Democratic daylight on Treasury rules

With help from Josh Gerstein and Katy O’Donnell

CRACKS IN THE WALL? Don’t look now, but it looks like there might be some growing Democratic skepticism about those Treasury rules targeting earnings stripping.

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Eleven Democrats on the House Ways and Means Committee wrote to Treasury Secretary Jack Lew on Wednesday, asking for a meeting about the rules that would allow the department to reclassify some debt as equity and maintaining that certain sectors might deserve transition rules to soften the blow from the regulations.

The Democrats specifically mentioned financial services, insurance and utilities as industries that could face particular challenges with the rules, and noted concerns about normal cash management methods like pooling. “There may be a number of unforeseen circumstances in which the regulations could adversely affect ordinary course business transactions between related parties in the absence of tax avoidance motives,” the Democratic tax writers wrote in a letter obtained by Morning Tax, while stressing they were 100 percent behind the goal of cracking down on earnings stripping.

If those arguments sound pretty similar to the complaints the business community has been making for weeks about the Section 385 regulations — well, that’s because they’re pretty similar. Some of the Democrats on the letter do have a reputation as business-friendly by their party’s standards — Rep. Richard Neal of Massachusetts and Rep. Ron Kind of Wisconsin, for instance. But others — notably Rep. Sander Levin of Michigan, the committee’s top Democrat — don’t exactly seem like the usual suspects for this kind of letter.

How much momentum this gives to the business community, which wants to delay the effective date for the rules that were rolled out as part of a broader anti-inversion package, in addition to a longer comment period, remains to be seen. But remember that we haven’t seen this kind of letter from Senate Democrats, at least as of yet.

IT’S THURSDAY, SO WE’RE ALMOST THERE. (If only we could skip town early like the House did last night.) It’s also the 148th anniversary of Christopher Latham Sholes receiving a patent for something he called the “Type-Writer.” (Wonder where the delete key was.)

Let us know what’s going on. Email:,,, Twitter: @berniebecker3, @tobyeckert, @brian_faler, @katyodonnell_ , @POLITICOPro and@Morning_Tax.

WHAT’S NEXT FOR JOHN KOSKINEN? The good news for Republicans seeking to remove the IRS commissioner: A group of legal scholars all agreed that providing false testimony to Congress rises to the level of impeachable offense. But as our Katy O’Donnell noted, there wasn’t a groundswell of support for the case that Republicans like House Oversight Chairman Jason Chaffetz and Rep. Jim Jordan were pushing — that Koskinen only needed to commit a bad act, not have bad intent, to borrow the phrasing of one of the witnesses. “The House has never impeached anyone for gross negligence or I think anything akin to it, and I think opening the door to that is going to present all sorts of serious problems,” said Michael Gerhardt, a law professor at the University of North Carolina.

In any event, the House Freedom Caucus wants a floor vote on Koskinen’s impeachment for his handling of the investigation into the IRS’s improper scrutiny of tea party groups, as The Hill’s Naomi Jagoda reports.

At the same time, Chaffetz’s measure to censure Koskinen has already passed the Oversight Committee. The last time Congress censured a sub-Cabinet official was back during the Teapot Dome scandal of the Roaring ’20s, according to the Congressional Research Service. (Apparently, Teapot Dome was once a plot point on “Downton Abbey.”)

SPEAKING OF THE IRS (AND THE CONSTITUTION): Those GOP efforts to strip Koskinen of his salary via the appropriations process might not be standing on the most solid constitutional footing, according to Richard Rubin of The Wall Street Journal. In fact, it could be a bill of attainder — just like the GOP efforts to take away Koskinen’s pension through the censure process. “This does sound a lot like imposing a punishment without a trial,” said Richard Briffault of Columbia Law School.

** A Message from the International Council of Shopping Centers: The shopping center industry is committed to finding a solution that will enhance compliance and curtail abuses of the Americans with Disabilities Act (ADA). We are committed to H.R. 3765, Congressional legislation that brings a common sense and a fair approach to correcting alleged ADA access violations. For more information visit **

HIP HIP HOORAY: There’s at least one group of House Republicans excited by the GOP’s tax reform framework. Our Brian Faler reports that the conservative Republican Study Committee gave one of their own, House Ways and Means Chairman Kevin Brady, a hearty round of applause after Brady outlined the tax reform plan scheduled for release on Friday. “It looks really good,” said RSC Chairman Bill Flores (R-Texas), adding that the response was “overwhelmingly positive.” (The RSC isn’t exactly the House Freedom Caucus, but the group has been known to stand in the way of GOP leadership priorities.)

The question now: When will we see the plan? It was slated for release Friday, but after a very topsy-turvy Wednesday in the House, with Democrats seeking to force gun votes and some late-night maneuvering from Republicans, the House adjourned early for the July 4 recess in the wee hours this morning. However, Speaker Paul Ryan’s avail is still on for today, so we’ll see whether that will be addressed.

BACK TO 385: Business groups that represent multinational corporations, like the Business Roundtable, have gotten a lot of the attention as opposition to those rules has grown. But groups like the S Corporation Association, which represents businesses that aren’t usually associated with earnings stripping, are trying to more loudly make their case that the rules would affect a wide cross-section of companies. “These regs are not limited to international activities,” said Brian Reardon, the S Corp group’s president. “It’s a tool they could use on international matters, but it’s not limited to that.”

Reardon and his group also say that the rules could be especially damaging to S corps, which are only allowed to have one class of stock. If some of a company’s debt is reclassified as equity, that could give an S corp a second class of stock, Reardon told Morning Tax. And if an S corp loses its status, it could either enter a potentially costly and long appeal with the IRS to restore it, or just become a corporation — neither a really appealing option, Reardon added.

JUSTICE NABS ANOTHER: A former Credit Suisse manager pleaded guilty on Wednesday to federal charges of helping U.S. citizens dodge their tax liabilities — after a roughly five-year period on the run. Michele Bergantino, an Italian citizen who was residing in Switzerland, acknowledged that his conduct alone led to between roughly $1.5 million and $3.5 million in lost revenue for the U.S. Treasury. Among Bergantino’s transgressions: helping facilitate lots of large cash withdrawals, especially at the Credit Suisse branch at the Zurich airport, and scrubbing an American client’s identity from his or her file.

On a somewhat related note, Justice also dropped a summons enforcement action against UBS, after the bank handed over all the Singapore-based records the IRS wanted regarding Henry Hsiaw, a U.S. citizen. The tax agency is trying to figure out the Hsiaw’s tax liability from 2006 to 2011.


JUDGMENT DAY ON BREXIT: We still have more than a few hours until finding out whether the United Kingdom decides to ditch the European Union. But what kind of tax impact might a Brexit have? If the Brits do vote to leave today, multinational corporations with a presence in Britain could face a new Value Added Tax regime and added costs from the potential loss of access to the EU’s “one-stop-shop” mechanisms. Most other taxes wouldn’t be immediately affected, though Britain would no longer be subject to EU harmonization efforts, including the push to build a common consolidated corporate tax base. Other effects are less direct.

Economists broadly agree the U.K. would experience immediate economic pain, for instance, and the resulting drag could push British authorities to lower their corporate rates to induce corporations to stay. And, of course, if the referendum sparks a contagion, leading countries like France to pull back, the broader EU tax structure would be in danger.

British-based companies would also face a tax hike, according to Bloomberg’s Lynnley Browning. “If U.K. voters decide to leave the union — a departure process that will take two years — British companies’ subsidiaries in EU nations would lose an exemption from withholding taxes on any dividends they pay to their British parents. While the U.K. has separate tax treaties with some countries that could serve the same purpose as the exemption, it doesn’t have treaties with all EU member states, said Patrick Cox, an international tax lawyer at Withers LLP in New York.”


KANSAS REACHES INTO THE PIGGY BANK: Kansas’ financial council overwhelmingly voted to temporarily borrow $900 million to make sure the state can cover its expenses through next June, The Associated Press reports. The move is the latest stopgap measure that Gov. Sam Brownback has had to rely on since pushing through a broad tax cut several years back.

WHO DOESN’T WANT A JERSEY GAS TAX HIKE? The airline industry, of course. Airlines for America has panned a bipartisan plan to raise the gas tax from 4 percent to 7 percent in New Jersey, which has historically had low gas taxes. “Aviation is not a piggy bank for the Legislature to use to solve their highway infrastructure problems,” said the group’s Sharon Pinkerton, via Bloomberg. “Airlines for America is seriously considering what our legal options would be if the legislature moves forward.”

Still, The New York Times reports that the stars might finally be aligning on the gas tax hike.


— One endorsement for the House GOP health care framework.

— New IRS deferred compensation rules offer a little clarity.


Warren G. Harding — in office during the Teapot Dome scandal — is the last U.S. president to have a county named for him: Harding County, N.M., which has a population of under 1,000 and is among the least populated counties in the country.

** A Message from the International Council of Shopping Centers: The shopping center industry supports H.R. 3765, a bill that closes a loophole in current law that has created a cottage industry of drive-by ADA lawsuits. H.R. 3765 balances the spirit of the ADA with a fair approach to correcting minor violations and enhancing compliance.

Founded in 1957, ICSC is the global trade association of the shopping center industry. Its more than 70,000 members in over 100 countries include shopping center owners, developers, managers, investors, retailers, brokers, academics, and public officials. Learn more at **

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