Governor Cuomo Proposes Increases to NY State Tax on Carried Interest: New York Governor Andrew Cuomo announced proposed legislation intended to increase state taxes on hedge fund managers, private equity investors, venture capitalists, and certain real estate investors who receive income from a carried interest treated as capital gain. The announcement says that the legislation would treat such income as ordinary income for New York state tax purposes and would impose a 17% tax on “every hedge fund manager working in New York State – including those living outside of the state.” The legislation would only take effect if Connecticut, New Jersey, Massachusetts, and Pennsylvania enact legislation having substantially the same effect as the bill.

Tax Court Upholds Validity of Section 956 Regulations: In SIH Partners LLLP v. Comm’r, 150 T.C. No. 3, the Tax Court upheld the validity of Treas. Regs. 1.956-2(c)(1) and 1.956-1(e)(2). The petitioners in the case argued that Treasury failed to satisfy “the reasoned decisionmaking requirement and the reasoned explanation requirement” under the Administrative Procedure Act. In upholding the regulations, the Tax Court explained that it could not “demand that an agency engage in and document an exhaustive review of hypothetical ‘aspect[s] of the problem’ that no one has raised and which Congress has not asked the agency to consider” and that the substance of the regulations were a permissible construction of the statute entitled to deference under Chevron. The Tax Court also reaffirmed its holding in Rodriguez v. Comm’r, 137 T.C. 174 (2011) that income inclusions required under sections 951(a)(1)(B) and 956 do not constitute qualified dividend income.

American Bar Association Calls for Increased IRS Funding: Karen L. Hawkins, the chair of the American Bar Association (ABA) Section on Taxation, wrote a letter dated January 16, 2018 to the chairs and ranking members of the House and Senate subcommittees responsible for making appropriations for the IRS. The letter calls on Congress to provide the IRS with “appropriate and adequate funding for fiscal year 2018 and subsequent years.” The letter notes that such funding is especially urgent in light of the need for the IRS to work with the Treasury Department to develop and issue a range of guidance and administrative changes in light of the 2017 tax reform legislation. According to a National Taxpayer Advocate report published earlier this month, the IRS has estimated it will need $495 million over the next two years to implement the new legislation; the IRS has faced substantial budget cuts since 2010. The ABA letter also calls on Congress to work with the administration to identify, nominate, and promptly confirm qualified individuals for Commissioner and Chief Counsel of the IRS, positions which are currently filled by acting personnel.