On April 11, 2017, we discussed what constitutes Tax Reform. In this blog post, we will explore the process by which Tax Reform will likely be created. After reading this post, if it seems to you that the legislative process for making tax laws is an awful lot like “making sausage,” you are perceptively correct.
The legislative process starts with the selection of special ingredients by lawmakers, who generally keep a keen eye on the intended result. The ingredients are mixed together carefully during the legislative process. Spices and other ingredients are added from various sources (e.g., input from legislative staff, the Treasury and industry). The product that results from the process is not always what was exactly intended at the start. Consequently, it may be tweaked somewhat before it is finally packaged and presented to the public.
This is the first of a series of posts on Tax Reform. In this series, I will be covering: what Tax Reform means, the legislative process for enacting it, the likely timing of its arrival, the estate & gift tax and income tax proposals already presented by the Trump administration and the U.S. House of Representatives, and possible planning strategies that businesses and individuals may wish to consider.
What Tax Reform Is
As a starter, what exactly is “Tax Reform”? Is it something you will know if you see it? Are there objective standards as to what constitutes “Tax Reform”?
The late Senator Russell B. Long, a Democrat from Louisiana, served more than four decades in the U.S. Senate. He was Chairman of the U.S. Finance Committee from 1966 to 1981, and was very influential in shaping our tax laws during the ’60s, ’70s and ’80s. In fact, he was one of the major contributors to the Tax Reform Act of 1986.
As a footnote, the ’86 Act, enacted over thirty years ago, was the last major tax reform legislation passed by our lawmakers. So, it has been a long time since we have seen Tax Reform.
In most areas of law, substance prevails over form. Code Section 1031 is possibly one of the few exceptions to this time-honored rule of jurisprudence. Under Code Section 1031, form may prevail over substance. The U.S. Tax Court’s decision in Estate of George H. Bartell, et. al. v. Commissioner, 147 TC 5 (June 10, 2016), supports this thesis.
Estate of George H. Bartell et. al. v. Commissioner
The facts of the case are fairly straightforward. Bartell Drug, an old family-owned chain of retail drugstores located in the state of Washington, was owned by the petitioner and his two children. In 1999, the company entered into an agreement to purchase a parcel of land upon which it intended to build a new drugstore (“Replacement Property”). Bartell Drug had a store located on a property it owned in White Center, Washington, and it anticipated selling this property (“Relinquished Property”) to fund, in part, the cost of the Replacement Property. In order to lawfully avoid paying taxes on the gain from the sale of the Relinquished Property, the stage was set for an exchange of real property that would qualify for tax deferral under Code Section 1031. A few obstacles, however, stood in the taxpayer’s way, namely: (i) the Replacement Property was found by the taxpayer before a buyer for the Relinquished Property could be found; (ii) the Replacement Property was land without the improvements needed to operate a drugstore (i.e., a building); and (iii) in order to defer all of the gain from the sale of the Relinquished Property, the taxpayer would need to buy the Replacement Property once it was improved.
As I reported previously, Oregon Measure 97 was overwhelmingly defeated by voters in the state’s general election this past November. It certainly appeared that the voters spoke loudly and clearly on November 8, 2016, when they voted to defeat the ill-designed amendments to the Oregon corporate minimum tax regime contained in Measure 97. Flaws in the legislation included:
- Measure 97 contained a corporate alternative tax based on Oregon gross receipts – a tax that has no relationship to profits.
- Measure 97 proposed a corporate alternative tax applicable only to C corporations. S corporations, entities taxed as partnerships and Oregon benefit companies would have escaped the proposed tax altogether.
- While Oregon benefit companies would have escaped the proposed tax, non-Oregon benefit companies were to be subject to the tax. As a result, Measure 97 was clearly in conflict with the Interstate Commerce Clause.
Enter Legislative Concept 3548
On February 13, 2017, Oregon Senate Finance Committee Chairman Mark Hass (D) requested that Legislative Concept 3548 (“LC 3548”) be released. LC 3548 is a legislative referendum to amend the Oregon Constitution in order to create a “Business Privilege Tax” based on gross receipts. It looks a lot like Measure 97. There are, however, some key differences, including:
It is hard to believe, but 2016 is close to an end. The year has proven to be a quite fascinating year in the world of tax law. Given the results of November’s presidential election and the composition of the House and the Senate, 2017 should be even more intriguing in terms of tax law developments. I plan to report these tax developments as they occur in the new year. Stay tuned!
During the past twelve months, we have explored numerous tax topics, including:
The proposed $3 billion per year tax-raising bill, Oregon Measure 97, was defeated yesterday by a 59% to 41% margin. The fight was long and bloody. Media reports that opponents and proponents together spent more than $42 million in their campaigns surrounding the tax bill.
So, What Now?
The defeat of Measure 97 eliminates the proposed 2.5% gross receipts alternative corporate tax applicable to C Corporations with annual Oregon gross receipts over $25 million. Oregon C Corporations, however, are still faced with a minimum tax based on Oregon gross receipts. The minimum tax applicable to Oregon’s C Corporations is based on gross revenues as follows:
As a reminder, you are invited to join me at the NYU 75th Institute on Federal Taxation (IFT) taking place on November 13-18, 2016 at Hotel del Coronado in San Diego, California. The IFT is one of the leading tax conferences in the country, geared specifically for CPAs and attorneys who regularly are involved in federal tax matters. I hope you can attend.
As previously reported, former U.S. Tax Court judge Diane L. Kroupa and her now estranged husband, Robert E. Fackler, were indicted on charges of conspiracy to defraud the United States, tax evasion, making and subscribing a false tax return, and obstruction of an Internal Revenue Service audit. On September 23, 2016, Mr. Fackler pleaded guilty to attempting to evade more than $400,000 in federal taxes. He also signed a plea agreement wherein he sets out in some detail a long-term scheme, which he proclaims was masterminded by Ms. Kroupa to evade taxes.
Effective October 1, 2016, the Internal Revenue Service (“IRS”) changed its approach to conducting appeals conferences. The changes were likely adopted by the government under the guise of efficiency and cost savings. With that said, the changes probably will result in increased negative taxpayer perception of the IRS administrative process, and a significant reduction in prompt and fair resolution of matters at the conference level.
In a nutshell, the major change adopted by the IRS, subject to limited exceptions, is that the government will conduct all appeals conferences by telephone (or a virtual conference, if available). IRM § 220.127.116.11.1. An in-person conference generally will only be allowed if the appeals conferee (i.e., the “Appeals Technical Employee” or “ATE”) and the Appeals Team Manager (“ATM”) concur that it is appropriate and reasonable. As such, they must agree:
As reported in my April 2016 blog post, former U.S. Tax Court judge Diane Kroupa and her husband, Robert E. Fackler, were indicted on charges of conspiracy to defraud the United States, tax evasion, making and subscribing a false tax return, and obstruction of an Internal Revenue Service audit. The indictment resulted from an investigation conducted by the Criminal Investigation Division of the Internal Revenue Service and the United States Postal Inspection Service.
Larry J. Brant is a Shareholder in Garvey Schubert Barer, a law firm based out of the Pacific Northwest, with offices in Seattle, Washington; Portland, Oregon; New York, New York; Washington, D.C.; and Beijing, China. Mr. Brant practices in the Portland office. His practice focuses on tax, tax controversy and transactions. Mr. Brant is a past Chair of the Oregon State Bar Taxation Section. He was the long term Chair of the Oregon Tax Institute, and is currently a member of the Board of Directors of the Portland Tax Forum. Mr. Brant has served as an adjunct professor, teaching corporate taxation, at Northwestern School of Law, Lewis and Clark College. He is an Expert Contributor to Thomson Reuters Checkpoint Catalyst. Mr. Brant is a Fellow in the American College of Tax Counsel. He publishes articles on numerous income tax issues, including Taxation of S Corporations, Reasonable Compensation, Circular 230, Worker Classification, IRC § 1031 Exchanges, Choice of Entity, Entity Tax Classification, and State and Local Taxation. Mr. Brant is a frequent lecturer at local, regional and national tax and business conferences for CPAs and attorneys. He was the 2015 Recipient of the Oregon State Bar Tax Section Award of Merit.
Upcoming Speaking Engagements
- New York, NY, 10.22.17-10.27.17
- San Francisco, CA, 11.12.17-11.17.17