Here’s a look at recent tax-related happenings on the Hill, including Republicans preparing for possible reconciliation on tax legislation and a U.S. Supreme Court ruling in favor of the IRS.
Lately on the Hill
Republicans Prepare for Reconciliation to Pass Tax Legislation
The Republican tax teams and working groups formed in the House Ways and Means Committee and the Senate Finance Committee in preparation for a 2025 combative contest with their congressional counterparts apparently serve two purposes — to receive public input to identify legislative solutions and to educate newer members on the reconciliation process.
Reconciliation is a legislative mechanism that allows lawmakers to enact tax, spending, and debt limit legislation with a simple majority, thereby avoiding the need for 60 votes in the Senate. The annual congressional budget resolution sets budgetary goals and reconciliation instructions directing various committees to propose legislation to meet them. The proposed legislation is then consolidated into a single reconciliation bill and voted on by both chambers of Congress, only requiring a majority vote to pass. The president must then sign or veto the bill.
Reconciliation has been used for significant legislation by both parties in recent years when controlling the White House, the House of Representatives, and a slight majority in the Senate. Examples include the Republican-crafted Tax Cuts and Jobs Act of 2017 (TCJA) and the Democratic Inflation Reduction Act of 2022.
While Democrats have recently been through the reconciliation process and its unique rules, it has been longer for Republicans who also have seen a major shift in their ranks. According to Tax Notes, Democrats have retained 11 of the 16 members who were part of the Ways and Means Committee in 2017 as compared to five of 25 Republicans. Likewise, 11 of the 13 Democrats that served on the Senate Finance Committee in the same year still occupy their seats while only six of 14 Republicans remain.
Jonathan Goldman, senior tax counsel to Finance Committee Democrats stated, “Our members have been through this process relatively recently in a couple of iterations, and that muscle memory helps.”
Republicans want their members to be prepared if the elections go their way. Senate Finance Committee Member Chuck Grassley (R-IA) said of the working groups, “They’re very necessary. Just in case we’re in the majority, in case we have a trifecta the next two years. We’ve got to be ready for the important work we have to do, starting right away on day 1 of 2025.”
In May, the Ways and Means Committee announced that written comments to the tax teams may be submitted to RepublicanTaxTeams@mail.house.gov. Comments will be accepted through Tuesday, October 15, 2024.
Noteworthy Decisions
The U.S. Supreme Court unanimously rules in favor of the IRS, holding that a corporation’s obligation to redeem shares upon the death of a shareholder is not an obligation that reduces the corporation’s value for estate tax purposes. Connelly v. United States, U.S., No. 23-146, June 6, 2024.
Thomas Connelly, as the executor of his brother Michael Connelly’s estate and sole remaining shareholder of the corporation he owned with his brother, valued the company at $3.86 million at the time of his brother’s passing. The IRS disagreed with the valuation because it did not include $3 million of life insurance proceeds received by the company, valuing the company at $6.86 million. Connelly reasoned that the life insurance proceeds should be offset by the liability the company has to redeem the deceased brother’s shares, resulting in a net $0 inclusion to the valuation. The Eighth Circuit previously held that the life insurance proceeds should be included in the value of the estate, not reduced by the redemption obligation.
The opinion, delivered by Justice Clarence Thomas, agreed that the company should be valued at the higher $6.86 million, stating, “An obligation to redeem shares at fair market value does not offset the value of life-insurance proceeds set aside for the redemption because a share redemption at fair market value does not affect any shareholder’s economic interest.” The decision went on to explain that the “whole point” of the valuation for estate tax purposes is to determine the value of the shares at the time the shareholder died “before [the company] spent $3 million on the redemption payment,” invoking Section 2033, which provides, in its entirety, “The value of the gross estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death.”
Addressing Thomas’ assertion that such a decision would make succession planning more difficult since the company would have needed a much larger insurance policy to satisfy the redemption at fair market value, the opinion said, “True enough, but that is simply a consequence of how the Connelly brothers chose to structure their agreement. There were other options.” The decision explained the possibility of the brothers purchasing life insurance on each other, rather than being purchased by the company, but later admitted, “every arrangement has its own drawbacks” and “it would have created its own tax consequences.”
Taxpayer files an appeal in the Fifth Circuit, challenging Soroban ruling on limited partners. Sirius Solutions, LLLP v. Commissioner, No. 24-60240.
The limited partner exception of §1402(a)(13) relating to the exclusion of distributive shares of partnership income or loss in net earnings subject to self-employment tax does not apply to a partner who is limited in name only, the U.S. Tax Court ruled in late 2023 in Soroban Capital Partners LP v. Commissioner. Although the partner may be considered limited in a state law limited partnership, a functional analysis test must be applied to determine if, in fact, a partner is a limited partner for purposes of this exception.
Sirius disagrees with the Soroban ruling but has conceded that the functional analysis test would not qualify its partners as limited partners. In consequence of the Soroban ruling, Sirius requested in its own case with the Tax Court that a decision be made in the IRS’ favor so it could proceed with an appeal to the Fifth Circuit. Sirius is the first taxpayer to challenge the functional analysis test; Soroban has yet to appeal to the Second Circuit.
Decisions pending by the U.S. Supreme Court concerning taxation of unrealized income and federal agency interpretations have yet to be released as of this article’s publication. Moore v. United States No. 22-800 and Loper Bright Enterprises v. Raimondo No. 22-451.
In Moore v. United States, Charles and Kathleen Moore are challenging the constitutionality of the Mandatory Repatriation Tax (MRT). The MRT was a one-time tax on deferred foreign income included in the TCJA. They argue that the tax violates the Constitution’s Apportionment Clause and the Fifth Amendment’s Due Process Clause. The central question is whether the 16th Amendment authorizes Congress to tax unrealized income.
In Loper Bright Enterprises v. Raimondo, a group of fisheries are contesting a federal agency’s interpretation of a law requiring them to pay wages of observers mandated by the agency. The petitioner is challenging the Chevron deference doctrine, which they say gives the executive branch excessive power to interpret ambiguities in the law. The ruling could have repercussions among other federal agencies, including the IRS.
Other Important Developments
IRS Technical Guidance
- Revenue Procedure 2024-22 obsoletes Rev. Proc. 82-2, which identified the state laws and circumstances to permit an organization to be organized for one or more exempt purposes under the requirements of §1.501(c)(3)-1(b)(4). Publication 557, Tax-Exempt Status for Your Organization, includes sample articles with a dissolution provision that satisfies the requirements of §1.501(c)(3)-1(b)(4). See also Program Manager Technical Advice Memorandum 2024-02.
- Revenue Ruling 2024-10 obsoletes Rev. Rul. 75-38, which identified the state laws and circumstances that would permit an organization to satisfy the private foundation governing instrument requirements of §508(e). Publication 557, Tax-Exempt Status for Your Organization, includes samples of governing instrument provisions that a private foundation may include in its governing instrument to satisfy the requirements of §508(e). See also Program Manager Technical Advice Memorandum 2024-03.
- Notice 2024-43 announces intentions to amend regulations under §59A and §6038A on base erosion and anti-abuse tax. The amendments would defer the applicability date of certain provisions relating to the reporting of qualified derivative payments until taxable years beginning on or after January 1, 2027.
- Notice 2024-44 provides additional guidance for complying with the §871(m) final regulations regarding dividend equivalents. The Notice extends transition relief for two years.
Miscellaneous
- IR-2024-160 announces relief for individuals and businesses affected by severe storms, straight-line winds, tornadoes, flooding, landslides, and mudslides in certain areas of West Virginia, currently including Boone, Brooke, Cabell, Fayette, Hancock, Kanawha, Lincoln, Marshall, Nicholas, Ohio, Preston, Putnam, Tyler, Wayne, and Wetzel counties. These taxpayers have until November 1, 2024 to file tax returns and make tax payments.
- IR-2024-159 announces relief for individuals and businesses affected by severe storms, straight-line winds, tornadoes, flooding, landslides, and mudslides in certain areas of Kentucky, currently including Boyd, Carter, Fayette, Greenup, Henry, Jefferson, Jessamine, Mason, Oldham, Union, and Whitley counties. These taxpayers have until November 1, 2024 to file tax returns and make tax payments.
- TX-2024-13 announces relief for individuals and businesses affected by severe storms, straight-line winds, tornadoes, and flooding in certain areas of Texas, currently including Bell, Calhoun, Collin, Cooke, Denton, Eastland, Guadalupe, Hardin, Harris, Henderson, Jasper, Jones, Lamar, Liberty, Montague, Montgomery, Polk, San Jacinto, Trinity, Tyler, Walker, and Waller counties. These taxpayers have until November 1, 2024 to file tax returns and make tax payments.
- IR-2024-154 announces relief for individuals and businesses affected by severe storms and flooding in certain areas of Massachusetts, currently including Bristol and Worcester counties. These taxpayers have until July 31, 2024 to file tax returns and make tax payments.
- NE-2024-12 announces relief for individuals and businesses affected by severe storms, straight-line winds, and tornadoes in certain areas of Nebraska, currently including Boone, Douglas, Greeley, Howard, Sherman, and Washington counties. These taxpayers have until September 3, 2024 to file tax returns and make tax payments.
- IA-2024-03 announces relief for individuals and businesses affected by severe storms and tornadoes in certain areas of Iowa, currently including Clarke, Harrison, Mills, Polk, Pottawattamie, Ringgold, Shelby, and Union counties. These taxpayers have until October 15, 2024 to file tax returns and make tax payments.
- The Pension Benefit Guaranty Corporation has released the variable rate premium for payment years beginning in May 2024. The interest rates are used to value vested benefits for variable rate premium purposes.
Continued Coverage of the Inflation Reduction Act (IRA)
Revenue Procedure 2024-26 updates and provides additional procedures for qualified manufacturers to submit information regarding the clean vehicle credit under §30D.
- Notice 2024-49 provides guidance on registration requirements for the §45Z clean fuel production credit. The notice encourages taxpayers to apply for registration as soon as possible since they must have a signed registration letter from the IRS dated on or before January 1, 2025 to be eligible to claim the credit starting January 1, 2025.
- Notice 2024-48 provides information used to determine whether a taxpayer meets the requirements under the Statistical Area Category or the Coal Closure Category for purposes of the energy community bonus credit amounts under §§45, 45Y, 48, and 48E.
- Proposed Regulations (REG-119283-23) have been issued relating to the §45Y clean electricity production credit and the §48E clean electricity investment credit. The proposed regulations provide guidance for qualifying facilities placed into service after 2024. A public hearing on these proposed regulations will be held on August 12, 2024.
- Notice 2024-41 has been corrected, modifying certain elements of the Solar PV Table in Table 1 – New Elective Safe Harbor. The Notice modifies the domestic content safe harbor in Notice 2023-38 and provides a new elective safe harbor for determining the domestic content bonus credit amounts under §§45, 45Y, 48, and 48E.
- IR-2024-144 announces that the §48C Qualified Advanced Energy Project Credit Program Applicant Portal is now open. Applicants have until June 21, 2024 to submit their concept papers. This is the second round of the credit allocations that the IRS announced would include up to $6 billion for clean energy projects.
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.