Originally published on Forbes.com.
We are continuing to enjoy our pleasant tour of the Tax Cuts And Jobs Act Conference Report. Skip the first 500 pages and then scroll to where the pagination restarts and then to Page 81. For more instructions, you can look here.
Where Are The College Football Fans?
Denial of charitable deduction for college athletic event seating rights – The provision amends section 170(l) to provide that no charitable deduction shall be allowed for any amount described in paragraph 170(l)(2), generally, a payment to an institution of higher education in exchange for which the payor receives the right to purchase tickets or seating at an athletic events.
It is amazing that this made it through the Conference Committee. I wrote about this in a review of Billion Dollar Ball by Gilbert Gaul who calls college football an unlikely charity.
If you live inside the bubble of college football, writing a large check to lock down a seat at your favorite college stadium and then getting to deduct 80 percent of the amount from your taxes, feels normal. But if you happen to reside outside that zip code, the seat donation scheme probably feels strange, even wrong.
Didn’t have this in TRA 1986. The Gipper would not have signed it.
Don’t Mess With The Teachers
Teachers get an above the line deduction for school supplies that they purchase. It is capped at $250 per year. I always thought it was a silly provision. We’re not going to pay for the supplies you need to do your job, but if you buy them yourself, we will kick back some tax money so you can buy a cup of coffee every other week or so. The House wanted to take that away and it caused quite a stir. So the Conference instead of taking it away has doubled it at least for a while. So maybe it is a cup of coffee every week now.
Sadly it seems like they took it out on bicycle riders who could exclude up to $20 per month in employer reimbursements, but will be losing that if the bill passes.
Letters Of Marque And Reprisal
Congress is still not onto the idea that funding the IRS better would bring in more money, but there is something in the bill for the bounty hunters. In order to get a good reward you have to help them bring in two million bucks and there were things that the IRS said did not count toward the threshold like FBAR penalties. Now they do.
Like-kind Exchange
I was really pleased that they left 1031 intact for real estate. Its repeal would create a crisis in the market for net lease commercial real estate, which is fueled by 1031 money. But the fact that they eliminated it for everything else, makes me nervous.
Another Gimmick Gone
Employers can deduct employee achievement awards that don’t have to be recognized as income by the employee. Hanging on the wall of my office next to my certificate for having passed the CPA exam on the first sitting (Not bragging. Just saying.) is a wooden plaque with a much younger version of myself who was named Employee of the Month – February 1978. When GM Teddy Mingola presented the award he said something about night auditors being weird. I cherish the thing, but employers figured out that maybe a gift certificate to a place like Spags or Walmart where you can buy just about anything would be even more appreciated. None of that anymore if the bill passes.
The Senate amendment adds a definition of “tangible personal property” that may be considered a deductible employee achievement award. It provides that tangible personal property shall not include cash, cash equivalents, gift cards, gift coupons or gift certificates (other than arrangements conferring only the right to select and receive tangible personal property from a limited array of such items pre-selected or pre-approved by the employer), or vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and other similar items. No inference is intended that this is a change from present law and guidance.
Technical Terminations
There is some simplifications here and there. One of the things the bill does is end the rule that partnerships are terminated for income tax purposes when there is a 50% shift in ownership. I’m going to miss that one. Most people are mystified by that and it gave me an opportunity to show off my expertise. So it goes. I did note that the footnote in the discussion refers to McKee’s Federal Taxation of Partnerships and Partners. Christians have their Bible. Corporate tax geeks have Bitker and Eustice and we partnership geeks have McKee. I am glad to see that Mr. McKee is still with us. Boris Bitker died in 2005.
Sexual Harassment
If you ever wonder why the Internal Revenue Code is so long, here is why. It is the Swiss Army Knife of policy. This provision was thrown in by the Senate and its inclusion in the Conference agreement is pretty irresistible.
Under the provision, no deduction is allowed for any settlement, payout, or attorney fees related to sexual harassment or sexual abuse if such payments are subject to a nondisclosure agreement.
This is the third time in my lifetime that sexual harassment has been in the forefront of national consciousness. The first time was in the seventies when second wave feminists started getting everybody looking at the way rape is treated. Then there were the Clarence Thomas hearings which had a salutary effect on office behavior. It would have been much more effective if all those seminars had been put on by retired parochial school nuns. I think those women were proto-radical feminists and they knew how to suppress bad male behavior. Now we are having another round. Don’t get me wrong. I think it is a good thing that abuse of power, which is the focus this time, is being looked at. I just don’t think a special tax provision is the way to deal with it, particularly one that is not that well thought out.
If settlements are not deductible, they will probably be smaller and maybe sometimes the victim would just as soon there not be disclosure, but can use nondisclosure to get a larger settlement. And if it is bad to settle sexual harassment on a non disclosed basis, why is it OK to settle other wicked things that companies do without disclosure? Like cheating customers out of money or injuring employees in other ways.
Insurance Industry
There are a host of changes affecting the insurance industry. I can’t figure them out. I have studiously avoid Subchapter L for over three decades. As it happens though one of my best friends from high school (We bonded over Jean Shepherd, whose nightly broadcasts on WOR warped a generation of nerdy adolescents in the metro New York area) is an expert in insurance taxation . Here is what my friend has to say about the changes in the bill.
The tax bill represents a major shift in the federal government’s approach to the taxation of life insurance companies. Since 1984, companies have had to measure their income using “federally prescribed” reserve methods. That is, the tax code dictated the interest rates and methods to be used in measuring these liabilities. The economic effect of these rules was significant back in 1984 when interest rates were high. (Using a high interest rate in measuring a future liability can seriously reduce the amount of the deduction.) Now that interest rates are low, the impact of the requirement to use “federally prescribed reserves” is typically less than a 2% reduction for most policy reserves The tax bill drops the concept of “federally prescribed reserves” so that reserves will now be computed by the rules prescribed by the NAIC. Under the new tax bill, the state insurance regulators (rather the IRS) will be the ones who have control over the way this expense item is measured.
Although the new law makes a big change in that it hands control of the rules for the computation of tax reserves to the NAIC, it is intended to be revenue neutral. To accomplish this, policy reserves will be subject to a haircut of about 7%. The purpose behind the reserve haircut is to keep the tax cost to the insurance industry the same as it was under current law. Thus, while other industries will enjoy a tax savings from the drop in the corporate rate from 35% to 21%, insurance company taxes may stay about the same. (I have not crunched any numbers but that’s the intention.)
There are a number of other changes in the bill that affect insurers but they were again intended mostly to keep the revenue impact neutral. The industry should be happy with the changes.
I should add that I got a comment from my other high school best friend. The three of us ate lunch together pretty much every school day for three years and had many other adventures. The other guy who is something of a curmudgeonly libertarian of sorts had this to say.
How ’bout Dear Donald, thanks for stealing less of my hard earned paycheck next year.
There is more to that, but, you know how it is with contributor standards and all.
There Is More
This seems like a good place to stop. There will be at least one more post in the series. Remember for a comprehensive treatment of the provisions that affect regular people, check out Kelly Erb.
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