Legislative Lowdown
House FY 2025 Appropriations Bill Targets IRS Funding: On June 5, the House Appropriations Subcommittee on Financial Services and General Government (FSGG) marked up its fiscal year (FY) 2025 appropriations legislation, favorably reporting it for consideration by the full House Appropriations Committee on Thursday. The bill would provide the Internal Revenue Service (IRS) with about $10.1 billion, a $2.35 billion reduction in funding from the IRS’s FY 2024 funding level, with a $2 billion cut in Enforcement and $350 million cut from Operations Support. The amount of funding allocated for Taxpayer Service operations would remain unchanged from FY 2024 levels. The reduction in funding is at odds with the Senate Appropriations Committee’s FSGG bill, which leaves IRS funding unchanged at $12.3 billion, as well as the President’s Budget request, which also requested $12.3 billion for the agency. Cuts to IRS annual funding, like those included in the House bill, are unlikely to pass a Democratic-controlled Senate, but would likely be under renewed consideration if Republicans were to take control of the Senate and the White House in 2025.
Tax Worldview
Former OECD Official Expresses Doubts That Pillar One Will Meet Deadline: At a panel on June 5, Pascal Saint-Amans, former Organisation for Economic Co-operation and Development (OECD) Director of the Centre for Tax Policy and Administration, expressed doubt that the OECD will be able to complete negotiations on the Pillar One global tax agreement by the June 30 deadline. He noted that, should the agreement not be ready for signature by then, “it will not be ratified.” The OECD missed its initial March deadline to finalize negotiations, and Pillar One has faced numerous hurdles over a range of controversial provisions in the framework as well as the lack of commitments by crucial signatories, such as the United States, to support the current version of the agreement. Failure to enact Pillar One is expected to unleash digital services taxes (DSTs) in a number of countries, which will disproportionately increase tax burdens on U.S. multinational businesses and may lead to global tax instability.
1111 Constitution Avenue
IRS Announces Tax Relief for East Palestine Train Disaster Payments: On June 5, the Internal Revenue Service (IRS) issued Notice 2024-46, announcing that relief payments issued to taxpayers affected by the February 2023 train derailment in East Palestine, Ohio, would be considered a qualified disaster under Section 139 of the Internal Revenue Code and would thus be excluded from taxation. The derailment occurred on Feb. 3, 2023, and caused the spillage of several hazardous materials, polluting waterways and releasing toxic fumes into the atmosphere, affecting East Palestine residents as well as residents in nearby communities in Pennsylvania and West Virginia. Following the derailment, the common carrier operating the derailed train provided assistance in the affected region, including payments for relocation expenses, rehabilitation costs, medical expenses, lost wages, inconvenience payments and other property-related payments, issued under Form 1099-MISC. As the IRS has now declared the derailment to be an “event of a catastrophic nature” under §139(c)(3), such payments will be considered nontaxable.
Following the announcement, Sen. Sherrod Brown (D-OH) praised the IRS’s decision, saying that “the people of East Palestine should never have had to pay taxes on assistance they needed in the wake of the trail derailment.” Tax relief for East Palestine residents was included as a provision in the Federal Tax Relief Act (H.R. 5863), introduced by Rep. Greg Steube (R-FL), which overwhelmingly passed the House on May 23 via the use of a discharge petition, but has not yet been considered by the Senate. It was also included in disaster relief legislation in the Tax Relief for American Families and Workers Act (H.R. 7024), which has stalled in the Senate. It remains to be determined whether the IRS’s decision will make passage of either of these bills more difficult.
IRS Issues Guidance on Energy Community Bonus Credit: On June 7, the Internal Revenue Service (IRS) issued Notice 2024-48 regarding qualifications for the Energy Community Bonus Credit amounts or rates under Sections 45, 45Y, 48, and 48E of the Internal Revenue Code, sections enacted or expanded under the Inflation Reduction Act (Pub. L. 117-169). The guidance supplements previous IRS Notices designating qualifying census tracks and adds to qualifying areas in the Statistical Area Category and the Coal Closure Category (Appendices 1 and 2), but does not address areas in the Brownfield Category. The Notice also clarifies requirements for taxpayers seeking increased credit amounts or rates for energy projects within designated energy communities. Appendix 1 includes additional metropolitan and non-metropolitan statistical areas (MSAs and non-MSAs) that qualify as energy communities, including those exceeding the Fossil Fuel Employment threshold and unemployment rate for the calendar year 2023. The new areas are based on the Bureau of Labor Statistics’ Local Area Unemployment Statistics program and is current as of April 19, 2024, and are effective as of June 7, 2024, until updated by the Treasury Department and the IRS.
Appendix 2 details new census tracts subject to coal-mine closures or retirements of coal-fired electric- generating units, utilizing data from the Mine Safety and Health Administration and the U.S. Energy Information Administration. The notice recommends that taxpayers consider Appendix 2 in conjunction with Appendices C (IRS Notice 2023-29) and 3 (IRS Notice 2023-47) from prior notices for a comprehensive list of census tracts impacted by coal closures.
The Department of Energy’s online mapping tool for qualifying Energy Community bonus credits has been updated to reflect the additional areas designated in Notice 2024-48.
At a Glance
Partnerships Reportedly Responsive to IRS Compliance Alert Letters: At a conference on May 31, Internal Revenue Service (IRS) Large Business and International (LB&I) Division Commissioner Holly Paz reported that over 60% of partnerships that received compliance alert letters flagging potential balance-sheet discrepancies have responded to the IRS. Paz noted that the IRS has been following up with respondents to determine whether further action is needed. The compliance alert letters are part of LB&I’s campaign to expand examinations of large partnerships in the United States, which is a key component of the agency’s overarching initiative to scrutinize wealthy taxpayers, large corporations and complex partnerships through increased audit rates. The IRS began efforts last year to hire specialists to conduct audits under the partnership compliance assurance program.
IRS Planning for Year-End Release of Hydrogen Tax Credit Guidance: At a conference on June 4, Internal Revenue Service (IRS) Office of Associate Chief Counsel official Richard Blumenreich said that the IRS is hoping to release final regulations concerning the Section 45V Clean Hydrogen Production Credit by the end of the year. The credit, expanded as part of the Inflation Reduction Act, is designed to incentivize the production of hydrogen fuel for use in manufacturing, transportation and other industries. Final guidance on the new hydrogen credit continues to be delayed despite persistent calls for industry participants, and especially taxpayers with hydrogen projects on the drawing board, for certainty with regard to the operation of the Section 45V credit.
Rep. Wenstrup Introduces S-Corp Modernization Rules: On June 4, Rep. Brad Wenstrup (R-OH) introduced the S Corporation Modernization Act of 2024 (H.R. 8619), which amends the Internal Revenue Code with regard to the tax treatment of S corporations. The bill would change the treatment of built-in gain amounts following the death of a shareholder, expand the list of eligible S corporation shareholders to include nonresident aliens, and make modifications to S corporation passive investment income rules, among other provisions. The bill aims to expand S corporations’ access to capital, as well as provide general simplification and reform to S corporations.
Supreme Court Ruling Potentially Complicates Succession Planning Strategies: On June 6, the Supreme Court ruled unanimously in Connelly v. United States that life insurance payouts must be included in valuation of certain family-owned businesses for estate tax purposes after the death of one of their co-owners. The Connellys argued that the insurance proceeds should not be included in the company’s valuation due to the company’s agreement to buy out the decedent’s interest. In the court’s opinion, Justice Clarence Thomas wrote that “a corporation’s contractual obligation to redeem shares at fair market value does not reduce the value of those shares in and of itself.” The justices rejected the argument that such a decision would make succession planning more difficult for family-owned businesses because of the increased difficulty of using life insurance as part of succession planning, noting that the type of buy-sell agreement the Connellys employed was fairly uncommon, and succession-planning strategies can be restructured in other ways to avoid such a situation. Nevertheless, the ruling may encourage family-owned businesses to alter their succession plans to favor cross-purchase agreements over buy-sell agreements.
IRS Announces 1 Million Submissions Received on Document Upload Tool: On June 5, the Internal Revenue Service (IRS) announced that the Document Upload Tool (DUT) accepted its one millionth submission since it was introduced in 2021. The tool is designed to allow taxpayers to directly respond to IRS notices digitally through a secure portal. This tool was expanded through Inflation Reduction Act funding, as part of ongoing agency digitization initiatives. IRS Commissioner Daniel Werfel stated that the tool helps “transform the IRS into a virtually paperless industry.” The IRS estimates that 94% of taxpayers may be able to use this technology, which would optimize the IRS’s efficiency in processing future tax returns.
IRS Announces Tax Relief, Filing Extension for Qualifying West Virginia and Kentucky Taxpayers: On June 7, the Internal Revenue Service (IRS) announced that taxpayers affected by severe storms in parts of Kentucky and West Virginia will be able to receive tax relief in the form of postponed payment deadlines. The areas affected were designated by the Federal Emergency Management Agency (FEMA) as a qualified disaster area, allowing taxpayers to exclude qualified disaster relief payments from his or her taxable income. The announcement also notes that affected taxpayers have until Nov. 1 to file their 2023 tax return.
Treasury Department, IRS Update Procedures on Clean Vehicle Credit: On June 10, the Department of the Treasury and Internal Revenue Service (IRS) issued Rev. Proc. 2024-26, which updates submission procedures for manufacturers of clean vehicles qualifying under the Section 30D Clean Vehicle Credit, as well as dealers and sellers of such vehicles. The guidance also provides rules regarding seller-report updates and clarifies the transition rule for impracticable-to-trace materials in batteries, such as certain critical minerals.
Hearings and Events
House Ways and Means Committee
On June 13, the House Ways and Means Committee will hold a hearing titled “The Crisis on Campus: Antisemitism, Radical Faculty, and the Failure of University Leadership.”
Senate Finance Committee
The Senate Finance Committee has no tax hearings scheduled for this week.
Other
On June 12, the Senate Budget Committee will hold a hearing titled “Making Wall Street Pay Its Fair Share: Raising Revenue, Strengthening Our Economy.”
On June 13, the House Appropriations Committee will hold a markup of several bills, including the Fiscal Year 2025 Financial Services and General Government bill, which includes funding for the Department of the Treasury and Internal Revenue Service.
On June 13, the House Energy and Commerce Subcommittee on Environment, Manufacturing, and Critical Materials will hold a hearing titled “Securing America’s Critical Materials Supply Chains and Economic Leadership."