Lawmakers Press Onward with Tax Reform Efforts; Tax Extenders, Highway Funding Coming Into Focus
With tax-writers having moved trade legislation out of their respective committees, the Senate Finance Committee’s Tax Reform Working Groups have begun to hold roundtables to brief their colleagues on the status of their work and to receive initial feedback. In somewhat of a surprise move, Chairman Hatch indicated last week that he may decide to keep the Working Groups’ recommendations confidential. Despite the relatively tight-lipped nature of the process thus far, Members and their staff remain generally positive about the possibility of seeing a package from the Finance Committee; however, it remains clear that successfully achieving tax reform – even in some limited way – will not be an easy task, especially given that Chairman Hatch will only consider proposals that have bipartisan support.
Relatedly, last week, Senator Chuck Schumer (D-NY) indicated that he believes lawmakers are close enough “in concept” on international tax reform that such reforms seem achievable. In particular, Senator Schumer stated that the International Tax Working Group has generally come to an agreement on the need to eliminate deferral and implement a territorial system of taxation – an idea supported by both President Obama and former House Ways and Means Committee Dave Camp (R-MI), which bodes well for that group’s proposal. However, with regard to individual tax reform, Senator Schumer has suggested that there is not “much chance at all” of such reforms being achieved this Congress, due in large part to debate over the rates and how to best protect small businesses who are taxed as passthroughs (i.e., entities taxed under the individual portion of the tax Code).
Recognizing the difficult path ahead, Chairman Hatch has signaled that he plans to move forward with an extenders package – including a number of permanent business tax breaks – if lawmakers are unable to reach a consensus on tax reform in a timely manner. According to Ranking Member Ron Wyden (D-OR), he and fellow Democrats are willing to negotiate on the issue, as “[t]he longer that it takes to get traction for tax reform, the louder will be the drumbeat from the extender line.” Notably, House Majority Leader Kevin McCarthy (R-CA) recently released a legislative agenda for the rest of May, which includes consideration during the week of May 18 of the American Research and Competitiveness Act of 2015 (H.R. 880), a bill that would simplify and permanently extend the research and development (“R&D”) tax credit.
Another agenda item for tax-writers – and inextricably intertwined with efforts on tax reform generally – is funding the Highway Trust Fund beyond its May 31 expiration date. While various ideas continue to circulate in Washington, it appears that the most likely short-term solution will be an extension of the Highway Trust Fund through the end of the year, using a combination of a General Fund Transfer and various revenue raisers. Although the revenue raisers that will ultimately be included in a short-term extension remain unclear, both Chairman Hatch and House Ways and Means Committee Ranking Member Sandy Levin (D-MI) have suggested that providing an extension for the remainder of the year will provide tax-writers with the best chance of reaching agreement on a longer-term (possibly a six-year) reauthorization, which potentially could be funded using monies raised through repatriation in the context of international tax reform.
One final consideration for U.S. tax-writers: international efforts on base erosion and profit sharing (BEPS), such as the Organisation for Economic Co-operation and Development’s (OECD) BEPS Project. As former Committee Chairman Camp emphasized last week, “[t]he rapid changes in global tax policy constitute both a challenge and a threat as the United States considers a long-overdue reform of our nation’s tax laws. The bottom line is that change is coming – if not here at home, then it is certainly coming from overseas. So now is the time to engage. 2015 is a very important year. We need tax reform now.”
Wyden Releases “Move America”
In a renewed effort to expand the use of municipal bonds to attract private investment in the nation’s infrastructure, Ranking Member Wyden this week introduced the “Move America” program, which would authorize up to $180 billion of tax-exempt bonds over 10 years and provide up to $45 billion in new infrastructure tax credits to match private-equity investment. According to his office’s analysis of the bill, the proposal could cost as much as $15 billion over a 10-year scoring window. It is presently unclear how Ranking Member Wyden’s “Move America” program fits into the Senate Finance Committee’s efforts to develop a long-term source of funding for the Highway Trust Fund.
IRS Proposes Regulations on MLPs and NPCs, Issues Guidance on Stock Transfers and Reorganizations; Treasury Delays 871(m) Rules
On Wednesday, May 6, the Internal Revenue Service (IRS) published in the Federal Register highly-anticipated proposed regulations clarifying what income-generating activities will allow Master Limited Partnerships’ (MLPs) to qualify for, or maintain, their tax-advantaged structure. Specifically, the proposal contains an exclusive list of operations that are considered qualifying activity for MLP treatment. According to the IRS, the list can be updated through further public guidance. The proposal also indicates that because certain activities supporting the production of minerals and natural resources are “intrinsic” to the process and give rise to qualifying income under the statute, the IRS will follow a three-part test to determine if a support activity is an essential service that qualifies for MLP treatment. The regulations would apply to income earned by a partnership in a tax year beginning on or after May 6. Comments on the proposed regulations are due by August 4.
Moreover, on Friday, May 8, the IRS published in the Federal Register final and temporary regulations to provide that a notional principal contract (NPC) with a non-periodic payment – whether or not significant —be treated as two separate transactions consisting of one or more loans and an on-market level payment swap. The IRS is issuing the regulations as proposed rules and withdrawing temporary rules (T.D. 9589) published in 2012. The final and temporary regulations became effective upon publication in the Federal Register. Comments on the accompanying proposed rules are due by August 6.
Separately, the IRS issued guidance (Rev. Rul.2015-10) concluding that the successive transfer of a parent corporation’s interests in a taxable limited liability corporation to a series of subsidiaries in exchange for additional stock would be treated as two transfers of stock in exchanges governed by tax code Section 351, followed by a reorganization under Section 368(a)(1)(D). The IRS also issued guidance on similar issues involving transfers of stock between a domestic corporation and a foreign holding company subsidiary (Rev. Rul. 2015-9). Both revenue rulings will be published on May 26 in Internal Revenue Bulletin 2015-21.
Additionally, the Department of Treasury announced last week that it plans to postpone the effective date of its rules on dividend equivalent withholding until January 1, 2017. While finishing the final rules remains a priority for the government, the Treasury also recognized practitioners’ concerns and appears to agree that a January 1, 2016, effective date would have been problematic.