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Monday December 18, 2017

Washington News

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Potential Benefits of Tax Reform

In the United States there is general agreement that the current tax system is too complex and outdated. Members of the House and Senate from both parties agree that America needs a new tax system.

The last major tax reform was in 1986. A Republican President and a Democratic Chairman of the House Ways and Means Committee were able to build bipartisan support for comprehensive tax reform. They lowered the tax rates and also reduced various deductions and credits.

On June 7, Douglas Holtz-Eakin, President of the American Action Forum, testified before the House Budget Committee. He reviewed the prior tax reform three decades ago and noted, "If history is any guide, a 1986 style reform offers faster economic growth. This is borne out by retrospective analysis of TRA that found that the 1986 tax reform produced about one percentage point higher growth over a long period."

Because of this history of significant economic growth during the two decades following passage of the 1986 tax act, many economists and commentators believe that it is time for another major overhaul of the tax system. While the 2017 economy differs from 1986, there still could be major economic benefits.

Holt-Eakin notes, "Highly respected economists David Altig, Allen Auerbach, Lawrence Kotlikoff, Kent A. Smetters and Jan Walliser simulated multiple tax reforms and found GDP could increase by as much as 9.4% from tax reform."

These economists simulated a much simpler tax system than the current Internal Revenue Code. They eliminated all deductions and credits and assumed a flat tax. The economic increase was approximately 4.4% over a decade. This increase in the economy also included creation of a substantial number of new jobs.

The House, Senate and White House continue to develop a comprehensive tax reform plan. Speaking to the media on June 2, National Economic Council Director Gary Cohn stated that the White House plan was in process. He noted, "We will have a very detailed, draft tax plan to deliver to Congress" by the end of the summer recess.

Editor's Note: Comprehensive tax reform is quite difficult. Some deductions and credits will be reduced. Even with an effort to keep the bill revenue-neutral, some taxpayers will pay less and others will pay more. However, with these known potential improvements in the economy, there is a bipartisan recognition that tax reform would be helpful for the nation. It could increase economic growth and employment over the next decade.

Brady Promotes Border Adjustable Tax (BAT)


On June 7, there was a meeting of Treasury Secretary Steven Mnuchin, National Economic Council Director Gary Cohn, Speaker of the House Paul Ryan (R-WI), Senate Majority Leader Mitch McConnell (R-KY), Senate Finance Committee Chairman Orin Hatch (R-UT) and House Ways and Means Committee Kevin Brady (R-TX). The meeting was part of a continuing series of meetings to review potential tax reform plans.

Prior to the meeting, Brady stated, "I think it is critically important that we unify around one tax reform plan, because that is how we will achieve this in 2017."

The attendees claim that they are now 80% in agreement on the provisions for comprehensive tax reform. The House taxwriters plan to pass a revenue-neutral bill, but this is possible in their view only if there is a BAT. Therefore, Brady and Ryan continue to advocate passage of a BAT, even though the White House and Senate have not yet agreed to support the new tax.

Brady expressed confidence in the BAT during a national media event on June 7th. He noted, "I am convinced working with others—the White House and Senate—that we can design and transition it in a way that addresses the concerns that have been raised."

Senator Hatch spoke at the National Press Club on June 7th. He outlined three key aspects of his vision for tax reform. First, there must be a territorial system for corporations. Hatch suggested the territorial system will "put us on par with other industrialized countries and allow our businesses to compete in the global market place."

Second, the tax bill must have "significant tax relief for middle class workers and families." Third, the tax bill need not be deficit neutral immediately, but may have near-term deficits and growth in later years."

Editor's Note: Brady and Ryan are emphasizing that the House needs a revenue-neutral bill if it is going to be supported by the required 218 members. Their solution is a BAT to raise approximately $1 trillion in revenue over a decade and make their bill acceptable under the scoring rules of the Joint Committee on Taxation. Other tax increases such as a VAT or carbon tax are not under consideration because they are not supported in the House. The White House and Senate are not in favor of BAT, but both want a comprehensive tax bill. These negotiations will be continued during the summer and fall months.

Estate Tax Foreclosure Approved


In Holmes, Barbara L. et al. v. United States; No. 16-20790 (5th Cir. 2017), the Fifth Circuit affirmed a U.S. District Court decision that permitted the IRS to foreclose real estate liens to pay estate taxes, penalties and interest.

Decedent Shirley Bernhardt passed away in October of 1997. Nephew Kevin Holmes was a beneficiary. He is also a CPA and attorney. Holmes filed IRS Form 706 in July 1998. The estate was valued at $2,884,113 and the estate tax was $700,024. The IRS audited, revalued the estate at $4,706,731 and assessed a deficiency of $1,225,577.

After a U.S. Tax Court proceeding in 2004, there was a settlement between the IRS and the estate for an additional tax of $215,264. However, the estate has not paid this tax. The court noted, "The taxpayers never paid a nickel of this and interest, penalties, and fees grew upon the neglected sum. By March of 2015, the IRS figured that the estate owed $537,740.

In 2013 and 2014, the IRS placed liens on real property owned by Holmes. In October of 2013, the estate filed IRS Form 12153, "Request for a Collection Due Process or Equivalent Hearing." The IRS determined that the request was received on October 6, 2013. In addition, the Federal Government was shut down from October 1 to October 16 of that year.

On March 10, 2015 the IRS commenced an action to foreclose on the liens.

The estate and executrix Barbara L. Holmes countersued the IRS under Sec. 7433. It claimed damages and also stated that the IRS had failed to take action within the required 10 year statute of limitations. The District Court determined that the estate had requested a hearing and, having requested the hearing, they were estopped from claiming that the statute of limitations had not been suspended during interim period.

The court noted under Sec. 6502(a)(1) that the IRS had 10 years to file suit and collect the tax. However, the period between July 16, 2004 and the date of filing was 10 years, 237 days.

During the pendency of the hearing, the statute of limitations is suspended. Therefore, the IRS claimed that the suspension of the statute of limitations between October 5, 2013 to June 2, 2014 comprised a period of 241 days. Therefore, the action was filed four days before the statute of limitations expired. The court determined that this was the correct calculation of the statutory period and the action to foreclose was permitted.

Applicable Federal Rate of 2.4% for June -- Rev. Rul. 2017-12; 2017-23 IRB 1 (17 May 2017)


The IRS has announced the Applicable Federal Rate (AFR) for June of 2017. The AFR under Section 7520 for the month of June will be 2.4%. The rates for May of 2.4% or April of 2.6% 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 2017, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return. Federal rates are available by clicking here.

Published June 9, 2017

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