November 17 Tax Policy Update

• Congress funds government, but mostly only through January 30
• Congress focuses on health care and remaining appropriations
• Outlook for tax legislation
• Rev. Proc. 2025-31: Safe harbor for investment and grantor trusts to stake digital assets
• Tax Court in micro-captive case holds Economic Substance Doctrine requires threshold relevancy determination
• IRS appeals ruling on jurisdictional status of filing deadline
• Tax policy personnel

Congress to consider health insurance tax credits as shutdown ends

The government shutdown ended on Wednesday evening when President Trump signed into law the bill passed by the Senate on Monday and then the House on Wednesday to fund three appropriations categories – veterans affairs/military construction, agriculture and legislative – through September 30, 2026, the end of the fiscal year, and to fund the rest of the government with a continuing resolution (CR) through January 30.

As part of the deal obtaining some bipartisan support for the funding bill, Senate Majority Leader Thune (R-SD) promised to let Democrats bring to the Senate floor this year legislation addressing the increased tax credits for Affordable Care Act health insurance premiums enacted in the 2021 American Rescue Plan Act. Congressional Democrats had opposed any bill to fund the government unless the legislation also addressed those credits. The increased tax credits are currently set to expire at the end of the year.

It remains to be seen whether Democrats choose to bring to the Senate floor a bill to make permanent the increased credits or a compromise crafted to attract bipartisan support. Health insurance premiums are set to significantly increase next year for many Americans, but only part of the increase is due to the expiration of the increased tax credits. Most Republicans oppose the increased tax credits absent significant reforms. Other Republicans support extending the increased credits, at least temporarily. Still other Republicans want to repeal the ACA more broadly and undertake fundamental health policy reform.

House Speaker Johnson (R-LA) did not commit to bringing to the House floor any such bill passed by the Senate. However, if the Senate passes a bill (which would have to be bipartisan because of the 60-vote threshold), Speaker Johnson would likely face political pressure to do so, especially if the House did not pass another bill dealing with the issue.

A bipartisan group of Senators appears to be making progress in reaching a compromise on the health care credits. Or at least this is what House members who fear being left out appear to believe. On November 14, a bipartisan group of 32 House members sent a letter to Majority Leader Thune and Minority Leader Schumer (D-NY) requesting that members of the House be included in Senate discussions of the health care credit. The letter begins: “We kindly request that you include both House Democrats and Republicans in the legislative process leading to the promised health care reform vote in December.”

The Committee on Ways and Means is reportedly considering H.R. 5608, the Affordable Care and Comprehensive Economic Support through Savings Act, sponsored by Rep. Steube (R-FL) that would allow individuals to choose government contributions to a Health Savings Account (under Tax Code section 223) instead of receiving subsidized ACA health insurance premiums through government payments to an insurance company. President Trump advocated this general approach during the shutdown. It seems doubtful such an approach would receive the bipartisan support needed to get through the Senate filibuster. However, some Republicans want to make fundamental changes to the ACA in a budget reconciliation bill, which could pass with only Republican votes.

House Majority Whip Emmer (R-MN) expressed some hope that Congress will pass the rest of the appropriations bills before the end of the year. He said that bicameral bipartisan negotiations between the appropriators have been going well. However, some Democrats have floated the possibility of not supporting legislation to fund the government past January 30 (when the just-enacted CR is set to expire) unless the health insurance tax credits are addressed.

But first, the House is set to deal this week with several politically sensitive issues roiling the Capitol arising from personal, political, House-Senate, and ideological tensions. Last week, Speaker Johnson swore in Rep. Adelita Grijalva (D-AZ), who was elected on September 25 to fill the vacancy created by the death of her father, former Rep. Raul Grijalva, on March 13. Upon swearing in, she provided the 218th signature on a discharge petition concerning a House resolution requiring the Department of Justice to release files on Jeffrey Epstein that some speculate will reflect badly on President Trump. Some have also speculated that Speaker Johnson delayed swearing in Grijalva because of this issue. Under the House rules, any member who has signed the discharge petition, can call for the resolution to be brought to the House floor seven legislative days after the petition has attained 218 signatures. The Speaker then has two legislative days to bring the resolution for a vote on the House floor. The House will also likely vote on a privileged motion by Rep. Perez (D-WA) to censure Rep. Garcia (D-IL) with regards to the timing of his announcement not to run for reelection. On the last day of eligibility to file to run for the seat, his chief of staff, Patty Garcia (no relation) filed to run. The next day, Rep. Garcia announced his retirement, leaving his chief of staff the only one on the ballot. Finally, the House will likely vote on a bill to strip out a provision in the funding law enacted last week giving Senators the ability to sue the United States for $500,000 for each circumstance in which Federal law enforcement authorities searched their phone records, which stems from the Jack Smith investigation.

Tax Legislation Outlook

If a bipartisan bicameral compromise is reached on health care issues, tax provisions on health care are likely to be an important part of the package. This could open the opportunity for other bipartisan tax legislation to also be attached. An end-of-year appropriations bill might also be a vehicle to which bipartisan tax legislation could be attached. The alternative partisan budget reconciliation bill path on health care could also include tax provisions. Another budget reconciliation bill this Congress appears to be a long shot, but that was also the view of many in early 2025 as to the likelihood of Republicans pulling off the OBBBA, especially by July 4.

Bipartisan discussions are continuing on tax provisions addressing digital assets after hearings on the subject in July and October, respectively, in the House Committee on Ways and Means and Senate Finance Committee. It is not clear if and when agreement will be reached.

Rev. Proc. 2025-31: Safe Harbor for Investment and Grantor Trusts to Stake Digital Assets

On November 10, Treasury and the IRS released Rev. Proc. 2025-31 providing a safe harbor under which investment trusts and grantor trusts may stake their digital assets without jeopardizing their trust status for federal tax purposes. The revenue procedure also provides a nine-month period beginning on November 10 for existing trusts to amend their governing instruments to authorize staking in accordance with the safe harbor requirements.

If a trust satisfies the safe harbor requirements, “a trust’s authorization, pursuant to its trust agreement, to stake its digital assets and the resulting staking of the trust’s digital assets do not prevent the trust from qualifying for Federal income tax purposes as a trust classified as an investment trust under Reg. § 301.7701-4(c) and as a grantor trust.”

Somewhat unusually for a revenue procedure, Treasury Secretary Scott Bessent announced the guidance in a post on X. In the post, he stated that the new guidance gives “crypto exchange-traded products a clear path to stake digital assets and share staking rewards with their retail investors. This move increases investor benefits, boosts innovation, and keeps America the global leader in digital asset and blockchain technology.”

The publication of this revenue procedure follows a July 30 report from the President’s Working Group on Digital Asset Markets setting out policy recommendations with regards to digital assets, including the tax treatment of such assets. The report states that U.S. investment funds holding digital assets that qualify as exchange-traded products under securities laws are often organized as trusts. These funds typically take the position that these trusts are investment trusts treated as grantor trusts for federal income tax purposes. Investment trusts qualifying as grantor trusts have simplified tax reporting to their investors.

Entities claiming status as an investment trust must comply with strict requirements under Reg. § 301.7701-4(c), or are otherwise reclassified as a business entity. Specifically, an investment trust may not be engaged in a profit-making business, may not have the power to vary its investment portfolio, and must have only one class of ownership interest. Investors in an investment trust that is a grantor trust are treated as if they were the direct owners of their pro rata interests in trust assets for federal income tax purposes and receive tax reporting from the trust or their brokers on Forms 1099.

The safe harbor rule in the revenue procedure sets out 14 specific requirements that a trust must satisfy to qualify for protection:

• The trust’s interests must be traded on a national securities exchange.
• The trust may hold only cash and a single type of digital asset.
• Those digital assets must be maintained by a custodian at addresses under its control.
• Staking activities are permitted only to the extent that they serve to protect trust property by preventing any undue concentration of control that could negatively affect the asset’s value.
• The trust’s activities are strictly limited to several functions: accepting deposits for new interests; holding digital assets and cash; paying expenses and redeeming interests; purchasing additional digital assets; distributing assets or cash in connection with redemptions; liquidating assets; and directing staking activities consistent with exchange and safe harbor rules.
• The trust may stake assets only through custodians that work with staking providers.
• The trust, custodian, and sponsor may have no right or role in directing the actions of staking providers.
• All digital assets held by the trust must generally be staked.
• The trust may withhold some assets as a liquidity reserve in accordance with exchange policies.
• The trust may temporarily hold un-staked assets during certain events but must stake them promptly thereafter.
• Imposes liquidity reserve conditions on holding un-staked assets.
• The trust may also establish contingent liquidity arrangements to meet redemption needs, provided that any assets involved are distributed soon after the redemption event.
• The trust’s assets must be indemnified from slashing losses by the staking providers.
• Staking yields must consist solely of additional units of the same digital asset already held by the trust.

The procedure states that no inference should be drawn as to the consequences should trusts act outside the “limited scope” of the revenue procedure, or the Federal tax consequences of matters not expressly addressed therein, including whether staking income is treated as effectively connected income or unrelated business taxable income.

The revenue procedure is effective for tax years ending on or after November 10, 2025.

Tax Court: Codified Economic Substance Doctrine Requires Threshold Relevancy Determination

In a unanimous precedential opinion, Patel v. Commissioner, the Tax Court held that the economic substance doctrine codified in the Tax Code requires a threshold relevancy determination before application. Judge Jones explained that Congress “could hardly have been clearer” that section 7701(o)(1) requires courts to first determine whether the economic substance doctrine is relevant before proceeding to the two-part economic substance test described in section 7701(o)(1)(A) and (B).

The economic substance doctrine is a longstanding judicial doctrine codified in Tax Code section 7701(o) by the Health Care and Education Reconciliation Act of 2010, Public Law 111-152. Section 7701(o) defines the “economic substance doctrine” as the common law doctrine that disallows tax benefits if the transaction that produces those benefits lacks economic substance or a business purpose. Under section 7701(o)(1), a transaction has economic substance if: (1) the transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer’s economic position; and (2) the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into such transaction. Section 6662(b)(6) imposes a penalty on an underpayment of tax attributable to tax benefits that were disallowed because a transaction lacks economic substance.

The question of how to sequence the application of the economic substance doctrine is an issue of first impression for the Tax Court. The language of section 7701(o)(1) states that “in the case of any transaction to which the economic substance doctrine is relevant,” a transaction is treated as having economic substance only if it changes the taxpayer’s economic position in a meaningful way (apart from federal income tax effects), and the taxpayer has a substantial nontax business purpose for entering into it.

The Tax Court split from an opinion issued by the U.S. District for the District of Colorado in Liberty Global Inc. v. U.S., which held that section 7701(o) does not require a threshold relevancy determination before the two-part test is applied. That case is now on appeal in the Tenth Circuit.

At issue in the Patel case was whether the petitioners, Sunil Patel and his wife, Laurie McAnally-Patel, are liable for penalties under section 6662(b)(6), which imposes a 20 percent strict liability penalty on tax underpayments attributable to transactions lacking economic substance within the meaning of section 7701(o). The transactions in question related to two micro-captive insurance companies that Patel created and controlled, with help from, amongst others, CIC Services. After first concluding that section 7701(o) was relevant, Judge Jones applied the two-part test and found that the taxpayer’s micro-captive transactions lacked economic substance. The case is also notable because in a prior ruling, the Tax Court disallowed certain penalties imposed by the IRS because the IRS agent failed to satisfy the supervisory approval requirement set forth in Tax Code section 6751(b).

As background, amounts paid to insurance companies are generally deductible, but amounts set aside as a form of self-insurance are not. A micro-captive insurance company is an insurance company that writes insurance policies for its owners and affiliated companies of the owner. A micro-captive insurance company that meets the statutory written premium limit may make an election under section 831(b) to only be taxed on its investment income and not on its underwriting income. Since the owner(s) of a micro-captive receive a deduction for premiums paid to the micro-captive, and the micro-captive may exclude those same premiums from its income in years when it meets the IRC § 831(b) premium limit, cash transactions between related parties are deducted but not correspondingly taxed as income, reducing the overall tax burden.

As further background, although not directly relevant in Patel, on January 14, 2025, the IRS issued regulations making micro-captive transactions or substantially similar transactions a category of listed transactions. In Notice 2016-66, the IRS had previously made such transactions into “transactions of interest.” However, in CIC Services LLC v. IRS, (E.D.TN) a federal district court struck down the notice as not complying with the Administrative Procedure Act. This was the second big loss for the IRS in the case after the Supreme Court unanimously overturned the Sixth Circuit and ruled that the Anti-Injunction Act did not prohibit a pre-enforcement suit against the notice by the taxpayer [the aforementioned CIC Services]. Justice Kagan introduced her unanimous opinion by noting: “Americans have never had much enthusiasm for paying taxes.” 593 U.S. 209 (2021).

IRS Requests Rehearing on whether missing filing deadline is jurisdictional

The Commissioner filed a petition for rehearing en banc in the Sixth Circuit, after a panel of the Circuit held that the deadline for filing a deficiency petition pursuant to section 6213(a) is a claims-processing rule, subject to equitable tolling. In so ruling, the Sixth Circuit became the third circuit court to find that the deadline in section 6213(a) is non-jurisdictional, following the Second Circuit in Buller v. Commissioner, 152 F.4th 84 (2d Cir. 2024) and the Third Circuit in Culp v. Commissioner, 75 F.4th 196 (3d Cir. 2023). The IRS petitioned the Supreme Court for certiorari after the Third Circuit held that the deadline for filing a petition in a deficiency case was not jurisdictional, which the Supreme Court denied. Comm’r of Internal Revenue v. Culp, 144 S. Ct. 2685 (2024).

Whether the Tax Court’s jurisdiction is conditioned upon meeting filing deadlines is a growing area of interest. If a filing deadline is jurisdictional, the Court is unable to apply equitable tolling to extend the deadline. In such cases, if a taxpayer files a petition challenging a notice of deficiency after the deadline, the Tax Court dismisses the case without prejudice because of a lack of jurisdiction. The taxpayer has the option of paying the tax and then suing for a refund. However, if a filing deadline is not jurisdictional and a petitioner requests the deadline be equitably tolled, their case is dismissed res judicata if the Court finds no grounds for equitable tolling. This precludes them from suing for a refund after paying the tax. On October 3, the Committee on Ways and Means favorably reported a bill dealing with this issue. H.R. 5349 – Tax Court Improvement Act, would amend Tax Code section 6213(a) to permit the Tax Court to apply equitable tolling in deficiency cases, and permit taxpayers who petitioned for but were not granted equitable tolling to sue for a refund after paying the tax.

Deficiency jurisdiction is one form of jurisdiction that taxpayers have argued should be subject to equitable tolling. The Supreme Court ruled in Boechler v. Commissioner, 596 U.S. 199, 203 (2022), that a procedural requirement, such as a filing deadline, is jurisdictional only if Congress “clearly states” that it is. The Supreme Court held that this “clear statement” was not present in the procedural requirements for filing a petition for a collection due process appeal in the Tax Court, and, thus, the filing deadline was subject to equitable tolling.

This resulted in a flurry of challenges to the jurisdictional nature of several filing deadlines in the Tax Court. The Seventh Circuit (applying the Supreme Court’s clear-statement rule) has joined the Fifth, Eighth, Ninth, Tenth, Eleventh, and D.C. Circuits, as well as the Tax Court (and its predecessor the Board of Tax Appeals), in holding the timely filing of a deficiency petition to be a jurisdictional requirement. See Tilden v. Commissioner, 846 F.3d 882, 886–87 (7th Cir. 2017), rev’g and remanding T.C. Memo. 2015-188; Rich v. Commissioner, 250 F.2d 170, 175 (5th Cir. 1957) (Johnsen, J., concurring in part); Teel v. Commissioner, 248 F.2d 749, 751 (10th Cir. 1957), aff’g 27 T.C. 375 (1956); DeWelles v. United States, 378 F.2d 37, 39 (9th Cir. 1967); Hallmark Rsch. Collective v. Commissioner, 159 T.C. 126, 161 (2022); Rochelle v. Commissioner, 293 F.3d 740, 741 (5th Cir. 2002) (per curiam), aff’g 116 T.C. 356 (2001); Edwards v. Commissioner, 791 F.3d 1, 4 (D.C. Cir. 2015); Elings v. Commissioner, 324 F.3d 1110, 1112 (9th Cir. 2003); see also Organic Cannabis Found., LLC v. Commissioner, 962 F.3d 1082, 1092–93 (9th Cir. 2020) (applying the clear statement rule to section 6213(a) and concluding that its deadline is jurisdictional).

According to a procedural rule for appellate venue in the Tax Court, the circuit split will result in some taxpayers being eligible for requesting equitable tolling, while others may not, depending on which Circuit Court the taxpayer is geographically located in. Unless new legislation is passed, however, a taxpayer who requests but is denied equitable tolling may not then sue for a refund.

Tax personnel

On Friday, President Trump announced on Truth Social that he is withdrawing the nomination of Donald Korb to be the Chief Counsel of the IRS. Assistant Secretary of the Treasury for Tax Policy Ken Kies is currently serving as the acting Chief Counsel of the IRS. Treasury Secretary Scott Bessent is currently serving as acting Commissioner of the IRS.