On February 26, Representative Dave Camp (R-Mich.), chairman of the House Ways and Means Committee, released his much-awaited comprehensive tax reform plan (the “Camp Proposal”).  That proposal seeks to cut marginal tax rates on individuals and corporations by dramatically reducing the number of available deductions and credits, and proposes significant other changes to the tax code that would affect taxpayers across tax brackets and industries.

Many view this proposal as the most comprehensive tax reform plan released by a member of Congress since 1986, and its breadth is hard to overstate – the legislative text is 978 pages and the section-by-section explanation is 198 pages.  In this alert, we describe the current state of comprehensive tax reform, what this proposal means for taxpayers, and the most significant aspects of the proposal in the areas of individual taxation, general corporate taxation, partnerships and S corporations, real estate, insurance, energy, international, REITs and RICs, and employee benefits and executive compensation.

Comprehensive Tax Reform: Where Are We Now?

The release of the Camp Proposal is the most recent step in a long process that Chairman Camp, along with then-Senator (now Ambassador) Max Baucus (D-Mont.), has engaged in to achieve tax reform.  Chairman Camp previously released discussion drafts on international tax, pass-throughs and financial products, and much of what was included in those drafts is reflected in the Camp Proposal.  Senator Baucus had also released discussion drafts on international tax, energy, cost recovery and accounting, and tax administration.  The two Congressmen also have held dozens of hearings and travelled the country together pushing tax reform.

Although there is regular rhetoric in Washington about the need for tax reform, a clear path to comprehensive tax reform has yet to develop.  The issue of whether to increase revenue through tax reform has been a major partisan divide preventing agreement.  In addition, shifting leadership may affect the future of tax reform.  Senator Ron Wyden (D-Ore.) has succeeded to the position of chairman of the Senate Finance Committee following Senator Baucus’s swearing in as Ambassador to China.  Although Senator Wyden has expressed support for tax reform, it is not clear whether tax reform is a near-term priority for him.  In addition, Chairman Camp will step down from his position as chairman of Ways and Means at the end of the current Congress, pursuant to Republican leadership rules.  Chairman Camp may view his proposal as a final chance to build momentum for comprehensive tax reform. 

What Does this Tax Reform Proposal Mean for Taxpayers?

If nothing else, the Camp Proposal demonstrates just how hard comprehensive tax reform will be.  It should be reviewed with the following in mind:  don’t overestimate its importance, but don’t underestimate its importance

  • Don’t overestimate its importance:  The conventional wisdom is that comprehensive tax reform will not happen in 2014, so any comprehensive tax reform package is highly unlikely to become law this year.  In addition, with respect to the Camp Proposal, Congressional Republicans – members of Chairman Camp’s own party – have not embraced it, and its design as a revenue neutral plan runs counter to requirements of Congressional Democrats who have insisted that tax reform raise revenue.  Moreover, as noted above, Chairman Camp will give up the Ways and Means chair at the end of the current Congress.  Because this proposal is Chairman Camp’s, and Chairman Camp’s alone, the prospect that it will become law at any point appears slim. 
  • Don’t underestimate its importance:  Although structured as a comprehensive tax reform plan, the Camp Proposal is in effect an index of hundreds of separate tax reform proposals, any of which may be introduced as part of another bill to offset some future spending program or to provide a tax cut.  Although there is no expectation that the entire proposal will become law, any individual provision has the potential to be included in other legislation, including any future comprehensive tax reform proposal.  It is therefore very important for taxpayers to understand which provisions of the Camp Proposal may be adverse to their interests and evaluate how best to deal with the possibility that such a provision may be considered in future legislation. 

Highlights of the Camp Proposal

Although the Camp Proposal is a comprehensive reform plan, there are certain key features that are addressed by the plan, particularly in the areas of individual tax, corporate tax, partnerships and S corporations, real estate, insurance, energy, international tax, REITs and RICs, and employee benefits and executive compensation.  The most significant proposals are summarized below.  The legislative text and section-by-section explanation are available at TaxReformLaw.com, Sutherland’s blog tracking business tax reform considerations and proposals.


The Camp Proposal would lower individual tax rates and repeal the AMT, while eliminating or limiting many deductions and credits. 

  • Lower rates and fewer brackets – The Camp Proposal provides for individual tax brackets of 10% and 25%, and imposes an additional 10% surtax on single taxpayers earning $400,000 and married couples earning $450,000.  Accordingly, individual rates would be decreased and the number of tax brackets would be reduced from seven to, effectively, three: 10%, 25% and 35%. 
  • Deductions and credits – The personal exemption would be eliminated, and many itemized deductions and credits would be repealed or limited.  Significantly, the deduction for state and local taxes would be repealed and the amount of mortgage indebtedness eligible for the home mortgage interest deduction would be reduced for newly-incurred debt from $1 million to $500,000.  The charitable contribution deduction would also be modified and limited.  The effect of certain lost deductions and credits may be offset by an increased standard deduction.
  • Restriction on tax preferences – The Camp Proposal would restrict the use of tax preferences, including the standard deduction and all itemized deductions, except the charitable deduction, for taxpayers in the 35% bracket. 
  • Capital gain preference – The preferential rate applicable to net capital gains would be repealed and replaced with an “above-the-line” deduction of 40% of an individual taxpayer’s net capital gain.  The net effect is to create preferential treatment of capital gains that is similar to, but not exactly the same as, the current capital gain rates.
  • Net Investment Income Tax – The 3.8% net investment income tax would be left in place in the Camp Proposal.

General Corporate

The Camp Proposal would reduce the corporate tax rate, repeal the corporate AMT, and eliminate or modify corporate deductions and credits. 

  • Lower Rate – The tax rate for corporations would be reduced to 25% by 2019.
  • Depreciation and NOLs – The Modified Accelerated Cost Recovery System (MACRS) for tangible property would be repealed and replaced with rules “substantially similar” to the Alternative Depreciation System (ADS).  The Camp Proposal would limit the deduction of NOL carrybacks and carryforwards to 90% of a corporation’s taxable income and repeal special carryback rules.
  • Research and experimentation – All research and experimentation expenditures would be required to be amortized over a five-year period.  The research credit would be made permanent, but the amount of available research tax credit would be reduced and amounts paid for supplies and with respect to computer software would be eliminated as qualifying expenses.
  • Intangibles – The amortization period for acquired goodwill and other intangibles would be increased to 20 years, a self-created patent, invention, model or design, or secret formula or process would no longer be treated as a capital asset, and gain from the sale of a patent would no longer be treated as a long-term capital gain.

Partnerships and S Corporations

The Camp Proposal’s partnership and S corporation provisions generally draw from the prior discussion draft on small business reform that Chairman Camp released in March 2013.  Specifically, the proposal follows the approach of, and is generally consistent with, option 1 of the 2013 discussion draft, which proposed to retain but amend the existing regimes applicable to these entities.  It also includes some new proposals that were not contained in the prior discussion draft. 


  • Carried interest – Gains from carried interests (i.e., profits interests received in exchange for services) would be characterized as ordinary income, if the partnership is engaged in a trade or business (other than a real property trade or business) conducted on a regular, continuous and substantial basis of (i) raising or returning capital, (ii) identifying, investing in, or disposing of other trades or businesses, and (iii) developing such trades or businesses.
  • Publicly-traded partnerships – The passive income exception would be repealed for publicly-traded partnerships other than those with 90 percent of their income from activities relating to mining and natural recourses.
  • Anti-mixing bowl rules – The 7-year time limit on the application of the anti-mixing bowl rules would be eliminated.
  • Basis adjustment – Basis adjustments would be mandatory in connection with partnership distributions and dispositions of partnership interests, including in cases involving securitization and electing investment partnerships, and in tiered partnership structures.
  • Audit procedures – The existing TEFRA partnership audit procedures and the audit procedures for “electing large partnerships” would be replaced with a single set of rules for auditing partnerships and their partners at the partnership level.

S Corporations

  • S corporation with C corporation history – The built-in gains recognition period would be permanently reduced to 5 years, and, for an S corporation with accumulated earnings and profits, (i) the 25% threshold above which the corporation’s excess net passive income is subject to corporate-level tax would be increased to 60% and (ii) the rule that terminates the S election if the corporation has had accumulated earnings and profits and excess net passive income for three consecutive years would be repealed.  
  • Permissible S corporation shareholders – Permits non-resident aliens to be S corporation shareholders through an electing small business trust.

Real Estate

The Camp Proposal includes a number of provisions that would be adverse to taxpayers engaged in the real estate business or otherwise holding investments in real estate.  

  • Like-kind exchanges – The like-kind exchange rules would be repealed so that exchanges of like-kind property would be taxable.
  • Installment sales – The exceptions and special rules that apply to installment sales of farm property (including timberlands), timeshares and residential lots would be repealed, so that (i) dealers of such property would no longer be permitted to report sales of such property on the installment method and (ii) the interest charge on the tax deferral that generally applies to installment sales exceeding $5 million would apply to sales of farm property, timeshares and residential lots.
  • Timber – Gain from timber cut by an owner and used in its trade or business, and gain from the disposal of timber (or coal or domestic iron ore) held for more than one year before disposal, would be treated as ordinary income rather than capital gain.
  • Depreciation – The ordinary income recapture rules with respect to depreciable real property would be revised so that gain on a disposition of depreciable real property would be treated as ordinary income to the extent of earlier depreciation deductions taken with respect to the property, except that the recapture of depreciation attributable to periods before January 1, 2015 would be limited to the depreciation adjustments only to the extent that they would exceed the depreciation that would have been available under the straight-line method.


A number of provisions included in the Camp Proposal target insurance companies or otherwise would have a direct impact on them.  Overall, the effect of the Camp Proposal is to more closely align the taxation of insurance companies (both life and property and casualty) with that of other corporate business enterprises.  Importantly, however, the Camp Proposal would not change present law tax incentives for individuals who purchase life insurance products to provide financial protection for themselves and their families, including the well-established rule that exempts “inside build-up” from current taxation.

For a comprehensive discussion of the potential impact of the Camp Proposal on insurance companies, see our Legal Alert of February 28, 2014.


The Camp Proposal would repeal or reduce tax incentives for energy production, especially in the alternative energy and renewable fuels sector. 

  • Fuels credits – The credits available for alcohol fuels and alternative fuels (which expired at the end of 2011) and for biodiesel and second generation biofuels (which expired at the end of 2013) would not be extended and therefore would effectively be repealed.
  • Production tax credit – The production tax credit (PTC) would be reduced then eliminated for generation of electricity from wind, biomass and certain other renewable resources.  The PTC requires that construction of the project begin by the end of 2013 with the credit, adjusted annually for inflation, being available for 10 years beginning in the year the project is completed.  The Camp Proposal would entirely eliminate the inflation adjustment and repeal the credit for electricity produced after 2024 (including for facilities still entitled to additional years of tax credit).  The proposal, perhaps contrary to IRS guidance, would also require that there be a continuous plan of construction with regard to the project (whether a PTC or ITC in lieu of PTC is claimed), regardless of when completed. 
  • Investment tax credit – The investment tax credit (ITC) for construction of solar and other renewable energy facilities would be repealed.  The repeal would affect the credit for energy facilities that are completed after 2016, including facilities that claim the ITC in lieu of PTC. 

Many other renewable and alternative energy tax credits also are repealed under the Camp Proposal.


The Camp Proposal retains much of the structure of a discussion draft that Chairman Camp released in 2011 on the taxation of foreign income of the subsidiaries of U.S. businesses. 

  • Participation exemption regime – The Camp Proposal retains the general design of the participation exemption regime, or territorial system, from the 2011 discussion draft.   This includes a 95% deduction for dividends paid by foreign corporations to 10% U.S. shareholders.  No foreign tax credits would be allowed to offset the tax on the residual 5% of the dividends. 
  • Transition tax – The post-1986 earnings and profits of a foreign corporation which has not been previously taxed by the U.S. would be subject to a transition tax.  The portion of earnings and profits that consists of cash or cash equivalents would be taxed at 8.75%, while the remaining earnings and profits (ostensibly from property, plant, and equipment) would face a tax of 3.5%. 
  • Foreign intangibles income – A new category of subpart F income would be added: “foreign base company intangible income.”  This is a modified version of “option C” in the 2011 discussion draft.  The foreign base company intangibles income would be equal to the foreign subsidiary’s gross income over 10 percent of the foreign subsidiary’s adjusted basis in depreciable tangible property, with some exclusions. 
  • Low taxed foreign income – While under current law, income which may be subpart F is excluded if the effective tax rate is at least 90% of the U.S. rate, this “high-tax kickout” would be adjusted.  For foreign personal holding income, it would be increased to 100% of the top U.S. rate, but it would be decreased to 50% of the U.S. rate for foreign base company sales income and 60% of the U.S. rate for the new foreign base company intangibles income.


Under the Camp Proposal, real estate investment trusts (“REITs”) and regulated investment companies (“RICs”) would continue to exist as vehicles for collective investment on a tax-efficient basis.  However, the proposal provides for a number of significant changes to the rules governing these entities.  The proposed changes to the REIT rules are particularly significant.  In some cases, the proposed changes would add flexibility to REIT operations, but other rules narrow the types of activities that may be conducted by REITs and would make it more difficult for existing C corporations to convert to REITs. 

  • Conversions and reorganizations – Built-in gains of a C corporation that converts to a REIT would be required to be recognized immediately.  Moreover, all C corporation earnings and profits that must be purged for a former C corporation to qualify as a REIT would be required to be paid in cash, effectively eliminating the taxable stock dividend technique that has been used for most public company conversions in the last 15 years.  REITs would be prohibited from participating in tax-free spin-off transactions and the Camp Proposal would prohibit any entity that was involved in a tax-free spin-off from making a REIT election for 10 years following the spin-off.
  • REIT assets – Timber would be eliminated as a category of real property for purposes of REIT qualification and real property would only include assets with a class life of at least 27.5 years.  The percentage of a REIT’s total assets that may be invested one or more taxable REIT subsidiaries (“TRSs”) would be reduced from 25% to 20%.  TRSs would be allowed to develop and manage REIT property and to operate foreclosure property owned by the REIT.
  • RICs – Changes to the rules applicable to RICs generally would be less severe. Built-in gains of a C corporation that converts to a RIC would be required to be recognized immediately.  Also notable for its absence is an extension of provisions that expired at the end of 2013, which allowed RICs to pass-through interest-related dividends and short-term capital gain dividends to non-U.S. shareholders without the imposition of withholding tax.

Employee Benefits and Executive Compensation

The Camp Proposal would significantly limit non-qualified deferred compensation and deductions for executive compensation paid by public companies, and it eliminates, reduces or freezes various benefits-related deductions, limits and exclusions.  Notably, the proposal would make only minimal changes to the Affordable Care Act, such as repealing the medical device tax. 

  • Compensation planning – Non-qualified deferred compensation would be prohibited for all taxpayers, similar to current rules under Section 457A that are generally limited to offshore deferred compensation.  The compensation deduction limitations of Section 162(m) would be expanded to cover additional executives of public companies and eliminates the exception for performance-based compensation.
  • Retirement plan and IRA contributions – The annual limits on pre-tax elective deferrals to Section 401(k), 403(b), and 457(b) defined contribution plans would be reduced to $8,750, but  the annual limit on Roth contributions (which are after-tax) would be retained at $17,500.  Income limitations on contributions to Roth IRAs would be eliminated.  Moreover, contributions to traditional IRAs would be eliminated and the maximum annual contributions to Roth IRAs would be frozen at 2014 levels until 2024.  Certain other annual limits on contributions to defined contribution plans and benefits under defined benefit plans would be frozen at 2014 levels until 2024.
  • Retirement plan and IRA distributions -- The exclusion from income for net unrealized appreciation on employer securities distributed to a participant from an employer-sponsored retirement plan would be repealed.  With limited exceptions, interests in IRAs and employer-sponsored retirement plan accounts would be required to be distributed within five years of a participant’s death.  In-service withdrawals would be permitted from pension plans and governmental Section 457(b) plans at age 59 ½ to align with rules governing Section 401(k) and 403(b) plans.