Legislative Activity

Tax-Writers Running Out of Time on Highway Bill

Following the passage last week of the House’s $8 billion five-month highway patch, the Senate continues to remain focused on moving forward with its own bill, which provides for a six year highway reauthorization and three years’ worth of funding (more than $47 billion), with offsets derived from: (1) shifting the deposit of civil motor vehicle safety penalties to the Highway Trust Fund; (2) tax compliance, such as mortgage information reporting; (3) fees and receipts, such as index user fees; and (4) outlays, such as rescinding certain unused TARP funds.

After weekend work on the legislation, the Senate hopes to wrap up the process before the House leaves town on Friday. Still, concerns over the underlying safety title, various pay-fors, and unrelated amendments (i.e., votes on Affordable Care Act repeal and Export-Import reauthorization) have put the bill’s future in jeopardy. What’s more, recognizing that the longer-term bill faces a tough road, Majority Leader McConnell has suggested that his backup plan will be to put forward a two-month patch in its steed. With only five legislative days left in the session before the House closes up shop until September, it is unclear what approach will ultimately prevail.

Importantly, if the House’s five-month extension does win the day, House Ways and Means Committee Chairman Paul Ryan (R-WI) is likely to press forward with international tax reform when lawmakers return to Washington in September. If the Senate’s longer-term bill prevails, however, any outstanding hope for international tax reform this year is all but dead.

Lawmakers to Debate Tax Code’s Impact on Foreign Acquisitions  of U.S. Businesses

This week, the Senate Permanent Subcommittee on Investigations will hold a hearing to explore the impact of the U.S. tax code on foreign acquisitions of U.S. businesses and the ability of U.S. businesses to expand by acquisition. Despite Democrats continued frustration over tax inversions – and desire to combat the issue with further regulations – we expect Senator Rob Portman (R-OH), Chair of the Subcommittee, to continue urging lawmakers to instead focus on reforming the tax Code as a way to make U.S. businesses more competitive and encourage them to stay in the United States.

This Week’s Hearings:

  • Tuesday, July 28: The House Ways and Means Subcommittee on Select Revenue Measures will hold a hearing titled “Reform of the Multiemployer Pension System.”
  • Tuesday, July 28: The Joint Economic Committee will hold a hearing titled “Dynamic Scoring: How Will It Affect Fiscal Policymaking?”
  • Wednesday, July 29: The Senate Judiciary Subcommittee on Oversight, Agency Action, Federal Rights and Federal Courts will hold a hearing titled “Revisiting IRS Targeting: Progress of Agency Reforms and Congressional Options.”
  • Thursday, July 30: The Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations will hold a hearing titled “Impact of the U.S. Tax Code on the Market for Corporate Control and Jobs.”

Regulatory Activity

IRS Issues Proposed Rule on “Disguised Payments”, Exempt Organizations

On Thursday, July 23, the Department of the Treasury and Internal Revenue Service (IRS) issued a long-awaited notice of proposed rulemaking (Notice) on “Disguised Payments for Services.” The Notice addresses, among other things, the tax treatment of management fee waivers, the tax treatment of carried interests received by a recipient for services to be provided by a person other than the recipient of the carried interest (such as a management company), and a variety of technical, but sometimes important issues, relating to whether payments or obligations to make payments are treated as: (1) distributive shares of partnership income; (2) payments to a partner in a capacity other than as a partner to which section 704(a) of the Internal Revenue Code applies; or (3) “guaranteed payments” to which section 704(c) applies. The technical provisions can be of importance because they may convert what a partner thought would be a share of partnership capital gain income to ordinary income.

The Notice states that proposed regulations included in the Notice will be effective with respect to arrangements entered into or modified after the regulations are issued in final form. It also states that pending final regulations, the determination of whether a payment is a disguised payment for services is made on the basis of the statute and the legislative history and “[p]ending the publication of final regulations, the position of the Treasury Department and the IRS is that the proposed regulations generally reflect Congressional intent as to which arrangements are appropriately treated as disguised sale payments for services.” Thus, for practical purposes the proposed regulations can be viewed as effective immediately with potential retroactive effect.

The Squire Patton Boggs tax team will provide a more detailed analysis of the Notice soon, including its impact on partners in existing partnerships.

Separately, IRS Commissioner John Koskinen last week indicated that final rules on political activity for exempt organizations will not be effective before the 2016 presidential election. According to Commissioner Koskinen he does not “want people thinking we are trying to get these regs done so we can influence the election.” However, the IRS may actually propose the rules in advance of the election, providing for a 90 day comment period, which will be followed by a hearing. Specifically, the rules are expected to address how much political activity exempt organizations can engage in without jeopardizing their tax-exempt status.