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House-passed bill providing savings program for the disabled includes other tax law changes

The “Achieving a Better Life Experience (ABLE) Act of 2014” was passed by the House of Representatives on Dec. 3. While its main provisions would provide for a new type of tax-advantaged savings program for individuals with disabilities, it also contains other tax provisions, including those that contain revenue offsets.

The bill as passed was H.R. 647. Since then, the text of the ABLE Act has been added to the one-year extender package that was passed the same day; i.e., it has become Division B of H.R. 5771.

In this article, we discuss tax provisions in the ABLE Act other than those pertaining to the tax-advantaged savings program for individuals with disabilities. For a discussion of the ABLE Act provisions that pertain to the tax-advantaged savings program for individuals with disabilities, see ¶ 22. For a discussion of the one-year extender package, see ¶ 21.

Investment direction rule for 529 plans.Background. The Code provides that a program isn’t treated as a qualified tuition program (QTP, or 529 plan) unless it provides that any contributor to, or designated beneficiary under, the program may not directly or indirectly direct the investment of any contributions to the program (or any earnings on the contributions). (Code Sec. 529(b)(4)) However, in Notice 2001-55, 2001-39 IRB 299 as modified by Notice 2009-1, 2009-2 IRB 250, IRS announced that it expects that final regs will provide that a program won’t violate the above no-investment-direction rule if it allows a change in the investment strategy once per calendar year and/or upon a change in the designated beneficiary of the account.

House bill. The provision would allow Code Sec. 529 QTPs to permit investment direction by an account contributor or designated beneficiary up to two times per year. (Sec. 105)

Effective for: tax years that begin after Dec. 31, 2014.

Inland Waterways Trust Fund financing rate.Background. Subject to various exemptions, the inland waterways fuel tax is imposed on any liquid used during any calendar quarter by any person as a fuel in a vessel in commercial waterway transportation. The tax consists of two components, one of which is the 20 cents per gallon inland waterways trust fund financing rate. (Code Sec. 4042(b)(1), Code Sec. 4042(b)(2)(A))

House bill. The provision would increase this financing rate to 29 cents per gallon. (Sec. 205)

Effective for: fuel used after Mar. 31, 2015.

Certified professional employer organizations.Background. Under current law, when a business contracts with a professional employer organization (PEO) to administer its payroll functions, the business customer remains responsible for all withholding taxes with respect to its employees. Thus, even though the PEO pays the employees, the customer remains liable if the PEO fails to withhold or remit the taxes or otherwise comply with related reporting requirements.

House bill. The provision would authorize IRS to certify qualifying PEOs, which would allow the PEO to become solely responsible for the customer’s employment taxes. To be certified by IRS, a PEO would have to satisfy various requirements—such as reporting obligations, posting a bond in case the PEO fails to satisfy its employment tax withholding and payment obligations, and submitting audited financial statements—intended to ensure that the PEO properly remits wages and employment taxes. The PEO would also be subject to an annual fee of $1,000. (Sec. 206)

Effective for: wages paid by a certified PEO for services performed by an employee on or after January 1 of the first calendar year beginning more than 12 months after enactment (presumably, Jan. 1, 2016). IRS would be required to establish the PEO certification program not later than six months before this effective date (presumably, by July 1, 2015).

Exclusion of dividends from controlled foreign corporations from the definition of personal holding company income.Background. Under current law, the personal holding company tax, i.e., an additional 20% tax on personal holding company income (Code Sec. 541), applies to the retained passive income of corporations that are majority-owned by five or fewer individuals and more than 60% of whose income consists of certain types of passive income (Code Sec. 542) such as dividends, interest, and royalties—including dividends derived from an active trade or business of a foreign subsidiary (Code Sec. 543(a)(1)).

House bill. The provision would exclude dividends received from a foreign subsidiary from personal holding company income, though the dividends would remain subject to corporate income tax. (Sec. 207)

Effective for: tax years ending on or after the date of enactment.

Inflation adjustment for certain civil penalties.Background. Tax penalties generally do not contain inflation-adjustment provisions. Exceptions to this general rule apply under Code Sec. 6721(f) (failure to file correct information returns) and Code Sec. 6722(f) (failure to furnish correct payee statements), for which an inflation adjustment applies every five years.

House bill. The provision would index for inflation each calendar year the fixed-dollar civil tax penalties under current law for: (1) failure to file a tax return or to pay tax (Code Sec. 6651); (2) failure to file certain information returns, registration statements, and certain other statements (Code Sec. 6652); (3) failure of a paid preparer to meet certain obligations (Code Sec. 6695); (4) failure of a partnership (Code Sec. 6698) or an S corporation (Code Sec. 6699) to file a return; and (5) failure to file correct information returns (Code Sec. 6721(f)) and payee statements (Code Sec. 6722(f)). (Sec. 208)

Effective for: returns required to be filed after Dec. 31, 2014.

Increase in continuous levy. The effect of a levy on “specified payments” payable to or received by a taxpayer is continuous from the date the levy is first made until the levy is released, if the levy is approved by IRS. (Code Sec. 6311(h)(1)) Specified payments include certain government payments and certain amounts otherwise exempt from levy. (Code Sec. 6331(h)(2)) With exceptions not relevant here, this continuous levy attaches to up to 15% of any specified payment due to the taxpayer. (Code Sec. 6311(h)(1))

House bill. IRS would be authorized to continuously levy up to 30% of specified payments to a Medicare provider. (Sec. 209)

Effective for: payments made after 180 days after the date of enactment.

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