Summary
- Health tax credit discussions will continue when Congress returns after Thanksgiving
- Final regulations narrow scope of stock buyback tax, including axing funding rule
- Tax credits to be disallowed as “federal public benefits” for certain aliens
- Notice 2025-69: treatment of qualified tips and overtime compensation in 2025
- Notice 2025-71: OBBBA’s interest exclusion for agricultural loans
- Former DOJ Tax Appellate Chief Criticizes Variance Doctrine in Shleifer Appeal
Tax State of the Union by Assistant Secretary for Tax Policy/Acting Chief Tax Counsel
On November 20, Ken Kies, Assistant Secretary of Treasury for Tax Policy, and acting Chief Counsel of the IRS, delivered what amounted to a tax state of the union address on tax policy and administration.
Drawing a sharp contrast with the prior Treasury, he summarized the current Treasury’s approach. “We actually like taxpayers — taxpayers generate trillions of dollars in income to run the federal government. When people criticize us as being taxpayer friendly, I say ‘thank you for pointing that out.’”
Kies stated that the IRS will be ready for the upcoming tax filing season in early 2026 and that the shutdown did not slow the work on OBBBA guidance. He said that Treasury and the IRS had started working on OBBBA implementation even before enactment. He rejected “doomsday” media reports and claims by “armchair Commissioners” – which he called “nattering nabobs of negativism,” quoting former Vice President Agnew – that turnover in IRS leadership and the current absence of nominees for Commissioner and Chief Tax Counsel are harming tax administration. Kies said he intends to stay on as Acting Chief Tax Counsel until a nominee is confirmed.
Kies said that in the coming months, Treasury and the IRS will issue guidance on many OBBBA provisions, including tips, overtime, qualified production property, bonus depreciation, Trump accounts, school choice tax credits, and Tax Code section 45Z credit for clean fuel.
Treasury is also working on guidance concerning the international provisions in the OBBBA, Kies said, including the reduction of the foreign tax credit haircut from 20% to 10%, the modified pro rata share rules for the treatment of dividends paid by controlled foreign corporations and the definition of deduction-eligible income under the new rules in Tax Code section 250 for deduction-eligible income.” He said that Treasury will issue guidance on the OBBBA provision eliminating the one-month deferral election this month. He warned that if other countries do not implement a “side-by-side” system for the U.S. regarding the OECD’s Pillar 2, Congress will enact Tax Code section 899, which was dropped from the OBBBA.
On non-profits, Kies said Treasury and the IRS will issue new guidance on the Johnson Amendment. On July 7, the IRS filed a joint motion in litigation against the government concerning the provision, clarifying its position that certain types of statements by houses of worship, sometimes including endorsing political candidates, will not endanger their tax-exempt status, as further described in this S&C memo. He said the IRS is also examining the tax-exempt status of 501(c)(3) groups that may be supporting violent activity or otherwise engaged in illegal conduct.
Congress Set to Resume Appropriations and Health Care Tax Negotiations After Thanksgiving
Congress is out this week for Thanksgiving. Negotiations over the remaining appropriations items and tax incentives for healthcare continued last week, with no outward sign of progress.
Congress will return after Thanksgiving for three weeks before it is scheduled to leave for the remainder of the year in mid-December. On November 12, President Trump signed into law a bill funding three appropriations categories—veterans affairs/military construction, agriculture and legislative—through September 30, 2026, the end of the fiscal year, and the rest of the government with a continuing resolution (CR) through January 30.
Senate Finance Committee Ranking member Ron Wyden (D-OR) summarized the state of negotiations: “Everybody’s going home for Thanksgiving. Particularly the Monday after Thanksgiving, I think people are going to be all over those phones saying, ‘Who’s gonna help me?’”
The issue receiving the most attention is the expiration at the end of the year of the increased tax credit for Affordable Care Act (ACA) health insurance premiums enacted in the 2021 American Rescue Plan Act. Democrats want to make the provision permanent. Some congressional Republicans want to extend the provision for at least another year. It appears that most congressional Republicans want any bill extending the provision to make at least some changes to the credit, such as imposing stricter income limits. Other Republicans want to shift the tax credit from a government payment to insurance companies to a more direct tax credit, such as a government contribution to a health savings account. President Trump has emphasized repeatedly that subsidies should go directly to individuals, rather than to insurance companies. On November 20, Senator Rick Scott (R-FL) introduced the “More Affordable Care Act” to make significant changes to the ACA.
President Trump said that Congress should address health insurance issues by the January 30 CR deadline. According to weekend press reports, the White House plans to propose a two-year extension of the credits, combined with some reforms, including stricter eligibility rules.
In connection with increased tariff revenue, President Trump has been calling for Congress to enact legislation to send $2,000 to each low- and middle-income American.
Final Regulations Narrow Scope of Stock Buyback Tax, Including Axing Funding Rule
On November 21, Treasury and the IRS issued final regulations on the stock buyback tax under Tax Code section 4501, enacted by the Inflation Reduction Act. The final regulations significantly narrow the circumstances in which the tax applies, including eliminating the funding rule, limiting the application in M&A transactions, and generally excluding plain preferred stock. The regulations are described in more detail in this S&C client update.
Tax Credits to be Disallowed as “Federal Public Benefits” for Certain Aliens
On November 20, Treasury announced that it will issue proposed regulations on the treatment of refundable individual income tax credits under the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA). According to the announcement, the proposed regulations will “clarify” that the refunded portions of the earned income tax credit, the child tax credit, the American Opportunity tax credit and the Saver’s March Credit are “federal public benefits” under PRWORA. Thus, “illegal aliens and other non-qualified aliens” will not be eligible for such portions of those credits.
On November 19, the Department of Justice issued an opinion on these issues, following up an opinion it issued in 2020. The opinion concludes that the 2020 opinion is the best reading of the law as required by Loper Bright, and also includes the ACA credits as a “federal public benefit” under the PRWORA. It remains to be seen when the new guidance will be effective.
Notice 2025-69: Treatment of Qualified Tips and Overtime for 2025
On November 21, Treasury and the IRS issued Notice 2025-69, providing guidance on calculating qualified tips and overtime pay, both of which were created by the OBBBA, for 2025. Employers are not required to separately report these amounts for 2025, so employees must determine them independently.
Tips
Under new Tax Code section 224, individuals in tip-receiving occupations may deduct up to $25,000 in “qualified tips,” subject to income phase-outs ($150,000 / $300,000 MAGI limits). Employees may use reported Social Security tips (Form W-2 Box 7), employer statements, or amounts on Form 4137. Non-employees may reference income reported on Forms 1099-MISC, NEC, or K and must estimate the portion attributable to tips. A transition rule treats tips from pre-2025 tipped occupations as qualifying as not being in a specified trade or business. This transition rule will apply until January 1 of the first calendar year following the issuance of final regulations on this issue.
Overtime
New Tax Code section 225 allows a deduction for “qualified overtime compensation” (up to $12,500 per individual or $25,000 jointly), with the same income phase-outs. The notice outlines seven methods for calculating overtime premiums, depending on how pay is reported. Although the statute references overtime pay under section 7 of the Fair Labor Standards Act, the notice allows adjustments for different types of overtime arrangements.
Notice 2025-71 – Section 139L Interest Exclusion for Agricultural Loans
On November 20, Treasury and the IRS issued Notice 2025-71, providing interim guidance under new Tax Code section 139L (added by the OBBBA), which allows a 25% exclusion from gross income for interest on qualified agricultural real estate loans. Treasury intends to issue regulations consistent with the notice.
Key Definitions
A qualified lender includes FDIC-insured banks, regulated insurers, certain U.S. affiliates of bank or insurance holding companies, and Farm Credit System institutions (for loans secured by agricultural real estate). A qualified real estate loan is one secured by rural or agricultural property—land or facilities substantially used for farming, aquaculture, or fishing—made after July 4, 2025. Refinancings of pre-enactment loans are excluded.
Interim Guidance
“Interest received” is interest includible in income under the lender’s accounting method. Only the portion of a loan up to the fair market value of the property at origination qualifies. Lenders may rely on a safe harbor treating a loan as fully secured if the property value is at least 80% of the loan amount at issuance, using any commercially reasonable valuation method. In partial refinancings, only the post-enactment portion qualifies; significant modifications count as refinancings.
Effective Date and Comments
Taxpayers may rely on the notice for loans made after July 4, 2025, until 30 days after final regulations are issued. Treasury and the IRS request comments (due January 20, 2026) on various definitions, mixed-use property, loan security tests, and securitization treatment.
Former DOJ Tax Appellate Chief Ugolini Criticizes Variance Doctrine in Shleifer Appeal
Francesca Ugolini, former Chief of the Justice Department Tax Division’s Appellate Section, wrote an article joining critics of a strict reading of the “variance doctrine” being considered by the Eleventh Circuit in Shleifer v. United States.
Tax Code section 7422 provides that a taxpayer cannot sue the United States for a refund until the taxpayer files a refund claim with the IRS. This claim must, among other things, set forth in detail each ground upon which a credit or refund is claimed and provide facts sufficient to apprise the IRS of the basis for the claim.
The variance doctrine, derived from Treas. Reg. § 301.6402-2(b)(1), bars taxpayers from raising refund arguments that differ from those stated in their administrative claims. The regulation states:
No refund or credit will be allowed after the expiration of the statutory period of limitation applicable to the filing of a claim therefor except upon one or more of the grounds set forth in a claim filed before the expiration of such period. The claim must set forth in detail each ground upon which a credit or refund is claimed and facts sufficient to apprise the Commissioner of the exact basis thereof. . . . A claim which does not comply with this paragraph will not be considered for any purpose as a claim for refund or credit.
Ugolini argues the doctrine has “morphed from a sensible rule about telling the IRS why you are claiming a refund into an increasingly impossible-to-meet standard requiring a full legal brief to be attached to a refund claim.”
In Shleifer, taxpayers sought a refund based on a depreciation deduction reported on Schedule C rather than Schedule E. Although the IRS agent recognized and discussed the issue with the taxpayer’s CPA, the claim was denied. The district court held that the Schedule E argument was barred by the variance doctrine, which it stated is jurisdictional, despite the refund’s basis and amount remaining the same and the discussion of the issue with the IRS agent.
An amicus brief by the Center for Taxpayer Rights contends the variance doctrine is not jurisdictional because it arises from regulation, not statute, and fails the Supreme Court’s Boechler clear-statement test. The brief also challenges the rule under Loper Bright, arguing Treasury exceeded its authority by requiring taxpayers to preserve every possible legal theory in administrative claims.
S&C’s November 3 Tax Policy Update discussed another amicus brief filed in this case in favor of the Shleifers.