Here’s a look at recent tax-related happenings on the Hill, including Democrats working on their tax priorities and looking to pass their own tax package next year if the Tax Cuts and Jobs Act (TCJA) expires.
Lately on the Hill
Democrats Prepare for 2025 Tax Overhaul
Senate Finance Committee Democrats met to begin assembling their tax priorities in preparation for a significant tax legislative overhaul in 2025. While Republicans hope to do well in the coming elections to extend and expand the expiring provisions of the TCJA, Democrats are content with their expiration and are intent on passing a considerable tax package of their own.
“This can’t just be a debate about the 2017 tax bill; this is going to be Tax Armageddon. It’s time to suit up and come up with the theories of the case rather than the normal ‘it should be X rate or Y rate,’” said Sen. Mark Warner (D-VA), according to Tax Notes.
The meeting centered on ideas to raise revenues, a mirrored focus of President Joe Biden’s proposal that the wealthy “pay their fair share.” Sen. Sheldon Whitehouse (D-RI) commented after the meeting, “We have got huge, huge opportunities to restore some fairness and integrity to the tax code.”
An event last week hosted by the Washington Center for Equitable Growth titled “The Promise of Equitable and Pro-Growth Tax Reform” featured Sen. Elizabeth Warren (D-MA) and a panel of tax policy experts to “discuss potential changes to the tax code in 2025 and to showcase the best research on how to achieve equitable, pro-growth tax reform.”
“The expiration of the individual provisions of the Trump tax cuts presents a generational opportunity to not just correct the failures of that legislation but to fundamentally reorient our tax system towards shared growth and economic opportunity – to address structural issues in our tax code that have long preferenced wealth over work,” said National Economic Council Deputy Director Daniel Hornung.
“It’s time to stiffen our spines. Joe Biden is right: if the 2025 tax bill doesn’t call on wealthy people and giant corporations to shoulder a bigger share of what it costs to run this country, Democrats should reject it outright,” said Warren.
The CBO Releases 10-Year Budget & Economic Projections
The Congressional Budget Office (CBO) published its outlook on the federal budget and economy over the next 10 years, assuming tax laws and spending generally remain unchanged from what they are now.
The CBO is projecting a $2 trillion deficit in 2024, increasing to $2.8 trillion by 2034. The deficit, for both the current fiscal year projection and the 10-year projection, equals approximately 7% of GDP—significantly more than the 50-year average of 3.7%.
The deficit estimate represents a 27% increase over the agency’s February projections driven primarily by four factors: $145 billion increase for potential student loan reductions, $70 billion in delayed payment recovery from resolving bank failures, $60 billion in new legislation, and $50 billion in Medicaid costs that were higher than expected.
The nation’s debt is projected to swell from 99% of GDP in the current fiscal year to 122% in 2034 as interest costs and mandatory spending outpace decreases in discretionary spending and revenue growth. Beginning in 2025, interest on the debt is expected to exceed spending on defense as well as discretionary spending for nondefense programs. The interest burden in relation to GDP will be greater than it ever has been dating back to 1940 when such data began being reported.
The Judicial Report
The U.S. Supreme Court holds the MRT constitutional and avoids ruling on whether realization is a constitutional requirement. Moore v. United States No. 22-800.
The Supreme Court held 7 to 2 that the mandatory repatriation tax (MRT), a one-time tax on deferred foreign income included in the 2017 TCJA, does not exceed Congress’s constitutional authority.
Charles and Kathleen Moore challenged the constitutionality of the MRT, arguing that it was a property tax on their shares of the controlled foreign corporation (CFC) they owned, requiring apportionment among the states. The government contended that the MRT is a tax on income, therefore not requiring apportionment. The Moores did not believe that they had realized any income because they did not receive distributions from the CFC.
The court disagreed with the Moores’ interpretation of a realization requirement. “This Court’s longstanding precedents, reflected in and reinforced by Congress’s longstanding practice, confirms that Congress may attribute an entity’s realized and undistributed income to the entity’s shareholders or partners and then tax the shareholders or partners on their portions of that income,” according to the ruling written by Justice Brett Kavanaugh. “Notably, the principle has repeatedly been invoked by the lower courts in upholding subpart F.”
The 16th Amendment arguably does not contain a verbatim realization requirement for income to be taxed, which some Democratic lawmakers are counting on to implement wealth taxes on unrealized earnings. “Right-wing billionaires hoped an obscure legal case would blow up the tax code to avoid paying what they owe, but this effort failed at the Supreme Court. The fight goes on to tax the rich, pass a wealth tax on ultra-millionaires and billionaires, and make the system more fair,” Warren posted on X after the ruling.
Justice Clarence Thomas centered his dissent, joined by Justice Neil Gorsuch, on a realization requirement. “The Moores are correct. Sixteenth Amendment ‘incomes’ include only income realized by the taxpayer. The text and history of the Amendment make clear that it requires a distinction between ‘income’ and the ‘source’ from which that income is ‘derived.’ And, the only way to draw such a distinction is with a realization requirement. Because the Moores never actually received any of their investment gains, those unrealized gains could not be taxed as ‘income’ under the Sixteenth Amendment.”
Understanding the effect the ruling could have had on the realization argument, the majority opinion stipulated that the ruling is “narrow” and “limited,” adding that “this decision [does not] attempt to resolve the parties’ disagreement over whether realization is a constitutional requirement for an income tax.” The ruling only interprets Congress’s ability to attribute to a shareholder or partner an entity’s realized and undistributed income and tax them on their portion.
From the Treasury & IRS
IR-2024-169 issued by the IRS announces plans to resume processing low-risk claims of the Employee Retention Credit (ERC) while also denying “tens of thousands” of claims it has determined to be high risk. According to the announcement, 10 to 20% of claims will be denied due to “warning signals that clearly fall outside the guidelines established by Congress.” On top of that, 60 to 70% of claims have unacceptable levels of risk requiring additional analysis to protect against improper payments of the credit. The IRS anticipates that payments will resume later this summer.
IR-2024-171 announces the IRS’ newly released draft of Form 6765, Credit for Increasing Research Activities. The changes aim to “alleviate taxpayer burden, provide taxpayers with a consistent and predefined format and improve the information received for tax administration.”
On its FAQ page for Section 41 Research Credit claims, the IRS has updated information requirements for refund claims. Effective June 18, 2024, taxpayers no longer need to provide the names of the individuals who performed each research activity and the information each individual sought to discover. This information, however, may be requested if a Research Credit refund claim is selected for examination.
Announcement 2024-26 provides that the U.S. formally suspend certain articles of the Convention between the United States of America and the Russian Federation for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital. The suspension takes effect on August 16, 2024.
Revenue Ruling 2024-13 has been issued providing the July 2024 various rates for federal income tax purposes, including the applicable federal rates (AFR), adjusted AFR, adjusted federal long-term rate, and the long-term tax-exempt rate.
Notice 2024-53 has been released with guidance on the corporate bond monthly yield curve, spot segment rates, 24-month average segment rates, and the interest rate on 30-year Treasury securities.
Notice 2024-55 provides guidance on the application of the exceptions to the 10% additional tax under §72(t)(1) on a distribution from a qualified retirement plan. Section 72(t)(2) provides several exceptions to the punitive tax.
Forvis Mazars in the News
"Forvis Mazars’ own Phil Laminack was published by Bloomberg Tax last week discussing Pillar Two and tax planning. Read more about his recommendations in the article (subscriber content).
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.