Does TCJA Make C Corps Better?

Does TCJA Make C Corps Better? Generally no when you factor in double taxation of C corporations. I've got an article looking at this question but only looking at domestic tax rules. Certainly, lots of international activity might make the C corporation look better.  Here is the article, published this week in the Wealth Strategies Journal - https://wealthstrategiesjournal.com/2019/08/08/is-a-c-corporation-preferred-after-tax-reform/

What do you think?

A more temporary tax system

For at least the past decade, our federal tax system has had several temporary provisions. That is, rules added to the law with an expiration date. Many of these items are credits that often are not included as permanent items because they tie to economic stimulus or temporary energy needs (such as promoting alternative fuels by lowering their cost). Another reason for temporary provisions that result in less federal revenues is that they don't "cost" as much in a 10-year budget window if in existence for one or two years rather than for all ten years.

The Tax Cuts and Jobs Act (P.L. 115-97 (12/22/17) has increased the number of temporary provisions in the law. Most notably, most of the individual tax cuts, such as lower rates, a higher standard deduction and child credit, as well as lost deductions such as interest on home equity debt and casualty/theft losses, are only in the law for eight years (2018 through 2025).

Each January, the Joint Committee on Taxation (JCT) publishes a list of all temporary provisions and when they expire. Below I have a summary of the number of expiring provisions identified in their January 2017 report and the one issued in January 2018.

Year	2017 JCT Report	2018 JCT Report
2016	36	34*
2017	2	1**
2018	1	3
2019	10	9
2020	1	1
2021	4	3
2022	2	2
2023	1	1
2024	0	0
2025	1	23
2026	0	2
2027	0	1
TOTAL	58	80

As you can see, we go from 58 temporary provisions last year to 80 temporary ones today. Also, the number is really higher each year because the JCT combines some similar items, such as various empowerment zone tax incentives.

Missing Item: I think the number for the 2018 report is missing at least one new temporary item.  P.L. 115-97 provides that for tax years beginning after 12/31/22, taxpayers may no longer follow Code section 174(a) on expensing of R&D expenditures. Instead, such costs must be capitalized and then amortized over 5 years (15 years for foreign research). Thus, I think we really have 4 temporary items expiring in 2021 because section 174(a) should have been included.  Also, I expect that Congress will find a way for this capitalization provision to never go into effect. Favorable treatment of R&D expenditures should be in our tax law for a few reasons: simplification, incentivizing R&D, and international competitiveness.  So, why did Congress add a provision that harms economic growth?  Likely to help generate revenue to help reach the $1.5 trillion cost of tax reform without going over that amount.

What do you think?

*Includes section 199(d)(8) for certain Puerto Rico benefits. P.L. 115-97 repeals section 199 effective for tax years beginning after 12/31/17, so this temporary item is only relevant for possibly seeing Congress renew it for 2017. An item removed from the 2016 for the 2018 report is the 7.5% threshold for deducting medical expenses for individuals age 65 or over. It got moved to the 2018 list because for 2017 and 2018, all individuals use a 7.5% threshold for both regular tax and AMT.

**Airport excise taxes were renewed one year by 2017 legislation (so got moved to the 2018 list for the 2018 JCT report.

Top Ten Items of Tax Policy Interest for 2015 - #4

Continuing with my list of ten news items and activities from 2015 that I think have particular tax policy relevance.  Today, for my fourth item is an odd and unfortunate way that the IRS is telling us they disagree with a 2013 court decision. In August 2015, the IRS issued proposed regulations under Section 199, Income attributable to domestic production activities - REG–136459–09 (8/27/15). This provision was added in 2004 and provides a "bonus" deduction for taxpayers engaged in domestic manufacturing which is broadly defined to include some construction, film production, and software development. It is a fairly complex provision that involves numerous definitions and allocations to identify the specified income that then generally produces a 9% deduction for the taxpayer.

The issue helps show the complexity that is involved when special rules exist. Special rules require precise definitions to know what qualifies and what does not. The particular issue I'm referring to what constitutes minor assembly (no 199 deduction) versus production (generates a 199 deduction). 

Per the IRS, one purpose of the proposed regulations is to clarify this distinction AND attempt to reverse a 2013 District Court decisions. Per the preamble to the proposed regulations:

"Section 1.199–3(e)(2) provides that if a taxpayer packages, repackages, labels, or performs minor assembly of QPP and the taxpayer engages in no other MPGE activities with respect to that QPP, the taxpayer’s packaging, repackaging, labeling, or minor assembly does not qualify as MPGE with respect to that QPP. This rule has been the subject of recent litigation. See United States v. Dean, 945 F. Supp. 2d 1110 (C.D. Cal. 2013) (concluding that the taxpayer’s activity of preparing gift baskets was a manufacturing activity and not solely packaging or repackaging for purposes of section 199). The Treasury Department and the IRS disagree with the interpretation of § 1.199–3(e)(2) adopted by the court in United States v. Dean, and the proposed regulations add an example (Example 9) that illustrates the appropriate application of this rule in a situation in which the taxpayer is engaged in no other MPGE activities with respect to the QPP other than those described in § 1.199–3(e)(2)."

Example 9 is the Dean case with an opposite conclusion than reached by the court. The court noted that there were no other cases on this issue. It described Dean's gift basket creation process as complex and involving a production process. Per the court: "the individual items are assembled in a gift basket or gift tower based on one of many detailed plans. This complex production process relies on both assembly line workers and machines. The final products, gift baskets and gift towers, are distinct in form and purpose from the individual items inside. The individual items would typically be purchased by consumers as ordinary groceries. But after Houdini’s production process, they are transformed into a gift that is usually given during the holiday season."

The IRS did not appeal the Dean case or issue an Action on Decision (such as to say it does not agree with the case (nonacquiescence). It is not known if the IRS asked Congress to clarify Section 199 to support its position in the Dean case.

And, interestingly enough, a few weeks after the proposed reg was issued, the District Court for the Northern District of Illinois issued an opinion in Precision Dose, Inc., No. 12C50180 (9/24/15), that cited the Dean case in support of its conclusion that a producer of medicines packaged in single dose containers was not involved in minor assembly. The court primarily refers to the 199 regulations rather than the statute. This court, though, states what it thinks is minor assembly (putting items in a grocery cart). Per the court:

"The government argues Dean is wrongly decided. It contends the Dean court failed to understand that all Houdini's activities were just part of the repackaging process and thus did not take those activities outside the (e)(2) exception. However, the court disagrees. Dean correctly determined that Houdini was creating an entirely new product — a gift basket or gift tower — which was not simply a method of repackaging the components included in the baskets or towers. A gift basket is not simply a container of stuff — like a grocery cart in which the items had been dropped when pulled from the shelf. It is a unique product itself. Likewise, a unit dose is a unique product. Plaintiff is entitled to the Section 199 deduction." 

The regulations are proposed. I don't see that any comments are posted yet on it (at least on the Federal Register website). I assume commentators will address the issue of writing a regulation to support its losing position. If the IRS ends up finalizing the regs as they are, courts do not need to follow them. They can find that they are contrary to the statute.  Perhaps Congress will step in.  We'll see. But this all just seems like an odd way to oppose a court decision where the IRS lost, and not a good use of time to resolve the matter.

What do you think?   

My list so far of news and activities of 2015 with tax policy relevance (no ranking involved):

1. Congress can alter our tax system via a lot of non-tax bills - here
2. IRS funding challenges - here 
3. Justice Kennedy called for a review of the 1992 Quill decision - here