- Tax legislation, appropriations, politics and redistricting
- Personnel issues
- Johnson Amendment amicus showdown
- Executive Order: Democratizing Access to Alternative Assets for 401(k) investors
The IRS announced on August 7 that it will not adjust 2025 withholding tables to take into account changes made by the One Big Beautiful Bill Act. Taxpayers receiving tax breaks from the bill, such as the child tax credit, tips and overtime will instead have lower tax bills or larger refunds when filing their 2025 tax returns in early 2026.
Republicans continue to discuss enacting another reconciliation bill with significant tax provisions towards the end of the year. There is some uncertainty about whether congressional rules allow Congress to pass another reconciliation bill this fiscal year given that the OBBBA addresses all three of the issues that can be included in reconciliation: spending, revenue, and the debt limit. But that is probably a moot point because the fiscal year will end at the end of September, several weeks after Congress returns from August recess. The first formal step in the process is to pass another budget resolution, although Republicans would likely first forge agreement on the rough parameters of the bill they would like to enact pursuant to that resolution.
But Congress and the White House will likely spend all of September attempting to reach a deal on funding the government. Congress has made more progress this year than in the recent past – the Senate passage of three of the twelve appropriations bills before August recess was the first time the Senate has passed any of the twelve bills before September since 2018. But there remain significant roadblocks. The Senate will also likely engage in a bitter partisan battle over changing the rules under which a President’s nominees are considered. A continuing resolution through the first quarter of next year seems like the most viable path, although even that may not be doable. The White House proposing another recissions package may result in Democrats refusing to agree to any deal.
IRS funding and the IRA
According to a report by the Treasury Inspector General for Tax Administration (TIGTA), the IRS still has $23.8 billion of the $80 billion funding boost it was given in the 2022 Inflation Reduction Act. The IRS has spent about $13.8 billion of the funding, while Congress subsequently rescinded about $40 billion. As of April 21, the IRS had canceled 93 contracts entered into with IRA funding.
Personnel
On Friday, August 8, IRS Commissioner Billy Long, in office since June 12, announced on Twitter that he will become Ambassador to Iceland. Treasury Secretary Bessent will become acting IRS Commissioner.
The IRS has reduced its workforce by 25% since February, according to TIGTA. In February, the IRS had about 103,000 employees. As of May, 77,428 employees remained. The Small Business/Self Employed Business unit had the largest decrease in the percentage (35%) and number of employees (8,604).
The Trump administration has stated that it is determined to significantly reform the IRS, particularly by upgrading its technology.
Senators Grassley (R-IA) and Curtis (R-UT) are blocking three of President Trump’s nominees for positions in the Treasury Department pending Treasury issuing guidance regarding the solar and wind tax credits pursuant to President Trump’s Executive Order of July 7. Senator Grassley announced in the August 1 Congressional Record:
“Mr. President, today, I placed a hold on three Department of the Treasury nominees. The nominees are Brian Morrissey, Jr., of Virginia, to be General Counsel for the Department of the Treasury; Francis Brooke, of Virginia, to be an Assistant Secretary of the Treasury [for International Trade and Development]; and Jonathan McKernan, of Tennessee, to be an Under Secretary of the Treasury [for Domestic Finance]. During consideration of the One Big Beautiful Bill Act, I worked with my colleagues to provide wind and solar an appropriate glidepath for the orderly phase-out of the tax credits. Ultimately, Congress enshrined in statute a 12-month transition period based on when projects “begin construction.”
What it means for a project to “begin construction” has been well established by Treasury guidance for more than a decade. Moreover, Congress specifically references current Treasury guidance to set that term’s meaning in law. This is a case where both the law and congressional intent are clear.
The Department of the Treasury is expected to issue rules and regulations implementing the agreed upon phase-out of the wind and solar credits by August 18, 2025.
Until I can be certain that such rules and regulations adhere to the law and congressional intent, I intend to continue to object to the consideration of these Treasury nominees.”
On August 7, President Trump nominated Chairman of the Council of Economic Advisers (CEA), Stephen Miran to the Federal Reserve Board of Governors to fill the seat of Adriana Kugler who announced her resignation last week. The term expires on January 31, 2026. The next scheduled vacancy on the Board is not until September 7, 2027. Chairman Powell’s term as Chairman (although not as a governor) is set to expire on May 15, 2026.
Miran’s November 2024 critique of post-Cold War American international economic policy, “A User Guide to Restructuring the Global Trading System,” has helped shape President Trump’s trade agenda. Miran has been a top advocate of the OBBBA, leading the CEA’s economic analysis of the bill. Miran has also strongly argued that President Trump’s tariffs should not dissuade the Fed from lowering interest rates.
President Trump has said that he is considering Kevin Warsh, Kevin Hassett and two other unnamed candidates for Federal Reserve Chair, although recent reports indicate he has expanded the search. Picking a person currently not on the Board would require such person to be nominated and confirmed to fill the seat expiring on January 31, 2026, for which Miran was nominated – unless another Board member resigns, which appears unlikely. Alternatively, President Trump could ultimately decide to nominate Miran for a full term, and then nominate Miran or another existing Governor for Chair.
Executive Order: Democratizing Access to Alternative Assets for 401(k) investors
On August 7, President Trump signed an Executive Order to facilitate 401(k) plans offering alternative asset funds as investment options. The Order includes six classes of alternative assets: (1) private market equity or debt holdings not traded on public exchanges, including where the investment managers take an active management role; (2) real estate interests; (3) actively managed vehicles investing in digital assets; (4) commodities; (5) infrastructure development project financing; and (6) lifetime income investment strategies, including longevity risk-sharing pools.
Employer-sponsored defined contribution plans, such as 401(k)s, and defined benefit plans are subject to myriad rules under the Tax Code and ERISA. In general, specific laws and regulations do not dictate what investment options plan trustees may include in a plan (other than rules against prohibited transactions, such as self-dealing). The decision by trustees as to what investment options to offer in a 401(k) plan is subject to the general fiduciary obligations governing plan trustees under ERISA.
As noted in the Executive Order, in June 2020, the Department of Labor (DOL), issued an Information Letter concluding that a 401(k) plan offering a “professionally managed asset allocation fund with a private equity component” as an investment option would not violate fiduciary duties if the trustees properly weighed the risks and benefits of offering such option. In December 2021, DOL issued a Supplemental Statement to the 2020 Information Letter striking a very different tone, although not a formal retraction. The Supplemental Statement noted that the 2020 guidance did not affirmatively recommend inclusion of alternative assets as investment options and highlighted the potential downsides (but not upsides) of such investments discussed in the Information Letter. The 2021 guidance provides that fiduciaries of a large 401(k) plan also serving as fiduciaries of an affiliated defined benefit plan already using alternative assets may be suited to analyze those investments for the 401(k) plan, but “cautions against application of the Information Letter outside of that context. Except in this minority of situations, plan-level fiduciaries of small, individual account plans are not likely suited to evaluate the use of PE investments in designated investment alternatives in individual account plans.”
President Trump ordered the Secretary of Labor to reexamine DOL’s fiduciary guidance, including whether to rescind the 2021 guidance, within 180 days. The Secretary of Labor shall also “seek to clarify DOL’s position on alternative assets and the appropriate fiduciary process associated with offering asset allocation funds containing investments in alternative assets under ERISA.” The Secretary shall also propose “rules, regulations or guidance” to clarify fiduciary duties associated with offering alternative asset investment options to participants, which “may include calibrated safe harbors.”
The DOL Secretary is to consult with the Secretary of Treasury, the SEC, and other Federal regulators in carrying out the order, including the possibility of other Federal regulators carrying out parallel regulatory changes.
The Executive Order blames “a combination of regulatory overreach and encouragement of lawsuits filed by opportunistic trial lawyers” for “stifl[ing] investment innovation” and depriving 401(k) plan participants of the opportunity to invest in asset classes utilized by public pension plans and other institutional investors.
A recent Committee on Education and the Workforce subcommittee hearing focused on the proliferation of private lawsuits alleging violations of fiduciary duties by defined contribution plans and claims of wrongful collusion by DOL under President Biden with plaintiffs’ attorneys to advance those lawsuits.
Plan fiduciaries may be reluctant to include alternative asset investment options even if DOL provides more favorable guidance, especially if such guidance is informal. But DOL issuing regulations (after undergoing formal notice and comment rulemaking) providing safe harbors as to what steps fiduciaries should take in offering such investment options might lead to inclusion of such options in more plans. DOL will want to carefully consider how to formulate such guidance in a manner that would allow trustees who are acting properly to avoid getting dragged into costly litigation.
Johnson Amendment litigation update
The joint motion filed by the IRS and the plaintiffs in National Religious Broadcasters Association et al. v. Long with regards to the Johnson Amendment’s applicability to houses of worship is still outstanding, with Judge J. Campbell Barker of the United States District Court, Eastern District of Texas, yet to rule. The motion to intervene by the Americans United for Separation of Church and State is also still outstanding. On August 7, Judge Barker granted motions by a string of organizations for leave to file amicus briefs in the case.
Proposed Reg. Sec. 1.132-4: “Line of business” update
On Tuesday, August 5, Treasury and the IRS released proposed regulations addressing the line of business requirement for no-additional-cost services and qualified employee discounts. Section 132(a)(1) and (2) exclude from gross income any fringe benefit qualifying as a no-additional cost service or a qualified employee discount, respectively.
An employee is only eligible for either tax benefit if the employee is performing services for the employer in the same “line of business” as the service or (in the case of the qualified employee discount) property is offered for sale to customers.
The Deficit Reduction Act of 1984 added Section 132 to the Tax Code. The House Committee Report provides that Treasury “may” use the Standard Industrial Classifications (SIC), which was developed by the Office of Management and Budget in 1938, to categorize lines of business.
Treas. Reg. Sec. 1.32-4(a)(2)(i), issued in 1989, provides that an employer’s line of business is determined by reference to the Enterprise Standard Industrial Classification Manual (ESIC Manual), a supplement to the SIC that was last updated in 1974.
Under the regulations, an employer is considered to have more than one line of business if the employer offers for sale to customers property or services in more than one two-digit classification in the ESIC Manual. However, there are certain circumstances under which more than one line of business will be treated as a single line of business. More specifically, this favorable treatment applies if (1) it is uncommon for any of the separate lines of business to be operated without the others; (2) it is common for a substantial number of employees to perform substantial services for more than one line of business so that determination of which employee works at which line of business would be difficult; or (3) if the employer has more than one line of business in retail operations on the same premises, but the lines of business would be considered one line of business if the merchandise were offered for sale at a department store.
The proposed regulations would replace the ESIC Manual with the North American Industrial Classification System (NAICS), which the OMB developed with Canada and Mexico starting in 1992, and which is updated every five years. NAICS is used by the IRS for other purposes under the Tax Code, including Form 1120 and Form 1040, Schedule C. The four-digit classification under the NAICS would be the determining factor in what constitutes a line of business.
The proposed regulations would also amend the existing regulations summarized above to replace “department store” with “general merchandise store, including warehouse clubs and super centers.”
The proposed regulations are proposed to be effective on the date final regulations are published in the Federal Register and apply to taxable years beginning on or after that date.