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President Obama signed into law on March 25 the Philippines Charitable Giving Assistance Act (H.R. 3771), allowing taxpayers the option of accelerating into 2013 their charitable deduction for certain cash contributions made for the relief of victims of Typhoon Haiyan, which struck the Philippines in November 2013. Under the new law, a taxpayer may treat any otherwise qualifying cash contribution for the relief of victims made after the date of enactment (after March 25, 2014) and before April 15, 2014 as made on December 31, 2013, and not in 2014.

 

The Senate had approved the measure earlier on March 25 by unanimous consent. The House approved the measure on March 24.

 

The new law also provides that a “telephone bill” showing the name of the donee organization, the date of the contribution, and the amount of the contribution will be deemed to meet the recordkeeping requirements of Code Sec. 170(f)(17). That Code section ordinarily would require, among other things, a “written communication from the donee.” 

 

Two questions may spring from this reference to “telephone bill”:  (1) Does it include texting donations?  (2) And, if so, are donations by texting not usually deductible if not protected within specific legislation?

 

In response to Question #1, texting donations are apparently covered, if not implied to be the main reason for the provision, The bill language in this new law for the most part mirrors the language used in the Hiring Incentives to Restore Employment (HIRE) Act (P.L. 111-126), Sec. 1, which accelerated the deduction of cash contributions made in relief of the victims of the January 11, 2010 earthquake in Haiti. The Joint Committee on Taxation Report (JCX-2-10) that accompanied the HIRE Act, in elaborating on the provision, commented: Thus, for example, in the case of a charitable contribution made by text message and chargeable to a telephone or wireless account, a bill from the telecommunications company containing the relevant information will satisfy the requirement.”

 

In response to Question #2, donations by text technically probably must then ordinarily be acknowledged by the donee organization. IRS Pub 526, Charitable Contributions, under “When to Deduct” states: “Contributions made by text message are deductible in the year you send the text message if the contribution is charged to your telephone or wireless account.” However, under “Recordkeeping,” Pub 526 only recites, as sufficient substantiation, “ “bank record,” “credit card statement,” or “a receipt …. from the qualifying organization.”  A receipt from the telephone company is not included in this list.

 

  Also of note: The period within which the contributions for Typhoon relief receive favorable treatment (March 26-April 14, 2014) appears to be drafted solely to encourage an immediate rush of new cash donations, since it does not similarly reward any contribution made previously in 2014 between the Jan 1 and March 25 period.  The original version of the bill, as introduced in December, prospectively would have accelerated deductions for the January 1 through March 1, 2014 period. 

After a year of draft tax reform proposals from the House and the Senate covering specific areas of tax law, Ways and Means Committee Chair Camp has put forth a comprehensive tax reform draft.  The Senate tax reform effort has been stalled since Finance Committee Chair Baucus was appointed as Ambassador to China.  The House draft consists of eight titles:  Tax Reform for Individuals, Alternative Minimum Tax Repeal, Business Tax Reform, Participation Exemption System for the Taxation of Foreign Income, Tax Exempt Entities, Tax Administration and Compliance, Excise Taxes, and Deadwood and Technical Provisions.  The overall proposal is projected to be revenue neutral and distributionally neutral among household income categories.

 

Individual tax reform includes a simplified rate structure with 10 and 25 percent tax rates.  However, the draft also includes a 10 percent surtax on higher income taxpayers. Capital gains taxation would revert to an older system of exempting part of the gains rather than a separate rate structure.  The standard deduction and child tax credit would be increased and personal exemptions eliminated.  Tax breaks for education would be simplified with a focus on the American Opportunity Credit and repeal of other provisions including the exclusion for savings bonds used for education, the tuition and fees deduction, and the deduction for student loan interest.  Coverdell education savings accounts would be frozen.  Many credits would be repealed including the dependent care credit, the adoption credit, the first-time homebuyer credit and the energy-related credits. Significant modifications would be made to itemized deductions, including mortgage interest and charitable contributions, and deductions for state and local taxes, casualty losses, medical expenses, and employee business expenses would be among those slated for repeal.  In the pension and retirement area, further contributions to traditional IRAs would be eliminated, along with new SEPs and SIMPLE 401(k)s, with the focus shifting to Roth IRAs, including eliminating income restrictions on Roth contributions.  Several employment tax modifications are also proposed.

 

Business tax reform takes a similar form with a 25 perent corporate tax rate and the repeal of many tax breaks. Depreciation, net operating loss deductions, and the amortization of advertising expenses would be revised.  The research and development credit would be revised but made permanent.  A long list of provisions are slated for repeal with the domestic production activities deduction, amortization of pollution control facilities, and repeal of like-kind exchanges being among those involving the most projected revenue increases.  Included in accounting method changes is the repeal of LIFO.  Included in financial instrument changes is the termination of private activity bonds.  There are also significant changes involving the insurance industry, pass-thorugh entities, REITs, interactions with foreign peresons and entities, and compensation.

 

The new peoposed foreign exemption system would involve a deduction for dividends received by domestic corporations from certain foreign corporations, a limitation on losses from foreign corporations, and a transition rule for current deferred foreign income.  The move to an exemption system would also involve changes to the foreign tax credit system and the treatment of passive and mobile income.

 

Similar to the more specific prior tax reform drafts, the Ways and Means Committee is soliciting input and feedback on this comprehensive draft.  Most commentators express doubt that there will be any significant tax reform legislation passed in 2014; however, as the tax reform proposals get increasingly detailed, this draft may be moving us closer to an eventual serious attempt at passing comprehensive tax reform.

This past week was a significant one politically on Capitol Hill.  Reading the tea leaves for how the future of tax legislation has changed as a result, the prospects seem to remain the same: gridlock on tax reform legislation in 2014, with a promise of a breakthrough in 2015  …And with extenders legislation still possible a bit sooner.

 

Hopes of renewed bipartisanship being jumpstarted by the Farm Bill that was signed into law this past week were immediately dashed by House Speaker Boehner’s comment that no immigration bill was possible this year.  Meanwhile, another showdown on the debt ceiling over the next few weeks, although likely to have a good ending, will likely postpone any immediate bipartisan cooperation on other matters; and perhaps poison cooperation further over the coming months.

 

The imminent departure of Senate Finance Committee Chairman Max Baucus after being confirmed by the Senate on Feb. 6 as ambassador to China, however, may hold some promise for a fresh start toward bi-partisan cooperation. Although along with Baucus goes a powerful voice for tax reform, Sen. Ron Wyden, D-Ore., who is expected to take over the helm of the Finance Committee as early as this coming week, brings a fresh, pragmatic perspective that may encourage bi-partisanship.  True, Wyden brings to the job some of his own ideas about tax reform that are not particularly popular with the GOP, one being a standard deduction for the middle class that will effectively exempt the first $30,000 of income from federal tax.  However, he said about this proposal this past week that he would do so through “a bipartisan reform effort.”  

 

Wyden also carried forward a bipartisan theme in response to recent questions about what “reform” should be tackled first.  When asked this past week whether reform should be in stages with corporate and international tax addressed first, he sidestepped this larger question entirely by saying that extenders legislation should come first.  "I think the challenge is to make sure that we deal with those so that we don't have horrendous economic consequences with investment tapering off, and use them as a bridge to broader tax reform," he explained.  So, his game plan may be that he will try to have everyone take a smaller step first through brokering an extenders deal through bi-partisan cooperation, which would then set the stage for bipartisanship directed toward the more ambitious work on tax reform in 2015.

The budget agreement reached by Congress postpones a major spending fight until after the 2014 mid-term elections, but the compromises used to reach agreement have resulted in a funding cut for the IRS for fiscal year 2014 as compared to 2013.  The funding reductions reflect not only the tight fiscal climate in Washington but also a punishment of the IRS for its handling of Code Sec. 501(c)(4) applications.  It is somewhat ironic that the IRS mishandling of 501(c)(4) applications was caused by insufficient resources and insufficient guidance as to how much political activity 501(c)(4) organizations can undertake and still qualify for exempt status.  The funding reductions will just make the IRS's job that much more difficult.  If the funding reductions reduce IRS enforcement activity, it could end up adding to the federal deficit rather than reducing it.  We have already seen some downturn in IRS audit percentages in the most recent statistics after a few years of increasing audit activity that had reached its nadir following enactment of the IRS Restructuring and Reform Act of 1998.

Congress is gone for the year…with virtually nothing to show in the way of tax legislation since the passage of the American Taxpayer Relief Act on January 1.  Of some note, the Bipartisan Budget Act of 2013, which passed the House 332 to 92 on Dec 12 and the Senate on Dec 18 by a 64-36 vote, sets overall discretionary spending for the current fiscal year at $1.012 trillion and provides $63 billion in sequester relief over two years. The law also restricts access to Social Security’s Death Master File to curb identity theft and the filing of fraudulent income tax returns. Also before leaving, the full Senate approved 59-36 the nomination of John Koskinen, who is known as a private-sector turnaround specialist, to lead the IRS as Commissioner in a turn around of sorts after the 501(c)(4) controversy that has continued since May. 

 

Also of note, Congress failed to a package of tax extenders (Sen 1859), thereby leaving dozens of tax breaks to expire on December 31.  Expectations are that an extenders bill will find success sometime in early Spring 2014, with retroactive reinstatement given to those that make the final list. 

 

Although hopes for extenders in 2013 had hinged in part of their becoming part of a more comprehensive tax reform package, the same expectations in 2014 are fading as hopes for tax reform in the near future also fade.  The nomination of Senate Finance Committee Chair Max Baucus, D-Mont., as the next ambassador to China, removes a leading voice for tax reform; and along with the previous announcement by Rep Dave Camp, Ways and Mean Chair, not to seek reelection in the 2014 mid-terms, momentum for tax reform is predicted to slow considerably if not stall completely until 2015.

 

Short-term, too, the removal of tax reform from the immediate future requires any tax extenders bill to find its own sources for revenue offsets.  While a higher tax on carried interest, or the removal of LIFO, have been discussed on the revenue side, the need to cut back on the extent of extender provisions has also been gaining supporters. The renewal of bonus depreciation or enhanced section 179 expensing may be significantly scaled back, if not removed entirely.  It appears that the next step in this process will likely not be taken until the President submits his usual FY budget recommendations in February.

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