Summary
- House to consider health care bill after Senate rejects Republican and Democratic alternatives; Congress to leave for the year at end of week
- Treasury and the IRS issue final and proposed regulations under Section 892: foreign government income
- House Ways and Means Committee votes to favorably report several tax bills
- Judge denies AUCS Motion to Intervene on Johnson Amendment in National Religious Broadcasters
Congress Resumes Appropriations and Health Care Tax Negotiations
Last week, the Senate held votes on a Democratic proposal to extend the increased tax credits for Affordable Care Act (ACA) health insurance premiums enacted in the 2021 American Rescue Plan Act, and on a Republican proposal to provide government payments to health savings accounts for certain ACA participants. Neither proposal attained the 60 votes needed, with the vote on each being 51-48.
The House Rules Committee is scheduled to consider a health care bill on Tuesday, which was released on Friday. The bill addresses a range of health care policy issues, including giving employers additional options with regards to providing employees with health insurance, and changes to the rules applicable to pharmacy benefit managers. A House floor vote on the bill is expected later in the week. The bill does not include the ACA tax credits. It is expected that the bill will be significantly amended, perhaps to include the credits.
President Trump indicated last week that it is unlikely Republicans will attempt a second budget reconciliation bill this Congress next year. However, some House Republicans, including Budget Chairman Arrington (R-TX), said that it is too early to rule out such a bill, highlighting health care as an issue they would like to address. Congress is scheduled to recess at the end of the week until next year.
Final and Proposed Regulations Under Section 892: Foreign Government Investment Income
On December 12, Treasury and the IRS issued final and proposed regulations under Tax Code section 892 addressing when foreign governments are treated as engaged in commercial activities and when entities are classified as their controlled commercial entities (CCEs). The guidance addresses portions of proposed regulations issued in 1988, 2011 and 2022 and includes several notable changes relevant to sovereign investment structures.
Section 892 generally exempts certain income of foreign governments from U.S. taxation, unless the income is derived from commercial activity or received from a CCE or its disposition. There are many issues left unaddressed by the statute, starting with the definition of the term “foreign government.”
This S&C memo describes the notice in more detail.
OECD Tax Pillars
Negotiations are continuing at the OECD on the details of the side-by-side agreement by the G-7 with regards to the treatment of the United States under Pillar 2, and how the agreement will be implemented. The safe harbor largely exempting American-parented companies from the UTPR ends at the end of 2025. It was reported last week that China, Estonia, Poland and Czechia are objecting to an agreement that would provide separate treatment to the United States. Nonetheless, Treasury officials expressed optimism that a deal will be reached this year.
Soroban Opening Brief in Limited Partner Exception Case in Second Circuit
Soroban Capital Partners LP, a New York hedge fund management business organized as a Delaware limited partnership, filed its opening brief in its challenge to the Tax Court’s opinion in Soroban, 161 T.C. 310, which addressed for the first time how Tax Code section 1402(a)(13) applies to state law limited partners. In that opinion, the Tax Court held that state law classifications were not controlling and that Congress intended the phrase “limited partners, as such” to refer to passive investors. Furthermore, the Tax Court held that a functional analysis was required to determine whether a partner in a state law limited partnership is subject to the exception. Soroban is one of three pending appeals in the limited partner exception context (the others are Sirius Solutions in the Fifth Circuit and Denham Capital Partners in the First Circuit).
House Ways and Means Committee Votes to Favorably Report Several Tax Bills
On December 10, the Committee on Ways and Means marked up and voted to favorably report nine separate bills on tax, trade and Social Security. Most of the bills received broad bipartisan support in Committee. The three tax bills were H.R. 6506, H.R. 6495 and H.R. 4242. At the beginning of the mark-up session, Chairman Smith (R-MO) and Ranking Member Neal (D-MA) delivered remarks addressing the announcements by Reps. Schweikert (R-AZ), Arrington (R-TX) and Doggett (D-TX) that they will not be running for re-election.
H.R. 6506: The Taxpayer Due Process Enhancement Act
The Taxpayer Due Process Enhancement Act, H.R. 6506, was introduced by Reps. Nathaniel Moran (R-TX) and Terri Sewell (D-AL) to strengthen procedural protections for taxpayers in disputes with the IRS. The bill would amend the Tax Code to provide taxpayers with enhanced due process rights by, among other things, suspending the statute of limitations for filing refund or credit claims while administrative collection proceedings are ongoing and prohibiting the IRS from applying overpayments to disputed tax liabilities until required due process protections have been satisfied. It also seeks to expand the jurisdiction of the U.S. Tax Court so that taxpayers can obtain pre-enforcement review of certain IRS determinations that affect their rights and liabilities before the IRS takes collection actions, ensuring that disputes are addressed on their merits through fair administrative and judicial review.
The legislation also would mandate greater transparency and documentation from the IRS. Prior to initiating significant enforcement actions such as levies, liens or seizures, the IRS would be required to provide taxpayers with more detailed notices explaining the factual and legal basis for its actions, the taxpayer’s rights and the applicable procedures for appeal. By clarifying notice requirements and improving access to administrative and judicial review, the bill aims to reduce improper or premature enforcement activity, enhance taxpayer confidence in IRS processes, and ensure that taxpayers have meaningful opportunities to contest IRS decisions. The bill’s provisions reflect a focus on procedural fairness and due process in federal tax administration.
The Amendment in the Nature of a Substitute (AINS) from Chairman Smith was clerical. The Committee voted to favorably report the AINS by a 41-0 vote.
H.R. 6495: The Taxpayer Notification and Privacy Act
The Taxpayer Notification and Privacy Act, H.R. 6495, was introduced by Reps. Gregory W. Steube (R-FL) and Jimmy Panetta (D-CA). The bill seeks to overhaul how the IRS communicates with taxpayers and handles taxpayer information. It would require the IRS to provide clearer, more detailed notices before initiating audits, assessments, collections or enforcement actions, including specific explanations of taxpayers’ rights, the legal and factual basis for IRS determinations, and standardized deadlines for responses. The legislation also strengthens privacy protections for taxpayer data, tightening restrictions on internal access and the disclosure of tax information to external parties, and establishing procedures for documenting and sharing the evidence underlying IRS decisions before significant compliance actions. In addition, H.R. 6495 aims to enhance transparency and appeals processes by mandating comprehensive documentation prior to enforcement and clarified instructions on administrative appeal options, along with compliance certification requirements for the IRS before levies, liens and other enforcement actions proceed. The bill also includes provisions regarding regulatory implementation and periodic reporting requirements to Congress.
The AINS from Chairman Smith clarified that specificity is required only in cases in which the information to be obtained from third parties is related to determining tax liability. The Committee voted to favorably report the AINS by a 41-0 vote.
H.R. 4242: The Innovate Less Lethal to De-Escalate Tax Modernization Act
The Innovate Less Lethal to De-Escalate Tax Modernization Act, H.R. 4242, was introduced by Reps. David Schweikert (R-AZ) and Greg Stanton (D-AZ). The bill would exempt certain less-than-lethal projectile devices and their associated cartridges from the federal firearms and ammunition excise tax. It would require Treasury to issue classification determinations within 90 days upon manufacturer request, and to publish annually updated lists identifying qualifying devices and those that would qualify but exceed the velocity limit.
The AINS from Chairman Smith was clerical. The Committee voted to favorably report the AINS by a 26-15 vote.
Judge Denies AUCS Motion to Intervene on Johnson Amendment in National Religious Broadcasters
On Friday, Judge J. Campbell Barker denied the motion by Americans United for Separation of Church and State to intervene as a party in National Religious Broadcasters v. Bessent. The government and the plaintiffs have submitted a joint motion in the case that would clarify the IRS position on the Johnson Amendment.
The Johnson Amendment provides that 501(c)(3) organizations (including churches) may “not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.”
The joint motion stated: “When a house of worship in good faith speaks to its congregation, through its customary channels of communication on matters of faith in connection with religious services, concerning electoral politics viewed through the -2- The IRS Revisits the Johnson Amendment July 15, 2025 lens of religious faith, it neither ‘participate[s]’ nor ‘intervene[s]’ in a ‘political campaign,’ within the ordinary meaning of those words.”
This S&C memo provides more details about the case and on the Johnson Amendment.
Final Regulations on Tribal Government Tax Classification
On December 15, Treasury and the IRS issued final regulations regarding the Federal tax classification of entities wholly owned by Indian Tribal Governments (Tribes). Under the regulations, entities wholly owned by Tribes and organized or incorporated under the laws of one or more of the Tribes that own them will not be treated as separate entities for Federal tax purposes.
However, such entities, as well as certain Tribal corporations chartered by the Department of the Interior will be treated as separate entities for Federal employment and certain Federal excise tax purposes. Each of these types of Tribal entities will be treated as an instrumentality of one or more Indian Tribal governments for purposes of making elective payment elections for energy credits under the IRA.
Treasury and the IRS issued proposed regulations on these issues on October 9, 2024, which were adopted by final regulations with “clarifying changes and modifications.” The regulations are effective thirty days after they are formally published (likely this week) in the Federal Register.
Revenue Procedure for State Elections under Section 25F Scholarship Tax Credit
On December 12, Treasury and the IRS issued Revenue Procedure 2026-6 providing a procedure for States (and the District of Columbia) to make an Advance Election to become a “covered state” prior to identifying scholarship granting organizations (SGOs).
Tax Code Section 25F, added by the OBBBA, generally provides an annual 100% tax credit of up to $1,700 for charitable contributions to SGOs identified by a “covered state,” that is a State electing to participate in 25F and that identifies SGOs in that State. The law is generally effective starting in 2027. Under the guidance, making an Advance Election allows a State to make potential SGOs aware of the State’s participation in 25F before submitting the SGO list, giving such organizations time to prepare to participate.
The election may be made on Form 15714. Future guidance will detail how States may submit their lists of eligible SGOs. Interestingly, Treasury estimates that every State and DC will make the election.