1. May 15, 2015
TAX TALK
“Make no mistake, a new tax code is being built.”
~ Former House Ways and Means Chairman Dave Camp (R-MI), May 7, 2015
“I’m just sitting here watching the wheels go round and round…”
~ “Watching the Wheels” by John Lennon, March 13, 1981
In this issue of Tax Talk, we discuss: (1) the “positive” steps lawmakers are taking toward tax reform; (2) Senate
Finance Committee Chairman Orrin Hatch’s (R-UT) renewed focus on retirement plans for small businesses; (3)
various other tax-related industry and legislative/regulatory updates; and (4) discussion at the Joint Committee on
Taxation (“JCT”) related to dynamic scoring.
IN FOCUS: LAWMAKERS TAKING “POSITIVE” STEPS TOWARD TAX REFORM
With the month of May now half-way over, the Senate Finance Committee’s Tax Reform Working Groups are
approaching the end-of-month deadline imposed by Chairman Hatch by which the groups are to report their
recommendations to the full Committee. As we learned this past Thursday from Senate Finance Committee
Member Dan Coats (R-IN) during the Tax Council’s monthly legislative luncheon, while the Working
Groups have now each discussed all the options they will consider as part of their recommendations, no
group has yet finalized its recommendations for the Committee. According to Senator Coats, the Working
Groups are working hard to deliver their recommendations to the Committee by month’s end, but this date may
slip.
As a preamble, Senator Coats semi-jokingly noted that there are reasons that tax reform has not been done since
1986, alluding to the fact that lawmakers today appear to lack the personal relationships required to successfully
navigate tough negotiations on tax reform. Nevertheless, like an old-school statesman, he quickly pivoted to a
series of items on which both sides appear to agree. First, he indicated that both sides agree that our tax Code puts
U.S. businesses at a competitive disadvantage and must be reformed. Though perhaps stating the obvious, it is
nevertheless a good sign that after starting the process of examining the tax Code, both sides have reached
consensus on this. Second, according to Senator Coats, U.S. policymakers are facing growing pressure as
foreign governments adjust their own international tax policies and are seriously considering patent boxes
(i.e., offering companies a special low tax rate on intellectual property in hopes of promoting and attracting
innovative activity) – more on this later. Third, he suggested that tax-writers all recognize the need to address the
disparity between rates on the corporate side and those on the individual side; however, he did not indicate how to
do so.
Fourth, Senator Coats told us that both sides agree corporate inversions are increasingly becoming a problem,
however, there is not yet consensus on what needs to be done. While Democrats generally prefer to curb inversions
through legislation, Republicans – especially Chairman Hatch – have signaled that inversions are merely a
symptom of larger issues stemming from a tax Code in need of reform and should instead be resolved via a broader
tax reform package.

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Finally, as we have previously mentioned, Senator Coats confirmed that a key hurdle that remains for tax reform
efforts is figuring out how to protect small businesses that file under the individual tax Code without actually
statutorily lowering the rates. Importantly, last Wednesday, the Individual Tax Working Group met and its
Co-Chairs, Senators Chuck Grassley (R-IA) and Debbie Stabenow (D-MI), indicated that they are doing
“positive things” and making good progress towards developing a recommendation for the Committee.
While the Senators revealed few other details, Senator Grassley stated that the Committee has narrowed its focus to
four areas and is particularly focused on “simplification.” Moreover, according to Tom Barthold, JCT Staff
Director, the group has “reached a point of estimating revenue implications of specific policy ideas.”
Senator Coats concluded with this: “Can we get this done? I am increasingly concerned the answer is no, but many
folks are putting forth real effort.”
STAYING IN FOCUS: PAYING FOR PATENT BOXES
Returning to the discussion on patent boxes, as Senator Ben Cardin (D-MD) acknowledged to reporters following a
recent closed-door meeting of the Finance Committee, “[i]t’s a hot subject right now” and may provide a way to
keep U.S. companies’ profits at home. In fact, following the same meeting, Senators Rob Portman (R-OH) and
Chuck Schumer (D-NY) – Co-Chairs of the International Tax Reform Working Group – discussed the use of patent
boxes in Europe and noted that the regime is helping those countries attract more companies and is something “we
need to look at it.” Even Chairman Hatch appears to be on board with the idea, stating after the meeting: “It’s easy
to see the appeal…If you just bring rates down, and you don’t do anything about patents, you may not be doing a
good enough job to compete in the world…We want to be the country where intellectual property is the most
robust.”
Despite the growing support for patent boxes, some lawmakers appear wary of the idea, which Senator Cardin
admits presents “great” potential for gamesmanship and “abuse” by companies. Moreover, a patent box regime
would likely at least partially overlap with the R&D Tax Credit and may not be of much use to certain companies
using that credit (which permanent extension is set to be considered in the House this week). “There is no question
that [patent boxes are] in competition with the R&D Credit…[it’s] certainly one of the issues we’re struggling with.
Is that the best way to encourage innovation and research?” Moreover, there are concerns about what impact the
proposal would have on revenues, as it could be quite a costly idea and divert money from efforts to lower
corporate rates. However, as Senator Portman recently suggested during a briefing, “[i]t could be helpful to
revenues if you’re going to move R&D back here” from abroad.
Similarly, patent boxes have become an “almost primary” topic in the House Ways and Means Committee. In
speaking at the American Bar Association Taxation Section’s Annual Meeting, George Callas (Chief Tax Counsel
for the Ways and Means Committee) – who also worked with former Chairman Dave Camp (R-MI) to develop his
sweeping tax reform draft last year – noted that a “substantial portion of the business community….[has] decided
that a patent box…was one of their top priorities.” While the shift “caught folks on the Hill a little bit off guard,”
Mr. Callas also emphasized that international efforts on base erosion and profit sharing (“BEPS”), such as the
Organisation for Economic Co-operation and Development’s (“OECD”) BEPS Project, are driving the shift in
focus, as concern is growing that other countries may become more aggressive in their tax enforcement efforts,
while at the same time providing for favorable treatment of intangibles. As former Chairman Camp recently
emphasized during the same meeting, “[t]he rapid changes in global tax policy constitute both a challenge
and a threat as the United States considers a long-overdue reform of our nation’s tax laws. The bottom line is
that change is coming – if not here at home, then it is certainly coming from overseas. So now is the time to
engage. 2015 is a very important year. We need tax reform now.”
STILL IN FOCUS: INFRASTRUCTURE AND EXTENDERS
In addition to discussing overall progress in the slow(ing) march toward comprehensive tax reform, Senator Coats
also briefly discussed tax-writers’ work on two other pending issues before the Finance Committee: funding the
Highway Trust fund and figuring out what to do with tax extenders.

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By way of an update to the last edition of Tax Talk, it appears that Senate Environmental and Public Works
Committee Chairman Jim Inhofe (R-OK) has now coalesced around Chairman Hatch’s plan to provide for an $11
billion extension of the Highway Trust Fund, which would fund the nation’s infrastructure through December 31 of
this year. While exactly how their proposal will be funded remains unclear (note: we posited last week it is likely
to be done through a combination of a General Fund Transfer and various payfors), one thing appears to be clear: a
gas tax hike is off the table. In addition to Senator Coats’ remarks at our luncheon, Representative Rosa DeLauro
(D-CT) last week also underscored that “you cannot pass a gas tax. There isn’t going to be anyone that’s going to
vote for an increase in the gas tax…I’m not talking about the state government. I’m talking about the reality in the
U.S. Congress.” (See Remarks by Representative DeLauro at Financing 21st
Century Infrastructure in the United
States, The Hamilton Project by The Brookings Institution, May 11, 2015).
More broadly, while certain Republicans in the Senate appear to agree that extending the Highway Trust Fund
through the end of the year will provide them sufficient time to come up with long-term funding, Democrats (and
some House Republicans) aren’t so sure. During a recent briefing, Democratic Whip Steny Hoyer (D-MD)
emphasized that “Democrats are united, unanimous, on the proposition that a short-term patch . . . didn’t work
[and] [t]here’s no prediction the short-term patch is gonna work again.” Moreover, given similar efforts last year
(i.e., an $11 billion, 10-month extension), Senator Tom Carper (D-DE) told reporters last week: “We had a bite out
of that apple last year…They said, ‘Well give us plenty of time to do this to do this, to figure this out, and we’ll
have the answer at the end of May.’ And now they’re saying, ‘Well give us seven to eight months and we’ll have
this figured out.’ I’m not so sure we will.” However, following a recent Republican caucus lunch, Chairman Hatch
emphasized that he “want[s] enough time to be able to do [a long-term extension]. I think we can raise the
approximately $11 billion to go until the end of this year…That gives us time to find enough billions of
dollars to be able to do a multiyear agreement. And if we can do that, it will be a tremendous change
compared to what we’ve had in the past.” Moreover, Chairman Hatch underscored that “I don’t
make…suggestions without wanting to fulfill them…Democrats want a two-, two-and-a-half-month extension,
because they think they can bludgeon the Republicans into a tax increase. They’re not going to do that, we’re not
going to do that.”
Interestingly, despite Chairman Hatch’s position, it now appears that the House will consider a two-month
extension of the Highway Trust Fund through July 31, 2015. The proposal, which was introduced by House Ways
and Means Committee Chairman Paul Ryan (R-WI) and House Transportation and Infrastructure Committee
Chairman Bill Shuster (R-PA), is expected to be considered on the floor this week once the House Rules
Committee reviews the legislation (H.R. 2353) later today. On the Senate side, Senators Barbara Boxer (D-CA)
and Tom Carper have introduced a similar proposal (S. 1350), which Senate Majority Leader Mitch McConnell (R-
KY) has announced will be fast-tracked and is likely to receive floor consideration this week. Lawmakers pursuing
this route are hoping to put pressure on lawmakers to work toward a long-term extension of the Highway Trust in
the near-term.
Speaking of long-term transportation funding, one option that continues to percolate is repatriation as part of
international tax reform. However, given the difficulties that remain for tax reform this year, it is unclear whether
such a proposal is viable before year’s end. Even as rhetoric has begun to shift from true comprehensive tax reform
to business-only tax reform, hurdles still remain that may ultimately prevent lawmakers from reaching agreement.
For example, House Ways and Means Committee Sandy Levin (D-MI) has indicated that business-only tax reform
will be “difficult…[to do] on a bipartisan basis,” highlighting his concerns with how accelerated depreciation
affects manufacturing. In the same vein, Senator Bob Menendez (D-NJ) noted that “there’s a lot of desire to look at
individual rates as well as other elements of the code as well. I think it’s very difficult to surgically extract one and
leave the rest of it in place.” However, Senator John Cornyn (R-TX) and others disagree, suggesting that “it may
make sense in this environment to do things on a more step-by-step basis.” Moreover, former Chairman Camp
seemed to think that the urgent need for tax reform may force lawmakers to come to an agreement: “From a
business standpoint, we must have tax reform.”
Recognizing the difficult path ahead, Chairman Hatch has signaled that he plans to move forward with an extenders
package – including a number of permanent business tax breaks – if lawmakers are unable to reach a consensus on
tax reform in a timely manner. According to Senate Finance Committee Ranking Member Ron Wyden (D-OR), he
and fellow Democrats are willing to negotiate on that issue, as “[t]he longer that it takes to get traction for tax
reform, the louder will be the drumbeat from the extender line.” However, as House Ways and Means Committee

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Ranking Member Levin stated, “nobody knows” whether action on tax extenders will be permanent legislation
attached to highway funding or a retroactive bill at the end of the year. Nevertheless, as Senator Coats – who voted
against the temporary extension of expired tax provisions last Congress – noted, extenders will continue to be an
issue on tax-writers agenda until they come to an agreement on permanency, which he in particular believes to be
important.
IN OTHER TAX NEWS…
Last week, there were several other tax developments, including that: (1) Chairman Hatch renewed his focus on
retirement plans for small businesses; (2) President Obama again criticized carried interest; and (3) the EU
indicated it will not implement its financial transactions tax this year.
Hatch Focuses on Retirement Plans for Small Businesses. As the Senate Finance Committee Tax Reform
Working Groups move forward in developing their tax reform proposals, Chairman Hatch recently urged the
Savings and Investment Working Group to help encourage small businesses to establish retirement plans for their
employees. Referencing his 2013 legislation (the Secure Annuities for Employee Retirement Act), which would
have created “starter” tax-favored 401(k) retirement plans for small businesses that did not offer retirement plans,
Chairman Hatch indicated that he hopes the group will “produce a robust set of proposals that make it easier and
less expensive for small employers to sponsor plans.”
Obama Criticizes Carried Interest. Last week, President Obama again expressed criticism of carried interest,
suggesting that the provision is fundamentally unfair. As he has noted before, “[t]he top 25 hedge fund managers
made more than all the kindergarten teachers in the country. You pretty much have more than you’ll ever be able to
use and your family will be able to use. There’s a fairness issue here.” According to President Obama, he would
use the money raised from eliminating carried interest to improve early childhood education.
IRS, Treasury Propose, Postpone Rules. On Friday, May 8, the IRS published in the Federal Register final and
temporary regulations to provide that a notional principal contract (“NPC”) with a non-periodic payment – whether
or not significant —be treated as two separate transactions consisting of one or more loans and an on-market level
payment swap. The IRS is issuing the regulations as proposed rules and withdrawing temporary rules (T.D. 9589)
published in 2012. The final and temporary regulations became effective upon publication in the Federal Register.
Comments on the accompanying proposed rules are due by August 6. Additionally, the Department of
Treasury announced last week that it plans to postpone the effective date of its rules on dividend equivalent
withholding until January 1, 2017. While finishing the final rules remains a priority for the government, the
Treasury also recognized practitioners’ concerns and appears to agree that a January 1, 2016, effective date would
have been problematic.
EU Will Not Implement Financial Transactions Tax in 2015. Last week, German Finance Minister Wolfgang
Schaeuble announced that the European Union will not be ready to implement its proposed financial transactions
tax in 2015 (and is unlikely to do so before 2017). The tax, which will levy a fee on transactions between financial
institutions, still faces several obstacles, including exactly how to levy the tax and whether to include derivatives.
Nevertheless, Mr. Schaeuble indicated that the EU is making steady progress and is ultimately expected to
overcome any remaining obstacles.
Federal Regulations a “Hidden Tax.” According to an annual report recently released by the Competitive
Enterprise Institute (“CEI”), federal regulations are costing U.S. taxpayers nearly $1.9 trillion in compliance costs
each year, which effectively represents a “hidden tax.” As CEI points out, the $1.9 trillion in compliance costs
(approximately $15,000 per household) surpasses the $1.3 trillion in individual income taxes the federal
government collected last year.
RELEVANT TAX LEGISLATION
In recent weeks, lawmakers have introduced various pieces of tax-related legislation, including bills to: (1) provide
tax-related regulatory relief to small businesses; (2) expand the availability of employee stock ownership plans

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sponsored by S corporations; and (3) expand the denial of the deduction for certain “excessive” executive
compensation.
The Small Business Tax Certainty and Growth Act of 2015 (S. 1141). Senator Susan Collins (R-ME)
introduced this bill on April 30, 2015, to permanently double deductions for small business start-up expenses,
organizational expenses, and syndication fees; clarify cash accounting for small businesses; and extend other tax
provisions. Presently S. 1141 has two co-sponsors (Senators Bob Casey (D-PA) and Kelly Ayotte (R-NH)) and is
awaiting action by the Senate Finance Committee.
The Promotion and Expansion of Private Employee Ownership Act of 2015 (H.R. 2096). Representative
David Reichert (R-WA) introduced this bill on April 29, 2015, to expand availability of employee stock ownership
plans sponsored by S corporations. Presently, H.R. 2096 has bipartisan support from 10 co-sponsors (4
Republicans and 6 Democrats) and is awaiting action by the House Ways and Means, Small Business, and
Education and the Workforce Committees.
The Stop Subsidizing Multimillion Dollar Corporate Bonuses Act (H.R. 2103/S. 1127). Representative Lloyd
Doggett (D-TX) and Senator Jack Reed (D-RI), respectively, introduced these bills on April 29, 2015, to expand the
denial of deduction for certain excessive compensation to corporate employees. Presently, H.R. 2103 has 23 co-
sponsors (all Democrats) and is awaiting action by the House Ways and Means Committee. S. 1127 has three co-
sponsors (all Democrats) and is awaiting action by the Senate Finance Committee.
UPDATES FROM THE JOINT COMMITTEE ON TAXATION
The JCT and National History Center recently held a congressional briefing during which experts described the
evolution of the federal tax system from the early twentieth century through the present day. In addition to
discussion of sweeping plans for “tax replacement” that have surfaced repeatedly – including calls for broad-based
consumption levies like a national sales tax or value-added tax – the briefing examined the Tax Reform Act of
1986, which is “arguably the most important peacetime tax reform in American history.”
While the JCT did not release any reports last week, Chief of Staff Tom Barthold recently announced that the
Committee is struggling with how to arrive at a point estimate, rather than a range of estimates, when required to
use dynamic scoring methods to score proposed legislation. Moreover, he noted that staff is still trying to determine
“what [] extra information should be [collected]” for purposes of dynamic scoring.
About the Authors:
Matthew D. Cutts Mara Giorgrio Brandon Román
(202) 457-6079 (202) 457-6522 (202) 457-5330