Here’s a look at recent tax-related happenings on the Hill, including extended deadlines for appropriations bills, the status of tax-relief legislation, and the Senate filling the vacant IRS chief counsel position.
Lately on the Hill
Divided government is on full display as Congress has punted—once again—on government appropriations, passing another continuing resolution extending the deadlines to March 8 for appropriations for Agriculture, Interior, Energy-Water, Commerce-Justice-Science, Military Construction-VA, and Transportation-HUD, and March 22 for appropriations for Defense, Financial Services, Homeland Security, Labor-Health and Human Services-Education, Legislative Branch, and State and Foreign Operations.
The House did release the text of the first appropriations minibus bill, the Consolidated Appropriations Act, 2024, covering the first tranche of bills due March 8. In a press release from the Appropriations Committee, House Appropriations Chair Kay Granger (R-TX) expressed, “In recent years, spending on domestic priorities has skyrocketed, adding trillions to our national debt. The House Republican Conference made a commitment to change the trajectory of federal funding and put an end to wasteful spending, especially on initiatives that received billions of dollars outside of the normal appropriations process.” The next package due March 22 is viewed as the more difficult task, which includes funding for the IRS and healthcare.
The delay in passing appropriations bills may actually bode well for the potential passage of the Tax Relief for American Families and Workers Act of 2024 (Act) as the bills are some of the last potential legislative vehicles to attach the Act and pass it without further amendment from legislators. The additional time may provide members of Congress time to work through their differences concerning the Act. However, movement within the Senate has remained elusive as Republican members of the Finance Committee disapprove of the measure’s provision of refundable child tax credits. If an agreement on the Act cannot be obtained in time to attach to an appropriations bill, or the Federal Aviation Administration funding bill (also in consideration for extension), it may be likely that the Act will not receive further consideration until the post-November election “lame duck” session depending on the election results.
Sen. Mike Crapo (R-ID), the Senate Finance Committee ranking member, issued a statement concerning the Act. Crapo acknowledged frustrations with his failure to “rubber stamp” the Act as presently constituted, explaining his concerns with the Act’s provisions for the Child Tax Credit (CTC), “I remain concerned the CTC provisions undermine the work requirement and represent a significant shift – described by some Democrats as a down payment – to transform the CTC from primarily working family tax relief into a government subsidy.” Of particular concern to Crapo is the Act’s allowance for taxpayers to elect to use earned income from the prior taxable year to calculate the credit, potentially allowing individuals who did not work in the current taxable year to receive the credit. “[E]fforts to pressure the Senate to ‘take it or leave it’ and categorically dismiss a Senate regular order process have only amplified calls for changes and amendments. This was the risk of announcing a deal without my support and with no near-term path forward in the Senate,” Crapo chided.
After more than three years of vacancy, the Senate has filled the IRS chief counsel position by confirming Marjorie Rollinson on a 56-to-41 vote. In prepared comments by Sen. Ron Wyden (D-OR), Finance Committee chair, Rollinson’s tenure will begin with significant IRS initiatives already in the works, including implementation of the clean energy provisions of the Inflation Reduction Act and focused enforcement on high-income taxpayers. Commenting on her qualifications, Wyden stated, “First she served as Technical Deputy Associate Chief Counsel and then as Associate Chief Counsel, both times on international tax issues. And trust me, you don’t earn those job titles without real expertise in tax law, down to the finest details that leave most of us scratching our heads. All this experience is a big reason why she got bipartisan support in the Finance Committee.”
The Congressional Research Service (CRS) has analyzed hypothetical solvency measures for Social Security. This analysis references the 2023 annual report of the Social Security Board of Trustees, which projected its funds and assets will be insufficient to pay full benefits beyond 2034. The trustees provided four hypothetical options to maintain solvency through the 75-year projection period, including: an immediate payroll tax increase of 3.44%, an immediate benefit reduction of 21.3%, a delayed tax increase in 2034 of 4.15%, and a delayed benefit reduction in 2034 of 25%. The CRS’ report applies these hypothetical scenarios to a set of hypothetical persons of different income levels including very low, low, medium, high, and maximum and birth years including 1960, 1980, 2000, and 2020. The report concludes that delayed action scenarios result in a larger burden placed on the younger generations whereas immediate action would distribute the burden across all subject generations. Older generations may, however, may find it more difficult to respond to the changes to adjust work and savings behaviors.
Speaking to the simplification of filing administrative adjustment requests (AARs), Maria Dolan of the IRS Large Business and International Division stated, “It’s going to take time, but we hope to address a lot of these concerns that people have because it is confusing to figure out which forms you’re supposed to be filing depending on how you file your forms,” as reported by Tax Notes. Dolan continued, “So we’re trying to figure out how to make that process more efficient, not just for the IRS but for partnerships, [and] a lot more seamless from beginning to end.” The comments were made at a Federal Bar Association conference on March 1 and in reference to the many comments received by the IRS about the confusing filing process for AARs.
Noteworthy Decisions
Corporate Transparency Act requiring companies to report ownership information ruled unconstitutional by U.S. District Court. National Small Business United v. Janet Yellen, N.D. Alabama, No. 5:22-cv-01448-LCB, 3/1/2024.
U.S. District Court Judge Liles Burke ruled that a law in the Corporate Transparency Act requiring companies to report beneficial ownership information is unconstitutional. The law as of January 1, 2024 requires companies to report the identities and other information of their owners to the Financial Crimes Enforcement Network (FinCEN) in an effort to combat illicit financial activities. The ruling questioned the “nexus to any enumerated power” of Congress in enacting this law. It is important to note that the ruling only applies to the plaintiffs, but the potential legal proceedings as a result of this ruling could broaden the issue.
Establishing precedent, the U.S. Tax Court rules financing costs can be included in eligible basis when calculating low-income housing tax credits. 23rd Chelsea Associates, LLC v. Commissioner, No. 22382-19, 162 T.C. No. 3.
23rd Chelsea Associates, LLC (Chelsea) financed the construction of a residential rental property by a loan from a state agency through the issuance of bonds. For several years, Chelsea claimed the Section 42 low-income housing credit. The commissioner determined that for purposes of the credit, Chelsea has overstated the eligible basis of the residential property by including financing costs related to the issuance of bonds.
Section 42 does not define adjusted basis; therefore, the court looked to §263A and stated, “That section provides that ‘the direct costs of such property’ and ‘such property’s proper share of those indirect costs … part or all of which are allocable to such property’ must be ‘capitalized.’”
The commissioner argued §42 requires the building to be subject to the Modified Accelerated Cost Recovery System (MACRS) under §168 to qualify for the credit and that the financing costs should be capitalized into the loan subject to depreciation under §167. The court disagreed “the Commissioner overlooks the changes that Congress made in adopting “uniform capitalization rules” (including section 263A.)” The court held that the residential rental property is tangible property subject to wear and tear and eligible for MACRS under §168. It said, “The fact that [Chelsea’s] bond-financed loan from the [state agency] was not tangible property is irrelevant, because the related costs were indirect costs ‘incurred by reason of’ the [property’s] construction.”
Other Important Developments
IRS Technical Guidance
- Revenue Procedure 2024-15 addresses a public utility’s non-recognition of gross income when entering into a state legislative authorized transaction to recover certain costs through the issuance of debt instruments. Furthermore, the revenue procedure expands the definition of a “public utility” and changes the definition of “qualifying securitization.”
- On May 6, 2024, a public hearing on the proposed regulations REG-142338-07 will be held regarding excise taxes on taxable distributions made by a sponsoring organization and certain fund managers from a donor-advised fund.
Employee Retention Credit (ERC)
- In light of the IRS’ ongoing review of ERC claims, taxpayers who have claimed a 2020 ERC credit may desire to file a protective informal refund claim with the IRS before the statutory period for filing a 2020 income tax refund claim expires. The statutory period for filing an amended income tax return or claim for refund of income taxes for the 2020 tax year will soon be closing for many taxpayers. In the event the IRS later notifies the taxpayer of a full or partial disallowance of their ERC claim, the filing of an informal claim for refund now may preserve a taxpayer’s ability to then request a refund of income taxes paid on the ERC-related wage adjustment. Work with your tax advisor for more information, including how to file a protective refund claim. For more information about the IRS’ efforts surrounding the ERC, see IR-2024-21.
- IRS Tax Tip 2024-12 provides a link to the IRS’ free webinar on the ERC Voluntary Disclosure Program for employers who received their ERC claims in error, the ERC withdrawal process for employers whose claim has not yet been processed and would like to withdraw their claim, and information on the ERC moratorium on processing claims filed after September 14, 2023. The deadline to apply for the ERC Voluntary Disclosure Program is March 22, 2024.
Miscellaneous
- IR-2024-56 broadcasts the IRS’ new efforts to improve tax compliance among those taxpayers making $400,000 or more in over 125,000 instances where such taxpayers have not filed income tax returns. In these instances, the IRS has received third-party information reporting (such as 1099s and W-2s), but the income recipients failed to file an income tax return. CP59 notices are now being sent urging immediate action to avoid additional penalties, interest, and possible criminal prosecution. The IRS credits additional funding from the Inflation Reduction Act to support this effort, which it has not been able to pursue in the past due to budget constraints.
- IR-2024-55 announces relief for individuals and businesses affected by wildfires in certain areas of Washington state currently, including Spokane County. These taxpayers have until June 17, 2024 to file tax returns and make tax payments. The relief also applies to extensions, although any extension filed between April 15 and June 17 will have to be paper filed.
- FS-2024-05 issued by the IRS contains a fact sheet about the U.S. Department of Agriculture’s Discrimination Financial Assistance Program. This program is in response to the Inflation Reduction Act’s provision of financial assistance for farmers, ranchers, and forest landowners subject to discrimination by USDA farm lending before 2021.
- IR-2024-51 announces relief for individuals and businesses affected by severe storms and flooding in certain areas of California, currently including San Diego County. These taxpayers have until June 17, 2024 to file tax returns and make tax payments. The relief also applies to extensions, although any extension filed between April 15 and June 17 will have to be paper filed.
- IR-2024-50 notifies that the IRS will accept applications for the Low-Income Taxpayer Clinic matching grants from February 26 to April 10. These clinics provide low-income taxpayers services such as pro bono representation for disputes with the IRS and education for taxpayers whose primary language is not English. The IRS provides matching grants to qualifying organizations to develop, expand, or maintain a clinic.
Continued Coverage of the Inflation Reduction Act (IRA)
- The IRS is providing additional office hours to help entities register to take advantage of elective payment or credit transfers. Certain entities such as qualifying businesses, tax-exempt organizations, and state and local government entities can take advantage of IRA credits even though they do not have taxable income through elective payment or credit transfers.
This newsletter features developing content that is subject to change at any time. It does not constitute legal or tax advice. Consult your professional advisors prior to acting on the information set forth herein.