Larry's Tax Law

The Oregon Legislature, in House Bill 3373, created the Office of the Taxpayer Advocate within the Oregon Department of Revenue.  The new law became effective on September 25, 2021.  According to the Oregon Department of Revenue website, the office is open and “here to help.”

The mission of the Office of the Taxpayer Advocate is threefold:

1. To assist taxpayers in obtaining “easily understandable” information about tax matters, department policies and procedures, including audits, collections and appeals;
2. To answer questions of taxpayers or their tax professionals about preparing and filing returns; and
3. To assist taxpayers and their tax professionals in locating documents filed with the department or payments made to the department.

Like last year, 2021 has been a difficult year.  The COVID-19 pandemic continues to be at the forefront of everyone’s existence.  On top of that, the Delta variant and the most recently discovered Omicron variant have entered the picture.

Personal loss, social unrest, lofty economic hurdles and limitations on personal interaction have permeated the planet for almost 24 months.  For at least the foreseeable future, it appears these strained conditions will continue.    

Thanks to the steadfast support of family, friends, clients and business colleagues, we are persevering throughout these trying times.  I am so grateful for these relationships!

On November 19, 2021, HR 5376, the 2,476-page bill, commonly known as the Build Back Better Act, was passed by the U.S. House of Representatives by a vote of 220-213.

The House’s vote on HR 5376 was held after the Congressional Budget Office released its cost estimates for the proposed legislation. It estimates HR 5376 will cost almost $1.7 trillion and add $367 billion to the federal deficit over 10 years. 

HR 5376 started out with robust changes to our tax laws, including large increases in the corporate, individual, trust and estate income tax rates, significant increases in the capital gains tax rates, taxation of unrealized gains of the ultra-wealthy, a huge reduction in the unified credit, a tax surcharge on high income individuals, trusts and estates, expansion of the application of the net investment income tax, elimination of gift and death transfer discounts, and additional limitations on the application of the qualified business income deduction. 

To the cheer of most U.S. taxpayers, HR 5376, as passed by the House, is a dwarf, in terms of the tax provisions, compared to its original form.  As tax legislation, at least in its current state, it is much ado about nothing.  

However, U.S. taxpayers should not get too joyful about the legislation in its current form.  It will likely be substantially altered by the Senate, regaining many of its original provisions (with or without modification).  In fact, Skopos Labs reports that the bill, as passed by the House, has a 10 percent chance of being in enacted into law.

HR 5376, at its heart, provides funding, establishes new programs and otherwise modifies current provisions of the law aimed at enhancing a broad array of programs, including education, childcare, healthcare and the environmental protections.

While it may not be worth spending too much time focusing on HR 5376, as its tax provisions will be drastically altered by the Senate, it is worth briefly noting what is in the bill and what may be missing.

As previously reported on May 7 and June 17 of this year,  Washington state lawmakers enacted a new capital gains tax, set to go into effect on January 1, 2022, but two lawsuits were initiated to declare the tax unconstitutional.  To date, the court cases are continuing their way through the judicial process.

On November 2, 2021, as part of the statewide general elections process, Washington voters were not asked to vote on the new state capital gains tax; rather they were asked for their opinion on the tax.

The specific question posed, as written by the Office of the Attorney General, is as follows:

Last fall, the IRS announced, with respect to pass-through entities (LLCs or other entities taxed as partnerships or S corporations), that, if state law allows or requires the entity itself to pay state and local taxes (which normally pass through and are paid by the ultimate owners of the entity), the entity will not be subject to the $10,000 state and local taxes deductibility cap (the “SALT Cap”). 

On February 4, 2021, Senate Bill 727 (“SB 727”) was introduced in the Oregon Legislature.  SB 727 is Oregon’s response to the IRS announcement (see discussion below).

On June 17, 2021, after some amendments, SB 727 was passed by the Senate and referred to the House.  Nine days later, the House passed the legislation without changes.  On June 19, 2021, Oregon Governor Kate Brown signed SB 727 into law, effective September 25, 2021.  In general, it applies to tax years beginning on or after January 1, 2022.  Interestingly, SB 727 sunsets at the end of 2023.

In relevant part, SB 727 allows pass-through entities to make an annual election to pay Oregon state and local taxes at the entity level.  For pass-through entities that make the election, their owners will potentially be able to deduct more than $10,000 of Oregon state and local taxes on the federal income tax return.  However, it gets even better—SB 727 includes a refundable credit feature that may result in further tax savings for some owners of pass-through entities.

As song writer and musician Bob Dylan said in his hit song, “The Times They Are A-Changin'”:

Come gather’ round people
Wherever you roam
And admit that the waters
Around you have grown
And accept it that soon
You’ll be drenched to the bone
If your time to you is worth savin’
Then you better start swimmin’ or you’ll sink like a stone
For the times they are a-changin’

The federal tax laws are certainly about to change. With the need to raise revenue as a top priority for the Biden Administration, everyone is expecting dramatic changes to the Internal Revenue Code.

Prologue

Kyle N. Richard recently joined Foster Garvey.  Kyle’s practice is primarily focused on assisting our municipal clients in bond and tax matters.  With his tax experience, however, he assists our tax practice group clients on broader federal, state and local tax matters.  We are excited to have Kyle join our tax team, adding to our already robust bench strength.

The article below was authored by Kyle.  Expect to see more of Kyle’s contributions to Larry’s Tax Law in the future.

Larry

On September 30, 2021, the Washington State Supreme Court upheld the constitutionality of the additional 1.2 percent business and occupation (B&O) tax imposed by the 2019 Substitute House Bill 2167 (“SHB 2167”) on “specified financial institutions”—financial institutions with annual net income of more than $1 billion.  SHB 2167 increases the tax rate for these institutions from 1.5 percent (the rate generally applicable to financial institutions) to 2.7 percent.

The tax was codified in Section 82.04.29004 Revised Code of Washington (“RCW”).  Like other B&O taxes in Washington, the amount of tax due is measured by the amount of the specified financial institution’s gross revenues attributed to Washington State, which is generally based on an apportionment formula (contained in RCW 82.04.460-.462).  The effect of this apportionment regime is that a certain percentage of a financial institution’s total gross income for the year is treated as earned in Washington and taxed under Washington law.

The Washington Bankers Association and American Bankers Association (taxpayers) commenced a lawsuit, arguing that the tax violated the U.S. Constitution’s Dormant Commerce Clause (“DCC”).  At trial, the court concluded that the taxpayers had standing to challenge the tax under the Uniform Declaratory Judgments Act (“UDJA”) and held that the additional graduated tax rate discriminated against out-of-state businesses, in violation of the DCC.  The trial court denied reconsideration of its decision.  The Washington Department of Revenue then appealed directly to the Washington State Supreme Court.

As many readers have noticed, I have been silent for the past few months.  That is partly due to exhaustion from reporting on the flurry of tax events that have occurred since the COVID-19 pandemic commenced in 2020 and also partly due to the need to conserve energy to fully learn, digest and report on the highly anticipated, new broad-sweeping federal tax legislation we should see within the next few weeks.  While many commentators are publishing articles on what could be contained in final legislation and what taxpayers should be doing currently, I decided, especially since I do not possess a good crystal ball, to wait until the legislation is passed (or at least gets further along in the legislative process) before reporting on it and advising taxpayers on what they should be doing in anticipation of the legislation.  So, all has been calm on the Larry’s Tax Law blog front.  Once the legislation is passed, however, I expect a nasty storm to ensue.

I plan to provide you with a summary of the most salient provisions of the law and how those provisions may impact taxpayers.  In the interim, I wanted to share some interesting tax trivia just published by the Internal Revenue Service.

As I previously reported, on May 4, 2021, Washington State Governor Jay Inslee signed Senate Bill 5096 ("SB 5096") into law, creating the state's first capital gains tax.  It is set to go into effect on January 1, 2022. 

The new law has had a turbulent ride during its infancy.  Before Governor Inslee could even sign the bill into law, opponents to the legislation filed a lawsuit in the Superior Court of Washington for Douglas County, challenging the new tax regime as a tax on income – a violation of the state’s constitution.  The plaintiffs in that case seek to enjoin the taxing authorities from assessing and collecting the tax or otherwise enforcing the new law. 

The Oregon Society of Certified Public Accountants (OSCPA) will be hosting its 2021 Annual Real Estate Conference as a live webcast on Wednesday, June 9, 2021. I’ve been a frequent speaker at the OSCPA’s conferences over the past 30+ years. This year, I am looking forward to present on “Section 1031 Exchanges: A Look At Recent Developments and Other Tax Deferral Alternatives.”