Senate Jumps Over Procedural Hurdle; Passes Budget with Tax Reform Instructions

Tax Reform cleared a major procedural hurdle last night when the Senate passed a budget 51-49. Perhaps more important, Senate and House Republicans also reached an agreement on how to reconcile the differing House and Senate budget bills, which may eliminate the need for a conference committee. As expected, the Senate’s version of the budget contains instructions for tax reform, opening the door for Republicans to pursue tax reform with a bare majority through the budget reconciliation process.

The Senate budget resolution does provide some interesting (although not unexpected) clues as to the content of tax reform legislation.

For example, the Senate’s budget resolution allows the tax reform bill to add up to $1.5 trillion to the deficit over 10 years, which House Republicans confirmed would carry through to the final negotiated resolution. Continue Reading

Senate Finance Explores International Tax Reform

In the first hearing on tax reform since the “Big Six” released their framework last week, the Senate Finance Committee focused on international tax reform. The academics invited to testify criticized the framework proposal, which combines elements of a territorial system and a minimum tax, and took the opportunity to advocate their own proposals for international tax reform. While Chairman Hatch (R-UT) expressed support for a move to a territorial regime, Ranking Member Wyden (D-OR) characterized the framework as a “corporate wish list.”

Professor Itai Grinberg voiced a full-throated defense of a territorial system, arguing that the current U.S. Continue Reading

Treasury Considers Revoking Documentation, Disguised Sale Rules

The Treasury Department this morning released a report proposing the revocation or revision of eight significant Obama-era regulations.  Among other proposals, the Treasury Department is considering revoking the “documentation rule” promulgated under Section 385 and the regulations changing the allocation of partnership liabilities for purposes of determining whether a disguised sale has occurred.  The “bottom dollar” guarantee rules for partnership liabilities would be retained, however, as would the “per se” rule of the Section 385 regulations, at least for now, pending tax reform.   Additional proposals include providing an exception to the new Section 367 regulations for transfers of foreign goodwill and going concern value in situations unlikely to be abusive and providing additional time and flexibility for the implementation of new rules under Section 987. Continue Reading

Court Invalidates Serial Acquiror Inversion Rule

As we await the release of the Treasury Department’s recommended revisions to certain significant Obama-era regulations, a court has struck down perhaps the most controversial of the regulations issued during President Obama’s tenure: the anti-inversion temporary regulation that frustrated the Pfizer-Allergan combination. As we described in a recent client memorandum, the District Court for the Western District of Texas invalidated the temporary regulation that excluded certain recent acquisitions of U.S. companies by the non-U.S. party to a potential inversion transaction in calculating the “ownership fraction,” which had the effect of reducing the size of the non-U.S. party and thus of making it more difficult to satisfy the requirements of Section 7874. Continue Reading

The Big Six Framework “Arrives”

The Big Six tax reform framework has arrived, sort of. The Big Six officially released “The Unified Framework for Fixing our Broken Tax Code” this morning, in a format (and in many ways content) that resembles the House Republican blueprint from 2016. Although more detailed than the proposal put forward by the Trump administration in April, the Framework leaves a number of key decisions up to the House and Senate tax writing committees. Without further ado, here is a summary of what the Framework contains:

A few initial observations:

Not a Lot of Detail.  While the framework sets forth a rough outline of a tax reform bill, the level of detail contained in the framework and the number of instances where the framework specifically leaves discretion to the tax writing committees indicates that the plan is very fluid at this stage. Continue Reading

The Framework is Coming

The Big Six are scheduled to announce their tax reform framework sometime tomorrow. Previews of its content have been steadily leaking this week. Here is what we’ve heard so far:

  • Top corporate tax rate cut to 20% (down from 35%)
  • Pass-through business income (excluding income characterized as compensation) taxed at 25%
  • Full expensing (but only for five years)
  • Top individual tax rate cut to 35% (down from 39.6%) (maybe)
  • Individual rate brackets simplified to three brackets (maybe) set at 10%, 25% and 35%
  • The Framework may give Congress the flexibility to include a fourth individual bracket at 39.6%
  • Standard deduction doubled
  • Deductions for charitable giving and mortgage interest preserved
  • Deduction for state and local taxes eliminated
  • Estate tax repealed

Notably absent are rumors about international tax reform. Continue Reading

What is in a Baseline? Current Law vs. Current Policy

Revenue neutrality has traditionally been among the stated goals of Congressional Republicans with respect to tax reform. This goal generally requires that any rate reduction, new tax incentives, or policy changes (e.g., territoriality) be funded with new revenues from elsewhere in the system. Recently, though, some lawmakers have started asking how to properly define “revenue-neutrality” (and whether it can be defined in a way that requires less new revenue to offset the revenue lost as a result of tax reform).  (Others are now questioning whether revenue neutrality is a worthwhile goal at all.)

At issue is how the status quo or “baseline” is defined for purposes of comparing proposed reforms.  Continue Reading

Foreign Minimum Tax: A Primer

Although light on details, the recent statement on tax reform from the “Big 6” group of Republican Congressional and White House policymakers provided two important hints on the direction that tax reform may be heading. First, the Big 6 remain dedicated to imposing a “system that encourages American companies to bring back jobs and profits trapped overseas.” Whether this means true international tax reform or merely lower tax rates at home is up for debate. However, if international tax reform remains a goal, the joint statement made clear that it will not be accomplished by way of a destination-based cash flow tax (a “DBCFT”). Continue Reading

Senate Democrats Announce Their Terms

45 out of 48 Senate Democrats signed a letter to President Trump, Mitch McConnell (R-KY) and Orrin Hatch (R-UT) today, urging Republicans to work with them on tax reform. The olive branch, of course, came with terms:

  • No increase in the tax burden on the middle class
  • No tax cuts for the top 1%
  • Tax Reform is accomplished through regular order, not the budget reconciliation process
  • Tax Reform is deficit neutral

The full letter is available here. Aside from the request to pursue tax reform through regular order, the Democrat’s terms look remarkably similar to positions publicly supported by the Big 6 (check out our infographic). Continue Reading

(Re)Setting the Stage for Comprehensive Tax Reform: Big Six Send First Signals

The Legislative Calendar: Six Months In.  With yesterday’s late night last ditch failed effort by the Senate to pass a so-called “skinny” repeal of the Affordable Care Act, the Republican controlled chamber has nearly run the clock on its strategy for passing major legislation by majority vote, which relied on reconciliation instructions under the FY 2017 budget resolution (a process we highlighted back in December). Congress will soon need to adopt budget resolutions for the 2018 fiscal year if regular order is to be readopted and any progress is to be made on the President’s budget proposals (which are traditionally only a starting point for negotiations). Continue Reading