Senate tax writers on Capitol Hill continue to discuss bipartisan retirement savings bills as the House gears up for a vote on a related tax measure.

Senate tax writers on Capitol Hill continue to discuss bipartisan retirement savings bills as the House gears up for a vote on a related tax measure.

The Senate Finance Committee (SFC) held a May 14 hearing during which lawmakers on both sides of the aisle highlighted the importance of moving forward with retirement savings-related legislative efforts. While a number of related tax proposals have been introduced recently, SFC lawmakers paid particular focus to the bipartisan Retirement Enhancement Savings Bill, more commonly referred to as “RESA.”

“[T]his committee worked on a bipartisan basis to put together the [RESA],” SFC ranking member Ron Wyden, D-Ore., said during opening statements. “Our bill is all about making it easier for employers -- particularly small businesses -- to offer retirement plans to their employees,” Wyden added. “Giving those small businesses an opportunity to band together and offer a common retirement plan is a simpler and more cost-effective way of helping more people save.”

House Vote Expected on Secure Bill

Notably, the Senate’s RESA bill has many similarities to the House’s Setting Every Community Up for Retirement Enhancement (SECURE) Bill of 2019 (HR 1994). The bipartisan SECURE Bill is expected to reach the House floor for a full chamber vote in the coming days.

“We’re on track to go to the House floor this month,” Kara Getz, chief tax counsel for House Ways and Means Committee Chairman Richard Neal, DMass., has said. Getz, while speaking on May 10 at the American Bar Association (ABA) May Tax Meeting in Washington, D.C., said that the House bill is derived from a true “partnership” between Democrats and Republicans.

To that end, SFC Chairman Chuck Grassley, R-Iowa, alluded during the May 14 hearing that the Senate and House measures could soon be reconciled and enacted. “I’m hoping that the House will send its version of RESA over to us at some point this month,” Grassley said. “And, I’ll continue to work closely with Senator Wyden and other Committee members to reconcile the differences and get this important bill to the President.”

Additionally, Drew Crouch, senior tax counsel for the SFC minority, while speaking on May 10 at the ABA May Meeting, stated that there is a “high probability” the retirement bill(s) will be enacted this year. Crouch further emphasized this position by adding that that there is a “high chance retirement legislation will make it across the finish line,” in this Congress.

Retirement Savings 2.0

Meanwhile, House and Senate lawmakers are already working toward Retirement Savings “2.0,” Getz stated at the ABA May Meeting. House tax writers are “actively working on 2.0,” Getz said, adding that, “we would really like to markup a second retirement bill.”

Likewise, Grassley alluded to the Retirement Savings 2.0 initiative on May 14, noting in his
opening statement that the SFC hearing “marks the start of our work on the next round of retirement savings reforms.”

To that end, SFC members Rob Portman, R Ohio, and Ben Cardin, D-Md., on March 14 introduced
a 132-page bipartisan retirement savings tax bill. The Retirement Savings & Security Bill would
make several sweeping reforms to retirement savings.

President Donald Trump and Democratic congressional leaders have agreed to develop a $2 trillion infrastructure plan, according to Senate Minority Leader Chuck Schumer, D-N.Y.

President Donald Trump and Democratic congressional leaders have agreed to develop a $2 trillion infrastructure plan, according to Senate Minority Leader Chuck Schumer, D-N.Y.

$2 Trillion Infrastructure Plan

"There was goodwill in this meeting…which is a very good thing," Schumer told reporters at the White House on April 30 after meeting with Trump. "We agreed on a number – $2 trillion for infrastructure,"Schumer said. Further, House Speaker Nancy Pelosi, D-Calif., and Schumer both praised Trump after the meeting for his bipartisan cooperation.

The president and Democratic leaders were to meet again to discuss how to pay for the infrastructure plan, Schumer said. At that time, Trump is expected to convey his ideas on funding, Schumer added. "This was a very, very good start…and we hope it will go to a constructive conclusion."

“Pay-Fors”

Additionally, Schumer told reporters at the White House that the infrastructure plan’s "pay-fors"remained undetermined. Notably, Schumer suggested from the Senate floor on April 29 rolling back part of Republicans’ 2017 tax reform law to fund infrastructure costs.

Generally, infrastructure is considered a bipartisan priority among lawmakers. However, reaching an agreement on how to pay for the reportedly $2 trillion infrastructure plan that is still in development is expected on Capitol Hill to be an arduous task. Namely, Democrats are expected to propose scaling back certain tax cuts under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) to foot the infrastructure bill, which is not likely to receive GOP support.

"That’s a non-starter" Senate Majority Leader Mitch McConnell, R-Ky., told reporters at the U.S. Capitol on April 30. "This tax bill [TCJA] is what has generated this robust economy; the last thing we want to do is step on all of this growth…by repealing in effect what has generated all of this prosperity and low unemployment," McConnell said.

White House: Meeting Excellent, Productive

Meanwhile, the White House praised the April 30 infrastructure meeting between Trump and top congressional Democrats, calling it "excellent and productive," as noted in a statement released by White House Press Secretary Sarah Huckabee Sanders shortly after the meeting. Notably, however, the statement did not mention the $2 trillion figure allegedly agreed upon by Trump and Democratic congressional leadership.

"We will have another meeting in three weeks to discuss specific proposals and financing methods,"Sanders added. "The president looks forward to working together in a bipartisan way and getting things done for the American people."

Highly anticipated proposed regulations have been issued on the withholding required with respect to the disposition of certain partnership interests. The proposed regulations affect certain foreign persons that recognize gain or loss on the disposition of an interest in a partnership that is engaged in a trade or business in the United States, and persons that acquire those interests. Also affected are partnerships that directly or indirectly have foreign partners.

Highly anticipated proposed regulations have been issued on the withholding required with respect to the disposition of certain partnership interests. The proposed regulations affect certain foreign persons that recognize gain or loss on the disposition of an interest in a partnership that is engaged in a trade or business in the United States, and persons that acquire those interests. Also affected are partnerships that directly or indirectly have foreign partners.

Gain or loss from the disposition of a partnership interest is treated as income effectively connected to a U.S. trade or business, to the extent that there would have been effectively connected income to the foreign partner, if the partnership assets were sold under Code sec. 864(c)(8). The withholding rules of Code Sec. 1446(f) require 10 percent withholding on the amount realized on the disposition, absent certification that the transferor is not a nonresident alien or foreign corporation.

The proposed regulations are a companion to Proposed Reg. 1.864(c)(8)-1 issued in December 2018, on gain or loss by foreign persons on the disposition of a partnership interest.

Reporting, Withholding and Paying Tax

The proposed regulations provide rules for withholding, reporting and paying tax upon the disposition of a partnership interest in a partnership described in Code Sec. 864(c)(8) and Proposed Reg. 1.864(c)(8)-1. The proposed regulations adopt much of the temporary guidance issued in Notice 2018-29, I.R.B. 2018-16, 495, which looked to the rules for withholding on dispositions of U.S. real property interests by foreign persons in Code Sec. 1445.

The proposed regulations also:

• clarify the reporting rules for transfers of partnership interests under Code Sec. 6050(k),
• provide rules for implementing withholding by brokers on transfers of certain interests in publicly traded partnerships,
• make changes to withholding rules for distributions by publicly traded partnerships,
• make changes to reporting rules and procedures for adjusting withholding; and
• provide coordination rules to prevent overwithholding.

A transferee is required to report and pay any tax withheld by the 20th day after the date of the transfer. Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests, and Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests.

The proposed regulations also provide rules that address a partnership’s requirement to withhold if the transferee fails to withhold.

General Rule and Exceptions

A transferee of a partnership interest must withhold a tax equal to 10 percent of the amount realized on any transfer of a partnership interest (other than certain publicly traded partnership interests), if the gain is treated as effectively connected income.

There are six exceptions to withholding under the proposed regulations:

• certification by transferor of non-foreign status,
• certification by transferor that no gain is realized on transfer by transferor,
• certification by partnership that effectively connected gain from the disposition would be less than 10 percent,
• certification by transferor that for prior three tax years its effectively connected taxable income for each year was less than 10 percent of its total distributive share of net partnership income for the year;
• certification by transferor that a nonrecognition provision applies, and
• certification by transferor that a treaty provision applies.

Publicly Traded Partnership Interests

The proposed regulations provide rules for withholding and reporting on the transfer of an interest in a publicly traded partnership (a PTP interest). The withholding obligation is generally limited to brokers that receive proceeds from the sale and act on behalf of the transferor. Once the proposed regulations are final, the suspension on withholding on a PTP interest in Notice 2018-08, I.R.B. 2018-7, 352, will end.

Notice Requirements

A foreign partner that transfers its partnership interest will need information from the partnership to compute its tax liability based on the deemed sale. Rules are provided that will facilitate the transfer of information between a foreign partner and partnership for purposes of Code Sec. 864(c)(8).

Proposed regulations provide rules on the attribution of ownership of stock or other interests for determining whether a person is a related person with respect to a controlled foreign corporation (CFC) under the foreign base company sales income rules.

Proposed regulations provide rules on the attribution of ownership of stock or other interests for determining whether a person is a related person with respect to a controlled foreign corporation (CFC) under the foreign base company sales income rules.

The proposed regulations also provide rules to determine whether a CFC receives rents in the active conduct of a trade or business, for determining the exception from foreign personal holding company income.

Ownership Attribution

The proposed regulations provide specific rules for applying principles similar to those in the Code Sec. 958(b) constructive ownership rules when determining related person status under the foreign base company sales rules. Determining related person status is relevant for many purposes, including whether certain types of income can be characterized as subpart F foreign base company sales or service income.

A person is a related person with respect to a CFC if the person is:

• an individual who controls the CFC;
• an entity that controls or is controlled by the CFC; or
• an entity that is controlled by the same person that controls the CFC.

Under current Reg. §1.954-1(f), the Code Sec. 318(a)(3) downward attribution rules, which attribute ownership downward from the owner of an entity to an entity, apply by reference to the Code Sec. 958stock ownership rules. These rules are applied regardless of the size of the ownership interest in a partnership, estate or trust, but are applied to corporations based on a 50-percent or more ownership interest.

Based on concern that the downward attribution rules could produce inappropriate results, the proposed regulations provide that the downward attribution rule of Code Sec. 318(a)(3) and Reg. §1.958-2(d) will not apply for purposes of determining related person status under the foreign base company sales income rules.

This change does not preclude a corporation, partnership, trust, or estate from being treated as controlled by the same person or persons that control the CFC under other rules that remain applicable for the related person rules.

Additionally, an anti-abuse rule is provided with respect to the option attribution rule in Code Sec. 318(a)(4). The option attribution rule will not be applied to treat a person with an option as owning the stock or equity interest for purposes of the related person rule if the principal purpose of using the option was to cause a person to be treated as a related person.

The proposed regulations also incorporate a similar rule issued in Notice 2007-9, 2007-1 CB 401. The rule applies if the principal purpose for the use of an option is to qualify dividends, interest, rents or royalties paid by a foreign corporation for the Code Sec. 954(c)(6) CFC look-through exception from foreign personal holding company income. The rule is proposed to apply for tax years of CFCs beginning after December 31, 2006, and ending before the date that final regulation are published in the Federal Register, and for tax year of U.S. shareholders in which or with which such tax years end.

Foreign Personal Holding Company Rules

The proposed regulations modify the foreign personal holding company rules on amounts paid or incurred by a CFC in connection with the CFC’s rental income and the active rents exception. Rents are excluded from foreign personal holding company income if they are:

• received from a person other than a related person; and
• from the active conduct of a trade or business.

If rents are from leasing property as a result of marketing activities, there must be a substantial marketing organization in order to meet the active trade or business test. Under a safe harbor, an organization is substantial if active leasing expenses equal or exceed 25 percent of adjusted leasing profit. If the CFC receives rents from property it does not own, the substantiality of the organization is determined net of those rent payments.

The propose regulations extend the rule to apply to royalties, in addition to rents. As a result, the substantiality of the organization is determined under the safe harbor, net of the rents or royalties paid or incurred by the lessor CFC, for the right to use the property (or a component part of the property) that generated the rental income.

Applicability Date

The proposed regulations are generally proposed to apply to tax years of CFCs ending on or after the date the final regulations are published in the Federal Register, and for tax year of U.S. shareholders in which or with which such tax years end.

Final regulations have been issued on transactions of U.S. taxpayers that have qualified business units (QBUs) with functional currency other than the U.S. dollar.

Final regulations have been issued on transactions of U.S. taxpayers that have qualified business units (QBUs) with functional currency other than the U.S. dollar. Specifically, the final regulations:

• cover combinations and separations of QBUs subject to Code Sec. 987 (Reg. 1.987-2 and Reg. 1. 987-4),
• cover recognition and deferral of foreign currency gain or loss with respect to a QBU subject to Code Sec. 987 in connection with certain QBU terminations and other transactions involving partnerships (Reg. 1. 987-12), and 
• withdraw Temporary regulations that determine a partner’s share of assets and liabilities of a Code Sec. 987 aggregate partnership (Temporary Reg. 1.987-7T). In general, the regulations prevent the selective recognition of Code Sec. 987 gain or loss.

Applicability Dates

The IRS declined to extend the applicability of these provisions. The final regulations retain the applicability dates of the temporary regulations, as extended by IRS guidance. The final regulations under Reg. 1.987-2 and Reg. 1. 987-4 generally apply to tax years beginning on or after the day that is three years after the first day of the first tax year following December 7, 2016. The final regulations under Reg. 1. 987-12 generally apply to any deferral event or outbound loss event that occurs on or after January 6, 2017.

Medicaid waiver payments were earned income, even though IRS Notice 2014-7 treated them as “difficulty of care” foster care payments that were excluded from gross income. The Tax Court held that excluding the payments from earned income would improperly deny the taxpayers’ earned income credit and the additional child tax credit.

Medicaid waiver payments were earned income, even though IRS Notice 2014-7 treated them as “difficulty of care” foster care payments that were excluded from gross income. The Tax Court held that excluding the payments from earned income would improperly deny the taxpayers’ earned income credit and the additional child tax credit.

IRS Excludes Medicaid Waiver Payments From Gross Income

The taxpayers received payments under a state Medicaid waiver program for proving care to their adult disabled children in the family home. IRC §131 excludes foster care payments from gross income, but it applies only when the foster individuals are placed in the caregiver’s home by the state. Despite the statutory language, however, Notice 2014-7 treats Medicaid waiver payments as excludable “difficulty of care” foster payments. Thus, the taxpayers excluded the payments from their gross income.

Gross Income Vs. Earned Income

However, the taxpayers included the payments in their earned income, which allowed them to claim the earned income credit and the additional child tax credit. The IRS denied the credits, arguing that only gross income can be earned income. The Tax Court sided with the taxpayers.

No Deference For Notice 2014-7

The court concluded that Notice 2014-7 was entitled to little if any deference for two reasons:

1. The taxpayers’ payments did not satisfy the plain statutory definition of excludable foster care payments.
2. The notice reversed the IRS’s long-held position that payments like these were not foster care payments

Although the Medicaid waiver payments were not covered by §131, they absolutely fell within the statutory definition of “earned income.” The IRS could not rely on Notice 2014-7 to deny credits that Congress clearly intended to provide for earned income.

IRS, Not Congress, Provided Double Benefit

Finally, the court recognized that the taxpayers were receiving an unintended double benefit, because they were getting tax credits that were based on tax-free income. However, this was only because the IRS:

1. unilaterally decided to exclude Medicaid waiver
   payments from gross income, and
2. failed to argue that if the Tax Court included the payments in earned income, they should also be included in gross income.

As 2015 winds down, another temporary extension of the tax extenders appears almost certain. Despite talk in early 2015 about finding a permanent solution to the on-again, off-again extenders, the arrival of November brings a short window for Congress to extend these tax breaks. The expected late passage of these popular tax breaks also adds uncertainty to year-end tax planning as well as possibly causing a delay to the start of the 2016 filing season.

As 2015 winds down, another temporary extension of the tax extenders appears almost certain. Despite talk in early 2015 about finding a permanent solution to the on-again, off-again extenders, the arrival of November brings a short window for Congress to extend these tax breaks. The expected late passage of these popular tax breaks also adds uncertainty to year-end tax planning as well as possibly causing a delay to the start of the 2016 filing season.

Tax extenders

A host of temporary but popular tax incentives expired after December 31, 2014. Under current law, these incentives are unavailable for 2015 (although a very small number, notably bonus depreciation, have special provisions that may make them available in 2015 to qualified taxpayers).

For individuals, the popular state and local sales tax deduction, higher education tuition and fees deduction, exclusion of cancellation indebtedness on principal residence, the Code Sec. 25C residential energy credit, charitable distributions from IRAs, and the teachers' classroom expense deduction, have all expired. Unless extended, taxpayers will not be able to claim these incentives when they file their 2015 returns in 2016.

For businesses, the list of expired extenders is lengthy. Along with enhanced expensing under Code Sec. 179, other expired extenders for businesses include:

• New Markets Tax Credit;
• Employer wage credit for activated military reservists;
• Subpart F exceptions for active financing income;
• Look-through rule for related controlled foreign corporation payments;
• Railroad track maintenance credit;
• Seven-year recovery period for motorsports entertainment complexes;
• 100 percent exclusion for gain on sale of qualified small business stock;
• Reduced recognition period for S corporation built-in gains tax;
• Enhanced deduction for charitable contributions of food inventory;
• Tax incentives for empowerment zones;
• Indian employment credit;
• Accelerated depreciation for business property on Indian reservations;
• Special expensing rules for qualified film and television productions;
• Mine rescue team training credit;
• Election to expense advanced mine safety equipment;
• Qualified zone academy bonds;
• Low-income tax credits for non-federally subsidized new buildings;
• Low-income housing tax credit treatment of military housing allowances;
• Treatment of dividends of regulated investment companies (RICs);
• Treatment of RICs as qualified investment entities;
• S corporations making charitable donations of property; and
• Economic development credit for American Samoa.

Pending legislation

A Senate bill, the Tax Relief Extension Act of 2015, may be the likely vehicle to extend the extenders. The Senate bill would extend the tax breaks for individuals and businesses for two years: 2015 and 2016 (retroactive to January 1, 2015 and through 2016). The Senate bill also tweaks some of the extenders. For example, the Senate bill adds the long-term unemployed to the list of eligible targeted groups for the Work Opportunity Tax Credit. The Senate bill also enhances the employer wage credit for activated military reservists, the special expensing rules for film and television, and transit benefits. Our office will keep you posted of developments as extenders legislation moves through Congress.

Not all expired

While taxpayers wait for action on the extenders. Some popular individual tax breaks are available for 2015. They include the American Opportunity Tax Credit (AOTC) (an enhanced version of the Hope education credit available through 2017) and the Code Sec. 25D energy efficiency credit (available through 2016). Additionally, the $1,000 child tax credit is permanent (although some the current provision that reduces the earnings threshold for the refundable portion of the child tax credit to $3,000 is only extended through 2017.). The student loan interest deduction and the child and dependent care credit are also permanent.

Please contact our office if you have any questions about the tax extenders.

After acknowledging earlier this year that hackers breached one of its popular online apps, the IRS has promised more identity theft protections in the 2016 filing season. The IRS, along with partners in the tax preparation community, has identified and tested more than 20 new data elements on returns to help detect and prevent identity-theft related filings. The agency is also working to prevent criminals from accessing tax-time financial products.

After acknowledging earlier this year that hackers breached one of its popular online apps, the IRS has promised more identity theft protections in the 2016 filing season. The IRS, along with partners in the tax preparation community, has identified and tested more than 20 new data elements on returns to help detect and prevent identity-theft related filings. The agency is also working to prevent criminals from accessing tax-time financial products.

Identity theft

Combatting identity theft is on ongoing process as criminals continue to create new ways of stealing personal information and using it for their gain. Tax-related identity theft typically peaks early in the filing season. Criminals file bogus returns early so taxpayers remain unaware you have been victimized until they try to file a return and learn one already has been filed. Between 2011 and 2015, the IRS identified 19 million suspicious returns and prevented the issuance of some $60 billion in fraudulent refunds. During the 2015 filing season, the IRS detected and stopped more than 3.8 million suspicious returns.

However, criminals continue to probe for weaknesses. In May, the IRS discovered that criminals had breached its Get Transcript app. Return information of as many as 300,000 taxpayers may have been compromised, the IRS reported.

New protections

In March, the IRS began working with the return preparation community and the tax software industry to develop a coordinated response to tax-related identity theft. The stakeholders, the IRS reported, have focused on a number of areas including improved validation of the authenticity of taxpayers and information on returns, increased information sharing to improve refund fraud detection and expand prevention, as well as more sophisticated threat assessment and strategy development to prevent risks and threats.

One outgrowth of the process is the creation of new data elements that can be shared at the time of filing with the IRS to help authenticate a taxpayer's identity. The IRS explained that there are more than 20 new data components. They will be submitted with electronic return transmissions during the 2016 filing season. Some of the data elements are

• Reviewing the transmission of the tax return, including the improper and/or repetitive use of internet addresses from which the return is originating;
• Reviewing the time it takes to complete a tax return, so computer mechanized fraud can be detected.
• Capturing metadata in the computer transaction that will allow review for identity theft related fraud.

"We are taking new steps upfront to protect taxpayers at the time they file and beyond," IRS Commissioner John Koskinen said at a news conference in Washington, D.C. "Thanks to the cooperative efforts taking place between the industry, the states and the IRS, we will have new tools in place this January to protect taxpayers during the 2016 filing season."

Financial products

Previously, the IRS announced that it would limit the number of direct deposit refunds to a single financial account or pre-paid debit card to three. Fourth and subsequent valid refunds will convert to paper checks and be mailed to the taxpayer. The IRS emphasized that it will continue to bolster its efforts to curb tax-time financial product fraud.

If you have any questions about tax-related identity theft, please contact our office.

IR-2015-117, FS-2015-23

As the calendar approaches the end of 2015, it is helpful to think about ways to shift income and deductions into the following year. For example, spikes in income from selling investments or other property may push a taxpayer into a higher income tax bracket for 2015, including a top bracket of 39.6 percent for ordinary income and short-term capital gains, and a top bracket of 20 percent for dividends and long-term capital gains. Adjusted gross incomes that exceed the threshold for the net investment income (NII) tax can also trigger increased tax liability. Accordingly, traditional year-end techniques to defer income or to accelerate deductions can be useful.

As the calendar approaches the end of 2015, it is helpful to think about ways to shift income and deductions into the following year. For example, spikes in income from selling investments or other property may push a taxpayer into a higher income tax bracket for 2015, including a top bracket of 39.6 percent for ordinary income and short-term capital gains, and a top bracket of 20 percent for dividends and long-term capital gains. Adjusted gross incomes that exceed the threshold for the net investment income (NII) tax can also trigger increased tax liability. Accordingly, traditional year-end techniques to defer income or to accelerate deductions can be useful.

Techniques for deferring income include:

• Hold appreciated assets;
• Consider a tax-fee like-kind exchange or property if disposing of appreciated assets used for investment or in a business;
• Sell depreciated capital assets, especially if capital gains have been realized;
• Hold U.S. savings bonds;
• Sell property on the installment basis;
• Defer bonuses earned in 2015 until 2016;
• Make salary-reduction contributions into employer-sponsored plans, such as 401(k) plans, 403(b) plans, and 457 plans, and into flexible spending accounts;
• Minimize retirement distributions;
• Defer billings and collections;
• Recharacterize a Roth IRA as a traditional IRA if the traditional IRA was converted to a Roth IRA in 2015, and the assets in the Roth IRA have subsequently declined in value.

It is important to monitor the progress of tax legislation. Congress has not yet renewed individual and business tax extender provisions that expired at the end of 2014, but historically Congress does renew these provisions. Extenders for individuals include the state and local sales tax deduction (in lieu of the state and local income tax deduction), the higher education tuition and fees deduction, the teacher's classroom expense deduction, and the residential energy property credit.

Techniques for accelerating deductions include into 2015:

• Bunch itemized deductions into 2015 by paying medical expenses, making charitable contributions, and paying miscellaneous expenses such as employment-related items (don't delay bill payments until 2016);
• Accelerate payments of state and local taxes by increasing withholding or making the final state estimated tax payment installment in 2015;
• Make payments/contributions by credit card (timing is based on payment by credit card, not on payment of the credit card bill);
• Use Code Sec. 179 for business expensing and bonus depreciation to write off the costs of newly-acquired equipment.