With help from Mark Scott
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— Final rules mark the end of making many tax-exempt groups report their big money donors to the IRS.
— Earlier-stage rules could soon shed light on question marks about taxing top salaries at nonprofits.
— Another day, another White House official is talking up payroll tax cuts to help the economy during the coronavirus pandemic.
IT’S WEDNESDAY at Morning Tax, already the middle of the week. Don’t let the next couple of days slip by without getting in touch with us, though.
PUT IT IN THE BOOKS: Treasury Department and IRS regulators officially eliminated the need for a large swath of politically active tax-exempt organizations to file information on their top donors to the IRS. “The rules, which have been in the works for several years, will affect groups organized under 501(c)(4) of the tax code, which include political heavy-hitters like the National Rifle Association and AARP; labor unions; and ‘dark money’ groups that fly under the radar,” our Toby Eckert reports.
Critics blasted the regulations for what they consider a backdoor to let untraceable money flow into the political system. Sen. Ron Wyden (D-Ore.), the Finance Committee’s ranking member, issued a statement noting the rule’s timing just months before President Donald Trump is on the ballot for reelection. “We’re in the midst of a global pandemic and once-in-a-lifetime economic crisis and the Trump administration is prioritizing boosting the president’s political prospects with shady cash,” Wyden said.
Yet supporters of the change have argued that the IRS doesn’t need the information and its mere possession risks privacy, even though the agency kept the information under wraps. The groups must continue to keep the names and addresses of those who contribute more than $5,000 in their own records in case of audit, and an IRS news release said the “change will have no effect on transparency, as contributor information that is open to public inspection will be unaffected by this regulation.”
The regulatory change dates to 2018 when Treasury and the IRS announced they’d ended the reporting requirement, but a federal judge later ruled that they bypassed regular rulemaking procedures, so they’ve gone through the motions since then. Certain other tax-exempt groups organized under 501(c)(3) of the code, which do some limited lobbying, and Section 527 political organizations, which include candidate committees, still have to disclose their major donors’ names to the IRS.
COMPUTING EXCESS COMPENSATION: Another rule affecting the tax-exempt world is soon expected, though its reach extends only to nonprofits that pay people in excess of $1 million, triggering an excise tax on the overage. But calculating the total amount a person gets paid is of particular interest in certain cases, as regulators came to discover after releasing initial guidelines early last year. The 2017 GOP-led tax overhaul established the excise tax.
Though Treasury and the IRS took into account related organizations, they didn’t consider the specific structure of a foundation with a related corporation in which employees of the corporation may be officers of or provide services to the foundation, even if the foundation doesn’t pay any compensation for the services.
“This is just an issue that wasn’t thought about initially,” said Elinor Ramey, partner at Steptoe & Johnson LLP, who previously led this rule-writing effort as part of Treasury’s Office of Tax Policy. As a result, the January 2019 guidance seemed to lump together salaries from related organizations that shouldn’t have been aggregated, some commenters later told regulators.
While they’re watching for potential clarification on applying the tax to related entities, other controversial aspects of the tax need a legislative fix, including its treatment of highly compensated college coaches and other employees at public schools who won’t get taxed, while those at private schools will. Regulators also aren’t likely to add a clause to grandfather in contracts that predate the law but now trigger the tax.
DRIVING IT HOME: Stop me if you’ve heard this once before, about Trump’s affinity for cutting payroll taxes to help the sputtering economy come back to life. But this talk just won’t stop despite plenty of skeptics, including on the GOP side of the ledger. National Economic Council Director Larry Kudlow continued to cheerlead for the idea on Tuesday. “The president’s very strong on it, very keen this time on the workforce side,” he said, noting that businesses are already getting a break on the portion of payroll taxes they pay so Trump is pressing to broaden the break.
Kudlow also emphasized the administration’s concerns about extending unemployment benefits for too long in comments on Fox News. He expressed worry about the assistance becoming a work disincentive and instead talked up the idea of a temporary weekly bonus for workers who get back on the job, in addition to their regular wages. Republicans in Congress are increasingly discussing this proposal as a contrast to Democrats’ continued push to stretch out unemployment benefits, our Eli Okun reports.
As chatter continues about forthcoming economic aid legislation, Kudlow said concrete ideas from the White House would surface “before long,” adding that proposals such as tax breaks to help the beleaguered travel industry through deductions for taking trips and business entertainment costs “absolutely” remain under consideration. Kudlow also cautioned that White House officials would continue to take stock of legislation that’s already passed over the past couple of months before making final decisions. “We haven’t made up our mind on specifics yet,” Kudlow said.
THE CASE AGAINST DSTs: The business-friendly Tax Foundation has crunched the numbers to see if digital service taxes are legal under international tax, trade and European law (mostly because current DSTs come from EU governments). The answer? Probably not. In its analysis, the group focuses on how current levies by the likes of France or Italy represent potential discrimination. That includes under existing trade law (like the World Trade Organization’s General Agreement on Trade in Services) and under international tax rules if the digital taxes breach existing bilateral agreements between countries (say France and Ireland, where much of Silicon Valley calls home outside the U.S.).
As for existing EU rules? A country’s digital taxes may run afoul of the bloc’s fundamental freedoms (in particular, freedom of establishment by the companies), though such a fight would likely wind its way to Europe’s highest court — and take years to conclude.
Still, Europe-wide budget needs have risen due to the coronavirus crisis, and DSTs are in play. Martin Selmayr, a former secretary-general of the European Commission, indicated earlier this week that the Commission is set to propose new sources of revenue including a carbon border tax, a digital tax and a Common Corporate Tax Base. Nevertheless, it remains unlikely that any brand-new tax proposal could garner the support of all 27 member countries in time for the beginning of the new budget in January 2021. Leaders, however, could decide to keep negotiating on new sources of revenue, with the aim of introducing them in a few years.
WAIT AND SEE: Pennsylvania House lawmakers passed a temporary budget that keeps current spending levels without increasing taxes despite an expected revenue hit from the coronavirus pandemic, with a Senate vote still to come, the Associated Press reports. Supporters said the plan gives them time to tab up their losses and possibly secure federal assistance to cover that shortfall. Some elements of the nearly $26 billion budget provide full-year funding, including for public schools, while other parts would only get funding through Nov. 30. “I think all of us are struggling to know exactly what the financial situation is going to look like over the course of the whole next fiscal year, so we are going to do, I know, some unusual things,” said Gov. Tom Wolf, who previously proposed a $36 billion budget.
The coronavirus crisis crushed revenue projections in Florida by nearly $880 million in April.
Walmart de Mexico paid about $359 million in back taxes to Mexico.
Rudy Giuliani has Palm Beach, Fla., property tax delinquency.
The current Breakers hotel in Palm Beach is the third iteration of the famed property; two fires burned down prior structures.