Washington Hotline – July 29 2014

Washington News

Washington Hotline

House Passes Single Higher Education Credit

With a vote of 227-187, the House passed the Student and Family Tax Simplification Act (H.R. 3393). The bill proposes to combine all of the higher education tax credits into a single credit. It was co-sponsored by Rep. Diane Black (R-TN) and Rep. Danny K. Davis (D-IL).

The single credit in the bill replaces the existing above-the-line tuition deduction, the HOPE credit, the lifetime learning credit and the American Opportunity Tax Credit. The single credit has a limit of $2,500 per year for up to four years with a total benefit of $10,000.

The bill creates a modified American Opportunity Tax Credit for higher education. One hundred percent of the first $2,000 of qualified expense is offset by the credit. $1,500 of the credit is refundable for low-income persons. There is also an additional credit of 25% of the second $2,000 in qualified education expense or an added credit amount of $500. The total credit would be $2,500 per year.

House Ways and Means Chairman Dave Camp (R-MI) supported the bill. He noted, “This new, improved credit will provide greater benefits for those who need it most.”

In the past, the White House has supported making the American Opportunity Tax Credit permanent. It published a press release and noted that it was looking “forward to working with Congress to ensure that students and working families have ongoing access to this and other important middle class tax benefits that are also scheduled to expire in just a few years.” However, the White House expressed concern because the $96.5 billion cost of the credit over a decade is not offset by any tax increases.

Representative Black spoke in favor of the bill. She stated, “Today’s broken tax code does little to ease that financial burden or provide a sense of security that education will be a reality in the future. Streamlining the number of education provisions and retooling those that are most effective allows us to simplify the code and reduce some of the confusion that exists today.”

Ways and Means Committee Ranking Member Sander Levin (D-MI) noted that he supported the concept of a higher education tax credit. However, Levin expressed concern that there would be individuals who do not benefit from this credit. He noted that it would not help students who take over four years to graduate, it would fail to assist many adult learners who use part time programs over a longer duration and it may provide less benefit to some low and middle-income persons.

Editor’s Note: The House has now passed permanent bills that cover 14 different tax extenders. The cost per year for these provisions is approximately $83 billion. The House is now setting up a negotiation with Majority Leader Harry Reid (D-NV) for the November lame-duck session. The House leaders will attempt to persuade Sen. Reid to make these provisions permanent or at least pass them for a five to 10 year duration rather than the traditional two years. The November negotiations will also include five charitable tax extenders that were passed previously by the House.

Will Walgreens Move to Switzerland?

Washington is abuzz with discussions about “corporate inversions.” A corporate inversion occurs when a U.S. company moves its headquarters overseas for tax purposes, but the operating divisions remain largely intact in America. A major American corporation, Walgreens, is currently negotiating with a Swiss company named Alliance Boots regarding relocation. If the negotiations are successful, then Walgreens may in essence move its business headquarters and tax domicile to Switzerland. This change could substantially reduce its U.S. taxes.

Sen. Richard Durbin (D-IL) strongly opposed the move and sent a letter to the Board of Directors of Walgreens. He stated, “Much of Walgreens’ financial success was built on programs and infrastructure provided by the U.S. government and paid for by U.S. taxpayers. The future success of Walgreens will continue to depend on U.S. taxpayers and government-funded programs, yet Walgreens will be using a clever tax dodge to avoid paying $4 billion in U.S. taxes.”

Senate Finance Committee Chairman Ron Wyden (D-OR) agreed that action was appropriate. While Wyden has favored comprehensive corporate tax reform, he suggested that interim action was needed to avoid a major number of large American companies moving their headquarters overseas.

Wyden commented, “The American tax code is an anti-competitive mess. Comprehensive tax reform needs to happen soon. The longer we wait, our tax base will keep eroding, cash piles overseas will continue to grow, and investment dollars will be driven overseas.” Wyden hopes to try to close the “inversion loophole” and then proceed to major tax reform.

Senate Finance Committee Ranking Member Orrin Hatch (R-UT) also hoped to complete corporate tax reform first. However, given the urgency of the situation, he has agreed to explore interim options. Hatch expressed the hope that a solution would be found to encourage firms to stay in the United States.

Editor’s Note: These corporate inversions by major American companies are a threat to the entire corporate income tax system. If a sizable number of American companies relocate their tax headquarters overseas, most other members of the Fortune 500 will feel obligated to follow. Because the 35% top U.S. tax rate is now the highest rate among all industrial nations, both Wyden and Hatch agree that there is an urgent need to broaden the tax base and lower the top rate. While Treasury Secretary Jacob Lew has suggested tax reform is a good plan, he and his department have submitted no legislative bill or plan to Congress. Under the circumstances, Wyden and Hatch hope to take some limited interim action and then pursue major corporate tax reform next year.

Executor Liable for Estate Tax

In United States v. Fred K. Whisenhunt et al.; No. 3:12-cv-00614 (20 Jul 2014), the U.S. District Court for the Northern District of Texas held that an executor and beneficiary are liable for estate tax. The ongoing litigation between the parties over the tax bill did not preclude liability.

Decedent Jacob Lindy Kaye passed away on August 16, 2002. Executor Fred Whisenhunt distributed the estate’s assets before making full payment of the federal estate tax. As of the date of filing of this action, the IRS indicated the estate tax, penalties and interest totaled $178,406.

The estate beneficiaries included Whisenhunt, John Frederick Voelker, Elizabeth K. Spain, Joyce K. Whisenhunt and Blake Clifton. The IRS sought judgment against Whisenhunt and Voelker and filed notices of dismissal for actions against Joyce K. Whisenhunt, Elizabeth K. Spain and Blake Clifton.

Voelker cross-claimed against Whisenhunt for breach of fiduciary duty and breach of covenants.

In the current suit for final judgment against Whisenhunt and Voelker, there were two basic issues. Voelker claimed that it was necessary first to resolve the contest between himself and executor Whisenhunt. Second, Voelker suggested that Whisenhunt had not filed the return because of medical issues and therefore should have been able to make a “reasonable cause” defense.

The court noted that the dispute between the two parties did not absolve either of the liability for payment of estate tax. Because the reasonable cause defense had not been raised earlier, it was not appropriate to consider that at this time. The final judgment was therefore issued and the IRS may now take appropriate enforcement actions.

Applicable Federal Rate of 2.2% for August — Rev. Rul. 2014-19: 2014-32 IRB 1 (18 July 2014)

The IRS has announced the Applicable Federal Rate (AFR) for August of 2014. The AFR under Section 7520 for the month of August will be 2.2%. The rates for July of 2.2% or June of 2.2% 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 2014, pooled income funds in existence less than three tax years must use a 1.4% deemed rate of return. Federal rates are available by clicking here.

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