Daily Tax Update - November 17, 2017: Senate Finance Committee Approves Tax Reform Proposal

Senate Finance Committee Approves Tax Reform Proposal:  Yesterday evening, the Senate Finance Committee completed markup of the Tax Cuts and Jobs Act. The Committee voted along party lines, 14-12, to approve the proposal. The full Senate is expected to take up the measure the week after Thanksgiving.

During yesterday’s markup, Chairman Hatch (R-Utah) introduced an amendment, referred to as Hatch #25, to provide modifications, clarifications, and additions to the Chairman’s mark.

Hatch #25 included the following changes:

  • International Provisions
    • Exclude the accumulated deferred foreign income from the real estate investment trust (REIT) gross income tests. In addition, REITs would be permitted to elect to meet their distribution requirement to REIT shareholders with respect to the accumulated deferred foreign income over an eight-year period under the same installment percentages as apply to US shareholders who elect to pay the net tax liability resulting from the mandatory inclusion of pre-effective-date undistributed controlled foreign corporation (CFC) earnings in eight installments.
  • Pass-Through Taxation
    • Impose a three-year holding period requirement for qualification as long-term capital gain with respect to certain partnership interests received in connection with the performance of services.
  • Corporate Taxation
    • Add new reporting requirements for corporate taxpayers that pay dividends to shareholders. The provision includes a placeholder for an integration plan that permits corporations to deduct “zero percent” of dividends paid in computing taxable income.
    • Increase the excise tax on stock compensation in an inversion from 15% to 20%.
  • Executive Compensation
    • Modify the transition rule so that proposed changes to section 162(m) do not apply to any remuneration under a written binding contract which was in effective on November 2, 2017, and which was not modified thereafter in any material respect whether or not vested.
  • Exempt Organizations
    • Provide a clarification to the excise tax on private college and university endowments. The proposal, as modified, would impose a 1.4% excise tax on the net investment income of private colleges and universities with over 500 students and endowment assets in excess of $250,000 per student. In determining whether it meets the endowment asset threshold, an educational institution must include the assets held for it by related organizations that control, are controlled by, are under common control with, or are supported or supporting organizations of, the private colleges and universities. In addition, the net investment income on such assets must be included when computing the tax.
    • While the amendment provides a transition rule for  certain public company executives, the transition rule does not apply to the corresponding proposal to impose a 20% excise tax on compensation over $1 million paid by tax-exempt organizations. As a result, tax-exempt organizations could face the excise tax on compensation required to be paid out under existing contracts.