Programming Note: Taxation & Representation will return on July 10, following the one-week congressional recess.
Legislative Lowdown
2025 Outlook—Democrats Setting Battle Lines as 2024 Elections Loom: Though much of the attention on the expiration of key tax provisions of the Tax Cuts and Jobs Act (TCJA, Pub. L. 115-97) has been focused on the variety of options congressional Republicans could employ, as well as the multitude of scenarios concerning control of the White House and Congress after the November elections, congressional Democrats have been doing their own planning to prepare for 2025.
After an internal meeting among Democrats on the Senate Finance Committee, Chairman Ron Wyden (D-OR) said that they would build a “revenue menu” of options “to get good ideas” on which tax policies to advance. Ways and Means Committee Democrats have also had informal discussions, though both groups have resisted creating formal teams or working groups like Ways and Means and Finance committees Republicans. While much of the discussion will be on TCJA, many Democrats are looking to their own priorities, such as further expansions of the child tax credit and the low-income housing tax credit, and the potential introduction of legislation to tax unrealized gains, such as Chairman Wyden’s proposed Billionaires Income Tax Act. In a speech last week, Sen. Elizabeth Warren (D-MA) urged Democrats to insist that any deal include significant tax increases on wealthy Americans and corporations, adding to the plans to draw tough lines and even consider the blanket expiration of TCJA without replacement.
Additionally, Democrats may seek to disrupt discussion of tax policy planning for 2025 by forcing a vote on the Tax Relief for American Families and Workers Act of 2024 (H.R. 7024). The legislation, negotiated by Chairman Wyden and House Ways and Means Committee Chairman Jason Smith (R-MO), overwhelmingly passed the House in January but has not been taken up in the Senate due to opposition by Senate Republicans. Vulnerable Senate Democrats, such as Sens. Sherrod Brown (D-OH) and Jon Tester (D-MT), have urged Majority Leader Chuck Schumer (D-NY) to force a vote to secure the bill’s tax benefits or pin its downfall on the Republicans if the vote fails. While Leader Schumer has employed similar strategies as part of preelection messaging initiatives, he has not indicated whether he would plan to do the same for the Wyden-Smith tax package.
CBO Estimates Surge in Individual Tax Collections If TCJA Expires: On June 18, the Congressional Budget Office (CBO) released a report finding that the expiration of key tax provisions of the Tax Cuts and Jobs Act (TCJA) would lead to an increase in individual tax collections by 10% in 2025 and 11% in 2026. This increase is about $100 billion higher than previous CBO projections of collections for 2026 and 2027, with total revenues of $3.1 trillion now expected in 2027. CBO attributed a significant portion of the increase to the reduced threshold for the estate and gift taxes should the TCJA-set thresholds expire, as revenues from these taxes are set to grow by 40% in 2027. The report also notes that the cost of implementing the clean vehicle credits in the Inflation Reduction Act (IRA, Pub. L. 117-169) is expected to become more expensive over the next 10 years.
Tax Worldview
Supreme Court Issues Ruling in Closely Watched Repatriation Tax Case: On June 20, the Supreme Court issued a decision in Moore v. United States, a case relating to the mandatory repatriation tax (MRT) enacted as part of the Tax Cuts and Jobs Act (TCJA). The MRT requires U.S. shareholders of controlled foreign corporations (CFC) to pay a one-time toll charge on the previously untaxed earnings of the CFC. The tax applies to earnings from a CFC, even if they had not been distributed to U.S. shareholders. The provision was included in TCJA as part of the transition from a worldwide to a quasi-territorial tax system for U.S. companies and their shareholders. The case was initially filed by Charles and Kathleen Moore, who invested $40,000 in the Indian farming supply company KisanKraft. Under the MRT, the Moores were required to pay $14,729 on KisanKraft’s previously deferred taxable income of $132,000.
The 7-2 majority opinion, written by Justice Brett Kavanaugh, was decidedly narrow and only ruled on the constitutionality of the MRT. The court carefully avoided opining on whether the Constitution requires realization before income can be subject to taxation. While the Moores attempted to distinguish the MRT from similar provisions in the tax code that are constitutional, such as subpart F, the court’s majority dismissed the argument as failing “on its own terms” since the Moores conceded that many passthrough tax regimes such as partnerships, S-corporations and subpart F taxes were all constitutional.
Justice Amy Coney Barrett wrote a concurring opinion, joined by Justice Samuel Alito, in which she noted that while she disagrees with the majority’s reasoning, the MRT is a specific tax, and if the issue had involved a different tax, it would have presented a vastly different issue for the court to decide. Notably, Justice Barrett emphasized that the actual question on which the court took the case was to determine “[w]hether the Sixteenth Amendment authorizes Congress to tax unrealized sums without apportionment among the states,” the answer to which in her opinion was a “straightforward: No.” While Justice Barrett disagreed with the majority’s reasoning and adopted a similar analysis as the dissent, she concurred with the majority that “subpart F is not meaningfully different from the MRT in how it attributes corporate income to shareholders,” and that due to the lack of “focused briefing on the attribution question,” the Moores had not met their burden to show that the provision was unconstitutional.
Justice Clarence Thomas wrote a dissenting opinion, joined by Justice Neil Gorsuch, arguing that the Moores were “correct” in stating that income, for the purposes of the 16th Amendment, only includes realized income. Thomas argued that when looking at the historical setting of the amendment, it is clear that “it requires a distinction between ‘income’ and ‘source’ from which that income is ‘derived.’” Thus, since the “Moores did not actually receive any of their investment gains, those unrealized gains could not be taxed as ‘income’ under the Sixteenth Amendment.” The dissent also argued that the majority sidestepped the original question and did “not address the Government’s argument that a gain need not be realized to constitute income under the Constitution” and instead relied on “unrelated precedent to uphold that Congress can attribute undistributed income of an entity to the entity’s shareholder of partners.”
Congressional reaction to the ruling was mixed, with some Democrats approving of the ruling and Republicans mostly staying silent. House Ways and Means Ranking Member Richard Neal (D-MA) said that the ruling would “ensure that our tax system would continue to function as it has for nearly a century.” Sen. Elizabeth Warren (D-MA) stated that the lawsuit was a failed effort by “right-wing billionaires” to “blow up the tax code.” Sen. Warren and other progressive lawmakers were concerned that a sweeping ruling in favor of the Moores may have led to the unconstitutionality of some progressive tax policy proposals concerning the taxation of unrealized income, such as wealth taxes.
With at least four justices signaling that realization may be required under the Constitution, serious questions remain for proposals like Chairman Ron Wyden’s (D-OR) “billionaires income tax.” The majority opinion did not explore whether all types of taxation of unrealized gains were unconstitutional, instead finding that income taxed by the MRT was realized and attributed to the Moores as controlling shareholders. Overall, the Moore case laid the foundation for future litigation of proposals to tax unrealized gains and may cause sufficient doubt to change the political trajectory of such proposals in Congress.
Canada Moves Forward with Digital Tax, Global Minimum Tax Proposals: On June 20, Canada’s Bill C-59 received royal assent, the final step in Canada’s legislative process to bring into effect a 3% digital services tax (DST) on technology companies with an annual revenue over €750 million ($803 million), which will be applied retroactively to Jan. 1, 2022. The Biden administration and U.S. lawmakers have repeatedly expressed concerns with Canada’s implementation of a DST, as it would disproportionately affect U.S. business and undermine international cooperation on the Pillar One global tax framework currently being negotiated by the Organisation for Economic Co-operation and Development (OECD). Implementation of Pillar One would require countries to abandon their commitment to impose DSTs, but Canada’s actions may open the door to a proliferation of DSTs by other countries, creating further economic instability. With the passage of the bill in Canada’s Senate on June 19, House Ways and Means Committee Chairman Jason Smith (R-MO) called for a “swift response,” saying that “America will not stand by quietly while Canada embraces discriminatory taxes on Americans that undermine the U.S. economy and our historic trade partnership.”
In addition to the DST, Bill C-69 aligned Canada with the OECD’s Pillar Two global tax agreement, imposing a 15% minimum effective global minimum tax affecting large multinational businesses, as well as implementing OECD guidance concerning the treatment of transferable tax credit and hybrid arbitrage rules and other enforcement provisions.
1111 Constitution Avenue
Treasury Department, IRS Issue Guidance on Prevailing Wage and Apprenticeship Requirements: On June 18, the Treasury Department and Internal Revenue Service (IRS) issued final regulations implementing the prevailing-wage and apprenticeship (PWA) requirements applicable to most energy-tax incentives enacted as part of the Inflation Reduction Act (IRA). For taxpayers that pay workers area-specific prevailing wages—as determined under existing Davis-Bacon labor standards—and use registered apprentices for the construction, alteration and repair of qualified clean-energy property, the taxpayer may increase the base amount of an applicable IRA energy incentive by five times. The PWA requirements apply to the tax incentives provided under sections 30C, 45, 45L, 45Q, 45U, 45V, 45Y, 45Z, 48, 48C, 48E, and 179D. For most credits, however, a taxpayer is not required to meet the PWA requirements in the case of certain small energy facilities with a nameplate capacity of less than 1 megawatt, or if the facility began construction before Jan. 29, 2023.
As highlighted in the preamble to the regulations, the PWA requirements “do not alter the general approach” taken in the proposed regulations issued in August 2023. Nonetheless, the preamble notes that the Treasury Department and IRS, in consultation with the Department of Labor (DOL), adopted “certain changes” with respect to the final regulations to “support compliance with the PWA requirements, and to encourage taxpayers to adopt certain practices.” Among other modifications to the August 2023 guidance, the final regulations expand on the evaluation criteria concerning the “good-faith exception,” as well as the factors that may demonstrate a taxpayer’s “intentional disregard” of the PWA requirements.
The final regulations also provide additional information and examples intended to help taxpayers meet the mandated PWA recordkeeping and reporting requirements, although the guidance still does not prescribe a specific form or manner in which records must be kept.
In conjunction with the issuance of the final regulations, the IRS also released a fact sheet, overview and frequently asked questions page about the PWA requirements and the guidance issued.
IRS Announces Shift in ERTC Claims Processing Practices as Backlog Swells: On June 20, the Internal Revenue Service (IRS) announced that the agency would begin denying claims for the Employee Retention Tax Credit (ERTC) considered “high risk,” while processing claims deemed lower risk, citing the results of an internal review conducted over the past year. The IRS has estimated that between 10% and 20% of ERTC claims show “clear signs” of being erroneous and the agency will begin to systematically deny such claims. Between 60% 70% show an “unacceptable level of risk” that the IRS will conduct additional analysis on before deciding whether to accept or deny those claims. The credit was enacted by the CARES Act (Pub. L. 116-136) as an incentive for companies to keep employees on the payroll during the COVID-19 pandemic, but has become a hotbed for erroneous claims due to aggressive marketing promotions and fraudulent actors. Due to ERTC fraud, the agency had announced a moratorium on claims processing in September 2023, and as a result, the number of outstanding ERTC claims has grown to 1.4 million, according to IRS Deputy Commissioner Douglas O’Donnell. He added that agency initiatives allowing taxpayers to withdraw an outstanding claim or pay back an erroneous claim have also not seen much take-up, with only about 9,000 taxpayers utilizing those programs.
Responding to the IRS’s announcements, Commissioner Werfel said that it would take time for the IRS to begin processing the backlogged claims, saying that the ERTC “is one of the most complex credits the IRS has administered, and we continue to ask taxpayers for patience as we unravel this complex process.” Meanwhile, Werfel has requested Congress to pass legislation to terminate the submission of new claims, expressing concerns that, once the moratorium is lifted, there will be a “flood” of questionable and fraudulent claims. However, the Tax Relief for American Families and Workers Act, which would have included such a provision, has not been taken up in the Senate, and some lawmakers have continued to state that cutting off claims would hurt businesses that have filed, or have yet to file, legitimate claims.
Treasury Department, IRS to Crack Down on Partnership Basis-Shifting Transactions: On June 17, the Treasury Department and Internal Revenue Service (IRS) issued a package of guidance concerning partnerships purported “inflation” of the basis of their underlying assets for the chief purpose of “generat[ing] inappropriate tax benefits.” With the release of the guidance, the IRS asserted that such transactions, known as “basis shifting” transactions, “allow increased depreciation deductions or reduced gain on the sale of an asset with little or no substantive economic consequence.” The guidance includes Notice 2024-54, which would prevent partnerships with basis adjustments from covered transactions from claiming “inappropriate tax benefits” and provide rules concerning arrangements in which members of a consolidated group of corporations own interests in partnerships. Also included are proposed regulations concerning the disclosure of some partnership-related-party basis adjustment transactions as transactions of interest as well as a revenue ruling concerning the codified economic substance doctrine as it relates to basis-shifting transactions.
The IRS stated that it estimates that the guidance will save taxpayers up to $50 billion over the next 10 years due to induced compliance by partnerships, and IRS Commissioner Daniel Werfel said that this package “signals the IRS is accelerating our work in the partnership arena, which has been overlooked for more than a decade and allowed tax abuse to go on for far too long.” The package is part of IRS’s increased commitment to increase scrutiny on wealthy individuals, large corporations and complex partnerships. However, the guidance was met with swift criticism given its complexity and compliance challenges. Practitioners are also questioning the regulatory authority to support such expansive guidance.
At a Glance
Oregon to Join Direct File Program in 2025: On June 18, the Treasury Department and Internal Revenue Service (IRS) announced that Oregon would join the IRS Direct File Program, which was piloted in 2024 and allowed eligible taxpayers in select states to file their federal tax return at no cost through government-operated filing software. Separately, Direct File Service Owner Bridget Roberts stated that the 12 states that were part of the pilot in 2024 have all opted to remain in the program for the 2025 filing season, bringing the number of participating states thus far to 13. The Treasury Department noted that at least 580,000 Oregon residents will be eligible to use the program in 2025, when the program’s expansion may also include additional eligibility criteria. Treasury Secretary Janet Yellen claimed that Oregon’s participation “will save Oregonians time and money,” and Senate Finance Committee Chairman Ron Wyden (D-OR) said that the program is “long overdue.”
House, Senate Republicans Introduce Bills Exempting Tips from Federal Taxation: On June 20, Sen. Ted Cruz (R-TX) introduced the “No Tax on Tips Act” (S. 4621), which would exempt cash tips—including tips received via credit and debit card charges and checks—from federal income taxes by establishing a full deduction for tip income. This deduction would be available to taxpayers regardless of whether they elect to take the standard deduction or choose to itemize. The bill comes as a proposal echoing former President Trump’s campaign speech in Nevada on June 9, where he raised the issue as a potential tax policy proposal. Sen. Cruz dismissed the idea that the proposal could increase the federal deficit by at least $250 billion over the next decade, instead blaming the increased deficit on excessive spending. The bill was co-sponsored by Sens. Steve Daines (R-MT), Kevin Cramer (R-ND) and Rick Scott (R-FL). Similar legislation exempting tips from federal taxation (H.R. 8785) was introduced in the House by Reps. Thomas Massie (R-KY) and Matt Gaetz (R-FL).
IRS Releases Draft Form for Research Credit: On June 21, the Internal Revenue Service (IRS) released a revised draft of Form 6765, Credit for Increasing Research Activities. The form revises the number of business components that need to be reported under section G for research credits. The changes require taxpayers to report 80% of total qualified research expenses (QREs) per business component, with a maximum of 50 business components that can be reported. The changes are optional for filers for tax year 2024, but will be fully effective for tax year 2025.
IRS Provides Guidance on SECURE 2.0 Additional Tax Exceptions: On June 20, the Internal Revenue Service (IRS) issued Notice 2024-55, which provides guidance on certain exceptions from the 10% tax penalty for early retirement plan distributions. The notice provides that certain emergency personal expense distributions, as well as distributions taken by victims of domestic abuse, will not be penalized.
IRS Releases Inflation Adjustment for Hydrogen Credit: On June 24, the Internal Revenue Service (IRS) published Notice 2024-45, which provides an adjustment for inflation for the Section 45V Clean Hydrogen Production Credit for calendar years 2023 and 2024. Depending on the lifecycle greenhouse gas emissions rate of the process producing clean hydrogen, the notice establishes the inflation adjustment as between $0.120 and $0.600 for hydrogen produced in calendar year 2023 and between $0.124 and $0.622 for calendar year 2024.
Brownstein Bookshelf
CRFB Report Explores Budgetary Effects of Excluding Tips from Taxation: On June 16, the Committee for a Responsible Federal Budget released a report estimating that exempting tip income from federal income and payroll taxes would reduce federal revenues by between $150 and $250 billion over the next 10 years. This estimate does not consider the potential post-enactment “behavioral effects” of what would happen if more income were to be reported as tips, which would reduce revenue even further.
Hearings and Events
House Ways and Means Committee
The House Ways and Means Committee has no tax hearings scheduled for this week.
Senate Finance Committee
The Senate Finance Committee has no tax hearings scheduled for this week.