Washington Hotline – May 19, 2015


Washington Hotline

Highway Trust Fund Bill Slowly Rolling Forward

On May 31 the current bill to provide funding for the Highway Trust Fund will expire. If Congress does not act, hundreds of summer highway construction projects will be placed on hold.

At a May 11 conference in Washington, Transportation Secretary Anthony Foxx predicted another short term extension for highway project funding. Rep. Rosa DeLauro (D-CT) was on a panel with Foxx. She agreed that the solution would be short term and noted, “There is not going to be a long-term fix – the five or six years that we have been able to pass, pull together on a bipartisan basis. This will be the 33rd short-term extension over the last six years.”

At the same conference, Rep. John Delaney (D-MD) also predicted a short-term funding solution. Delaney praised the Grow America Act which would fund the Highway Trust Fund for six years. It uses an 8.75% tax on the $2 trillion of overseas profits of U.S. corporations to create an American Infrastructure Fund.

Senate Finance Committee Chair Orrin Hatch (R-UT) is attempting to find $11 billion in tax revenue to fund the projects from June 1 to December 31, 2015. He is regularly meeting with House Ways and Means Chair Paul Ryan (R-WI) to discuss acceptable offsets. Both chairmen have indicated they anticipate creating a solution by the end of May.

Editor’s Note: The shortfall in highway funding is in part due to Washington action in mandating more fuel-efficient cars. The federal gas tax receipts assumed a larger number of gallons used each year. With the more fuel-efficient cars, Americans are not using the anticipated amount of gas and the result is less tax revenue for the Highway Trust Fund. Because increases in the gas tax are very unpopular, Washington has simply moved forward with 33 short-term patches.

International Tax Reform Bill by Summer?

House Ways and Means Committee Member Charles Boustany Jr. (R-LA) has been developing an international tax reform plan. He indicated this week that he believes it will be available by summer. Boustany’s proposal will be similar to the territorial system of international taxation advocated by former Ways and Means Committee Chair Dave Camp.

The proposal is expected to include three main components. There would be an “innovation box” that allows lower rates for new developments and concepts. The top corporate rate would be reduced, perhaps to the 25% proposed by several earlier plans. Finally, there will be a dividend exemption system.

Former Chairman Camp spoke in Washington on May 7 to the American Bar Association Section on Taxation. He noted that the United States corporate rate is 39% when both federal and state taxes are included. This is at least 10% higher than the average rate for the other seven large economies who are our competition.

Camp compared the current corporate tax system developed back in the 1960s with the advances in phone technology. He suggested that we are essentially using a rotary phone while the other seven nations have upgraded to an Apple 6 smartphone.

In his address, Camp noted, “Every other G7 country and 28 of the other 33 OECD member countries have international tax rules that allow their resident companies to repatriate active foreign earnings to their home country without paying a significant second layer of domestic tax.”

The current U.S. system subjects the overseas earnings to a second level of tax if they are returned to this country. As a result, there are over $2 trillion of U.S. corporate earnings that are invested overseas.

Camp predicted that companies would “seek to accomplish tax reform for themselves” if Congress does not take action. There has been a wave of both inversions and foreign takeovers that are primarily tax-motivated because our tax system needs to be updated.

Editor’s Note: Many tax commentators expect major tax reform in 2017 following the elections. Both Senate Finance Committee Chair Orrin Hatch and House Ways and Means Committee Chair Paul Ryan have working groups developing principles for that tax reform. However, it is possible that Boustany’s international corporate reform could occur in 2015. The primary challenge is that both chairmen desire to include passthrough businesses in that reform while the White House is opposed to any change in those rates. Over half of all businesses are LLCs, Sub S corporations or partnerships. A corporate-only reform could leave these passthrough entities at a disadvantage.

Carryover Basis Proposed Regulations

In 2010 the executors of decedents with larger estates were permitted to elect out of estate taxes under Sec. 1022. The election applies to property owned by the decedent. This property included one-half of tenancies by the entirety, qualified revocable trust assets, both halves of community property and the decedent’s separate property.

There was no estate tax, but there was a system of carry-forward basis. The basis of decedents could be adjusted by a $3 million Spousal Property Basis Increase or a $1.3 million Aggregate Basis Increase. Property transferred to a spouse typically qualified for the Spousal Property Basis Increase. Assets moved to a bypass trust could benefit from the $1.3 million Aggregate Basis Increase.

On May 11, Treasury published REG-107595-11; 80 F.R. 26873-26882. Treasury determined that for “decedents dying in calendar year 2010, basis determined under that section will continue to be relevant until all of the property that had basis determined under Section 1022 has been sold or otherwise disposed of. Accordingly, the existing regulations need to be updated to include appropriate references to basis determined under Section 1022.”

The proposed regulations provide examples of specific adjustments. For example, “any qualified rehabilitation expenditures incurred by the decedent under Section 48 within the measuring period that are treated as having been incurred by the transferee decreased the transferee’s basis for purposes of the substantial rehabilitation test.”

There are numerous technical rules that may impact the claimed basis on future sales of Sec. 1022 assets. If any of these assets are sold in the future, CPAs should review these proposed regulations to make the appropriate basis adjustments.

Applicable Federal Rate of 1.8% for May — Rev. Rul. 2015-8; 2015-17 IRB 1 (17 Apr 2015)

The IRS has announced the Applicable Federal Rate (AFR) for May of 2015. The AFR under Section 7520 for the month of May will be 1.8%. The rates for April of 2.0% or March of 1.8% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2015, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return. Federal rates are available by clicking here.