Overview
House Ways and Means Committee Chair Kevin Brady introduced legislation that would reinstate a set of incentives that expired at the end of 2014 and extend them through the end of 2016. It is expected that this two-year extension will only be moved forward if a permanent agreement cannot be reached.
Expiring Provisions
The bill largely extends the incentives without significant change. Among the changes is an expansion of the research and development credit. Specifically, under the legislation, the credit would be simplified and creditable against alternative minimum tax for certain eligible small businesses.
REIT Provisions
In addition to the extenders, the bill includes several provisions related to real estate investment trusts (REITs). It would ban the type of spinoff transaction recently completed by companies such as Darden Restaurants Inc. and Windstream Holdings Inc. The IRS recently provided in Rev. Proc. 2015-43 that it would ordinarily not rule on any issue regarding whether such transactions qualified for tax-free treatment under section 355, and indicated that such transactions were under study in Notice 2015-59.
Specifically, the bill would make section 355 inapplicable to any distribution “if either the distributing corporation or controlled corporation is a real estate investment trust.” Exceptions would exist for spinoffs of a REIT by another REIT and for spinoffs of certain taxable REIT subsidiaries. Additionally, if a corporation is a distributing corporation or controlled corporation with respect to any distribution to which section 355 applies, the bill generally provides that such corporation would be ineligible to make a REIT election for any taxable year beginning before the end of the 10-year period beginning on the date of such distribution. These amendments, if enacted into law, would apply to distributions made on or after December 7, 2015.
The bill would make numerous other changes to the tax treatment of REITs, and includes provisions that would reduce the percentage of REIT assets that may be invested in taxable REIT subsidiaries, repeal the preferential dividend rule for publicly offered REITs, treat debt instruments of publicly offered REITs as real estate assets, treat certain personal property that is ancillary to real property as real property for purposes of the asset test, and modify the calculation of REIT earnings and profits to avoid duplicate taxation. Many of these provisions appeared in former Chairman Camp’s Tax Reform Act of 2014.
In addition, the bill would significantly relax the Foreign Investment in Real Estate Property Tax Act (FIRPTA) rules that apply to foreign investments in US REITs. Specifically, the bill would increase from 5% to 10% the ownership threshold for the FIRPTA exemption that applies to gains from the sale of regularly traded REIT shares or distributions by a REIT of gain from the sale or other disposition of US real property. It would also provide a complete exemption for sales by, or distributions to, a qualified shareholder of a REIT (i.e., certain foreign REITs or pass-through entities) to the extent that the qualified shareholder did not have greater than 10% shareholders or partners and substantially ameliorate the effects of Notice 2007-55 for these shareholders. Finally, the bill would add a version of the administration's proposal to exempt from FIRPTA gain of a foreign pension fund from the sale of an interest in US real property.
IRS Provisions
The bill also contains several provisions regarding the IRS, including:
- A ban on use of personal email to conduct any official business by IRS employees
- New procedures for a section 501(c) organization to request an administrative appeal of an adverse determination
- A requirement that section 501(c)(4) organization notify the IRS within 60 days of establishment of their intent to operate
- Expansion of section 1203(b) to provide for termination of employment of any IRS employee performing, delaying, or failing to perform any official action with respect to a taxpayer for the purpose of extracting personal gain or for a political purpose
- Removal of transfers of money or other property to section 501(c)(4), (5), or (6) organizations from the gift tax regime
Provisions Relating to Tax Court
Lastly, the bill contains a number of provisions related to the Tax Court, including increasing access to the Tax Court for interest abatement and innocent spouse cases, applying the Federal Rules of Evidence to Tax Court proceedings, requiring the Tax Court to prescribe rules establishing procedures for filing complaints with respect to the conduct of a Tax Court judge, and the creation of an annual judicial conference of the Tax Court judges for the purpose of considering means of improving the administration of the court. The bill also contains a provision stating that the Tax Court is not an agency of the executive branch but rather an independent body.
