Breyer Retire: Looking Back on Supreme Court Tax Cases.After serving for 28 years, Supreme Court Justice Stephen Breyer announced his retirement last Wednesday. During his time on the Supreme Court, Justice Breyer has ruled on several cases with implications for the tax world. Below is a look back on where Breyer and the Supreme Court landed on the following notable tax cases during his tenure.
South Dakota v. Wayfair
In South Dakota v. Wayfair, the Supreme Court ruled that states may charge tax on purchases made from out-of-state sellers without a physical presence in the state. This case overruled Quill Corp v. North Dakota, which required a business to have a physical presence in a state before that state could require the business to collect sales or use tax on purchases made in-state.
Breyer sided with the minority, acknowledging the growth of e-commerce but stating that stare decisis weighed against overruling Quill and that the decision should be left up to Congress.
Alabama Department of Revenue v. CSX Transportation
Alabama required that railroads that purchase diesel fuel pay the 4% sales tax, exempting interstate motor and water carriers from paying the tax. CSX Transportation, Inc. claimed that the state enacted a discriminatory tax that was in violation of the Railroad Revitalization and Regulatory Reform Act of 1976.
The Supreme Court's majority, which included Breyer, ruled in favor of CSX Transportation, Inc., holding that railroads could challenge sales and use taxes that exempt their competitors in the transportation industry, but apply to them.
Oklahoma Tax Commission v. Jefferson Lines
In this case, the Supreme Court addressed whether Oklahoma could impose a retail sales tax on the entire proceeds of bus ticket sales on travel that extended beyond Oklahoma's borders to other states.
The majority held that the state could impose such a tax, ruling that it did not violate the Commerce Clause.
Justice Breyer authored the dissent and argued that the tax was not imposed on a product but "upon interstate travel itself—the very essence of interstate commerce."
Latest BBBA Update: SALT and CTC. In addition to the American Rescue Plan Act and the Infrastructure Investment and Jobs Act, the Build Back Better Act (BBBA) was the primary legislative focus in 2021. In the new year, however, the package has been pushed aside in favor of other policy objectives, such as appropriations, a U.S. innovation and competitiveness bill, and election reform, among other issues.
The most recent BBBA negotiation status update came on Tuesday, when Sen. Joe Manchin (D-WV), who was asked if he was engaged in discussions on the bill, said, "No, no, no, no. It's dead." When asked to clarify, Manchin said, "If we're talking about the whole big package, that's gone." Before the end of the day, Manchin's spokesperson said Manchin was referring to the House bill, not future negotiations, when he said the package was "dead." Although no formal discussions have taken place in weeks, if not months, committee staff are continuing to take taxpayer feedback on various payfors and spending proposals. Even with Manchin's comments, informal discussions could begin this week, according to some familiar with discussions.
Manchin later added that new discussions must begin with a clean slate, suggesting that he was potentially open to a smaller version of the bill. Manchin also said "whatever we come up with" will be a different bill. At the same time, however, Manchin signaled there could still be a deal on revising the tax code and lowering prescription drug costs, calling those two goals "extremely doable."
Despite the slow movement on BBBA, there have been a few policy developments with the package. Below is an update on developments related to the $10,000 cap on state and local tax (SALT) deduction and the Advanced Child Tax Credit (CTC) as they pertain to the BBBA.
State and Local Tax Deduction
Some congressional Democrats have said off the record it would be "okay" if the effort to lift or remove the $10,000 SALT cap was ultimately removed from the BBBA. Sen. Martin Heinrich (D-NM) said "I hope so" when asked if SALT was on its way out of the package, adding that he is "not a fan of SALT." Sen. Mark Warner (D-VA) struck a similar tone, saying, "Even though my state would be a beneficiary of a more generous SALT provision, since we're not able to—unfortunately—roll back the Trump tax cuts, it would be a little ironic to give folks in the $700,000 to $800,000 range a tax cut in this bill."
According to reports, other unnamed Democratic senators involved in negotiations have said that lifting the SALT cap is unlikely to be included, especially since Manchin has issues with the proposal.
Because BBBA discussions remain ongoing, however, it is unclear whether SALT has been definitively cast aside. It remains a top priority for Democrats from states like New Jersey and Connecticut. Sen. Bob Menendez (D-NJ) recently released a statement saying that the potential elimination of the provision was news to him and that "SALT remains higher in [his] list of priorities."
Advanced Child Tax Credit
Like SALT, efforts to extend the Advanced Child Tax Credit (CTC) have run into a Manchin-sized hurdle. Manchin has suggested the CTC might be too costly for the BBBA—a concern of his that has been exacerbated by recent inflationary trends. Moreover, Manchin wants to tie work requirements to the credit—something that other Democratic lawmakers have largely opposed. Even President Joe Biden has recently said that he is "not sure" if the CTC will be included in the package. However, because the CTC is such a high priority for congressional Democrats, many are reportedly willing to accept Manchin's demands to see the extension over the finish line.
More concessions have recently come from House Majority Whip Jim Clyburn (D-SC), who suggested last week that Democrats should accept a lower income threshold for the CTC, proposing the credit be targeted at individuals making below $75,000 annually. He also urged Manchin to "come forward with a bill for the child tax credit that's means-tested," adding that he thinks "it would pass" and that Manchin would "get it through the Senate" and that his Democrats "could get it through the House."
In the meantime, Democratic senators continue pushing for the administration to include the CTC in its BBBA negotiations. In a letter to President Biden and Vice President Kamala Harris last week, several Democratic senators, including Finance Committee Chair Ron Wyden (D-OR) and Banking Committee Chair Sherrod Brown (D-OH), said, "The consequences of failing to extend the CTC expansion are dire, particularly as families face another wave of the COVID-19 pandemic." They asked the White House to work to extend the Advanced CTC "as a centerpiece" of the BBBA.
Potential IRS Funding Boost. The Senate version of the BBBA contains nearly $3.2 billion for the IRS to improve taxpayer services. However, with negotiations on that package stalled, lawmakers are exploring other avenues to boost IRS funding, such as the annual appropriations process.
Sen. Chris Van Hollen (D-MD), chair of the Senate Appropriations Subcommittee on Financial Services and General Government and leader of the subcommittee responsible for IRS funding, said he "would like to see taxpayer services get a bigger boost because of exactly the kind of backlog we're in."
However, this received pushback from Sen. Richard Shelby, ranking member on the Senate Appropriations Committee, who characterized the boost as among the "partisan reforms" in the Democratic proposal. Other Republicans have also pushed back, arguing that much of the nearly $2 billion for "necessary expenses for the Internal Revenue Service" enacted under the American Rescue Plan Act (ARPA, P.L.117-2) has not yet been spent. Among such lawmakers is Rep. Kevin Brady (R-TX), ranking member on the House Ways and Means Committee, who said in a Jan. 19 letter to IRS Commissioner Charles Rettig that the IRS "crisis is not due to a lack of funding."
The government is currently operating under a continuing resolution (CR) set to expire on Feb. 18. If Congress fails to act before then—by either enacting another CR or passing new appropriations language—the government will be forced to shut down. Appropriators have been in negotiations to reach an agreement on appropriations legislation, and there is optimism that an agreement can be reached on an omnibus prior to the CR deadline, although another short-term CR might be required to provide lawmakers with additional time to finalize all the details.
Lawmakers Push Treasury and IRS for Taxpayer Relief. A bipartisan and bicameral group of lawmakers is pressing the Treasury Department and the IRS to provide leniency for taxpayers who incur penalties stemming from IRS mail backlog issues. In a letter to Treasury Secretary Janet Yellen last week, about 200 lawmakers explained how internal IRS backlog concerns have contributed to taxpayers erroneously accruing automatic penalty notices because IRS officials have not yet opened properly filed correspondence. This has left taxpayers confused and frustrated.
In response, the lawmakers asked the IRS to:
- halt automated collections until at least 90 days after the filing season ends;
- delay the collection process for filers until any active and pending penalty abatement requests have been processed;
- streamline the reasonable cause penalty abatement process for taxpayers impacted by the COVID-19 pandemic without the need for written correspondence;
- provide targeted tax penalty relief for taxpayers who paid at least 70% of the tax due for the 2020 and 2021 tax year; and
- expedite processing of amended returns and provide the Taxpayer Advocate Service and congressional caseworkers with timely responses.
Among the signatories are most Republicans and Democrats on the House Ways and Means Committee—including Chair Richard Neal (D-MA). The only Ways and Means members to not sign the letter were the top Republican, Rep. Kevin Brady, and Reps. Lloyd Doggett (D-TX), Ron Kind (D-WI), Stacey Plaskett (D-VI), Adrian Smith (R-NE), Mike Kelly (R-PA) and Lloyd Smucker (R-PA).
Far fewer Senate Finance Committee members signed onto the letter. In fact, Sen. Bob Menendez (D-NJ), who helped lead the effort, was the only committee member to sign it.
Following the letter, the Professional Managers Association (PMA), a group representing the interest of IRS managers, responded on Friday to each of the requests from Congress. In short, while PMA shared concern "regarding the current state of the IRS," it also highlighted the "apparent disconnect between Congressional demands and the IRS's practical capacity to address them."
Tax Filing Season Status. The 2022 tax filing season began on Monday, Jan. 24, and despite months of preparation from IRS personnel, the agency remains plagued by remnants of issues wrought by the COVID-19 pandemic, such as the persistent backlog of returns and correspondence, staffing shortages and dwindling resources. Despite these challenges, IRS Commissioner Rettig said the agency wants to reduce the backlog to a "healthy" level before the next filing season.
Issuing refunds in a timely fashion is a top priority for the IRS, particularly this year. The agency has already urged taxpayers to file their taxes electronically to expedite the turnaround time for receiving their refunds—a process that typically takes up to three weeks. In fact, Rettig underscored the sense of urgency for the IRS, saying recently that "every person at the IRS is highly focused on this" and that "the importance of this is not lost on any of us."
The difficulty of the current and recent tax filing seasons has highlighted for some lawmakers the need to provide the IRS with additional resources for IT modernization and staffing boosts. Assistant Treasury Secretary for Tax Policy Lily Batchelder and Deputy Treasury Assistant Secretary for Economic Policy Natasha Sarin, for instance, last week authored a blog post that underscored the "herculean challenge" of administering the tax system during the COVID-19 pandemic. The duo explained the inevitable delays some taxpayers will face regardless of whether they take prudent steps like filing electronically, leveraging online tools and reaching out to the IRS directly. To alleviate these issues, they called on Congress to pass the $80 billion in funding included in the BBBA, which they said would help invest in taxpayer service, overhaul technology and collect taxes owed by wealthy evaders.
Senate Finance Committee Chair Wyden has also sought to provide the IRS with additional resources and has advocated for heightened funding to improve taxpayer services at the agency. Wyden has also sought to provide the IRS with additional relief by exploring ways to extend the filing deadline, which will be April 18 due to Emancipation Day, a holiday in the District of Columbia, on April 15. However, Rettig has recently said there is no reason to think the filing deadline will need to be delayed.
More Tax Filing Season: Advanced CTC. One of the most glaring issues with the tax season thus far concerns one of the most popular tax credits: the Advanced CTC that congressional Democrats enacted under the American Rescue Plan Act (ARPA, P.L.117-02).
According to reports, hundreds of thousands or millions of taxpayers are receiving letters from the IRS that contain incorrect CTC amounts. In these instances, taxpayers are receiving letters with information that does not align with what they received in their bank accounts for the Advanced CTC last year. There are even suggestions that information on the online IRS portal for the CTC could also be incorrect, thus causing potentially even more confusion. Naturally, this will likely cause further processing delays for the IRS and likely add to the existing backlog. Making matters worse, the IRS is concerned that some taxpayers who are not used to receiving mail from the IRS will accidentally discard IRS documents intended to rectify the errors.
During a conference call last week, Rettig and Chief Taxpayer Experience Officer Ken Corbin said it was unclear how many taxpayers have received wrong CTC notices. Despite this, however, they reportedly tried to downplay that the number was in the millions and even expressed confidence that the number was less than hundreds of thousands. Other IRS officials supported these numbers later in the week, suggesting that only a small subset of CTC letters have these errors and reassuring that the IRS is developing a plan to address the issue and speedily process affected returns. IRS spokesperson Jodie Reynolds recently said, "The IRS is also putting in place procedures to assist with handling processing of tax returns where there is a question about the Child Tax Credit payments; this process will help keep refunds moving."
To temporarily prevent matters from becoming worse, the IRS said in late January that "stopping these letters [...] will help avoid confusion." The IRS will thus pause using automated notices for taxpayers in which payments have been credited but no return has been processed.
To further help taxpayers navigate the Advanced CTC this filing season, the Treasury Department and the White House last week launched a revamped version of the ChildTaxCredit.gov website. The website contains several new features designed to help taxpayers file their taxes and access the remainder or full amount of the expanded CTC. Among the new features is a tool that directs taxpayers to the best free filing options based on answers to a handful of simple questions. According to the release, "These options include both virtual and in-person support in multiple languages. It also features clearly written, reliable information about the CTC, eligibility, and how to get the credit."
IRS Preparing to Target Abusive Tax Transactions. The IRS announced in a press release last week that it wants to hire up to 200 new attorneys to help "combat syndicated conservation easements, abusive micro-captive insurance arrangements and other tax schemes." The positions—which will be housed in the Large Business & International Tax, Small Business/Self Employed and Technical divisions—will be located throughout the U.S. in 50 different locations, including Washington, D.C.
The new attorneys will be responsible for handling the increasing caseload of complex tax shelter schemes through which taxpayers attempt to avoid tax obligations. Specific areas of focus for the new hires will include handling cases in the U.S. Tax Court, serving on trial teams for complex trials and coordinating with the Department of Justice Tax Division. Others will be responsible for "developing global regulatory solutions for the most sophisticated and abusive transactions" and advising the IRS litigation teams.
Relatedly, Lois Deitrich, director of the Office of Promoter Investigations, said during a virtual conference last week that the IRS plans to flag suspect tax schemes on a more regular basis. The new list, which could contain a list of tax shelters and illegal maneuvers, will be included in the "Dirty Dozen," an annual publication from the IRS on common tax schemes. During the conference, Deitrich said this list will "come out more than yearly and that will be something I think that will be helpful to practitioners because they tend to be more complex schemes."
Rettig Looks Ahead to Cryptocurrency Action. IRS Commissioner Rettig indicated last week that President Biden could soon sign an executive order on cryptocurrency, saying, "I think you'll see some information come out of the White House." Shortly after Rettig said this, though, the agency quickly backpedaled and clarified that the commissioner misspoke. Instead, the IRS said Rettig meant to refer to speculation that a potential announcement could come in February.
That will not prevent the IRS from addressing tax issues related to cryptocurrency, however. Rettig said the IRS is "all hands on deck" to tackle cryptocurrency issues during the ongoing tax filing season and stands ready to initiate audits as discrepancies arise.
Rettig is also looking for additional authority to regulate digital assets, asking Congress last week to provide the agency requisite power to address underreported cryptocurrency income. Deputy Treasury Secretary Wally Adeyemo echoed this sentiment last week, saying, "Even in emerging issues we find ways to make sure that people aren't able to hide assets that aren't allowing us to collect tax revenue," adding that the Treasury Department is "working on rules that will allow us to do that and carefully working with the IRS to ensure that we're in a place where we can capture the revenues that people owe."
Additional insight is expected in early February when Treasury Undersecretary for Domestic Finance Nellie Liang will testify on stablecoins before the House Financial Services Committee on Feb. 8. At least part of the hearing will focus on the President's Working Group on Financial Markets.
ID.me Reconsidered. As part of its modernization efforts, the IRS announced in November 2017 that it was updating how users sign in and verify their identity for certain online services. The IRS contracted with ID.me, a software company that provides identity proofing, authentication and group affiliation verification for government and private entities. To fully sign into online IRS tools using the software, taxpayers would be required to provide a government ID, a utility bill receipt and a "selfie."
At the time, the IRS characterized ID.me as "a trusted technology provider of identity verification and sign-in services." ID.me, which claims to have 70 million users, asserts it complies with National Institute of Standards and Technology requirements and is used by other federal agencies.
Following the announcement that the IRS would use ID.me, however, the decision came under intense scrutiny. Private industry noted that facial recognition technology is prone to error and is "more likely to misidentify women and people of color." ID.me specifically was accused of having "serious problems with inaccuracy," including improperly locking out individuals because of faulty systems. ID.me has also come under fire for using one-to-many facial recognition, a "more complex and problematic" process whereby it scans an individual's face against a dataset. Moreover, ID.me uses Rekognition—facial recognition technology also used by Amazon, who had to cease its use with law enforcement agencies amidst concerns of bias.
Key members of Congress are looking into the matter, such as Senate Finance Committee Wyden, who said that "no one should be forced to submit to facial recognition as a condition of accessing essential government services," and that he is "continuing to seek more information about ID.me and other identity verification systems being used by federal agencies."
In the wake of this pushback, the Treasury Department is now reconsidering IRS reliance on ID.me and is instead considering alternatives, according to agency officials.
Global Getdown
OECD International Tax Framework: Status Update. Last year, nearly 140 countries reached agreement through the Organization for Economic Cooperation and Development (OECD) to adopt a two-pillar approach to address the digitization of the economy and limit base erosion and profit shifting. The dual pillars of the agreement involve (1) reallocating profits of large multinational enterprises to the country in which their customers are located (Pillar One), and (2) establishing a global minimum tax regime (Pillar Two).
As additional details continue to be released by the OECD—most recently with model rules for Pillar Two—countries around the world are beginning to implement the new agreement. In the United States, implementing both Pillar One and Two will likely require statutory changes to the tax code as well as Senate ratification of any new multilateral treaty or changes to the U.S. tax treaty network. Treasury Department officials maintain that Pillar One can be implemented by the administration unilaterally without altering new or existing treaties. Deputy Treasury Secretary Adeyemo noted in January 2022 that forthcoming action on Pillar One is not imminent. In an interview, Adeyemo said, "As the conversations go on, on Pillar One, we also expect to find a path for getting that done. But right now, we're focused on making sure that we get the provisions that need to be done in 2022 done in order to bring this agreement into effect."
Republicans contend that congressional consent is required for both pillars. In a Jan. 19, 2022, letter to Treasury Secretary Yellen, House Ways and Means Committee Republicans asserted that "the Constitution does not permit the Administration to bind the United States internationally to such policies without express Congressional consent." The lawmakers underscored their position by stressing that "[b]ecause the [OECD] Two-Pillar Solution to Address Tax Challenges Arising from the Digitalization of the Economy implicates core Congressional revenue-raising powers, implementing legislation is required for either pillar to have domestic legal effect."
Recognizing the necessity of statutory changes with respect to Pillar Two, Democrats proposed language in the Build Back Better Act (BBBA) last fall that would ostensibly bring the United States into compliance with the OECD global minimum tax regime by altering the existing global intangible low-taxed income (GILTI) regime and the base erosion anti-abuse (BEAT) rules. However, because the BBBA has thus far stalled in Congress, these provisions—and compliance with the OECD regime—remain uncertain. Moreover, the OECD model rules to implement Pillar Two and the Treasury Department's new final regulations on foreign tax credits are raising additional concerns about potential double taxation of corporate earnings under the global minimum tax and unintended effects on tax competition among countries participating in the OECD agreement.
At a Glance
- Neal, Pascrell Address EITC, CTC Refund Delays. House Ways and Means Committee Chair Richard Neal (D-MA) and Rep. Bill Pascrell (D-NJ) introduced legislation last week would undo tax refund delays for recipients of the Earned Income Tax Credit (EITC) and the CTC. The bill, according to the release, would allow the IRS to issue refunds of the EITC and the CTC before Feb. 15 if the amount on the tax return has been matched (verified) with Forms W-2.
- Lankford Asks IRS About Hot Topics. Sen. James Lankford (R-OK), a member of the Senate Finance Committee, sent a letter to IRS Commissioner Rettig last week asking for an update on multiple fronts. Specifically, Lankford asked Rettig to provide the latest with respect to the agency's investigation into the ProPublica data leak, its progress updating its IT systems to guard against cyber vulnerabilities and the status of refund and customer service delays during the current tax season.
Brownstein Bookshelf
- America COMPETES Act. On Tuesday, House Democrats released the America COMPETES Act, the lower chamber's counterpart to the U.S. Innovation and Competition Act (USICA), which passed the Senate in July 2021. The nearly 3,000-page bill aims to promote U.S. competitiveness vis-à-vis China through a number of means, but the small component within the jurisdiction of the House Ways and Means Committee is squarely focused on trade issues, rather than tax. To read Brownstein's analysis of the two packages, click here.
- TAS Pushed to Address Backlog. On the first day of the 2021 tax filing season, almost a dozen House Democrats sent a letter to National Taxpayer Advocate Erin Collins urging the Taxpayer Advocate Service (TAS) to address the backlog created by IRS delays in processing amended tax returns. The lawmakers said they stand ready to work with TAS on "any legislative action that may be required to address these challenges."
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