General Explanations of the Administration's Revenue Proposals for Fiscal Year 2024

General Explanations

of the

Administration’s Fiscal Year 2024

Revenue Proposals

Department of the Treasury

March 9, 2023

This document is available on line at

https://home.treasury.gov/policy-issues/tax-policy/revenue-proposals

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

TABLE OF CONTENTS

Notes ...................................................................................................................................... vi

REVENUE PROPOSALS ........................................................................................................ 1

Reform Business Taxation ................................................................................................... 2

Raise the corporate income tax rate to 28 percent ............................................................. 2

Increase the excise tax rate on repurchase of corporate stock ........................................... 4

Tax corporate distributions as dividends ............................................................................ 5

Limit tax avoidance through inappropriate leveraging of parties to divisive

reorganizations ....................................................................................................... 8

Limit losses recognized in liquidation transactions ......................................................... 11

Prevent basis shifting by related parties through partnerships ........................................ 13

Conform definition of “control” with corporate affiliation test ....................................... 15

Strengthen limitation on losses for noncorporate taxpayers ............................................ 16

Accelerate and tighten rules on excess employee remuneration ...................................... 18

Prevent prison facility rent payments from contributing to qualification as a REIT ....... 20

Reform International Taxation ......................................................................................... 22

Revise the global minimum tax regime, limit inversions, and make related reforms ....... 22

Adopt the undertaxed profits rule ..................................................................................... 32

Repeal the deduction for foreign-derived intangible income ........................................... 37

Revise the rules that allocate Subpart F income and GILTI between taxpayers to ensure

that Subpart F income and GILTI are fully taxed................................................. 38

Eliminate exploited mismatch in calculation of earnings and profits of controlled foreign

corporations .......................................................................................................... 41

Limit foreign tax credits from sales of hybrid entities ...................................................... 43

Restrict deductions of excessive interest of members of financial reporting groups ........ 45

Treat payments substituting for partnership effectively connected income as U.S. source

dividends ............................................................................................................... 48

Expand access to retroactive qualified electing fund elections ........................................ 50

Reform taxation of foreign fossil fuel income ................................................................... 52

Provide tax incentives for locating jobs and business activity in the United States and

remove tax deductions for shipping jobs overseas ............................................... 54

Support Housing and Urban Development ...................................................................... 56

Make permanent the new markets tax credit .................................................................... 56

Provide a neighborhood homes credit .............................................................................. 58

Expand and enhance the low-income housing credit ....................................................... 61

Modify Energy Taxes .......................................................................................................... 64

Eliminate fossil fuel tax preferences ................................................................................. 64

Eliminate drawbacks on petroleum taxes that finance the Oil Spill Liability Trust Fund

and Superfund ....................................................................................................... 69

Impose digital asset mining energy exise tax .................................................................... 71

Strengthen Taxation of High-Income Taxpayers ............................................................ 72

Apply the net investment income tax to pass-through business income of high-income

taxpayers ............................................................................................................... 72

iii

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Increase the net investment income tax rate and additional Medicare tax rate for high-

income taxpayers .................................................................................................. 75

Increase the top marginal income tax rate for high-income earners ............................... 77

Reform the taxation of capital income .............................................................................. 78

Impose a minimum income tax on the wealthiest taxpayers ............................................. 82

Modify Rules Relating to Retirement Plans .................................................................... 85

Prevent excessive accumulations by high-income taxpayers in tax-favored retirement

accounts and make other reforms ......................................................................... 85

Support Workers, Families, and Economic Security ...................................................... 93

Expand the child credit, and make permanent full refundability and advanceability ...... 93

Restore and make permanent the American Rescue Plan expansion of the earned income

tax credit for workers without qualifying children ............................................. 102

Make permanent the Inflation Reduction Act expansion of health insurance premium tax

credits .................................................................................................................. 105

Make the adoption tax credit refundable and allow certain guardianship arrangements to

qualify ................................................................................................................. 107

Make permanent the income exclusion for forgiven student debt .................................. 109

Extend tax-preferred treatment to certain Federal and tribal scholarship and education

loan programs ..................................................................................................... 110

Increase the employer-provided childcare tax credit for businesses.............................. 113

Improve the design of the work opportunity tax credit to promote longer-term

employment ......................................................................................................... 114

Modify Estate and Gift Taxation ..................................................................................... 115

Improve tax administration for trusts and decedents’ estates ........................................ 115

Limit duration of generation-skipping transfer tax exemption ....................................... 121

Modify income, estate, gift, and generation-skipping transfer tax rules for

certain trusts ....................................................................................................... 123

Revise rules for valuation of certain property ................................................................ 130

Close Loopholes ................................................................................................................. 133

Tax carried (profits) interests as ordinary income ......................................................... 133

Repeal deferral of gain from like-kind exchanges .......................................................... 135

Require 100 percent recapture of depreciation deductions as ordinary income for certain

depreciable real property ................................................................................... 136

Limit use of donor advised funds to avoid a private foundation payout requirement .... 139

Exclude payments to disqualified persons from counting toward private foundation

payout requirement ............................................................................................. 141

Extend the period for assessment of tax for certain Qualified Opportunity Fund

investors .............................................................................................................. 142

Impose ownership diversification requirement for small insurance company election . 144

Expand pro rata interest expense disallowance for business-owned life insurance ...... 148

Modify rules for insurance products that fail the statutory definition of a life insurance

contract ............................................................................................................... 150

Correct drafting errors in the taxation of insurance companies under the Tax Cuts and

Jobs Act of 2017 .................................................................................................. 153

Define the term “ultimate purchaser” for purposes of diesel fuel exportation .............. 156

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Improve Tax Administration ........................................................................................... 157

Enhance accuracy of tax information ............................................................................. 157

Amend the centralized partnership audit regime to permit the carryover of a reduction in

tax that exceeds a partner’s tax liability ............................................................. 160

Modify requisite supervisory approval of penalty included in notice ............................ 161

Modify the requirement that general counsel review certain offers in compromise ...... 163

Incorporate chapters 2/2A in centralized partnership audit regime proceedings .......... 164

Simplify foreign exchange gain or loss rules and exchange rate rules for individuals .. 165

Increase threshold for simplified foreign tax credit rules and reporting ....................... 167

Authorize limited sharing of business tax return information to measure the economy

more accurately .................................................................................................. 168

Expand TIN matching and improve child support enforcement ..................................... 170

Clarify that information previously disclosed in a judicial or administrative proceeding is

not return information ........................................................................................ 172

Improve Tax Compliance. ................................................................................................ 173

Address taxpayer noncompliance with listed transactions ............................................. 173

Impose an affirmative requirement to disclose a position contrary to a regulation ...... 176

Require employers to withhold tax on failed nonqualified deferred compensation plans

............................................................................................................................. 177

Extend to six years the statute of limitations for certain tax assessments ...................... 178

Increase the statute of limitations on assessment of the COVID-related paid leave and

employee retention tax credits ............................................................................ 179

Expand and increase penalties for noncompliant return preparation and e-filing and

authorize IRS oversight of paid preparers .......................................................... 181

Address compliance in connection with tax responsibilities of expatriates ................... 186

Define control of the payment of wage ........................................................................... 189

Modernize Rules,

Including those for Digital Assets..................................................... 190

Apply the wash sale rules to digital assets and address related party transactions ...... 190

Modernize rules treating loans of securities as tax-free to include other asset classes and

address income inclusion .................................................................................... 193

Provide for information reporting by certain financial institutions and digital asset

brokers for purposes of exchange of information ............................................... 197

Require reporting by certain taxpayers of foreign digital asset accounts ...................... 200

Amend the mark-to-market rules to include digital assets

......................................... 202

Improve Benefits Tax Administration ............................................................................ 204

Clarify tax treatment of fixed indemnity health policies ................................................. 204

Rationalize funding for post-retirement medical and life insurance benefits ................. 206

Clarify tax treatment of on-demand pay arrangements .................................................. 207

Extend IRS Funding ......................................................................................................... 209

Extend mandatory funding provided to the IRS for fiscal years 2032 and 2033 ............ 209

TABLE OF REVENUE ESTIMATES ............................................................................... 210

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

NOTES

The revenue proposals are estimated relative to a baseline of current law.

The Administration’s proposals are not intended to create any inferences regarding current law.

Within the General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals,

unless otherwise stated:

• “AGI” refers to Adjusted Gross Income

• “Budget” refers to the Fiscal Year 2024 Budget of the U.S. Government

• “Code” refers to the Internal Revenue Code

• “C-CPI-U” refers to the Chained Consumer Price Index for Urban Consumers

• “IRS” refers to the Internal Revenue Service

• “OECD” refers to the Organisation for Economic Co-operation and Development”

• “Section” refers to the respective section of the Internal Revenue Code

• “Secretary” refers to the Secretary

• “Treasury” refers to the Department of the Treasury

• “TIN” refers to Taxpayer Identification Number

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

REVENUE PROPOSALS

In the Fiscal Year 2024 Budget, the President proposes reforms that would raise revenues,

expand tax credits for workers and families, improve tax administration and compliance, and

make the tax system more equitable and efficient.

Reforms to business and international taxation would raise the corporate tax rate, increase the

excise tax rate on stock buybacks, and close several business tax loopholes. Additional reforms

would strengthen the taxation of foreign earnings and reduce tax incentives that encourage profit

shifting and offshoring, consistent with the historic international agreement to implement a

global minimum tax. This agreement will help end the race to the bottom in corporate tax rates

and level the playing field for U.S. businesses while protecting U.S. workers. Together the

business and international tax reforms in the Budget would increase revenues and build a fairer

tax system.

Reforms to the taxation of high-income taxpayers would further raise revenues and help ensure

more equal treatment of labor and capital income. Income tax rates for those with the highest

incomes would increase. Capital gains and dividends would generally be taxed at ordinary rates

for those with high incomes, and a loophole that lets some capital gains income escape income

taxation forever would be eliminated for certain wealthy taxpayers. A 25-percent minimum

income tax would be imposed on extremely wealthy taxpayers, which would require prepayment

of taxes on unrealized capital gains. Gaps that allow some pass-through business owners to avoid

Medicare taxes would be eliminated for high-income taxpayers and Medicare tax rates would be

increased for high-income taxpayers. Loopholes, including the carried interest preference and the

like-kind exchange real estate preference, would be eliminated for those with the highest

incomes.

The Budget would expand tax credits for workers and families, which would reduce child

poverty and expand opportunity. The child tax credit would be expanded through 2025, and

would permanently be made fully refundable, determined monthly, and paid out in advance.

Delivery reforms would facilitate take-up. The earned income tax credit would be expanded to

cover more workers without children. The expansion of the premium tax credits first enacted in

the American Rescue Plan Act of 2021 and extended in the Inflation Reduction Act of 2022

would be made permanent, keeping health insurance more affordable for millions of families.

Additional reforms would support housing and urban development, eliminate fossil fuel tax

preferences, close estate and gift tax loopholes, and improve tax administration and compliance,

among other reforms.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

REFORM BUSINESS TAXATION

RAISE THE CORPORATE INCOME TAX RATE TO 28 PERCENT

Current Law

Income of a business entity can be subject to Federal income tax in a manner that varies

depending upon the classification of the entity for Federal income tax purposes. Most small

businesses are owned by individuals and taxed as “pass-through” entities, meaning that their

income is passed through to their owners who are taxed under the individual income tax system.

Most large businesses, including substantially all publicly traded businesses, are classified as “C

corporations” because these corporations are subject to the rules of subchapter C of chapter 1 of

the Internal Revenue Code (Code) and accordingly pay an entity-level income tax. Additionally,

taxable shareholders of such corporations generally pay Federal income tax on most distributions

attributable to their ownership in the corporation. Some mid-sized businesses choose a pass-

through form of entity classification (under subchapter K or subchapter S of chapter 1 of the

Code) while others choose the C corporation form of entity classification.

C corporations determine their taxable income, credits, and tax liability according to the Code

and regulations promulgated thereunder. The Tax Cuts and Jobs Act of 2017 replaced a

graduated tax schedule (with most corporate income taxed at a marginal and average rate of 35

percent) with a flat tax of 21 percent applied to all C corporations.

Reasons for Change

Raising the corporate income tax rate is an administratively simple way to raise revenue to pay

for the Administration’s fiscal priorities. A corporate tax rate increase can also increase the

progressivity of the tax system and help reduce income inequality. Additionally, a significant

share of the effects of the corporate tax increase would be borne by foreign investors. Therefore,

some of the revenue raised by the proposal would result in no additional Federal income tax

burden on U.S. persons. Finally, the majority of income from capital investments in domestic C

corporations is untaxed by the U.S. government at the shareholder level, so the corporate tax is a

primary mechanism for taxing such capital income.

Proposal

The proposal would increase the tax rate for C corporations from 21 percent to 28 percent.

The effective global intangible low-taxed income (GILTI) rate would increase to 14 percent

under the proposal. The proposal Revise the Global Minimum Tax Regime, Limit Inversions, and

Make Related Reforms described later in this text would further increase the effective GILTI rate

to 21 percent.

The proposal would be effective for taxable years beginning after December 31, 2022. For

taxable years beginning before January 1, 2023, and ending after December 31, 2022, the

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

corporate income tax rate would be equal to 21 percent plus 7 percent times the portion of the

taxable year that occurs in 2023.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

INCREASE THE EXCISE TAX RATE ON REPURCHASE OF CORPORATE STOCK

Current Law

The stock repurchase excise tax applies at a rate of one percent of the fair market value (FMV) of

any stock of a covered corporation that is repurchased by the corporation during its taxable year.

The statute generally defines a “covered corporation” as a domestic corporation whose stock is

publicly traded on an established securities market. An established securities market for this

purpose includes U.S. national securities exchanges, certain foreign securities exchanges,

regional or local exchanges, and certain interdealer quotation systems. “Repurchases” include a

corporation’s acquisition of any of its stock from a shareholder for property that qualifies as a

redemption of the stock as defined in the Internal Revenue Code. The statute also provides that a

repurchase includes any other transaction that the Secretary or her delegates determines in

regulations or other guidance to be “economically similar” to a redemption of stock. A

repurchase also may include acquisitions of the corporation’s stock by certain specified affiliates.

The annual FMV of a covered corporation’s repurchased stock is reduced by certain exceptions

and reductions, including the FMV of the covered corporation’s stock that is issued or provided

to employees during the taxable year. The stock repurchase excise tax also applies to certain

subsidiaries of foreign corporations, as well as certain non-U.S. corporations subject to the

inversion rules.

Reasons for Change

Stock repurchases are tax-favored relative to dividends as a means of distributing corporate

profits to shareholders. Increasing the excise tax rate on stock repurchases would reduce this

disparity. Moreover, raising the tax rate is an administratively simple and progressive way to

raise revenue to pay for the Administration’s fiscal priorities.

Proposal

The proposal would increase the tax rate on corporate stock repurchases to 4 percent.

The proposal would apply to repurchases of stock after December 31, 2022.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

TAX CORPORATE DISTRIBUTIONS AS DIVIDENDS

Current Law

Section 301 of the Internal Revenue Code (Code) provides rules for characterizing a distribution

of property by a corporation to a shareholder. The amount of the distribution is first treated as a

dividend under section 301(c)(1) to the extent of the distributing corporation’s applicable

earnings and profits. Outside of corporate reorganization and spin-off contexts, section 316

provides that all of a corporation’s current and accumulated earnings and profits are taken into

account in determining the extent to which a distribution of property made by the corporation is

taxed as a dividend. The amount of the corporation’s earnings and profits at the time the

distribution is made is not controlling. Rather, earnings and profits of a corporation are generally

computed on a standalone basis as of the close of the corporation’s taxable year in which the

distribution is made without diminution as a result of distributions made during the taxable year.

Special rules apply for consolidated groups, and in the case of a deemed dividend resulting from

a sale of stock of a controlled foreign corporation (CFC), as defined in section 957.

The portion of the distribution received by the shareholder that is not a dividend is applied

against and reduces the shareholder’s adjusted basis of the corporation’s stock under section

301(c)(2), and any amount distributed in excess of the shareholder’s basis that is not a dividend

is treated as gain from the sale or exchange of property under section 301(c)(3). The shareholder

takes a basis in the distributed property equal to its fair market value under section 301(d).

Generally, the corporation is required to recognize under section 311(b) any gain realized on the

distribution of any appreciated property to a shareholder (and its earnings and profits are

increased by such gain under section 312) but does not recognize under section 311(a) any loss

realized on a distribution of property with respect to its stock. Although the corporation does not

recognize a loss, its earnings and profits are decreased under section 312 by the sum of the

amount of money, the principal amount or issue price of any obligations (as the case may be),

and the adjusted basis of any other property, so distributed.

If an actual or deemed redemption of stock is treated under section 302 as equivalent to the

receipt of a dividend by a shareholder, the shareholder’s basis in any remaining stock of the

corporation is increased by the shareholder’s basis in the redeemed stock. In addition, if a

subsidiary corporation acquires in exchange for cash or other property stock of a direct or

indirect corporate shareholder issued by that corporation (often referred to as “hook stock”), the

issuing corporation does not recognize gain or loss (or any income) under section 1032 upon the

receipt of the subsidiary’s cash or other property in exchange for issuing the hook stock.

If, as part of a corporate reorganization, a shareholder receives in exchange for stock of the target

corporation both stock and property not permitted to be received without the recognition of gain

(often referred to as “boot”), the exchanging shareholder is required to recognize under section

356(a)(1) gain equal to the lesser of the gain realized in the exchange or the amount of boot

received (commonly referred to as the “boot-within-gain” limitation). If the exchange has the

effect of the distribution of a dividend, then section 356(a)(2) provides that all or part of the gain

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

recognized by the exchanging shareholder is treated as a dividend to the extent of the

shareholder’s ratable share of the corporation’s earnings and profits. The remainder of the gain

(if any) is treated as gain from the exchange of property.

Reasons for Change

Corporations have devised many ways to avoid dividend treatment under current law. For

example, corporations can enter into preparatory transactions to eliminate a corporation’s

earnings and profits or shift the corporation’s earnings and profits to a prior or subsequent tax

year. Corporations also enter into transactions (so-called “leveraged distributions”) to avoid

dividend treatment upon a distribution by having a corporation with earnings and profits provide

funds (for example, through a loan) to a related corporation with no or little earnings and profits,

but in which the distributee shareholder has high stock basis. In addition, because current law

permits a corporation to receive cash without recognizing any income in exchange for issuing its

stock, subsidiaries may distribute property tax-free to corporate shareholders in exchange for

hook stock issued by such shareholder.

Under current law, these types of transactions reduce earnings and profits for the year in which a

distribution is made without a commensurate reduction in a corporation’s dividend paying

capacity. Such transactions are inconsistent with a corporate tax regime in which earnings and

profits are viewed as measuring a corporation’s dividend-paying capacity, and these transactions

inappropriately result in the avoidance of dividend treatment for the corporation’s shareholders.

Finally, there is not a significant policy reason to vary the tax treatment of a distribution received

in a reorganization (and currently subject to the boot-within-gain limitation of section 356) with

the treatment afforded ordinary distributions under section 301.

Proposal

The proposal would amend the Code to ensure that a transfer of property by a corporation to its

shareholder(s) better reflects the corporation’s dividend-paying capacity in the following ways:

Prevent elimination of earnings and profits through distributions of certain stock with basis

attributable to dividend equivalent redemptions

The proposal would amend section 312(a)(3) to provide that earnings and profits are reduced by

the basis in any distributed high-basis stock determined without regard to basis adjustments

resulting from actual or deemed dividend equivalent redemptions or any series of distributions or

transactions undertaken with a view to create and distribute high-basis stock of any corporation.

The proposal would be effective as of the date of enactment.

Prevent use of leveraged distributions from related corporations to avoid dividend treatment

The proposal would treat a leveraged distribution from a corporation (distributing corporation) to

its shareholder(s) that is treated as a recovery of basis as the receipt of a dividend directly from a

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

related corporation (funding corporation) to the extent the funding corporation funded the

distribution with a principal purpose of not treating the distribution as a dividend from the

funding corporation.

The proposal would be effective for transactions occurring after December 31, 2023.

Treat purchases of hook stock by a subsidiary as giving rise to deemed distributions

The proposal would disregard a subsidiary’s purchase of hook stock for property so that the

property used to purchase the hook stock gives rise to a deemed distribution from the purchasing

subsidiary (through any intervening entities) to the issuing corporation. The hook stock would be

treated as being contributed by the issuer (through any intervening entities) to the subsidiary. The

proposal would grant the Secretary and her delegates authority to prescribe regulations to treat

purchases of interests in shareholder entities other than corporations in a similar manner and

provide rules related to hook stock within a consolidated group.

The proposal would be effective for transactions occurring after December 31, 2023.

Repeal gain limitation for dividends received in reorganization exchanges

The proposal would repeal the boot-within-gain limitation in reorganization transactions in

which the shareholder’s exchange is treated under section 356(a)(2) as having the effect of the

distribution of a dividend. For this purpose, the Administration also proposes to align the

available pool of earnings and profits to test for dividend treatment with the rules of section 316

governing ordinary distributions.

The proposal would be effective for transactions occurring after December 31, 2023.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

LIMIT TAX AVOIDANCE THROUGH INAPPROPRIATE LEVERAGING OF

PARTIES TO DIVISIVE REORGANIZATIONS

Current Law

In general, when a corporation distributes appreciated property to its shareholders, the

corporation must recognize gain on the built-in appreciation (that is, the value of that property

less the corporation’s adjusted basis in that property). Sections 355 and 368(a)(1)(D) of the

Internal Revenue Code (Code) provide an exception to this general gain recognition rule in the

case of divisive reorganizations, commonly referred to as “spin-offs”, “split-offs”, or “split-ups”.

In a divisive reorganization, a parent corporation ("Distributing") transfers property (for

example, the appreciated assets underlying a line of business) to a corporation it controls

("Controlled"), in exchange for consideration. In the simplest version of a divisive

reorganization, the consideration Distributing receives consists solely of Controlled stock, which

Distributing then must distribute to its shareholders. In this case, none of Distributing,

Controlled, or their shareholders will recognize any gain, despite Distributing effectively

transferring the built-in gain underlying the Controlled stock (related to the appreciated assets

transferred to Controlled by Distributing to Distributing’s shareholders.

Commonly, divisive reorganizations are structured such that Distributing receives more than

Controlled stock. This consideration may include (a) securities or other debt obligations of which

Controlled is the obligor (Controlled debt), (b) money and other property other than Controlled

debt (Controlled boot), and (c) the assumption by Controlled of Distributing’s liabilities

(Controlled liability assumption). Distributing can transfer Controlled boot and debt to its

creditors without recognition of gain. This is known as “monetization”.

This monetization may require Distributing to recognize gain. For instance, Distributing

recognizes gain on any boot or Controlled debt that it retains. However, current law provides for

two safe harbors that allow some monetization to occur without Distributing recognizing gain.

The first safe harbor provides that Distributing does not recognize gain if the amount of the

assumed Controlled liabilities and any Controlled boot transferred to Distributing’s creditors

does not exceed the aggregate adjusted basis of the assets that Distributing transfers to

Controlled (adjusted basis limitation). The second safe harbor provides that an unlimited amount

of Controlled debt securities may be transferred to Distributing’s creditors without gain

recognition.

In addition, certain other liabilities assumed by Controlled under current law are not subject to

the adjusted basis limitation due to their contingent or speculative nature (contingent Distributing

liabilities). Once fixed and determinable at a later date, these liabilities often are very large, and

typically far exceed their estimated amounts. As a result, Distributing can cause Controlled to

make payments to satisfy contingent Distributing liabilities arising from assets and businesses

contributed to Controlled for an unlimited future period and in an unlimited aggregate amount.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

For the transaction to qualify for non-recognition treatment, the Code requires that Distributing

and Controlled be engaged immediately after the distribution in the active conduct of a trade or

business. However, currently there are no adequate safeguards to ensure Controlled’s adequate

capitalization or continued economic viability following its separation from Distributing through

a divisive reorganization.

Reasons for Change

The Distributing monetization techniques carried out in divisive reorganizations are all

economically similar, and therefore should be subject to the same adjusted basis limitation. In the

absence of a comprehensive limitation, divisive reorganizations can provide opportunities for

tax-planners to structure transactions that economically resemble tax-free cash sales.

Moreover, as described above, Distributing can effectively circumvent the adjusted basis limit by

transferring contingent liabilities to Controlled, which similarly allows Distributing to

accomplish transactions that resemble tax-free cash sales. Additionally, this practice can burden

Controlled with crippling liabilities and excessive leverage, jeopardizing its ability to continue as

a viable going concern. Such practice is inconsistent with the intent and purposes of the divisive

reorganization provisions of the Code,

and has resulted in numerous Controlled bankruptcies.

Taken together, the proposal’s elimination of these monetization loopholes will increase the

integrity of the Code.

Proposal

Eliminate excessive tax-free monetization of divisive reorganizations

The proposal would modify the two safe harbors for the tax-free transfer of Controlled boot and

securities to Distributing creditors. In particular, the proposal would define a new quantity, the

“excess monetization amount,” equal to the aggregate of the following amounts less the total

adjusted bases of the assets transferred by Distributing to Controlled: (a) the total amount of the

liabilities assumed by Controlled, (b) the total amount of Controlled boot transferred to

Distributing’s creditors, (c) the fair market value of nonqualified preferred stock transferred to

Distributing’s creditors, and (d) the total principal amount of Controlled debt transferred to

Distributing’s creditors.

The proposal would not limit the amount of stock (or right to acquire stock) in Distributing or

Controlled received as part of the transaction, which the statute treats as property qualifying for

This proposal would eliminate those opportunities by extending Congress’ prior amendments to section 361 that

eliminated unlimited nonrecognition treatment for Controlled boot transferred to Distributing’s creditors. H.R. Conf.

Rep. 108-755 (Oct. 7, 2004), at 770 (observing that the amount of property that may be distributed to creditors

without gain recognition is unlimited under then-present law).

Gregory v. Helvering, 293 U.S. 465, 469 (1935) (“But the question for determination is whether what was done,

apart from the tax motive, was the thing which the statute intended.”); S. Rep. No. 82-781, at 58 (1951)

(emphasizing that “all of the new corporations as well as the parent [must] carry on a business”).

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

nonrecognition treatment. This exception reflects the fact that such qualifying property does not

give rise to the same tax-free monetization concerns that are posed by Controlled debt, which

more closely resembles cash than an equity interest.

Under the proposal, an excess monetization amount would cause Distributing to recognize gain

in two ways. First, Distributing would recognize gain dollar-for-dollar equal to the smaller of

Distributing’s excess monetization amount or the amount of Controlled boot that Distributing

transfers to its creditors. Therefore, if Distributing’s excess monetization amount equaled $3

billion and Distributing transferred $4 billion of Controlled boot to its creditors, Distributing

would recognize $3 billion of gain.

Second, Distributing would recognize gain if Distributing’s excess monetization amount exceeds

the amount of Controlled boot that Distributing transfers to Distributing’s creditors. Specifically,

this remaining excess monetization amount would cause an equal principal amount of Controlled

debt to be treated as if sold in a taxable sale. Therefore, if Distributing’s excess monetization

amount equaled $5 billion, and Distributing transferred $4 billion of Controlled boot and $1

billion of Controlled debt to Distributing’s creditors, Distributing would recognize gain to the

extent that $1 billion exceeds the adjusted basis of that Controlled debt. This would be in

addition to the $4 billion in dollar-for-dollar gain on the Controlled boot transferred to

Distributing’s creditors.

Prevent tax avoidance through the transfer of contingent liabilities to Controlled

The proposal would impose two additional requirements under section 355 that, if not satisfied,

would result in gain recognition by Distributing (but not Distributing’s shareholders). First,

under the proposal, Controlled must be adequately capitalized as a result of the divisive

reorganization. Second, Controlled must continue to be an economically viable entity after the

completion of the divisive reorganization. The satisfaction of both of these requirements would

be based on all relevant facts and circumstances,

including (a) the projected, as well as actual,

amount of contingent Distributing liabilities assumed by Controlled, and (b) whether Controlled

declares bankruptcy within the five-year period following the divisive reorganization. In

addition, the proposal would authorize the Secretary or her delegates to promulgate such

regulations as may be necessary to carry out the purposes of the proposal or to prevent the

avoidance of tax.

Both parts of the proposal would be effective for transactions occurring after enactment.

However, the new rules would not apply to any distribution pursuant to a divisive reorganization

described in a ruling request initially submitted to the Internal Revenue Service on or before the

date of enactment (if the request has not been withdrawn and for which a ruling has not been

issued or denied in its entirety as of such date).

For purposes of this analysis, the fact that one or more creditors would lend to Controlled would not be relevant.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

LIMIT LOSSES RECOGNIZED IN LIQUIDATION TRANSACTIONS

Current Law

In general, if a corporation distributes its property in complete liquidation, the shareholders of

the corporation recognize gain or loss on their stock under section 331, and the corporation

recognizes gain or loss on the property distributed to the shareholders under section 336. Under

section 332, however, if the same corporate shareholder owns 80 percent or more (by vote and

value) of the distributing corporation’s stock, then the 80 percent corporate shareholder does not

recognize gain or loss on the liquidation and, under section 337, the liquidating corporation does

not recognize gain or loss on property distributed to the 80 percent shareholder. Related party

stock ownership is not taken into account for purposes of determining whether the 80 percent

threshold is satisfied, unless the shareholders are members of a single U.S. consolidated group.

Section 267(a) disallows losses recognized on sales or exchanges of property between related

parties. However, losses recognized on the sale or exchange of property between members of a

controlled group of corporations, are generally deferred under section 267(f)(2) until the property

is transferred outside the controlled group. For this purpose, a controlled group of corporations is

defined using a 50 percent ownership threshold under sections 267(f)(1) and 1563(a). Section

267 does not apply to losses incurred on the complete liquidation of a corporation.

Reasons for Change

Taxpayers with a built-in loss in the stock of a subsidiary may be able to recognize the loss on a

taxable liquidation within a controlled group of corporations under section 331, without exiting

their investment. For example, a corporate taxpayer may transfer more than 20 percent of the

stock of the subsidiary to a related entity, reducing ownership below the 80 percent threshold,

and then cause the subsidiary to liquidate.

The liquidation is often accomplished through a

“check-the-box” election to be classified as a partnership rather than a corporation, an election

which applies only for U.S. income tax purposes. Structuring into such taxable liquidations can

also be used to recognize a loss on property held by the liquidating corporation under section

336, such as in cases involving a foreign-owned domestic corporation.

Proposal

Section 267 would be modified to apply to complete liquidations within a controlled group

where the assets of the liquidating corporation remain in the controlled group after the

liquidation. Where applicable, this would cause losses – both on the stock of the liquidating

corporation and the property it holds – to be denied. The proposal would also grant the Secretary

and her delegates the authority to allow for the deferral, rather than the denial, of such losses

under the principles of section 267(f), as well to address the use of controlled partnerships to

Granite Trust Co. v. United States, 238 F.2d 670 (1st Cir. 1956).

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

avoid these rules.

The proposal would apply to distributions after the date of enactment.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

PREVENT BASIS SHIFTING BY RELATED PARTIES THROUGH PARTNERSHIPS

Current Law

A partnership is permitted to make a section 754 election to adjust the basis of its property when

it makes certain distributions of money or property to a partner. For example, if a partnership

distributes property to a partner and the partnership has a section 754 election in effect, the

partnership may increase (“step-up”) the basis of its non-distributed property. If there is no gain

recognized by the distributee-partner as a result of the distribution, the partnership step-up is

generally equal to the excess of the partnership’s basis in the distributed property over the

distributee-partner’s basis in its interest. If applicable, the distributee-partner’s basis in its

interest is first reduced (but not below zero) by the amount of cash distributed to the partner.

Reasons for Change

Under current law, related-party partners may use a section 754 election to shift basis between

partners and achieve an immediate tax savings for the partners as a group without any

meaningful change in the partners’ economic arrangement.

More specifically, in partnerships with related-person partners, a partnership basis step-up could

be designed to shift basis from non-depreciable, non-amortizable partnership property to

depreciable or amortizable partnership property, resulting in immediate increases in depreciation

or amortization deductions for remaining partners related to the distributee-partner. For example,

when a partnership distributes property to a partner, the distributee-partner may take a basis in

the distributed property that is less than that of the distributing partnership, resulting in a

decrease (“step-down”) in the basis of the distributed property in the hands of the distributee-

partner. In such a situation, the distributing partnership is allowed to step-up the basis of its non-

distributed property by an amount equal to the distributee-partner’s step-down in the basis of its

distributed property. If the distributed property is held by the distributee-partner indefinitely, the

basis step-down does not create taxable income for the distributee-partner, while the basis step-

up to the distributing partnership’s depreciable or amortizable property could result in remaining

partners related to the distributee-partner immediately benefiting from increased amounts of

allocable deductions for depreciation or amortization.

Proposal

The proposal would reduce the ability of related parties to use a partnership to shift partnership

basis among themselves for the purpose of creating advantageous tax results with no meaningful

economic consequences. In the case of a distribution of partnership property that results in a

step-up of the basis of the partnership’s non-distributed property, the proposal would apply a

matching rule that would prohibit any partner in the distributing partnership that is related to the

distributee-partner from benefitting from the partnership’s basis step-up until the distributee-

partner disposes of the distributed property in a fully taxable transaction.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

The Secretary and her delegates would have the authority to prescribe regulations necessary to

implement the matching rule with respect to related parties.

The proposal would be effective for partnership taxable years beginning after December 31,

2023.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

CONFORM DEFINITION OF “CONTROL” WITH CORPORATE AFFILIATION TEST

Current Law

Most large businesses in the United States are comprised of corporate affiliates connected to the

parent company through direct and indirect links of stock ownership. In order to administer the

income tax to these corporate groups in a manner that reflects economic substance and prevents

abuse, the Internal Revenue Code (Code) must define what it means for one corporation to

“control” another.

For purposes of most corporate tax provisions, “control,” as defined by section 368(c) of the

Code, requires ownership of stock possessing at least 80 percent of the total combined voting

power of all classes of voting stock and at least 80 percent ownership of the total number of

shares of each class of outstanding nonvoting stock of the corporation. For the purpose of

determining whether a corporation is a member of an “affiliated group” of corporations under

section 1504(a)(1) of the Code, the “affiliation” test is significantly different. Specifically, the

test under section 1504(a)(2) requires ownership of stock possessing at least 80 percent of the

total voting power of the stock of the corporation and that has a value of at least 80 percent of the

total value of the stock of the corporation.

Reasons for Change

The control test under section 368(c) creates potential for taxpayers to improperly achieve

desired tax outcomes through structured transactions. By carefully allocating voting power

among the shares of a corporation, taxpayers can manipulate the section 368(c) control test in

order to qualify or not qualify, as desired, a transaction as tax-free. For example, a taxpayer may

structure a transaction in this manner to avoid tax-free treatment in order to recognize a loss. In

addition, the absence of a value component under this standard allows corporations to retain

control of a corporation but to “sell” a significant amount of the value of the corporation tax-free.

A uniform ownership test for corporate transactions would reduce the complexity currently

caused by these inconsistent tests.

Proposal

The proposal would conform the control test under section 368(c) with the affiliation test under

section 1504(a)(2). Therefore, “control” would be defined as the ownership of at least 80 percent

of the total voting power and at least 80 percent of the total value of stock of a corporation. The

term “stock” would not include certain preferred stock that meets the requirements of section

1504(a)(4).

The proposal would be effective for transactions occurring after December 31, 2023.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

STRENGTHEN LIMITATION ON LOSSES FOR NONCORPORATE TAXPAYERS

Current Law

Section 461(l) of the Internal Revenue Code (Code) provides that, for taxable years 2021 through

2028 (inclusive of the extensions under the American Rescue Plan Act of 2021 and the Inflation

Reduction Act of 2022), any excess business losses are disallowed for noncorporate taxpayers.

Excess business losses are the excess of current-year net business losses over a specified amount.

In 2023, these specified amounts are $578,000 for married couples filing jointly, and $289,000

for all other taxpayers. These specified amounts are adjusted for inflation each year.

In determining the amount of an excess business loss, business losses for the taxable year

exclude net operating loss (NOL) deductions and the 20 percent deduction for qualified business

income under section 199A of the Code. Additionally, income, deductions, and gains attributable

to a taxpayer’s performance of services as an employee (i.e., wage income) are disregarded.

Lastly, business income or gains include capital gain net income only when attributable to a trade

or business.

Excess business losses may be carried forward and deducted as NOLs in subsequent years.

Reasons for Change

In general, for individual taxpayers, non-passive losses from a business activity may offset

income or gains from unrelated activities. There are several reasons why this is undesirable.

First, evidence from randomized audits suggests that business losses are especially likely to be

misreported on a taxpayer’s Federal income tax return. The benefit of allowing business losses to

offset other types of income or gain without limitation provides an additional incentive for such

misreporting on the return.

Second, the ability to use business losses to offset unrelated income or gain creates a distortion in

entity organization choice. The business losses may generate a reduction in tax liability much

earlier if the business is organized as a pass-through entity rather than a C corporation because C

corporation losses do not flow through to individual owners. As a result, C corporations’

business losses cannot be deducted by individual owners of C corporations, and a C

corporations’ ability to deduct business losses (including those carried from prior years) is

limited only to the extent they have business income or gain. By constraining individuals’

abilities to offset income sources such as wages with nonpassive pass-through business losses,

section 461(l) creates a more similar tax regime for business losses across different forms of

business organization and types of business activity.

Section 461(l) is designed to reduce the ability of individual taxpayers to use business losses to

offset unrelated income by capping net business losses at $289,000 (or $578,000 for married

filing jointly taxpayers), indexed for inflation. However, under current law, section 461(l)

contains a significant deficiency: the losses denied by section 461(l) in a current year become an

NOL carryforward in the subsequent year, subject only to the general limitations in section 172

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

(e.g., NOLs may not reduce taxable income by more than 80 percent). For example, consider a

taxpayer who each year has a large amount of business losses, an even larger amount of non-

business gains, and no other income. Section 461(l) effectively delays the benefit of the excess

business loss for only one year. In contrast, under the proposal this taxpayer would never be able

to benefit from the excess business loss.

Proposal

The proposal would make permanent the excess business loss limitation. It would also treat

excess business losses carried forward from the prior year as current-year business losses instead

of as NOL deductions.

The proposal would be effective for taxable years beginning after December 31, 2023.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

ACCELERATE AND TIGHTEN RULES ON EXCESS EMPLOYEE REMUNERATION

Current Law

Section 162(m) of the Internal Revenue Code (Code) generally disallows a deduction by a

publicly held corporation for compensation in excess of $1 million paid to certain employees and

former employees (“covered employees”) in a taxable year. Covered employees include the chief

executive officer (CEO); chief financial officer (CFO); the three highest-paid non-CEO, non-

CFO officers; or anyone who met these criteria for any previous taxable year (but not in taxable

years beginning before December 31, 2016).

For taxable years beginning after December 31, 2026, the definition of covered employee is

expanded to include the next five highest-paid employees.

The section 162(m) deduction disallowance rules apply to “applicable employee remuneration”

in excess of $1 million paid to a covered employee in the taxable year. In general, applicable

employee remuneration means all otherwise-deductible remuneration paid to an employee (or an

employee’s beneficiary) for services performed, including cash and non-cash remuneration,

performance-based compensation, and commissions, regardless of when the services were

performed. Certain types of compensation are not subject to the deduction disallowance and are

not taken into account in determining whether other compensation exceeds $1 million, including

(a) certain grandfathered compensation payments, (b) payments made to a tax-favored retirement

plan (including salary-reduction contributions), and (c) amounts that are excludable from the

employee’s gross income, such as employer-provided health benefits and miscellaneous fringe

benefits.

Reasons for Change

Under current law, employers are able to plan around the section 162(m) deduction disallowance

rules by using various structures to compensate covered employees. The proposal would address

certain of these arrangements.

Section 162(m) does not include an entity aggregation rule, and the aggregation rule in the

regulations is not as broad as the rules that generally apply in other contexts, in particular to

employer-sponsored retirement plans and other employee benefits. Some taxpayers have used the

lack of a comprehensive aggregation rule to avoid the application of the deduction disallowance

rules. The proposal would add an aggregation rule to section 162(m) to ensure that publicly held

corporations and each of the members of their controlled groups are subject to the section

162(m) deduction disallowance.

Some taxpayers have tried to avoid the application of the section 162(m) deduction disallowance

rules by paying a covered employee’s compensation from an affiliated partnership, rather than

directly from the publicly held corporation. The proposal would clarify and reinforce the types of

compensation subject to the deduction disallowance rules.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

To address concerns that taxpayers structure compensation arrangements to avoid the application

of the deduction disallowance rules, the proposal would give the Secretary broad authority to

enforce the rules.

Proposal

The proposal would address the deduction disallowance for compensation in excess of $1 million

paid to covered employees by amending section 162(m) to add or modify a number of

provisions.

First, it would accelerate the effective date of the expanded definition of covered employees

from taxable years beginning after December 31, 2026, to taxable years beginning after

December 31, 2023.

Second, the proposal would add an aggregation rule that would treat all members of a controlled

group within the meaning of section 414(b), (c), (m), and (o) of the Code as a single employer

for purposes of determining the covered employees and applying the deduction disallowance for

compensation paid to these employees in excess of $1 million. The section 414 controlled group

rules are the rules used to treat related entities as a single employer for other employee benefits

purposes.

Third, the proposal would amend section 162(m) to ensure that otherwise deductible

compensation paid to a covered employee is considered applicable employee remuneration,

whether or not paid directly by the publicly held corporation.

Finally, the proposal expands the regulatory authority of the Secretary to issue regulations and

other guidance as necessary to carry out the purposes of section 162(m) and to prevent the

avoidance of the rule, including through the performance of services other than as an employee

or by payment of compensation through a partnership or other pass-through entity.

The proposal would be effective for taxable years beginning after December 31, 2023.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

PREVENT PRISON FACILITY RENT PAYMENTS FROM CONTRIBUTING TO

QUALIFICATION AS A REIT

Current Law

If a C corporation qualifies as a Real Estate Investment Trust (REIT), it can deduct the dividends

that it pays to its shareholders in order to avoid an entity-level tax on its income. To qualify as a

REIT for a taxable year, the corporation must satisfy various criteria, including two income tests:

(a) in general, at least 95 percent of its gross income for the year must be derived from sources

on one list, and (b) at least 75 percent of its gross income for the year must be derived from

sources on a second list. (Both lists include “rents from real property.”)

Even if, for some year, a corporation would not satisfy the 95 percent and/or the 75 percent test,

the Secretary may treat some non-qualifying income as qualifying or may treat some non-

qualifying income as not being gross income. These actions to cause the corporation to qualify as

a REIT may be taken to the extent necessary to carry out the purposes of the REIT provisions of

the Internal Revenue Code (Code) and applies only for purposes of those provisions.

REITs may own real estate assets of private for-profit prisons. Often the REIT owns the prison

real estate assets and receives rents from the (possibly related) business that is operating the

prison.

Reasons for Change

A January 26, 2021, Executive Order forbade the Federal Department of Justice from entering

any new or renewed contracts with privately operated criminal detention facilities. The

Executive Order described investigations that had uncovered situations in which “privately

operated criminal detention facilities do not maintain the same levels of safety and security” as

do governmentally operated facilities. In addition, it is important to “reduce profit-based

incentives to incarcerate.”

Although the Executive Order will phase out private operation of Federal prisons, it does not

affect REITs’ involvement with non-Federal facilities. The reasons underlying the Executive

Order, however, make it inappropriate to provide the tax benefits of REIT status for the private

operation of any detention facility.

Proposal

The proposal would exclude from both the 95 percent and the 75 percent income lists any rent

received from a prison or other detention facility. The exclusion would apply to rent from any

rented property a substantial use of which is in connection with punishment, detention, or

correction. Moreover, the Secretary would not have the ability under section 856(c)(5)(J) of the

Code either to treat that rent as qualifying income, or to exclude it from gross income, for

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

purposes of the REIT provisions of the Code.

The proposal would be effective for taxable years beginning after December 31, 2023.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

REFORM INTERNATIONAL TAXATION

REVISE THE GLOBAL MINIMUM TAX REGIME, LIMIT INVERSIONS, AND MAKE

RELATED REFORMS

Current Law

Global minimum tax regime with respect to controlled foreign corporation earnings

Any U.S. shareholder of a controlled foreign corporation (CFC) is taxed annually in the United

States under the global minimum tax in Internal Revenue Code (Code) section 951A with respect

to its CFCs (generally referred to as global intangible low-taxed income, or GILTI). A U.S.

shareholder’s global minimum tax inclusion is determined by combining its pro rata share of the

tested income (or tested loss) of its CFCs. A CFC’s tested income is the excess of certain gross

income of the CFC over the deductions of the CFC that are properly allocable to the CFC gross

tested income. A CFC’s tested loss is the excess of the CFC’s properly allocable deductions over

the CFC’s gross tested income. A U.S. shareholder’s pro rata share of a CFC’s tested loss may be

used to offset the shareholder’s pro rata share of the tested income of another CFC owned by the

shareholder; however, if there is a net tested loss, the U.S. shareholder has no global minimum

tax inclusion. Any unused loss may not be carried back or carried forward for use in another

year.

The U.S. shareholder’s actual global minimum tax inclusion reflects a reduction for a 10 percent

return on qualified business asset investment (QBAI), which is generally foreign tangible

property eligible for depreciation, such as buildings or machinery. QBAI does not include assets

that are not depreciable (such as land) or intangible assets (such as patents, copyrights, and

trademarks).

Under section 250, subject to a taxable income limitation, a corporate U.S. shareholder is

generally allowed a 50 percent deduction against its global minimum tax inclusion. The section

250 deduction generally results in a 10.5 percent U.S. effective tax rate on a corporate U.S.

shareholder’s global minimum tax inclusion under the current U.S. corporate tax rate of 21

percent. The 50 percent deduction is scheduled to be reduced to 37.5 percent starting in 2026.

Certain foreign income taxes paid by a CFC are creditable against a corporate U.S. shareholder’s

U.S. tax liability attributable to its global minimum tax inclusion. The allowable credit is limited

to 80 percent of the amount of the foreign income taxes properly allocable to a CFC’s tested

income taken into account as part of the global minimum tax inclusion. Unlike foreign income

taxes allocated to other types of foreign source income, if a taxpayer cannot claim a credit for

foreign income taxes associated with its global minimum tax inclusion in a given year because of

the operation of the foreign tax credit (FTC) limitation, those foreign income taxes are not

eligible to be carried back or carried forward for use in another taxable year.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Under Treasury regulations, if the foreign effective tax rate on the gross income of a CFC that

would otherwise be part of a global minimum tax inclusion exceeds 90 percent of the U.S.

corporate income tax rate, the U.S. shareholder of the CFC is generally permitted to exclude that

gross income (and the associated deductions and foreign income taxes) from its global minimum

tax inclusion. A similar statutory rule applies for purposes of certain Subpart F income, i.e.,

certain foreign income earned indirectly by U.S. persons at full U.S. tax rates.

A single FTC limitation generally applies to a corporate U.S. shareholder’s global minimum tax

inclusion. This means foreign income taxes paid to a high-tax foreign jurisdiction can be used to

reduce the U.S. tax liability with respect to global minimum tax income earned in lower-tax

jurisdictions. Thus, generally, a U.S. shareholder’s aggregate U.S. tax (after accounting for the

allocation of U.S. shareholder deductions) on its global minimum tax inclusion is reduced by

reference to the average foreign effective tax rate on its aggregate global minimum tax income

rather than the effective tax rates in each individual foreign jurisdiction where income is earned.

Deduction for dividends received from non-controlled foreign corporations

The Code provides different dividends received deductions for domestic corporate shareholders,

depending on the nature of the dividend distributed, the shareholder’s ownership level in the

distributing corporation, and whether the distributing corporation is a domestic or foreign

corporation. First, section 243 provides a dividends received deduction (section 243 DRD) for

domestic corporate shareholders on distributions received from other domestic corporations. The

amount of the section 243 DRD depends on the level of ownership in the domestic corporation.

In general, if the domestic corporate shareholder is part of the same affiliated group as the

distributing corporation, the section 243 DRD is 100 percent. If the domestic corporate

shareholder owns at least 20 percent of the distributing corporation but is not affiliated with the

distributing corporation, then the section 243 DRD is 65 percent; in all other cases, the section

243 DRD is 50 percent.

Under section 245, a domestic corporate shareholder generally is entitled to a dividends received

deduction (section 245 DRD) for the U.S.-source portion of dividends received from certain

foreign corporations. A foreign corporation qualifies for the section 245 DRD only if it is not a

passive foreign investment company and at least 10 percent of the stock is owned by the

domestic corporate shareholder. The amount of the section 245 DRD is based on the amount

provided in section 243.

However, if a domestic corporation is a U.S. shareholder of a foreign corporation, in general, the

domestic corporation is allowed a 100 percent dividends received deduction under Code section

245A (section 245A DRD) equal to the foreign-source portion of any dividend (“foreign-sourced

dividend”) received from that foreign corporation. For example, if the undistributed earnings of

the foreign corporation are entirely foreign sourced, then this section 245A DRD allows the

domestic corporation to receive a dividend from the foreign corporation without any increase in

its U.S. tax burden. Under Code section 951(b), a U.S. shareholder is a U.S. person who owns at

least 10 percent of the stock (by vote or value) of a foreign corporation.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

A foreign corporation whose stock is majority owned directly or indirectly by U.S. shareholders

is a CFC. When a CFC earns Subpart F income or tested income, U.S. shareholders are subject to

current U.S. taxation (but eligible for FTCs) on their pro rata shares of that income under

sections 951(a) and 951A(a) of the Code, respectively. When these previously taxed earnings

and profits are remitted to U.S. shareholders, under section 959, those earnings are not subject to

U.S. tax again.

Treatment of deductions properly allocable to exempt income

Certain dividends received by a domestic corporation from foreign corporations are effectively

exempt from U.S. tax by reason of the section 245A DRD. Specifically, section 245A provides a

domestic corporation a deduction equal to the foreign-source portion of a dividend received from

a specified 10 percent owned foreign corporation, but only if the domestic corporation is a U.S.

shareholder of the foreign corporation.

Section 265(a)(1) generally disallows a deduction for any amount that is allocable to certain

classes of income that are wholly exempt from U.S. tax. For purposes of determining a

taxpayer’s FTC limitation, tax exempt assets and their associated income are disregarded under

section 864(e)(3). Section 904(b)(4) applies to disregard (solely for purposes of the FTC

limitation) deductions allocable to income attributable to foreign stock other than global

intangible low-taxed income (GILTI) or Subpart F income inclusions.

Limitations on the ability of domestic corporations to expatriate

Section 7874 applies to certain transactions (known as “inversion transactions”) in which a U.S.

corporation is acquired by a foreign corporation (“foreign acquiring corporation”) in a

transaction where (a) substantially all of the assets held directly or indirectly by the domestic

corporation are acquired directly or indirectly by the foreign acquiring corporation; (b) the

former shareholders of the domestic corporation hold at least a 60 percent ownership interest in

the foreign acquiring corporation by reason of the acquisition; and (c) the foreign acquiring

corporation, together with its expanded affiliated group, does not conduct substantial business

activities in the country in which the foreign acquiring corporation is created or organized.

Similar provisions apply to acquisitions of domestic partnerships. The tax consequences of an

inversion transaction depend on the level of continuing former shareholder ownership. If the

continuing former shareholder ownership of the foreign acquiring corporation is at least 80

percent (by vote or value), the foreign acquiring corporation is treated as a domestic corporation

for all U.S. tax purposes (the “80 percent test”). If the continuing former shareholder ownership

is at least 60 percent but less than 80 percent (by vote or value), the foreign acquiring corporation

is respected as foreign but full U.S. tax must generally be paid with respect to certain income or

gain recognized by the expatriated U.S. entity and its affiliates in connection with the inversion

or within the ten-year period ending after the completion of the inversion (the “60 percent test”).

Furthermore, the Tax Cuts and Jobs Act of 2017 adopted several anti-abuse provisions that apply

to inversion transactions that satisfy the 60 percent test.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Stock losses attributable to foreign income that was taxed at a reduced rate

Section 250 generally provides a 50 percent deduction (37.5 percent for taxable years beginning

after December 31, 2025) for a global minimum tax inclusion, resulting in a 10.5 percent

effective tax rate (13.125 percent for taxable years beginning after December 31, 2025) on this

income (before taking FTCs into account). (This General Explanation of the Administration’s

Fiscal Year 2024 Revenue Proposals proposes to increase the corporate rate to 28 percent and

reduce the section 250 deduction rate to 25 percent, resulting in a 21 percent effective tax rate on

this income.) A global minimum tax inclusion increases a U.S. shareholder’s basis in the stock of

a CFC dollar-for-dollar (that is, without regard to the 50 percent deduction). Thus, if stock of a

CFC is sold at a loss, the U.S. shareholder can take a deduction at the full value of the U.S.

corporate tax rate. A similar result occurs if a U.S. shareholder had income inclusions with

respect to a specified foreign corporation under the section 965 transition tax. This is because a

section 965(c) deduction was allowed for a section 965 inclusion, resulting in a lower effective

tax rate (prior to FTCs) on this income, but basis in the stock of the specified foreign corporation

was increased dollar-for-dollar.

Information reporting requirements for foreign business entities

Section 6038 generally requires a U.S. person who controls a foreign business entity (whether a

corporation or partnership) to report certain information regarding such entity. The statute

provides for penalties for a failure to report.

Reasons for Change

Global minimum tax regime with respect to CFC earnings

The reduction to global minimum tax inclusions for a percentage of certain foreign tangible

assets incentivizes U.S. multinational companies to invest in tangible assets abroad rather than

domestically. The elimination of QBAI would eliminate this perverse investment incentive while

simplifying the taxation of CFCs.

The difference between the effective U.S. tax rate on global minimum tax inclusions and the

effective U.S. tax rate on income earned directly by U.S. companies that results from the section

250 deduction incentivizes U.S. companies to locate profits and operations offshore. Reducing

the section 250 deduction for these foreign earnings would reduce this perverse incentive.

The determination of a U.S. company’s global minimum tax inclusion and residual U.S. tax

liability on such inclusions on a global blended basis incentivizes U.S. companies with

operations in high-tax jurisdictions to invest in lower-tax jurisdictions, to take advantage of the

automatic global averaging under the existing global minimum tax regime. In some cases, U.S.

companies may have an incentive to locate operations in jurisdictions with corporate income tax

rates higher than the United States, to average these high taxes against low-taxed income earned

elsewhere. This automatic blending feature exacerbates the race to the bottom on corporate

income tax rates and encourages U.S. companies to report profits (as well as the activities that

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

give rise to those profits) in offshore jurisdictions rather than in the United States, creating a

perverse “America last” tax policy. Similar global blending concerns arise with respect to high

and low-taxed income earned through foreign branches.

In contrast, determining a taxpayer’s global minimum tax inclusion and residual U.S. tax liability

on such inclusions on a jurisdiction-by-jurisdiction basis would be a stronger deterrent to profit

shifting and offshoring because residual U.S. tax would be due on every dollar earned in a low-

tax jurisdiction at the minimum rate, with no ability to reduce that residual U.S. tax for excess

foreign taxes paid to higher-tax jurisdictions.

In a jurisdiction-by-jurisdiction system, high-tax income cannot be used to offset low-tax income

from other jurisdictions. In contrast, as discussed above, current law allows more favorable

global blending of income and tax. This favorable treatment is partially offset by restrictive rules

for foreign tax credits and losses. Thus, in conjunction with the adoption of a jurisdiction-by-

jurisdiction system, elimination of the QBAI exemption, and a higher effective GILTI rate, the

proposal would also allow increased use of foreign tax credits and both foreign tax credit and

loss carryforwards.

In December 2021, the OECD/G20 Inclusive Framework on BEPS reached agreement on Model

Rules under Pillar Two for a comprehensive jurisdiction-by-jurisdiction global minimum

taxation regime that would help end the race to the bottom on corporate tax rates in a manner that

puts the United States and other countries on a more level playing field.

The Pillar Two

“income inclusion rule” (IIR) applies on a “top down” basis. That is, it is applied only by the

ultimate parent entity of a multinational group, and generally is not applied by lower-tier holding

companies. Therefore, in the case of foreign-controlled domestic corporations that own CFCs,

the IIR is expected to be applied by the foreign parent with respect to low-taxed CFC income.

Deduction for dividends received from non-controlled foreign corporations

The section 245A DRD effectively exempts from U.S. taxation the foreign-sourced dividend of a

CFC. With limited exceptions, for the earnings to be eligible for the section 245A DRD, the

earnings must first be potentially subject to tax under the global minimum tax or Subpart F

regimes (or be subject to a sufficiently high level of foreign tax). However, current law also

effectively exempts the foreign-sourced dividend from a foreign corporation that is not a CFC,

even though such earnings are not subject to tax under the global minimum tax or Subpart F

regimes and may be subject to low or no tax in the foreign jurisdiction. Moreover, the section

245A DRD for the foreign-source earnings of non-CFCs (100 percent) is larger than the section

In December 2021, the OECD/G20 Inclusive Framework on BEPS reached agreement on Model Rules under Pillar

Two for a comprehensive jurisdiction-by-jurisdiction global minimum taxation regime. OECD, “Tax Challenges

Arising from the Digitalisation of the Economy Global Anti-Base Erosion Model Rules (Pillar Two),”

https://www.oecd.org/tax/beps/tax-challenges-arising-from-the-digitalisation-of-the-economy-global-anti-base-

erosion-model-rules-pillar-two.pdf; OECD, “Tax Challenges Arising from the Digitalisation of the Economy –

Commentary to the Global Anti-Base Erosion Model Rules (Pillar Two),” https://www.oecd.org/tax/beps/tax-

challenges-arising-from-the-digitalisation-of-the-economy-global-anti-base-erosion-model-rules-pillar-two-

commentary.pdf.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

243 DRD available on dividends from domestic corporations or the section 245 DRD available

on dividends from foreign corporations on U.S.-source income, where the shareholder owns 50

percent or less of the distributing corporation (50 to 65 percent).

Deductions attributable to income exempt from U.S. tax and taxed at preferential rates

To the extent deductions are claimed for expenses allocable to income eligible for a deduction

under section 245A or section 250, on the basis that section 265 does not apply because that

income is not “wholly exempt” from U.S. tax, the United States is providing a tax subsidy for

foreign investment.

Limitations on the ability of domestic corporations to expatriate

To reduce their U.S. tax liabilities, certain domestic entities have been combining with smaller

foreign entities in transactions that avoid the 80 percent test but that may satisfy the 60 percent

test under section 7874. These combination transactions are typically structured so that the

domestic entity and the foreign entity become subsidiaries of a newly formed foreign parent

company. The domestic entities can often substantially reduce their U.S. income tax liability

following these combination transactions with only a minimal change to their operations.

Inversion transactions raise significant policy concerns because they facilitate the erosion of the

U.S. tax base through deductible payments by the U.S. members of the multinational group to

the non-U.S. members and through aggressive transfer pricing for transactions between such

U.S. and non-U.S. members. The inverted group also may reduce its U.S. taxes by reducing or

eliminating altogether its direct and indirect U.S. ownership in foreign subsidiaries or assets. The

adverse tax consequences under current law of 60 percent inversion transactions have not

deterred taxpayers from pursuing these transactions. There is no policy reason to respect an

inverted structure when the owners of a domestic entity retain a controlling interest in the group,

only minimal operational changes are expected, and there is potential for substantial erosion of

the U.S. tax base. Furthermore, an inverted structure should not be respected when the structure

results from the combination of a larger U.S. group with a smaller entity or group and, after the

transaction, the expanded affiliated group is primarily managed and controlled in the United

States and does not have substantial business activities in the relevant foreign country, even if the

shareholders of the domestic entity do not maintain control of the resulting multinational group.

Stock losses attributable to foreign income that was taxed at a reduced rate

Under current law, if an increase in stock basis from an inclusion under section 951A or section

965 results in a loss on the sale or other disposition of the stock, the loss may inappropriately be

available to offset income or gain that would be subject to the full corporate tax rate even though

the income inclusion that gave rise to the basis was subject to tax at a reduced rate.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Definition of foreign business entity

Because of the shift in emphasis to apply the global minimum tax, Subpart F, and the FTC rules

using a jurisdiction-by-jurisdiction taxable unit standard, there is a need to collect information at

the same level, with respect to each taxable unit in a foreign jurisdiction. By obtaining accurate

information on each taxable unit, compliance and enforcement efforts would be improved. To

further improve compliance, penalties for failure to provide information should also apply for

reporting failures at the taxable unit level.

Proposal

Revise global minimum tax regime with respect to controlled foreign corporation earnings

The proposal would make several changes to the existing global minimum tax system. First, the

QBAI exemption would be eliminated, so that the U.S. shareholder's entire net CFC tested

income is subject to U.S. tax. Second, the section 250 deduction for a global minimum tax

inclusion would be reduced to 25 percent, generally increasing the U.S. effective tax rate under

the global minimum tax (to 21 percent under the proposed U.S. corporate income tax rate of 28

percent). Third, the “global averaging” method for calculating a U.S. shareholder’s global

minimum tax would be replaced with a “jurisdiction-by-jurisdiction” calculation. Under the new

standard, a U.S. shareholder’s global minimum tax inclusion and, by extension, residual U.S. tax

on such inclusion, would be determined separately for each foreign jurisdiction in which its

CFCs have operations. This means a separate FTC limitation would apply for each foreign

jurisdiction. A similar jurisdiction-by-jurisdiction approach would also apply with respect to a

U.S. taxpayer’s foreign branch income. These changes mean that foreign taxes paid to higher-

taxed jurisdictions will no longer reduce the residual U.S. tax paid on income earned in lower-

taxed foreign jurisdictions.

With respect to the global minimum tax, the proposal would decrease the 20 percent

disallowance of FTCs incurred to 5 percent, would allow net operating losses (NOLs) to be

carried forward (within a single jurisdiction), and would allow FTCs to be carried forward ten

years (within a single jurisdiction). In each case, the carryover would be at the U.S. shareholder

level.

The proposal would also repeal the high-tax exemption to Subpart F income and the cross-

reference to that provision in the global minimum tax regulations issued under section 951A.

A domestic corporation that is a member of a foreign-parented controlled group generally owes

residual U.S. tax when it has a global minimum tax inclusion. The proposal would account for

any foreign taxes paid by the foreign parent, under an IIR that is consistent with the

OECD/Inclusive Framework Pillar Two Model Rules on global minimum taxation, with respect

to the CFC income that would otherwise be part of the domestic corporation’s global minimum

tax inclusion. The proposal’s jurisdiction-by-jurisdiction approach would also apply for this

purpose.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

The reduction in the section 250 deduction to 25 percent would be effective for taxable years

beginning after December 31, 2022. The other elements of the proposal in this section would be

effective for taxable years beginning after December 31, 2023.

Limit the deduction for dividends received from non-controlled foreign corporations

The proposal would limit the section 245A DRD to only those dividends remitted either by CFCs

or by qualified foreign corporations, which includes corporations incorporated in a territorial

possession of the United States and certain corporations eligible for the benefits of a

comprehensive income tax treaty. A U.S. shareholder would receive a DRD equal to 65 percent

of the foreign-sourced dividends received from a qualified foreign corporation that is not a CFC

if the U.S. shareholder owns at least 20 percent of the stock (by vote and value) of the qualified

foreign corporation. Otherwise, if a U.S. shareholder owns less than 20 percent (by vote or

value) of the stock of a qualified foreign corporation that is not a CFC, the U.S. shareholder

would receive a DRD equal to 50 percent of the foreign-sourced dividends received.

The DRD would remain unchanged for dividends received from CFCs.

The proposal would be effective for distributions after the date of enactment.

Reform the treatment of deductions properly allocable to exempt income

The proposal would expand the application of section 265 to disallow deductions allocable to a

class of foreign gross income that is exempt from tax or taxed at a preferential rate through a

deduction (e.g., a global minimum tax inclusion with respect to which a section 250 deduction is

allowed or dividends eligible for a section 245A deduction).

The proposal would provide rules

for determining the amount of disallowed deductions when only a partial deduction is allowed

under section 245A with respect to a dividend or a partial section 250 deduction with respect to a

global minimum tax inclusion. The proposal would also repeal section 904(b)(4).

The proposal would be effective for taxable years beginning after December 31, 2023.

Limit the ability of domestic corporations to expatriate

The proposal would broaden the definition of an inversion transaction by replacing the 80-

percent test with a greater than 50 percent test and eliminating the 60 percent test. The proposal

would also provide that, regardless of the level of shareholder continuity, an inversion

transaction occurs if (a) immediately prior to the acquisition, the fair market value of the

domestic entity is greater than the fair market value of the foreign acquiring corporation, (b) after

the acquisition the expanded affiliated group is primarily managed and controlled in the United

States, and (c) the expanded affiliated group does not conduct substantial business activities in

the country in which the foreign acquiring corporation is created or organized. The proposal

As is true for all proposals described this volume, this proposal is not intended to create any inferences regarding

current law, including whether section 265 currently applies to this income.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

would also expand the scope of an acquisition for purposes of section 7874 to include a direct or

indirect acquisition of substantially all of the assets constituting a trade or business of a domestic

corporation, substantially all of the assets of a domestic partnership, or substantially all of the

U.S. trade or business assets of a foreign partnership. Furthermore, a distribution of stock of a

foreign corporation by a domestic corporation or a partnership that represents either substantially

all of the assets or substantially all of the assets constituting a trade or business of the distributing

corporation or partnership would be treated as a direct or indirect acquisition of substantially all

of the assets or trade or business assets, respectively, of the distributing corporation or

partnership. The Secretary would be granted regulatory authority to exempt certain internal

restructurings involving partnerships from the application of section 7874 and to define a trade or

business for purposes of section 7874.

The proposal would be effective for transactions that are completed after the date of enactment.

Disallow stock losses attributable to foreign income that was taxed at a reduced rate

The rules for basis in the stock of a foreign corporation would be amended to provide that, for

purposes of determining loss on a U.S. shareholder’s disposition of stock of a foreign

corporation, the basis in stock of the foreign corporation is reduced (but not below zero) by the

sum of (a) the section 245A DRDs allowed to the U.S. shareholder with respect to the stock, (b)

the deductions for GILTI inclusions that are attributable to the stock, and (c) the deductions for

income inclusions under the section 965 transition tax that are attributable to the stock. In

addition, the principles of the proposal would apply to reduce the basis in other property by

reason of which a domestic corporate U.S. shareholder owns stock of a foreign corporation under

section 961(a). Finally, the proposal would apply to successors of the basis in stock or other

property subject to the proposal and to exchanged basis property or similar property.

The proposal would apply to dispositions occurring on or after the date of enactment (regardless

of whether the deductions under section 250 or 965(c) were claimed in taxable years prior to

such date).

Expand the definition of foreign business entity to include taxable units

The proposal would expand the definition of foreign business entity to treat any taxable unit in a

foreign jurisdiction as a “foreign business entity” for purposes of applying section 6038. Thus,

information would be required to be reported separately with respect to each taxable unit, and

penalties would apply separately for failures to report with respect to each taxable unit. To

harmonize the reporting with the annual accounting period for which taxable income of a branch

or disregarded entity is determined, the proposal would also provide that, except as otherwise

provided by the Secretary or her delegates (Secretary), the annual accounting period for a taxable

unit that is a branch or disregarded entity is the annual accounting period of its owner. For

example, if a domestic corporation or a CFC conducts activities in a foreign branch or owns a

foreign disregarded entity, the annual accounting period of the foreign branch or foreign

disregarded entity generally would be the annual accounting period of the domestic corporation

or CFC, respectively. Finally, for a taxpayer who is a U.S. person (as defined in section

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

7701(a)(30) of the Code) but who is resident of a foreign jurisdiction, the proposal would

provide the Secretary with the authority to treat the taxpayer as a resident of the United States for

the purpose of identifying a taxable unit subject to reporting under section 6038.

The proposal would apply to taxable years of a controlling U.S. person that begin after

December 31, 2023, and to annual accounting periods of foreign business entities that end with

or are within such taxable years of the controlling U.S. person.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

ADOPT THE UNDERTAXED PROFITS RULE

Current Law

Section 59A of the Internal Revenue Code (Code) imposes a Base Erosion Anti-Abuse Tax

(BEAT) liability on certain corporate taxpayers in addition to their regular tax liability. Liability

for BEAT is generally limited to corporate taxpayers with substantial gross receipts that make

deductible payments to foreign related parties above a specified threshold (referred to as a “base

erosion payment”). Taxpayers potentially liable for this additional tax have three-year average

gross receipts in excess of $500 million and a “base erosion percentage” exceeding a specified

threshold. The base erosion percentage is generally determined by dividing the taxpayer’s “base

erosion tax benefits” by the amount of all deductions allowed to the taxpayer for the taxable

year.

A taxpayer’s BEAT liability is computed by referencing the taxpayer’s “modified taxable

income” and comparing the resulting amount to the taxpayer’s regular tax liability. For purposes

of this calculation, regular tax liability is reduced by some but not all credits. When calculating

BEAT liability for taxable years beginning after December 31, 2025, regular tax liability is

reduced by all credits. A taxpayer’s modified taxable income is equal to its regular taxable

income increased by base erosion tax benefits with respect to base erosion payments and an

adjustment for the taxpayer’s net operating loss (NOL) deduction, if any. The taxpayer’s BEAT

liability generally equals the difference, if any, between 10 percent of the taxpayer’s modified

taxable income and the taxpayer’s regular tax liability (as reduced by certain credits against such

tax). For taxable years beginning after December 31, 2025, the relevant BEAT rate increases to

12.5 percent.

Reasons for Change

On October 8, 2021, the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting

reached a comprehensive agreement on minimum taxation under Pillar Two, and on December

20, 2021, it published Model Rules describing two interlocking Pillar Two rules: (a) an Income

Inclusion Rule (IIR), which imposes top-up tax on a parent entity with respect to the low-taxed

income of a member of its financial reporting group; and (b) an Undertaxed Profits Rule

(UTPR), which denies deductions or requires an equivalent adjustment to tax liability to the

extent that the low-taxed income of a member of the group is not subject to an IIR.

Under current Treasury regulations, taxpayers can avoid a BEAT liability by electing to “waive” enough

deductions for payments made to related foreign persons sufficient to remain below the base erosion percentage

threshold.

For all periods, the relevant BEAT rate is one percentage point higher for certain banks and registered securities

dealers.

In December 2021, the OECD/G20 Inclusive Framework on BEPS reached agreement on Model Rules under Pillar

Two for a comprehensive jurisdiction-by-jurisdiction global minimum taxation regime. OECD, “Statement on a

Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy,”

https://www.oecd.org/tax/beps/statement-on-a-two-pillar-solution-to-address-the-tax-challenges-arising-from-the-

digitalisation-of-the-economy-october-2021.pdf; OECD, “Tax Challenges Arising from the Digitalisation of the

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

In conjunction with the global intangible low-taxed income (GILTI) regime, adopting the UTPR

ensures that income earned by a multinational company, whether parented in the United States or

elsewhere, is subject to a minimum rate of taxation regardless of where the income is earned.

Just as the GILTI proposal (see Revise the Global Minimum Tax Regime, Limit Inversions, and

Make Related Reforms) ensures that a minimum per-jurisdiction rate of tax is paid by U.S.-based

multinationals on income earned through controlled foreign corporations (CFCs), the UTPR

ensures that a minimum per-jurisdiction rate of tax is paid on income earned in each jurisdiction

in which foreign-parented multinationals operate. This ensures that companies cannot avoid a

minimum rate of taxation by, for example, relocating their headquarters to a foreign jurisdiction

that has not implemented an IIR. The UTPR is designed to encourage countries to adopt the

global minimum tax agreed to as part of the international negotiations by ensuring that profits in

low-tax jurisdictions are taxed at the same minimum rate.

The proposal would increase alignment between the U.S. international tax rules and the

international system emerging from Pillar Two. In addition, the UTPR has the potential to

address the concern of erosion of the U.S. corporate tax base more fully and evenly. For

example, the BEAT does not apply comprehensively to cost of goods sold, or COGS, of

manufacturing companies in the same manner that it applies to deductions incurred by services

firms. Further, firms with lower profit margins are more likely to have a BEAT liability than

similarly situated firms with higher profit margins because the BEAT is a form of alternative

minimum tax that effectively claws back a percentage of deductions above a threshold level.

Proposal

The proposal would repeal the BEAT and replace it with a UTPR that is consistent with the

UTPR described in the Pillar Two Model Rules. When another jurisdiction adopts a UTPR, the

proposal also includes a domestic minimum top-up tax that would protect U.S. revenues from the

imposition of UTPR by other countries. Separately, the proposal would provide a mechanism to

ensure U.S. taxpayers would continue to benefit from U.S. tax credits and other tax incentives

that promote U.S. jobs and investment.

The UTPR would disallow domestic corporations’ and domestic branches’ of foreign

corporations U.S. tax deductions in an amount determined by reference to low-taxed income of

foreign entities and foreign branches that are members of the same financial reporting group

(including the common parent of the financial reporting group).

However, the UTPR would not

apply with respect to income subject to an IIR that is consistent with the Pillar Two Model Rules,

Economy Global Anti-Base Erosion Model Rules (Pillar Two),” https://www.oecd.org/tax/beps/tax-challenges-

arising-from-the-digitalisation-of-the-economy-global-anti-base-erosion-model-rules-pillar-two.pdf.

A financial reporting group is any group of business entities that prepares consolidated financial statements and

that includes at least one domestic entity or domestic branch and at least one foreign entity or foreign branch.

Consolidated financial statements means those determined in accordance with U.S. Generally Accepted Accounting

Principles (GAAP), International Financial Reporting Standards (IFRS), or other methods authorized by the

Secretary under regulations. Under the proposal, the Secretary would be delegated authority to treat a group of

business entities as a financial reporting group if a financial reporting group would exist had those business entities

been required to prepare consolidated financial statements.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

which would include income that is subject to GILTI, reformed as proposed. Thus, the UTPR

would generally not apply to U.S.-parented multinationals.

The UTPR would primarily apply to foreign-parented multinationals with operations in low-tax

jurisdictions. In addition, the UTPR would only apply to financial reporting groups that have

global annual revenue of the dollar equivalent to €750 million or more in at least two of the prior

four years.

Under the proposal, when UTPR applies, domestic group members would be disallowed U.S. tax

deductions to the extent necessary to collect the hypothetical amount of top-up tax required for

the financial reporting group to pay an effective tax rate of at least 15 percent in each foreign

jurisdiction in which the group has profits.

The amount of this top-up tax would be determined

based on a jurisdiction-by-jurisdiction computation of the group’s profit and effective tax rate

consistent with the Pillar Two Model Rules, which would take into account all income taxes,

including the corporate alternative minimum tax. As discussed below, the top-up amount would

be allocated among all of the jurisdictions where the financial reporting group operates that have

adopted a UTPR consistent with the Pillar Two Model Rules (a Qualified UTPR).

The computation of profit and the effective tax rate for a jurisdiction is based on the group’s

consolidated financial Statements, with certain specified adjustments such as rules to address

temporary and permanent differences between the financial accounting and tax bases. In

addition, the computation of a group’s profit for a jurisdiction is reduced by an amount equal to 5

percent of the book value of tangible assets and payroll with respect to the jurisdiction.

In addition to the general limitation of the UTPR to financial reporting groups that have global

annual revenue of at least the dollar equivalent of €750 million, the proposal includes several de

minimis exclusions. The UTPR would not apply to a group’s profit in a jurisdiction if the three-

year average of the group’s revenue in the jurisdiction is less than $11.5 million and the three-

year average of the group’s profit in the jurisdiction is less than $1.15 million.

Under an

exception for groups in the initial phase of their international activity, the UTPR would not apply

to a group with operations in no more than five jurisdictions outside of the group’s primary

jurisdiction and the book value of the group’s tangible assets in those jurisdictions is less than

$57 million. This exception would expire five years after the first day of the first year in which

the UTPR otherwise would apply to the group.

For example, a group with $1,000x of profits in a foreign jurisdiction with no corporate income tax would have a

top-up tax amount of $150x with respect to that jurisdiction. If the top-up tax were not collected under GILTI or an

IIR implemented by a foreign jurisdiction, a domestic corporation or domestic branch that is a member of the group

would be subject to a deduction disallowance of $536x, equal to the top-up tax amount of $150x divided by the U.S.

corporate income tax rate of 28 percent. For simplicity, this example assumes that there are no tangible assets or

payroll in the foreign jurisdiction with no corporate income tax, and that there are no other jurisdictions with a

UTPR such that all of the top-up tax is allocated to the domestic corporation or domestic branch.

During a transition period of nine years, the exclusion equals 7.8 percent of the book value of tangible assets and

9.8 percent of payroll, declining annually by 0.2 percentage points for the first four years, by 0.4 percentage points

for tangible assets and by 0.8 percentage points for payroll for the last five years.

Under the proposal, the Secretary would be delegated authority to adjust dollar-based thresholds to address

currency fluctuations for international standards reflected in Euros.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

The deduction disallowance applies pro rata with respect to all otherwise allowable deductions,

and applies after all other deduction disallowance provisions in the Code. To the extent that the

UTPR disallowance for a taxable year exceeds the aggregate deductions otherwise allowable to

the taxpayer for that year, such excess amount of the UTPR disallowance would be carried

forward indefinitely until an equivalent amount of deductions are disallowed in future years.

A coordination rule would reduce the UTPR disallowance imposed by the United States to

reflect any top-up tax collected by members of the group under a Qualified UTPR (QUTPR) in

one or more other jurisdictions. With respect to each financial reporting group, the percentage of

top-up tax allocated to the United States would be determined by the following formula where a

QUTPR jurisdiction is a jurisdiction applying a qualified UTPR.

U.S.

allocation =

50% ×

Number of employees in the U.S.

Number of employees in all QUTPR jurisdictions

50% ×

Total book value of tangible assets in the U.S.

Total book value of tangible assets in all QUTPR jurisdictions

The portion of the top-up tax allocated to the United States would be allocated among domestic

group members (domestic corporations and domestic branches) under regulations prescribed by

the Secretary or her delegates (Secretary).

If any prior year’s UTPR disallowance has not yet resulted in cash tax liability equal to the full

amount of the prior year’s allocated top-up tax (for instance, due to net operating losses) then, in

general, no additional top-up tax for the current year would be allocated to the United States until

the UTPR disallowance has resulted in a cash tax liability equal to the full amount of the

allocated top-up tax. Any low-taxed profits of the group for the given year may instead be

subject to a Qualified UTPR applied in other jurisdictions.

Whether a foreign jurisdiction has in effect a Qualified UTPR or an IIR that is consistent with

the Pillar Two Model Rules would be determined by the Secretary under the standard specified

in the Pillar Two Model Rules.

The proposal includes a domestic minimum top-up tax that would apply to U.S. profits when

another jurisdiction adopts the UTPR. This top-up tax equals the excess of (a) 15 percent of the

financial reporting group’s U.S. profit determined using the same rules as under the UTPR to

determine the group’s profit for a jurisdiction, over (b) all the group’s income tax paid or accrued

with respect to U.S. profits (including Federal and State incomes taxes, corporate alternative

minimum tax, and creditable foreign income taxes incurred with respect to U.S. profits). When

For example, if a taxpayer incurs $50x of interest expense that would otherwise be deductible and would

otherwise be allowed a $50x depreciation deduction, a UTPR disallowance of $20x would disallow a deduction for

$10x of the interest expense and $10x of the depreciation.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

another jurisdiction adopts the UTPR, the proposal would also ensure that taxpayers continue to

benefit from tax credits and other tax incentives that promote U.S. jobs and investment.

The proposal to repeal the BEAT and replace it with the UTPR would be effective for taxable

years beginning after December 31, 2024.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

REPEAL THE DEDUCTION FOR FOREIGN-DERIVED INTANGIBLE INCOME

Current Law

Current law provides a deduction to domestic corporations on their foreign-derived intangible

income (FDII). The deduction allowed is 37.5 percent of a domestic corporation’s FDII for any

taxable year beginning after December 31, 2017, and 21.875 percent for any taxable year

beginning after December 31, 2025. A domestic corporation’s FDII is the portion of its

intangible income, determined on a formulaic basis, that is derived from exports. The formulaic

calculation of income eligible for the FDII deduction is generally determined by taking a

domestic corporation’s overall income, minus certain exceptions, and reducing it by a deemed

tangible income return which is 10 percent of a domestic corporation’s qualified business asset

investment to arrive at a domestic corporation’s deemed intangible income. A portion of this

amount is treated as FDII based on the percentage of the taxpayer’s income that is derived from

serving foreign markets.

Reasons for Change

FDII is not an effective way to encourage research and development (R&D) in the United States.

It provides large tax breaks to companies with excess profits – who are already reaping the

rewards of prior innovation – rather than incentivizing new domestic investment. Further, FDII

preferences multinational companies at the expense of domestic producers, offering tax

incentives only to those companies with high export sales, rather than those with significant

domestic sales.

In addition, FDII creates undesirable incentives to locate certain economic activity abroad.

Because the preferential FDII rate applies to income in excess of a domestic corporation’s

tangible assets, firms can lower the hurdle necessary to obtain preferential tax treatment by

reducing tangible investments in the United States. Coupled with the current global intangible

low-taxed income (GILTI) regime, there is a strong incentive for companies to offshore plants

and equipment, since moving equipment offshore both increases the tax-free return under GILTI

and increases the tax deduction under FDII.

Finally, eliminating FDII will raise significant revenue that can be deployed to incentivize R&D

in the United States directly and more effectively.

Proposal

The proposal would repeal the deduction allowed for FDII. The resulting revenue will be used to

encourage R&D.

The proposal would be effective for taxable years beginning after December 31, 2023.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

REVISE THE RULES THAT ALLOCATE SUBPART F INCOME AND GILTI

BETWEEN TAXPAYERS TO ENSURE THAT SUBPART F INCOME AND GILTI ARE

FULLY TAXED

Current Law

Section 951(a) of the Internal Revenue Code (Code) generally requires a United States

shareholder (U.S. shareholder) of a controlled foreign corporation (CFC) to include in gross

income its pro rata share of the CFC’s Subpart F income. A U.S. shareholder is required to

include this amount only if the U.S. shareholder directly or indirectly owns stock in the foreign

corporation on the last day of the foreign corporation’s taxable year on which it is a CFC (the

“last relevant day”).

In general, a U.S. shareholder’s pro rata share of Subpart F income is based on the amount of

current year earnings and profits that the U.S. shareholder would receive if the CFC were to

distribute all its current year earnings and profits on the last relevant day. However, a U.S.

shareholder’s pro rata share is reduced by the portion of the year during which the foreign

corporation was not a CFC and by any dividends paid by the CFC during the year to another

person with respect to stock of the CFC that the U.S. shareholder owns on the last relevant day.

The reduction for dividends paid is limited to the CFC’s Subpart F income allocable to the period

that the U.S. shareholder did not own the stock of the CFC.

Thus, a dividend paid to a corporate U.S. shareholder with respect to the stock of a CFC that the

U.S. shareholder sells may reduce the tax burden on the U.S. shareholder who subsequently

purchases the stock in the same year. This is the case even though the selling U.S. shareholder

may not pay any tax on the dividend because it is eligible for a dividends received deduction

under section 245A of the Code (section 245A DRD).

A U.S. shareholder’s pro rata share of a CFC’s tested income, which is used to determine its

global intangible low-taxed income (GILTI) inclusion under section 951A(a) of the Code, is

determined based on the pro rata share rules for Subpart F income.

Reasons for Change

Current law allows Subpart F income, or tested income of a CFC, to escape U.S. taxation in

certain cases in which stock of the CFC is transferred and the CFC distributes a dividend

(including a deemed dividend) to any person other than the U.S. shareholder on the last relevant

day.

To illustrate the potential tax avoidance, suppose a corporate U.S. shareholder (the “seller”)

owns 50 percent of the single class of outstanding stock of a CFC at the beginning of the CFC’s

tax year. The CFC pays a dividend of $80 to the seller, and then three-quarters of the way into

the tax year, the seller sells all of its stock of the CFC to another U.S. shareholder (the “buyer”).

The CFC earns $200 of Subpart F income for its tax year. Without taking into account the

dividend, the buyer’s pro rata share of the CFC’s Subpart F income would be $100 (50 percent of

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

$200). Because the $80 dividend received by the seller is greater than $75 (the portion of the

Subpart F income allocable to the period the stock of the CFC is owned by the seller and not the

buyer), the buyer’s pro rata share of the CFC’s Subpart F income is reduced by $75 to $25.

Furthermore, the seller is generally allowed a 100 percent section 245A DRD. As a result, the

dividend does not increase the seller’s taxable income. Thus, in effect, $75 of the CFC’s Subpart

F income has escaped U.S. taxation by reason of the sale.

Regulations issued under section 245A of the Code limit this type of tax avoidance in certain

cases when a U.S. shareholder owns, directly or indirectly, more than 50 percent of the stock of a

CFC, but do not address all cases, such as the previous example, where the seller owns 50

percent or less of the CFC.

Proposal

The proposal would modify the existing pro rata share rules to require a U.S. shareholder of a

CFC that owns, directly or indirectly, a share of stock of the CFC for part of the CFC’s taxable

year, but not on the last relevant day, to include in gross income a portion of the foreign

corporation’s Subpart F income allocable to the portion of the year during which it was a CFC.

That portion of Subpart F income would equal the portion of the CFC’s current year earnings and

profits paid as non-taxed current dividends on the share while it was a CFC. A non-taxed current

dividend is the portion of a dividend paid out of current year earnings and profits that, without

regard to the proposal, either (a) is paid to a U.S. shareholder and would qualify for a dividends

received deduction, or (b) to the extent prescribed by the Secretary, is paid to an upper-tier CFC.

The remaining portion of a CFC’s Subpart F income that is allocable to the portion of the year

during which it was a CFC – that is, the amount that is not allocated under the non-taxed current

dividend rule – would be allocated to a U.S. shareholder that owns a share of stock of the CFC

on the last relevant day. Similar to current law, a U.S. shareholder’s pro rata share of Subpart F

income with respect to the share of stock would be reduced for taxable dividends paid by the

foreign corporation, provided the taxable dividends are paid while it was a CFC, out of current

year earnings and profits, and are paid either (a) to another United States person, or (b), to the

extent prescribed by the Secretary, to another CFC. However, the U.S. shareholder’s pro rata

share would not be reduced below the portion attributable to the portion of the year during which

the U.S. shareholder owned the share.

Because the proposal applies on a share-by-share basis, a U.S. shareholder may be allocated

Subpart F income under both the non-taxed current dividend rule and the last relevant day rule.

The proposal would similarly revise the pro rata share rules for determining a U.S. shareholder’s

GILTI inclusion with respect to a CFC.

The Secretary would be authorized to issue regulations or other guidance necessary or

appropriate to carry out the purposes of the proposal, including (a) to treat distributions and other

amounts as dividends or not dividends for purposes of this section, (b) to treat a partnership as an

aggregate of its partners, (c) to provide rules allowing or requiring a foreign corporation to close

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

its taxable year upon a change in ownership for purposes of determining U.S. shareholders’ pro

rata share, and (d) to treat a distribution and related issuance of stock to a shareholder not subject

to tax under this chapter in the same manner as an acquisition of stock.

The proposal would apply to taxable years of foreign corporations beginning after the date of

enactment and to taxable years of U.S. shareholders in which or with which such taxable years of

foreign corporations end.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

ELIMINATE EXPLOITED MISMATCH IN CALCULATION OF EARNINGS AND

PROFITS OF CONTROLLED FOREIGN CORPORATIONS

Current Law

In general, a U.S. shareholder of a controlled foreign corporation (CFC) must include in its

current income its pro rata share of the CFC's Subpart F income. Subpart F income is generally

passive income and certain other related-party income that is readily movable from one

jurisdiction to another. A CFC's Subpart F income, however, generally is limited to its earnings

and profits (E&P) for the taxable year (current-year E&P).

In calculating taxable income, domestic corporations generally take into account three special

income tax accounting concepts: installment sales, last-in-first-out (LIFO) inventory

adjustments, and the completed contract method of accounting. Under the installment method of

accounting, for example, the inclusion of income follows the payments of the purchase price

(i.e., over time).

In calculating its current-year E&P, however, a domestic corporation does not

take into account these three special accounting concepts (i.e., the income under the installment

method is taken into account immediately at the time of the sale) so that its current-year E&P

generally is higher than its taxable income.

In calculating current-year E&P, a CFC generally follows rules substantially similar to those

applicable to domestic corporations.

Therefore, a CFC generally does not take into account the

three special accounting concepts in calculating its current-year E&P. For Subpart F purposes,

however, a CFC takes into account these special accounting concepts.

Therefore, a CFC’s

current-year E&P is generally lower for Subpart F purposes than it is for other purposes.

Reasons for Change

Current law provides for two different calculations of E&P of a CFC, one for Subpart F purposes

and one for all other purposes. Among other things, this mismatch in E&P allows taxpayers to

engage in internal gain recognition transactions that generate a large amount of E&P for all

purposes other than Subpart F. This E&P immediately becomes eligible to support a tax-free

dividend under section 245A but is not subject to immediate tax because of the interaction

between the special accounting rules for calculating E&P for Subpart F purposes (which reduce

current year E&P below the amount available for distribution) and the current-year E&P limit for

determining a CFC’s Subpart F income. That E&P may subsequently be used to transfer the CFC

outside the U.S. tax system, preventing future taxation of the deferred Subpart F income.

As described in section 453(b)(1)(c), the installment method is a method of accounting under which the income

recognized for any taxable year from a disposition is that proportion of the payments received in that year which the

gross profit bears to the total contract price.

Section 312(n)(4)-(6).

Section 964(a).

Section 952(c)(3), referencing section 312(n)(4) through (6).

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Proposal

The proposal would provide that the E&P of a CFC will be determined for all purposes by taking

into account LIFO, installment sales, and the completed contract method of accounting. Thus,

under the proposal, the E&P of a CFC generally would follow the income tax accounting

treatment, including for purposes of determining the amount of E&P available for distribution

under section 245A.

The provision would be effective for taxable years of foreign corporations ending on or after

December 31, 2023, and to taxable years of U.S. shareholders in which or with which such

taxable years of the foreign corporations end.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

LIMIT FOREIGN TAX CREDITS FROM SALES OF HYBRID ENTITIES

Current Law

A corporation that makes a qualified stock purchase of a target corporation is permitted to elect,

under section 338 of the Internal Revenue Code (known as a “section 338 election”) to treat the

stock acquisition as an asset acquisition for U.S. tax purposes, thereby generally adjusting the

post-acquisition tax basis of the target corporation’s assets to fair market value. For this purpose,

a qualified stock purchase is any transaction or series of transactions in which the purchasing

corporation acquires at least 80 percent of the stock of the target corporation. Section 338(h)(16)

provides that (subject to certain exceptions) the deemed asset sale resulting from a section 338

election is generally ignored in determining the source or character of any item for purposes of

applying the foreign tax credit rules to the seller. Instead, for these purposes, any gain recognized

by the seller is treated as gain from the sale of the stock of the target corporation. Thus, in the

case of a foreign target corporation, section 338(h)(16) prevents the earnings and profits

generated from the deemed asset sale from changing the character of the gain from capital to

ordinary, thereby permitting the use of foreign tax credits (FTCs) to reduce or eliminate residual

U.S. tax on the stock gain.

Similar to a section 338 election, Treasury regulations under section 336(e) allow a corporation

to elect to treat certain dispositions of stock of a domestic corporation (but not a foreign

corporation) as a disposition of the assets of the domestic corporation instead. These regulations

apply section 338(h)(16) to a deemed sale of foreign assets of the domestic corporation.

Reasons for Change

Section 338(h)(16) applies to a qualified stock purchase for which a section 338 election is made,

but it does not apply to transactions that produce similar results – sales of an interest in an entity

that is treated as a corporation for foreign tax purposes but as a partnership or a disregarded

entity for U.S. tax purposes (specified hybrid entity), or taxable changes in the classification of

an entity for U.S. tax purposes that are not recognized for foreign tax purposes. These

transactions present the same FTC concerns as in the case of a qualified stock purchase for which

a section 338 election is made, and so should be subject to similar limitations.

Proposal

The proposal would apply the principles of section 338(h)(16) to determine the source and

character of any item recognized in connection with a direct or indirect disposition of an interest

in a specified hybrid entity and to a change in the classification of an entity that is not recognized

for foreign tax purposes (for example, due to an election under the entity classification

regulations). Thus, for purposes of applying the foreign tax credit rules, the source and character

of any item resulting from the disposition of the interest in the specified hybrid entity, or change

in entity classification, would be determined based on the source and character of an item of gain

or loss for the seller would have accounted upon the sale or exchange of stock (determined

without regard to section 1248). In addition, because the proposal is limited to determining the

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

source and character of such an item of gain or loss for purposes of applying the foreign tax

credit rules, the proposal does not affect the amount of gain or loss recognized as a result of the

disposition or the change in entity classification. The Secretary and her delegates would be

granted authority to issue any regulations necessary or appropriate to carry out the purposes of

the proposal, including those applying the proposal to other transactions that have a similar effect

and exempting certain transactions among related parties from application of the proposal.

The proposal would be effective for transactions occurring after the date of enactment.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

RESTRICT DEDUCTIONS OF EXCESSIVE INTEREST OF MEMBERS OF

FINANCIAL REPORTING GROUPS

Current Law

Business interest expense generally is deductible from regular taxable income. An exception to

this general rule is section 163(j) of the Internal Revenue Code (Code), which generally limits

U.S. tax deductions for business interest expense to the sum of (a) business interest income, (b)

30 percent of adjusted taxable income (not less than zero), and (c) floor plan financing interest.

Business interest expense for which a deduction is disallowed under section 163(j) may be

carried forward indefinitely for deduction in a subsequent year.

Certain interest paid to a foreign related party is treated as a base erosion payment for purposes

of the base erosion and anti-abuse tax (BEAT), in which case the deduction is added back to the

BEAT modified taxable income base. See Adopt the Undertaxed Profits Rule earlier in this

volume for a description of the relevant law.

In addition, certain interest paid to a foreign related party may not be deductible by reason of the

anti-hybrid rules of section 267A, which limit deductibility of an interest payment when the

amount is not included in the income of the recipient under foreign tax laws or when the

recipient receives a deduction with respect to the payment. Furthermore, certain rules under the

Code affect the timing of a deduction for interest. For example, certain interest owed to a related

party may not be deductible to the payor by reason of section 267(a) until the interest is included

in the gross income of the related-party payee.

In addition, both case law and regulations issued under section 385 can determine whether an

instrument issued by an entity is treated as indebtedness that gives rise to interest expense for

Federal income tax purposes, or as stock. Specifically, regulations under section 385 treat as

stock certain debt instruments issued by a corporation to a controlling shareholder in a

distribution or in certain other related-party transactions that achieve an economically similar

result.

Reasons for Change

The fungibility of money makes it easy for multinational groups to substitute debt for equity in a

controlled entity in order to shift profits to lower-tax jurisdictions. Under current law,

multinational groups are able to reduce their U.S. tax on income earned from U.S. operations by

over-leveraging their U.S. operations relative to those located in lower-tax jurisdictions.

Although section 163(j) limits the amount of interest expense a corporation can deduct relative to

its U.S. earnings, section 163(j) does not consider the leverage of a multinational group’s U.S.

operations relative to the leverage of the group’s worldwide operations. In addition, while certain

interest paid to a foreign related party is added to the modified taxable income base for

determining a taxpayer’s BEAT liability, many taxpayers are able to avoid a BEAT liability

because of the various exceptions for certain deductible payments. Moreover, the BEAT rate is

less than half of the regular corporate income tax rate. (See Adopt the Undertaxed Profits Rule in

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

this volume.) The proposal would limit the ability of multinational groups to lower U.S. taxable

income through high interest-to-income ratios for U.S. operations relative to the worldwide

group.

Proposal

Under the proposal, a financial reporting group (defined below) member’s deduction for interest

expense generally would be limited if the member has net interest expense for U.S. tax purposes

and the member’s net interest expense for financial reporting purposes (computed on a separate

company basis) exceeds the member’s proportionate share of the financial reporting group’s net

interest expense reported on the group’s consolidated financial Statements (excess financial

Statement net interest expense). A member’s proportionate share of the financial reporting

group’s net interest expense would be determined based on the member’s proportionate share of

the group’s earnings (computed by adding back net interest expense, tax expense, depreciation,

depletion, and amortization) reflected in the financial reporting group’s consolidated financial

Statements. The proposal generally would apply to an entity that is a member of a multinational

group that prepares consolidated financial Statements (“financial reporting group”) in accordance

with U.S. Generally Accepted Accounting Principles (GAAP), International Financial Reporting

Standards (IFRS), or other method identified by the Secretary under regulations.

When a financial reporting group member has excess financial Statement net interest expense, a

deduction will be disallowed for the member’s excess net interest expense for U.S. tax purposes.

For this purpose, the member’s excess net interest expense equals the member’s net interest

expense for U.S. tax purposes multiplied by the ratio of the member's excess financial Statement

net interest expense to the member’s net interest expense for financial reporting purposes.

Conversely, if a member’s net interest expense for financial reporting purposes is less than the

member’s proportionate share of the net interest expense reported on the group’s consolidated

financial Statements, such excess limitation would be converted into a proportionate amount of

excess limitation for U.S. tax purposes and carried forward three years.

Alternatively, if a financial reporting group member fails to substantiate its proportionate share

of the group’s net interest expense for financial reporting purposes, or a member so elects, the

member’s interest deduction would be limited to the member’s interest income plus ten percent

of the member’s adjusted taxable income (as defined under section 163(j)). Regardless of

whether a taxpayer computes the interest limitation under the proportionate share approach or

using the ten percent alternative, any disallowed interest expense could be carried forward

indefinitely. A member of a financial reporting group that is subject to the proposal would

continue to be subject to the application of section 163(j). Thus, the amount of interest expense

disallowed for a taxable year of a taxpayer that is subject to both interest expense disallowance

provisions would be determined based on whichever of the two provisions imposes the lower

limitation. A member of a financial reporting group may also be subject to the new undertaxed

profits rule. (See Adopt the Undertaxed Profits Rule in this volume for a description)

Each U.S. subgroup of a financial reporting group would be treated as a single member of the

financial reporting group for purposes of applying the proposal (except for purposes of applying

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

the ten percent alternative). For this purpose, a U.S. subgroup is comprised of any U.S. entity

that is not owned directly or indirectly by another U.S. entity, and all members (domestic or

foreign) that are owned directly or indirectly by such entity. If a member of a U.S. subgroup

owns stock in one or more foreign corporations, the proposal would apply before the application

of section 265, which generally disallows a deduction for amounts allocable to tax-exempt

income. Under the Administration’s proposals, tax-exempt income would include dividends from

a foreign corporation eligible for a section 245A deduction and a global intangible low-taxed

income (GILTI) inclusion eligible for a section 250 deduction. (See Revise the Global Minimum

Tax Regime, Limit Inversions, and Make Related Reforms in this volume.)

The proposal would not apply to financial services entities, and such entities would be excluded

from the financial reporting group for purposes of applying the proposal to other members of the

financial reporting group. The proposal also would not apply to financial reporting groups that

would otherwise report less than $5 million of net interest expense, in the aggregate, on one or

more U.S. income tax returns for a taxable year.

The Secretary would be granted authority to promulgate any regulations necessary to carry out

the purposes of the proposal, including (a) coordinating the application of the proposal with other

interest deductibility rules, (b) defining interest and financial services entities, (c) permitting

financial reporting groups to apply the proportionate share approach using the group’s net

interest expense for U.S. tax purposes rather than net interest expense reported in the group’s

financial Statements, (d) providing for the treatment of pass-through entities, (e) providing

adjustments to the application of the proposal to address differences in functional currency of

members, (f) if a U.S. subgroup has multiple U.S. entities that are not all members of a single

U.S. consolidated group for U.S. tax purposes, providing for the allocation of the U.S.

subgroup’s excess net interest expense for U.S. tax purposes among the members of the U.S.

subgroup; (g) allowing or requiring the adjustment of amounts reported on applicable financial

Statements, including by increasing a member’s reported net business interest expense under

rules similar to those that apply for disallowed interest expense; and (h) providing rules to

address structures with a principal purpose to limit application of the proposal. In addition, if a

financial reporting group does not prepare financial Statements under U.S. GAAP or IFRS, it is

expected that regulations generally would allow the use of financial Statements prepared under

other jurisdictions’ generally accepted accounting principles in appropriate circumstances.

The proposal would be effective for taxable years beginning after December 31, 2023.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

TREAT PAYMENTS SUBSTITUTING FOR PARTNERSHIP EFFECTIVELY

CONNECTED INCOME AS U.S. SOURCE DIVIDENDS

Current Law

A foreign taxpayer that invests in a U.S. partnership with income effectively connected to the

conduct of a trade or business (ECI) is required to file a U.S. tax return to report that income and

pay tax on it. Some or all of the gain on the sale of an interest in a partnership that is engaged in

the conduct of a U.S. trade or business may be treated as ECI by reference to a deemed sale of

the partnership’s assets, and tax is required to be withheld on that gain.

For certain purposes, including the U.S. withholding tax rules applicable to foreign persons, a

dividend equivalent is treated as a dividend from U.S. sources. A dividend equivalent is any

substitute dividend made pursuant to a securities lending or a sale-repurchase transaction that

(directly or indirectly) is contingent upon, or determined by reference to, the payment of a

dividend from sources within the United States. Any payment made under a specified notional

principal contract, or made under an equity-linked instrument that meets certain criteria, that

directly or indirectly is contingent upon, or determined by reference to, the payment of a

dividend from sources within the United States also is treated as a dividend equivalent.

In the case of a dividend equivalent payment made by a foreign person to a foreign person, the

jurisdiction of the foreign person making the payment may not treat the payment as a U.S. source

dividend subject to U.S. taxation. As a result, the foreign person making the payment may be

subject to different and potentially conflicting obligations under U.S. law and foreign law.

Reasons for Change

Foreign taxpayers may take the position that the rules requiring reporting and payment of tax on

investments in U.S. partnerships do not apply if the foreign taxpayer acquires an economic

interest in a publicly traded partnership with ECI through a derivative financial instrument, such

as a total return swap, and that the payments on the financial instrument that are received by the

foreign taxpayer are foreign source payments. Foreign taxpayers may also take the position that

the rules requiring withholding on dividend equivalent payments do not apply to payments on the

financial instrument or apply only to a small portion of those payments. As a result, taxpayers

can readily avoid the imposition of U.S. tax on ECI from an investment in a partnership with a

U.S. trade or business.

Proposal

The proposal would treat the portion of a payment on a derivative financial instrument (including

a securities loan or sale-and-repurchase agreement) that is contingent on income or gain from a

publicly traded partnership or other partnership specified by the Secretary or her delegates

(Secretary) as a dividend equivalent, to the extent that the related income or gain would have

been treated as ECI if the taxpayer held the underlying partnership interest.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

The Secretary would have authority to prescribe such regulations or other guidance as may be

necessary or appropriate to carry out the purposes of, and prevent the avoidance of, this section,

including with respect to payments made between foreign persons.

No inference is intended as to the application of current law to derivative transactions on

interests in partnerships with ECI.

The proposal would be effective for taxable years starting December 31, 2023.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

EXPAND ACCESS TO RETROACTIVE QUALIFIED ELECTING FUND ELECTIONS

Current Law

The passive foreign investment company (PFIC) rules are intended to prevent taxpayers from

deferring the taxation of income from passive investments and from transforming the character

of income from those investments from ordinary income into capital gain by holding the

investments through a foreign investment company. Absent a qualified electing fund (QEF) or

another permitted election, excess distributions received from a PFIC are subject to additional

tax in an amount determined by reference to the rate of interest that applies to underpayments of

tax. Gain recognized on disposition of PFIC stock is treated as an excess distribution.

If an investor in a PFIC makes a QEF election, the taxpayer is not subject to the tax on excess

distributions after the effective date of the election. Instead, the taxpayer generally is required to

take into account the taxpayer’s pro rata share of the ordinary income and long-term capital gain

of the PFIC on an annual basis and pay tax on this income. Section 1295(b)(2) of the Internal

Revenue Code generally allows the owner of a PFIC to make a QEF election for any taxable year

at any time on or before the due date for filing the return of the tax. Section 1295(b)(2) permits

an election to be made after that date if the taxpayer reasonably believed that the company was

not a PFIC, to the extent provided by regulations.

Under regulations, a taxpayer also is permitted to make a retroactive QEF election if the

Commissioner of the Internal Revenue Service (IRS) consents to the election under a special

consent procedure. To qualify for the special consent procedure, three conditions must be met:

the taxpayer must have relied on a qualified tax professional, granting consent must not prejudice

the interests of the U.S. Government, and the request for the special consent must be made

before the issue is raised on audit.

Reasons for Change

A taxpayer who makes a QEF election does not obtain the timing and character benefits that the

PFIC rules are intended to prevent. QEF elections reduce tax costs to investors and increase tax

compliance. The availability of a QEF election also incentivizes taxpayers to voluntarily report

investments in a PFIC.

Under current law, individuals who inadvertently did not make a QEF election with respect to a

PFIC investment may not be eligible for relief under the special consent procedure. For example,

a student with low or no income may inherit stock and discover only years later that the stock is

that of a PFIC when the individual hires a qualified tax professional. In other cases, an individual

may have hired a qualified tax professional who fails to advise the taxpayer of the availability of

a QEF election but refuses to provide an affidavit acknowledging that failure.

Additionally, there are large individual and administrative costs under current law for the

existing special consent procedure. The existing procedure requires a taxpayer to file a ruling

request with IRS and pay a user fee that is currently several thousand dollars. IRS receives many

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

requests for consent, which result in the use of IRS time and resources to determine whether

consent should be granted and, if so, to issue the private letter ruling. In many cases, allowing the

taxpayer to make a retroactive QEF election would be consistent with the proper administration

of the law and would promote tax compliance, but IRS must deny the request because the

taxpayer does not qualify for relief under the special consent procedure.

To encourage more taxpayers to make QEF elections, improve taxpayer disclosure, and relieve

the costs and burdens that current law imposes on both taxpayers and the IRS, retroactive QEF

elections should be permitted for a broader range of circumstances through changes to the statute

that expand regulatory authority. For example, the IRS should have authority to allow a

retroactive QEF election after the first year of ownership of a PFIC in appropriate cases that

promote these goals even if the taxpayer cannot demonstrate a reasonable belief that the

company was not a PFIC and cannot satisfy the special consent requirements.

Proposal

The proposal would modify section 1295(b)(2) of the Code to permit a QEF election by the

taxpayer at such time and in such manner as the Secretary or her delegates (Secretary) shall

prescribe by regulations.

Taxpayers would be eligible to make a retroactive QEF election without requesting consent only

in cases that do not prejudice the U.S. Government. For example, if the taxpayer owned the PFIC

in taxable years that are closed to assessment, the taxpayer would need to obtain consent and to

pay an appropriate amount to compensate the government for the taxes not paid in the closed

years on amounts that would have been includable in the taxpayer’s income if the taxpayer had

made a timely QEF election.

While it is less common for partnerships and other non-individual taxpayers to inadvertently fail

to make a QEF election, the Secretary would have authority to allow such taxpayers to make

retroactive QEF elections in appropriate circumstances.

The proposal would be effective on the date of enactment. It is intended that regulations or other

guidance would permit taxpayers to amend previously filed returns for open years.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

REFORM TAXATION OF FOREIGN FOSSIL FUEL INCOME

Current Law

Under the global intangible low-taxed income (GILTI) rules, foreign oil and gas extraction

income (FOGEI) of a controlled foreign corporation (CFC) is excluded from tested income,

whereas foreign oil related income (FORI) is included. In addition, FOGEI and FORI earned by

a CFC are not part of the CFC’s Subpart F income. Therefore, FOGEI earned through CFCs may

be eligible for a deduction under section 245A when repatriated and thus is generally exempt

from U.S. taxation. In contrast, both FOGEI and FORI earned directly through a foreign branch

(including a disregarded entity) are subject to full U.S. taxation, subject to allowable foreign tax

credits (FTCs).

Subject to certain limitations, a taxpayer may claim a credit against its U.S. income tax liability

for income, war profits, and excess profits taxes paid or accrued during the taxable year to any

foreign country or possession of the United States. Under Treasury regulations, a foreign levy is

a tax if it requires a compulsory payment pursuant to the authority of a foreign government to

levy taxes. A foreign levy is not a tax to the extent a person subject to the levy receives a specific

economic benefit from the foreign country in exchange for the payment (e.g., a concession to

extract government-owned petroleum).

A taxpayer that is subject to a foreign levy and who also receives a specific economic benefit

from the foreign country (a dual capacity taxpayer) must establish the amount that is paid

pursuant to the distinct element of the foreign levy that is a tax. The dual capacity taxpayer

cannot claim FTCs with respect to amounts paid in exchange for the specific economic benefit.

Treasury regulations provide a safe harbor for determining the qualifying portion of the levy

based on the generally applicable rate of tax under the jurisdiction’s income tax. However,

taxpayers may use the facts and circumstances method for determining the qualifying portion of

the levy rather than the safe harbor.

Reasons for Change

FTCs are intended to mitigate double taxation of income by the United States and a foreign

government. When a payment is made to a foreign government in exchange for a specific

economic benefit, there is no double taxation. Current law recognizes the distinction between a

payment of creditable taxes and a payment in exchange for a specific economic benefit but may

fail to achieve the appropriate split between the two (e.g., when a foreign jurisdiction does not

charge royalties but imposes a levy only on oil and gas income, or imposes a higher levy on oil

and gas income as compared to other income). The safe harbor method reflects the view that the

higher effective rate of the nominal foreign tax is appropriately characterized as compensating

the foreign government in its capacity as the owner of the minerals in place, rather than in its role

as tax collector. However, many dual capacity taxpayers subject to alternative tax regimes use

the facts and circumstances method for determining the qualifying portion of the levy and claim

FTCs for a much larger amount than would be creditable under the safe harbor method.

Consequently, many oil and gas producers are able to claim a credit against their U.S. income tax

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

liability for high levies imposed by foreign governments that effectively constitute royalty

equivalents (instead of income taxes), while other U.S. businesses (not in the oil/gas sector) in

those same countries pay a much lower income tax rate (and therefore are only eligible for the

correspondingly lower FTCs in the United States).

Foreign hydrocarbon income should not be eligible for preferential tax treatment relative to other

industries because of the negative externalities associated with such industry and the

Administration’s overall goal of promoting clean energy.

Proposal

The proposal would repeal the exemption from GILTI for FOGEI. The definition of FOGEI and

FORI would also be amended to include income derived from shale oil and tar sands activity.

In the case of a dual capacity taxpayer, the proposal would limit the amount of a levy that would

qualify as a creditable foreign tax to the amount of tax that the dual capacity taxpayer would

have paid to the foreign government if it were a non-dual capacity taxpayer. Thus, the proposal

would codify the safe harbor included in the current Treasury regulations for determining the

portion of the levy that is paid in exchange for a specific economic benefit, and would make the

safe harbor the sole method for determining the creditable portion of the levy. The aspect of the

proposal that would determine the amount of a foreign levy paid by a dual-capacity taxpayer that

qualifies as a creditable tax would yield to United States treaty obligations that explicitly allow a

credit for taxes paid or accrued on certain oil or gas income.

The proposal would be effective for taxable years beginning after December 31, 2023.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

PROVIDE TAX INCENTIVES FOR LOCATING JOBS AND BUSINESS ACTIVITY IN

THE UNITED STATES AND REMOVE TAX DEDUCTIONS FOR SHIPPING JOBS

OVERSEAS

Current Law

Under current law, there are limited tax incentives for U.S. employers to bring offshore jobs and

investments into the United States. In addition, costs incurred to offshore U.S. jobs generally are

deductible for U.S. income tax purposes.

Reasons for Change

The proposal creates a tax incentive to bring offshore jobs and investment back to the U.S.

Reducing the tax benefits from moving U.S. jobs offshore will increase incentives to keep those

jobs at home.

Proposal

The proposal would create a new general business credit equal to 10 percent of the eligible

expenses paid or incurred in connection with onshoring a U.S. trade or business. For this

purpose, onshoring a U.S. trade or business means reducing or eliminating a trade, business, or

line of business currently conducted outside the United States and starting up, expanding, or

otherwise moving the same trade or business within the United States, to the extent that this

action results in an increase in U.S. jobs. While the eligible expenses may be incurred by a

foreign affiliate of the U.S. taxpayer, the tax credit would be claimed by the U.S. taxpayer. If a

non-mirror code U.S. territory (the Commonwealth of Puerto Rico and American Samoa)

implements a substantially similar proposal, the Department of the Treasury (Treasury) will

reimburse the U.S. territory for the new general business credits provided to their taxpayers

pursuant to a plan. Furthermore, the Treasury will reimburse a mirror code U.S. territory (Guam,

the Commonwealth of the Northern Mariana Islands, and the U.S. Virgin Islands) for the new

general business credits provided to their taxpayers by reason of the enactment of the proposal.

In addition, to reduce tax benefits associated with U.S. companies moving jobs outside of the

United States, the proposal would disallow deductions for expenses paid or incurred in

connection with offshoring a U.S. trade or business. For this purpose, offshoring a U.S. trade or

business means reducing or eliminating a trade, business, or line of business currently conducted

inside the United States and starting up, expanding, or otherwise moving the same trade or

business outside the United States, to the extent that this action results in a loss of U.S. jobs. In

addition, no deduction would be allowed against a U.S. shareholder’s global intangible low-

taxed income or Subpart F income inclusions for any expenses paid or incurred in connection

with moving a U.S. trade or business outside the United States.

For purposes of the proposal, expenses paid or incurred in connection with onshoring or

offshoring a U.S. trade or business are limited solely to expenses associated with the relocation

of the trade or business and do not include capital expenditures or costs for severance pay and

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

other assistance to displaced workers. The Secretary or her delegates may prescribe rules to

implement the provision, including rules to determine covered expenses and treatment of

independent contractors.

The proposal would be effective for expenses paid or incurred after the date of enactment.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

SUPPORT HOUSING AND URBAN DEVELOPMENT

MAKE PERMANENT THE NEW MARKETS TAX CREDIT

Current Law

The new markets tax credit (NMTC) is an up-to-39 percent credit for qualified equity

investments (QEIs) made to acquire stock in a corporation, or a capital interest in a partnership,

that is a qualified community development entity (CDE). The investment must be held for a

period of at least seven years and must have been made within five years after the CDE receives

an allocation out of the national credit limitation amount for the year. The CDEs in turn are

required to invest substantially all of the proceeds of the QEIs in low-income communities. For

example, CDEs may make loans or capital investments in companies that operate in low-income

communities.

In order for an entity to qualify as a CDE, it must meet three requirements. First, the primary

mission of the entity must be to serve or provide investment capital for low-income communities

or low-income persons. Second, the entity must maintain accountability to residents of low-

income communities through their representation on the entity’s governing or advisory board.

Third, the entity must be certified as a CDE by the Department of the Treasury’s Community

Development Financial Institutions Fund (CDFI Fund).

For calendar years 2010 through 2019, the national credit limitation amount per year was $3.5

billion, and for 2020 through 2025 the annual amount is $5 billion. No new investment allocation

authority is provided beyond 2025. The CDFI Fund allocates credit amounts, subject to the total

national credit limitation, among CDEs based on a competitive application process.

A taxpayer’s allowable credit amount for any given year is the applicable percentage of the

amount paid to the CDE for the investment at its original issue. Specifically, the applicable

percentage is five percent for the year the equity interest is purchased from the CDE and for each

of the two subsequent years, and it is six percent for each of the following four years. The

NMTC is available for a taxable year to the taxpayer who holds the QEI on the date of the initial

investment or on an investment anniversary date that occurs during the taxable year. The credit is

recaptured if, at any time during the seven-year period that begins on the date of the original

issue of the investment, one of three things occurs: (a) the entity ceases to be a qualified CDE,

(b) the proceeds of the investment cease to be used as required, or (c) the equity investment is

redeemed.

The NMTC can be used to offset regular Federal income tax liability but, if the taxpayer is not a

corporation and has an alternative minimum tax (AMT) liability, the NMTC cannot be used to

offset the AMT.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Reasons for Change

Permanent extension of the NMTC would allow CDEs to continue to generate investments in

low-income communities. The extension would also create greater certainty for investment

planning purposes.

Proposal

The proposal would extend the NMTC permanently, with a new allocation for each year after

2025. The annual amount would be $5 billion, indexed for inflation after 2026.

The proposal would be effective after the date of enactment.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

PROVIDE A NEIGHBORHOOD HOMES CREDIT

Current Law

There are no Federal tax provisions that directly support building or renovating affordable

owner-occupied housing or that cover a development or financing gap for such housing. The

low-income housing credit supports construction and rehabilitation of affordable housing for

low-income renters. The mortgage interest deduction, tax-exempt housing bonds, and mortgage

credit certificates assist homeowners by reducing the after-tax costs of their mortgage payments,

but this support is not directed at addressing development cost gaps for affordable owner-

occupied housing.

Reasons for Change

In neighborhoods where homes are in poor condition, property values are often too low to

support new construction or substantial renovation of existing properties. The lack of move-in-

ready homes makes it difficult to attract or retain homebuyers in these areas. A subsidy for home

builders and homeowners seeking to rehabilitate these homes can encourage residential

development in these neighborhoods. If targeted at homes sold to (or being rehabilitated by)

owner-occupants, the subsidy can encourage further improvements to these areas, as owner-

occupants generally have greater long-term interest in their neighborhoods than renters.

Proposal

The proposal would create a new allocated tax credit, the neighborhood homes credit (NHC), to

encourage (a) new construction for sale, (b) substantial rehabilitation for sale, and (c) substantial

rehabilitation by existing homeowners who will remain in their communities. The credit would

be allocated through each State’s Neighborhood Homes Credit Agency for projects meeting

criteria described below.

Neighborhood Homes Credit Agencies (NHCAs): Each State would create or designate an

NHCA to allocate potential NHCs to project sponsors – i.e., individuals or entities that organize

the project. Sponsors seeking NHCs would apply to their State NHCA. The NHCAs would

evaluate the applications and choose those deemed best suited to achieving the goals of the

program. Furthermore, the NHCA would be responsible for monitoring compliance with all

provisions governing NHCs and for reporting violations to the IRS. NHCAs would also set

standards for developer fees, building quality (including all local criteria for habitability and

safety), and development costs.

Allocation to States, U.S. territories, and the District of Columbia (collectively, States): Each

State would have a specified amount of potential NHCs to allocate each year. For 2024 each

State could allocate the greater of $8 million or the product of $6 times the State’s population.

The amounts would be indexed for inflation for subsequent years. States would be able to carry

forward any unallocated potential NHCs for up to three years.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Eligibility criteria for NHC residences: Sponsors would only be eligible for NHCs if the

residences they were constructing or rehabilitating met the following criteria:

1. The project must be a single-family home (including homes with up to four dwelling

units), a condominium, or a residence in a housing cooperative.

2. The project must be in an NHC neighborhood (defined below).

3. The project must be sold, or in the case of owner-rehabilitation projects completed,

within five years of the NHCA allocation of the credit.

4. After construction or rehabilitation, the home must be owned by an occupant who is an

NHC-qualified owner (defined below).

Eligibility criteria for NHC neighborhoods: An NHC neighborhood is a census tract that meets at

least one the following criteria:

1. Has median family income not exceeding 80 percent of the area/State median income,

has a poverty rate not less than 130 percent of the area/State poverty rate, and has a

median value for owner-occupied homes not exceeding the area/State median value;

2. Has median family income not exceeding area/State median income, is located in a city

with a poverty rate of at least 150 percent of the area/State poverty rate and a population

of at least 50,000, and has a median value for owner-occupied homes not exceeding 80

percent of the area/State median value;

3. Has median family income not exceeding area/State median income, is located in a non-

metropolitan county, and has been designated by a NHCA; or

4. Is located in a disaster area.

Eligibility criteria for qualifying owners: An NHC-qualified owner is someone who will use the

home as their primary residence, whose household income does not exceed 140 percent of

area/State median income, and who, in the case of a sale, is not related to the seller.

Determination of credit amount: In general, the credit amount would increase as development

costs increase and decrease as sales proceeds (or owner payments, in the case of rehabilitation

for current homeowners) increase. In a determination of the credit amount, construction costs

would count only to the extent they are incurred after a NHCA has allocated potential NHCs to

the project, and acquisition costs for land and buildings would count only to the extent they are

incurred not more than three years prior to such an allocation. For home sales, the credit would

be limited to no more than 35 percent of the lesser of development costs and 80 percent of the

national median sales price for new homes. The credit amount would smoothly phase out such

that it would be zero when sales proceeds are five times area median family income. (An

alternative phase out would apply in the case of residences with more than one dwelling unit.) A

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

taxpayer would always be better off obtaining a higher sales price, and a small increase in sales

price would not trigger a disproportionate loss of credits. In the case of a rehabilitation of an

owner-occupied residence, the credit would not exceed the lesser of $50,000 and 50 percent of

rehabilitation costs. Similar to the case of a home sale, a taxpayer would always be better off

obtaining a higher owner payment for home rehabilitations, and a small increase in owner

payments would not trigger a disproportionate loss of credits.

Treatment of losses: If a taxpayer sells or rehabilitates a home for a loss (which will generally be

the case), the credit will not be considered compensation for that loss for purposes of

determining whether the loss is deductible.

Return of unused credits: If any credits allocated to a project are unused five years after the

NHCA allocation, they are returned to the pool of potential credits for the NHCA to re-allocate.

As with other potential credits that the NHCA receives for a year, these returned credits may be

carried forward for up to three years.

Timing of owner occupancy: A taxpayer may claim NHCs only after construction and inspection

are complete and the home is occupied by an NHC-qualified owner. If, within five years of the

date of qualification for the NHC, the purchasing or rehabilitating owner-occupant sells or rents

the home, there may be NHC-related financial consequences to the owner-occupant. In the case

of a sale, up to 50 percent of the gain from the sale would have to be paid to the NHCA. In the

case of renting, during the five-year period expenses with respect to renting would not be

deductible against Federal income taxes.

Implementation and reporting: The Secretary and her delegates (Secretary) would be given

authority to prescribe rules to implement this provision. NHCAs would be required to submit an

annual report to the Secretary specifying the amount of potential NHCs allocated to each project

for the previous year, information on each NHC residence completed in the previous year, and

such other information as the Secretary may require.

The proposal would be effective for taxable years beginning after December 31, 2023.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

EXPAND AND ENHANCE THE LOW-INCOME HOUSING CREDIT

Current Law

Low-income housing credits (LIHTCs) incentivize and subsidize the construction and

rehabilitation of affordable rental housing for low-income tenants. Building owners earn LIHTCs

by constructing and operating a low-income housing project in conformity with the LIHTC

requirements (including limitations on tenant income, restrictions on gross rents, and periodically

assessed habitability). For each of 10 years, the owner receives LIHTCs for a building in such a

project. The number of LIHTCs received each year may not exceed the product of: (a) the

depreciable cost of the entire building (eligible basis); (b) the portion of the building that consists

of low-income units; and (c) a credit rate. Credit rates are generally either 4 or 9 percent.

In the case of the 9 percent credit rate, the credits for each of the 10 years may not exceed the

housing credit dollar amount (HCDA) that a State or local housing credit agency (HCA)

previously allocated to the taxpayer. Each State, including the District of Columbia and

territories of the United States, receives a pool of new HCDAs to allocate every year. (For 2023,

each State receives $2.75 per capita in new potential credits to allocate, subject to a minimum of

$3,185,000 for smaller States.) The total ceiling available for a State to allocate each year also

includes unused or returned HCDAs from prior years. Because the HCAs’ HCDA pools are

almost always oversubscribed, potential developers of LIHTC projects compete for allocations

by offering project proposals to the relevant HCA. Each HCA must have a Qualified Allocation

Plan (QAP) to guide its allocations.

A building can be eligible to earn credits at a 4 percent rate if the building and the land on which

it sits are financed at least 50 percent by private activity bonds (PABs) that are subject to a

State’s volume cap. (A State’s volume cap is the annual limit on the PABs that the State may

issue for all purposes, including for qualified residential rental projects that can earn LIHTCs.)

By focusing its volume cap on financing qualified residential rental projects, in combination with

allocating HCDAs, a State can more than double the number of LIHTC-supported affordable

rental units that it could achieve with its HCDAs alone.

Qualifying buildings may not earn LIHTCs unless they are subject to an extended low-income

housing commitment: an agreement for a period of at least 30 years that requires the building to

maintain affordability and habitability, and binds all subsequent owners during that period. In

addition to an owner’s ability to transfer a LIHTC building subject to their commitment, current

law contains two particular mechanisms for the original owner to sever their connection to the

building and yet to leave affordability and habitability requirements intact.

First, after the 14

year of the extended-use period, the owner can ask the HCA to provide a

qualified contract, under which the owner can sell the building. In general, a qualified contract

requires the buyer to continue to maintain the building’s affordability and habitability at a

purchase price that includes a fair market value component for the non-low-income portion of

the building plus a component for the low-income portion of the building that is at or above an

amount based on a statutory formula. If, however, the HCA fails to provide such an offer within

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

a year of the owner’s request, the extended use period terminates, as do the affordability and

habitability requirements.

Second, current law contains a safe harbor for a “right of first refusal” (ROFR) to facilitate a sale

to tenants (or a tenant group), to a resident management corporation, to a qualified nonprofit

organization, or to a government agency. The purchase under such a contract would occur after

the 15

year for at least the outstanding debt incurred more than five years before the sale, plus

Federal income tax triggered by the sale. These purchasers would remain subject to the

requirements to maintain affordability and habitability. Under the safe harbor, no Federal income

tax benefit with respect to the building is denied to the original owners.

Reasons for Change

The United States faces a housing supply gap. Increasing the supply of housing will mean more

affordable rents and more attainable homeownership for Americans in every community. The

LIHTC incentive is the Federal Government’s largest source of support for the construction and

rehabilitation of rental housing for low-income tenants. Increasing annual HCDAs can help

increase housing supply and reduce the gap. Reducing the PAB financing requirement will

further expand the reach of the credit to more projects and thereby further support housing

supply.

In addition, the qualified contract provision and ROFR provisions no longer function as

intended. The statutorily determined purchase price in a qualified contract is generally higher

than what buyers are willing to pay for a building subject to affordability and habitability

requirements. As a result, the qualified contract provision serves to reduce the duration of the

affordability and habitability requirements. LIHTC investors have imposed hurdles to the use of

ROFRs that allow LIHTC projects to be too easily converted to market-rate housing.

Proposals

The proposal would make the following changes to current law:

1. Increase annual HCDAs.

For 2024, each State would receive $4.25 per capita in new potential credits for allocation,

subject to a minimum of $4,901,620 for smaller States. For 2025, the per capita and State

minimum amounts would be $4.88 and $5,632,880, respectively. For 2026 and subsequent years,

these amounts would be the amounts for the prior year, indexed for inflation as under current

law.

2. Reduce the 50 percent PAB financing requirement.

A building would be eligible to earn LIHTCs on the basis of 25 percent (rather than 50 percent)

PAB financing of the building and land. This change would apply to buildings placed in service

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

in taxable years beginning after December 31, 2023.

3. Repeal the qualified contract provision.

The proposal would repeal the qualified contract provision, meaning that an owner could no

longer end the extended use period for a building by requesting—and not receiving—a qualified

contract to purchase the building.

The repeal of the qualified contract provision would not apply to a building if, before January 1,

2024: (a) the building received an allocation of HCDAs, or (b) in the case of a building some

portion of which is financed with PABs subject to volume cap, the building received a

determination that the LIHTCs received on account of the PAB financing would be necessary for

the building’s financial feasibility and continued viability, and that an allocation of HCDAs

would have been permissible in the absence of PAB financing.

For buildings that continue to be subject to the qualified contract provision, a qualified contract

submitted after the date of enactment must have an offer purchase price that is the sum of the

FMV of the non-low-income and low-income portions of the building taking into account

requirements under LIHTC rules.

The proposal to repeal the qualified contract provision would apply from the date of enactment.

4. Repeal the ROFR safe harbor and replace it with an option safe harbor.

The safe harbor applicable under current law to a ROFR would instead be applicable to options

to buy. Only persons that are eligible under current law to hold a right of first refusal could be

the holder(s) of the option. To be eligible for the safe harbor, the right to purchase would have to

cover both the building and assets required for continued operation as affordable rental housing

and/or remaining partnership interests in the building. In addition, the right to purchase would

have to be exercisable regardless of the approval or non-approval of the current owner or related

persons.

Finally, the purchase price of the LIHTC building would have to be at least the debt incurred

more than 5 years before the date of sale that is secured by the building. The contractual

purchase price of partnership interest(s) would have to be at least the partnership’s ratable share

of the amount described in the preceding sentence.

The proposals would apply to agreements entered into, or amended, after the date of enactment.

The Administration will work with Congress to develop an approach appropriate for existing

agreements.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

MODIFY ENERGY TAXES

ELIMINATE FOSSIL FUEL TAX PREFERENCES

Current Law

Current law provides several credits, deductions, and other special provisions that are targeted

towards encouraging oil, gas, and coal production.

Credit for enhanced oil recovery

The general business credit includes a 15 percent credit for eligible costs attributable to enhanced

oil recovery (EOR) projects. Eligible costs include the cost of constructing a gas treatment plant

to prepare Alaskan natural gas for pipeline transportation, the cost of depreciable or amortizable

tangible property that is integral to a qualified EOR project, intangible drilling and development

costs (IDCs), and any allowable qualified tertiary injectant expenses that are paid or incurred in

connection with a qualified EOR project. A qualified EOR project must be located in the United

States and must involve the application of one or more of nine tertiary recovery methods. The

allowable credit is phased out over a $6 range for a taxable year if the annual reference price

exceeds an inflation adjusted threshold.

Credit for oil and natural gas produced from marginal wells

In addition, the general business credit includes a credit for crude oil and natural gas produced

from marginal wells. For taxable years beginning after 2005, the full potential credit rate is

determined by the annual inflation adjustment applied to a starting credit rate of $3.00 per barrel

of oil and $0.50 per 1,000 cubic feet of natural gas. The credit per well is limited to 1,095 barrels

of oil or barrel-of-oil equivalents per year. The credit rates for crude oil and natural gas are

phased out for a taxable year if the reference price exceeds the applicable thresholds. The crude

oil phase-out range and the applicable threshold at which the phase-out begins in 2021 are $4.02

and $20.10 respectively. The natural gas phase-out range and the applicable threshold at which

the phase-out begins are $0.44 and $2.24. Both sets of rates are adjusted annually for inflation. In

2021, the credit amount was the full rate of $0.67 per 1,000 cubic feet of natural gas and the

credit for oil was completely phased out.

Expensing of intangible drilling costs (IDCs)

IDCs include all expenditures made by an operator for wages, fuel, repairs, hauling, supplies,

and other expenses incident to and necessary for the drilling of wells and the preparation of wells

for the production of oil and natural gas. Generally, IDCs do not include expenses for items

which have a salvage value or items related to the acquisition of the property. An operator who

pays or incurs IDCs in the development of an oil or natural gas property located in the United

States, including certain wells drilled offshore, may elect either to expense or capitalize those

costs. If a taxpayer elects to expense IDCs, the amount of the IDCs is deductible as an expense in

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

the taxable year that the cost is paid or incurred. For any particular taxable year, a taxpayer may

deduct some portion of its IDCs and capitalize the rest under the provision.

Deduction of costs paid or incurred for any tertiary injectant used as part of tertiary recovery

method

Taxpayers are allowed to deduct the cost of qualified tertiary injectant expenses for the taxable

year. Qualified tertiary injectant expenses are amounts paid or incurred for any tertiary

injectants, except for recoverable hydrocarbon injectants, that are used as part of a tertiary

recovery method to increase the recovery of crude oil. The deduction is treated as an

amortization deduction in determining the amount subject to recapture upon disposition of the

property.

Exception to passive loss limitations provided to working interests in oil and natural gas

properties

Deductions attributable to passive activities, to the extent they exceed income from passive

activities, generally may not be used against other income, such as wages, portfolio income, or

business income that is derived from a nonpassive activity. A similar rule applies to credits.

Passive activities are defined to include trade or business activities in which the taxpayer does

not materially participate. An exception is provided, however, for any working interest in an oil

or natural gas property that the taxpayer holds directly or through an entity that does not limit the

liability of the taxpayer with respect to the interest. Suspended deductions and credits are carried

forward and treated as deductions and credits from passive activities in the next year. The

suspended losses and credits from a passive activity are allowed in full when the taxpayer

completely disposes of the activity.

Use of percentage depletion with respect to oil and natural gas wells

The capital costs of oil and natural gas wells are recovered through the depletion deduction.

Under the cost depletion method, the basis recovery for a taxable year is proportional to the

exhaustion of the property during the year and cannot exceed basis. A taxpayer may also qualify

for percentage depletion, under which the amount of the deduction is a statutory percentage of

the gross income from the property. In general, only independent producers and royalty owners,

in contrast to integrated oil companies, qualify for the percentage depletion deduction. A

qualifying taxpayer determines the depletion deduction for each oil and natural gas property

under both the percentage depletion method and the cost depletion method then deducts the

larger of the two amounts. Because percentage depletion is computed without regard to the

taxpayer’s basis in the depletable property, a taxpayer may continue to claim percentage

depletion after all the expenditures incurred to acquire and develop the property have been

recovered.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Two-year amortization of independent producers’ geological and geophysical expenditures

Geological and geophysical expenditures are costs incurred for the purpose of obtaining and

accumulating data that will serve as the basis for the acquisition and retention of mineral

properties. The amortization period for geological and geophysical expenditures incurred in

connection with oil and natural gas exploration in the United States is two years for independent

producers and seven years for major integrated oil companies.

Expensing of mine exploration and development costs

A taxpayer may elect to expense the exploration costs incurred for the purpose of ascertaining

the existence, location, extent, or quality of a domestic ore or mineral deposit, including a

deposit of coal or other hard mineral fossil fuel. After the existence of a commercially

marketable deposit has been disclosed, costs incurred for the development of a mine to exploit

the deposit are deductible in the year paid or incurred unless the taxpayer elects to deduct the

costs on a ratable basis as the minerals or ores produced from the deposit are sold.

Percentage depletion for hard mineral fossil fuels

The capital costs of coal mines and other hard-mineral fossil-fuel properties are recovered

through the depletion deduction. Under the cost depletion method, the basis recovery for a

taxable year is proportional to the exhaustion of the property during the year. A taxpayer may

also qualify for percentage depletion; hence, the amount of the deduction is a statutory

percentage of the gross income from the property. A qualifying taxpayer determines the

depletion deduction for each property under both the percentage depletion method and the cost

depletion method and deducts the larger of the two amounts. Because percentage depletion is

computed without regard to the taxpayer’s basis in the depletable property, a taxpayer may

continue to claim percentage depletion after all the expenditures incurred to acquire and develop

the property have been recovered.

Capital gains treatment for royalties

Royalties received on the disposition of coal or lignite generally qualify for treatment as long-

term capital gain, and the royalty owner does not qualify for percentage depletion with respect to

the coal or lignite. This treatment does not apply unless the taxpayer has been the owner of the

mineral in place for at least one year before it is mined.

Exemption from the corporate income tax for fossil fuel publicly traded partnerships

Publicly traded partnerships are generally subject to the corporate income tax. Partnerships that

derive at least 90 percent of their gross income from depletable natural resources, real estate, or

commodities are exempt from the corporate income tax. Instead, they are taxed as partnerships.

They pass through all income, gains, losses, deductions, and credits to their partners, with the

partners then being liable for income tax (or benefitting from the losses) on their distributive

shares.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Oil Spill Liability Trust Fund (OSTLF) and Hazardous Substance Superfund (Superfund) excise

tax exemption for crude oil derived from bitumen and kerogen-rich rock

Crudes such as those that are produced from bituminous deposits as well as kerogen-rich rock

are not treated as crude oil or petroleum products for purposes of the OSTLF and Superfund

taxes. The rate of tax on crude is the sum of the $0.09 per barrel financing rate dedicated to the

OSLTF and the $0.164 per barrel financing rate dedicated to the Superfund. The tax is imposed

on crude oil received at a United States refinery, and on petroleum products entered into the

United States for consumption, use, or warehousing.

Amortization of air pollution control facilities

Under current law, a taxpayer may elect to amortize expenses related to certain pollution control

facilities over 60 months or 84 months. The 60-month period applies to property placed in

service at a plant that began operation prior to January 1, 1976. The 84-month period applies to

property placed in service after April 11, 2005, and used in connection with an electric

generation plant or other property which is primarily coal-fired and constructed after December

31, 1975. Eligible pollution control facilities include new identifiable treatment facilities that are

used to abate or control water or atmospheric pollution by removing, altering, disposing, storing,

or preventing the creation or emission of pollutants, contaminants, wastes, or heat. Eligible

facilities must be certified by a State certifying authority and a Federal certifying authority as

being in compliance with applicable regulations and requirements. Without this special

treatment, most pollution control facilities would be depreciated over 39 years as nonresidential

real estate property.

Reasons for Change

These oil, gas, and coal tax preferences distort markets by encouraging more investment in the

fossil fuel sector than would occur under a neutral system. This market distortion is detrimental

to long-term energy security and is also inconsistent with the Administration’s policy of

supporting a clean energy economy, reducing our reliance on oil and reducing greenhouse gas

emissions.

Proposal

The proposal would repeal: (a) the enhanced oil recovery credit for eligible costs attributable to a

qualified enhanced oil recovery project; (b) the credit for oil and gas produced from marginal

wells; (c) the expensing of intangible drilling costs; (d) the deduction for costs paid or incurred

for any qualified tertiary injectant used as part of a tertiary recovery method; (e) the exception to

passive loss limitations provided to working interests in oil and natural gas properties; (f) the use

of percentage depletion with respect to oil and gas wells; (g) two year amortization of geological

and geophysical expenditures by independent producers, instead allowing amortization over the

seven-year period used by major integrated oil companies; (h) expensing of exploration and

development costs; (i) percentage depletion for hard mineral fossil fuels; (j) capital gains

treatment for royalties; (k) the exemption from the corporate income tax for publicly traded

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

partnerships with qualifying income and gains from activities relating to fossil fuels; (l) the

OSTLF and Superfund excise tax exemption for crude oil derived from bitumen and kerogen-

rich rock; and (m) accelerated amortization for air pollution control facilities.

Unless otherwise specified, the proposal provisions would be effective for taxable years

beginning after December 31, 2023. In the case of royalties, the proposal provision would be

effective for amounts realized in taxable years beginning after December 31, 2023, regardless of

when the property generating these royalties was acquired. The repeal of the exemption from the

corporate income tax for publicly traded partnerships with qualifying income and gains from

activities relating to fossil fuels would be effective for taxable years beginning after December

31, 2028.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

ELIMINATE DRAWBACKS ON PETROLEUM TAXES THAT FINANCE THE OIL

SPILL LIABILITY TRUST FUND AND SUPERFUND

Current Law

An excise tax is imposed on: (a) crude oil received at a U.S. refinery; (b) imported petroleum

products (including crude oil) entered into the United States for consumption, use, or

warehousing; and (c) any domestically produced crude oil that is used (other than on the

premises where produced for extracting oil or natural gas) in or exported from the United States

if, before such use or exportation, no taxes were imposed on the crude oil. The rate of tax is the

sum of (1) the Hazardous Superfund financing rate of 16.4 cents per barrel, adjusted annually for

inflation and (2) the Oil Spill Liability Trust Fund financing rate of 9 cents per barrel.

The revenues from the Hazardous Superfund financing rate are dedicated to the Hazardous

Substance Superfund (Superfund). Amounts in the Superfund are available for expenditures

incurred in connection with releases or threats of releases of hazardous substances into the

environment under specified provisions of the Comprehensive Environmental Response,

Compensation, and Liability Act of 1980 (as amended).

The revenues from the Oil Spill Liability Trust Fund (OSLTF) financing rate are dedicated to the

OSLTF to pay costs associated with oil removal and damages resulting from oil spills, as well as

to provide annual funding to certain agencies for a wide range of oil pollution prevention and

response programs, including research and development. In the case of an oil spill, the OSLTF

makes it possible for the Federal Government to pay for removal costs up front, and then seek

full reimbursement from the responsible parties.

U.S. Code Title 19 (Customs Duties), section 1313 – Drawbacks and Refunds has been

administratively interpreted to allow drawback of the tax (a rebate of taxes paid when goods are

imported and then exported again) when products subject to this tax are exported.

Reasons for Change

The magnitude of the Federal response to recent disasters has reinforced the importance of the

OSLTF and the need to maintain a sufficient balance in the fund, particularly in order to

accommodate spills of national significance. The Superfund provides critical financing to

remedy damages caused by releases of hazardous substances.

The drawback of the petroleum tax is granted when the product is exported even though there is

no concomitant reduction in the risk of an oil spill or release of a hazardous substance. A

prohibition on the drawbacks of the tax will strengthen the finances of the OSLTF and Superfund

and remove an incentive to export crude and like products.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Proposal

The eligibility of the petroleum taxes dedicated to the OSLTF and Superfund for drawback

would be eliminated.

The proposal would be effective after December 31, 2023.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

IMPOSE DIGITAL ASSET MINING ENERGY EXISE TAX

Current Law

Current law does not provide tax rules specifically addressing digital assets, with the exception

of certain rules relating to broker reporting and reporting of cash transactions.

Reasons for Change

Digital asset mining is a process for validating transactions among holders of digital assets to

record and transfer cryptographically secured assets on a distributed ledger by, for example,

using high-powered computers to perform calculations to select the validator.

The computational effort involved in mining can be substantial and can therefore require a

correspondingly large amount of energy. The increase in energy consumption attributable to the

growth of digital asset mining has negative environmental effects and can have environmental

justice implications as well as increase energy prices for those that share an electricity grid with

digital asset miners. Digital asset mining also creates uncertainty and risks to local utilities and

communities, as mining activity is highly variable and highly mobile.

An excise tax on electricity usage by digital asset miners could reduce mining activity along with

its associated environmental impacts and other harms.

Proposal

Any firm using computing resources, whether owned by the firm or leased from others, to mine

digital assets would be subject to an excise tax equal to 30 percent of the costs of electricity used

in digital asset mining.

Firms engaged in digital asset mining would be required to report the amount and type of

electricity used as well as the value of that electricity, if purchased externally. Firms that lease

computational capacity would be required to report the value of the electricity used by the lessor

firm attributable to the leased capacity, which would serve as the tax base. Firms that produce or

acquire power off-grid, for example by using the output of a particular electricity generating

plant, would be subject to an excise tax equal to 30 percent of estimated electricity costs.

Except as otherwise provided by the Secretary, the term “digital asset” means any digital

representation of value which is recorded on a cryptographically secured distributed ledger or

any similar technology as specified by the Secretary.

The proposal would be effective for taxable years beginning after December 31, 2023. The

excise tax would be phased in over three years at a rate of 10 percent in the first year, 20 percent

in the second, and 30 percent thereafter.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

STRENGTHEN TAXATION OF HIGH-INCOME TAXPAYERS

APPLY THE NET INVESTMENT INCOME TAX TO PASS-THROUGH BUSINESS

INCOME OF HIGH-INCOME TAXPAYERS

Current Law

Individuals with modified adjusted gross incomes over a threshold amount are subject to a 3.8

percent tax on net investment income. The threshold is $200,000 for single and head of

household returns and $250,000 for joint returns. Net investment income generally includes: (a)

interest, dividends, rents, annuities, and royalties, other than such income derived in the ordinary

course of a trade or business; (b) income derived from a trade or business in which the taxpayer

does not materially participate; (c) income from a business of trading in financial instruments or

commodities; and (d) net gain from the disposition of property other than property held in a trade

or business in which the taxpayer materially participates. The net investment income tax (NIIT)

does not apply to self-employment earnings.

Self-employment earnings and wages are subject to employment taxes under the Self-

Employment Contributions Act (SECA) and the Federal Insurance Contributions Act (FICA),

respectively. Both SECA and FICA taxes apply at a rate of 12.4 percent for social security tax on

employment earnings (capped at $160,200 in 2023) and at a rate of 2.9 percent for Medicare tax

on all employment earnings (not subject to an earnings cap). An additional 0.9 percent Medicare

tax is imposed on self-employment earnings and wages of high-income taxpayers, above the

same NIIT thresholds of $200,000 for single and head of household filers and $250,000 for joint

filers, thus bringing the combined rate of Medicare tax to 3.8 percent for these taxpayers.

General partners and sole proprietors pay SECA tax on the full amount of their net trade or

business income, subject to certain exceptions. Section 1402(a)(13) of the Internal Revenue Code

provides that the distributive share of partnership income or loss of a limited partner is excluded

from SECA tax, although limited partners are subject to SECA tax on their section 707(c)

guaranteed payments from the partnership that are for services they provide to, or on behalf of,

the partnership. Because the statutory exclusion only refers to limited partners, questions have

arisen as to the meaning of this term and whether the limited partner exclusion might be

applicable to limited liability company (LLC) members. Some partners who claim to be limited

partner members may more accurately be described as general partners who would be subject to

SECA.

S corporation shareholders are not subject to SECA tax. However, tax law requires that those

shareholders who are owner-employees pay themselves “reasonable compensation” for services

provided, on which they pay FICA tax like any other employee. Nonwage distributions to

shareholders of S corporations are not subject to either FICA or SECA taxes.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Reasons for Change

Active owners of pass-through businesses, including S corporations and partnerships, are treated

differently for purposes of the NIIT, SECA tax, and FICA tax according to the legal form of their

ownership and the legal form of the payment that they receive. While general partners and sole

proprietors pay SECA tax on earnings from their businesses, S corporation owner-employees pay

employment taxes on only a portion of their earnings, and limited partners often pay little or no

SECA tax. Although the NIIT reflects an intention to impose the 3.8 percent tax on both earned

and unearned income of high-income taxpayers, certain income, specifically distributions to S

corporation shareholder-employees and distributions to limited partners who claim the statutory

exclusion for limited partners, escape the combined 3.8 percent tax from FICA or SECA and the

NIIT.

These inconsistencies in the treatment of pass-through business income are unfair and inefficient.

They distort choice of organizational form and provide tax planning opportunities for business

owners, particularly those with high incomes, to avoid paying their fair share of taxes.

The current system is also a challenge for the Internal Revenue Service (IRS) to administer. The

determination of “reasonable compensation” of S corporation owner-employees generally

depends on facts and circumstances and requires a valuation analysis that can be contested by the

taxpayer and increases the IRS’s cost of administration and enforcement. Uncertainty

surrounding the treatment of limited partners and LLC members who materially participate in

their businesses undermines the IRS’s ability to ensure payment of SECA tax and the NIIT.

Proposal

The proposal would expand the NIIT base to ensure that all pass-through business income of

high-income taxpayers is subject to either the NIIT or SECA tax.

In order to determine the amount of trade or business income that would be subject to the NIIT

under the proposal, the taxpayer would sum (a) ordinary business income derived from S

corporations for which the owner materially participates in the trade or business, (b) ordinary

business income derived from either limited partnership interests or interests in LLCs that are

classified as partnerships to the extent a limited partner or LLC member materially participates in

its partnership’s or LLC’s trade or business,

and (c) any other trade or business income to the

extent that such income is not subject to NIIT or SECA under current law (this sum referred to as

the “potential NIIT income”). The additional income that would be subject to the NIIT would be

a specified percentage of potential NIIT income. The specified percentage would start at zero

and would increase linearly to 100 as adjusted gross income rose from $400,000 to $500,000

($200,000 to $250,000 for married taxpayers filing separately). The threshold amounts given in

this paragraph would not be indexed for inflation.

For purposes of clause (b), limited partners and LLC members claiming to be limited partners who provide

services and materially participate in their partnerships and LLCs would be subject to the NIIT on their distributive

shares of partnership or LLC ordinary income to the extent that this income exceeds certain threshold amounts and

is not treated as self-employment income subject to SECA.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Material participation standards would apply to individuals who participate in a business in

which they have a direct or indirect ownership interest. Taxpayers are usually considered to

materially participate in a business if they are involved in it in a regular, continuous, and

substantial way. Often this means they work for the business for at least 500 hours per year. The

statutory exception to SECA tax for limited partners would not exempt a limited partner from the

NIIT if the limited partner otherwise materially participated.

The proposal would be effective for taxable years beginning after December 31, 2022.

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

INCREASE THE NET INVESTMENT INCOME TAX RATE AND ADDITIONAL

MEDICARE TAX RATE FOR HIGH-INCOME TAXPAYERS