The House Ways and Means Committee on November 6, 2017, adopted 24-16 Chairman Kevin Brady's (R-TX) Amendment to the Chairman's Mark of the "Tax Cuts and Jobs Act." The amendment makes a number of changes to the anti-base erosion provisions of the Mark, as well as other elements, in an effort to solidify support for the bill.

The amendment was presented about 5 1/2 hours into the Committee's markup of the bill. The markup will resume at 10 a.m. on Tuesday, November 7, and is expected to last until Thursday. An initial Amendment in the Nature of a Substitute was released last week and, technically, this evening's changes were to that substitute amendment.

International tax

Tax on income with a high foreign rate of return (aka minimum tax)

For purposes of the so-called minimum tax on high return income, the amendment

— Excludes from the minimum tax broker dealer income that qualifies for the active financing exception to subpart F, thus conforming the exception for broker dealers to the exceptions that were already included in the original Chairman's Mark for insurance companies, finance companies and banks

— Expands the exclusion of "commodities gross income" for corporations to include the disposition of commodities which are produced or extracted by a partnership (in which a corporation is a partner) and the disposition of property that gives rise to such income

Excise tax on payments to affiliates

For purposes of the proposal in the Chairman's mark to impose an excise tax on payments made to foreign affiliates (which only applies when the effectively connected income election is made), the amendment:

— Increases the allowable deduction for deemed expenses so that "routine returns" are not taxed

— Excludes payments for the acquisition of securities (within the meaning of Section 475(c)(2)) from income.

— Changes the method of determining net income to reflect foreign profit margins rather than global profit margins

— Allows a foreign tax credit for a portion of the foreign taxes paid

Transition tax on deferred foreign earnings

The amendment clarifies the application of Section 78 for the gross up amount to be included as a result of foreign taxes paid by the foreign corporations.

Other changes

Carried interest — Chairman Brady earlier previewed one of the other changes, saying on CNBC that he would include a "holding period on carried interest to make sure really it's focused on those long-term, traditional real estate partnerships." The amendment would recharacterize, from long-term capital gain to short-term capital gain, certain partnership interests held in connection with the performance of services by imposing a three-year holding period for the interest.

The rule would apply to services conducted on a regular, continuous and substantial basis which consists of raising or returning capital and either investing in or developing securities, commodities, real estate, cash or cash equivalents, and derivative contracts. It would give Treasury the ability to issue a special rule which would not apply the general rule to income attributable to any asset not held for portfolio investment on behalf of third party investors.

Colleges and universities — The amendment would also clarify that the proposed 1.4% excise tax on the net investment income of private colleges and universities would only apply if the fair market value of the institution's assets (other than those assets used directly in carrying out its exempt purpose) is at least $250,000 per student, up from $100,000 in the previous version.

Nonqualified deferred compensation — The amendment would modify the inclusion of income from nonqualified deferred compensation so that certain employees of non-public companies who receive stock options can elect to defer income for up to five years after exercise of the option.

Other issues — The amendment would also preserve the treatment of self-created musical compositions and copyrights in musical works as capital assets. An extension through 2022 of the exclusion from income for up to $5,000 of employer-provided dependent-care assistance is included (an immediate repeal of the exclusion had been included in the Chairman's Mark), along with Earned Income Tax Credit enforcement provisions.

Remarks

Chairman Brady said his amendment would not be the last effort to make improvements to the bill, and that work will continue to deliver more and better-targeted relief to small businesses, and to address unintended consequences of certain insurance provisions in the Chairman's Mark.

He said health tax-related measures are not included as part of the tax reform effort because work continues with Democrats on "commonsense, temporary, and targeted relief from many of these taxes to be acted on in the House before the end of the year." These measures are expected to include relief from the medical device tax, the health insurance tax, and the tax on over-the-counter medications, Brady said.

The markup session included a very brief "walk-through" of the bill by Joint Committee on Taxation Chief of Staff Thomas Barthold, and Democratic members called attention to areas of concern. Rep. Mike Thompson (D-CA) criticized the proposed elimination of the deduction for personal casualty losses except for those affected by recent hurricanes, arguing that those affected by wildfires are not being treated fairly. Elimination of the provision is the "wrong message to send to people who have just had their entire life turned upside down," Thompson said. Chairman Brady said he expects additional disaster tax relief legislation this year and said he wants to "work to ensure that they can write that off."

Rep. John Larson (D-CT) objected to the proposed elimination of the deduction for out-of-pocket teacher expenses that he said was done to make other areas like the estate tax more generous. Democratic members also expressed concern over the proposed modification to the state and local tax deduction, modification of the mortgage interest deduction, repeal and modification of certain education incentives, repeal of the adoption credit, and the repeal of the deduction for out-of-pocket medical expenses. Republican members made statements asserting that the bill promotes simplicity, fairness, and freedom for American taxpayers.

Brady's amendment and a summary are attached.

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ATTACHMENTS

Chairman Brady Amendment

Summary of Amendment