Legislative Lowdown

Treasury Department and IRS Release Preliminary Guidance on Semiconductor Tax Credit. On March 23, the Treasury Department and IRS published proposed regulations for implementing the new section 48D advanced manufacturing investment tax credit (ITC) enacted through the Chips and Science Act. This ITC is equal to 25% of a taxpayer’s investment in qualified tangible property designed to produce semiconductors or semiconductor tooling equipment. The credit is available for facilities placed in service after Dec. 31, 2022, provided the construction of the facility begins before Jan. 1, 2027.
 
The proposed regulations offer additional guidelines for calculating the amount of a taxpayer’s qualified investment under section 48D(b)(1) for both corporate and passthrough entities. The rules generally align the credit calculation for partnerships with determinations used in established regulations for solar and wind tax credits under section 48. The regulations further clarify that the tax credit will not apply to any capital expenditures qualifying for the rehabilitation tax credit under section 47.
 
The proposed regulations provide definitions for several specific terms associated with the tax credit, which signal the approach that the Treasury Department and IRS may take in expected guidance used with other energy credits under the Inflation Reduction Act (IRA). This includes clarity that the term “qualified property” encompasses all items of property or advanced manufacturing facilities operated as part of a single project. This broad definition of included property may provide insight into the future treatment of multiple technologies operated as one project in other credits, such as the modified sections 48, 48C and 48X credits.
 
Taxpayers can elect to monetize the section 48D ITC as an overpayment against their taxes, allowing eligible entities to receive a direct cash payment equal to the full credit amount regardless of tax liability. Direct pay options are also provided for certain taxpayers monetizing green-energy credits implemented through the IRA.
 
Last week, Treasury Assistant Secretary for Tax Policy Lily Batchelder confirmed that the IRS had begun work on an electronic pre-filing registration process for eligible companies and organizations to monetize new direct pay and transferable tax incentives. The development of the registry is expected to be completed in late 2023 and will aim to limit tax fraud and ensure eligible taxpayers can more readily access the value of the applicable credits. Before the official launch of the registry, the Treasury Department and IRS will conduct user experience research to ensure the process works as intended.
 
Upcoming Energy-Tax Guidance Timeline. On a call last Wednesday, Treasury Assistant Secretary for Tax Policy Lily Batchelder outlined the timeline for the release of outstanding guidance on several energy-tax provisions included in the Inflation Reduction Act (IRA). Topping the list will be proposed guidance on the section 30D clean-vehicle tax credit, which the Treasury Department and IRS are expected to release later this week.
 
This guidance will detail the battery-sourcing requirements for qualifying electric vehicles (EVs) to be eligible for the $7,500 credit. To receive this full amount, the legislation mandates that a certain percentage of the value of the battery minerals must be mined or processed in North America or in a country that maintains a free-trade agreement with the United States. Despite outstanding questions regarding the definition of a “qualifying free-trade agreement,” the Treasury Department is reported to have reached qualified free-trade agreements with both the European Union and Japan (more information below), which have significant interests in the EV battery industry. These agreements are already garnering pushback from members of Congress, organized labor and U.S. businesses engaged in EV battery production.
 
The section 30D guidance was initially due last year but was delayed to provide regulators more time to draft credit guidelines. In the interim, the Treasury Department has waived the battery-sourcing rules for taxpayers to qualify for the full credit. This move solicited strong criticism from Sen. Joe Manchin (D-WV), who had insisted on the domestic-sourcing requirements as a condition for his support of the expanded EV incentive.
 
In the coming months, according to Batchelder, the Treasury Department, IRS and Energy Department will release further guidance on certain additional credit amounts provided to taxpayers who place qualified property near localities in which a coal mine or coal-fired power plant has recently closed—so-called “energy communities” under the IRA. Batchelder said that the Treasury Department, IRS, Labor Department and Commerce Department are also finalizing additional domestic-content, wage and apprenticeship guidelines required for taxpayers to receive bonus amounts for certain green-energy credits.

Tax Worldview

Republicans Urge House Appropriators to Eliminate OECD Funding. On March 24, Rep. Adrian Smith (R-NE), chairman of the House Ways and Means Subcommittee on Trade, sent a letter urging lawmakers to end U.S. support for the Organisation for Economic Co-Operation and Development (OECD) in fiscal year 2024. The letter was specifically addressed to the chairman and ranking member of the House Appropriations Subcommittee on State, Foreign Operations and Related Programs and was signed by nine other GOP members of the House tax-writing committee.
 
As the letter notes, the United States currently provides nearly $45 million or approximately 20% of the OECD’s Part I budget—more than double the contribution of any other country. The Part I budget is calculated based on the relative size of the member countries’ economies and accounts for a majority of the total OECD funding. Other significant contributors include Japan and Germany, each providing approximately 10% of the OECD’s Part I budget. Notably, China, the world’s second-largest economy, is not a member of the OECD and does not help finance the organization.
 
Despite significant U.S. contributions, the letter’s authors assert that the OECD has recently acted against the interests of U.S. taxpayers and has generally “evolved into a venue that advocates against the economic interests of the United States.” The letter explicitly references the preliminary global agreement on digital services taxes (DSTs) [Pillar One] and the international minimum-tax regime [Pillar Two] negotiated through the OECD by the Biden administration in 2021. Smith asserts that these agreements do not have sufficient congressional support to be enacted in the United States, but they will still have significant tax ramifications for U.S. multinational companies if enforced by foreign countries.
 
At a pair of hearings last week with U.S. Trade Representative Katherine Tai, GOP lawmakers raised similar concerns surrounding the ongoing implementation of DSTs by foreign countries. Senate Finance Committee Ranking Member Mike Crapo (R-ID) specifically addressed Canada’s pursuit of a new DST, which he perceived to be a violation of the United States-Mexico-Canada Agreement (USMCA) and the country’s commitment not to enact unilateral DSTs during ongoing Pillar One negotiations.
 
Regarding Pillar Two, Smith’s call to limit U.S. support for the OECD comes as several governments have already begun to enact policies to implement the global minimum-tax regime. Notably, the European Union reached a preliminary agreement in December for each member country to adopt the changes to their domestic tax laws by the end of 2023. Other countries, such as the United Kingdom, Australia and Japan, have also taken initial steps to adopt the global minimum-tax regime.
 
Bipartisan Group Rebuffs Biden’s Calls to Limit Step-Up in Basis. Last Tuesday, a bipartisan group of lawmakers introduced H.Res.237 to recognize the importance of stepped-up basis in preserving family-owned farms and small businesses.
 
The resolution reacts to a provision in President Joe Biden’s FY2024 budget, which would treat any transfer of appreciated property during a taxpayer’s life, or after death, as a taxable event. The proposal would provide individuals with a lifetime exemption of $5 million in property value (indexed for inflation). Lifetime transfers and a decedent’s estate would be subject to exceptions for transfers to a surviving spouse and for certain interests in closely held businesses.
 
In effect, the proposal would eliminate stepped-up basis for taxpayers seeking to pass property that exceeds the established threshold to their beneficiaries. The proposal is not Biden’s first time offering changes to stepped-up-basis rules. Similar proposals were included in prior budget submissions. Early versions of the Build Back Better legislation also included a similar provision to limit the use of stepped-up basis for transfers by individuals with over $1 million in assets.
 
However, in opposition to Biden’s proposal, the House resolution expressed formal support for stepped-up basis at death and voiced resistance to any efforts to impose additional taxes on multigenerational enterprises. Introduced by Rep. Tracey Mann (R-KS), the resolution has already garnered 66 co-sponsors, including three Democrats: Reps. Jim Costa (D-CA), Angie Craig (D-MN) and Jimmy Panetta (D-CA).

1111 Constitution Avenue

Democratic Senators Request Yellen Use Existing Authority to Crack Down on Trusts. In a letter to Treasury Secretary Janet Yellen on March 20, a group of progressive senators requested that the Treasury Department investigate and limit wealthy individuals’ use of grantor-retained annuity trusts (GRATs). The lawmakers, led by Sen. Elizabeth Warren (D-MA), expressed their concerns over perceived tax avoidance involving GRATs utilized by “ultra-wealthy” individuals in conjunction with other estate-planning tools, including valuation discounts, step-up in basis and the temporarily increased estate, gift and generation-skipping transfer tax exemptions.
 
To limit the use of these strategies, the senators offered several specific actions they believed the Treasury Department could pursue without congressional approval. These included revoking several private letter rulings that upheld the tax-favorable status of grantor trusts. Specifically, the letter requested a reversal of rulings that allow the transfer of assets between a grantor and grantee to be counted as a non-taxable event for federal income tax purposes. The lawmakers also requested a reversal of a ruling that held that gift tax would not apply to a grantor’s payment of tax attributable to trust income.
 
Furthermore, the lawmakers requested that the Treasury Department require GRATs to set a minimum remainder interest of at least 25% of contributed assets to qualify for tax-favorable treatment. This proposal largely mirrors a provision included in President Joe Biden’s FY2024 budget proposal, and it is unclear if Yellen could unilaterally enact these changes without congressional approval.
 
In addition to these specific proposals for regulators to exercise expanded authority, the lawmakers posed several questions to the Treasury Department with regard to taxpayers’ current use of grantor trusts. These include questions regarding the Treasury Department’s estimates for the total value of assets currently held in grantor trusts of various sizes. Other questions presented by the lawmakers seek budget estimates on the potential revenue that could be gained by implementing the proposals outlined in the letter. Responses to these inquiries are requested from the Treasury Department by April 3.
 
Thus far, the Biden administration has generally been unwilling to stretch its regulatory authority to enact significant modifications to established tax-planning techniques, such as those referenced in this letter. However, with split control of Congress, the Treasury Department may be willing to pursue stronger rulemaking in lieu of legislative action on key tax policy priorities.

At a Glance

House Tax-Writing Committee Expected to Hold Next Field Hearing in Georgia. According to a GOP staffer, the House Ways and Means Committee will hold its next field hearing in Georgia on April 21. This hearing is expected to focus on the state of the American economy, and it follows two earlier field hearings on the same topic. At the most recent field hearing in Oklahoma, several lawmakers questioned witnesses on the effectiveness of current federal agricultural policy, a topic that is likely to be a focus in the upcoming Georgia hearing. While there is undoubtedly an appetite among some lawmakers to consider tax policy in the Farm Bill, it will be a tough sell in a divided Congress. Ultimately, the House Ways and Means Committee would need to sign off on including tax policy in the legislation—something the committee has been reluctant to support in the past.
 
Japan Reaches Trade Agreement with the United States on Critical Minerals. Earlier today, the Treasury Department announced that it had struck a special “free trade agreement” (FTA) with Japan that will allow Japanese companies involved in the production of battery components for electric vehicles to benefit under the Inflation Reduction Act subsidies. This agreement, and a similar one recently negotiated with the European Union, is already receiving pushback from lawmakers and labor unions that are concerned it will undermine incentives for domestic battery production. However, if the Treasury Department administers the credits as if these special agreements qualify like other formal FTAs, it is unlikely that the political opposition will derail the quasi-FTAs. It remains to be seen whether any U.S. businesses will undertake a legal challenge and have standing for such a case. To date, Redwood Materials, a Nevada-based battery manufacturer, has been vocal in opposition to the Biden administration’s liberal interpretation of the FTA exception.
 
Treasury Releases Fiscal Year 2023 and 2024 Spending Plans. On March 24, the IRS published its annual budget in brief analysis, containing a high-level overview of the agency’s planned expenditures in the coming years. According to the document, the IRS plans to use an additional $8.6 billion in fiscal years 2023 and 2024 above-baseline mandatory Inflation Reduction Act (IRA) appropriations to hire approximately 20,000 new full-time equivalent workers. The IRS provided more information on the Biden administration’s recent request for a 15% increase in fiscal year 2024 discretionary funding. The agency said that these new funds would support taxpayer services and assist in the reduction of the paper return backlog. The agency plan also notes that the IRS intends to commence audits on 3,817 high-income taxpayers in fiscal year 2023 and an additional 4,830 the following year.
 
IRS Watchdog Suggests Improvements for Tax Gap Estimates. On March 23, the Treasury Inspector General for Tax Administration (TIGTA) released an audit report responding to lawmakers’ ongoing concerns over the process that the IRS uses to determine the value of total uncollected tax revenue. TIGTA determined that the IRS office responsible for estimating the tax gap, the Office of Research, Applied Analytics and Statistics (RAAS), did not have a formal strategy for its estimates and had not developed estimates for several sources of noncompliance that should have been reflected in IRS figures. Furthermore, TIGTA asserted that RAAS lacked formalized external or internal review processes and any written policies, procedures or guidance to govern the program’s adherence to specified milestones. To remedy these issues and improve tax-gap estimations, TIGTA offered several procedural recommendations to the IRS.

Brownstein Bookshelf

House Advances GOP Energy Bill. Yesterday, the House Rules Committee voted 9-4 to report a structured rule on the Lower Energy Costs Act.
 
Stakeholders Weigh in on Corporate Minimum Tax Guidance. Several industry comments were submitted this week in response to proposed regulations on the corporate alternative minimum tax. These included responses from the Business Roundtable, Chamber of Commerce and American Bar Association.
 
IRS Released Updated List of Top Tax Scams. On March 27, the IRS published its annual “Dirty Dozen” campaign warning individuals of potential illicit practices used by “shady” tax preparers to scam taxpayers.

Hearings and Events

House Ways and Means Committee
 
On Tuesday, the full committee held a hearing entitled “Hearing on President Biden’s Fiscal Year 2024 Budget Request with Health and Human Services Secretary Becerra.” The following witness testified:

• Xavier Becerra, U.S. Secretary of Health and Human Services

On Wednesday, the Subcommittee on Work and Welfare will hold a hearing entitled “Welfare is Broken: Restoring Work Requirements to Lift Americans Out of Poverty.” The following witnesses will testify:

• Grant Collins, Senior Vice President for Workforce Development, Fedcap Group
• Shakirah Francis, Employment Services Social Work Supervisor, Department of Social Services Employment Services Division
• Heather Reynolds, Managing Director, Lab for Economic Opportunities at the University of Notre Dame
• Jacob Maas, Chief Executive Officer, West Michigan Works!
• Victoria Gray

 
Senate Finance Committee
 
On Thursday, the full committee will hold a hearing entitled “Pharmacy Benefit Managers and the Prescription Drug Supply Chain: Impact on Patients and Taxpayers.” The following witnesses will testify:

• Robin Feldman, Arthur J. Goldberg Distinguished Professor of Law and Director of the Center for Innovation, Hastings College of Law, University of California
• Karen Van Nuys, Ph.D., Executive Director, Value of Life Sciences Innovation, Leonard D. Schaeffer Center for Health Policy and Economics, University of Southern California
• Lawton Robert Burns, Ph.D., James Joo-Jin Kim Professor of Health Care Management and Co-Director of the Roy and Diana Vagelos Program in Life Sciences and Management, Wharton School, University of Pennsylvania
• Matthew Gibbs, Pharm.D., President, Capital Rx
• Jonathan Levitt, Founding Partner, Frier Levitt Attorneys at Law

 
Private Sector
 
Tuesday, March 28
 
Peterson Institute for International Economics (PIIE)
Global Economic Prospects: Spring 2023
 
Thursday, March 30
 
National Bureau of Economic Research
Environment and Energy Economics Program Meeting, Spring 2023
 
Tuesday, April 4
 
Cato Institute
Cut the Budget, Change the Strategy
 
Urban Institute
Challenges and Opportunities: How Tight Labor Markets Create Mobility Ladders for Workers and Low-Income Families