden said, referring to the Inflation Reduction Act of 2022. ‘God love them.’
The president is referring to the corporate minimum tax that is scheduled to take effect this year. But corporations will not go gently into the night.
[M]aking the tax operational has become a mammoth challenge for the Biden administration, which has faced intense lobbying from industries that could be on the hook for billions of dollars in new taxes. Those groups have been flooding the Treasury Department with letters asking for lenient interpretations of the law and trying to create new loopholes before their tax bills come due next year. Republican lawmakers have been trying to repeal the law while Democrats such as Senator Elizabeth Warren of Massachusetts have been urging Treasury Secretary Janet L. Yellen to enforce it strictly.
If business taxation is a forest, then corporate lobbyists are bears. Many of these accountants and lawyers (aka: Lobbyists) actually wrote the existing tax law. And the new corporate minimum tax has endangered corporations that the bear protects. Now, the bear is mad, which means a years-long fight will ensue haggling over tax minutia that government tax staffers will struggle to understand. In the end, the bear will collect a lot of fees and probably outmaneuver or outspend the government (aka: Poach staffers) as the legislative fight continues until the bear wins. The bear has all the time (and money) to argue its case forever.
Unless you want a drawn-out, costly, legislative battle, don’t poke the bear.
Happy Star Trek Day! Whether you’re a Trekkie or not, you have to admire its legacy. The original Star Trek lasted less than three years (from September 8, 1966, to June 3, 1969), but its legacy continues to this day.