Here’s a look at recent tax-related happenings on the Hill, including Vice President Kamala Harris addressing former President Donald Trump’s tariff platform.
Lately on the Hill
Newly Nominated Presidential Candidate Harris Attacks Rival’s Tariff Proposals
Last week, Harris accepted her party’s nomination for president at the Democratic National Convention. During her speech, Harris seized the opportunity to address her opponent’s tariff platform, which Trump has suggested could enable the U.S. to no longer need a federal income tax.
The Republican Party’s tax platform—adopted during its own convention in July—seeks not only to make permanent the Tax Cuts and Jobs Act and expand the Child Tax Credit, but also seeks to shift the nation’s tax burden on foreign exporters through a baseline tariff on imported goods and institute legislation to address “unfair” trade practices. “As tariffs on foreign producers go up, taxes on American workers, families, and businesses can come down,” the party reasons.
According to the nonpartisan Tax Foundation, during Trump’s presidency tariffs were imposed on products valued around $380 billion.1 The tariffs have been largely left intact by the Biden administration and even increased by $18 billion on Chinese imports. The Tax Foundation has called the now bipartisan policy “one of the largest tax increases in decades.”
While Harris did not address the Trump-Biden tariff status quo, she seems to be against Trump’s latest proposals to impose a universal tariff of at least 10% and increase tariffs on Chinese goods to at least 60%. “[Trump] intends to enact what, in effect, is a national sales tax—call it, a Trump tax—that would raise prices on middle class families by almost $4,000 a year,” Harris said after accepting the nomination.
Erica York of the Tax Foundation has been critical of Trump’s tariff proposals, pointing out that individual income tax generates more than 27 times the revenue that current tariffs do.2 To achieve a total income tax replacement, tariff rates would have to be nearly 70% on imports from 2023—about $3.1 trillion. The reality, York surmises, is that this figure would have to be even higher after consideration of behavior changes due to noncompliance and the reduction of imports that would occur should such a tariff be imposed.
“The bigger issue is the relative size of the tax base,” states York. In 2021, taxpayers reported about $15 trillion of income and paid $2.2 trillion in taxes. Compare that to goods imported totaling $2.8 trillion in 2021 on which $80 billion was collected from tariffs. “To replace the roughly $2 trillion of revenue raised by the individual income tax with tariffs would require astronomically high tariff rates.”
The Judicial Report
An Amicus brief was filed in the Fifth Circuit pointing to contemporary limited partner meaning when the limited partner exception was enacted. Sirius Solutions, LLLP v. Commissioner, No. 24-60240.
Real Estate Roundtable Inc. filed an amicus brief for the Fifth Circuit, urging the court to reverse the U.S. Tax Court decision in Soroban Capital Partners v. Commissioner requiring a functional analysis test to determine if, in fact, a partner is a limited partner for purposes of the limited partner exception of Section 1402(a)(13).
In Soroban, the Tax Court ruled that the exception, relating to the exclusion of distributive shares of partnership income or loss in net earning subject to self-employment tax, does not apply to a partner who is limited in name only as designated under state law.
The real estate group, a nonprofit organization that “address[es] key national policy issues impacting real estate and the economy,” describes the impact of the ruling to its constituents explaining, “In 2021, there were over 2.1 million real estate partnerships in the United States, with nearly 9.7 million partners. Real estate partnerships represent close to 50 percent of all partnerships in the country.”3 The group also claims that real estate partnerships contribute more than 15 million jobs, $2.3 trillion of annual economic output, and $559 billion of annual local property taxes.
The brief delves into 1977 when the Social Security Amendments were enacted, including §1402(a)(13). “At the time of the 1977 Amendments, the term ‘limited partner’ had no common meaning outside of state law. As a result, the scope of that term has been fully defined by state courts, and it is not the role of a federal court to define the scope differently.” Roundtable points to the fact that leading up to 1977, many state courts had already held that the limited partner status would not be lost due a partner’s services rendered to the business. This is exemplified by the Revised Uniform Limited Partnership Act of 1976, proposed by the National Conference of Commissioners on Uniform State Laws regarding the governance of limited partnerships, which codified examples of business services that could be provided by limited partners and was adopted widely by the states.
“State law in the run-up to the 1977 Amendments tells an entirely different story,” the brief argues. “Limited partners have routinely provided key business services to their partnerships without losing their limited liability status.”
From the Treasury & IRS
Five New Warning Signs of Incorrect ERC Claims
The IRS encourages businesses to review their Employee Retention Credit (ERC) claims for five new warning signs that their claims may be incorrect. During the pandemic, many “aggressive promoters” helped businesses claim the credit although they were ineligible to do so. The IRS has provided programs to help such businesses withdraw their ineligible claims and repay the refunds or credits received without threat of litigation or penalty.
The five warning signs that a taxpayer’s claim may be illegitimate include: essential businesses that could fully operate and didn’t have a decline in gross receipts, inability to support how government orders sufficiently suspended business operations, reporting family members’ wages as qualified wages for purposes of calculating the credit, using wages to claim the credit that were already used to receive loan forgiveness as part of the Paycheck Protection Program, and large employers claiming wages for employees who were still providing services to the business.
Released Guidance
Final Regulations (T.D. 9993) concerning the election under the Inflation Reduction Act of 2022 to transfer certain tax credits have received corrections.
Proposed Regulations (REG-119683-22) propose amendments to the federal estate tax regulations applicable to estates of decedents passing property to or for the benefit of a noncitizen spouse in a domestic trust for which the executor of the decedent’s estate has made an election to be a qualified domestic trust and the trust satisfies all of the requirements for such treatment under applicable federal tax law and regulations.
Revenue Ruling 2024-18 announces interest rates for overpayments and underpayments of tax for the fourth quarter beginning October 1, 2024. The rates will remain unchanged at 8% for overpayments (7% for corporations), 8% for underpayments, 10% for large corporate underpayments, and the rate of interest paid on corporate overpayments exceeding $10,000 will be 5.5%.
Notice 2024-63 provides guidance with respect to Section 110 of the SECURE 2.0 Act of 2022, which allows employers to make matching contributions on account of employees’ qualified student loan payments under section 401(k) plans, section 403(b) plans, SIMPLE IRA plans, and governmental section 457(b) plans. This section applies to contributions made for plan years beginning after December 31, 2023.
IR-2024-221 announces relief for individuals and businesses affected by Tropical Storm Ernesto throughout Puerto Rico. These taxpayers have until February 3, 2025 to file tax returns and make tax payments.
IR-2024-222 announces relief for individuals and businesses affected by severe storms, straight-line winds and flooding in 26 South Dakota counties. These taxpayers have until February 3, 2025 to file tax returns and make tax payments.
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.