Trick or Treat: Latest Reconciliation Bill Text Includes Frightful Mishmash of Both

In a mad dash to replace a variety of proposed tax increases rejected from earlier versions of the Build Back Better Act (H.R. 5376), Democratic lawmakers have come up with a framework containing a mishmash of tax revenue raisers negotiated by President Joe Biden with Senators Joe Manchin (D-WV) and Kyrsten Sinema (D-AZ). On October 28, the Committee on Rules of the House of Representatives released legislative placeholder text¹ reflecting the agreement. While the framework and text will continue to evolve, the deal is the latest in a roller-coaster reconciliation ride during which traditional revenue raisers were jettisoned in favor of more novel pay-fors largely targeting some of the most profitable companies and wealthy individuals.

But do not let the bumps throw you off. Assuming the ride does not derail, readers should expect the bill will be further tweaked and clarified before enactment, which could happen as soon as sometime in November. Releasing text—especially near-final text—significantly increases the momentum. The longer proposed tax hikes hang around, the louder the opposition gets and the more trouble could be created in an environment with tight margins.

Those with significant exposure to the public markets should care deeply about a number of provisions in the bill. They should also keep a close eye on it as changes are made before it is voted on in the House (and again in the Senate). Despite being initially uncomfortable with what was left out of the bill, may progressives now seem optimistic. Congressional Progressive Caucus Chair Rep. Pramila Jayapal (D-WA) indicated that she expects the House to be able to turn to the bill next week (meaning the text could potentially be finalized in the form of a manager’s amendment as early as Monday with a vote as early as Wednesday).² This is an extremely optimistic timeline, but we should know within days whether events solidify to back it up. Once the bill clears the House, the Senate process could take at least a week (depending on how the Byrd Rule review by the Senate parliamentarian goes, the result of which could trigger additional changes).

Below are some highlights of what is in (and out) of the latest bill (with comparisons to similar proposals contained in the draft passed by the House Ways and Means Committee on September 15³). Once the text is final, the Joint Committee on Taxation (JCT) will need to score the bill, at which point some of the fantastical revenue estimates⁴ will be brought back to Earth and some holes may need to be filled.

IN – 15% Corporate Alternative Minimum Tax (§13801; p.1509; $325B)

The 15-percent corporate alternative minimum tax (AMT) in the Build Back Better Act (which only applies to companies⁵ that report over $1 billion in annual profits averaged over a three-year testing period) is the same⁶ as the Corporate Profits Minimum Tax⁷ proposal released on October 26. It combines features of Sen. Elizabeth Warren’s (D-MA) Real Corporate Profits Tax Act of 2021⁸ (namely, calculating the tax by reference to adjusted financial statement income) with aspects of the historic corporate AMT regime that existed in the tax code from 1987 through 2017 (namely, by reinstating and amending much of the preexisting corporate AMT statutory framework⁹). If, after calculating both its regular tax liability and the tax liability under this new corporate AMT, the latter amount is higher, then the corporation will add the difference to its regular tax bill.

Designed to target roughly the largest 200 corporations, which the Biden-Harris administration says only paid an average of 8 percent in taxes in 2019, this new tax would be most painful for firms that shrink their tax bills using deductions for accelerated depreciation and for employee stock options (Internal Revenue Code Section 423). While it would allow some net operating loss (NOL) carryovers each year, such carryovers would be capped at 80 percent of the corporation’s adjusted financial statement income, so that NOL carryovers on their own cannot entirely zero out a corporation’s tax bill. Further, the proposal would not diminish in any way the benefit of foreign tax credits (FTCs) or general business credits (GBCs) (including the R&D tax credit, low-income housing credits and clean energy credits such as the production tax credit (PTC)). Sen. Sinema tweeted on October 26 that the proposal “represents a commonsense step toward ensuring that highly profitable corporations . . . pay a reasonable minimum corporate tax.”¹⁰

An October 28 analysis by the Wall Street Journal identified certain companies that could potentially be hit by the minimum tax based just on the amount of GAAP pre-tax income reported alone (before adjustments for timing differences).¹¹

Notably, the new corporate AMT would also apply to certain foreign-parented corporations (those with at least one domestic subsidiary or at least one entity that is engaged in a trade or business within the United States in their group) that report over $100 million in annual profits effectively connected with the conduct of a U.S. trade or business averaged over a three-year testing period. If such a foreign-parented corporation is within scope, then it must take into account the adjusted financial statement income of all of its group members (to the extent such income is effectively connected with a trade or business in the U.S.) for purposes of calculating its corporate AMT liability.

Calculating the tax is not as simple as looking at the “net income” line on a large U.S. company’s consolidated income statement and multiplying it by 15 percent. New Section 56A provides that “adjusted financial statement income” will be modified for items such as related dividends, controlled foreign corporation (CFC) income and disregarded entities. Although many (including, reportedly, House Ways and Means Chair Richard Neal (D-MA)) were concerned that a book profits tax would be unworkable and would result in the Internal Revenue Service (IRS) effectively ceding calculation of the corporate tax base to an external financial accounting standards agency,¹² the proposal gives Treasury the authority to issue regulations or other guidance adjusting adjusted financial statement income to carry out the purposes of the section.

IN – 1% Stock Buyback Excise Tax (§138102; p.1530; $125B)

We have written extensively about a possible excise tax on stock buybacks (see our most recent October 11 report “Surprising Breadth of Proposed Tax on Stock Buybacks”). Lawmakers have now officially included it in their text of the reconciliation bill. There are changes, however, from Senate Finance Committee Chair Ron Wyden’s (D-OR) Stock Buyback Accountability Act.¹³ The biggest change is the rate—1 percent instead of 2 percent. We expected as much (see our October 26 report “Monster Tax Mash: Spooky Tax Proposals Impacting Pubco’s Rise from Fresh Grave of Murdered Corporate Rate Hike”) given that the revenue score is thought to be the same at either rate.

As a quick reminder of how this proposed tax would work, beginning in 2022, anytime a domestic (or certain foreign¹⁴) publicly traded corporation repurchases more than $1 million of its stock during the taxable year, the corporation (not the shareholders who received cash in exchange for their stock) generally must pay an excise tax equal to 1 percent of the value of the repurchased stock. There is an adjustment mechanism and some exceptions (including for tax-free reorganizations¹⁵ or if the repurchase is treated as a dividend). However, because a repurchase is broadly defined as a redemption within the meaning of Section 317(b),¹⁶ there is a risk that many unanticipated transactions could be impacted (such as taxable split-offs, partial liquidations, and—this one has generated a lot of attention and concern—many redemptions by special purpose acquisition companies (SPACs)).

In general, a SPAC redemption that occurs in connection with the initial business combination (IBC) would likely be caught by this excise tax unless it occurs in the same taxable year as the SPAC’s initial public offering (in which case the adjustment mechanism¹⁷ should wipe out the potential tax hit). The cost of any stock buyback excise tax triggered by a SPAC redemption presumably would be borne by the surviving merged company (and its shareholders) and would not impact amounts received by shareholders who elected to redeem as part of the de-SPAC, although the documents for each deal would need to be examined and analyzed in case they provided otherwise.

What happens if an IBC is identified but the de-SPAC transaction falls apart such that the SPAC has to return investors’ money and liquidate? Could the IRS take the position that the liquidating distribution is a transaction economically similar to a Section 317(b) redemption? While we do not think this stock buyback excise tax should apply to a liquidating distribution associated with a failed de-SPAC, under a strained reading of the statutory language, it could be argued that liquidation (under Section 331) might be covered as well. We await additional color in the explanation provided by the Joint Committee on Taxation. The White House’s section-by-section summary released on October 28 was not helpful on this point.

IN – International Tax Changes (GILTI, FDII, QBAI, Section 163(n) and BEAT) ($350B)

As we anticipated in our October 26 report, the international tax changes under consideration have been scaled back so that they align the U.S. rules with what leaders of the G20 (Group of 20)—in coordination with the Organisation for Economic Co-operation and Development (OECD)—have agreed to and not much more. At a high level, this means that the tax on global intangible low-taxed income (GILTI), the deduction for foreign derived intangible income (FDII), the deduction for qualified business asset investment (QBAI) and the base erosion and anti-abuse tax (BEAT) regime will be modified as follows:

• The GILTI rate on certain foreign-source income will rise from 10.5 percent to 15 percent.
• The GILTI calculation will be made on a country-by-country basis, and GILTI and subpart F FTC baskets will also be calculated on a country-by-country basis.
• FTC expense allocation rules are repealed for GILTI.
• The QBAI deduction will be preserved, but will decrease from 10 percent to 5 percent.
• Losses can be carried forward indefinitely in the new country-by-country system.
• FTCs can only be carried forward for 5 years (until 2031, when they may be carried forward for 10 years) and carrybacks are eliminated. Subpart F carryforwards remain at 10 years (although Subpart F carrybacks are eliminated).
• The 20 percent haircut on FTCs allowed to reduce a taxpayer’s GILTI liability will be reduced to 5 percent (bringing the all-in GILTI rate to approximately 15.8 percent).
• The FDII deduction will be adjusted so that the effective rate on FDII is increased from 13.125 percent to 15.8 percent. Recall that FDII was designed to essentially give a preferential rate (less than the 21 percent corporate rate) for income earned in the United States but derived from products sold to foreigners for a foreign use or from services provided outside the United States. The draft brings GILTI and FDII back into alignment after they were split in the original Ways and Means bill.
• The GILTI, QBAI and FDII changes are effective starting in 2023.
• The new Section 163(n) limitation on interest expense in a worldwide group¹⁸ is consistent with what was in the original Ways and Means bill, however the carryforward provision was made more generous. Under the original proposal, disallowed interest expense could only be carried forward under Section 163(o) for 5 years, but this latest draft provides for disallowed interest expense to be carried forward indefinitely. 
• Rather than repealing the BEAT and adopting President Biden’s Stopping Harmful Inversions and Ending Low-Tax Developments (SHIELD) proposal, the BEAT would be preserved and modified to increase the rate from 10 percent to 18 percent over four years (moving it to 12.5 percent in 2023, 15 percent in 2024 and 18 percent in 2025).
• Payments taxed by the United States will no longer be treated as base erosion payments.
• FTCs and general business credits will now be allowed to reduce BEAT liability.
• The BEAT will be modified so that it hits certain payments for cost of goods sold (COGS) capitalized in inventory. It will also be modified so that it works more like the OECD’s undertaxed payments rule, only denying deductions claimed by subsidiaries for payments made to a related entity if the payment is not subject to an effective rate of foreign tax not less than the BEAT rate or 15 percent (whichever is lower, meaning that the effective rate of foreign tax exception never reaches 18 percent). The non-rate BEAT changes are effective starting in 2022.

Note that these changes are not as dramatic as what was proposed by the Ways and Means Committee, and yet the White House is estimating that the revenue generated by them will be equal to or arguably greater than what JCT thought the Ways and Means provisions could raise. This could throw a huge wrench in Democrats’ plan to quickly pass the bill.

IN – Surcharge/Surtax on Wealthy Individuals, Trusts, Estates (§138203; p.1660; $230B)

While this new Section 1A surcharge was in the Ways and Means draft, the rates and thresholds have been modified. Instead of applying an additional 3 percent on the modified adjusted gross income (MAGI) of individuals over $5 million, the latest Build Back Better draft would apply an additional 5 percent on MAGI over $10 million—plus an extra 3 percent (for a total of 8 percent) on MAGI over $25 million. Surprisingly, the threshold goes up to $200,000 (it was only $100,000 in the Ways and Means version) for estates and trusts. Note that MAGI is defined such that it would generally apply to capital gains and most other types of income—assuming you met the thresholds. This means that long-term capital gains could be subject to tax as high as 31.8 percent (20 percent plus 3.8 percent plus 8 percent) while ordinary income could be subject to tax as high as 45 percent (37 percent plus 8 percent).

Note that this new surcharge does not go into effect until 2022, meaning that certain individuals (trusts and estates) would have an incentive to accelerate and recognize gains in 2021 before the tax applies. This could create end-of-year selling pressure that could impact the markets.

IN – Taxing Foreign Investors that Access PTPs Through Swaps (§138146; p.1638)

This proposal—which we wrote about in detail in our September 20 report “Proposed Major Expansion of Section 871(m) Would Tax Non-U.S. Investors that Access PTPs Through Swaps”—was in the House Ways and Means Committee draft of the Build Back Better reconciliation bill. While some were likely hoping the plan to tax certain partnership interest derivatives would get dropped, that did not happen. Although it did get modified.

The most important change is a delay in the effective date. While it was originally proposed to be effective 180 days after enactment, it is now proposed to be effective for payments made after December 31, 2022.

Numerous other technical changes were also made. Sale-repurchase transactions were kicked out of the primary provision, but Treasury was given authority to extend its application to payments determined under such transactions or to payments determined under securities lending transactions. Payments made by reference to gain from deemed dispositions can now be pulled into the regime. And the exceptions carving out the types of income or gain that would be impacted have been refined somewhat.

Importantly, specific regulatory authority is added such that Treasury is now required to issue regulations or other guidance necessary to carry out the purposes of the provision. This calls into question whether it would be self-effectuating without such implementing guidance.

IN – Repeal of Broad Downward Attribution Change (§138128; p.1587)

This is a very technical provision, but one that impacts a number of multinationals. The Ways and Means draft included a proposal (that arguably looked a lot like a technical correction to the 2017 Tax Cuts and Jobs Act (TCJA)) that would turn back on Section 958(b)(4), causing the constructive stock ownership attribution rule in Section 318(a)(3) to turn off for purposes of determining whether there is a controlled foreign corporation (CFC). The change would have been made retroactive to TCJA, but provided an election out. We wrote about this proposed change in our September 14 report “Congress Considering Retroactive Tax Change as Reconciliation Payfor that Could Cost Altaba Millions.”

It turns out that while the latest Build Back Better draft still contains the proposal to create new Section 951B, it is no longer retroactive (it only applies to distributions made after the date of enactment). This is extremely good news for Altaba Inc., which relied on the TCJA change to substantially increase its tax basis in its shares of Alibaba Group Holding Limited (NYSE: BABA), saving it hundreds of millions of dollars in taxes. Other changes have been incorporated into the proposal as well, including new language providing that no inference should be construed regarding whether the changes reflect proper application of any provision of the tax code.

IN – Expand PTPs (Not Kill Them) to Include Green Energy (§136107; p.1161; -$1B)

Not only are lawmakers preserving the ability for oil and gas businesses to utilize the tax-favored publicly traded partnership (PTP, also called master limited partnership or MLP) structure, but they are proposing to expand use of the structure so that green energy firms can also qualify. We wrote about this in more detail last month,¹⁹ but generally—starting in 2022—if at least 90 percent of a properly structured green energy business’s income and gains are derived from the generation of electricity produced from certain renewable sources, then it may not have to pay any corporate tax but will be treated as a flow-through partnership.

IN – End Prison REITs (§138144; p.1636)

As we flagged in our September 14 write-up of the Ways and Means draft (“Tax Provisions in Ways and Means Reconciliation Draft Could Have Far-Reaching Impacts on the Markets”), lawmakers have their sights set on doing away with real estate investment trusts (REITs) that generate income from property used in connection with any correctional, detention or penal facility, effective in 2022. It is not a surprise that it is still in, as its impact is limited. This proposed change under Section 856 would most visibly impact The GEO Group, Inc. (NYSE: GEO)—which is considering abandoning its REIT status—but so far the news does not appear to have materially impacted its stock price (which has gone up 40 percent in the past six months).

IN – Direct Pay Green Energy Tax Credits (§136101-136104; p.1085)

Both the Ways and Means draft and the latest Build Back Better text would extend and expand various existing tax credits frequently used by developers to help cover the cost of building wind, solar and other renewal energy projects. Specifically, the production tax credit and the investment tax credit would both generally be extended through the end of 2026.

Further, both drafts would allow taxpayers to elect to be treated as if they had paid the tax, which would effectively transform the otherwise ordinary tax credit (which often cannot be monetized without entering into a tax equity partnership with a taxable corporation that needs the tax credit to offset its liability) into what amounts to a direct pay or refundable tax credit (with no corresponding haircut in the value of the credit) that the developer can use to increase the amount it borrows to complete the project. This elective payment option may mean that the developer could get the cash benefit of the credit even if it does not have any tax liability.

IN – Wash, Constructive Sale Rules Apply to Cryptocurrencies (§§138152, 138150; $17B)

The Section 1091 wash sale rule (which generally prevents a taxpayer from selling stock at a loss to get a deduction only to turn around and buy it back again within 30 days) and the Section 1259 constructive sale rules will be extended to apply to digital assets (starting in 2022 for the wash sale rules and starting for constructive sales after the date of enactment).

IN – New Section 162(m) Aggregation Rule (§138401; p.1675)

We were expecting that lawmakers would tighten the rules regarding excessive CEO compensation in Section 162(m) (which generally caps the deduction a publicly held corporation can take at $1 million per year for each of its top five highest paid executives). While we thought they might simply accelerate the change to extend the limit to the 10 most highly compensated executives, the latest draft instead expands the scope of Section 162(m) by implementing an aggregation rule that could cause more companies to be subject to the cap. It also expands the definition of applicable employee remuneration so that it includes performance-based compensation (even if not directly paid by the corporation). The changes are effective in 2022.

ALSO IN (But Not Relevant to Public Company Traders)

Also included in the latest Build Back Better text are a number of provisions that we only wanted to mention in passing, as they are not particularly relevant to public company traders: closing the net investment income tax loophole for the wealthy;²⁰ amending the portfolio interest exception by expanding the definition of a 10-percent shareholder;²¹ and imposing a new limit on the small business stock gain exclusion for the wealthy.²²

OUT – Corporate, Individual and Capital Gains Rate Increases

Amazingly, the latest Build Back Better text would not raise the statutory tax rates imposed on the income of corporations or individuals, which will remain at 21 percent and 37 percent, respectively (for those in the highest income bracket). It also would not raise the tax rate on long-term capital gains (which will remain at 20 percent, for those in the highest income bracket, not including the 3.8 percent Section 1411 net investment income tax). Although, as we already mentioned, lawmakers are proposing a new surcharge on high-income individuals that could hit both ordinary income and capital gains.

OUT – Mark-to-Market Tax on Billionaires

This proposal did not even last 24 hours from the release of its legislative text to its untimely death. However, we think it warrants a brief explanation, as there is always the risk that it will be resurrected (if not in this bill, then sometime in the future when revenue needs arise).

Sen. Wyden has been interested in a mark-to-market tax on derivatives (which he viewed as financial products arguably designed to defer or minimize taxes) for years. He introduced a discussion draft embracing such a tax in 2016 after former House Ways and Means Committee Chair Dave Camp included a similar mark-to-market proposal in his Tax Reform Act of 2014.

But it was not until 2019 that Sen. Wyden proposed²³ a much broader imposition of mark-to-market. It would annually tax unrealized capital gains of the tradeable assets of the wealthy (while reducing the benefit of deferral in the case of any nontradeable assets). The proposal came at a time when concerns over income equality had become mainstream and calls for a wealth tax were gaining steam. Importantly, the tax would be levied at ordinary rates.

Wyden’s latest proposal (the text of which was released on October 27²⁴) is significantly more targeted than his original Treat Wealth Like Wages²⁵ plan. Although we addressed it in our October 26 report “Monster Tax Mash: Spooky Tax Proposals Impacting Pubco’s Rise from Fresh Grave of Murdered Corporate Rate Hike,” that was before the actual text of the proposal was released. Although it is now dead, the new proposal:

• Would have applied only to the top 0.1 percent of taxpayers (more than $100 million in annual income or more than $1 billion in assets—about 700 individuals), not the top
  0.3 percent (more than $1 million in annual income or more than $10 million in assets);
• Would have generated consequently less revenue (instead of as much as $2 trillion, the proposal would only have raised a few hundred billion dollars over 10 years);
• Would not have equalized tax rates for wage and capital income—the gains being accelerated would still have been taxed at the preferential 23.8 percent long-term capital gains plus net investment income tax rate (if eligible);
• Would have taxed each year any unrealized gains in tradeable, liquid assets (such as stocks traded on an established securities market), and impacted taxpayers could have elected to pay back the tax on the built-in gain the first time their assets were marked-to-market over an extended period of 5 years;
• Would have allowed for deductions and carrybacks for losses;
• Would have allowed for a $1 billion exception for tradable stock in a single corporation that could have been treated as a nontradable, illiquid asset;
• Would have taxed only upon disposition (sale or transfer) the gains in nontradable assets (such as real estate, business interests and art), but an additional interest tax (a so-called lookback charge or deferral recapture amount) would have been charged (at a rate of about 1.22 percent, allocating the gain pro rata over the holding period) although the amount of interest would be capped so that the total amount plus the regular tax due could not have been more than 49 percent of the gain; and
• Would have provided exceptions for transfers used by charities.

Although mark-to-market taxation of billionaires was expected to raise hundreds of billions of dollars, the proposal was struck from the bill after Sen. Manchin (among others) said he did not like it. ²⁶

OUT, BUT REALLY? – Repeal of Cap on State and Local Tax Deduction

Nowhere in the latest draft is there a repeal (in whole or in part) of the $10,000 state and local tax (SALT) deduction limit, even though lawmakers are still saying they expect something to be done about the cap, which is unpopular in many high-cost-of-living Democratic states. Rep. Neal reportedly said on October 28 that “SALT will be in the endgame, yes.”²⁷

We are hearing that full repeal of the limit for two years (2022, 2023) followed by a return to the $10,000 cap for the following four years (2024 through 2027) is one option under consideration (which would extend the cap, currently set to expire at the end of 2025, for another two years, and could potentially be scored as raising revenue).²⁸

OUT, BUT REALLY? – Carried Interest Tax Changes

In one of the more surprising omissions, the latest Build Back Better draft contains no changes to the tax treatment of so-called carried interest (which allows certain investment managers, among others, to arguably convert what some view as compensation in exchange for services that should be taxed at ordinary rates into investment income taxed at lower long-term capital gains rates).

The Ways and Means draft would have extended the three-year holding period in Section 1061—used to set guardrails for the favorable tax treatment of carried interest—to five years for taxpayers with adjusted gross income of $400,000 or more, along with making other technical changes. We suspect Sen. Manchin was on board with the plan, as “end carried interest” was included on his one-page list of revenue raisers shared with Senate Majority Leader Chuck Schumer (D-NY) on July 28.²⁹ That suggests that Sen. Sinema, and other lawmakers in both the House and Senate, may have had some say in this.

What Else Is in Limbo?

Passing big reconciliation bills always involves treacherous and exciting legislative maneuvering, but what we have experienced with the Build Back Better Act is unprecedented. Consider the numerous failed attempts to de-link the reconciliation bill from the so-called bipartisan infrastructure bill (BIF).³⁰ Consider how President Biden has arguably undercut House Speaker Nancy Pelosi (D-CA) by sending mixed messages to her caucus about whether to vote for BIF or wait for the Build Back Better Act. And consider how two moderate senators have arguably been calling all the shots as to what gets in the bill.

Despite our optimism on timing at the start of the report, it would be irresponsible for us not to caution that if the bill process stumbles during the next two weeks—meaning potential enactment drags into December—then the effort becomes even more challenging. The likelihood increases that “safe” proposals (either safe in or safe out) are suddenly up for grabs, and the negotiation becomes more of a free-for-all.

Many are of the belief that Sens. Manchin and Sinema would actually be more popular if the Build Back Better Act fails. On the other hand, Democratic leadership is arguably of the view that to do nothing would destroy everything. Because of these complicated dynamics, the following provisions (which were not included in the placeholder Build Back Better text released on October 28) still could be resurrected, especially if the bill does not solidify and proceed to consideration in the House in the coming days. The following proposals raise revenue and may still pose a risk of inclusion:

• IRS Bank Information Reporting on Accounts over $10,000.
• Limit Section 199A Qualified Business Income Deduction for Wealthy.
• Stepped-Up Basis at Death.
• Estate and Gift Tax Exemption Amount Reduction.
• Grantor Trust Tax Changes.
• Valuation Discount Elimination for Certain Transfers.
• Conservation Easement Limits for Pass-throughs.
• Individual Retirement Account (IRA) Limits (including prohibiting the inclusion of hard-to-value private investments in IRAs).
• Closing Various Partnership Tax Loopholes (including requiring all partnership debt to be allocated based on partnership profits and mandating the use of the so-called remedial method to determine allocations among partners, etc.).
• Further Tightening of International Tax Rules.

If you made it to the end of this report and do not have whiplash, then you may just survive to the end of the ride. While the prospects for passage of the Build Back Better Act have undeniably gone up now that a framework purportedly has been agreed to and (albeit placeholder) legislative text has been released, there are still many opportunities for this effort to derail.

It is notable that Sen. Sinema’s statement on October 28, following release of the framework, did not explicitly express support for the deal: “I look forward to getting this done, expanding economic opportunities and helping everyday families get ahead.”³¹ Sen. Manchin was similarly cagey: “This is all in the hands of the House right now. I’ve worked in good faith and I look forward to continuing to work on good faith and that’s all I’m going to say.”³²

We will continue to follow developments and keep readers up-to-date as proposals that potentially impact investments and trading positions get revised and revisited. We expect that negotiations will continue over the next several weeks as the bill proceeds through the various steps required for enactment.

One or more authors may have positions in stocks referred to in this article. Akin Gump may represent individuals or entities that may have positions in stocks referred to in this article.

Contact Information

Akin Gump has a full tax team closely following developments in this area. If you need assistance or have questions regarding this alert, please contact your Akin Gump relationship attorney or one of the authors.

¹ Legislative text: https://rules.house.gov/sites/democrats.rules.house.gov/files/BILLS-117HR5376RH-RCP117-17.pdf; section-by-section summary: https://rules.house.gov/sites/democrats.rules.house.gov/files/Section-by-Section-117HR5376RH-RCP117-17.pdf; White House’s microsite: https://www.whitehouse.gov/build-back-better/; the initial framework: http://image.uschamber.com/lib/fe3911727164047d731673/m/16/996c62eb-60d8-41e6-a9a9-6a30f0655984.pdf

² “Progressives tell us they think they’ll be ready to vote on the infrastructure bill and the reconciliation bill as early as next week. Rep. Pramila Jayapal (D-Wash.) said: ‘We will deliver both these bills …  from the House this week,’” as reported by John Bresnahan, Anna Palmer and Jake Sherman, Big whiff, Punchbowl News AM, Oct. 29, 2021 (https://punchbowl.news).

³ https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/NEAL_032_xml.pdf

⁴ Take, for example, the claim by the White House that additional investments in Internal Revenue Service (IRS) enforcement to close the tax gap—by way of no new information reporting requirements like proposed bank account reporting, but rather hiring enforcement agents, modernizing IRS technology and investing in taxpayer service—will net $400 billion in new revenue.

⁵ S corporations, regulated investment companies (RICs) and real estate investment trusts (REITs) are exempted.

⁶ There is at least one correction. Where the Corporate Profits Minimum Tax reads “years beginning after December 31, 2019” in new sub Section 59(k)(1)(B), the Build Back Better Act reads “years ending after December 31, 2019.”

⁷ Press Release, Senators Warren, King, and Wyden Announce Updated Proposal To Prevent The Biggest And Most Profitable Corporations From Paying Nothing In Federal Taxes (Oct. 26, 2021) (https://www.warren.senate.gov/newsroom/press-releases/senators-warren-king-and-wyden-announce-updated-proposal-to-prevent-the-biggest-and-most-profitable-corporations-from-paying-nothing-in-federal-taxes); Legislative text: https://www.warren.senate.gov/imo/media/doc/MCG21C14.pdf; One-page summary: https://www.warren.senate.gov/imo/media/doc/Warren-King-Wyden%20Corporate%20Profits%20Minimum%20Tax%20-%20One%20Pager.pdf

⁸ S. 2680: https://www.congress.gov/bill/117th-congress/senate-bill/2680?s=1&r=39

⁹ In Internal Revenue Code (IRC) §55.

¹⁰ https://twitter.com/SenatorSinema/status/1453104201463123973

¹¹ The named companies include not just Amazon.com, Inc. (NASDAQ: AMZN), but also Pfizer Inc. (NYSE: PFE), Stanley Black & Decker, Inc. (NYSE: SWK) and Archer-Daniels-Midland Company (NYSE: ADM). Whether these companies or others are actually impacted will largely depend on their reliance on accelerated depreciation. Theo Francis and Kristin Broughton, Who Could Pay More With a 15% Corporate Minimum Tax? Not Just Amazon, Wall St. J., Oct. 28, 2021 (https://www.wsj.com/articles/who-could-pay-more-with-a-15-corporate-minimum-tax-not-just-amazon-11635429418).

¹² Note, however, that this will not be the first tax code provision tied to applicable financial statements (see, e.g., §451B).

¹³ For the legislative text of the Stock Buyback Accountability Act (S. 2758), see https://www.brown.senate.gov/imo/media/doc/stock_buy_back_accountability_act_bill_text.pdf.

¹⁴ This provision also applies to certain foreign publicly traded corporations. If the U.S. subsidiary of a foreign corporation buys back its parent’s stock, the buyback would be subject to the excise tax, according to the section-by-section summary.

¹⁵ This exception for tax-free reorganizations means that a typical reverse Morris Trust (RMT) transaction—which generally involves a pro rata spin-off under §355 and a tax-free stock-for-stock reorganization under §368—would not be caught up by the excise tax. The pro rata spin-off ordinarily takes the legal form of a dividend of shares of the Spinco, and accordingly, would presumably not be covered by the “redemption” definition under the statute. If instead of a spin, the §355 distribution were done as a split-off, then this would more likely fit within the definition of a redemption and be more vulnerable.

¹⁶ IRC §317(b) provides that “stock shall be treated as redeemed by a corporation if the corporation acquires its stock from a shareholder in exchange for property, whether or not the stock so acquired is cancelled, retired, or held as treasury stock.”

¹⁷ The proposal contains an adjustment mechanism providing that “the amount taken into account [to calculate the excise tax] shall be reduced by the fair market value of any stock issued by the covered corporation during the taxable year.”

¹⁸ Section 163(n) generally caps the allowable interest expense deductions for a U.S. entity in a multinational group at 100 percent of its share of net interest expense calculated by reference to its share of the global group’s earnings.

¹⁹ We wrote about this in “Flurry of Last-Minute Reconciliation Proposals Could Significantly Impact Public Companies” (Sept. 11, 2021).

²⁰ (§138201; p.1655; $252B) Drafters of the §1411 net investment income tax originally intended for it to “tax all high-earners at 3.8 percent regardless of the source of their income.” But certain partnership and other income was left out, creating a loophole that President Obama later tried (and failed) to close. This provision would close the loophole (for taxpayers with greater than $400,000 in tax-able income and for trusts and estates) while ensuring that either the 3.8-percent tax or employment tax applies to the income. Expanding application of the tax so that it generally applies to all business income earned by active limited partners of a limited partnership and shareholders of an S corporation, who have historically avoided the tax, as long as the income is not also subject to FICA or SECA also happens to raise a significant amount of revenue.

²¹ (§138145; p.1637; $2B) We have not drawn attention to this before, but both the original Ways and Means draft and the latest Build Back Better text would modify the definition of a 10-percent shareholder for purposes of determining whether an interest is exempt from the imposition of 30-percent gross-basis tax (in §871(h)(3)(B)(i)). Interest received by a 10-percent shareholder is not exempt portfolio interest. Under current law, a 10-percent shareholder for this purpose must own 10 percent or more of the total combined voting power of the corporation. The amendment would expand the definition to also include those who own 10 percent or more of the total value of the corporation. The change would be effective for obligations issued after the date of enactment.

²² (§138149; p.1645; $6B) Under this proposal, taxpayers with adjusted gross income equal to or exceeding $400,000 (or trusts and estates) will have to pay more tax on their gains from qualified small business stock that would have otherwise qualified for a tax benefit under §1202. This proposal was in both the Ways and Means draft and the latest version, and both apply the change to sales and exchanges after September 13, 2021 (with a binding contract exception). This appears to be the most significant retroactive provision in the latest bill.

²³ Gabriel T. Rubin and Richard Rubin, Top Democrat Proposes Annual Tax on Unrealized Capital Gains. Wall St. J., April 2, 2019 (https://www.wsj.com/articles/top-democrat-proposes-annual-tax-on-unrealized-capital-gains-11554217383?shareToken=st544964b1660748839ae7a4aaca6fa439); Press Release, Wyden Unveils Proposal to Fix Broken Tax Code, Equalize Treatment of Wages and Wealth, Protect Social Security (Sept. 12, 2019) (https://www.finance.senate.gov/ranking-members-news/wyden-unveils-proposal-to-fix-broken-tax-code-equalize-treatment-of-wages-and-wealth-protect-social-security-).

²⁴ Press Release, Wyden Unveils Billionaires Income Tax (Oct. 27, 2021) (https://www.finance.senate.gov/chairmans-news/wyden-unveils-billionaires-income-tax). Legislative text: https://www.finance.senate.gov/imo/media/doc/Billionaires%20Income%20Tax.pdf; Section-by-section summary: https://www.finance.senate.gov/imo/media/doc/Billionaires%20Income%20Tax%20-%20Section-by-Section.pdf.

²⁵ For Sen. Wyden’s Treat Wealth Like Wages proposal, see https://www.finance.senate.gov/imo/media/doc/Treat%20Wealth%20Like%20Wages%20RM%20Wyden.pdf.

²⁶ The death was likely precipitated by the following comments: “I don’t like it. I don’t like the connotation that we’re targeting different people . . . [that] create a lot of jobs . . . and give a lot to philanthropic pursuits,” Sen. Manchin told Max Cohen of Punchbowl News Oct. 27, 2021 (twitter.com/maxpcohen/status/1453369762176585728; see also https://punchbowl.news).

²⁷ Laura Davison and Erik Wasson, SALT-Break Increase Seen Likely After Omission in Biden Plan (1), Daily Tax Report, Oct. 28, 2021 (subscription required).

²⁸ Id.

²⁹ Burgess Everett, Manchin proposed $1.5T top-line number to Schumer this summer, POLITICO, Sept. 30, 2021 (https://www.politico.com/news/2021/09/30/manchin-proposed-15t-topline-number-to-schumer-this-summer-514803).

³⁰ The bipartisan infrastructure bill or BIF (its official name is the Infrastructure Investment & Jobs Act or IIJA) passed the Senate on Aug. 10, 2021 (Senate Amendment 2137 to H.R. 3684) with the support of 48 Democrats, 2 Independents and 19 Republicans. It has not yet passed the House.

³¹ Jordain Carney, Manchin, Sinema sidestep saying if they support Biden framework, The Hill, Oct. 28, 2021 (https://thehill.com/homenews/senate/578922-manchin-sinema-sidestep-saying-if-they-support-biden-framework).

³² Id.