This the third and final look at the draft Tax Reform Act of 2014. Just to remind you all the tax increase/decrease numbers apply to years 2014 to 2023 unless indicated and they are all scored by the Joint Committee on Taxation (JCT).

This is a continuation of “TITLE III - Business”

Subtitle F - Insurance Reforms

This part is all pretty technical but there are a number of sections that raise significant tax “revenue”:

Section 3501: The exception to pro rata interest expense disallowance for corporate-owned life insurance is restricted to 20% owners (the provision is part of Obama’s 2014 budget). Tax increase $7.3B.

Section 3504: Change to the method of computing tax reserves. Tax increase $24.5B.

Section 3505: Adjustment in the method of computing reserves. Tax increase $2.5B.

Section 3508: Modification of proration rules for property and casualty companies. Tax increase $2.9B.

Section 3509: The special tax exemption rules that apply to Blue Cross and Blue Shield and other similar organizations is repealed. Tax increase $4B.

Section 3510: Modification of discounting rules for property and casualty insurance companies. Tax increase $17.9B.

Section 3512: Capitalization of certain policy acquisitions. Tax increase $11.7B.

Subtitle G - Pass-Thru and Certain Other Entities

Part 1 – S Corporations

The intention is to encourage C corporations to elect S corporation status.

Section 3601: The reduced recognition period of five years for built-in gains is made permanent. Tax decrease $3B.

Section 3602: Modification to S corporation passive investment income rules. Tax decrease $3.6B.

Part 2 – Partnerships

The intention is to clamp down on partnerships being used as tax avoidance vehicles.

Section 3620: The publicly traded exception is restricted to mining and natural resource partnerships.  Tax increase $4.3B.

Section 3621: Certain partnership interests held in connection with performance of services will be subject to a rule that characterizes a portion of capital gain as ordinary income. Tax increase $3.1B.

Section 3622: The partnership audits and adjustments processes are streamlined. Tax increase $13.4B. [Gotta love that “streamlining”.]

Part 3 – REITS and RICs

“The REIT rules were not intended to facilitate the erosion of the corporate tax base by allowing operating companies to convert from taxable C corporations into REITs.”

Section 3631: Prevention of tax-free spinoffs involving REITs. This provision overturns a 2001 IRS ruling. Effective February 26, 2014. Tax increase $5.9B.

Subtitle H - Taxation of Foreign Persons

Section 3701: US insurance companies cannot deduct reinsurance premiums paid to a foreign company not subject to US taxation. Tax increase $8.7B.

Section 3704: Modification of limitations on earnings stripping. Tax increase $2.9B.

Section 3705: Limitations on treaty benefits for certain deductible amounts. Tax treaty arrangements that could reduce withholding between entities and foreign parent companies may be limited/reduced. Tax increase $6.9B.

Subtitle I – Provisions related to Compensation

Part 1 – Executive Compensation

Section 3801: Nonqualified deferred compensation for highly compensated employees to be taxable as soon as there is no substantial risk of forfeiture. Current law applies to arrangements in effect until the tax year before 2023. Tax increase $9.2B.

Section 3802: Modification to limits on excessive executive compensation. The $1M exception for commissions/performance based pay is repealed.. Also the definition of “covered person” is revised. Tax increase $12.1B.

Section 3803: Excise tax of 25% on excess executive compensation in tax-exempt organizations. Applies to all remuneration to the top five highest paid in excess of $1M. Tax increase $4B.

Part 2 – Worker Classification

Section 3811: Clarification of the safe harbor rule preventing the IRS from retroactive reclassification of an independent contractor if good faith efforts were made to qualify for the safe harbor. Tax decrease $2.6B.

TITLE IV – Participation Exemption System For Taxation of Foreign Income

Subtitle A – Establishment of Exemption System

Section 4001: Deduction for dividends received by domestic corporations from certain foreign corporations. Taxing US corporations on foreign earnings of foreign subsidiaries when earnings are distributed is replaced by a dividend-exemption system. 95% of the dividend would be exempt from US tax if paid to US corporate shareholders that owns more than 10% or more of the foreign corporation. Tax decrease $212B.

Section 4003: Treatment of deferred foreign income upon transition to participation exemption system of taxation. US shareholders of at least 10% of a foreign subsidiary will include in income for their last tax year beginning before 2015 their pro-rata share of post-1986 earnings and profits (E&P) of the foreign subsidiary that have not been subject to US tax. The portion of E&P which is cash/cash equivalents will be taxed at 8.75% while that reinvested at 3.5%.

The money raised from this one-time tax ($126.5B) will be allocated to the Highway Trust Fund, 80% to the Highway Account and 20% to Mass Transit Account.

Total tax increase $170.4B.

Section 4004: Look-thru rule for controlled foreign corporations made permanent beginning after 2013. Tax decrease $13.1B.

Subtitle B – Modifications to Foreign Tax Credit

The cost of these sections are mostly included in Section 4001.

Subtitle C – Rules Related to Passive/Mobile Income

Part 1 – Modification of Subpart F Provisions

The cost of the following sections are included in Section 4211:

Section 4201:  Subpart F income to only include low-taxed foreign income.

Section 4202: Foreign base company sales income.

Section 4203: Inflation adjustment for de minimis exception for foreign base company income.

Section 4204: The temporary “active financing income” exception for banking, finance or insurance is extended for five years for foreign tax of 12.5% or greater. Tax decrease $18.4B.

Part 2 – Prevention of Base Erosion

Section 4211: The US parent of a foreign subsidiary is now subject to a new category of Subpart F income, “foreign base company intangible income” (FBCII). Tax increase $115.6B (includes 4201-4203).

Section 4212: The deduction of net interest expense to be reduced. Tax increase $24B.

TITLE V – Tax Exempt Entities

Subtitle A – Unrelated Business Income Tax

Section 5002: Any tax-exempt organization that licenses/trademarks/copyrights its name will be subject to unrelated business income tax (UBIT) on such income. Tax increase $1.8B.

Section 5003: Net unrelated taxable income is to be calculated separately for unrelated businesses. Any loss is to be offset against income from that business and losses will be subject to net operating loss provisions (carried back two years and forward twenty). Tax increase $3.2B.

Subtitle C – Excise Tax

Section 5204: Simplification of tax on private foundation investment income to be reduced to 1%. Tax decrease $1.6B.

Section 5206: A 1% excise tax to be applied to the net investment income of private colleges/universities on assets not tied directly to their educational purposes. Tax increase $1.7B.

Subtitle D – Requirements for Organizations Exempt from Tax

Section 5304: Type II and Type III supporting organizations are repealed. Tax increase $1.4B.

TITLE VI – Tax Administration and Compliance

Subtitle A – IRS Investigation – Related Reforms

An attempt to clean up the IRS coming out of the National Taxpayer Advocate’s Annual Report to Congress and 501(c)4 issues.

Subtitle B – Taxpayer Protection and Services Reform

Section 6101: Truncated SSNs on W-2s and 1099s

Subtitle D – Compliance Reforms

Section 6304: Reform of rules for qualified tax collection contracts with private debt collectors. Tax increase $ 4.4B.

TITLE VII – Excise Taxes

Section 7001: Repeal of the medical device excise tax. Tax decrease $29.5B.

Section 7004: Quarterly excise tax on systematically important financial institutions (SIFI) of 0.035%of total consolidated assets greater than $500B. After 2015, indexed to increases in GDP. Tax increase $86.4B.

That’s the end of the section-by-section review of draft TRA of 2014. Later, I’ll put down on paper some of my thoughts on the tax system.