General Explanations

of the

Administration’s Fiscal Year 2024 

Revenue Proposals

Department of the Treasury

March 9, 2023 

This document is available on line at 

https://home.treasury.gov/policy-issues/tax-policy/revenue-proposals
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

TABLE OF CONTENTS

Notes...................................................................................................................................... vi

REVENUE PROPOSALS........................................................................................................ 1

Reform Business Taxation ................................................................................................... 2

Raise the corporate income tax rate to 28 percent ............................................................. 2

Increase the excise tax rate on repurchase of corporate stock ........................................... 4

Tax corporate distributions as dividends ............................................................................ 5

Limit tax avoidance through inappropriate leveraging of parties to divisive 

reorganizations ....................................................................................................... 8

Limit losses recognized in liquidation transactions ......................................................... 11

Prevent basis shifting by related parties through partnerships ........................................ 13

Conform definition of “control” with corporate affiliation test ....................................... 15

Strengthen limitation on losses for noncorporate taxpayers ............................................ 16

Accelerate and tighten rules on excess employee remuneration ...................................... 18

Prevent prison facility rent payments from contributing to qualification as a REIT ....... 20

Reform International Taxation ......................................................................................... 22

Revise the global minimum tax regime, limit inversions, and make related reforms ....... 22

Adopt the undertaxed profits rule ..................................................................................... 32

Repeal the deduction for foreign-derived intangible income ........................................... 37

Revise the rules that allocate Subpart F income and GILTI between taxpayers to ensure 

that Subpart F income and GILTI are fully taxed................................................. 38

Eliminate exploited mismatch in calculation of earnings and profits of controlled foreign 

corporations .......................................................................................................... 41

Limit foreign tax credits from sales of hybrid entities ...................................................... 43

Restrict deductions of excessive interest of members of financial reporting groups ........ 45

Treat payments substituting for partnership effectively connected income as U.S. source 

dividends ............................................................................................................... 48

Expand access to retroactive qualified electing fund elections ........................................ 50

Reform taxation of foreign fossil fuel income ................................................................... 52

Provide tax incentives for locating jobs and business activity in the United States and 

remove tax deductions for shipping jobs overseas ............................................... 54

Support Housing and Urban Development ...................................................................... 56

Make permanent the new markets tax credit .................................................................... 56

Provide a neighborhood homes credit .............................................................................. 58

Expand and enhance the low-income housing credit ....................................................... 61

Modify Energy Taxes.......................................................................................................... 64

Eliminate fossil fuel tax preferences ................................................................................. 64

Eliminate drawbacks on petroleum taxes that finance the Oil Spill Liability Trust Fund 

and Superfund ....................................................................................................... 69

Impose digital asset mining energy exise tax .................................................................... 71

Strengthen Taxation of High-Income Taxpayers ............................................................ 72

Apply the net investment income tax to pass-through business income of high-income 

taxpayers ............................................................................................................... 72
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Increase the net investment income tax rate and additional Medicare tax rate for highincome taxpayers .................................................................................................. 75

Increase the top marginal income tax rate for high-income earners ............................... 77

Reform the taxation of capital income .............................................................................. 78

Impose a minimum income tax on the wealthiest taxpayers ............................................. 82

Modify Rules Relating to Retirement Plans .................................................................... 85

Prevent excessive accumulations by high-income taxpayers in tax-favored retirement 

accounts and make other reforms ......................................................................... 85

Support Workers, Families, and Economic Security ...................................................... 93

Expand the child credit, and make permanent full refundability and advanceability ...... 93

Restore and make permanent the American Rescue Plan expansion of the earned income 

tax credit for workers without qualifying children ............................................. 102

Make permanent the Inflation Reduction Act expansion of health insurance premium tax 

credits .................................................................................................................. 105

Make the adoption tax credit refundable and allow certain guardianship arrangements to 

qualify ................................................................................................................. 107

Make permanent the income exclusion for forgiven student debt .................................. 109

Extend tax-preferred treatment to certain Federal and tribal scholarship and education 

loan programs ..................................................................................................... 110

Increase the employer-provided childcare tax credit for businesses.............................. 113

Improve the design of the work opportunity tax credit to promote longer-term 

employment ......................................................................................................... 114

Modify Estate and Gift Taxation..................................................................................... 115

Improve tax administration for trusts and decedents’ estates ........................................ 115

Limit duration of generation-skipping transfer tax exemption ....................................... 121

Modify income, estate, gift, and generation-skipping transfer tax rules for 

certain trusts ....................................................................................................... 123

Revise rules for valuation of certain property ................................................................ 130

Close Loopholes................................................................................................................. 133

Tax carried (profits) interests as ordinary income ......................................................... 133

Repeal deferral of gain from like-kind exchanges .......................................................... 135

Require 100 percent recapture of depreciation deductions as ordinary income for certain 

depreciable real property ................................................................................... 136

Limit use of donor advised funds to avoid a private foundation payout requirement .... 139

Exclude payments to disqualified persons from counting toward private foundation 

payout requirement ............................................................................................. 141

Extend the period for assessment of tax for certain Qualified Opportunity Fund 

investors .............................................................................................................. 142

Impose ownership diversification requirement for small insurance company election . 144

Expand pro rata interest expense disallowance for business-owned life insurance ...... 148

Modify rules for insurance products that fail the statutory definition of a life insurance 

contract ............................................................................................................... 150

Correct drafting errors in the taxation of insurance companies under the Tax Cuts and 

Jobs Act of 2017 .................................................................................................. 153

Define the term “ultimate purchaser” for purposes of diesel fuel exportation .............. 156
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Improve Tax Administration ........................................................................................... 157

Enhance accuracy of tax information ............................................................................. 157

Amend the centralized partnership audit regime to permit the carryover of a reduction in 

tax that exceeds a partner’s tax liability ............................................................. 160

Modify requisite supervisory approval of penalty included in notice ............................ 161

Modify the requirement that general counsel review certain offers in compromise ...... 163

Incorporate chapters 2/2A in centralized partnership audit regime proceedings .......... 164

Simplify foreign exchange gain or loss rules and exchange rate rules for individuals .. 165

Increase threshold for simplified foreign tax credit rules and reporting ....................... 167

Authorize limited sharing of business tax return information to measure the economy 

more accurately .................................................................................................. 168

Expand TIN matching and improve child support enforcement ..................................... 170

Clarify that information previously disclosed in a judicial or administrative proceeding is 

not return information ........................................................................................ 172

Improve Tax Compliance. ................................................................................................ 173

Address taxpayer noncompliance with listed transactions ............................................. 173

Impose an affirmative requirement to disclose a position contrary to a regulation ...... 176

Require employers to withhold tax on failed nonqualified deferred compensation plans

............................................................................................................................. 177

Extend to six years the statute of limitations for certain tax assessments ...................... 178

Increase the statute of limitations on assessment of the COVID-related paid leave and 

employee retention tax credits ............................................................................ 179

Expand and increase penalties for noncompliant return preparation and e-filing and 

authorize IRS oversight of paid preparers .......................................................... 181

Address compliance in connection with tax responsibilities of expatriates ................... 186

Define control of the payment of wage ........................................................................... 189

Modernize Rules, Including those for Digital Assets..................................................... 190

Apply the wash sale rules to digital assets and address related party transactions ...... 190

Modernize rules treating loans of securities as tax-free to include other asset classes and 

address income inclusion .................................................................................... 193

Provide for information reporting by certain financial institutions and digital asset 

brokers for purposes of exchange of information ............................................... 197

Require reporting by certain taxpayers of foreign digital asset accounts ...................... 200

Amend the mark-to-market rules to include digital assets ......................................... 202

Improve Benefits Tax Administration ............................................................................ 204

Clarify tax treatment of fixed indemnity health policies ................................................. 204

Rationalize funding for post-retirement medical and life insurance benefits ................. 206

Clarify tax treatment of on-demand pay arrangements .................................................. 207

Extend IRS Funding ......................................................................................................... 209

Extend mandatory funding provided to the IRS for fiscal years 2032 and 2033 ............ 209

TABLE OF REVENUE ESTIMATES ............................................................................... 210
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

NOTES 

The revenue proposals are estimated relative to a baseline of current law.

The Administration’s proposals are not intended to create any inferences regarding current law. 

Within the General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals, 

unless otherwise stated: 

• “AGI” refers to Adjusted Gross Income

• “Budget” refers to the Fiscal Year 2024 Budget of the U.S. Government

• “Code” refers to the Internal Revenue Code

• “C-CPI-U” refers to the Chained Consumer Price Index for Urban Consumers

• “IRS” refers to the Internal Revenue Service

• “OECD” refers to the Organisation for Economic Co-operation and Development”

• “Section” refers to the respective section of the Internal Revenue Code

• “Secretary” refers to the Secretary

• “Treasury” refers to the Department of the Treasury

• “TIN” refers to Taxpayer Identification Number
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

REVENUE PROPOSALS

In the Fiscal Year 2024 Budget, the President proposes reforms that would raise revenues, 

expand tax credits for workers and families, improve tax administration and compliance, and 

make the tax system more equitable and efficient. 

Reforms to business and international taxation would raise the corporate tax rate, increase the 

excise tax rate on stock buybacks, and close several business tax loopholes. Additional reforms 

would strengthen the taxation of foreign earnings and reduce tax incentives that encourage profit 

shifting and offshoring, consistent with the historic international agreement to implement a 

global minimum tax. This agreement will help end the race to the bottom in corporate tax rates 

and level the playing field for U.S. businesses while protecting U.S. workers. Together the 

business and international tax reforms in the Budget would increase revenues and build a fairer 

tax system.

Reforms to the taxation of high-income taxpayers would further raise revenues and help ensure 

more equal treatment of labor and capital income. Income tax rates for those with the highest 

incomes would increase. Capital gains and dividends would generally be taxed at ordinary rates 

for those with high incomes, and a loophole that lets some capital gains income escape income 

taxation forever would be eliminated for certain wealthy taxpayers. A 25-percent minimum 

income tax would be imposed on extremely wealthy taxpayers, which would require prepayment 

of taxes on unrealized capital gains. Gaps that allow some pass-through business owners to avoid 

Medicare taxes would be eliminated for high-income taxpayers and Medicare tax rates would be 

increased for high-income taxpayers. Loopholes, including the carried interest preference and the 

like-kind exchange real estate preference, would be eliminated for those with the highest 

incomes.

The Budget would expand tax credits for workers and families, which would reduce child 

poverty and expand opportunity. The child tax credit would be expanded through 2025, and 

would permanently be made fully refundable, determined monthly, and paid out in advance. 

Delivery reforms would facilitate take-up. The earned income tax credit would be expanded to 

cover more workers without children. The expansion of the premium tax credits first enacted in 

the American Rescue Plan Act of 2021 and extended in the Inflation Reduction Act of 2022 

would be made permanent, keeping health insurance more affordable for millions of families. 

Additional reforms would support housing and urban development, eliminate fossil fuel tax 

preferences, close estate and gift tax loopholes, and improve tax administration and compliance, 

among other reforms. 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

REFORM BUSINESS TAXATION 

RAISE THE CORPORATE INCOME TAX RATE TO 28 PERCENT

Current Law

Income of a business entity can be subject to Federal income tax in a manner that varies 

depending upon the classification of the entity for Federal income tax purposes. Most small 

businesses are owned by individuals and taxed as “pass-through” entities, meaning that their 

income is passed through to their owners who are taxed under the individual income tax system. 

Most large businesses, including substantially all publicly traded businesses, are classified as “C 

corporations” because these corporations are subject to the rules of subchapter C of chapter 1 of 

the Internal Revenue Code (Code) and accordingly pay an entity-level income tax. Additionally, 

taxable shareholders of such corporations generally pay Federal income tax on most distributions 

attributable to their ownership in the corporation. Some mid-sized businesses choose a passthrough form of entity classification (under subchapter K or subchapter S of chapter 1 of the 

Code) while others choose the C corporation form of entity classification.

C corporations determine their taxable income, credits, and tax liability according to the Code 

and regulations promulgated thereunder. The Tax Cuts and Jobs Act of 2017 replaced a 

graduated tax schedule (with most corporate income taxed at a marginal and average rate of 35 

percent) with a flat tax of 21 percent applied to all C corporations. 

Reasons for Change 

Raising the corporate income tax rate is an administratively simple way to raise revenue to pay 

for the Administration’s fiscal priorities. A corporate tax rate increase can also increase the 

progressivity of the tax system and help reduce income inequality. Additionally, a significant 

share of the effects of the corporate tax increase would be borne by foreign investors. Therefore, 

some of the revenue raised by the proposal would result in no additional Federal income tax 

burden on U.S. persons. Finally, the majority of income from capital investments in domestic C 

corporations is untaxed by the U.S. government at the shareholder level, so the corporate tax is a 

primary mechanism for taxing such capital income. 

Proposal 

The proposal would increase the tax rate for C corporations from 21 percent to 28 percent. 

The effective global intangible low-taxed income (GILTI) rate would increase to 14 percent 

under the proposal. The proposal Revise the Global Minimum Tax Regime, Limit Inversions, and 

Make Related Reforms described later in this text would further increase the effective GILTI rate 

to 21 percent. 

The proposal would be effective for taxable years beginning after December 31, 2022. For 

taxable years beginning before January 1, 2023, and ending after December 31, 2022, the 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

corporate income tax rate would be equal to 21 percent plus 7 percent times the portion of the 

taxable year that occurs in 2023. 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

INCREASE THE EXCISE TAX RATE ON REPURCHASE OF CORPORATE STOCK 

Current Law

The stock repurchase excise tax applies at a rate of one percent of the fair market value (FMV) of 

any stock of a covered corporation that is repurchased by the corporation during its taxable year. 

The statute generally defines a “covered corporation” as a domestic corporation whose stock is 

publicly traded on an established securities market. An established securities market for this 

purpose includes U.S. national securities exchanges, certain foreign securities exchanges, 

regional or local exchanges, and certain interdealer quotation systems. “Repurchases” include a 

corporation’s acquisition of any of its stock from a shareholder for property that qualifies as a 

redemption of the stock as defined in the Internal Revenue Code. The statute also provides that a 

repurchase includes any other transaction that the Secretary or her delegates determines in 

regulations or other guidance to be “economically similar” to a redemption of stock. A 

repurchase also may include acquisitions of the corporation’s stock by certain specified affiliates. 

The annual FMV of a covered corporation’s repurchased stock is reduced by certain exceptions 

and reductions, including the FMV of the covered corporation’s stock that is issued or provided 

to employees during the taxable year. The stock repurchase excise tax also applies to certain 

subsidiaries of foreign corporations, as well as certain non-U.S. corporations subject to the 

inversion rules. 

Reasons for Change 

Stock repurchases are tax-favored relative to dividends as a means of distributing corporate 

profits to shareholders. Increasing the excise tax rate on stock repurchases would reduce this 

disparity. Moreover, raising the tax rate is an administratively simple and progressive way to 

raise revenue to pay for the Administration’s fiscal priorities.

Proposal 

The proposal would increase the tax rate on corporate stock repurchases to 4 percent. 

The proposal would apply to repurchases of stock after December 31, 2022. 

 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

TAX CORPORATE DISTRIBUTIONS AS DIVIDENDS

Current Law 

Section 301 of the Internal Revenue Code (Code) provides rules for characterizing a distribution 

of property by a corporation to a shareholder. The amount of the distribution is first treated as a 

dividend under section 301(c)(1) to the extent of the distributing corporation’s applicable 

earnings and profits. Outside of corporate reorganization and spin-off contexts, section 316 

provides that all of a corporation’s current and accumulated earnings and profits are taken into 

account in determining the extent to which a distribution of property made by the corporation is 

taxed as a dividend. The amount of the corporation’s earnings and profits at the time the 

distribution is made is not controlling. Rather, earnings and profits of a corporation are generally 

computed on a standalone basis as of the close of the corporation’s taxable year in which the 

distribution is made without diminution as a result of distributions made during the taxable year. 

Special rules apply for consolidated groups, and in the case of a deemed dividend resulting from 

a sale of stock of a controlled foreign corporation (CFC), as defined in section 957. 

The portion of the distribution received by the shareholder that is not a dividend is applied 

against and reduces the shareholder’s adjusted basis of the corporation’s stock under section 

301(c)(2), and any amount distributed in excess of the shareholder’s basis that is not a dividend 

is treated as gain from the sale or exchange of property under section 301(c)(3). The shareholder 

takes a basis in the distributed property equal to its fair market value under section 301(d). 

Generally, the corporation is required to recognize under section 311(b) any gain realized on the 

distribution of any appreciated property to a shareholder (and its earnings and profits are 

increased by such gain under section 312) but does not recognize under section 311(a) any loss 

realized on a distribution of property with respect to its stock. Although the corporation does not 

recognize a loss, its earnings and profits are decreased under section 312 by the sum of the 

amount of money, the principal amount or issue price of any obligations (as the case may be), 

and the adjusted basis of any other property, so distributed. 

If an actual or deemed redemption of stock is treated under section 302 as equivalent to the 

receipt of a dividend by a shareholder, the shareholder’s basis in any remaining stock of the 

corporation is increased by the shareholder’s basis in the redeemed stock. In addition, if a 

subsidiary corporation acquires in exchange for cash or other property stock of a direct or 

indirect corporate shareholder issued by that corporation (often referred to as “hook stock”), the 

issuing corporation does not recognize gain or loss (or any income) under section 1032 upon the 

receipt of the subsidiary’s cash or other property in exchange for issuing the hook stock. 

If, as part of a corporate reorganization, a shareholder receives in exchange for stock of the target 

corporation both stock and property not permitted to be received without the recognition of gain 

(often referred to as “boot”), the exchanging shareholder is required to recognize under section 

356(a)(1) gain equal to the lesser of the gain realized in the exchange or the amount of boot 

received (commonly referred to as the “boot-within-gain” limitation). If the exchange has the 

effect of the distribution of a dividend, then section 356(a)(2) provides that all or part of the gain 
6 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

recognized by the exchanging shareholder is treated as a dividend to the extent of the 

shareholder’s ratable share of the corporation’s earnings and profits. The remainder of the gain 

(if any) is treated as gain from the exchange of property. 

Reasons for Change 

Corporations have devised many ways to avoid dividend treatment under current law. For 

example, corporations can enter into preparatory transactions to eliminate a corporation’s 

earnings and profits or shift the corporation’s earnings and profits to a prior or subsequent tax 

year. Corporations also enter into transactions (so-called “leveraged distributions”) to avoid 

dividend treatment upon a distribution by having a corporation with earnings and profits provide 

funds (for example, through a loan) to a related corporation with no or little earnings and profits, 

but in which the distributee shareholder has high stock basis. In addition, because current law 

permits a corporation to receive cash without recognizing any income in exchange for issuing its 

stock, subsidiaries may distribute property tax-free to corporate shareholders in exchange for 

hook stock issued by such shareholder. 

Under current law, these types of transactions reduce earnings and profits for the year in which a 

distribution is made without a commensurate reduction in a corporation’s dividend paying 

capacity. Such transactions are inconsistent with a corporate tax regime in which earnings and 

profits are viewed as measuring a corporation’s dividend-paying capacity, and these transactions 

inappropriately result in the avoidance of dividend treatment for the corporation’s shareholders. 

Finally, there is not a significant policy reason to vary the tax treatment of a distribution received 

in a reorganization (and currently subject to the boot-within-gain limitation of section 356) with 

the treatment afforded ordinary distributions under section 301. 

Proposal 

The proposal would amend the Code to ensure that a transfer of property by a corporation to its 

shareholder(s) better reflects the corporation’s dividend-paying capacity in the following ways: 

Prevent elimination of earnings and profits through distributions of certain stock with basis 

attributable to dividend equivalent redemptions 

The proposal would amend section 312(a)(3) to provide that earnings and profits are reduced by 

the basis in any distributed high-basis stock determined without regard to basis adjustments 

resulting from actual or deemed dividend equivalent redemptions or any series of distributions or 

transactions undertaken with a view to create and distribute high-basis stock of any corporation. 

The proposal would be effective as of the date of enactment.

Prevent use of leveraged distributions from related corporations to avoid dividend treatment

The proposal would treat a leveraged distribution from a corporation (distributing corporation) to 

its shareholder(s) that is treated as a recovery of basis as the receipt of a dividend directly from a 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

related corporation (funding corporation) to the extent the funding corporation funded the 

distribution with a principal purpose of not treating the distribution as a dividend from the 

funding corporation. 

The proposal would be effective for transactions occurring after December 31, 2023. 

Treat purchases of hook stock by a subsidiary as giving rise to deemed distributions 

The proposal would disregard a subsidiary’s purchase of hook stock for property so that the 

property used to purchase the hook stock gives rise to a deemed distribution from the purchasing 

subsidiary (through any intervening entities) to the issuing corporation. The hook stock would be 

treated as being contributed by the issuer (through any intervening entities) to the subsidiary. The 

proposal would grant the Secretary and her delegates authority to prescribe regulations to treat 

purchases of interests in shareholder entities other than corporations in a similar manner and 

provide rules related to hook stock within a consolidated group. 

The proposal would be effective for transactions occurring after December 31, 2023. 

Repeal gain limitation for dividends received in reorganization exchanges 

The proposal would repeal the boot-within-gain limitation in reorganization transactions in 

which the shareholder’s exchange is treated under section 356(a)(2) as having the effect of the 

distribution of a dividend. For this purpose, the Administration also proposes to align the 

available pool of earnings and profits to test for dividend treatment with the rules of section 316 

governing ordinary distributions. 

The proposal would be effective for transactions occurring after December 31, 2023. 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

LIMIT TAX AVOIDANCE THROUGH INAPPROPRIATE LEVERAGING OF 

PARTIES TO DIVISIVE REORGANIZATIONS 

Current Law 

In general, when a corporation distributes appreciated property to its shareholders, the 

corporation must recognize gain on the built-in appreciation (that is, the value of that property 

less the corporation’s adjusted basis in that property). Sections 355 and 368(a)(1)(D) of the 

Internal Revenue Code (Code) provide an exception to this general gain recognition rule in the 

case of divisive reorganizations, commonly referred to as “spin-offs”, “split-offs”, or “split-ups”. 

In a divisive reorganization, a parent corporation ("Distributing") transfers property (for 

example, the appreciated assets underlying a line of business) to a corporation it controls 

("Controlled"), in exchange for consideration. In the simplest version of a divisive 

reorganization, the consideration Distributing receives consists solely of Controlled stock, which 

Distributing then must distribute to its shareholders. In this case, none of Distributing, 

Controlled, or their shareholders will recognize any gain, despite Distributing effectively 

transferring the built-in gain underlying the Controlled stock (related to the appreciated assets 

transferred to Controlled by Distributing to Distributing’s shareholders. 

Commonly, divisive reorganizations are structured such that Distributing receives more than 

Controlled stock. This consideration may include (a) securities or other debt obligations of which 

Controlled is the obligor (Controlled debt), (b) money and other property other than Controlled 

debt (Controlled boot), and (c) the assumption by Controlled of Distributing’s liabilities 

(Controlled liability assumption). Distributing can transfer Controlled boot and debt to its 

creditors without recognition of gain. This is known as “monetization”. 

This monetization may require Distributing to recognize gain. For instance, Distributing 

recognizes gain on any boot or Controlled debt that it retains. However, current law provides for 

two safe harbors that allow some monetization to occur without Distributing recognizing gain. 

The first safe harbor provides that Distributing does not recognize gain if the amount of the 

assumed Controlled liabilities and any Controlled boot transferred to Distributing’s creditors 

does not exceed the aggregate adjusted basis of the assets that Distributing transfers to 

Controlled (adjusted basis limitation). The second safe harbor provides that an unlimited amount 

of Controlled debt securities may be transferred to Distributing’s creditors without gain 

recognition. 

In addition, certain other liabilities assumed by Controlled under current law are not subject to 

the adjusted basis limitation due to their contingent or speculative nature (contingent Distributing 

liabilities). Once fixed and determinable at a later date, these liabilities often are very large, and 

typically far exceed their estimated amounts. As a result, Distributing can cause Controlled to 

make payments to satisfy contingent Distributing liabilities arising from assets and businesses 

contributed to Controlled for an unlimited future period and in an unlimited aggregate amount. 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

For the transaction to qualify for non-recognition treatment, the Code requires that Distributing 

and Controlled be engaged immediately after the distribution in the active conduct of a trade or 

business. However, currently there are no adequate safeguards to ensure Controlled’s adequate 

capitalization or continued economic viability following its separation from Distributing through 

a divisive reorganization. 

Reasons for Change 

The Distributing monetization techniques carried out in divisive reorganizations are all 

economically similar, and therefore should be subject to the same adjusted basis limitation. In the 

absence of a comprehensive limitation, divisive reorganizations can provide opportunities for 

tax-planners to structure transactions that economically resemble tax-free cash sales.1 

Moreover, as described above, Distributing can effectively circumvent the adjusted basis limit by 

transferring contingent liabilities to Controlled, which similarly allows Distributing to 

accomplish transactions that resemble tax-free cash sales. Additionally, this practice can burden 

Controlled with crippling liabilities and excessive leverage, jeopardizing its ability to continue as 

a viable going concern. Such practice is inconsistent with the intent and purposes of the divisive 

reorganization provisions of the Code,2

 and has resulted in numerous Controlled bankruptcies. 

Taken together, the proposal’s elimination of these monetization loopholes will increase the 

integrity of the Code. 

Proposal 

Eliminate excessive tax-free monetization of divisive reorganizations 

The proposal would modify the two safe harbors for the tax-free transfer of Controlled boot and 

securities to Distributing creditors. In particular, the proposal would define a new quantity, the 

“excess monetization amount,” equal to the aggregate of the following amounts less the total 

adjusted bases of the assets transferred by Distributing to Controlled: (a) the total amount of the 

liabilities assumed by Controlled, (b) the total amount of Controlled boot transferred to 

Distributing’s creditors, (c) the fair market value of nonqualified preferred stock transferred to 

Distributing’s creditors, and (d) the total principal amount of Controlled debt transferred to 

Distributing’s creditors. 

The proposal would not limit the amount of stock (or right to acquire stock) in Distributing or 

Controlled received as part of the transaction, which the statute treats as property qualifying for 

1 This proposal would eliminate those opportunities by extending Congress’ prior amendments to section 361 that 

eliminated unlimited nonrecognition treatment for Controlled boot transferred to Distributing’s creditors. H.R. Conf. 

Rep. 108-755 (Oct. 7, 2004), at 770 (observing that the amount of property that may be distributed to creditors 

without gain recognition is unlimited under then-present law). 2 Gregory v. Helvering, 293 U.S. 465, 469 (1935) (“But the question for determination is whether what was done, 

apart from the tax motive, was the thing which the statute intended.”); S. Rep. No. 82-781, at 58 (1951) 

(emphasizing that “all of the new corporations as well as the parent [must] carry on a business”).
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

nonrecognition treatment. This exception reflects the fact that such qualifying property does not 

give rise to the same tax-free monetization concerns that are posed by Controlled debt, which 

more closely resembles cash than an equity interest.

Under the proposal, an excess monetization amount would cause Distributing to recognize gain 

in two ways. First, Distributing would recognize gain dollar-for-dollar equal to the smaller of 

Distributing’s excess monetization amount or the amount of Controlled boot that Distributing 

transfers to its creditors. Therefore, if Distributing’s excess monetization amount equaled $3 

billion and Distributing transferred $4 billion of Controlled boot to its creditors, Distributing 

would recognize $3 billion of gain. 

Second, Distributing would recognize gain if Distributing’s excess monetization amount exceeds 

the amount of Controlled boot that Distributing transfers to Distributing’s creditors. Specifically, 

this remaining excess monetization amount would cause an equal principal amount of Controlled 

debt to be treated as if sold in a taxable sale. Therefore, if Distributing’s excess monetization 

amount equaled $5 billion, and Distributing transferred $4 billion of Controlled boot and $1 

billion of Controlled debt to Distributing’s creditors, Distributing would recognize gain to the 

extent that $1 billion exceeds the adjusted basis of that Controlled debt. This would be in 

addition to the $4 billion in dollar-for-dollar gain on the Controlled boot transferred to 

Distributing’s creditors.

Prevent tax avoidance through the transfer of contingent liabilities to Controlled 

The proposal would impose two additional requirements under section 355 that, if not satisfied, 

would result in gain recognition by Distributing (but not Distributing’s shareholders). First, 

under the proposal, Controlled must be adequately capitalized as a result of the divisive 

reorganization. Second, Controlled must continue to be an economically viable entity after the 

completion of the divisive reorganization. The satisfaction of both of these requirements would 

be based on all relevant facts and circumstances,3 including (a) the projected, as well as actual, 

amount of contingent Distributing liabilities assumed by Controlled, and (b) whether Controlled 

declares bankruptcy within the five-year period following the divisive reorganization. In 

addition, the proposal would authorize the Secretary or her delegates to promulgate such 

regulations as may be necessary to carry out the purposes of the proposal or to prevent the 

avoidance of tax.

Both parts of the proposal would be effective for transactions occurring after enactment. 

However, the new rules would not apply to any distribution pursuant to a divisive reorganization 

described in a ruling request initially submitted to the Internal Revenue Service on or before the 

date of enactment (if the request has not been withdrawn and for which a ruling has not been 

issued or denied in its entirety as of such date). 

3 For purposes of this analysis, the fact that one or more creditors would lend to Controlled would not be relevant.
11 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

LIMIT LOSSES RECOGNIZED IN LIQUIDATION TRANSACTIONS 

Current Law

In general, if a corporation distributes its property in complete liquidation, the shareholders of 

the corporation recognize gain or loss on their stock under section 331, and the corporation 

recognizes gain or loss on the property distributed to the shareholders under section 336. Under 

section 332, however, if the same corporate shareholder owns 80 percent or more (by vote and 

value) of the distributing corporation’s stock, then the 80 percent corporate shareholder does not 

recognize gain or loss on the liquidation and, under section 337, the liquidating corporation does 

not recognize gain or loss on property distributed to the 80 percent shareholder. Related party 

stock ownership is not taken into account for purposes of determining whether the 80 percent

threshold is satisfied, unless the shareholders are members of a single U.S. consolidated group. 

Section 267(a) disallows losses recognized on sales or exchanges of property between related 

parties. However, losses recognized on the sale or exchange of property between members of a 

controlled group of corporations, are generally deferred under section 267(f)(2) until the property 

is transferred outside the controlled group. For this purpose, a controlled group of corporations is 

defined using a 50 percent ownership threshold under sections 267(f)(1) and 1563(a). Section

267 does not apply to losses incurred on the complete liquidation of a corporation. 

Reasons for Change 

Taxpayers with a built-in loss in the stock of a subsidiary may be able to recognize the loss on a 

taxable liquidation within a controlled group of corporations under section 331, without exiting 

their investment. For example, a corporate taxpayer may transfer more than 20 percent of the 

stock of the subsidiary to a related entity, reducing ownership below the 80 percent threshold, 

and then cause the subsidiary to liquidate.4 The liquidation is often accomplished through a 

“check-the-box” election to be classified as a partnership rather than a corporation, an election 

which applies only for U.S. income tax purposes. Structuring into such taxable liquidations can

also be used to recognize a loss on property held by the liquidating corporation under section 

336, such as in cases involving a foreign-owned domestic corporation. 

Proposal 

Section 267 would be modified to apply to complete liquidations within a controlled group 

where the assets of the liquidating corporation remain in the controlled group after the 

liquidation. Where applicable, this would cause losses – both on the stock of the liquidating 

corporation and the property it holds – to be denied. The proposal would also grant the Secretary 

and her delegates the authority to allow for the deferral, rather than the denial, of such losses 

under the principles of section 267(f), as well to address the use of controlled partnerships to 

4 Granite Trust Co. v. United States, 238 F.2d 670 (1st Cir. 1956).
12

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

avoid these rules. 

The proposal would apply to distributions after the date of enactment.
13 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

PREVENT BASIS SHIFTING BY RELATED PARTIES THROUGH PARTNERSHIPS 

Current Law

A partnership is permitted to make a section 754 election to adjust the basis of its property when 

it makes certain distributions of money or property to a partner. For example, if a partnership 

distributes property to a partner and the partnership has a section 754 election in effect, the 

partnership may increase (“step-up”) the basis of its non-distributed property. If there is no gain 

recognized by the distributee-partner as a result of the distribution, the partnership step-up is 

generally equal to the excess of the partnership’s basis in the distributed property over the 

distributee-partner’s basis in its interest. If applicable, the distributee-partner’s basis in its 

interest is first reduced (but not below zero) by the amount of cash distributed to the partner.

Reasons for Change 

Under current law, related-party partners may use a section 754 election to shift basis between 

partners and achieve an immediate tax savings for the partners as a group without any 

meaningful change in the partners’ economic arrangement.

More specifically, in partnerships with related-person partners, a partnership basis step-up could 

be designed to shift basis from non-depreciable, non-amortizable partnership property to 

depreciable or amortizable partnership property, resulting in immediate increases in depreciation 

or amortization deductions for remaining partners related to the distributee-partner. For example, 

when a partnership distributes property to a partner, the distributee-partner may take a basis in 

the distributed property that is less than that of the distributing partnership, resulting in a 

decrease (“step-down”) in the basis of the distributed property in the hands of the distributeepartner. In such a situation, the distributing partnership is allowed to step-up the basis of its nondistributed property by an amount equal to the distributee-partner’s step-down in the basis of its 

distributed property. If the distributed property is held by the distributee-partner indefinitely, the 

basis step-down does not create taxable income for the distributee-partner, while the basis stepup to the distributing partnership’s depreciable or amortizable property could result in remaining 

partners related to the distributee-partner immediately benefiting from increased amounts of 

allocable deductions for depreciation or amortization. 

Proposal 

The proposal would reduce the ability of related parties to use a partnership to shift partnership 

basis among themselves for the purpose of creating advantageous tax results with no meaningful 

economic consequences. In the case of a distribution of partnership property that results in a 

step-up of the basis of the partnership’s non-distributed property, the proposal would apply a 

matching rule that would prohibit any partner in the distributing partnership that is related to the 

distributee-partner from benefitting from the partnership’s basis step-up until the distributeepartner disposes of the distributed property in a fully taxable transaction. 
14

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

The Secretary and her delegates would have the authority to prescribe regulations necessary to 

implement the matching rule with respect to related parties.

The proposal would be effective for partnership taxable years beginning after December 31, 

2023.
15 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

CONFORM DEFINITION OF “CONTROL” WITH CORPORATE AFFILIATION TEST

Current Law

Most large businesses in the United States are comprised of corporate affiliates connected to the 

parent company through direct and indirect links of stock ownership. In order to administer the 

income tax to these corporate groups in a manner that reflects economic substance and prevents 

abuse, the Internal Revenue Code (Code) must define what it means for one corporation to 

“control” another.

For purposes of most corporate tax provisions, “control,” as defined by section 368(c) of the 

Code, requires ownership of stock possessing at least 80 percent of the total combined voting 

power of all classes of voting stock and at least 80 percent ownership of the total number of 

shares of each class of outstanding nonvoting stock of the corporation. For the purpose of 

determining whether a corporation is a member of an “affiliated group” of corporations under 

section 1504(a)(1) of the Code, the “affiliation” test is significantly different. Specifically, the 

test under section 1504(a)(2) requires ownership of stock possessing at least 80 percent of the 

total voting power of the stock of the corporation and that has a value of at least 80 percent of the 

total value of the stock of the corporation. 

Reasons for Change 

The control test under section 368(c) creates potential for taxpayers to improperly achieve 

desired tax outcomes through structured transactions. By carefully allocating voting power 

among the shares of a corporation, taxpayers can manipulate the section 368(c) control test in 

order to qualify or not qualify, as desired, a transaction as tax-free. For example, a taxpayer may 

structure a transaction in this manner to avoid tax-free treatment in order to recognize a loss. In 

addition, the absence of a value component under this standard allows corporations to retain 

control of a corporation but to “sell” a significant amount of the value of the corporation tax-free. 

A uniform ownership test for corporate transactions would reduce the complexity currently 

caused by these inconsistent tests. 

Proposal 

The proposal would conform the control test under section 368(c) with the affiliation test under 

section 1504(a)(2). Therefore, “control” would be defined as the ownership of at least 80 percent 

of the total voting power and at least 80 percent of the total value of stock of a corporation. The 

term “stock” would not include certain preferred stock that meets the requirements of section 

1504(a)(4). 

The proposal would be effective for transactions occurring after December 31, 2023. 
16 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

STRENGTHEN LIMITATION ON LOSSES FOR NONCORPORATE TAXPAYERS

Current Law

Section 461(l) of the Internal Revenue Code (Code) provides that, for taxable years 2021 through 

2028 (inclusive of the extensions under the American Rescue Plan Act of 2021 and the Inflation 

Reduction Act of 2022), any excess business losses are disallowed for noncorporate taxpayers. 

Excess business losses are the excess of current-year net business losses over a specified amount. 

In 2023, these specified amounts are $578,000 for married couples filing jointly, and $289,000 

for all other taxpayers. These specified amounts are adjusted for inflation each year. 

In determining the amount of an excess business loss, business losses for the taxable year 

exclude net operating loss (NOL) deductions and the 20 percent deduction for qualified business 

income under section 199A of the Code. Additionally, income, deductions, and gains attributable 

to a taxpayer’s performance of services as an employee (i.e., wage income) are disregarded. 

Lastly, business income or gains include capital gain net income only when attributable to a trade 

or business. 

Excess business losses may be carried forward and deducted as NOLs in subsequent years. 

Reasons for Change 

In general, for individual taxpayers, non-passive losses from a business activity may offset 

income or gains from unrelated activities. There are several reasons why this is undesirable. 

First, evidence from randomized audits suggests that business losses are especially likely to be 

misreported on a taxpayer’s Federal income tax return. The benefit of allowing business losses to 

offset other types of income or gain without limitation provides an additional incentive for such 

misreporting on the return. 

Second, the ability to use business losses to offset unrelated income or gain creates a distortion in 

entity organization choice. The business losses may generate a reduction in tax liability much 

earlier if the business is organized as a pass-through entity rather than a C corporation because C 

corporation losses do not flow through to individual owners. As a result, C corporations’ 

business losses cannot be deducted by individual owners of C corporations, and a C 

corporations’ ability to deduct business losses (including those carried from prior years) is 

limited only to the extent they have business income or gain. By constraining individuals’ 

abilities to offset income sources such as wages with nonpassive pass-through business losses, 

section 461(l) creates a more similar tax regime for business losses across different forms of 

business organization and types of business activity. 

Section 461(l) is designed to reduce the ability of individual taxpayers to use business losses to 

offset unrelated income by capping net business losses at $289,000 (or $578,000 for married 

filing jointly taxpayers), indexed for inflation. However, under current law, section 461(l) 

contains a significant deficiency: the losses denied by section 461(l) in a current year become an 

NOL carryforward in the subsequent year, subject only to the general limitations in section 172 
17 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

(e.g., NOLs may not reduce taxable income by more than 80 percent). For example, consider a 

taxpayer who each year has a large amount of business losses, an even larger amount of nonbusiness gains, and no other income. Section 461(l) effectively delays the benefit of the excess 

business loss for only one year. In contrast, under the proposal this taxpayer would never be able 

to benefit from the excess business loss. 

Proposal 

The proposal would make permanent the excess business loss limitation. It would also treat 

excess business losses carried forward from the prior year as current-year business losses instead 

of as NOL deductions. 

The proposal would be effective for taxable years beginning after December 31, 2023. 
18 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

ACCELERATE AND TIGHTEN RULES ON EXCESS EMPLOYEE REMUNERATION

Current Law

Section 162(m) of the Internal Revenue Code (Code) generally disallows a deduction by a 

publicly held corporation for compensation in excess of $1 million paid to certain employees and 

former employees (“covered employees”) in a taxable year. Covered employees include the chief 

executive officer (CEO); chief financial officer (CFO); the three highest-paid non-CEO, nonCFO officers; or anyone who met these criteria for any previous taxable year (but not in taxable 

years beginning before December 31, 2016). 

For taxable years beginning after December 31, 2026, the definition of covered employee is 

expanded to include the next five highest-paid employees. 

The section 162(m) deduction disallowance rules apply to “applicable employee remuneration” 

in excess of $1 million paid to a covered employee in the taxable year. In general, applicable 

employee remuneration means all otherwise-deductible remuneration paid to an employee (or an 

employee’s beneficiary) for services performed, including cash and non-cash remuneration, 

performance-based compensation, and commissions, regardless of when the services were 

performed. Certain types of compensation are not subject to the deduction disallowance and are 

not taken into account in determining whether other compensation exceeds $1 million, including 

(a) certain grandfathered compensation payments, (b) payments made to a tax-favored retirement 

plan (including salary-reduction contributions), and (c) amounts that are excludable from the 

employee’s gross income, such as employer-provided health benefits and miscellaneous fringe 

benefits. 

Reasons for Change 

Under current law, employers are able to plan around the section 162(m) deduction disallowance 

rules by using various structures to compensate covered employees. The proposal would address 

certain of these arrangements.

Section 162(m) does not include an entity aggregation rule, and the aggregation rule in the 

regulations is not as broad as the rules that generally apply in other contexts, in particular to 

employer-sponsored retirement plans and other employee benefits. Some taxpayers have used the 

lack of a comprehensive aggregation rule to avoid the application of the deduction disallowance 

rules. The proposal would add an aggregation rule to section 162(m) to ensure that publicly held 

corporations and each of the members of their controlled groups are subject to the section 

162(m) deduction disallowance. 

Some taxpayers have tried to avoid the application of the section 162(m) deduction disallowance 

rules by paying a covered employee’s compensation from an affiliated partnership, rather than 

directly from the publicly held corporation. The proposal would clarify and reinforce the types of 

compensation subject to the deduction disallowance rules. 
19 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

To address concerns that taxpayers structure compensation arrangements to avoid the application 

of the deduction disallowance rules, the proposal would give the Secretary broad authority to 

enforce the rules.

Proposal 

The proposal would address the deduction disallowance for compensation in excess of $1 million 

paid to covered employees by amending section 162(m) to add or modify a number of 

provisions. 

First, it would accelerate the effective date of the expanded definition of covered employees 

from taxable years beginning after December 31, 2026, to taxable years beginning after 

December 31, 2023. 

Second, the proposal would add an aggregation rule that would treat all members of a controlled 

group within the meaning of section 414(b), (c), (m), and (o) of the Code as a single employer 

for purposes of determining the covered employees and applying the deduction disallowance for 

compensation paid to these employees in excess of $1 million. The section 414 controlled group 

rules are the rules used to treat related entities as a single employer for other employee benefits 

purposes. 

Third, the proposal would amend section 162(m) to ensure that otherwise deductible 

compensation paid to a covered employee is considered applicable employee remuneration, 

whether or not paid directly by the publicly held corporation. 

Finally, the proposal expands the regulatory authority of the Secretary to issue regulations and 

other guidance as necessary to carry out the purposes of section 162(m) and to prevent the 

avoidance of the rule, including through the performance of services other than as an employee 

or by payment of compensation through a partnership or other pass-through entity. 

The proposal would be effective for taxable years beginning after December 31, 2023. 
20 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

PREVENT PRISON FACILITY RENT PAYMENTS FROM CONTRIBUTING TO 

QUALIFICATION AS A REIT

Current Law

If a C corporation qualifies as a Real Estate Investment Trust (REIT), it can deduct the dividends 

that it pays to its shareholders in order to avoid an entity-level tax on its income. To qualify as a 

REIT for a taxable year, the corporation must satisfy various criteria, including two income tests: 

(a) in general, at least 95 percent of its gross income for the year must be derived from sources 

on one list, and (b) at least 75 percent of its gross income for the year must be derived from 

sources on a second list. (Both lists include “rents from real property.”) 

Even if, for some year, a corporation would not satisfy the 95 percent and/or the 75 percent test, 

the Secretary may treat some non-qualifying income as qualifying or may treat some nonqualifying income as not being gross income. These actions to cause the corporation to qualify as 

a REIT may be taken to the extent necessary to carry out the purposes of the REIT provisions of 

the Internal Revenue Code (Code) and applies only for purposes of those provisions. 

REITs may own real estate assets of private for-profit prisons. Often the REIT owns the prison 

real estate assets and receives rents from the (possibly related) business that is operating the 

prison. 

Reasons for Change 

A January 26, 2021, Executive Order forbade the Federal Department of Justice from entering 

any new or renewed contracts with privately operated criminal detention facilities. The 

Executive Order described investigations that had uncovered situations in which “privately 

operated criminal detention facilities do not maintain the same levels of safety and security” as 

do governmentally operated facilities. In addition, it is important to “reduce profit-based 

incentives to incarcerate.” 

Although the Executive Order will phase out private operation of Federal prisons, it does not 

affect REITs’ involvement with non-Federal facilities. The reasons underlying the Executive 

Order, however, make it inappropriate to provide the tax benefits of REIT status for the private 

operation of any detention facility. 

Proposal 

The proposal would exclude from both the 95 percent and the 75 percent income lists any rent 

received from a prison or other detention facility. The exclusion would apply to rent from any 

rented property a substantial use of which is in connection with punishment, detention, or 

correction. Moreover, the Secretary would not have the ability under section 856(c)(5)(J) of the 

Code either to treat that rent as qualifying income, or to exclude it from gross income, for 
21

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

purposes of the REIT provisions of the Code.

The proposal would be effective for taxable years beginning after December 31, 2023.
22 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

REFORM INTERNATIONAL TAXATION 

REVISE THE GLOBAL MINIMUM TAX REGIME, LIMIT INVERSIONS, AND MAKE 

RELATED REFORMS

Current Law

Global minimum tax regime with respect to controlled foreign corporation earnings 

Any U.S. shareholder of a controlled foreign corporation (CFC) is taxed annually in the United 

States under the global minimum tax in Internal Revenue Code (Code) section 951A with respect 

to its CFCs (generally referred to as global intangible low-taxed income, or GILTI). A U.S. 

shareholder’s global minimum tax inclusion is determined by combining its pro rata share of the 

tested income (or tested loss) of its CFCs. A CFC’s tested income is the excess of certain gross 

income of the CFC over the deductions of the CFC that are properly allocable to the CFC gross 

tested income. A CFC’s tested loss is the excess of the CFC’s properly allocable deductions over 

the CFC’s gross tested income. A U.S. shareholder’s pro rata share of a CFC’s tested loss may be 

used to offset the shareholder’s pro rata share of the tested income of another CFC owned by the 

shareholder; however, if there is a net tested loss, the U.S. shareholder has no global minimum 

tax inclusion. Any unused loss may not be carried back or carried forward for use in another 

year.

The U.S. shareholder’s actual global minimum tax inclusion reflects a reduction for a 10 percent 

return on qualified business asset investment (QBAI), which is generally foreign tangible 

property eligible for depreciation, such as buildings or machinery. QBAI does not include assets 

that are not depreciable (such as land) or intangible assets (such as patents, copyrights, and 

trademarks). 

Under section 250, subject to a taxable income limitation, a corporate U.S. shareholder is 

generally allowed a 50 percent deduction against its global minimum tax inclusion. The section 

250 deduction generally results in a 10.5 percent U.S. effective tax rate on a corporate U.S. 

shareholder’s global minimum tax inclusion under the current U.S. corporate tax rate of 21 

percent. The 50 percent deduction is scheduled to be reduced to 37.5 percent starting in 2026. 

Certain foreign income taxes paid by a CFC are creditable against a corporate U.S. shareholder’s 

U.S. tax liability attributable to its global minimum tax inclusion. The allowable credit is limited 

to 80 percent of the amount of the foreign income taxes properly allocable to a CFC’s tested 

income taken into account as part of the global minimum tax inclusion. Unlike foreign income 

taxes allocated to other types of foreign source income, if a taxpayer cannot claim a credit for 

foreign income taxes associated with its global minimum tax inclusion in a given year because of 

the operation of the foreign tax credit (FTC) limitation, those foreign income taxes are not 

eligible to be carried back or carried forward for use in another taxable year.
23 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Under Treasury regulations, if the foreign effective tax rate on the gross income of a CFC that 

would otherwise be part of a global minimum tax inclusion exceeds 90 percent of the U.S. 

corporate income tax rate, the U.S. shareholder of the CFC is generally permitted to exclude that 

gross income (and the associated deductions and foreign income taxes) from its global minimum 

tax inclusion. A similar statutory rule applies for purposes of certain Subpart F income, i.e., 

certain foreign income earned indirectly by U.S. persons at full U.S. tax rates. 

A single FTC limitation generally applies to a corporate U.S. shareholder’s global minimum tax 

inclusion. This means foreign income taxes paid to a high-tax foreign jurisdiction can be used to 

reduce the U.S. tax liability with respect to global minimum tax income earned in lower-tax 

jurisdictions. Thus, generally, a U.S. shareholder’s aggregate U.S. tax (after accounting for the 

allocation of U.S. shareholder deductions) on its global minimum tax inclusion is reduced by 

reference to the average foreign effective tax rate on its aggregate global minimum tax income 

rather than the effective tax rates in each individual foreign jurisdiction where income is earned. 

Deduction for dividends received from non-controlled foreign corporations 

The Code provides different dividends received deductions for domestic corporate shareholders, 

depending on the nature of the dividend distributed, the shareholder’s ownership level in the 

distributing corporation, and whether the distributing corporation is a domestic or foreign 

corporation. First, section 243 provides a dividends received deduction (section 243 DRD) for 

domestic corporate shareholders on distributions received from other domestic corporations. The 

amount of the section 243 DRD depends on the level of ownership in the domestic corporation. 

In general, if the domestic corporate shareholder is part of the same affiliated group as the 

distributing corporation, the section 243 DRD is 100 percent. If the domestic corporate 

shareholder owns at least 20 percent of the distributing corporation but is not affiliated with the 

distributing corporation, then the section 243 DRD is 65 percent; in all other cases, the section 

243 DRD is 50 percent. 

Under section 245, a domestic corporate shareholder generally is entitled to a dividends received 

deduction (section 245 DRD) for the U.S.-source portion of dividends received from certain 

foreign corporations. A foreign corporation qualifies for the section 245 DRD only if it is not a 

passive foreign investment company and at least 10 percent of the stock is owned by the 

domestic corporate shareholder. The amount of the section 245 DRD is based on the amount 

provided in section 243. 

However, if a domestic corporation is a U.S. shareholder of a foreign corporation, in general, the 

domestic corporation is allowed a 100 percent dividends received deduction under Code section 

245A (section 245A DRD) equal to the foreign-source portion of any dividend (“foreign-sourced 

dividend”) received from that foreign corporation. For example, if the undistributed earnings of 

the foreign corporation are entirely foreign sourced, then this section 245A DRD allows the 

domestic corporation to receive a dividend from the foreign corporation without any increase in 

its U.S. tax burden. Under Code section 951(b), a U.S. shareholder is a U.S. person who owns at 

least 10 percent of the stock (by vote or value) of a foreign corporation. 
24 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

A foreign corporation whose stock is majority owned directly or indirectly by U.S. shareholders 

is a CFC. When a CFC earns Subpart F income or tested income, U.S. shareholders are subject to 

current U.S. taxation (but eligible for FTCs) on their pro rata shares of that income under 

sections 951(a) and 951A(a) of the Code, respectively. When these previously taxed earnings 

and profits are remitted to U.S. shareholders, under section 959, those earnings are not subject to 

U.S. tax again. 

Treatment of deductions properly allocable to exempt income 

Certain dividends received by a domestic corporation from foreign corporations are effectively 

exempt from U.S. tax by reason of the section 245A DRD. Specifically, section 245A provides a 

domestic corporation a deduction equal to the foreign-source portion of a dividend received from 

a specified 10 percent owned foreign corporation, but only if the domestic corporation is a U.S. 

shareholder of the foreign corporation. 

Section 265(a)(1) generally disallows a deduction for any amount that is allocable to certain 

classes of income that are wholly exempt from U.S. tax. For purposes of determining a 

taxpayer’s FTC limitation, tax exempt assets and their associated income are disregarded under 

section 864(e)(3). Section 904(b)(4) applies to disregard (solely for purposes of the FTC 

limitation) deductions allocable to income attributable to foreign stock other than global 

intangible low-taxed income (GILTI) or Subpart F income inclusions. 

Limitations on the ability of domestic corporations to expatriate 

Section 7874 applies to certain transactions (known as “inversion transactions”) in which a U.S. 

corporation is acquired by a foreign corporation (“foreign acquiring corporation”) in a 

transaction where (a) substantially all of the assets held directly or indirectly by the domestic 

corporation are acquired directly or indirectly by the foreign acquiring corporation; (b) the 

former shareholders of the domestic corporation hold at least a 60 percent ownership interest in 

the foreign acquiring corporation by reason of the acquisition; and (c) the foreign acquiring 

corporation, together with its expanded affiliated group, does not conduct substantial business 

activities in the country in which the foreign acquiring corporation is created or organized. 

Similar provisions apply to acquisitions of domestic partnerships. The tax consequences of an 

inversion transaction depend on the level of continuing former shareholder ownership. If the 

continuing former shareholder ownership of the foreign acquiring corporation is at least 80 

percent (by vote or value), the foreign acquiring corporation is treated as a domestic corporation 

for all U.S. tax purposes (the “80 percent test”). If the continuing former shareholder ownership 

is at least 60 percent but less than 80 percent (by vote or value), the foreign acquiring corporation 

is respected as foreign but full U.S. tax must generally be paid with respect to certain income or 

gain recognized by the expatriated U.S. entity and its affiliates in connection with the inversion 

or within the ten-year period ending after the completion of the inversion (the “60 percent test”). 

Furthermore, the Tax Cuts and Jobs Act of 2017 adopted several anti-abuse provisions that apply 

to inversion transactions that satisfy the 60 percent test. 
25 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Stock losses attributable to foreign income that was taxed at a reduced rate

Section 250 generally provides a 50 percent deduction (37.5 percent for taxable years beginning 

after December 31, 2025) for a global minimum tax inclusion, resulting in a 10.5 percent 

effective tax rate (13.125 percent for taxable years beginning after December 31, 2025) on this 

income (before taking FTCs into account). (This General Explanation of the Administration’s 

Fiscal Year 2024 Revenue Proposals proposes to increase the corporate rate to 28 percent and 

reduce the section 250 deduction rate to 25 percent, resulting in a 21 percent effective tax rate on 

this income.) A global minimum tax inclusion increases a U.S. shareholder’s basis in the stock of 

a CFC dollar-for-dollar (that is, without regard to the 50 percent deduction). Thus, if stock of a 

CFC is sold at a loss, the U.S. shareholder can take a deduction at the full value of the U.S. 

corporate tax rate. A similar result occurs if a U.S. shareholder had income inclusions with 

respect to a specified foreign corporation under the section 965 transition tax. This is because a 

section 965(c) deduction was allowed for a section 965 inclusion, resulting in a lower effective 

tax rate (prior to FTCs) on this income, but basis in the stock of the specified foreign corporation 

was increased dollar-for-dollar. 

Information reporting requirements for foreign business entities

Section 6038 generally requires a U.S. person who controls a foreign business entity (whether a 

corporation or partnership) to report certain information regarding such entity. The statute 

provides for penalties for a failure to report. 

Reasons for Change 

Global minimum tax regime with respect to CFC earnings 

The reduction to global minimum tax inclusions for a percentage of certain foreign tangible 

assets incentivizes U.S. multinational companies to invest in tangible assets abroad rather than 

domestically. The elimination of QBAI would eliminate this perverse investment incentive while 

simplifying the taxation of CFCs. 

The difference between the effective U.S. tax rate on global minimum tax inclusions and the 

effective U.S. tax rate on income earned directly by U.S. companies that results from the section 

250 deduction incentivizes U.S. companies to locate profits and operations offshore. Reducing 

the section 250 deduction for these foreign earnings would reduce this perverse incentive. 

The determination of a U.S. company’s global minimum tax inclusion and residual U.S. tax 

liability on such inclusions on a global blended basis incentivizes U.S. companies with 

operations in high-tax jurisdictions to invest in lower-tax jurisdictions, to take advantage of the 

automatic global averaging under the existing global minimum tax regime. In some cases, U.S. 

companies may have an incentive to locate operations in jurisdictions with corporate income tax 

rates higher than the United States, to average these high taxes against low-taxed income earned 

elsewhere. This automatic blending feature exacerbates the race to the bottom on corporate 

income tax rates and encourages U.S. companies to report profits (as well as the activities that 
26 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

give rise to those profits) in offshore jurisdictions rather than in the United States, creating a 

perverse “America last” tax policy. Similar global blending concerns arise with respect to high 

and low-taxed income earned through foreign branches. 

In contrast, determining a taxpayer’s global minimum tax inclusion and residual U.S. tax liability 

on such inclusions on a jurisdiction-by-jurisdiction basis would be a stronger deterrent to profit 

shifting and offshoring because residual U.S. tax would be due on every dollar earned in a lowtax jurisdiction at the minimum rate, with no ability to reduce that residual U.S. tax for excess 

foreign taxes paid to higher-tax jurisdictions.

In a jurisdiction-by-jurisdiction system, high-tax income cannot be used to offset low-tax income 

from other jurisdictions. In contrast, as discussed above, current law allows more favorable 

global blending of income and tax. This favorable treatment is partially offset by restrictive rules 

for foreign tax credits and losses. Thus, in conjunction with the adoption of a jurisdiction-byjurisdiction system, elimination of the QBAI exemption, and a higher effective GILTI rate, the 

proposal would also allow increased use of foreign tax credits and both foreign tax credit and 

loss carryforwards.

In December 2021, the OECD/G20 Inclusive Framework on BEPS reached agreement on Model 

Rules under Pillar Two for a comprehensive jurisdiction-by-jurisdiction global minimum 

taxation regime that would help end the race to the bottom on corporate tax rates in a manner that 

puts the United States and other countries on a more level playing field.5 The Pillar Two

“income inclusion rule” (IIR) applies on a “top down” basis. That is, it is applied only by the 

ultimate parent entity of a multinational group, and generally is not applied by lower-tier holding 

companies. Therefore, in the case of foreign-controlled domestic corporations that own CFCs, 

the IIR is expected to be applied by the foreign parent with respect to low-taxed CFC income.

Deduction for dividends received from non-controlled foreign corporations 

The section 245A DRD effectively exempts from U.S. taxation the foreign-sourced dividend of a 

CFC. With limited exceptions, for the earnings to be eligible for the section 245A DRD, the 

earnings must first be potentially subject to tax under the global minimum tax or Subpart F 

regimes (or be subject to a sufficiently high level of foreign tax). However, current law also 

effectively exempts the foreign-sourced dividend from a foreign corporation that is not a CFC, 

even though such earnings are not subject to tax under the global minimum tax or Subpart F 

regimes and may be subject to low or no tax in the foreign jurisdiction. Moreover, the section 

245A DRD for the foreign-source earnings of non-CFCs (100 percent) is larger than the section 

5 In December 2021, the OECD/G20 Inclusive Framework on BEPS reached agreement on Model Rules under Pillar 

Two for a comprehensive jurisdiction-by-jurisdiction global minimum taxation regime. OECD, “Tax Challenges 

Arising from the Digitalisation of the Economy Global Anti-Base Erosion Model Rules (Pillar Two),” 

https://www.oecd.org/tax/beps/tax-challenges-arising-from-the-digitalisation-of-the-economy-global-anti-baseerosion-model-rules-pillar-two.pdf; OECD, “Tax Challenges Arising from the Digitalisation of the Economy – 

Commentary to the Global Anti-Base Erosion Model Rules (Pillar Two),” https://www.oecd.org/tax/beps/taxchallenges-arising-from-the-digitalisation-of-the-economy-global-anti-base-erosion-model-rules-pillar-twocommentary.pdf. 
27 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

243 DRD available on dividends from domestic corporations or the section 245 DRD available 

on dividends from foreign corporations on U.S.-source income, where the shareholder owns 50 

percent or less of the distributing corporation (50 to 65 percent). 

Deductions attributable to income exempt from U.S. tax and taxed at preferential rates 

To the extent deductions are claimed for expenses allocable to income eligible for a deduction 

under section 245A or section 250, on the basis that section 265 does not apply because that 

income is not “wholly exempt” from U.S. tax, the United States is providing a tax subsidy for 

foreign investment. 

Limitations on the ability of domestic corporations to expatriate

To reduce their U.S. tax liabilities, certain domestic entities have been combining with smaller 

foreign entities in transactions that avoid the 80 percent test but that may satisfy the 60 percent

test under section 7874. These combination transactions are typically structured so that the 

domestic entity and the foreign entity become subsidiaries of a newly formed foreign parent 

company. The domestic entities can often substantially reduce their U.S. income tax liability 

following these combination transactions with only a minimal change to their operations. 

Inversion transactions raise significant policy concerns because they facilitate the erosion of the 

U.S. tax base through deductible payments by the U.S. members of the multinational group to 

the non-U.S. members and through aggressive transfer pricing for transactions between such 

U.S. and non-U.S. members. The inverted group also may reduce its U.S. taxes by reducing or 

eliminating altogether its direct and indirect U.S. ownership in foreign subsidiaries or assets. The 

adverse tax consequences under current law of 60 percent inversion transactions have not 

deterred taxpayers from pursuing these transactions. There is no policy reason to respect an 

inverted structure when the owners of a domestic entity retain a controlling interest in the group, 

only minimal operational changes are expected, and there is potential for substantial erosion of 

the U.S. tax base. Furthermore, an inverted structure should not be respected when the structure 

results from the combination of a larger U.S. group with a smaller entity or group and, after the 

transaction, the expanded affiliated group is primarily managed and controlled in the United 

States and does not have substantial business activities in the relevant foreign country, even if the 

shareholders of the domestic entity do not maintain control of the resulting multinational group. 

Stock losses attributable to foreign income that was taxed at a reduced rate

Under current law, if an increase in stock basis from an inclusion under section 951A or section 

965 results in a loss on the sale or other disposition of the stock, the loss may inappropriately be 

available to offset income or gain that would be subject to the full corporate tax rate even though 

the income inclusion that gave rise to the basis was subject to tax at a reduced rate. 
28 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Definition of foreign business entity 

Because of the shift in emphasis to apply the global minimum tax, Subpart F, and the FTC rules 

using a jurisdiction-by-jurisdiction taxable unit standard, there is a need to collect information at 

the same level, with respect to each taxable unit in a foreign jurisdiction. By obtaining accurate 

information on each taxable unit, compliance and enforcement efforts would be improved. To 

further improve compliance, penalties for failure to provide information should also apply for 

reporting failures at the taxable unit level. 

Proposal 

Revise global minimum tax regime with respect to controlled foreign corporation earnings 

The proposal would make several changes to the existing global minimum tax system. First, the 

QBAI exemption would be eliminated, so that the U.S. shareholder's entire net CFC tested 

income is subject to U.S. tax. Second, the section 250 deduction for a global minimum tax 

inclusion would be reduced to 25 percent, generally increasing the U.S. effective tax rate under 

the global minimum tax (to 21 percent under the proposed U.S. corporate income tax rate of 28 

percent). Third, the “global averaging” method for calculating a U.S. shareholder’s global 

minimum tax would be replaced with a “jurisdiction-by-jurisdiction” calculation. Under the new 

standard, a U.S. shareholder’s global minimum tax inclusion and, by extension, residual U.S. tax 

on such inclusion, would be determined separately for each foreign jurisdiction in which its 

CFCs have operations. This means a separate FTC limitation would apply for each foreign 

jurisdiction. A similar jurisdiction-by-jurisdiction approach would also apply with respect to a 

U.S. taxpayer’s foreign branch income. These changes mean that foreign taxes paid to highertaxed jurisdictions will no longer reduce the residual U.S. tax paid on income earned in lowertaxed foreign jurisdictions. 

With respect to the global minimum tax, the proposal would decrease the 20 percent 

disallowance of FTCs incurred to 5 percent, would allow net operating losses (NOLs) to be 

carried forward (within a single jurisdiction), and would allow FTCs to be carried forward ten 

years (within a single jurisdiction). In each case, the carryover would be at the U.S. shareholder 

level. 

The proposal would also repeal the high-tax exemption to Subpart F income and the crossreference to that provision in the global minimum tax regulations issued under section 951A. 

A domestic corporation that is a member of a foreign-parented controlled group generally owes 

residual U.S. tax when it has a global minimum tax inclusion. The proposal would account for 

any foreign taxes paid by the foreign parent, under an IIR that is consistent with the 

OECD/Inclusive Framework Pillar Two Model Rules on global minimum taxation, with respect 

to the CFC income that would otherwise be part of the domestic corporation’s global minimum 

tax inclusion. The proposal’s jurisdiction-by-jurisdiction approach would also apply for this 

purpose. 
29 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

The reduction in the section 250 deduction to 25 percent would be effective for taxable years 

beginning after December 31, 2022. The other elements of the proposal in this section would be 

effective for taxable years beginning after December 31, 2023. 

Limit the deduction for dividends received from non-controlled foreign corporations 

The proposal would limit the section 245A DRD to only those dividends remitted either by CFCs 

or by qualified foreign corporations, which includes corporations incorporated in a territorial 

possession of the United States and certain corporations eligible for the benefits of a 

comprehensive income tax treaty. A U.S. shareholder would receive a DRD equal to 65 percent 

of the foreign-sourced dividends received from a qualified foreign corporation that is not a CFC 

if the U.S. shareholder owns at least 20 percent of the stock (by vote and value) of the qualified 

foreign corporation. Otherwise, if a U.S. shareholder owns less than 20 percent (by vote or 

value) of the stock of a qualified foreign corporation that is not a CFC, the U.S. shareholder 

would receive a DRD equal to 50 percent of the foreign-sourced dividends received. 

The DRD would remain unchanged for dividends received from CFCs. 

The proposal would be effective for distributions after the date of enactment. 

Reform the treatment of deductions properly allocable to exempt income 

The proposal would expand the application of section 265 to disallow deductions allocable to a 

class of foreign gross income that is exempt from tax or taxed at a preferential rate through a 

deduction (e.g., a global minimum tax inclusion with respect to which a section 250 deduction is 

allowed or dividends eligible for a section 245A deduction).6

 The proposal would provide rules 

for determining the amount of disallowed deductions when only a partial deduction is allowed 

under section 245A with respect to a dividend or a partial section 250 deduction with respect to a 

global minimum tax inclusion. The proposal would also repeal section 904(b)(4). 

The proposal would be effective for taxable years beginning after December 31, 2023. 

Limit the ability of domestic corporations to expatriate 

The proposal would broaden the definition of an inversion transaction by replacing the 80- 

percent test with a greater than 50 percent test and eliminating the 60 percent test. The proposal 

would also provide that, regardless of the level of shareholder continuity, an inversion 

transaction occurs if (a) immediately prior to the acquisition, the fair market value of the 

domestic entity is greater than the fair market value of the foreign acquiring corporation, (b) after 

the acquisition the expanded affiliated group is primarily managed and controlled in the United 

States, and (c) the expanded affiliated group does not conduct substantial business activities in 

the country in which the foreign acquiring corporation is created or organized. The proposal 

6 As is true for all proposals described this volume, this proposal is not intended to create any inferences regarding 

current law, including whether section 265 currently applies to this income.
30 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

would also expand the scope of an acquisition for purposes of section 7874 to include a direct or 

indirect acquisition of substantially all of the assets constituting a trade or business of a domestic 

corporation, substantially all of the assets of a domestic partnership, or substantially all of the 

U.S. trade or business assets of a foreign partnership. Furthermore, a distribution of stock of a 

foreign corporation by a domestic corporation or a partnership that represents either substantially 

all of the assets or substantially all of the assets constituting a trade or business of the distributing 

corporation or partnership would be treated as a direct or indirect acquisition of substantially all 

of the assets or trade or business assets, respectively, of the distributing corporation or 

partnership. The Secretary would be granted regulatory authority to exempt certain internal 

restructurings involving partnerships from the application of section 7874 and to define a trade or 

business for purposes of section 7874. 

The proposal would be effective for transactions that are completed after the date of enactment.

Disallow stock losses attributable to foreign income that was taxed at a reduced rate

The rules for basis in the stock of a foreign corporation would be amended to provide that, for 

purposes of determining loss on a U.S. shareholder’s disposition of stock of a foreign 

corporation, the basis in stock of the foreign corporation is reduced (but not below zero) by the 

sum of (a) the section 245A DRDs allowed to the U.S. shareholder with respect to the stock, (b) 

the deductions for GILTI inclusions that are attributable to the stock, and (c) the deductions for 

income inclusions under the section 965 transition tax that are attributable to the stock. In 

addition, the principles of the proposal would apply to reduce the basis in other property by 

reason of which a domestic corporate U.S. shareholder owns stock of a foreign corporation under 

section 961(a). Finally, the proposal would apply to successors of the basis in stock or other 

property subject to the proposal and to exchanged basis property or similar property. 

The proposal would apply to dispositions occurring on or after the date of enactment (regardless 

of whether the deductions under section 250 or 965(c) were claimed in taxable years prior to 

such date).

Expand the definition of foreign business entity to include taxable units 

The proposal would expand the definition of foreign business entity to treat any taxable unit in a 

foreign jurisdiction as a “foreign business entity” for purposes of applying section 6038. Thus, 

information would be required to be reported separately with respect to each taxable unit, and 

penalties would apply separately for failures to report with respect to each taxable unit. To 

harmonize the reporting with the annual accounting period for which taxable income of a branch 

or disregarded entity is determined, the proposal would also provide that, except as otherwise 

provided by the Secretary or her delegates (Secretary), the annual accounting period for a taxable 

unit that is a branch or disregarded entity is the annual accounting period of its owner. For 

example, if a domestic corporation or a CFC conducts activities in a foreign branch or owns a 

foreign disregarded entity, the annual accounting period of the foreign branch or foreign 

disregarded entity generally would be the annual accounting period of the domestic corporation 

or CFC, respectively. Finally, for a taxpayer who is a U.S. person (as defined in section 
31

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

7701(a)(30) of the Code) but who is resident of a foreign jurisdiction, the proposal would 

provide the Secretary with the authority to treat the taxpayer as a resident of the United States for 

the purpose of identifying a taxable unit subject to reporting under section 6038.

The proposal would apply to taxable years of a controlling U.S. person that begin after 

December 31, 2023, and to annual accounting periods of foreign business entities that end with 

or are within such taxable years of the controlling U.S. person.
32 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

ADOPT THE UNDERTAXED PROFITS RULE

Current Law 

Section 59A of the Internal Revenue Code (Code) imposes a Base Erosion Anti-Abuse Tax 

(BEAT) liability on certain corporate taxpayers in addition to their regular tax liability. Liability 

for BEAT is generally limited to corporate taxpayers with substantial gross receipts that make

deductible payments to foreign related parties above a specified threshold (referred to as a “base 

erosion payment”). Taxpayers potentially liable for this additional tax have three-year average 

gross receipts in excess of $500 million and a “base erosion percentage” exceeding a specified

threshold. The base erosion percentage is generally determined by dividing the taxpayer’s “base 

erosion tax benefits” by the amount of all deductions allowed to the taxpayer for the taxable 

year.7 

A taxpayer’s BEAT liability is computed by referencing the taxpayer’s “modified taxable 

income” and comparing the resulting amount to the taxpayer’s regular tax liability. For purposes 

of this calculation, regular tax liability is reduced by some but not all credits. When calculating 

BEAT liability for taxable years beginning after December 31, 2025, regular tax liability is 

reduced by all credits. A taxpayer’s modified taxable income is equal to its regular taxable 

income increased by base erosion tax benefits with respect to base erosion payments and an 

adjustment for the taxpayer’s net operating loss (NOL) deduction, if any. The taxpayer’s BEAT

liability generally equals the difference, if any, between 10 percent of the taxpayer’s modified 

taxable income and the taxpayer’s regular tax liability (as reduced by certain credits against such 

tax). For taxable years beginning after December 31, 2025, the relevant BEAT rate increases to 

12.5 percent.8

Reasons for Change 

On October 8, 2021, the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting 

reached a comprehensive agreement on minimum taxation under Pillar Two, and on December 

20, 2021, it published Model Rules describing two interlocking Pillar Two rules: (a) an Income 

Inclusion Rule (IIR), which imposes top-up tax on a parent entity with respect to the low-taxed 

income of a member of its financial reporting group; and (b) an Undertaxed Profits Rule 

(UTPR), which denies deductions or requires an equivalent adjustment to tax liability to the 

extent that the low-taxed income of a member of the group is not subject to an IIR.9 

7 Under current Treasury regulations, taxpayers can avoid a BEAT liability by electing to “waive” enough

deductions for payments made to related foreign persons sufficient to remain below the base erosion percentage 

threshold.

8 For all periods, the relevant BEAT rate is one percentage point higher for certain banks and registered securities 

dealers.

9 In December 2021, the OECD/G20 Inclusive Framework on BEPS reached agreement on Model Rules under Pillar 

Two for a comprehensive jurisdiction-by-jurisdiction global minimum taxation regime. OECD, “Statement on a 

Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy,” 

https://www.oecd.org/tax/beps/statement-on-a-two-pillar-solution-to-address-the-tax-challenges-arising-from-thedigitalisation-of-the-economy-october-2021.pdf; OECD, “Tax Challenges Arising from the Digitalisation of the 
33 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

In conjunction with the global intangible low-taxed income (GILTI) regime, adopting the UTPR 

ensures that income earned by a multinational company, whether parented in the United States or 

elsewhere, is subject to a minimum rate of taxation regardless of where the income is earned. 

Just as the GILTI proposal (see Revise the Global Minimum Tax Regime, Limit Inversions, and 

Make Related Reforms) ensures that a minimum per-jurisdiction rate of tax is paid by U.S.-based 

multinationals on income earned through controlled foreign corporations (CFCs), the UTPR 

ensures that a minimum per-jurisdiction rate of tax is paid on income earned in each jurisdiction 

in which foreign-parented multinationals operate. This ensures that companies cannot avoid a 

minimum rate of taxation by, for example, relocating their headquarters to a foreign jurisdiction 

that has not implemented an IIR. The UTPR is designed to encourage countries to adopt the 

global minimum tax agreed to as part of the international negotiations by ensuring that profits in 

low-tax jurisdictions are taxed at the same minimum rate. 

The proposal would increase alignment between the U.S. international tax rules and the 

international system emerging from Pillar Two. In addition, the UTPR has the potential to 

address the concern of erosion of the U.S. corporate tax base more fully and evenly. For 

example, the BEAT does not apply comprehensively to cost of goods sold, or COGS, of 

manufacturing companies in the same manner that it applies to deductions incurred by services 

firms. Further, firms with lower profit margins are more likely to have a BEAT liability than 

similarly situated firms with higher profit margins because the BEAT is a form of alternative 

minimum tax that effectively claws back a percentage of deductions above a threshold level. 

Proposal 

The proposal would repeal the BEAT and replace it with a UTPR that is consistent with the 

UTPR described in the Pillar Two Model Rules. When another jurisdiction adopts a UTPR, the 

proposal also includes a domestic minimum top-up tax that would protect U.S. revenues from the 

imposition of UTPR by other countries. Separately, the proposal would provide a mechanism to 

ensure U.S. taxpayers would continue to benefit from U.S. tax credits and other tax incentives

that promote U.S. jobs and investment. 

The UTPR would disallow domestic corporations’ and domestic branches’ of foreign 

corporations U.S. tax deductions in an amount determined by reference to low-taxed income of 

foreign entities and foreign branches that are members of the same financial reporting group 

(including the common parent of the financial reporting group).10 However, the UTPR would not 

apply with respect to income subject to an IIR that is consistent with the Pillar Two Model Rules, 

Economy Global Anti-Base Erosion Model Rules (Pillar Two),” https://www.oecd.org/tax/beps/tax-challengesarising-from-the-digitalisation-of-the-economy-global-anti-base-erosion-model-rules-pillar-two.pdf. 10 A financial reporting group is any group of business entities that prepares consolidated financial statements and 

that includes at least one domestic entity or domestic branch and at least one foreign entity or foreign branch. 

Consolidated financial statements means those determined in accordance with U.S. Generally Accepted Accounting 

Principles (GAAP), International Financial Reporting Standards (IFRS), or other methods authorized by the 

Secretary under regulations. Under the proposal, the Secretary would be delegated authority to treat a group of 

business entities as a financial reporting group if a financial reporting group would exist had those business entities 

been required to prepare consolidated financial statements. 
34

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

which would include income that is subject to GILTI, reformed as proposed. Thus, the UTPR 

would generally not apply to U.S.-parented multinationals. 

The UTPR would primarily apply to foreign-parented multinationals with operations in low-tax 

jurisdictions. In addition, the UTPR would only apply to financial reporting groups that have 

global annual revenue of the dollar equivalent to €750 million or more in at least two of the prior 

four years.

Under the proposal, when UTPR applies, domestic group members would be disallowed U.S. tax 

deductions to the extent necessary to collect the hypothetical amount of top-up tax required for 

the financial reporting group to pay an effective tax rate of at least 15 percent in each foreign

jurisdiction in which the group has profits.

11 The amount of this top-up tax would be determined 

based on a jurisdiction-by-jurisdiction computation of the group’s profit and effective tax rate

consistent with the Pillar Two Model Rules, which would take into account all income taxes, 

including the corporate alternative minimum tax. As discussed below, the top-up amount would 

be allocated among all of the jurisdictions where the financial reporting group operates that have

adopted a UTPR consistent with the Pillar Two Model Rules (a Qualified UTPR).

The computation of profit and the effective tax rate for a jurisdiction is based on the group’s 

consolidated financial Statements, with certain specified adjustments such as rules to address 

temporary and permanent differences between the financial accounting and tax bases. In 

addition, the computation of a group’s profit for a jurisdiction is reduced by an amount equal to 5 

percent of the book value of tangible assets and payroll with respect to the jurisdiction.12

In addition to the general limitation of the UTPR to financial reporting groups that have global 

annual revenue of at least the dollar equivalent of €750 million, the proposal includes several de 

minimis exclusions. The UTPR would not apply to a group’s profit in a jurisdiction if the threeyear average of the group’s revenue in the jurisdiction is less than $11.5 million and the threeyear average of the group’s profit in the jurisdiction is less than $1.15 million.13 Under an 

exception for groups in the initial phase of their international activity, the UTPR would not apply 

to a group with operations in no more than five jurisdictions outside of the group’s primary 

jurisdiction and the book value of the group’s tangible assets in those jurisdictions is less than 

$57 million. This exception would expire five years after the first day of the first year in which 

the UTPR otherwise would apply to the group.

11 For example, a group with $1,000x of profits in a foreign jurisdiction with no corporate income tax would have a 

top-up tax amount of $150x with respect to that jurisdiction. If the top-up tax were not collected under GILTI or an

IIR implemented by a foreign jurisdiction, a domestic corporation or domestic branch that is a member of the group 

would be subject to a deduction disallowance of $536x, equal to the top-up tax amount of $150x divided by the U.S. 

corporate income tax rate of 28 percent. For simplicity, this example assumes that there are no tangible assets or 

payroll in the foreign jurisdiction with no corporate income tax, and that there are no other jurisdictions with a 

UTPR such that all of the top-up tax is allocated to the domestic corporation or domestic branch. 12 During a transition period of nine years, the exclusion equals 7.8 percent of the book value of tangible assets and 

9.8 percent of payroll, declining annually by 0.2 percentage points for the first four years, by 0.4 percentage points 

for tangible assets and by 0.8 percentage points for payroll for the last five years.

13 Under the proposal, the Secretary would be delegated authority to adjust dollar-based thresholds to address 

currency fluctuations for international standards reflected in Euros.
35 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

The deduction disallowance applies pro rata with respect to all otherwise allowable deductions,14

and applies after all other deduction disallowance provisions in the Code. To the extent that the 

UTPR disallowance for a taxable year exceeds the aggregate deductions otherwise allowable to 

the taxpayer for that year, such excess amount of the UTPR disallowance would be carried 

forward indefinitely until an equivalent amount of deductions are disallowed in future years. 

A coordination rule would reduce the UTPR disallowance imposed by the United States to 

reflect any top-up tax collected by members of the group under a Qualified UTPR (QUTPR) in 

one or more other jurisdictions. With respect to each financial reporting group, the percentage of 

top-up tax allocated to the United States would be determined by the following formula where a 

QUTPR jurisdiction is a jurisdiction applying a qualified UTPR. 

U.S. allocation = 

 50% × Number of employees in the U.S.

Number of employees in all QUTPR jurisdictions 

 + 

 50% × Total book value of tangible assets in the U.S.

Total book value of tangible assets in all QUTPR jurisdictions

The portion of the top-up tax allocated to the United States would be allocated among domestic 

group members (domestic corporations and domestic branches) under regulations prescribed by 

the Secretary or her delegates (Secretary).

If any prior year’s UTPR disallowance has not yet resulted in cash tax liability equal to the full 

amount of the prior year’s allocated top-up tax (for instance, due to net operating losses) then, in 

general, no additional top-up tax for the current year would be allocated to the United States until 

the UTPR disallowance has resulted in a cash tax liability equal to the full amount of the 

allocated top-up tax. Any low-taxed profits of the group for the given year may instead be 

subject to a Qualified UTPR applied in other jurisdictions. 

Whether a foreign jurisdiction has in effect a Qualified UTPR or an IIR that is consistent with 

the Pillar Two Model Rules would be determined by the Secretary under the standard specified 

in the Pillar Two Model Rules. 

The proposal includes a domestic minimum top-up tax that would apply to U.S. profits when 

another jurisdiction adopts the UTPR. This top-up tax equals the excess of (a) 15 percent of the 

financial reporting group’s U.S. profit determined using the same rules as under the UTPR to 

determine the group’s profit for a jurisdiction, over (b) all the group’s income tax paid or accrued 

with respect to U.S. profits (including Federal and State incomes taxes, corporate alternative 

minimum tax, and creditable foreign income taxes incurred with respect to U.S. profits). When 

14 For example, if a taxpayer incurs $50x of interest expense that would otherwise be deductible and would 

otherwise be allowed a $50x depreciation deduction, a UTPR disallowance of $20x would disallow a deduction for 

$10x of the interest expense and $10x of the depreciation. 
36

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

another jurisdiction adopts the UTPR, the proposal would also ensure that taxpayers continue to 

benefit from tax credits and other tax incentives that promote U.S. jobs and investment. 

The proposal to repeal the BEAT and replace it with the UTPR would be effective for taxable 

years beginning after December 31, 2024.
37 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

REPEAL THE DEDUCTION FOR FOREIGN-DERIVED INTANGIBLE INCOME 

Current Law

Current law provides a deduction to domestic corporations on their foreign-derived intangible 

income (FDII). The deduction allowed is 37.5 percent of a domestic corporation’s FDII for any 

taxable year beginning after December 31, 2017, and 21.875 percent for any taxable year 

beginning after December 31, 2025. A domestic corporation’s FDII is the portion of its 

intangible income, determined on a formulaic basis, that is derived from exports. The formulaic 

calculation of income eligible for the FDII deduction is generally determined by taking a 

domestic corporation’s overall income, minus certain exceptions, and reducing it by a deemed 

tangible income return which is 10 percent of a domestic corporation’s qualified business asset 

investment to arrive at a domestic corporation’s deemed intangible income. A portion of this 

amount is treated as FDII based on the percentage of the taxpayer’s income that is derived from 

serving foreign markets. 

Reasons for Change 

FDII is not an effective way to encourage research and development (R&D) in the United States. 

It provides large tax breaks to companies with excess profits – who are already reaping the 

rewards of prior innovation – rather than incentivizing new domestic investment. Further, FDII 

preferences multinational companies at the expense of domestic producers, offering tax 

incentives only to those companies with high export sales, rather than those with significant 

domestic sales. 

In addition, FDII creates undesirable incentives to locate certain economic activity abroad. 

Because the preferential FDII rate applies to income in excess of a domestic corporation’s 

tangible assets, firms can lower the hurdle necessary to obtain preferential tax treatment by 

reducing tangible investments in the United States. Coupled with the current global intangible 

low-taxed income (GILTI) regime, there is a strong incentive for companies to offshore plants 

and equipment, since moving equipment offshore both increases the tax-free return under GILTI 

and increases the tax deduction under FDII. 

Finally, eliminating FDII will raise significant revenue that can be deployed to incentivize R&D 

in the United States directly and more effectively.

Proposal 

The proposal would repeal the deduction allowed for FDII. The resulting revenue will be used to 

encourage R&D. 

The proposal would be effective for taxable years beginning after December 31, 2023. 
38 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

REVISE THE RULES THAT ALLOCATE SUBPART F INCOME AND GILTI 

BETWEEN TAXPAYERS TO ENSURE THAT SUBPART F INCOME AND GILTI ARE 

FULLY TAXED 

Current Law

Section 951(a) of the Internal Revenue Code (Code) generally requires a United States 

shareholder (U.S. shareholder) of a controlled foreign corporation (CFC) to include in gross 

income its pro rata share of the CFC’s Subpart F income. A U.S. shareholder is required to 

include this amount only if the U.S. shareholder directly or indirectly owns stock in the foreign 

corporation on the last day of the foreign corporation’s taxable year on which it is a CFC (the 

“last relevant day”). 

In general, a U.S. shareholder’s pro rata share of Subpart F income is based on the amount of 

current year earnings and profits that the U.S. shareholder would receive if the CFC were to 

distribute all its current year earnings and profits on the last relevant day. However, a U.S. 

shareholder’s pro rata share is reduced by the portion of the year during which the foreign 

corporation was not a CFC and by any dividends paid by the CFC during the year to another 

person with respect to stock of the CFC that the U.S. shareholder owns on the last relevant day. 

The reduction for dividends paid is limited to the CFC’s Subpart F income allocable to the period 

that the U.S. shareholder did not own the stock of the CFC. 

Thus, a dividend paid to a corporate U.S. shareholder with respect to the stock of a CFC that the 

U.S. shareholder sells may reduce the tax burden on the U.S. shareholder who subsequently 

purchases the stock in the same year. This is the case even though the selling U.S. shareholder 

may not pay any tax on the dividend because it is eligible for a dividends received deduction 

under section 245A of the Code (section 245A DRD). 

A U.S. shareholder’s pro rata share of a CFC’s tested income, which is used to determine its 

global intangible low-taxed income (GILTI) inclusion under section 951A(a) of the Code, is 

determined based on the pro rata share rules for Subpart F income. 

Reasons for Change 

Current law allows Subpart F income, or tested income of a CFC, to escape U.S. taxation in 

certain cases in which stock of the CFC is transferred and the CFC distributes a dividend 

(including a deemed dividend) to any person other than the U.S. shareholder on the last relevant 

day. 

To illustrate the potential tax avoidance, suppose a corporate U.S. shareholder (the “seller”) 

owns 50 percent of the single class of outstanding stock of a CFC at the beginning of the CFC’s 

tax year. The CFC pays a dividend of $80 to the seller, and then three-quarters of the way into 

the tax year, the seller sells all of its stock of the CFC to another U.S. shareholder (the “buyer”). 

The CFC earns $200 of Subpart F income for its tax year. Without taking into account the 

dividend, the buyer’s pro rata share of the CFC’s Subpart F income would be $100 (50 percent of 
39 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

$200). Because the $80 dividend received by the seller is greater than $75 (the portion of the 

Subpart F income allocable to the period the stock of the CFC is owned by the seller and not the 

buyer), the buyer’s pro rata share of the CFC’s Subpart F income is reduced by $75 to $25. 

Furthermore, the seller is generally allowed a 100 percent section 245A DRD. As a result, the 

dividend does not increase the seller’s taxable income. Thus, in effect, $75 of the CFC’s Subpart 

F income has escaped U.S. taxation by reason of the sale.

Regulations issued under section 245A of the Code limit this type of tax avoidance in certain 

cases when a U.S. shareholder owns, directly or indirectly, more than 50 percent of the stock of a 

CFC, but do not address all cases, such as the previous example, where the seller owns 50 

percent or less of the CFC. 

Proposal 

The proposal would modify the existing pro rata share rules to require a U.S. shareholder of a 

CFC that owns, directly or indirectly, a share of stock of the CFC for part of the CFC’s taxable 

year, but not on the last relevant day, to include in gross income a portion of the foreign 

corporation’s Subpart F income allocable to the portion of the year during which it was a CFC. 

That portion of Subpart F income would equal the portion of the CFC’s current year earnings and 

profits paid as non-taxed current dividends on the share while it was a CFC. A non-taxed current 

dividend is the portion of a dividend paid out of current year earnings and profits that, without 

regard to the proposal, either (a) is paid to a U.S. shareholder and would qualify for a dividends 

received deduction, or (b) to the extent prescribed by the Secretary, is paid to an upper-tier CFC. 

The remaining portion of a CFC’s Subpart F income that is allocable to the portion of the year 

during which it was a CFC – that is, the amount that is not allocated under the non-taxed current 

dividend rule – would be allocated to a U.S. shareholder that owns a share of stock of the CFC 

on the last relevant day. Similar to current law, a U.S. shareholder’s pro rata share of Subpart F 

income with respect to the share of stock would be reduced for taxable dividends paid by the 

foreign corporation, provided the taxable dividends are paid while it was a CFC, out of current 

year earnings and profits, and are paid either (a) to another United States person, or (b), to the 

extent prescribed by the Secretary, to another CFC. However, the U.S. shareholder’s pro rata 

share would not be reduced below the portion attributable to the portion of the year during which 

the U.S. shareholder owned the share. 

Because the proposal applies on a share-by-share basis, a U.S. shareholder may be allocated 

Subpart F income under both the non-taxed current dividend rule and the last relevant day rule. 

The proposal would similarly revise the pro rata share rules for determining a U.S. shareholder’s 

GILTI inclusion with respect to a CFC. 

The Secretary would be authorized to issue regulations or other guidance necessary or 

appropriate to carry out the purposes of the proposal, including (a) to treat distributions and other 

amounts as dividends or not dividends for purposes of this section, (b) to treat a partnership as an 

aggregate of its partners, (c) to provide rules allowing or requiring a foreign corporation to close 
40

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

its taxable year upon a change in ownership for purposes of determining U.S. shareholders’ pro 

rata share, and (d) to treat a distribution and related issuance of stock to a shareholder not subject 

to tax under this chapter in the same manner as an acquisition of stock.

The proposal would apply to taxable years of foreign corporations beginning after the date of 

enactment and to taxable years of U.S. shareholders in which or with which such taxable years of 

foreign corporations end.
41 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

ELIMINATE EXPLOITED MISMATCH IN CALCULATION OF EARNINGS AND 

PROFITS OF CONTROLLED FOREIGN CORPORATIONS 

Current Law

In general, a U.S. shareholder of a controlled foreign corporation (CFC) must include in its 

current income its pro rata share of the CFC's Subpart F income. Subpart F income is generally 

passive income and certain other related-party income that is readily movable from one 

jurisdiction to another. A CFC's Subpart F income, however, generally is limited to its earnings 

and profits (E&P) for the taxable year (current-year E&P).

In calculating taxable income, domestic corporations generally take into account three special 

income tax accounting concepts: installment sales, last-in-first-out (LIFO) inventory 

adjustments, and the completed contract method of accounting. Under the installment method of 

accounting, for example, the inclusion of income follows the payments of the purchase price 

(i.e., over time).15 In calculating its current-year E&P, however, a domestic corporation does not 

take into account these three special accounting concepts (i.e., the income under the installment 

method is taken into account immediately at the time of the sale) so that its current-year E&P 

generally is higher than its taxable income.16

In calculating current-year E&P, a CFC generally follows rules substantially similar to those 

applicable to domestic corporations.17 Therefore, a CFC generally does not take into account the 

three special accounting concepts in calculating its current-year E&P. For Subpart F purposes, 

however, a CFC takes into account these special accounting concepts.18 Therefore, a CFC’s 

current-year E&P is generally lower for Subpart F purposes than it is for other purposes. 

Reasons for Change 

Current law provides for two different calculations of E&P of a CFC, one for Subpart F purposes 

and one for all other purposes. Among other things, this mismatch in E&P allows taxpayers to 

engage in internal gain recognition transactions that generate a large amount of E&P for all 

purposes other than Subpart F. This E&P immediately becomes eligible to support a tax-free 

dividend under section 245A but is not subject to immediate tax because of the interaction 

between the special accounting rules for calculating E&P for Subpart F purposes (which reduce 

current year E&P below the amount available for distribution) and the current-year E&P limit for 

determining a CFC’s Subpart F income. That E&P may subsequently be used to transfer the CFC 

outside the U.S. tax system, preventing future taxation of the deferred Subpart F income. 

15 As described in section 453(b)(1)(c), the installment method is a method of accounting under which the income 

recognized for any taxable year from a disposition is that proportion of the payments received in that year which the 

gross profit bears to the total contract price.

16 Section 312(n)(4)-(6). 17 Section 964(a). 18 Section 952(c)(3), referencing section 312(n)(4) through (6).
42 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Proposal 

The proposal would provide that the E&P of a CFC will be determined for all purposes by taking 

into account LIFO, installment sales, and the completed contract method of accounting. Thus, 

under the proposal, the E&P of a CFC generally would follow the income tax accounting 

treatment, including for purposes of determining the amount of E&P available for distribution 

under section 245A.

The provision would be effective for taxable years of foreign corporations ending on or after 

December 31, 2023, and to taxable years of U.S. shareholders in which or with which such 

taxable years of the foreign corporations end. 
43 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

LIMIT FOREIGN TAX CREDITS FROM SALES OF HYBRID ENTITIES

Current Law 

A corporation that makes a qualified stock purchase of a target corporation is permitted to elect, 

under section 338 of the Internal Revenue Code (known as a “section 338 election”) to treat the 

stock acquisition as an asset acquisition for U.S. tax purposes, thereby generally adjusting the 

post-acquisition tax basis of the target corporation’s assets to fair market value. For this purpose, 

a qualified stock purchase is any transaction or series of transactions in which the purchasing 

corporation acquires at least 80 percent of the stock of the target corporation. Section 338(h)(16) 

provides that (subject to certain exceptions) the deemed asset sale resulting from a section 338 

election is generally ignored in determining the source or character of any item for purposes of 

applying the foreign tax credit rules to the seller. Instead, for these purposes, any gain recognized 

by the seller is treated as gain from the sale of the stock of the target corporation. Thus, in the 

case of a foreign target corporation, section 338(h)(16) prevents the earnings and profits 

generated from the deemed asset sale from changing the character of the gain from capital to 

ordinary, thereby permitting the use of foreign tax credits (FTCs) to reduce or eliminate residual 

U.S. tax on the stock gain. 

Similar to a section 338 election, Treasury regulations under section 336(e) allow a corporation 

to elect to treat certain dispositions of stock of a domestic corporation (but not a foreign 

corporation) as a disposition of the assets of the domestic corporation instead. These regulations 

apply section 338(h)(16) to a deemed sale of foreign assets of the domestic corporation. 

Reasons for Change 

Section 338(h)(16) applies to a qualified stock purchase for which a section 338 election is made, 

but it does not apply to transactions that produce similar results – sales of an interest in an entity 

that is treated as a corporation for foreign tax purposes but as a partnership or a disregarded 

entity for U.S. tax purposes (specified hybrid entity), or taxable changes in the classification of 

an entity for U.S. tax purposes that are not recognized for foreign tax purposes. These 

transactions present the same FTC concerns as in the case of a qualified stock purchase for which 

a section 338 election is made, and so should be subject to similar limitations. 

Proposal 

The proposal would apply the principles of section 338(h)(16) to determine the source and 

character of any item recognized in connection with a direct or indirect disposition of an interest 

in a specified hybrid entity and to a change in the classification of an entity that is not recognized 

for foreign tax purposes (for example, due to an election under the entity classification 

regulations). Thus, for purposes of applying the foreign tax credit rules, the source and character 

of any item resulting from the disposition of the interest in the specified hybrid entity, or change 

in entity classification, would be determined based on the source and character of an item of gain 

or loss for the seller would have accounted upon the sale or exchange of stock (determined 

without regard to section 1248). In addition, because the proposal is limited to determining the 
44

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

source and character of such an item of gain or loss for purposes of applying the foreign tax 

credit rules, the proposal does not affect the amount of gain or loss recognized as a result of the 

disposition or the change in entity classification. The Secretary and her delegates would be 

granted authority to issue any regulations necessary or appropriate to carry out the purposes of 

the proposal, including those applying the proposal to other transactions that have a similar effect 

and exempting certain transactions among related parties from application of the proposal.

The proposal would be effective for transactions occurring after the date of enactment.
45 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

RESTRICT DEDUCTIONS OF EXCESSIVE INTEREST OF MEMBERS OF 

FINANCIAL REPORTING GROUPS

Current Law

Business interest expense generally is deductible from regular taxable income. An exception to 

this general rule is section 163(j) of the Internal Revenue Code (Code), which generally limits 

U.S. tax deductions for business interest expense to the sum of (a) business interest income, (b) 

30 percent of adjusted taxable income (not less than zero), and (c) floor plan financing interest. 

Business interest expense for which a deduction is disallowed under section 163(j) may be 

carried forward indefinitely for deduction in a subsequent year. 

Certain interest paid to a foreign related party is treated as a base erosion payment for purposes 

of the base erosion and anti-abuse tax (BEAT), in which case the deduction is added back to the 

BEAT modified taxable income base. See Adopt the Undertaxed Profits Rule earlier in this 

volume for a description of the relevant law.

In addition, certain interest paid to a foreign related party may not be deductible by reason of the 

anti-hybrid rules of section 267A, which limit deductibility of an interest payment when the 

amount is not included in the income of the recipient under foreign tax laws or when the 

recipient receives a deduction with respect to the payment. Furthermore, certain rules under the 

Code affect the timing of a deduction for interest. For example, certain interest owed to a related 

party may not be deductible to the payor by reason of section 267(a) until the interest is included 

in the gross income of the related-party payee. 

In addition, both case law and regulations issued under section 385 can determine whether an 

instrument issued by an entity is treated as indebtedness that gives rise to interest expense for 

Federal income tax purposes, or as stock. Specifically, regulations under section 385 treat as 

stock certain debt instruments issued by a corporation to a controlling shareholder in a 

distribution or in certain other related-party transactions that achieve an economically similar 

result.

Reasons for Change 

The fungibility of money makes it easy for multinational groups to substitute debt for equity in a 

controlled entity in order to shift profits to lower-tax jurisdictions. Under current law, 

multinational groups are able to reduce their U.S. tax on income earned from U.S. operations by 

over-leveraging their U.S. operations relative to those located in lower-tax jurisdictions. 

Although section 163(j) limits the amount of interest expense a corporation can deduct relative to 

its U.S. earnings, section 163(j) does not consider the leverage of a multinational group’s U.S. 

operations relative to the leverage of the group’s worldwide operations. In addition, while certain 

interest paid to a foreign related party is added to the modified taxable income base for 

determining a taxpayer’s BEAT liability, many taxpayers are able to avoid a BEAT liability 

because of the various exceptions for certain deductible payments. Moreover, the BEAT rate is 

less than half of the regular corporate income tax rate. (See Adopt the Undertaxed Profits Rule in 
46 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

this volume.) The proposal would limit the ability of multinational groups to lower U.S. taxable 

income through high interest-to-income ratios for U.S. operations relative to the worldwide 

group. 

Proposal 

Under the proposal, a financial reporting group (defined below) member’s deduction for interest 

expense generally would be limited if the member has net interest expense for U.S. tax purposes 

and the member’s net interest expense for financial reporting purposes (computed on a separate 

company basis) exceeds the member’s proportionate share of the financial reporting group’s net 

interest expense reported on the group’s consolidated financial Statements (excess financial 

Statement net interest expense). A member’s proportionate share of the financial reporting 

group’s net interest expense would be determined based on the member’s proportionate share of 

the group’s earnings (computed by adding back net interest expense, tax expense, depreciation, 

depletion, and amortization) reflected in the financial reporting group’s consolidated financial 

Statements. The proposal generally would apply to an entity that is a member of a multinational 

group that prepares consolidated financial Statements (“financial reporting group”) in accordance 

with U.S. Generally Accepted Accounting Principles (GAAP), International Financial Reporting 

Standards (IFRS), or other method identified by the Secretary under regulations. 

When a financial reporting group member has excess financial Statement net interest expense, a 

deduction will be disallowed for the member’s excess net interest expense for U.S. tax purposes. 

For this purpose, the member’s excess net interest expense equals the member’s net interest 

expense for U.S. tax purposes multiplied by the ratio of the member's excess financial Statement 

net interest expense to the member’s net interest expense for financial reporting purposes. 

Conversely, if a member’s net interest expense for financial reporting purposes is less than the 

member’s proportionate share of the net interest expense reported on the group’s consolidated 

financial Statements, such excess limitation would be converted into a proportionate amount of 

excess limitation for U.S. tax purposes and carried forward three years.

Alternatively, if a financial reporting group member fails to substantiate its proportionate share 

of the group’s net interest expense for financial reporting purposes, or a member so elects, the 

member’s interest deduction would be limited to the member’s interest income plus ten percent 

of the member’s adjusted taxable income (as defined under section 163(j)). Regardless of 

whether a taxpayer computes the interest limitation under the proportionate share approach or 

using the ten percent alternative, any disallowed interest expense could be carried forward 

indefinitely. A member of a financial reporting group that is subject to the proposal would 

continue to be subject to the application of section 163(j). Thus, the amount of interest expense 

disallowed for a taxable year of a taxpayer that is subject to both interest expense disallowance 

provisions would be determined based on whichever of the two provisions imposes the lower 

limitation. A member of a financial reporting group may also be subject to the new undertaxed 

profits rule. (See Adopt the Undertaxed Profits Rule in this volume for a description) 

Each U.S. subgroup of a financial reporting group would be treated as a single member of the 

financial reporting group for purposes of applying the proposal (except for purposes of applying 
47 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

the ten percent alternative). For this purpose, a U.S. subgroup is comprised of any U.S. entity 

that is not owned directly or indirectly by another U.S. entity, and all members (domestic or 

foreign) that are owned directly or indirectly by such entity. If a member of a U.S. subgroup 

owns stock in one or more foreign corporations, the proposal would apply before the application 

of section 265, which generally disallows a deduction for amounts allocable to tax-exempt 

income. Under the Administration’s proposals, tax-exempt income would include dividends from 

a foreign corporation eligible for a section 245A deduction and a global intangible low-taxed 

income (GILTI) inclusion eligible for a section 250 deduction. (See Revise the Global Minimum 

Tax Regime, Limit Inversions, and Make Related Reforms in this volume.) 

The proposal would not apply to financial services entities, and such entities would be excluded 

from the financial reporting group for purposes of applying the proposal to other members of the 

financial reporting group. The proposal also would not apply to financial reporting groups that 

would otherwise report less than $5 million of net interest expense, in the aggregate, on one or 

more U.S. income tax returns for a taxable year. 

The Secretary would be granted authority to promulgate any regulations necessary to carry out 

the purposes of the proposal, including (a) coordinating the application of the proposal with other 

interest deductibility rules, (b) defining interest and financial services entities, (c) permitting 

financial reporting groups to apply the proportionate share approach using the group’s net 

interest expense for U.S. tax purposes rather than net interest expense reported in the group’s 

financial Statements, (d) providing for the treatment of pass-through entities, (e) providing 

adjustments to the application of the proposal to address differences in functional currency of 

members, (f) if a U.S. subgroup has multiple U.S. entities that are not all members of a single 

U.S. consolidated group for U.S. tax purposes, providing for the allocation of the U.S. 

subgroup’s excess net interest expense for U.S. tax purposes among the members of the U.S. 

subgroup; (g) allowing or requiring the adjustment of amounts reported on applicable financial 

Statements, including by increasing a member’s reported net business interest expense under 

rules similar to those that apply for disallowed interest expense; and (h) providing rules to 

address structures with a principal purpose to limit application of the proposal. In addition, if a 

financial reporting group does not prepare financial Statements under U.S. GAAP or IFRS, it is 

expected that regulations generally would allow the use of financial Statements prepared under 

other jurisdictions’ generally accepted accounting principles in appropriate circumstances. 

The proposal would be effective for taxable years beginning after December 31, 2023. 
48 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

TREAT PAYMENTS SUBSTITUTING FOR PARTNERSHIP EFFECTIVELY 

CONNECTED INCOME AS U.S. SOURCE DIVIDENDS

Current Law

A foreign taxpayer that invests in a U.S. partnership with income effectively connected to the 

conduct of a trade or business (ECI) is required to file a U.S. tax return to report that income and 

pay tax on it. Some or all of the gain on the sale of an interest in a partnership that is engaged in 

the conduct of a U.S. trade or business may be treated as ECI by reference to a deemed sale of 

the partnership’s assets, and tax is required to be withheld on that gain. 

For certain purposes, including the U.S. withholding tax rules applicable to foreign persons, a 

dividend equivalent is treated as a dividend from U.S. sources. A dividend equivalent is any 

substitute dividend made pursuant to a securities lending or a sale-repurchase transaction that 

(directly or indirectly) is contingent upon, or determined by reference to, the payment of a 

dividend from sources within the United States. Any payment made under a specified notional 

principal contract, or made under an equity-linked instrument that meets certain criteria, that 

directly or indirectly is contingent upon, or determined by reference to, the payment of a 

dividend from sources within the United States also is treated as a dividend equivalent. 

In the case of a dividend equivalent payment made by a foreign person to a foreign person, the 

jurisdiction of the foreign person making the payment may not treat the payment as a U.S. source 

dividend subject to U.S. taxation. As a result, the foreign person making the payment may be 

subject to different and potentially conflicting obligations under U.S. law and foreign law. 

Reasons for Change 

Foreign taxpayers may take the position that the rules requiring reporting and payment of tax on 

investments in U.S. partnerships do not apply if the foreign taxpayer acquires an economic 

interest in a publicly traded partnership with ECI through a derivative financial instrument, such 

as a total return swap, and that the payments on the financial instrument that are received by the 

foreign taxpayer are foreign source payments. Foreign taxpayers may also take the position that 

the rules requiring withholding on dividend equivalent payments do not apply to payments on the 

financial instrument or apply only to a small portion of those payments. As a result, taxpayers 

can readily avoid the imposition of U.S. tax on ECI from an investment in a partnership with a 

U.S. trade or business. 

Proposal 

The proposal would treat the portion of a payment on a derivative financial instrument (including 

a securities loan or sale-and-repurchase agreement) that is contingent on income or gain from a 

publicly traded partnership or other partnership specified by the Secretary or her delegates 

(Secretary) as a dividend equivalent, to the extent that the related income or gain would have 

been treated as ECI if the taxpayer held the underlying partnership interest. 
49

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

The Secretary would have authority to prescribe such regulations or other guidance as may be 

necessary or appropriate to carry out the purposes of, and prevent the avoidance of, this section, 

including with respect to payments made between foreign persons.

No inference is intended as to the application of current law to derivative transactions on 

interests in partnerships with ECI.

The proposal would be effective for taxable years starting December 31, 2023.
50 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

EXPAND ACCESS TO RETROACTIVE QUALIFIED ELECTING FUND ELECTIONS 

Current Law

The passive foreign investment company (PFIC) rules are intended to prevent taxpayers from 

deferring the taxation of income from passive investments and from transforming the character 

of income from those investments from ordinary income into capital gain by holding the 

investments through a foreign investment company. Absent a qualified electing fund (QEF) or 

another permitted election, excess distributions received from a PFIC are subject to additional 

tax in an amount determined by reference to the rate of interest that applies to underpayments of 

tax. Gain recognized on disposition of PFIC stock is treated as an excess distribution. 

If an investor in a PFIC makes a QEF election, the taxpayer is not subject to the tax on excess 

distributions after the effective date of the election. Instead, the taxpayer generally is required to 

take into account the taxpayer’s pro rata share of the ordinary income and long-term capital gain 

of the PFIC on an annual basis and pay tax on this income. Section 1295(b)(2) of the Internal 

Revenue Code generally allows the owner of a PFIC to make a QEF election for any taxable year 

at any time on or before the due date for filing the return of the tax. Section 1295(b)(2) permits 

an election to be made after that date if the taxpayer reasonably believed that the company was 

not a PFIC, to the extent provided by regulations. 

Under regulations, a taxpayer also is permitted to make a retroactive QEF election if the 

Commissioner of the Internal Revenue Service (IRS) consents to the election under a special 

consent procedure. To qualify for the special consent procedure, three conditions must be met: 

the taxpayer must have relied on a qualified tax professional, granting consent must not prejudice 

the interests of the U.S. Government, and the request for the special consent must be made 

before the issue is raised on audit. 

Reasons for Change 

A taxpayer who makes a QEF election does not obtain the timing and character benefits that the 

PFIC rules are intended to prevent. QEF elections reduce tax costs to investors and increase tax 

compliance. The availability of a QEF election also incentivizes taxpayers to voluntarily report 

investments in a PFIC. 

Under current law, individuals who inadvertently did not make a QEF election with respect to a 

PFIC investment may not be eligible for relief under the special consent procedure. For example, 

a student with low or no income may inherit stock and discover only years later that the stock is 

that of a PFIC when the individual hires a qualified tax professional. In other cases, an individual 

may have hired a qualified tax professional who fails to advise the taxpayer of the availability of 

a QEF election but refuses to provide an affidavit acknowledging that failure. 

Additionally, there are large individual and administrative costs under current law for the 

existing special consent procedure. The existing procedure requires a taxpayer to file a ruling 

request with IRS and pay a user fee that is currently several thousand dollars. IRS receives many 
51 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

requests for consent, which result in the use of IRS time and resources to determine whether 

consent should be granted and, if so, to issue the private letter ruling. In many cases, allowing the 

taxpayer to make a retroactive QEF election would be consistent with the proper administration 

of the law and would promote tax compliance, but IRS must deny the request because the 

taxpayer does not qualify for relief under the special consent procedure. 

To encourage more taxpayers to make QEF elections, improve taxpayer disclosure, and relieve 

the costs and burdens that current law imposes on both taxpayers and the IRS, retroactive QEF 

elections should be permitted for a broader range of circumstances through changes to the statute 

that expand regulatory authority. For example, the IRS should have authority to allow a 

retroactive QEF election after the first year of ownership of a PFIC in appropriate cases that 

promote these goals even if the taxpayer cannot demonstrate a reasonable belief that the 

company was not a PFIC and cannot satisfy the special consent requirements. 

Proposal 

The proposal would modify section 1295(b)(2) of the Code to permit a QEF election by the 

taxpayer at such time and in such manner as the Secretary or her delegates (Secretary) shall 

prescribe by regulations. 

Taxpayers would be eligible to make a retroactive QEF election without requesting consent only 

in cases that do not prejudice the U.S. Government. For example, if the taxpayer owned the PFIC 

in taxable years that are closed to assessment, the taxpayer would need to obtain consent and to 

pay an appropriate amount to compensate the government for the taxes not paid in the closed 

years on amounts that would have been includable in the taxpayer’s income if the taxpayer had 

made a timely QEF election.

While it is less common for partnerships and other non-individual taxpayers to inadvertently fail 

to make a QEF election, the Secretary would have authority to allow such taxpayers to make 

retroactive QEF elections in appropriate circumstances.

The proposal would be effective on the date of enactment. It is intended that regulations or other 

guidance would permit taxpayers to amend previously filed returns for open years. 
52 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

REFORM TAXATION OF FOREIGN FOSSIL FUEL INCOME

Current Law

Under the global intangible low-taxed income (GILTI) rules, foreign oil and gas extraction 

income (FOGEI) of a controlled foreign corporation (CFC) is excluded from tested income, 

whereas foreign oil related income (FORI) is included. In addition, FOGEI and FORI earned by 

a CFC are not part of the CFC’s Subpart F income. Therefore, FOGEI earned through CFCs may 

be eligible for a deduction under section 245A when repatriated and thus is generally exempt 

from U.S. taxation. In contrast, both FOGEI and FORI earned directly through a foreign branch 

(including a disregarded entity) are subject to full U.S. taxation, subject to allowable foreign tax 

credits (FTCs).

Subject to certain limitations, a taxpayer may claim a credit against its U.S. income tax liability

for income, war profits, and excess profits taxes paid or accrued during the taxable year to any 

foreign country or possession of the United States. Under Treasury regulations, a foreign levy is 

a tax if it requires a compulsory payment pursuant to the authority of a foreign government to 

levy taxes. A foreign levy is not a tax to the extent a person subject to the levy receives a specific 

economic benefit from the foreign country in exchange for the payment (e.g., a concession to 

extract government-owned petroleum). 

A taxpayer that is subject to a foreign levy and who also receives a specific economic benefit 

from the foreign country (a dual capacity taxpayer) must establish the amount that is paid 

pursuant to the distinct element of the foreign levy that is a tax. The dual capacity taxpayer 

cannot claim FTCs with respect to amounts paid in exchange for the specific economic benefit. 

Treasury regulations provide a safe harbor for determining the qualifying portion of the levy 

based on the generally applicable rate of tax under the jurisdiction’s income tax. However, 

taxpayers may use the facts and circumstances method for determining the qualifying portion of 

the levy rather than the safe harbor. 

Reasons for Change 

FTCs are intended to mitigate double taxation of income by the United States and a foreign 

government. When a payment is made to a foreign government in exchange for a specific 

economic benefit, there is no double taxation. Current law recognizes the distinction between a 

payment of creditable taxes and a payment in exchange for a specific economic benefit but may 

fail to achieve the appropriate split between the two (e.g., when a foreign jurisdiction does not 

charge royalties but imposes a levy only on oil and gas income, or imposes a higher levy on oil 

and gas income as compared to other income). The safe harbor method reflects the view that the 

higher effective rate of the nominal foreign tax is appropriately characterized as compensating 

the foreign government in its capacity as the owner of the minerals in place, rather than in its role 

as tax collector. However, many dual capacity taxpayers subject to alternative tax regimes use 

the facts and circumstances method for determining the qualifying portion of the levy and claim 

FTCs for a much larger amount than would be creditable under the safe harbor method. 

Consequently, many oil and gas producers are able to claim a credit against their U.S. income tax 
53 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

liability for high levies imposed by foreign governments that effectively constitute royalty 

equivalents (instead of income taxes), while other U.S. businesses (not in the oil/gas sector) in 

those same countries pay a much lower income tax rate (and therefore are only eligible for the 

correspondingly lower FTCs in the United States). 

Foreign hydrocarbon income should not be eligible for preferential tax treatment relative to other 

industries because of the negative externalities associated with such industry and the 

Administration’s overall goal of promoting clean energy. 

Proposal 

The proposal would repeal the exemption from GILTI for FOGEI. The definition of FOGEI and 

FORI would also be amended to include income derived from shale oil and tar sands activity. 

In the case of a dual capacity taxpayer, the proposal would limit the amount of a levy that would 

qualify as a creditable foreign tax to the amount of tax that the dual capacity taxpayer would 

have paid to the foreign government if it were a non-dual capacity taxpayer. Thus, the proposal 

would codify the safe harbor included in the current Treasury regulations for determining the 

portion of the levy that is paid in exchange for a specific economic benefit, and would make the 

safe harbor the sole method for determining the creditable portion of the levy. The aspect of the 

proposal that would determine the amount of a foreign levy paid by a dual-capacity taxpayer that 

qualifies as a creditable tax would yield to United States treaty obligations that explicitly allow a 

credit for taxes paid or accrued on certain oil or gas income. 

The proposal would be effective for taxable years beginning after December 31, 2023. 
54 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

PROVIDE TAX INCENTIVES FOR LOCATING JOBS AND BUSINESS ACTIVITY IN 

THE UNITED STATES AND REMOVE TAX DEDUCTIONS FOR SHIPPING JOBS 

OVERSEAS

Current Law 

Under current law, there are limited tax incentives for U.S. employers to bring offshore jobs and 

investments into the United States. In addition, costs incurred to offshore U.S. jobs generally are 

deductible for U.S. income tax purposes. 

Reasons for Change 

The proposal creates a tax incentive to bring offshore jobs and investment back to the U.S. 

Reducing the tax benefits from moving U.S. jobs offshore will increase incentives to keep those 

jobs at home. 

Proposal

The proposal would create a new general business credit equal to 10 percent of the eligible 

expenses paid or incurred in connection with onshoring a U.S. trade or business. For this 

purpose, onshoring a U.S. trade or business means reducing or eliminating a trade, business, or 

line of business currently conducted outside the United States and starting up, expanding, or 

otherwise moving the same trade or business within the United States, to the extent that this 

action results in an increase in U.S. jobs. While the eligible expenses may be incurred by a 

foreign affiliate of the U.S. taxpayer, the tax credit would be claimed by the U.S. taxpayer. If a 

non-mirror code U.S. territory (the Commonwealth of Puerto Rico and American Samoa) 

implements a substantially similar proposal, the Department of the Treasury (Treasury) will 

reimburse the U.S. territory for the new general business credits provided to their taxpayers 

pursuant to a plan. Furthermore, the Treasury will reimburse a mirror code U.S. territory (Guam, 

the Commonwealth of the Northern Mariana Islands, and the U.S. Virgin Islands) for the new 

general business credits provided to their taxpayers by reason of the enactment of the proposal. 

In addition, to reduce tax benefits associated with U.S. companies moving jobs outside of the 

United States, the proposal would disallow deductions for expenses paid or incurred in 

connection with offshoring a U.S. trade or business. For this purpose, offshoring a U.S. trade or 

business means reducing or eliminating a trade, business, or line of business currently conducted 

inside the United States and starting up, expanding, or otherwise moving the same trade or 

business outside the United States, to the extent that this action results in a loss of U.S. jobs. In

addition, no deduction would be allowed against a U.S. shareholder’s global intangible lowtaxed income or Subpart F income inclusions for any expenses paid or incurred in connection 

with moving a U.S. trade or business outside the United States. 

For purposes of the proposal, expenses paid or incurred in connection with onshoring or 

offshoring a U.S. trade or business are limited solely to expenses associated with the relocation 

of the trade or business and do not include capital expenditures or costs for severance pay and 
55

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

other assistance to displaced workers. The Secretary or her delegates may prescribe rules to 

implement the provision, including rules to determine covered expenses and treatment of 

independent contractors.

The proposal would be effective for expenses paid or incurred after the date of enactment.
56 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

SUPPORT HOUSING AND URBAN DEVELOPMENT 

MAKE PERMANENT THE NEW MARKETS TAX CREDIT

Current Law 

The new markets tax credit (NMTC) is an up-to-39 percent credit for qualified equity 

investments (QEIs) made to acquire stock in a corporation, or a capital interest in a partnership, 

that is a qualified community development entity (CDE). The investment must be held for a 

period of at least seven years and must have been made within five years after the CDE receives 

an allocation out of the national credit limitation amount for the year. The CDEs in turn are 

required to invest substantially all of the proceeds of the QEIs in low-income communities. For 

example, CDEs may make loans or capital investments in companies that operate in low-income 

communities.

In order for an entity to qualify as a CDE, it must meet three requirements. First, the primary 

mission of the entity must be to serve or provide investment capital for low-income communities 

or low-income persons. Second, the entity must maintain accountability to residents of lowincome communities through their representation on the entity’s governing or advisory board. 

Third, the entity must be certified as a CDE by the Department of the Treasury’s Community 

Development Financial Institutions Fund (CDFI Fund). 

For calendar years 2010 through 2019, the national credit limitation amount per year was $3.5 

billion, and for 2020 through 2025 the annual amount is $5 billion. No new investment allocation 

authority is provided beyond 2025. The CDFI Fund allocates credit amounts, subject to the total 

national credit limitation, among CDEs based on a competitive application process. 

A taxpayer’s allowable credit amount for any given year is the applicable percentage of the 

amount paid to the CDE for the investment at its original issue. Specifically, the applicable 

percentage is five percent for the year the equity interest is purchased from the CDE and for each 

of the two subsequent years, and it is six percent for each of the following four years. The 

NMTC is available for a taxable year to the taxpayer who holds the QEI on the date of the initial 

investment or on an investment anniversary date that occurs during the taxable year. The credit is 

recaptured if, at any time during the seven-year period that begins on the date of the original 

issue of the investment, one of three things occurs: (a) the entity ceases to be a qualified CDE, 

(b) the proceeds of the investment cease to be used as required, or (c) the equity investment is 

redeemed.

The NMTC can be used to offset regular Federal income tax liability but, if the taxpayer is not a 

corporation and has an alternative minimum tax (AMT) liability, the NMTC cannot be used to 

offset the AMT. 
57 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Reasons for Change

Permanent extension of the NMTC would allow CDEs to continue to generate investments in 

low-income communities. The extension would also create greater certainty for investment 

planning purposes. 

Proposal 

The proposal would extend the NMTC permanently, with a new allocation for each year after 

2025. The annual amount would be $5 billion, indexed for inflation after 2026. 

The proposal would be effective after the date of enactment.
58 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

PROVIDE A NEIGHBORHOOD HOMES CREDIT

Current Law

There are no Federal tax provisions that directly support building or renovating affordable 

owner-occupied housing or that cover a development or financing gap for such housing. The 

low-income housing credit supports construction and rehabilitation of affordable housing for 

low-income renters. The mortgage interest deduction, tax-exempt housing bonds, and mortgage 

credit certificates assist homeowners by reducing the after-tax costs of their mortgage payments, 

but this support is not directed at addressing development cost gaps for affordable owneroccupied housing. 

Reasons for Change 

In neighborhoods where homes are in poor condition, property values are often too low to 

support new construction or substantial renovation of existing properties. The lack of move-inready homes makes it difficult to attract or retain homebuyers in these areas. A subsidy for home 

builders and homeowners seeking to rehabilitate these homes can encourage residential 

development in these neighborhoods. If targeted at homes sold to (or being rehabilitated by) 

owner-occupants, the subsidy can encourage further improvements to these areas, as owneroccupants generally have greater long-term interest in their neighborhoods than renters. 

Proposal 

The proposal would create a new allocated tax credit, the neighborhood homes credit (NHC), to 

encourage (a) new construction for sale, (b) substantial rehabilitation for sale, and (c) substantial 

rehabilitation by existing homeowners who will remain in their communities. The credit would 

be allocated through each State’s Neighborhood Homes Credit Agency for projects meeting 

criteria described below.

Neighborhood Homes Credit Agencies (NHCAs): Each State would create or designate an 

NHCA to allocate potential NHCs to project sponsors – i.e., individuals or entities that organize 

the project. Sponsors seeking NHCs would apply to their State NHCA. The NHCAs would 

evaluate the applications and choose those deemed best suited to achieving the goals of the 

program. Furthermore, the NHCA would be responsible for monitoring compliance with all 

provisions governing NHCs and for reporting violations to the IRS. NHCAs would also set 

standards for developer fees, building quality (including all local criteria for habitability and 

safety), and development costs. 

Allocation to States, U.S. territories, and the District of Columbia (collectively, States): Each 

State would have a specified amount of potential NHCs to allocate each year. For 2024 each 

State could allocate the greater of $8 million or the product of $6 times the State’s population. 

The amounts would be indexed for inflation for subsequent years. States would be able to carry 

forward any unallocated potential NHCs for up to three years. 
59 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Eligibility criteria for NHC residences: Sponsors would only be eligible for NHCs if the 

residences they were constructing or rehabilitating met the following criteria:

1. The project must be a single-family home (including homes with up to four dwelling 

units), a condominium, or a residence in a housing cooperative. 

2. The project must be in an NHC neighborhood (defined below). 

3. The project must be sold, or in the case of owner-rehabilitation projects completed, 

within five years of the NHCA allocation of the credit.

4. After construction or rehabilitation, the home must be owned by an occupant who is an 

NHC-qualified owner (defined below). 

Eligibility criteria for NHC neighborhoods: An NHC neighborhood is a census tract that meets at 

least one the following criteria:

1. Has median family income not exceeding 80 percent of the area/State median income, 

has a poverty rate not less than 130 percent of the area/State poverty rate, and has a 

median value for owner-occupied homes not exceeding the area/State median value; 

2. Has median family income not exceeding area/State median income, is located in a city 

with a poverty rate of at least 150 percent of the area/State poverty rate and a population 

of at least 50,000, and has a median value for owner-occupied homes not exceeding 80 

percent of the area/State median value; 

3. Has median family income not exceeding area/State median income, is located in a nonmetropolitan county, and has been designated by a NHCA; or 

4. Is located in a disaster area. 

Eligibility criteria for qualifying owners: An NHC-qualified owner is someone who will use the 

home as their primary residence, whose household income does not exceed 140 percent of 

area/State median income, and who, in the case of a sale, is not related to the seller. 

Determination of credit amount: In general, the credit amount would increase as development 

costs increase and decrease as sales proceeds (or owner payments, in the case of rehabilitation 

for current homeowners) increase. In a determination of the credit amount, construction costs 

would count only to the extent they are incurred after a NHCA has allocated potential NHCs to 

the project, and acquisition costs for land and buildings would count only to the extent they are 

incurred not more than three years prior to such an allocation. For home sales, the credit would 

be limited to no more than 35 percent of the lesser of development costs and 80 percent of the 

national median sales price for new homes. The credit amount would smoothly phase out such 

that it would be zero when sales proceeds are five times area median family income. (An 

alternative phase out would apply in the case of residences with more than one dwelling unit.) A 
60 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

taxpayer would always be better off obtaining a higher sales price, and a small increase in sales 

price would not trigger a disproportionate loss of credits. In the case of a rehabilitation of an 

owner-occupied residence, the credit would not exceed the lesser of $50,000 and 50 percent of 

rehabilitation costs. Similar to the case of a home sale, a taxpayer would always be better off 

obtaining a higher owner payment for home rehabilitations, and a small increase in owner 

payments would not trigger a disproportionate loss of credits. 

Treatment of losses: If a taxpayer sells or rehabilitates a home for a loss (which will generally be 

the case), the credit will not be considered compensation for that loss for purposes of 

determining whether the loss is deductible. 

Return of unused credits: If any credits allocated to a project are unused five years after the 

NHCA allocation, they are returned to the pool of potential credits for the NHCA to re-allocate. 

As with other potential credits that the NHCA receives for a year, these returned credits may be 

carried forward for up to three years.

Timing of owner occupancy: A taxpayer may claim NHCs only after construction and inspection 

are complete and the home is occupied by an NHC-qualified owner. If, within five years of the 

date of qualification for the NHC, the purchasing or rehabilitating owner-occupant sells or rents 

the home, there may be NHC-related financial consequences to the owner-occupant. In the case 

of a sale, up to 50 percent of the gain from the sale would have to be paid to the NHCA. In the 

case of renting, during the five-year period expenses with respect to renting would not be 

deductible against Federal income taxes.

Implementation and reporting: The Secretary and her delegates (Secretary) would be given 

authority to prescribe rules to implement this provision. NHCAs would be required to submit an 

annual report to the Secretary specifying the amount of potential NHCs allocated to each project 

for the previous year, information on each NHC residence completed in the previous year, and 

such other information as the Secretary may require. 

The proposal would be effective for taxable years beginning after December 31, 2023. 
61 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

EXPAND AND ENHANCE THE LOW-INCOME HOUSING CREDIT

Current Law

Low-income housing credits (LIHTCs) incentivize and subsidize the construction and 

rehabilitation of affordable rental housing for low-income tenants. Building owners earn LIHTCs 

by constructing and operating a low-income housing project in conformity with the LIHTC 

requirements (including limitations on tenant income, restrictions on gross rents, and periodically 

assessed habitability). For each of 10 years, the owner receives LIHTCs for a building in such a 

project. The number of LIHTCs received each year may not exceed the product of: (a) the 

depreciable cost of the entire building (eligible basis); (b) the portion of the building that consists 

of low-income units; and (c) a credit rate. Credit rates are generally either 4 or 9 percent.

In the case of the 9 percent credit rate, the credits for each of the 10 years may not exceed the 

housing credit dollar amount (HCDA) that a State or local housing credit agency (HCA) 

previously allocated to the taxpayer. Each State, including the District of Columbia and 

territories of the United States, receives a pool of new HCDAs to allocate every year. (For 2023, 

each State receives $2.75 per capita in new potential credits to allocate, subject to a minimum of 

$3,185,000 for smaller States.) The total ceiling available for a State to allocate each year also 

includes unused or returned HCDAs from prior years. Because the HCAs’ HCDA pools are 

almost always oversubscribed, potential developers of LIHTC projects compete for allocations 

by offering project proposals to the relevant HCA. Each HCA must have a Qualified Allocation 

Plan (QAP) to guide its allocations. 

A building can be eligible to earn credits at a 4 percent rate if the building and the land on which 

it sits are financed at least 50 percent by private activity bonds (PABs) that are subject to a 

State’s volume cap. (A State’s volume cap is the annual limit on the PABs that the State may 

issue for all purposes, including for qualified residential rental projects that can earn LIHTCs.) 

By focusing its volume cap on financing qualified residential rental projects, in combination with 

allocating HCDAs, a State can more than double the number of LIHTC-supported affordable 

rental units that it could achieve with its HCDAs alone. 

Qualifying buildings may not earn LIHTCs unless they are subject to an extended low-income 

housing commitment: an agreement for a period of at least 30 years that requires the building to 

maintain affordability and habitability, and binds all subsequent owners during that period. In 

addition to an owner’s ability to transfer a LIHTC building subject to their commitment, current 

law contains two particular mechanisms for the original owner to sever their connection to the 

building and yet to leave affordability and habitability requirements intact. 

First, after the 14th year of the extended-use period, the owner can ask the HCA to provide a 

qualified contract, under which the owner can sell the building. In general, a qualified contract 

requires the buyer to continue to maintain the building’s affordability and habitability at a 

purchase price that includes a fair market value component for the non-low-income portion of 

the building plus a component for the low-income portion of the building that is at or above an 

amount based on a statutory formula. If, however, the HCA fails to provide such an offer within 
62 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

a year of the owner’s request, the extended use period terminates, as do the affordability and 

habitability requirements.

Second, current law contains a safe harbor for a “right of first refusal” (ROFR) to facilitate a sale 

to tenants (or a tenant group), to a resident management corporation, to a qualified nonprofit 

organization, or to a government agency. The purchase under such a contract would occur after 

the 15th year for at least the outstanding debt incurred more than five years before the sale, plus 

Federal income tax triggered by the sale. These purchasers would remain subject to the 

requirements to maintain affordability and habitability. Under the safe harbor, no Federal income 

tax benefit with respect to the building is denied to the original owners. 

Reasons for Change 

The United States faces a housing supply gap. Increasing the supply of housing will mean more 

affordable rents and more attainable homeownership for Americans in every community. The 

LIHTC incentive is the Federal Government’s largest source of support for the construction and 

rehabilitation of rental housing for low-income tenants. Increasing annual HCDAs can help 

increase housing supply and reduce the gap. Reducing the PAB financing requirement will 

further expand the reach of the credit to more projects and thereby further support housing 

supply. 

In addition, the qualified contract provision and ROFR provisions no longer function as 

intended. The statutorily determined purchase price in a qualified contract is generally higher 

than what buyers are willing to pay for a building subject to affordability and habitability 

requirements. As a result, the qualified contract provision serves to reduce the duration of the 

affordability and habitability requirements. LIHTC investors have imposed hurdles to the use of 

ROFRs that allow LIHTC projects to be too easily converted to market-rate housing. 

Proposals 

The proposal would make the following changes to current law: 

1. Increase annual HCDAs. 

For 2024, each State would receive $4.25 per capita in new potential credits for allocation, 

subject to a minimum of $4,901,620 for smaller States. For 2025, the per capita and State 

minimum amounts would be $4.88 and $5,632,880, respectively. For 2026 and subsequent years, 

these amounts would be the amounts for the prior year, indexed for inflation as under current 

law.

2. Reduce the 50 percent PAB financing requirement. 

A building would be eligible to earn LIHTCs on the basis of 25 percent (rather than 50 percent) 

PAB financing of the building and land. This change would apply to buildings placed in service 
63 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

in taxable years beginning after December 31, 2023. 

3. Repeal the qualified contract provision. 

The proposal would repeal the qualified contract provision, meaning that an owner could no 

longer end the extended use period for a building by requesting—and not receiving—a qualified 

contract to purchase the building. 

The repeal of the qualified contract provision would not apply to a building if, before January 1, 

2024: (a) the building received an allocation of HCDAs, or (b) in the case of a building some 

portion of which is financed with PABs subject to volume cap, the building received a 

determination that the LIHTCs received on account of the PAB financing would be necessary for 

the building’s financial feasibility and continued viability, and that an allocation of HCDAs 

would have been permissible in the absence of PAB financing. 

For buildings that continue to be subject to the qualified contract provision, a qualified contract 

submitted after the date of enactment must have an offer purchase price that is the sum of the 

FMV of the non-low-income and low-income portions of the building taking into account 

requirements under LIHTC rules. 

The proposal to repeal the qualified contract provision would apply from the date of enactment. 

4. Repeal the ROFR safe harbor and replace it with an option safe harbor. 

The safe harbor applicable under current law to a ROFR would instead be applicable to options 

to buy. Only persons that are eligible under current law to hold a right of first refusal could be 

the holder(s) of the option. To be eligible for the safe harbor, the right to purchase would have to 

cover both the building and assets required for continued operation as affordable rental housing 

and/or remaining partnership interests in the building. In addition, the right to purchase would 

have to be exercisable regardless of the approval or non-approval of the current owner or related 

persons. 

Finally, the purchase price of the LIHTC building would have to be at least the debt incurred 

more than 5 years before the date of sale that is secured by the building. The contractual 

purchase price of partnership interest(s) would have to be at least the partnership’s ratable share 

of the amount described in the preceding sentence. 

The proposals would apply to agreements entered into, or amended, after the date of enactment. 

The Administration will work with Congress to develop an approach appropriate for existing 

agreements. 
64 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

MODIFY ENERGY TAXES

ELIMINATE FOSSIL FUEL TAX PREFERENCES

Current Law 

Current law provides several credits, deductions, and other special provisions that are targeted 

towards encouraging oil, gas, and coal production. 

Credit for enhanced oil recovery

The general business credit includes a 15 percent credit for eligible costs attributable to enhanced 

oil recovery (EOR) projects. Eligible costs include the cost of constructing a gas treatment plant 

to prepare Alaskan natural gas for pipeline transportation, the cost of depreciable or amortizable 

tangible property that is integral to a qualified EOR project, intangible drilling and development 

costs (IDCs), and any allowable qualified tertiary injectant expenses that are paid or incurred in 

connection with a qualified EOR project. A qualified EOR project must be located in the United 

States and must involve the application of one or more of nine tertiary recovery methods. The 

allowable credit is phased out over a $6 range for a taxable year if the annual reference price 

exceeds an inflation adjusted threshold. 

Credit for oil and natural gas produced from marginal wells 

In addition, the general business credit includes a credit for crude oil and natural gas produced 

from marginal wells. For taxable years beginning after 2005, the full potential credit rate is 

determined by the annual inflation adjustment applied to a starting credit rate of $3.00 per barrel 

of oil and $0.50 per 1,000 cubic feet of natural gas. The credit per well is limited to 1,095 barrels 

of oil or barrel-of-oil equivalents per year. The credit rates for crude oil and natural gas are 

phased out for a taxable year if the reference price exceeds the applicable thresholds. The crude 

oil phase-out range and the applicable threshold at which the phase-out begins in 2021 are $4.02 

and $20.10 respectively. The natural gas phase-out range and the applicable threshold at which 

the phase-out begins are $0.44 and $2.24. Both sets of rates are adjusted annually for inflation. In 

2021, the credit amount was the full rate of $0.67 per 1,000 cubic feet of natural gas and the 

credit for oil was completely phased out. 

Expensing of intangible drilling costs (IDCs)

IDCs include all expenditures made by an operator for wages, fuel, repairs, hauling, supplies, 

and other expenses incident to and necessary for the drilling of wells and the preparation of wells 

for the production of oil and natural gas. Generally, IDCs do not include expenses for items 

which have a salvage value or items related to the acquisition of the property. An operator who 

pays or incurs IDCs in the development of an oil or natural gas property located in the United 

States, including certain wells drilled offshore, may elect either to expense or capitalize those 

costs. If a taxpayer elects to expense IDCs, the amount of the IDCs is deductible as an expense in 
65 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

the taxable year that the cost is paid or incurred. For any particular taxable year, a taxpayer may 

deduct some portion of its IDCs and capitalize the rest under the provision. 

Deduction of costs paid or incurred for any tertiary injectant used as part of tertiary recovery 

method 

Taxpayers are allowed to deduct the cost of qualified tertiary injectant expenses for the taxable 

year. Qualified tertiary injectant expenses are amounts paid or incurred for any tertiary 

injectants, except for recoverable hydrocarbon injectants, that are used as part of a tertiary 

recovery method to increase the recovery of crude oil. The deduction is treated as an 

amortization deduction in determining the amount subject to recapture upon disposition of the 

property. 

Exception to passive loss limitations provided to working interests in oil and natural gas 

properties 

Deductions attributable to passive activities, to the extent they exceed income from passive 

activities, generally may not be used against other income, such as wages, portfolio income, or 

business income that is derived from a nonpassive activity. A similar rule applies to credits. 

Passive activities are defined to include trade or business activities in which the taxpayer does 

not materially participate. An exception is provided, however, for any working interest in an oil 

or natural gas property that the taxpayer holds directly or through an entity that does not limit the 

liability of the taxpayer with respect to the interest. Suspended deductions and credits are carried 

forward and treated as deductions and credits from passive activities in the next year. The 

suspended losses and credits from a passive activity are allowed in full when the taxpayer 

completely disposes of the activity. 

Use of percentage depletion with respect to oil and natural gas wells 

The capital costs of oil and natural gas wells are recovered through the depletion deduction. 

Under the cost depletion method, the basis recovery for a taxable year is proportional to the 

exhaustion of the property during the year and cannot exceed basis. A taxpayer may also qualify 

for percentage depletion, under which the amount of the deduction is a statutory percentage of 

the gross income from the property. In general, only independent producers and royalty owners, 

in contrast to integrated oil companies, qualify for the percentage depletion deduction. A 

qualifying taxpayer determines the depletion deduction for each oil and natural gas property 

under both the percentage depletion method and the cost depletion method then deducts the 

larger of the two amounts. Because percentage depletion is computed without regard to the 

taxpayer’s basis in the depletable property, a taxpayer may continue to claim percentage 

depletion after all the expenditures incurred to acquire and develop the property have been 

recovered. 
66 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Two-year amortization of independent producers’ geological and geophysical expenditures 

Geological and geophysical expenditures are costs incurred for the purpose of obtaining and 

accumulating data that will serve as the basis for the acquisition and retention of mineral 

properties. The amortization period for geological and geophysical expenditures incurred in 

connection with oil and natural gas exploration in the United States is two years for independent 

producers and seven years for major integrated oil companies. 

Expensing of mine exploration and development costs

A taxpayer may elect to expense the exploration costs incurred for the purpose of ascertaining 

the existence, location, extent, or quality of a domestic ore or mineral deposit, including a 

deposit of coal or other hard mineral fossil fuel. After the existence of a commercially 

marketable deposit has been disclosed, costs incurred for the development of a mine to exploit 

the deposit are deductible in the year paid or incurred unless the taxpayer elects to deduct the 

costs on a ratable basis as the minerals or ores produced from the deposit are sold. 

Percentage depletion for hard mineral fossil fuels

The capital costs of coal mines and other hard-mineral fossil-fuel properties are recovered 

through the depletion deduction. Under the cost depletion method, the basis recovery for a 

taxable year is proportional to the exhaustion of the property during the year. A taxpayer may 

also qualify for percentage depletion; hence, the amount of the deduction is a statutory 

percentage of the gross income from the property. A qualifying taxpayer determines the 

depletion deduction for each property under both the percentage depletion method and the cost 

depletion method and deducts the larger of the two amounts. Because percentage depletion is 

computed without regard to the taxpayer’s basis in the depletable property, a taxpayer may 

continue to claim percentage depletion after all the expenditures incurred to acquire and develop 

the property have been recovered. 

Capital gains treatment for royalties 

Royalties received on the disposition of coal or lignite generally qualify for treatment as longterm capital gain, and the royalty owner does not qualify for percentage depletion with respect to 

the coal or lignite. This treatment does not apply unless the taxpayer has been the owner of the 

mineral in place for at least one year before it is mined.

Exemption from the corporate income tax for fossil fuel publicly traded partnerships 

Publicly traded partnerships are generally subject to the corporate income tax. Partnerships that 

derive at least 90 percent of their gross income from depletable natural resources, real estate, or 

commodities are exempt from the corporate income tax. Instead, they are taxed as partnerships. 

They pass through all income, gains, losses, deductions, and credits to their partners, with the 

partners then being liable for income tax (or benefitting from the losses) on their distributive 

shares.
67 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Oil Spill Liability Trust Fund (OSTLF) and Hazardous Substance Superfund (Superfund) excise 

tax exemption for crude oil derived from bitumen and kerogen-rich rock

Crudes such as those that are produced from bituminous deposits as well as kerogen-rich rock 

are not treated as crude oil or petroleum products for purposes of the OSTLF and Superfund 

taxes. The rate of tax on crude is the sum of the $0.09 per barrel financing rate dedicated to the 

OSLTF and the $0.164 per barrel financing rate dedicated to the Superfund. The tax is imposed 

on crude oil received at a United States refinery, and on petroleum products entered into the 

United States for consumption, use, or warehousing. 

Amortization of air pollution control facilities

Under current law, a taxpayer may elect to amortize expenses related to certain pollution control 

facilities over 60 months or 84 months. The 60-month period applies to property placed in 

service at a plant that began operation prior to January 1, 1976. The 84-month period applies to 

property placed in service after April 11, 2005, and used in connection with an electric 

generation plant or other property which is primarily coal-fired and constructed after December 

31, 1975. Eligible pollution control facilities include new identifiable treatment facilities that are

used to abate or control water or atmospheric pollution by removing, altering, disposing, storing, 

or preventing the creation or emission of pollutants, contaminants, wastes, or heat. Eligible 

facilities must be certified by a State certifying authority and a Federal certifying authority as 

being in compliance with applicable regulations and requirements. Without this special 

treatment, most pollution control facilities would be depreciated over 39 years as nonresidential 

real estate property.

Reasons for Change 

These oil, gas, and coal tax preferences distort markets by encouraging more investment in the 

fossil fuel sector than would occur under a neutral system. This market distortion is detrimental 

to long-term energy security and is also inconsistent with the Administration’s policy of 

supporting a clean energy economy, reducing our reliance on oil and reducing greenhouse gas 

emissions. 

Proposal 

The proposal would repeal: (a) the enhanced oil recovery credit for eligible costs attributable to a 

qualified enhanced oil recovery project; (b) the credit for oil and gas produced from marginal 

wells; (c) the expensing of intangible drilling costs; (d) the deduction for costs paid or incurred 

for any qualified tertiary injectant used as part of a tertiary recovery method; (e) the exception to 

passive loss limitations provided to working interests in oil and natural gas properties; (f) the use 

of percentage depletion with respect to oil and gas wells; (g) two year amortization of geological 

and geophysical expenditures by independent producers, instead allowing amortization over the 

seven-year period used by major integrated oil companies; (h) expensing of exploration and 

development costs; (i) percentage depletion for hard mineral fossil fuels; (j) capital gains 

treatment for royalties; (k) the exemption from the corporate income tax for publicly traded 
68

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

partnerships with qualifying income and gains from activities relating to fossil fuels; (l) the 

OSTLF and Superfund excise tax exemption for crude oil derived from bitumen and kerogenrich rock; and (m) accelerated amortization for air pollution control facilities.

Unless otherwise specified, the proposal provisions would be effective for taxable years 

beginning after December 31, 2023. In the case of royalties, the proposal provision would be 

effective for amounts realized in taxable years beginning after December 31, 2023, regardless of 

when the property generating these royalties was acquired. The repeal of the exemption from the 

corporate income tax for publicly traded partnerships with qualifying income and gains from 

activities relating to fossil fuels would be effective for taxable years beginning after December 

31, 2028.
69 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

ELIMINATE DRAWBACKS ON PETROLEUM TAXES THAT FINANCE THE OIL 

SPILL LIABILITY TRUST FUND AND SUPERFUND 

Current Law 

An excise tax is imposed on: (a) crude oil received at a U.S. refinery; (b) imported petroleum 

products (including crude oil) entered into the United States for consumption, use, or 

warehousing; and (c) any domestically produced crude oil that is used (other than on the 

premises where produced for extracting oil or natural gas) in or exported from the United States 

if, before such use or exportation, no taxes were imposed on the crude oil. The rate of tax is the 

sum of (1) the Hazardous Superfund financing rate of 16.4 cents per barrel, adjusted annually for 

inflation and (2) the Oil Spill Liability Trust Fund financing rate of 9 cents per barrel. 

The revenues from the Hazardous Superfund financing rate are dedicated to the Hazardous 

Substance Superfund (Superfund). Amounts in the Superfund are available for expenditures 

incurred in connection with releases or threats of releases of hazardous substances into the 

environment under specified provisions of the Comprehensive Environmental Response, 

Compensation, and Liability Act of 1980 (as amended). 

The revenues from the Oil Spill Liability Trust Fund (OSLTF) financing rate are dedicated to the 

OSLTF to pay costs associated with oil removal and damages resulting from oil spills, as well as 

to provide annual funding to certain agencies for a wide range of oil pollution prevention and 

response programs, including research and development. In the case of an oil spill, the OSLTF 

makes it possible for the Federal Government to pay for removal costs up front, and then seek 

full reimbursement from the responsible parties.

U.S. Code Title 19 (Customs Duties), section 1313 – Drawbacks and Refunds has been 

administratively interpreted to allow drawback of the tax (a rebate of taxes paid when goods are 

imported and then exported again) when products subject to this tax are exported. 

Reasons for Change 

The magnitude of the Federal response to recent disasters has reinforced the importance of the 

OSLTF and the need to maintain a sufficient balance in the fund, particularly in order to 

accommodate spills of national significance. The Superfund provides critical financing to 

remedy damages caused by releases of hazardous substances.

The drawback of the petroleum tax is granted when the product is exported even though there is 

no concomitant reduction in the risk of an oil spill or release of a hazardous substance. A 

prohibition on the drawbacks of the tax will strengthen the finances of the OSLTF and Superfund 

and remove an incentive to export crude and like products.
70 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Proposal 

The eligibility of the petroleum taxes dedicated to the OSLTF and Superfund for drawback 

would be eliminated. 

The proposal would be effective after December 31, 2023. 
71 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

IMPOSE DIGITAL ASSET MINING ENERGY EXISE TAX

Current Law

Current law does not provide tax rules specifically addressing digital assets, with the exception 

of certain rules relating to broker reporting and reporting of cash transactions. 

Reasons for Change 

Digital asset mining is a process for validating transactions among holders of digital assets to 

record and transfer cryptographically secured assets on a distributed ledger by, for example, 

using high-powered computers to perform calculations to select the validator. 

The computational effort involved in mining can be substantial and can therefore require a 

correspondingly large amount of energy. The increase in energy consumption attributable to the 

growth of digital asset mining has negative environmental effects and can have environmental 

justice implications as well as increase energy prices for those that share an electricity grid with 

digital asset miners. Digital asset mining also creates uncertainty and risks to local utilities and 

communities, as mining activity is highly variable and highly mobile. 

An excise tax on electricity usage by digital asset miners could reduce mining activity along with 

its associated environmental impacts and other harms. 

Proposal 

Any firm using computing resources, whether owned by the firm or leased from others, to mine 

digital assets would be subject to an excise tax equal to 30 percent of the costs of electricity used 

in digital asset mining. 

Firms engaged in digital asset mining would be required to report the amount and type of 

electricity used as well as the value of that electricity, if purchased externally. Firms that lease 

computational capacity would be required to report the value of the electricity used by the lessor 

firm attributable to the leased capacity, which would serve as the tax base. Firms that produce or 

acquire power off-grid, for example by using the output of a particular electricity generating 

plant, would be subject to an excise tax equal to 30 percent of estimated electricity costs. 

Except as otherwise provided by the Secretary, the term “digital asset” means any digital 

representation of value which is recorded on a cryptographically secured distributed ledger or 

any similar technology as specified by the Secretary. 

The proposal would be effective for taxable years beginning after December 31, 2023. The 

excise tax would be phased in over three years at a rate of 10 percent in the first year, 20 percent 

in the second, and 30 percent thereafter. 
72 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

STRENGTHEN TAXATION OF HIGH-INCOME TAXPAYERS 

APPLY THE NET INVESTMENT INCOME TAX TO PASS-THROUGH BUSINESS 

INCOME OF HIGH-INCOME TAXPAYERS

Current Law

Individuals with modified adjusted gross incomes over a threshold amount are subject to a 3.8 

percent tax on net investment income. The threshold is $200,000 for single and head of 

household returns and $250,000 for joint returns. Net investment income generally includes: (a) 

interest, dividends, rents, annuities, and royalties, other than such income derived in the ordinary 

course of a trade or business; (b) income derived from a trade or business in which the taxpayer 

does not materially participate; (c) income from a business of trading in financial instruments or 

commodities; and (d) net gain from the disposition of property other than property held in a trade 

or business in which the taxpayer materially participates. The net investment income tax (NIIT) 

does not apply to self-employment earnings. 

Self-employment earnings and wages are subject to employment taxes under the SelfEmployment Contributions Act (SECA) and the Federal Insurance Contributions Act (FICA), 

respectively. Both SECA and FICA taxes apply at a rate of 12.4 percent for social security tax on 

employment earnings (capped at $160,200 in 2023) and at a rate of 2.9 percent for Medicare tax 

on all employment earnings (not subject to an earnings cap). An additional 0.9 percent Medicare 

tax is imposed on self-employment earnings and wages of high-income taxpayers, above the 

same NIIT thresholds of $200,000 for single and head of household filers and $250,000 for joint 

filers, thus bringing the combined rate of Medicare tax to 3.8 percent for these taxpayers. 

General partners and sole proprietors pay SECA tax on the full amount of their net trade or 

business income, subject to certain exceptions. Section 1402(a)(13) of the Internal Revenue Code 

provides that the distributive share of partnership income or loss of a limited partner is excluded 

from SECA tax, although limited partners are subject to SECA tax on their section 707(c) 

guaranteed payments from the partnership that are for services they provide to, or on behalf of, 

the partnership. Because the statutory exclusion only refers to limited partners, questions have 

arisen as to the meaning of this term and whether the limited partner exclusion might be 

applicable to limited liability company (LLC) members. Some partners who claim to be limited 

partner members may more accurately be described as general partners who would be subject to 

SECA. 

S corporation shareholders are not subject to SECA tax. However, tax law requires that those 

shareholders who are owner-employees pay themselves “reasonable compensation” for services 

provided, on which they pay FICA tax like any other employee. Nonwage distributions to 

shareholders of S corporations are not subject to either FICA or SECA taxes. 
73 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Reasons for Change 

Active owners of pass-through businesses, including S corporations and partnerships, are treated

differently for purposes of the NIIT, SECA tax, and FICA tax according to the legal form of their 

ownership and the legal form of the payment that they receive. While general partners and sole 

proprietors pay SECA tax on earnings from their businesses, S corporation owner-employees pay 

employment taxes on only a portion of their earnings, and limited partners often pay little or no 

SECA tax. Although the NIIT reflects an intention to impose the 3.8 percent tax on both earned 

and unearned income of high-income taxpayers, certain income, specifically distributions to S 

corporation shareholder-employees and distributions to limited partners who claim the statutory 

exclusion for limited partners, escape the combined 3.8 percent tax from FICA or SECA and the 

NIIT. 

These inconsistencies in the treatment of pass-through business income are unfair and inefficient. 

They distort choice of organizational form and provide tax planning opportunities for business 

owners, particularly those with high incomes, to avoid paying their fair share of taxes. 

The current system is also a challenge for the Internal Revenue Service (IRS) to administer. The 

determination of “reasonable compensation” of S corporation owner-employees generally 

depends on facts and circumstances and requires a valuation analysis that can be contested by the 

taxpayer and increases the IRS’s cost of administration and enforcement. Uncertainty 

surrounding the treatment of limited partners and LLC members who materially participate in 

their businesses undermines the IRS’s ability to ensure payment of SECA tax and the NIIT. 

Proposal 

The proposal would expand the NIIT base to ensure that all pass-through business income of 

high-income taxpayers is subject to either the NIIT or SECA tax. 

In order to determine the amount of trade or business income that would be subject to the NIIT

under the proposal, the taxpayer would sum (a) ordinary business income derived from S 

corporations for which the owner materially participates in the trade or business, (b) ordinary 

business income derived from either limited partnership interests or interests in LLCs that are 

classified as partnerships to the extent a limited partner or LLC member materially participates in 

its partnership’s or LLC’s trade or business,

19 and (c) any other trade or business income to the 

extent that such income is not subject to NIIT or SECA under current law (this sum referred to as 

the “potential NIIT income”). The additional income that would be subject to the NIIT would be 

a specified percentage of potential NIIT income. The specified percentage would start at zero 

and would increase linearly to 100 as adjusted gross income rose from $400,000 to $500,000 

($200,000 to $250,000 for married taxpayers filing separately). The threshold amounts given in 

this paragraph would not be indexed for inflation. 

19 For purposes of clause (b), limited partners and LLC members claiming to be limited partners who provide 

services and materially participate in their partnerships and LLCs would be subject to the NIIT on their distributive 

shares of partnership or LLC ordinary income to the extent that this income exceeds certain threshold amounts and 

is not treated as self-employment income subject to SECA.
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Material participation standards would apply to individuals who participate in a business in 

which they have a direct or indirect ownership interest. Taxpayers are usually considered to 

materially participate in a business if they are involved in it in a regular, continuous, and 

substantial way. Often this means they work for the business for at least 500 hours per year. The 

statutory exception to SECA tax for limited partners would not exempt a limited partner from the 

NIIT if the limited partner otherwise materially participated.

The proposal would be effective for taxable years beginning after December 31, 2022.
75 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

INCREASE THE NET INVESTMENT INCOME TAX RATE AND ADDITIONAL

MEDICARE TAX RATE FOR HIGH-INCOME TAXPAYERS

Current Law

Individuals with modified adjusted gross incomes over a threshold amount are subject to a 3.8 

percent tax on net investment income. The threshold is $200,000 for single and head of 

household returns and $250,000 for joint returns. Net investment income generally includes: (a) 

interest, dividends, rents, annuities, and royalties, other than such income derived in the ordinary 

course of a trade or business; (b) income derived from a trade or business in which the taxpayer 

does not materially participate; (c) income from a business of trading in financial instruments or 

commodities; and (d) net gain from the disposition of property other than property held in a trade 

or business in which the taxpayer materially participates. The net investment income tax (NIIT) 

does not apply to self-employment earnings. Proceeds from the NIIT flow into the General Fund 

of the Treasury. 

Self-employment earnings and wages are subject to employment taxes under either the SelfEmployment Contributions Act (SECA) or the Federal Insurance Contributions Act (FICA), 

respectively. Both SECA and FICA taxes apply at a rate of 12.4 percent for social security tax on 

employment earnings (capped at $160,200 in 2023) and at a rate of 2.9 percent for Medicare tax 

on all employment earnings (not subject to a cap). An additional 0.9 percent Medicare tax is 

imposed on self-employment earnings and wages of high-income taxpayers, above the same 

NIIT thresholds of $200,000 for single and head of household filers and $250,000 for joint filers, 

thus bringing the combined rate of Medicare tax to 3.8 percent for these taxpayers. The FICA 

and SECA Medicare taxes flow into the Hospital Insurance Trust Fund (HITF), which finances 

Medicare Part A.

Reasons for Change 

According to current projections from the Medicare trustees, the Hospital Insurance Trust Fund 

(HITF) will be exhausted in 2028. Increasing the NIIT and additional Medicare tax for highincome taxpayers and devoting NIIT proceeds to the HITF will extend the life of the trust fund. 

In addition, the differential treatment of NIIT revenues and the Medicare portion of FICA and 

SECA taxes, with the former paid into the General Fund of the Treasury and the latter paid into 

the HITF, is inconsistent with the fact that the taxes are intended for the same purpose. 

A former proposal in this volume, Apply the Net Investment Income Tax to Pass-Through 

Business Income of High-Income Taxpayers, would expand the base of the NIIT to ensure all 

pass-through trade or business income is taxed either through the NIIT or SECA taxes.

Proposal 

The proposal would increase the additional Medicare tax rate by 1.2 percentage points for 

taxpayers with more than $400,000 of earnings. When combined with current-law tax rates, this 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

would bring the marginal Medicare tax rate up to 5 percent for earnings above the threshold. The 

threshold would be indexed for inflation.

The proposal would also increase the NIIT rate by 1.2 percentage points for taxpayers with more 

than $400,000 of income, similarly bringing the marginal NIIT rate to 5 percent for investment 

income above the threshold. Specifically, for taxpayers with positive net investment income, the 

NIIT would increase by 1.2 percentage points on the lesser of (a) net investment income or (b) 

the excess, if any, of modified adjusted gross income over $400,000. The threshold would be 

indexed for inflation.

Finally, under the proposal, the revenue from the NIIT (that raised under current law and that 

which would be raised under any proposed expansion) would be directed to the HITF in the same 

manner as the revenue from the current 3.8 percent tax on earnings and the proposed additional 

1.2 percent tax on earnings.

The proposal would be effective for taxable years beginning after December 31, 2022.
77 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

INCREASE THE TOP MARGINAL INCOME TAX RATE FOR HIGH-INCOME 

EARNERS

Current Law 

For taxable years beginning after December 31, 2017, and before January 1, 2026, the top 

marginal individual income tax rate is 37 percent. For taxable years beginning after December 

31, 2025, the top marginal tax rate is 39.6 percent.

For taxable years beginning after December 31, 2022, and before January 1, 2024, the top 

marginal tax rate applies to taxable income over $693,750 for married individuals filing a joint 

return and surviving spouses, $578,125 for unmarried individuals (other than surviving spouses), 

$578,100 for head of household filers, and $346,875 for married individuals filing a separate 

return. The tax bracket thresholds are indexed for inflation. 

Reasons for Change 

Raising the top tax rate for the highest-income taxpayers would raise revenue and increase the 

progressivity of the tax system. 

Proposal 

The proposal would increase the top marginal tax rate to 39.6 percent. The top marginal tax rate 

would apply to taxable income over $450,000 for married individuals filing a joint return, 

$400,000 for unmarried individuals (other than surviving spouses), $425,000 for head of 

household filers, and $225,000 for married individuals filing a separate return. After 2024, the 

thresholds would be indexed for inflation using the C-CPI-U, which is used for all current 

thresholds in the tax rate tables. 

The proposal would be effective for taxable years beginning after December 31, 2022. 
78 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

REFORM THE TAXATION OF CAPITAL INCOME

Current Law 

Most realized long-term capital gains and qualified dividends are taxed at graduated rates based 

on the taxpayer’s taxable income, with 20 percent generally being the highest rate (23.8 percent 

including the net investment income tax, if applicable based on the taxpayer’s modified adjusted 

gross income). Moreover, capital gains are taxable only upon the sale or other disposition of an 

appreciated asset. When a donor gives an appreciated asset to a donee during the donor’s life, the 

donee’s basis in the asset is the basis of the donor; the basis is “carried over” from the donor to 

the donee. There is no realization of capital gain by the donor at the time of the gift, and there is 

no recognition of capital gain by the donee until the donee later disposes of that asset. When an 

appreciated asset is held by a decedent at death, the basis of the asset for the decedent’s heir is 

adjusted (usually “stepped up”) to the fair market value of the asset at the date of the decedent’s 

death. As a result, the appreciation accruing during the decedent’s life on assets that are still held 

by the decedent at death avoids Federal income tax.

Reasons for Change 

Preferential tax rates on long-term capital gains and qualified dividends disproportionately 

benefit high-income taxpayers and provide many high-income taxpayers with a lower tax rate 

than many low- and middle-income taxpayers. The rate disparity between taxes on capital gains 

and qualified dividends on the one hand, and taxes on labor income on the other, also encourages 

economically wasteful efforts to convert labor income into capital income as a tax avoidance 

strategy.

Under current law, because a person who inherits an appreciated asset receives a basis in that 

asset equal to the asset’s fair market value at the time of the decedent’s death, appreciation that 

had accrued during the decedent’s life is never subjected to income tax. In contrast, less-wealthy 

individuals who must spend down their assets during retirement pay income tax on their realized 

capital gains. This dynamic increases the inequity of the tax treatment of capital gains. In 

addition, the preferential treatment for assets held until death produces an incentive for taxpayers 

to inefficiently lock in portfolios of assets and hold them primarily for the purpose of avoiding 

capital gains tax on the appreciation, rather than reinvesting the capital in more economically 

productive investments. 

Moreover, the distribution of wealth among Americans has grown increasingly unequal, 

concentrating economic resources in a steadily shrinking percentage of individuals. Coinciding 

with this period of growing inequality, the long-term fiscal shortfall of the United States has 

significantly increased. Reforms to the taxation of capital gains and qualified dividends will 

reduce economic disparities among Americans and raise needed revenue.
79 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Proposal 

Tax capital income for high-income earners at ordinary rates

Long-term capital gains and qualified dividends of taxpayers with taxable income of more than 

$1 million would be taxed at ordinary rates, with 37 percent generally being the highest rate 

(40.8 percent including the net investment income tax).20 The proposal would only apply to the 

extent that the taxpayer’s taxable income exceeds $1 million ($500,000 for married filing 

separately), indexed for inflation after 2024.21 

The proposal would be effective for gains required to be recognized and for dividends received 

on or after the date of enactment.

Treat transfers of appreciated property by gift or on death as realization events 

Under the proposal, the donor or deceased owner of an appreciated asset would realize a capital 

gain at the time of the transfer. The amount of the gain realized would be the excess of the 

asset’s fair market value on the date of the gift or the decedent’s date of death over the 

decedent’s basis in that asset. That gain would be taxable income to the donor or to the 

decedent’s estate on the Federal gift or estate tax return or on a separate capital gains return. The 

use of capital losses and carry-forwards from transfers at death would be allowed against capital 

gains and up to $3,000 of ordinary income on the decedent’s final income tax return, and the tax 

imposed on gains deemed realized at death would be deductible on the estate tax return of the 

decedent’s estate (if any). 

Gain on unrealized appreciation also would be recognized by a trust, partnership, or other noncorporate entity that is the owner of property if that property has not been the subject of a 

recognition event within the prior 90 years. This provision would apply to property held on or 

after January 1, 1942, that is not subject to a recognition event after December 31, 1941, so that 

the first recognition event would be deemed to occur on December 31, 2032. 

A transfer would be defined under the gift and estate tax provisions and would be valued at the 

value used for gift or estate tax purposes. However, for purposes of the imposition of this capital 

gains tax, the following would apply. First, a transferred partial interest generally would be 

valued at its proportional share of the fair market value of the entire property, provided that this 

rule would not apply to an interest in a trade or business to the extent that its assets are actively 

used in the conduct of that trade or business. Second, transfers of property into, and distributions 

in kind from a trust, other than a grantor trust that is deemed to be wholly owned and revocable 

20 A separate proposal would first raise the top ordinary rate to 39.6 percent (43.4 percent including the net 

investment income tax). An additional proposal would increase the net investment income tax rate by 1.2 percentage 

points above $400,000, bringing the marginal net investment income tax rate to 5 percent for investment income 

above the $400,000 threshold. Together, the proposals would increase the top marginal rate on long-term capital 

gains and qualified dividends to 44.6 percent.

21 For example, a taxpayer with $1,100,000 in taxable income of which $200,000 is preferential capital income 

would have $100,000 of capital income taxed at the preferential rate and $100,000 taxed at ordinary rates.
80

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

by the donor, would be recognition events, as would transfers of property to, and by, a 

partnership or other non-corporate entity, if the transfers have the effect of a gift to the 

transferee. The deemed owner of such a revocable grantor trust would recognize gain on the 

unrealized appreciation in any asset distributed from the trust to any person other than the 

deemed owner or the U.S. spouse of the deemed owner, not including distributions made in 

discharge of an obligation of the deemed owner. All of the unrealized appreciation on assets of 

such a revocable grantor trust would be realized at the deemed owner’s death or at any other time 

when the trust becomes irrevocable.

Certain exclusions would apply. Transfers to a U.S. spouse or to charity would carry over the 

basis of the donor or decedent. Capital gain would not be realized until the surviving spouse 

disposes of the asset or dies, and appreciated property transferred to charity would be exempt 

from capital gains tax. The transfer of appreciated assets to a split-interest trust would be subject 

to this capital gains tax, with an exclusion from that tax allowed for the charity’s share of the 

gain based on the charity’s share of the value transferred as determined for gift or estate tax 

purposes. 

The proposal would exclude from recognition any gain on all tangible personal property such as 

household furnishings and personal effects (excluding collectibles). The $250,000 per-person 

exclusion under current law for capital gain on a principal residence would apply to all 

residences and would be portable to the decedent’s surviving spouse, making the exclusion 

effectively $500,000 per couple. Finally, the exclusion under current law for capital gain on 

certain small business stock would also apply. 

In addition to the above exclusions, the proposal would allow a $5 million per-donor exclusion 

from recognition of other unrealized capital gains on property transferred by gift during life. This 

exclusion would apply only to unrealized appreciation on gifts to the extent that the donor’s 

cumulative total of lifetime gifts exceeds the basic exclusion amount in effect at the time of the 

gift. In addition, the proposal would allow any remaining portion of the $5 million exclusion that 

has not been used during life as an exclusion from recognition of other unrealized capital gains 

on property transferred by reason of death. This exclusion would be portable to the decedent’s 

surviving spouse under the same rules that apply to portability for estate and gift tax purposes

(resulting in a married couple having an aggregate $10 million exclusion) and would be indexed 

for inflation after 2023. The recipient’s basis in property, whether received by gift or by reason 

of the decedent’s death, would be the property’s fair market value at the time of the gift or the 

decedent’s death. 

The proposal also includes several deferral elections. Taxpayers could elect not to recognize 

unrealized appreciation of certain family-owned and -operated businesses until the interest in the 

business is sold or the business ceases to be family-owned and -operated. Furthermore, the 

proposal would allow a 15-year fixed-rate payment plan for the tax on appreciated assets 

transferred at death, other than liquid assets such as publicly traded financial assets and other 

than businesses for which the deferral election is made. The Internal Revenue Service (IRS) 

would be authorized to require security at any time when IRS perceives a reasonable need for 
81

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

security to continue this deferral. That security could be provided from any person, and in any 

form, deemed acceptable by IRS.

Additionally, the proposal would include other legislative changes designed to facilitate and 

implement the proposal, including without limitation: the allowance of a deduction for the full 

cost of appraisals of appreciated assets; the imposition of liens; the waiver of penalty for 

underpayment of estimated tax to the extent that underpayment is attributable to unrealized gains 

at death; the grant of a right of recovery of the tax on unrealized gains; rules to determine who 

has the right to select the return filed; the achievement of consistency in valuation for transfer 

and income tax purposes; coordinating changes to reflect that the recipient would have a basis in 

the property equal to the value on which the capital gains tax is computed; and a broad grant of 

regulatory authority to provide implementing rules.

To facilitate the transition to taxing gains at gift, death and other events under the proposal, the 

Secretary and her delegates would be granted authority to issue any regulations or other guidance

necessary or appropriate to implement the proposal, including rules and safe harbors for 

determining the basis of assets in cases where complete records are unavailable, reporting 

requirements for all transfers of appreciated property including value and basis information, and 

rules where reporting could be permitted on the decedent’s final income tax return instead.

The proposal would be effective for gains on property transferred by gift, and on property owned 

at death by decedents dying, after December 31, 2023, and on certain property owned by trusts, 

partnerships, and other non-corporate entities on January 1, 2024.
82 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

IMPOSE A MINIMUM INCOME TAX ON THE WEALTHIEST TAXPAYERS

Current Law

Most realized long-term capital gains and qualified dividends are taxed at graduated rates under 

the individual income tax, with 20 percent generally being the highest rate (23.8 percent 

including the net investment income tax, if applicable, based on the taxpayer’s modified adjusted 

gross income). Moreover, capital gains are taxable only upon a realization event, such as the sale 

or other disposition of an appreciated asset. As a result, the Federal income taxation of the 

appreciation of an asset that accrues during the asset’s holding period is deferred. In the case of 

unrealized appreciation at death, the basis adjustment (usually, a step-up) for a decedent’s assets 

may cause Federal income taxation of that gain to be eliminated entirely. 

Reasons for Change 

Preferential treatment for unrealized gains disproportionately benefits high-wealth taxpayers and 

provides many high-wealth taxpayers with a lower effective tax rate than many low- and middleincome taxpayers. 

 

Under current law, the preferential treatment for unrealized gains produces an incentive for 

taxpayers to inefficiently lock in portfolios of assets and hold them primarily for the purpose of 

avoiding capital gains tax on the appreciation, rather than reinvesting the capital in more 

economically productive investments. 

Reforms to the taxation of capital gains will reduce economic disparities among Americans and 

raise needed revenue.

Proposal 

The proposal would impose a minimum tax of 25 percent on total income, generally inclusive of 

unrealized capital gains, for all taxpayers with wealth (that is, the difference obtained by 

subtracting liabilities from assets) greater than $100 million. 

Under the proposal, taxpayers could choose to pay the first year of minimum tax liability in nine 

equal, annual installments. For subsequent years, taxpayers could choose to pay the minimum tax 

imposed for those years (not including installment payments due in that year) in five equal, 

annual installments. 

A taxpayer’s minimum tax liability would equal the minimum tax rate (that is, 25 percent) times 

the sum of taxable income and unrealized gains (including on ordinary assets) of the taxpayer, 

less the sum of the taxpayer’s unrefunded, uncredited prepayments and regular tax. Payments of 

the minimum tax would be treated as a prepayment available to be credited against subsequent 

taxes on realized capital gains to avoid taxing the same amount of gain more than once. The 

amount of a taxpayer’s “uncredited prepayments” would equal the cumulative minimum tax 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

liability assessed (including installment payments not yet due) for prior years, less any amount 

credited against realized capital gains in prior years. 

Uncredited prepayments would be available to be credited against capital gains taxes due upon 

realization of gains, to the extent that the amount of uncredited prepayments, reduced by the 

cumulative amount of unpaid installments of the minimum tax (net uncredited prepayments), 

exceeds 25 percent of unrealized gains. Refunds would be provided to the extent that net 

uncredited prepayments exceed the long-term capital gains rate (inclusive of applicable surtaxes) 

times the taxpayer’s unrealized gains – such as after unrealized loss or charitable gift. However, 

refunds would first offset any remaining installment payments of minimum tax before being 

refundable in cash.

Minimum tax liability would be reduced to the extent that the sum of minimum tax liability and 

uncredited prepayments exceeds two times the minimum tax rate times the amount by which the 

taxpayer’s wealth exceeds $100 million. As a result, the minimum tax would be fully phased in 

for all taxpayers with wealth greater than $200 million.

For single decedents, net uncredited prepayments in excess of tax liability from gains at death

would be refunded to the decedent’s estate and would be included in the decedent’s gross estate

for Federal estate tax purposes. For married decedents, net uncredited prepayments that are 

unused would be transferred to the spouse or as otherwise provided by the Secretary or her 

delegates (Secretary) through regulations or other guidance.

Taxpayers with wealth greater than the threshold would be required to report to the Internal 

Revenue Service (IRS) on an annual basis, separately by asset class, the total basis and total 

estimated value (as of December 31 of the taxable year) of their assets in each specified asset 

class, and the total amount of their liabilities. Tradable assets (for example, publicly traded 

stock) would be valued using end-of-year market prices. Taxpayers would not have to obtain 

annual, market valuations of non-tradable assets. Instead, non-tradable assets would be valued 

using the greater of the original or adjusted cost basis, the last valuation event from investment,

borrowing, or financial Statements, or other methods approved by the Secretary. Valuations of 

non-tradable assets would not be required annually and would instead increase by a conservative 

floating annual return (the five-year Treasury rate plus two percentage points) in between 

valuations. IRS may offer avenues for taxpayers to appeal valuations, such as through appraisal. 

This reporting also would be used to determine if the taxpayer is eligible to be treated as 

“illiquid.” Taxpayers would be treated as illiquid if tradeable assets held directly or indirectly by 

the taxpayer make up less than 20 percent of the taxpayer’s wealth. Taxpayers who are treated as

illiquid may elect to include only unrealized gain in tradeable assets in the calculation of their

minimum tax liability. However, taxpayers making this election would be subject to a deferral 

charge upon, and to the extent of, the realization of gains on any non-tradeable assets. The 

deferral charge would not exceed ten percent of unrealized gains. 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Estimated tax payments would not be required for minimum tax liability. The minimum tax 

payment amount would be excluded from the prior year’s tax liability for purposes of computing 

estimated tax required to be paid to avoid the penalty for the underpayment of estimated taxes.

The proposal would provide the Secretary or her delegates with the authority to prescribe such 

regulations or other guidance determined to be necessary or appropriate to carry out the purposes 

of the proposal, including rules to prevent taxpayers from inappropriately converting tradeable 

assets to non-tradeable assets.

The proposal would be effective for taxable years beginning after December 31, 2023.
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

MODIFY RULES RELATING TO RETIREMENT PLANS 

PREVENT EXCESSIVE ACCUMULATIONS BY HIGH-INCOME TAXPAYERS IN 

TAX-FAVORED RETIREMENT ACCOUNTS AND MAKE OTHER REFORMS

Current Law

Individuals may save for retirement through a tax-favored retirement arrangement. The taxfavored retirement arrangement could be an employer-sponsored plan, such as a qualified plan 

under section 401(a), a section 403(b) plan, a simplified employer pension (SEP), a SIMPLEIRA plan, or an eligible deferred compensation plan described in section 457(b), or it could be an 

individual retirement account or annuity (IRA) described in section 408(a) and 408(b). 

Employer-sponsored plans and IRAs have distinct characteristics. The following briefly 

summarizes these rules for employer-sponsored plans and IRAs: 

1. Contributions to an employer-sponsored plan 

An employee who saves through an employer-sponsored plan is subject to a limit on elective 

contributions. For 2023, the annual limit on these elective contributions is generally $22,500, 

except that an employee who is at least 50 years old generally can contribute an additional 

$7,500. The $22,500 contribution limit and the $7,500 “catch-up contribution” limit are adjusted 

for inflation. An employer can also provide matching contributions or non-elective contributions 

under its plan (and may also permit the employee to make after-tax contributions), but there is a 

limit on the total of the employer and employee contributions (other than rollover contributions) 

for a year. For 2023, that limit is $66,000 in the case of a qualified plan, a section 403(b) plan, or 

SEP (with lower limits for a SIMPLE-IRA plan and an eligible deferred compensation plan), 

except that a taxpayer who is at least 50 years old can make the additional catch-up contribution 

(generally $7,500, with a lower amount in the case of certain plans). The $66,000 contribution 

limit is adjusted for inflation. 

Employer contributions and an employee’s elective contributions to an employer-sponsored plan 

are generally excluded from an employee’s income for the year of the contribution (but the 

contributions and earnings on those contributions are included in the distributee’s income when 

distributed). However, an employer may design the plan to provide its employees the option of 

designating some or all of an employee’s elective contributions (or a vested employer’s 

contributions) as Roth contributions. Designated Roth contributions are included in the 

employee’s income when they are made, but the contributions, and earnings on the contributions, 

are excluded from income when distributed, if the distribution satisfies the requirements to be a 

qualified distribution. 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

2. Contributions to an IRA

A taxpayer who saves using an IRA is subject to a limit on their contributions (other than 

rollover contributions). The annual limit on contributions is $6,500 for 2023, except that a 

taxpayer who is at least 50 years old can contribute an additional $1,000. The $6,500 

contribution limit and the $1,000 “catch-up contribution” limit are adjusted for inflation. 

If a taxpayer’s contribution to an IRA for a year exceeds the allowable contribution for that 

taxpayer and the taxpayer does not withdraw that excess contribution and net income attributable 

to the excess prior to the tax filing deadline (with extensions) for the year, then the taxpayer is 

subject to an annual 6 percent excise tax on the amount of the excess contribution. 

The tax treatment of a contribution to an IRA depends on whether the IRA is a traditional IRA or 

a Roth IRA. A taxpayer may deduct a contribution to a traditional IRA; however, if the taxpayer 

or the taxpayer’s spouse is an active participant in an employer-sponsored plan, then the 

deduction is available only if the taxpayer’s income is below a specified limit. A taxpayer for 

whom the deduction is limited or unavailable because of the income limit for an active 

participant can make an after-tax contribution to a traditional IRA (and a taxpayer who is not so 

limited can also choose to make an after-tax contribution rather than deduct that contribution). 

Contributions to a Roth IRA are not deductible when they are made, but the contributions, and 

earnings on the contributions, are excluded from income when distributed, if the distribution 

satisfies the requirements to be a qualified distribution. A taxpayer may not contribute to a Roth 

IRA if the taxpayer’s income for the year exceeds certain thresholds. 

The following five features of the rules applicable to tax-favored retirement arrangements under 

current law are addressed by the proposal: 

1. Distribution rules, including rules for required minimum distributions 

Under current law, taxpayers are not required to receive a distribution from tax-favored 

retirement arrangements due to the vested account balance exceeding a specified amount. 

Instead, under current law, taxpayers are required to commence to receive distributions from 

their tax-favored retirement arrangement when they attain a specified age, except in the case of a 

Roth IRA or designated Roth account. 

A retired employee who participates in an employer-sponsored plan generally is required to 

begin distributions from that plan (other than from a designated Roth account under the plan) by 

the required beginning date (April 1 following the calendar year in which the employee attains 

age 73) and to take the required minimum distributions (RMDs) over the employee’s life 

expectancy or lifetime (or over the life expectancy or the lifetime of the employee and a 

designated beneficiary). If the employee is not a 5 percent owner of the employer then the 

required beginning date is no earlier than April 1 following the calendar year in which the 

employee retires.
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

A taxpayer who has an IRA is also subject to the RMD rules. However, there is no RMD 

requirement for a Roth IRA during the lifetime of the IRA owner (although the beneficiary of the 

IRA is subject to the RMD rules after the IRA owner dies). If an IRA owner has more than one 

IRA (or a taxpayer is the beneficiary of more than one IRA from the same decedent) then the 

total of the RMD requirements for a year calculated for all of those IRAs may be satisfied by a 

distribution from any of those IRAs. However, the RMD requirements for IRAs that are not Roth 

IRAs cannot be satisfied by distributions from a Roth IRA and the RMD requirements for Roth 

IRAs cannot be satisfied by distributions from an IRA that is not a Roth IRA. 

If a taxpayer is subject to the requirement to take an RMD for a year and does not take the full 

amount required, then the taxpayer is subject to a 25 percent excise tax on the portion of the 

distribution not taken (reduced to 10 percent if the failure is corrected within a specified period). 

A distribution of an eligible rollover distribution from an employer-sponsored tax-favored 

retirement plan is subject to mandatory income tax withholding at a 20 percent tax rate. A 

nonperiodic distribution from an IRA (other than from a Roth IRA) is subject to income tax 

withholding at a 10 percent tax rate. However, an individual can elect to have no withholding 

apply to a nonperiodic distribution from an IRA. 

2. Rollovers and conversions to designated Roth retirement accounts or to Roth IRAs 

Under current law, an employer may design its plan to permit employees who participate in the 

plan to elect to rollover a distribution from the plan that is not from the designated Roth account 

(or to transfer a portion of the balance of the employee’s account that is not held as a designated 

Roth account) into a designated Roth account. Any amount so rolled over or transferred 

(sometimes referred to as a conversion) is included in the employee’s income to the same extent 

as if the amount rolled over or transferred were distributed (except that the additional income tax 

for early distributions does not apply). 

An employer may also design the plan to provide the employee with the option to make after-tax 

contributions that are not designated Roth contributions. These after-tax contributions are 

excluded from income when distributed (but earnings on those contributions are included in 

income when distributed). If an employee has made after-tax contributions to the plan, then 

generally a portion of each distribution is treated as coming from the employee’s after-tax 

contributions and the remainder of the distribution is a taxable distribution of employer 

contributions and earnings (with the proportions of those amounts for the distribution based on 

the total of those amounts for the employee as a whole).

Individuals are permitted to roll over a distribution from an employer-sponsored tax-favored 

retirement plan or from an IRA to a Roth IRA. If the distribution was from an account other than 

a designated Roth account (or was from an IRA other than a Roth IRA) any amount rolled over 

is included in the employee’s income to the same extent as if the amount rolled over was 

distributed (except that the additional income tax for early distributions does not apply). These 

rollovers are sometimes called conversions. 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

3. IRA prohibited transactions 

If the individual for whom an IRA is established engages in a prohibited transaction, the account 

loses its tax-favored retirement account status as of the first day of the taxable year in which the 

transaction occurs and the account is treated as if all the assets in the account were distributed on 

that day. A prohibited transaction is any direct or indirect: (a) sale or exchange, or leasing, of any 

property between the IRA and a “disqualified person”; (b) lending of money or other extension 

of credit between the IRA and a disqualified person; (c) furnishing of goods, services, or 

facilities between the IRA and a disqualified person; (d) transfer to, or use by or for the benefit 

of, a disqualified person of the income or assets of the IRA; (e) act by a disqualified person who 

is a fiduciary whereby they deal with the income or assets of the IRA in their own interest or for 

their own account; or (f) receipt of any consideration for their own personal account by any 

disqualified person who is a fiduciary from any party dealing with the IRA in connection with a 

transaction involving the income or assets of the IRA. 

A disqualified person includes a fiduciary, certain members of a fiduciary’s family, and certain 

entities controlled by a fiduciary. A fiduciary is any person who: (a) exercises any discretionary 

authority or discretionary control respecting management of the IRA or exercises any authority 

or control respecting management or disposition of its assets; (b) renders investment advice for a 

fee or other compensation, direct or indirect, with respect to any moneys or other property of 

such plan, or has any authority or responsibility to do so; or (c) has any discretionary authority or 

discretionary responsibility in the administration of such plan. 

Section 4975 imposes an excise tax on a disqualified person who participates in a prohibited 

transaction (other than an IRA owner who engages in that transaction) in an amount equal to 15 

percent of the amount involved, up to 100 percent of the amount involved if the prohibited 

transaction is not corrected. 

4. DISC and FSC ownership interests 

A domestic international sales corporation (DISC) that earns qualified export receipts may 

exempt a portion of that income, subject to an interest charge imposed on the shareholders of the 

DISC with respect to those tax-deferred amounts. Shareholders of the DISC are taxed with 

respect to qualified export receipts of the DISC either upon actual distribution or deemed 

distribution from the DISC. The effect of these rules is to defer tax liability except to the extent 

that the interest charge reduces that deferral benefit. 

A foreign sales corporation (FSC) that earns foreign trading gross receipts may exempt a portion 

of that income. Shareholders of the FSC are generally not subject to tax when those amounts are 

distributed to them. The FSC provisions were generally repealed by the FSC Repeal and 

Extraterritorial Income Exclusion Act of 2000, subject to transition rules.
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

5. Statute of Limitations 

The Internal Revenue Code includes a general rule under which the assessment of tax must occur

within 3 years of the date that a return is filed. For purposes of the excise tax on excess 

contributions under section 4973, the return that starts this 3-year period is generally the income 

tax return. For purposes of the excise tax on prohibited transactions, the return that starts the 3-

year period is the Form 5330. 

Reasons for Change 

The purpose of tax-favored retirement arrangements is to help people save for retirement. In 

recent years, it has become clear that some taxpayers have been able to accumulate amounts in 

tax-favored retirement arrangements that are far in excess of the amount needed for retirement 

security. In addition, the exemption from required minimum distribution rules for Roth IRAs 

means that a taxpayer who has other sources of retirement income could choose to continue 

accumulating investment returns on a tax-favored basis until the taxpayer dies, which means that 

the tax-favored retirement arrangement could be passed on in its entirety to the taxpayer’s heirs. 

By requiring a high-income taxpayer with an excessive accumulation in tax-favored retirement 

arrangements to distribute a portion of that excess (and to cease contributions to an IRA), the 

arrangements would be used for the intended retirement savings purpose. This is especially 

important if the taxpayer has an excessive accumulation in a Roth IRA or in a designated Roth 

account in an employer-sponsored tax-favored plan (because of the lifetime exemption from the 

RMD rules). Prohibiting a high-income taxpayer from converting an amount into a Roth IRA 

will minimize the extent to which the taxpayer can take advantage of the exemption from the 

RMD rules for Roth IRAs.

Some taxpayers have avoided the income-based limitations on making Roth IRA contributions 

by (a) making a non-deductible contribution to a traditional IRA or an after-tax contribution to 

an employer-sponsored plan, (b) taking a distribution from that IRA or plan, and (c) rolling that 

distribution into a Roth IRA. This practice inappropriately sidesteps the income restrictions on 

contributions to Roth IRAs. 

Some IRA owners or beneficiaries have taken the position that they are not fiduciaries. As a 

result, they take the position that they, their family members, and entities that they control are 

not disqualified persons (so that they may participate in transactions with the IRA that would 

otherwise be prohibited). 

Some taxpayers have directed their Roth IRA to purchase a DISC or FSC ownership interest in 

order to use the special tax characteristics of those corporations to funnel excessive amounts into 

the IRA. These transactions, the subsequent payment of commissions to the DISC or FSC, and 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

the distributions from the DISC or FSC to the Roth IRA have, in substance, violated the annual 

limitation on contributions to a Roth IRA.22

 

It is difficult for the Internal Revenue Service to enforce the IRA rules, particularly in the case of 

IRAs that are invested in hard-to-value assets. For example, it may be difficult for the IRS to 

identify if a transaction with the IRA has inappropriately transferred value into the IRA or to 

identify whether a prohibited transaction has occurred. 

Proposal

1. Impose special distribution rules on high-income taxpayers with large retirement account 

balances

The proposal would require a high-income taxpayer with an aggregate vested account balance 

under tax-favored retirement arrangements that exceeded $10 million as of the last day of the 

preceding calendar year to distribute a minimum of 50 percent of that excess. The tax-favored 

retirement arrangements included in this calculation are: (a) defined contribution plans to which 

section 401(a) or 403(a) applies; (b) annuity contracts under section 403(b); (c) eligible deferred 

compensation plans described in section 457(b) maintained by a State, a political subdivision of 

a State, or an agency or instrumentality of a State or political subdivision of the State; and (d) 

IRAs. In addition, if the high-income taxpayer’s aggregate vested account balance under these 

tax-favored retirement arrangements exceeds $20 million, then the required distribution is 

subject to a floor. The floor is the lesser of (a) that excess and (b) the portion of the taxpayer’s 

aggregate vested account balance that is held in a Roth IRA or designated Roth account. 

A taxpayer is considered a high-income taxpayer if for the taxable year the taxpayer’s modified 

adjusted gross income is: (a) over $450,000, if the taxpayer is married and filing jointly (or is 

filing as a surviving spouse); (b) over $425,000, if the taxpayer is a head-of-household; or (c) 

over $400,000, in other cases.23 

The taxpayer would generally be permitted to choose from which of the tax-favored retirement 

arrangements the required distribution is paid. However, if the floor applies, then the distribution 

must come first from Roth IRAs and then from designated Roth accounts. In addition, the 

taxpayer may not specify that any of the required distribution come from an employee stock 

ownership plan (ESOP) to the extent the account under the ESOP holds employer securities that 

are not readily tradable on an established securities market (other than any portion of that 

account attributable to a rollover contribution made after the date of enactment). 

22 Summa Holdings. Inc. v. Commissioner, 848 F.3d 779 (6th Cir. 2017), reversing T.C. Memo. 2015-119; Mazzei v. 

Commissioner, 998 F.3d 1041 (9th Cir. 2021), reversing T.C. Memo. 2014-55 (in both cases, the application of the 

substance-over-form judicial doctrine by the United States Tax Court to determine that the arrangements were, in 

substance, excess contributions, was overturned on appeal).

23 The dollar thresholds for the definition of a high-income taxpayer are adjusted for inflation. For this purpose, 

modified adjusted gross income means adjusted gross income determined without regard to sections 911, 931, and 

933, without regard to any deduction for contributions to an individual retirement plan, and without regard to any 

increase in RMDs under the proposal.
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

The distribution required under the proposal is structured as an increase to the RMD for purposes 

of the excise tax on failure to take RMDs. As a result, a taxpayer who fails to satisfy the 

requirement is subject to a 25 percent excise tax on the portion of the distribution not taken 

(reduced to 10 percent if the failure is corrected within a specified period). The requirement to 

take this minimum distribution applies without regard to whether an RMD otherwise must be 

taken by the taxpayer in the year. 

The amount distributed would be exempt from the additional income tax on early distributions 

under section 72(t) and would not be eligible for rollover. If the distribution is from a Roth IRA 

or from a designated Roth account, then it is treated as a qualified distribution (and therefore is 

not includible in the taxpayer’s income). If the distribution is from a tax-favored retirement 

arrangement other than an IRA, then it would be subject to mandatory withholding at a 35 

percent rate (unless it is from a designated Roth account). 

If an individual has an increase in the RMD for a year as a result of the excessive accumulation,

any contribution the individual makes to an IRA for the year (other than a rollover) is treated as 

an excess contribution to an IRA, subject to the 6 percent excise tax under section 4973.24 

A plan administrator of a tax-favored retirement arrangement that is included in the calculation 

of whether a high-income taxpayer has an excessive accumulation in tax-favored retirement 

arrangements would be required to report the vested account balance of any participant or 

beneficiary for whom the vested account balance exceeds $2.5 million (as adjusted for inflation) 

to the Secretary. This requirement would apply without regard to whether the plan administrator 

is required to file a registration Statement for a participant who separated from service under the 

plan (i.e., it would apply to plans that are not subject to the vesting standards of Title I of 

ERISA), but it would not apply to an IRA. The report would separately report the portion of the 

vested account balance that is held in a designated Roth account and the portion of that balance 

that is held in other accounts. 

This provision would be effective for tax years beginning after December 31, 2023, except that 

the requirement that a plan administrator report vested account balances above $2.5 million 

would be effective for plan years beginning after December 31, 2023. 

2. Limit rollovers and conversions to designated Roth retirement accounts or to Roth IRAs 

The provision would prohibit a rollover to a Roth IRA of an amount distributed from an account 

in an employer-sponsored eligible retirement plan that is not a designated Roth account (or of an 

amount distributed from an IRA other than a Roth IRA) for a high-income taxpayer. The 

provision would also prohibit rollovers or transfers of amounts that are not held within a 

designated Roth account into a designated Roth account for a high-income taxpayer. High24 If a high-income taxpayer does not have such an increase because the individual’s aggregate vested account 

balance in tax-favored retirement arrangements is less than the $10 million threshold, then any contribution to an 

IRA (other than a contribution made by an employer under a SIMPLE plan or SEP arrangement) that when added to 

the aggregate vested account balance in tax-favored retirement arrangements as of the last day of the preceding 

calendar year would result in a total in excess of $10 million is also treated as an excess contribution.
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

income taxpayers would be defined in the same manner as above. This provision would be 

effective for taxable years beginning after December 31, 2023. 

The proposal also would prohibit a rollover of a distribution from a tax-favored retirement 

arrangement into a Roth IRA unless the distribution was from a designated Roth account within 

an employer-sponsored retirement plan or was from another Roth IRA if any part of the 

distribution includes a distribution of after-tax contributions. Similarly, the proposal would 

prohibit a rollover of a distribution from a tax-favored retirement arrangement into a designated 

Roth account if any part of the distribution includes a distribution of after-tax contributions, 

unless the distribution was from a designated Roth account. 

This provision would be effective for distributions made after December 31, 2023 

3. Clarify disqualified persons for purposes of IRA prohibited transactions 

The proposal would clarify that the individual for whom an IRA is maintained is always a 

disqualified person for purposes of prohibited transaction rules. 

This provision would be effective for transactions after December 31, 2023. 

4. Prohibit IRA purchase of a DISC or FSC ownership interest 

The proposal would prohibit an IRA from holding an interest in a DISC or FSC that receives a 

payment from an entity owned by the IRA owner. Whether an entity is owned by the IRA owner 

would be determined by substituting 10 percent for 50 percent in the constructive ownership 

rules in section 318 of the Internal Revenue Code. The sanction for a violation of this prohibition 

would be the same as the sanction for an IRA owner engaging in a prohibited transaction (i.e., 

the IRA would be deemed to have distributed all of its assets as of the first day of the taxable 

year). 

This provision would be effective for interests in DISCs and FSCs acquired or held after 

December 31, 2023. 

5. Extend statute of limitations 

The proposal would extend the statute of limitations in the case of a substantial error relating to 

valuation of assets with respect to an IRA from three years to six years. The proposal would also 

extend the statute of limitations for the excise tax on prohibited transactions from three years to 

six years. 

This provision would be effective for taxes for which the three-year window would end after 

December 31, 2023. 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

SUPPORT WORKERS, FAMILIES, AND ECONOMIC SECURITY

EXPAND THE CHILD CREDIT, AND MAKE PERMANENT FULL REFUNDABILITY 

AND ADVANCEABILITY

Current Law

A taxpayer may claim a child tax credit (CTC) for each qualifying child. A qualifying child for 

the CTC must meet the following five requirements:

1. Relationship – The child generally must be the taxpayer’s son, daughter, grandchild,

sibling, niece, nephew, or foster child.

2. Residence – The child must live with the taxpayer in the same principal place of abode

for over half the year.

3. Support – The child must not have provided more than half of their own support.

4. Age – The child must be under the age of 17 (or under 18 in taxable year 2021) at the end

of the year.

5. Identification – The child must have a taxpayer identification number (TIN) at the time

the return is filed. (In taxable years 2021 through 2025 this TIN must be a social security

number valid for work.)

The value of the credit, the portion of the credit that may be received as a refund, the presence of 

a related credit for children and dependents who do not meet the requirements for the CTC, and 

the income thresholds differ across taxable years. Taxpayers receive the credit in two parts: the 

portion that offsets tax liability which is generally called the CTC, and the remainder which is 

potentially received as an additional child tax credit (ACTC). 

The American Rescue Plan Act of 2021 (ARP) expanded the CTC for taxable year 2021. Earlier 

expansions under the Tax Cuts and Jobs Act of 2017 (TCJA) applied in taxable year 2022 and 

still apply for taxable years 2023 through 2025. In later taxable years, most elements of the child 

credit reflect pre-TCJA law. Specific rules for each period are described below: 

CTC for taxable year 2021 (ARP was in effect)

Taxpayers could claim a CTC for up to $3,600 for each qualifying child under age 6 and up to 

$3,000 for all other qualifying children under age 18. The full amount of the credit was

refundable, regardless of the taxpayer’s Federal income tax liability or the presence of earned

income.
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

A taxpayer could also claim a $500 nonrefundable credit for all children and other dependents 

for whom a CTC could not be claimed. This second credit is called the credit for other 

dependents (ODTC).

The first $1,600 of the CTC per qualifying child under age 6 and the first $1,000 per qualifying 

child age 6 through 17 phased out sequentially with modified adjusted gross income (modified 

AGI) in excess of $150,000 for married joint filers or surviving spouses, $112,500 for head of 

household filers, and $75,000 for all other filers, at a rate of $50 per $1,000 (or part thereof) of 

modified AGI in excess of the relevant threshold. 

The remainder of the CTC, plus any amount of ODTC, was further reduced by $50 for each 

$1,000 (or part thereof) that exceeded $200,000 ($400,000 for married taxpayers filing a joint 

return) of modified AGI. Larger families followed a modified phaseout rule that extended the 

AGI range of the phaseout.

Taxpayers could have received up to 50 percent of their estimated total CTC (including ACTC) 

in advance, in a series of periodic payments. These payments were issued from July to December 

of 2021 and were based on information reported by taxpayers on their 2020 individual income 

tax return (or the 2019 return if the 2020 return was not available).

Taxpayers were allowed to opt out of advance payments of the credit. A taxpayer’s Federal 

income tax was increased, dollar for-dollar, if their total CTC advance payments during 2021 

exceeded the amount of the CTC to which they were eventually entitled. However, safe harbor 

rules reduced the additional income tax owed by many low- and moderate-income families, as 

determined solely by the taxpayer’s 2021 modified AGI. 

CTC for taxable years 2022-2025 (TCJA in effect) 

For taxable years 2022 through 2025, a taxpayer may claim a CTC of up to $2,000 per qualifying 

child, only part of which is refundable. A taxpayer without sufficient Federal income tax liability 

to claim the full CTC can claim the ACTC. In 2023 the ACTC will be the lesser of (a) $1,600 per 

qualifying child, and (b) 15 percent of earnings in excess of $2,500, up to the amount of any 

unclaimed CTC. 

A taxpayer may also claim a $500 ODTC for all children and other dependents for whom a CTC 

may not be claimed. The sum of the CTC (including any ACTC) and the ODTC will be reduced 

by $50 for each $1,000 (or part thereof) that exceeds $200,000 of modified AGI or $400,000 of 

modified AGI for married taxpayers filing a joint return. 

The $1,600 maximum refundable amount per qualifying child in 2023 is indexed for inflation but 

cannot exceed $2,000. The maximum credit amount per qualifying child, the income at which 

the phaseout begins, and the $2,500 earned income threshold for refundability are not indexed. 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

CTC in taxable years after 2025 (TCJA has expired) 

For taxable years beginning after December 31, 2025, a taxpayer may claim a CTC of up to

$1,000 per qualifying child. A taxpayer without sufficient Federal income tax liability to claim 

the full $1,000 credit can claim the ACTC. The ACTC will be the lesser of (a) $1,000 per 

qualifying child, and (b) 15 percent of earnings in excess of $3,000, up to the amount of any 

unclaimed CTC. 

The credit will be reduced for single taxpayers with over $75,000 of modified AGI, $110,000 for 

married taxpayers filing a joint return, and $55,000 for married taxpayers filing separately. No 

parameters are indexed for inflation.

U.S. territories (permanent changes included in the American Rescue Plan): 

The Code provides for permanent reimbursement of mirror code Territories for the costs of this 

credit. Puerto Rico’s child tax credit is administered by the Internal Revenue Service (IRS) 

directly. American Samoa has the choice of reimbursement from the IRS for its CTC or 

administration of the credit by the IRS, and American Samoa has chosen to be reimbursed. 

Reasons for Change 

Expanding the CTC and making it fully refundable will substantially reduce child poverty. The 

ARP achieved historic reductions in child poverty through the 2021 CTC and advance CTC 

payment program. Moreover, full refundability would help ensure that families that have been 

historically excluded from economic opportunities or experienced persistent poverty are fully 

included in the nation’s future growth. 

Offering the credit in advance would also make it more useful for families. Periodic payments 

with a consistent pay date allow families to rely on the income when making their plans to buy 

groceries, pay bills, or set money aside for a rainy day. 

Determining the credit on a monthly basis and basing the rules for determining who can claim a 

child on who provides care for a child better accommodate the dynamics of modern families and 

better supports children and their caregivers. Adopting a system of presumptive eligibility will 

also reduce taxpayer errors and help the IRS administer the law.

Finally, setting up automatic procedures to establish eligibility at birth using information 

provided via the Social Security Administration’s enumeration at birth program will increase 

take-up and help ensure all eligible families benefit from the credits for which they are eligible. 

Proposal 

For taxable years beginning after December 31, 2022, and ending before January 1, 2026, the 

proposal would: 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

1. Increase the maximum credit per child to $3,600 for qualifying children under age 6 and 

to $3,000 for all other qualifying children. 

2. Phase out the portion of the credit in excess of $2,000 with income in excess of $150,000 

of modified AGI for married joint filers or surviving spouses, $112,500 for head of 

household filers, and $75,000 for all other filers, with a modified rule for large families. 

3. Increase the maximum age to qualify for the CTC from 16 to 17. 

For taxable years beginning after December 31, 2022, the proposal would: 

1. Make the CTC fully refundable, regardless of earned income.

For taxable years beginning after December 31, 2023, the proposal would make additional 

changes to the CTC to implement an advance payment program so that taxpayers who wish to 

could receive their credit in a series of advance monthly payments during the year instead of 

receiving their credit as a lump sum when they file their income tax return in the following year. 

The Secretary and her delegates (Secretary) will develop and implement a mechanism for 

advancing 100 percent of the credit in monthly installments that accommodates changes in 

family structure and resources over the year. These changes are described in greater detail below.

Eligibility and credit amount determined monthly, rather than annually 

The proposal would reform the CTC to divide the annual tax credit described above into 12 

monthly tax credits, referred to as “monthly specified child allowances.” In general, a taxpayer’s 

eligibility for, and amount of, a monthly specified child allowance would be determined on a 

monthly basis, rather than a taxable year basis. The total amount of CTC for a given child would 

equal the sum of the taxpayer’s allowed monthly specified child allowances for the taxable year. 

The monthly specified child allowance would be reduced by 1/12 of 5 percent of the excess of 

the taxpayer’s modified AGI over the phase-out threshold or thresholds in effect for the taxable 

year. For taxable years 2023 through 2025, the first phaseout would not reduce a taxpayer’s 

monthly specified child allowance below $166.67 per child (that is, $2,000 per child for the 

year). For purposes of applying the phase out, the proposal would require the use of the 

taxpayer’s lowest modified AGI for the three taxable years ending with the taxable year that 

includes the month for which the monthly specified child allowance would be determined.25 

25 For example, for purposes of claiming any remaining credit on a tax year 2024 return (filed in 2025), the taxpayer 

would use the lowest modified AGI from their tax year 2022, 2023, or 2024 Federal income tax return. For purposes 

of determining the monthly advance child payment amount in January 2025, at which time the taxpayer has not yet 

filed their 2024 return, the IRS would use the modified AGI from the taxpayer’s tax year 2023 Federal income tax 

return. Suppose the taxpayer files a 2024 return in February 2025. Then, for purposes of calculating the taxpayer’s 

monthly advance child payment amount in March 2025, the IRS would use the lowest modified AGI from the 

taxpayer’s tax year 2023 and 2024 returns. However, if the taxpayer subsequently reported to the IRS their expected 

modified AGI for 2025 – for example, through the portal described below – then the IRS would use the lowest of 

their expected modified AGI for 2025 and the modified AGI amounts from the taxpayer’s tax year 2023 and 2024 

Federal income tax returns to calculate the monthly payment amount for the remaining months of 2025.
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Replacement of “qualifying child” with “specified child” standard

The proposal would replace the historical “qualifying child” eligibility standard with a new 

“specified child” standard solely for purposes of the child credit that would focus primarily on 

the source of care received by the child. A child would qualify as a “specified child” of a 

taxpayer only if the child (a) shared the taxpayer’s principal place of abode for more than onehalf of the month and (b) received uncompensated care from the taxpayer, disregarding 

compensation received from Federal, State, local, or Tribal governments. A taxpayer would be 

determined to have provided the required “care” to a child based on all facts and circumstances, 

including (a) supervision of the child’s daily activities, (b) maintenance of a secure environment 

for the child, (c) arrangement of medical care for the child, and (d) the involvement in, and other 

financial support for, the education of the child. 

Under the proposal, the taxpayer first allowed to claim a child as a specified child following the 

child’s birth would be allowed to claim the child in all months during the same calendar year 

prior to the child’s birth. In addition, the taxpayer last allowed to claim a child as a specified 

child prior to the child’s death would be allowed to claim the child in all months during the same 

calendar year after the child’s death.

The proposal also would revise the historical tie-breaker rules that have addressed situations 

when a child is a qualifying child of multiple taxpayers, only one of whom can claim the CTC 

under current law, as well as other rules.

Establishment of presumptive eligibility

The proposal would establish a “presumptive eligibility” concept to determine when a taxpayer 

would be eligible to claim a monthly specified child allowance or receive a monthly advance 

child payment. 

Once a taxpayer establishes presumptive eligibility with respect to a child, that child would be 

treated as a specified child of the taxpayer for each month during the period of the taxpayer’s 

presumptive eligibility. Therefore, the taxpayer would be eligible to claim a monthly specified 

child allowance or receive a monthly advance child payment with regard to that child until the 

date on which the taxpayer’s presumptive eligibility terminates. In addition, the proposal would 

prohibit that child from being treated as a specified child of any other taxpayer with respect to 

whom a period of presumptive eligibility has not been established. 

Under the proposal, taxpayers would establish presumptive eligibility solely by filing a Federal 

income tax return, using an online information portal, or pursuant to any other procedures 

established by the Secretary. Among other requirements, the taxpayer must express a reasonable 

expectation and intent that the taxpayer will continue to be eligible to claim the child for the 

credit. The proposal also would authorize the Secretary to provide any additional requirements 

for taxpayers to establish presumptive eligibility.
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

A taxpayer’s period of presumptive eligibility would begin with the month for which 

presumptive eligibility is established and end with the earliest of three dates. First, a taxpayer’s 

period of presumptively eligibility would be treated as never existing if the Secretary determines 

that the taxpayer committed fraud or intentionally disregarded rules or regulations in establishing 

or maintaining presumptive eligibility. Second, a taxpayer’s presumptive eligibility period would 

terminate in the month specified by the Secretary in a written notice provided to the taxpayer that 

terminated or suspended presumptive eligibility due to a question regarding eligibility. Finally, a 

taxpayer’s presumptive eligibility period would terminate on the first month following any 

failure of the taxpayer to make the required annual renewal of presumptive eligibility. In such 

case, the Secretary would be required to provide to the taxpayer written notification of the 

termination as well as information on how to reestablish their presumptive eligibility.

Automatic presumptive eligibility based on information-sharing with trusted partners 

The proposal would require the Secretary to issue regulations or other guidance to establish 

procedures by which a parent of a child born during a month would be treated as automatically 

establishing presumptive eligibility with respect to that child, including through information 

provided to the Secretary via the Social Security Administration’s enumeration at birth program. 

The proposal also would require the Secretary to issue regulations or other guidance to establish 

procedures under which a taxpayer would be treated as automatically establishing presumptive 

eligibility with respect to a child based on information provided to the Secretary by one or more 

government entities, including, for example, the Social Security Administration, State Medicaid 

agencies, or State agencies administering the Supplemental Nutrition Assistance Program.

Automatic grace period to address certain failures to timely establish presumptive eligibility

The proposal would provide two types of automatic grace periods under which a taxpayer who 

failed to establish presumptive eligibility in a timely way could receive monthly specified child 

allowances or retroactive monthly advance child payment for prior months in which the taxpayer 

otherwise would have been presumptively eligible. First, in the absence of fraud or reckless 

disregard for any rules or regulations, a taxpayer could automatically receive a three-month grace 

period in the case of any failure or delay to establish presumptive eligibility with respect to a 

child. Such taxpayer would not be able to receive this automatic relief more frequently than once 

every 36-month period. Second, the proposal would authorize the Secretary to provide an 

extended six-month grace period in cases of domestic violence, serious illness, natural disaster, 

and any other hardships. No limitation in frequency would be imposed with regard to this second 

form of relief.

Monthly advance child payment program 

The proposal would require the Secretary to establish a program for making monthly advance 

child payments. A “monthly advance child payment” of a taxpayer would equal 100 percent of 

the amount of the taxpayer’s monthly specified child allowance estimated by the Secretary for 

the calendar month based on the taxpayer’s relevant “reference month” and “reference taxable 

year.” In determining the estimated amount of a taxpayer’s monthly advance child payment, the 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

proposal would authorize the Secretary to consider all available information with regard to the 

taxpayer.

The proposal also would provide safeguards to ensure that the Secretary has adequate 

information, as well as time to verify such information, before disbursing any monthly advance 

child payment. Specifically, no month or year would be treated as a “reference month” or 

“reference taxable year” upon which a monthly advance child payment could be made unless (a) 

all relevant information with respect to that month or year is available to the Secretary, and (b) 

the Secretary has adequate time to make estimates on the basis of such information before the 

beginning of such calendar month. In the case in which the Secretary has insufficient information 

to make a monthly advance child payment, the Secretary would not disburse a payment until 

after the Secretary receives and verifies sufficient information.

Form and manner of monthly advance child payments 

The proposal generally would require that the Secretary disburse monthly advance child 

payments through electronic funds transfer to the same extent and in the same manner as if those 

payments were Federal payments not made under the Code. In addition, any monthly advance 

child payment would not be subject to reduction or offset of (a) past-due support against 

overpayments, (b) collection of debts owed to Federal agencies, (c) collection of past-due, 

legally enforceable State income tax obligation, (d) collection of unemployment compensation 

debts, and (e) any similar authority permitting offset. In addition, the proposal would mandate 

that such payments could not be reduced or offset by other assessed Federal taxes that would 

otherwise be subject to levy or collection. 

The proposal also would provide rules for the U.S. territories to facilitate the ability of those 

territories to provide monthly advance child payment programs. 

Establishment of online information portal 

To facilitate the sharing of information between taxpayers and the IRS, the proposal would 

require the Secretary to establish an online information portal similar to the online portal 

required by the ARP. This online portal would allow a taxpayer to (a) elect to begin or cease 

receiving monthly advance child payments, and (b) provide information to the Secretary for 

determining the taxpayer’s eligibility for, and amount of, monthly advance child payments. The 

proposal would authorize the Secretary to expand the information that could be provided through 

the portal and also establish “specified alternative mechanisms” to help facilitate sharing of 

information between the IRS and taxpayers for those who lack reasonable access to the internet 

and in other circumstances where the portal does not suffice. 

Streamlined adjudication process to address competing claims for a specified child

The proposal would provide rules and procedures to address claims by multiple taxpayers of the 

same specified child. As a general rule, the proposal would require the Secretary to resolve any 

competing claim among multiple taxpayers in favor of the taxpayer with the most recent 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

reference month. To address instances in which each competing taxpayer relies on the same 

reference month, the proposal would require the Secretary to establish streamlined procedures 

under which the Secretary would adjudicate those competing claims of presumptive eligibility. 

The streamlined adjudication procedures required by the proposal would include an expedited 

process for taxpayers meeting criteria specified by the Secretary and procedures for adjudicating 

appeals of an adverse decision. Under the proposal, the Secretary would be authorized to enter 

into agreements to receive information from, and otherwise coordinate with, Federal agencies; 

State, local, or Tribal governments; and any other individual or entity the Secretary determines to 

be appropriate for purposes of adjudicating such claims. The proposal also will authorize the 

Secretary to make retroactive payments if the Secretary determines that a child is a specified 

child of a taxpayer and the Secretary did not make payments to that taxpayer during any portion 

of the period during which the determination was made. Likewise, the Secretary would be 

authorized to recapture payments from taxpayers based upon a facts-and-circumstances analysis 

pursuant to procedures established by the Secretary. 

Reconciliation and potential recapture of monthly advance child payments 

The proposal would require taxpayers to compare on their Federal income tax return (a) the total 

amount of the monthly advance child payments received during the taxable year, with (b) the 

total amount of monthly specified child allowances that the taxpayer could properly claim on that 

return. If the aggregate amount of allowances exceeds the aggregate amount of payments 

received during the taxable year, the taxpayer could claim the remaining amount of CTC on their 

Federal income tax return. If the aggregate amount of allowances is less than the aggregate 

amount of payments received during the taxable year, the taxpayer may be required to repay the 

difference, based on the recapture rules described below. 

Statutory repayment protection based on presumptive eligibility

A taxpayer who receives a monthly advance child payment for a child generally would not be 

required to repay that amount to the IRS if the taxpayer received that payment during a period in 

which the taxpayer established presumptive eligibility with respect to that child. However, a 

taxpayer would be required to repay any monthly advance child payment received for a child for 

whom the taxpayer had not established presumptive eligibility. Similarly, the proposal would 

require a taxpayer to repay any monthly advance child payments identified for recapture by the 

Secretary through written notification to the taxpayer. 

The proposal also would require taxpayers to repay any excess monthly advance child payments 

due to understatements or changes of income and changes in filing status by the taxpayer. 

Specifically, recapture in these circumstances would be required even if the taxpayer had 

established presumptive eligibility with regard to the child to whom such excess monthly 

advance child payments were attributable. 

In addition, if the taxpayer received monthly payments because of fraud or reckless or intentional 

disregard of CTC rules and regulations, the proposal would require taxpayers to repay those 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

excess monthly advance child payments. To prevent potential abuse, the proposal also would 

authorize the Secretary to issue special rules to address taxpayers who have moved to another 

jurisdiction, as well as any other circumstances that the Secretary determines could give rise to 

abuse.

The changes described in the above pages to implement an advance monthly payment program 

would be effective for all taxable years beginning after December 31, 2023. The changes to the 

maximum credit amounts, phase-out thresholds, age requirements, and refundability would be 

effective for taxable years beginning after December 31, 2022 and, except for refundability, 

would expire for taxable years beginning after December 31, 2025.
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

RESTORE AND MAKE PERMANENT THE AMERICAN RESCUE PLAN EXPANSION 

OF THE EARNED INCOME TAX CREDIT FOR WORKERS WITHOUT 

QUALIFYING CHILDREN 

Current Law

Low- and moderate-income workers may be eligible for a refundable earned income tax credit 

EITC. Eligibility for the EITC is based on the presence and number of qualifying children in the 

worker’s household, the worker’s earned income, adjusted gross income (AGI), investment 

income, filing status, age, and immigration and work status in the United States. 

The EITC has a phase-in range (where each additional dollar of earned income results in a larger 

credit), a plateau (where additional dollars of earned income or AGI have no effect on the size of 

the credit), and a phase-out range (where each additional dollar of the larger of earned income or 

AGI results in a smaller total credit). The phaseout begins at a higher earned income or AGI for 

joint filers than for other filers. The dollar thresholds and the amount by which the phaseout for 

joint filers exceeds that for other filers are adjusted annually for inflation. The phase-in rate and 

the phaseout rate vary with the number of children. 

The American Rescue Plan Act of 2021 (ARP) expanded the credit for workers without children 

in taxable year 2021 by increasing the phase-in and phase-out rates, and increasing the income 

range over which the credit phases in. These changes increased the maximum credit from $542 

to $1,502. 

Under current law and prior to ARP, the taxpayer must be at least 25 years old and less than 65. 

In the case of married taxpayers filing jointly, at least one spouse must have been within the age 

range. The ARP decreased the minimum age at which a taxpayer may claim the credit and 

eliminated the maximum age at which a taxpayer may claim the credit.

The chart below shows the 2023 current law parameters for workers without children and what 

those parameters would have been in 2023 had ARP been extended. 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

EITC PARAMETERS FOR WORKERS WITHOUT CHILDREN IN 2023

EITC Parameter 2023 Current Law 2023 ARP Extended

Credit phase-in rate 7.65% 15.30%

Credit phase-out rate 7.65% 15.30%

End of phase-in range $7,840 $10,840

End of plateau $9,800 $12,820 

 (married joint filers) $16,370 $19,390 

End of phase-out range $17,640 $23,660 

 (married joint filers) $24,210 $30,230 

Maximum credit $600 $1,659

Investment income max $11,000 $11,000

Reasons for Change 

The permanent EITC for workers without children is relatively small and phases out at very low 

incomes. As such, it provides little or no assistance to individuals at or near the poverty line. For 

example, in 2023 a single worker without children who earned $15,000 (a wage close to the 

poverty line), would be in the phase-out range and eligible for a credit of about $202. This credit 

would generate a net refund of about $87 after subtracting their Federal income tax. (The 

taxpayer would pay over $1,100 in Federal payroll taxes.) A larger EITC for workers without 

children would promote employment and reduce poverty for this group of workers. It also would 

increase the progressivity of the Federal tax system. 

The current age restrictions prevent young workers and older workers from claiming the EITC. 

As a result, young workers living independently from their families are unable to benefit from 

the anti-poverty and work-related effects of the EITC just when they are establishing the patterns 

of behavior that may persist throughout their working lives. The EITC, by increasing the 

effective after-tax wage, encourages additional work. 

Proposal 

The proposal would restore for taxable year 2023 and make permanent the increase in the EITC 

parameters for workers without children enacted in the ARP. The end of the phase-in and the end 

of the plateau would be indexed for inflation in the same manner as other EITC parameters (by 

the Chained Consumer Price Index for All Urban Consumers, or C-CPI-U). The EITC 

parameters that would be in place for 2023 are those presented in “2023-ARP Extended 

Parameters” of the table above. 

The proposal would also restore for taxable year 2023 and make permanent the ARP expansion 

of age-eligibility. As under ARP law, taxpayers who could be claimed as a qualifying child or a 

dependent would not be eligible for the EITC for childless workers. Thus, full-time students who 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

are dependent on their parents would not be allowed to claim the EITC for workers without 

qualifying children, despite meeting the new age requirements, even if their parents did not claim 

a dependent exemption or an EITC on their behalf.

More concretely, under the proposal, the taxpayer must be at least 19 years old or at least 24 if a 

full-time student. In the case of married taxpayers filing jointly, the credit may be claimed if at 

least one spouse is over age 19 (or at least 24 if a full-time student). Former foster children and 

qualified homeless individuals are eligible at 18, regardless of student status. The proposal would 

eliminate the maximum age at which a taxpayer may claim the credit.

The proposal would be effective for taxable years beginning after December 31, 2022.
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

MAKE PERMANENT THE INFLATION REDUCTION ACT EXPANSION OF

HEALTH INSURANCE PREMIUM TAX CREDITS 

Current Law

A premium assistance tax credit (premium tax credit or PTC) is provided to certain individuals 

who purchase health insurance through an exchange in the individual health insurance market 

established under the Affordable Care Act (ACA). The PTC is refundable and payable in 

advance (as advance payments of the premium tax credit, or APTC) directly to the insurer. 

Eligibility for the APTC is based on an individual's expected household income and family size. 

APTC may be updated to reflect mid-year changes in income, marital or other household 

circumstances, and employment status. 

Through 2025, the PTC is generally available to individuals with household income above 100 

percent of the Federal poverty line (FPL) for the relevant family size. After 2025, the PTC is 

generally available to individuals with household income between 100 and 400 percent of the 

FPL. Individuals are eligible for the PTC only if they are not eligible for health care under 

programs such as Medicare, Medicaid, the Children’s Health Insurance Program, Basic Health 

Program, TRICARE, or for certain types of health insurance provided through an employer. 

A taxpayer’s PTC is equal to the lesser of: (a) the premium for the plan chosen by the taxpayer, 

or (b) the amount by which the cost of the benchmark plan exceeds a required contribution by 

the taxpayer. The taxpayer’s required contribution is a percentage of household income (the 

applicable contribution percentage) calculated with reference to the taxpayer’s FPL. 

The American Rescue Plan Act of 2021 (ARP) decreased the applicable contribution percentages 

and extended PTC eligibility to taxpayers with household income above 400 percent of FPL for 

taxable years 2021 and 2022. The Inflation Reduction Act of 2022 (IRA) extended these changes 

through taxable year 2025. Unlike prior law, which had a sharp household income limitation on 

eligibility for the credit, the PTC under ARP and IRA phases out with income as the required 

contribution eventually exceeds the benchmark premium. By fixing the parameters for five years, 

the ARP and IRA paused the pre-ARP indexation of the applicable contribution percentage. 

Applicable contribution percentages for the PTC are shown under ARP/IRA and under prior law 

in the following table. 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

APPLICABLE CONTRIBUTION PERCENTAGES FOR PREMIUM TAX CREDIT1

Percent of FPL ARP/IRA Pre-ARP2

Up to 133% 0% 2%

133% up to 150% 0% 3%-4%

150% up to 200% 0%-2% 4%-6.3%

200% up to 250% 2%-4% 6.3%-8.05%

250% up to 300% 4%-6% 8.05%-9.5%

300% up to 400% 6%-8.5% 9.5%

400%+ 8.5% not eligible 1 Required contributions increase incrementally between income breaks.

2 Pre-ARP applicable contribution percentages are indexed beginning in 2015.

Reasons for Change 

Even with the ACA’s changes to the individual market, health coverage can still be expensive for 

some families and out of reach for others. Making permanent the American Rescue Plan and 

Inflation Reduction Act’s expansion of the PTC will reduce individuals’ cost of individual 

market coverage by increasing the amount and availability of premium tax credits for a wide 

range of income levels. 

Proposal 

The proposal would make permanent the ARP and IRA decrease in the applicable contribution 

percentages of household income used for determining the PTC. The proposal would also make 

permanent the ARP and IRA expansion of PTC eligibility to taxpayers with household income 

above 400 percent of FPL.

In addition, the proposal would permanently repeal the indexation of the applicable contribution 

percentages.

The proposal would be effective for taxable years beginning after December 31, 2025. 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

MAKE THE ADOPTION TAX CREDIT REFUNDABLE AND ALLOW CERTAIN 

GUARDIANSHIP ARRANGEMENTS TO QUALIFY

Current Law

Two tax benefits are provided to taxpayers who adopt children: (a) a nonrefundable 100 percent 

tax credit for a limited amount of qualified expenses incurred in the adoption of a child; and (b) 

an exclusion from gross income of a limited amount of qualified adoption expenses paid or 

reimbursed by an employer under an adoption assistance program. For taxable year 2023 the 

separate limits on qualified adoption expenses for the credit and the exclusion are $15,950. 

Taxpayers may use both adoption tax benefits, but the same expenses cannot be used for both 

benefits. Taxpayers may claim the credit for domestic and foreign adoptions, although the rules 

differ. 

For domestic adoptions, qualifying expenses paid prior to the year in which the adoption is 

finalized are allowable as a credit in the year following the year of payment (even if the adoption 

is never finalized); however, qualifying expenses paid in the year in which the adoption is 

finalized (or later) are allowable as a credit in the year of payment. For foreign adoptions, the 

credit may be claimed only in the year the adoption becomes final (or, if later, in the year the 

qualified expense is paid). 

Taxpayers who adopt children with special needs may claim the full $15,950 credit even if total 

adoption expenses are less than that amount, although credits in excess of actual expenses may 

only be claimed for the year the adoption is finalized. 

In 2023, if modified adjusted gross income (AGI) exceeds $239,230, both the credit amount and 

the amount excluded from gross income are reduced pro rata over the next $40,000 of modified 

AGI. The maximum credit, the maximum exclusion, and the income at which the phaseout range 

begins are indexed annually for inflation. The credit and exclusion amounts are per adoption; 

benefits for a given adoption may be claimed over several years. 

Taxpayers may carry forward credit amounts they are unable to use because they have 

insufficient tax liability for up to five years. 

Reasons for Change 

Tax benefits for adoption lower the cost of adoptions. Because adoption credits are currently 

non-refundable, low- and moderate-income families are unlikely to have sufficient tax liability to 

benefit from the full amount of the credit to which they are otherwise entitled. Refundability 

would help low- and moderate-income families afford adoption expenses, potentially making 

adoption more attainable for these families and ensure that this credit is available to all 

taxpayers, regardless of tax liability. Because the adoption process, and therefore the expenses, 

may extend over several years, it is important that the change to make the adoption credit 

refundable be made permanent.
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

There are circumstances where a family might choose to claim legal and financial responsibility 

for a child via guardianship instead of adoption. Expanding the credit to include families bonded 

by legal guardianship rather than adoption promotes the goal of creating stability for vulnerable 

children and provides assistance to the families caring for them. 

Proposal 

The proposal would make the adoption credit fully refundable. Thus, taxpayers could claim the 

full amount of any eligible credit in the year that the expense was first eligible regardless of tax 

liability. 

In addition, taxpayers with unused carryforward amounts from eligible expenses from earlier 

adoptions would be able to claim the full amount of any unused carryforward on their 2024 tax 

return. However, unused carryforward amounts that expired before 2024 (pursuant to the 5-year 

limit under current law) would not be eligible to be claimed. 

The proposal would also allow families who enter into a guardianship arrangement with a child 

that meets the requirements below to claim a refundable credit for the expenses related to 

establishing the guardianship relationship in the year such requirements are satisfied. Unless 

otherwise specified, eligible expenses and the timing of claims for guardianships would follow 

existing rules for domestic adoptions.26 The extra benefit for special needs adoptions would not 

be extended to include cases of guardianships. 

A guardianship arrangement would be eligible for the credit if four requirements were met: (a) 

the relationship must be established by court order, (b) the relationship must not be with one’s 

own child or stepchild (as is the case with the adoption credit), (c) the guardian and the child 

must meet a residency requirement, and (d) the child must be under 18 at the time the 

relationship was established. 

In cases where the child was later adopted by the same individual (or individuals on a joint 

return), allowable expenses for the adoption credit by this individual (or individuals) would be 

decreased by the amount already claimed. 

The Secretary and her delegates would be granted regulatory authority to develop rules and 

reporting requirements to ensure that eligibility, relationships, and expenses are well defined and 

verifiable and to establish cooperation procedures with relevant State and local agencies and 

courts. 

The proposal will be effective for taxable years beginning after December 31, 2023. 

26 As with adoption, qualified expenses would include court and attorney fees, travel, and other expenses directly 

related to and for the principal purpose of the establishing guardianship of the child. Taxpayers generally claim a 

credit for domestic adoption expenses in the taxable year after the expense was paid or incurred, except in the year 

the adoption is finalized (expenses paid or incurred in the year the adoption is finalized can be claimed as a credit in 

such year).
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

MAKE PERMANENT THE INCOME EXCLUSION FOR FORGIVEN STUDENT DEBT 

Current Law

Loan amounts that are forgiven or otherwise discharged are considered gross income to the 

borrower and subject to individual income tax in the year of discharge, unless otherwise 

provided. Exceptions are provided in the Internal Revenue Code for some, but not all, education 

debt. The American Rescue Plan Act of 2021 (ARP) provides an exception to the treatment of 

forgiven loan amounts as gross income for certain qualifying student debt that is discharged after 

December 31, 2020, and before January 1, 2026. 

During the period of the exception, forgiven student loans will be excluded from gross income 

and thus not subject to taxation. A qualified student loan is a loan that was taken out for the 

express purpose of funding post-secondary education expenses, subject to specific rules that vary 

with the characteristics of the originator or insurer of the loan. The tax exclusion is extended to 

forgiven amounts for both private and public student loans and includes loan amounts borrowed 

for the education of one’s children (e.g., Parent PLU.S. loans). 

Reasons for Change 

Permanently extending the ARP's tax treatment of student loan debt forgiven by the lender will 

encourage lower income borrowers to enroll in income-driven repayment (IDR) plans, remove 

barriers for colleges and universities seeking to provide relief on debts owed to them by students, 

and provide relief to Federal borrowers resulting from legal causes of action. This provision of 

the ARP conforms the tax treatment of most student loan forgiven debt, including balances under 

IDR plans, which were taxable in absence of this provision, non-Federal loans (including private 

education loans), which were taxable in most cases, and the tax treatment of Federal student 

loans cancelled due to (a) meeting certain work requirements, (b) death or permanent and total 

disability, or (c) receipt of certain student loan repayment assistance. Conformity eliminates the 

need for future legislative changes to accommodate specific loan programs that support future 

policy goals. 

Proposal 

The proposal would make permanent the ARP exclusion of certain student loan amounts 

forgiven by the lender from gross income. 

The proposal would be effective for taxable years beginning after December 31, 2025. 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

EXTEND TAX-PREFERRED TREATMENT TO CERTAIN FEDERAL AND TRIBAL 

SCHOLARSHIP AND EDUCATION LOAN PROGRAMS

Current Law

Treatment of scholarship income 

Gross income generally does not include certain scholarship amounts that are used to pay tuition, 

required fees, and related expenses (e.g., books, certain computing equipment, fees, and 

supplies). Scholarship amounts for other expenses, including childcare and travel not incidental 

to the scholarship, are included in ordinary income. If the scholarship represents payment for 

teaching, research, or other services required as a condition for receiving the scholarship, 

including a future work obligation, the scholarship is considered ordinary income (i.e., wages) 

and is thus taxable.

An exception to the work rule exists for recipients of National Health Service Corp (NHSC) 

scholarships, who provide care to underserved populations, and recipients of awards from several 

other scholarship programs. The NHSC is a Health Resources and Service Administration 

(HRSA) program. 

Treatment of education loans repaid on another’s behalf 

Loan amounts repaid on another’s behalf are considered ordinary income and are taxable unless 

excepted through a provision of the Code. Exceptions include debt repaid under the NHSC Loan 

Repayment Program, certain State programs intended to increase the availability of health care 

services in underserved areas, certain work-related loan forgiveness programs, and (through 

2025) loan payments through a cafeteria plan up to $5,250 per year. 

Support for underserved communities 

HRSA programs described in the Public Health Services Act (PHSA) provide scholarships and 

loan repayment assistance in exchange for a commitment to work with underserved populations 

upon graduation or to train medical personnel in shortage areas related to underserved 

populations. Their programs include the following: the NHSC Scholarship Program, the Nurse 

Corps Scholarship Program, the Native Hawaiian Health Scholarship Program, the Nurse Corps 

Loan Repayment Program, the Substance Use Disorder Treatment and Recovery Loan 

Repayment Program, the Faculty Loan Repayment Program, and the new Child and Adolescent 

Mental Health Pediatric Subspecialty Loan Repayment Program.27 Only the NHSC Scholarship 

Program and the NHSC Loan Repayment Program receive preferred Federal tax treatment.

27 The current list of scholarship and loan forgiveness programs administered by the HRSA that provide care to 

underserved communities are described here: https://bhw.hrsa.gov/funding. The Child and Adolescent Mental 

Health Pediatric Subspecialty Loan Repayment program is new. It should begin to disburse funds this year.
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

The Indian Health Service (IHS) Scholarship Program and the IHS Loan Repayment Program

described in sections 108 and 104 of the Indian Health Care Improvement Act (Public Law 94-

437) provide scholarships and loan repayment assistance in exchange for a commitment to work 

in IHS facilities. These IHS programs do not receive preferred tax treatment. 

Segal AmeriCorps Education Awards (Segal Awards) described in subsection D of the National 

and Community Service Act of 1990 provide assistance with education expenses or student loan 

repayment upon completion of a term of service with AmeriCorps or other participating serviceoriented programs (e.g. Teach For America alumni are eligible for Segal Awards). Segal Awards 

do not receive preferred tax treatment. In certain limited cases, the grants are transferable.

Reasons for Change 

The proposal would provide HRSA loan repayment and scholarship programs and the parallel 

programs at the IHS with the Federal tax treatment enjoyed by participants in the NHSC 

programs. These programs serve similar purposes and should be treated similarly for tax 

purposes. In fact, participants from the different programs may work alongside each other. 

The IHS Health Professions Scholarship and IHS Loan Repayment Program are similar to the 

programs receiving exceptions under current Federal tax law and/or the proposal and should be 

treated similarly for tax purposes. This change would provide the same treatment to Tribal 

governments that is provided to State governments offering similar programs. 

Segal Awards can be used strictly for education purposes – either for current expenses or loan 

repayment. As such, they are similar to other scholarship and loan repayment programs receiving 

exceptions under current Federal tax law and should be treated similarly for tax purposes. 

Proposal 

The proposal would extend tax preferred treatment for scholarship and loan repayment programs 

to certain Federal programs dedicated to improving access to medical care for underserved 

populations. It would do so by adding these programs to the exceptions listed in sections 

117(c)(2) (scholarships) and 108(f)(4) (loans), which are provided preferential tax treatment even 

though they involve a (future) work obligation. The programs that would be added are: 

1. Loan Repayment Programs administered by the HRSA as described in the PHSA: the 

Nurse Corps Loan Repayment Program, the Substance Use Disorder Treatment and 

Recovery Loan Repayment Program, the Faculty Loan Repayment Program, and the new 

Child and Adolescent Mental Health Pediatric Subspecialty Loan Repayment Program. 

2. Scholarship Programs administered by the HRSA as described in the PHSA: the Nurse 

Corps Scholarship Program and the Native Hawaiian Health Scholarship Program. 

3. The Indian Health Service (IHS) Scholarship Program and the IHS Loan Repayment 

Program described in sections 108 and 104 of the Indian Health Care Improvement Act. 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

In addition, Segal AmeriCorps Education Awards used for current education expenses would be 

treated like scholarships even though the awards represent payment for services. Awards used to 

repay student loans would be excluded from income. Transferred awards would also be 

excluded.

The proposal would be effective for taxable years beginning after December 31, 2023.
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

INCREASE THE EMPLOYER-PROVIDED CHILDCARE TAX CREDIT FOR 

BUSINESSES

Current Law

Employers who provide childcare facilities or contract with an outside facility for the provision 

of care may claim a nonrefundable credit of 25 percent of qualified care expenses and 10 percent 

of referral expenses, for a maximum total credit of $150,000 per year. Qualified expenses 

include the acquisition, construction, rehabilitation or expansion of qualifying properties, 

operating costs, or contracting with a qualified childcare facility to provide services for the 

taxpayer’s employees.

Reasons for Change

Increased tax credits available to businesses would subsidize the cost and encourage the 

provision of childcare for employees. On-site childcare is valued by parents, and may generate 

important benefits such as lower absenteeism, higher employee performance, higher employee 

retention, and higher employee satisfaction. 

Proposal

The proposal would increase the existing tax credit to 50 percent of the first $1 million of 

qualified care expenses for a maximum total credit of $500,000 per year. The portion of the tax 

credit related to referral expenses would remain at 10 percent with a maximum amount of 

$150,000. 

The proposal would be effective for taxable years beginning after December 31, 2023. 
IMPROVE THE DESIGN OF THE WORK OPPORTUNITY TAX CREDIT TO 

PROMOTE LONGER-TERM EMPLOYMENT 

Current Law

The work opportunity tax credit (WOTC) is available for employers hiring individuals from one 

or more of 10 targeted groups and is generally equal to 40 percent of qualified wages paid during 

the first year of employment (i.e., first-year wages). The WOTC does not apply to wages paid to 

individuals who work fewer than 120 hours in the first year of service. The WOTC rate is

reduced to 25 percent if the individual works at least 120 hours, but less than 400 hours. 

Individuals must be certified by a designated local agency as a member of a targeted group. 

Current WOTC targeted groups include the following: (a) recipients of Temporary Assistance for 

Needy Families; (b) veterans; (c) people recently convicted of, or released from incarceration

for, a felony, (d) residents of an empowerment zone or a rural renewal community who are at

least 18 but not yet 40 years old; (e) referrals from State-sponsored vocational rehabilitation 

programs for the mentally and physically disabled; (f) summer youth employees who are 16 or 

17 years old residing in an empowerment zone; (g) Supplemental Nutrition Assistance Program 

benefits recipients at least 18 years old but not yet 40 years old; (h) Supplemental Security 

Income recipients; and (i) long-term family assistance recipients, and (j) long-term 

unemployment recipients. 

Qualified first-year wages are capped at the first $3,000 for summer youth employees, $10,000 

for long-term family assistance recipients, $12,000 for disabled veterans hired within one year of 

being discharged or released from active duty, $14,000 for long-term unemployed veterans, 

$24,000 for long-term unemployed veterans who are also disabled, and $6,000 for all other 

categories of targeted individuals. In addition, the first $10,000 of qualified second-year wages

paid to long-term family assistance recipients is eligible for a 50 percent credit. A disabled 

veteran is a veteran entitled to compensation for a service-connected disability. 

The WOTC does not apply to an individual who begins work after December 31, 2025. 

Reasons for Change

The allowance of the 25 percent credit for employees who work between 120 and 400 hours may 

encourage the hiring of temporary employees, contrary to the goal of WOTC of providing longterm employment opportunities to members of targeted groups. 

Proposal

The proposal would increase the minimum number of hours worked by an individual in the first 

year of service to become eligible for the WOTC from 120 to 400. 

The proposal would be effective for individuals hired after December 31, 2023. 

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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

MODIFY ESTATE AND GIFT TAXATION 

IMPROVE TAX ADMINISTRATION FOR TRUSTS AND DECEDENTS’ ESTATES 

Current Law 

Definition of executor 

Section 2203 of the Internal Revenue Code (Code) defines “executor” for purposes of the estate 

tax as the person appointed, qualified, and acting within the United States as executor or 

administrator of the decedent’s estate or, if none, then “any person in actual or constructive 

possession of any property of the decedent” who is considered a “statutory” executor. A 

“statutory” executor is a person who is not appointed by a court but has an obligation to file an 

estate tax return because they possess assets of the decedent. A statutory executor could include, 

for example, the trustee of the decedent’s revocable trust, a beneficiary of an individual 

retirement account (IRA) or life insurance policy, or a surviving joint tenant of jointly owned 

property. 

Limit on the reduction in value of special use property 

Generally, the fair market value of real property for estate tax purposes is based on the property’s 

value at its “highest and best use.” For example, an undeveloped parcel of land might be valued 

as property that could be developed for residential or commercial purposes. However, the estates 

of owners of certain real property used in a family-owned trade or business may reduce the value 

of that property for Federal estate tax purposes below its highest and best use value to help 

preserve its current use. The maximum reduction in value is limited to $750,000, as adjusted for 

inflation since 1997; in 2023, the reduction in value is capped at $1.31 million. 

Duration of certain estate and gift tax liens

Current law provides an automatic lien on all gifts made by a donor and generally on all property 

in a decedent’s estate to enforce the collection of gift and estate tax liabilities from the donor or 

the decedent’s estate, as applicable. The lien remains in effect for 10 years from the date of the 

gift for gift tax, or the date of the decedent’s death for estate tax, unless the tax is paid in full 

sooner. 

Reporting of estimated total value of trust assets and other information about the trust 

Although most domestic trusts are required to file an annual income tax return, there is no 

requirement to report the nature or value of their assets. As a result, the IRS has no statistical 

data on the nature or magnitude of wealth held in domestic trusts. Other agencies collect data on 

the amount of wealth held in some types of domestic trusts, but this data is not comprehensive. 

In contrast, private foundations are required to report both the basis and fair market value of their 

assets on their annual tax return. While some of that asset information is required to compute the 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

foundation’s tax liability and distribution requirements, that information also provides statistical 

data useful to the IRS for various tax administration purposes and policy development. 

Use of defined value formula clauses to determine bequests or gifts 

Taxpayers often want to make gifts, bequests, or disclaimers in an amount that achieves a 

particular tax result. For example, a taxpayer may wish to avoid triggering gift tax liability by 

limiting the gift to that amount of property equal to the donor’s remaining gift tax exclusion 

amount.28 The mechanism used for such transfers is sometimes referred to a “defined value 

formula clause.” That clause purports to define the gift by a value determined by a formula. 

Often, the formula determines the value by reference to the results of IRS enforcement 

activities.29

Exclusion from the gift tax for annual gifts 

The first $17,000 of gifts made to each donee in 2023 are excluded from the donor’s taxable gifts 

(and therefore do not use up any of the donor’s lifetime exclusion from gift and estate taxes). 

This annual gift tax exclusion is indexed for inflation and there is no limit on the number of 

donees to whom such gifts may be made by a donor in any one year. To qualify for this 

exclusion, each gift must be of a present interest rather than a future interest in the donated 

property. A present interest is an unrestricted right to the immediate use, possession, or 

enjoyment of property or the income from property (including life estates and term interests). 

Generally, a contribution to a trust for the donee is a future interest. 

Reasons for Change 

Definition of executor 

Because the statutory definition of executor applies only for estate tax purposes, a statutory 

executor (including a surviving spouse who filed a joint income tax return) has no authority to 

represent the decedent or the estate with regard to the decedent’s final income tax liabilities, 

failures to report foreign assets, or other tax liabilities and obligations that arose before the 

decedent's death. Similarly, no one has the authority to extend a limitations statute, claim a 

refund, agree to a compromise or assessment, or pursue judicial relief with regard to a tax 

liability of the decedent. Because reporting obligations (particularly regarding interests in foreign 

assets or accounts) have increased, problems associated with this absence of any representative 

authority are arising more frequently. Additionally, in the absence of an appointed executor, 

28 Another common example is defining the bequest that will qualify for the marital deduction as the minimum 

amount needed to reduce the decedent’s estate tax liability to zero.

29 An example of such a formula is the following: “I give my interest in [entity] as follows: to my children, that 

number of units having a fair market value as of [date of gift], as finally determined for Federal transfer tax 

purposes, of [specified amount] dollars; and to [another person, such as a charity], my remaining number of units 

after satisfying the gifts to my children.” Generally, the units remaining after the defined gift are retained by the 

owner or are given to another person or entity (often a charity or marital trust) whose receipt would not give rise to a 

gift tax liability.
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

multiple persons may meet the definition of executor and, on occasion, multiple persons have 

filed separate estate tax returns for the decedent’s estate or have made conflicting tax elections. 

Limit on the reduction in value of special use property 

The inflation adjustments since 1997 have not kept up with the increases in the value of real 

property over that same period, causing this special use valuation provision to be of diminishing 

benefit to decedents’ estates.

Duration of certain estate and gift tax liens

Currently, this 10-year lien cannot be extended, including in cases where the taxpayer enters into 

an agreement with the IRS to defer tax payments or to pay taxes in installments that extend 

beyond 10 years. Thus, for unpaid amounts due to be paid after the 10-year period, this special 

lien has no effect. 

Reporting of estimated total value of trust assets and other information about the trust 

Because of the lack of statistical data on the nature and value of assets held in trusts in the United 

States, it is difficult to develop the administrative and legal structures capable of effectively 

implementing appropriate tax policies and evaluating compliance with applicable statutes and 

regulations. This lack of this data further hampers efforts to design tax policies intended to 

increase the equity and progressivity of the tax system. 

Use of defined value formula clauses to determine bequests or gifts 

The increasing popularity and use of defined value formula clauses poses a significant challenge 

to the administration of the gift and income taxes by potentially (a) allowing a donor to escape 

the gift tax consequences of undervaluing transferred property, (b) making examination of the 

gift tax return and litigation by the IRS cost-ineffective, and (c) requiring the reallocation of 

transferred property among donees long after the date of the gift. Further, defined value formula 

clauses that depend on the value of an asset as finally determined for Federal transfer tax 

purposes create a situation where the respective property rights of the various donees are being 

determined in a tax valuation process in which those donees have no ability to participate or 

intervene.

Exclusion from the gift tax for annual gifts 

Because the annual per-donee gift tax exclusion is available only for gifts of a present interest, 

taxpayers making a gift in trust usually give the trust beneficiary a limited right to withdraw the 

trust contribution (a “Crummey power”).30 Generally, a Crummey power makes the gift in trust a 

present interest gift if timely notice of the existence of the power is given to the donee. However, 

30 Crummey powers are widely used, particularly in life insurance trusts and in irrevocable trusts to hold property for 

the benefit of minor children.
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

the cost to taxpayers of complying with the notice and record maintenance requirements 

associated with Crummey powers is significant, as is the cost to the IRS of administering these

rules. Further, because Crummey powers can be granted to an unlimited number of beneficiaries, 

these powers can be given to multiple discretionary beneficiaries, most of whom are never 

intended to receive a distribution from the trust, for the primary (if not exclusive) purpose of 

shielding a larger trust contribution from gift tax. 

Proposal 

Expand definition of executor 

The proposal would move the existing definition of executor from section 2203 to section 7701 

of the Code, expressly making it applicable for all tax purposes, and would authorize such an 

executor to do anything on behalf of the decedent in connection with the decedent’s pre-death 

tax liabilities or other tax obligations that the decedent could have done if still living. Because 

this definition frequently results in multiple parties being an executor, the proposal also would 

grant regulatory authority to the Secretary and her delegate (Secretary) to adopt rules to resolve 

conflicts among multiple executors authorized by that provision. 

The proposal would apply upon enactment, regardless of a decedent’s date of death. 

Increase the limit on the reduction in value of special use property 

The proposal would increase the cap on the maximum valuation decrease for “qualified real 

property” elected to be treated as special use property to $13 million. Such property generally 

would include the real estate used in family farms, ranches, timberland, and similar enterprises.

The proposal would apply to the estates of decedents dying on or after the date of enactment. 

Extend 10-year duration for certain estate and gift tax liens 

The proposal would extend the duration of the automatic lien beyond the current 10-year period 

to continue during any deferral or installment period for unpaid estate and gift taxes. 

The proposal would apply to 10-year liens already in effect on the date of enactment, as well as 

to the automatic lien on gifts made and the estates of decedents dying on or after the date of 

enactment.

Require reporting of estimated total value of trust assets and other information about the trust 

The proposal would require certain trusts administered in the United States, whether domestic or 

foreign (other than a trust subject to the reporting requirements of section 6048(b) of the Code), 

to report certain information to the IRS on an annual basis to facilitate the appropriate analysis of 

tax data, the development of appropriate tax policies, and the administration of the tax system. 

That reporting could be done on the annual income tax return or otherwise, as determined by the 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Secretary, and would include the name, address, and TIN of each trustee and grantor of the trust, 

and general information with regard to the nature and estimated total value of the trust’s assets as 

the Secretary may prescribe. Such reporting on asset information might be satisfied by 

identifying an applicable range of estimated total value on the trust’s income tax return. This 

reporting requirement for a taxable year would apply to each trust whose estimated total value on 

the last day of the taxable year exceeds $300,000 (indexed for inflation after 2024) or whose 

gross income for the taxable year exceeds $10,000 (indexed for inflation after 2024). 

In addition, each trust (regardless of value or income) would be required to report on its annual 

income tax return the inclusion ratio of the trust at the time of any trust distribution to a non-skip 

person, as well as information regarding any trust modification or transaction with another trust 

that occurred during that year. This additional information will provide the IRS and taxpayers 

with current information necessary to verify the GST effect of any trust contribution or 

distribution without requiring either party to go back through multiple prior years’ records to 

determine that information.

The proposal would apply for taxable years ending after the date of enactment.

Require that a defined value formula clause be based on a variable that does not require IRS 

involvement 

The proposal would provide that if a gift or bequest uses a defined value formula clause that 

determines value based on the result of involvement of the IRS, then the value of such gift or 

bequest will be deemed to be the value as reported on the corresponding gift or estate tax return. 

However, a defined value formula clause would be effective if (a) the unknown value is 

determinable by something identifiable (other than activity of the IRS), such as an appraisal that 

occurs within a reasonably short period of time after the date of the transfer (even if after the due 

date of the return) or (b) the defined value formula clause is used for the purpose of defining a 

marital or exemption equivalent bequest at death based on the decedent’s remaining transfer tax 

exclusion amount. 

The proposal would apply to transfers by gift or on death occurring after December 31, 2023. 

Simplify the exclusion from the gift tax for annual gifts 

The proposal would eliminate the present interest requirement for gifts that qualify for the gift 

tax annual exclusion. Instead, the proposal would define a new category of transfers (without 

regard to the existence of any withdrawal or put rights) and would impose an annual limit of 

$50,000 per donor, indexed for inflation after 2024, on the donor’s transfers of property within 

this new category that would qualify for the gift tax annual exclusion. This new $50,000 limit 

would not provide an exclusion in addition to the annual per-donee exclusion; rather, it would be 

a further limit on those amounts that otherwise would qualify for the annual per-donee exclusion. 

Thus, a donor’s transfers in the new category in a single year in excess of a total amount of 

$50,000 would be taxable, even if the total gifts to each individual donee did not exceed $17,000. 

The new category would include transfers in trust (other than to a trust described in section 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

2642(c)(2)), transfers of interests in passthrough entities, transfers of interests subject to a 

prohibition on sale, partial interests in property, and other transfers of property that, without 

regard to withdrawal, put, or other such rights in the donee, cannot immediately be liquidated by 

the donee. 

The proposal would be effective for gifts made after December 31, 2023.
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

LIMIT DURATION OF GENERATION-SKIPPING TRANSFER TAX EXEMPTION 

Current Law

The generation-skipping transfer (GST) tax is imposed on gifts and bequests by an individual 

transferor to transferees who are two or more generations younger than the transferor. Each 

individual has a lifetime GST tax exemption ($12.92 million in 2023) that can be allocated to 

transfers made by that individual to a grandchild or other “skip person,” whether directly or in 

trust. Allocating GST exemption does not directly exempt any assets or portion of a trust from 

tax. Rather, allocating GST exemption to a trust or transfer reduces the applicable rate of tax 

(from as high as 40 percent to as low as 0 percent) on generation-skipping transfers.

31 An 

allocation of GST exemption to a trust has the potential to exclude from GST tax not only the 

value to which GST exemption was allocated, but also all subsequent appreciation and accrued 

income on that value during the existence of the trust. 

Reasons for Change 

In most cases, as long as property remains in a trust, the death of a trust beneficiary typically will 

not trigger the imposition of estate tax on trust assets. This is because beneficiaries typically have 

no rights to the trust property that would cause the property to be includable in that beneficiary’s 

gross estate at death. At the termination of the trust, however, the trust assets are required to vest 

in one or more persons, at which point the assets become the property of those persons and 

reenter the gift and estate tax base. 

At the time of the enactment of the GST provisions, the laws of most States included a commonlaw Rule Against Perpetuities (RAP) or some statutory version of it requiring that every trust 

terminate no later than 21 years after the death of a person who was alive at the time the trust 

was created. Today, many States either have limited the application of their RAP statutes 

(permitting trusts to continue for several hundred or up to 1,000 years), or entirely repealed their 

RAP statute. In those States, trusts are permitted to continue in perpetuity and the property in 

those trusts has been permanently removed from the estate and gift tax base. 

Proposal 

The proposal would make the GST exemption applicable only to: (a) direct skips and taxable 

distributions to beneficiaries no more than two generations below the transferor, and to younger 

generation beneficiaries who were alive at the creation of the trust; and (b) taxable terminations 

31 The GST tax is imposed as a flat tax rate equal to the highest estate tax rate (currently 40 percent) multiplied by 

the trust’s “inclusion ratio.” Generally, the inclusion ratio is determined by subtracting the “applicable fraction” 

from one. The numerator of the applicable fraction is the total amount of GST exemption allocated to the trust or 

transfer, and the denominator is the fair market value of the trust or property transferred. For example, if the amount 

of GST exemption allocated to the trust is equal to the value of property transferred to the trust, the inclusion ratio 

will be zero and the applicable tax rate will be 0 percent (40 percent multiplied by the inclusion ratio). Such a trust is 

described as being fully exempt from the GST tax.
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

occurring while any person described in (a) is a beneficiary of the trust.32 Under current law, 

section 2653 resets the generation assignment of trust beneficiaries once GST tax has been 

imposed, treating younger generations of skip persons as being in the first generation below that 

of the transferor (and thus as non-skip persons). Under the proposal, section 2653 would not 

apply in determining the generation assignment of a beneficiary for purposes of testing whether 

the GST exemption has terminated. In addition, solely for purposes of determining the duration 

of the exemption, a pre-enactment trust would be deemed to have been created on the date of 

enactment and, in this case, the proposal would provide that the grantor is deemed to be the 

transferor and in the generation immediately above the oldest generation of trust beneficiaries in 

existence on the date of enactment. The result of these proposals is that the benefit of the GST 

exemption, which shields property from the GST tax, would not last for a trust’s duration. 

Instead, the GST exemption would only shield the trust assets from GST tax for as long as the 

life of any trust beneficiary who either is no younger than the transferor’s grandchild or is a 

member of a younger generation who was alive at the creation of the trust.

Specifically, upon the expiration of this limit on the duration of the GST exemption, the trust’s

inclusion ratio would be increased to one, thereby rendering no part of the trust exempt from 

GST tax. Because contributions to a trust from different grantors are deemed to be held in 

separate trusts under section 2654(b) of the Code, each such separate trust would be subject to 

the same rule for the duration of the exemption, measured from the date of the first contribution 

by the grantor of that separate trust. The special rule for pour-over trusts under section 

2653(b)(2) would continue to apply to pour-over trusts and to trusts created under a decanting 

authority, and for purposes of this rule, such trusts would be deemed to have the same date of 

creation as the initial trust.33 The other rules of section 2653 would continue to apply and would 

be relevant in determining when a taxable distribution or taxable termination occurs. An express 

grant of regulatory authority to the Secretary and her delegates would be included to facilitate the 

implementation and administration of this provision. 

The proposal would apply on and after the date of enactment to all trusts subject to the 

generation-skipping transfer tax, regardless of the trust’s inclusion ratio on the date of enactment. 

32 The three types of GST transfers are direct skips, taxable distributions, and taxable terminations. Section 2612

defines a direct skip as a transfer to a skip person that is subject to Federal estate or gift tax; a skip person generally 

is one assigned to a generation more than one generation below that of the transferor. Section 2612 also defines a 

taxable distribution and taxable termination.

33 A pour-over trust is a trust to receive assets passing under the will of the grantor at death. In general, decanting 

involves distributing assets from one trust to another trust, thereby changing the terms of the trust.
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

MODIFY INCOME, ESTATE, GIFT, AND GENERATION-SKIPPING TRANSFER TAX 

RULES FOR CERTAIN TRUSTS

Current Law

Tax rules for grantor trusts 

Generally, a trust is a grantor trust, and the grantor is its deemed owner, if the grantor (a) creates 

a revocable trust, or (b) creates an irrevocable trust but retains certain powers over the trust or its 

assets (such as the power to control or direct the trust’s income or assets).34 A deemed owner of 

a grantor trust is treated as owning the assets of the trust solely for income tax purposes. As a 

result, sales and other transactions between a grantor trust and its deemed owner are disregarded 

for income tax purposes so no income tax on gains is incurred. Further, the income tax liability 

generated by trust’s assets is the obligation of the deemed owner, rather than the obligation of the 

trust or its beneficiaries. No amount paid by the deemed owner of a grantor trust to satisfy the 

trust’s income tax liability is treated as a gift by the deemed owner to the trust or its beneficiaries 

for Federal gift tax purposes. 

A grantor retained annuity trust (GRAT) is an irrevocable grantor trust in which the grantor 

retains an annuity interest for a term of years. At the end of that term, the assets then remaining 

in the trust are transferred to (or held in further trust for) the beneficiaries. The gift of this 

remainder interest is subject to gift tax at the creation of the trust and is valued by deducting the 

present value of the grantor’s retained annuity interest from the fair market value of the property 

contributed to the GRAT. The present value of the grantor’s retained annuity interest is the value 

of the expected payments to the grantor during the GRAT term, determined using a discount rate 

or rate of return based in part on the applicable Federal rate in effect for the month in which the 

GRAT is funded. 

Generation-Skipping Transfer (GST) inclusion ratio on transactions with other trusts 

The GST tax is imposed by multiplying the value of a trust by the product of a flat tax rate (equal 

to the highest estate tax rate, currently 40 percent), and the trust’s “inclusion ratio.” A trust’s 

inclusion ratio is determined by subtracting the “applicable fraction” from one. Generally, the 

numerator of the applicable fraction is equal to the amount of GST exemption allocated to the 

trust and the denominator is equal to the value of the trust. The applicable fraction is 

redetermined on each allocation of GST exemption to the trust and on certain changes to the trust 

principal, such as additional contributions to the trust or the consolidation of multiple trusts. 

GST tax characterization of certain tax-exempt organizations 

A taxable termination is one of three types of transfers that triggers the imposition of GST tax. In 

defining a taxable termination of a trust, the statute provides that there is no taxable termination 

34 A grantor also can create a trust that gives a beneficiary certain powers over the trust (such as the right to 

withdraw all of the trust’s income). If that trust is a grantor trust, the beneficiary may be the trust’s deemed owner.
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as long as a non-skip person has an interest in the trust.35 Although for this purpose, the current 

GST statute ignores trust interests held by most charities, there are other types of non-charitable 

tax-exempt organizations that are treated as non-skip persons. As a result of this characterization, 

a discretionary interest held by such an organization will prevent a taxable termination and 

thereby avoid the imposition of GST tax. 

Definition of a guaranteed annuity from a charitable lead annuity trust (CLAT) 

A CLAT requires the payment of an annuity at least annually to one or more charitable 

beneficiaries for a term of years or for the life of the donor. At the end of that term, the trust 

distributes any remaining trust property to noncharitable remainder beneficiaries. The CLAT’s 

grantor makes a gift of the remainder interest to the remainder beneficiaries on the creation of the 

CLAT, and the present value of that deferred remainder interest is based, in part, on an assumed 

rate of growth for the trust’s assets during the annuity term. However, the actual rate of 

appreciation of the trust’s assets can exceed the assumed rate of growth on which the gift tax 

calculation is based. As a result, the value of the remainder interest subjected to gift tax on the 

CLAT’s creation can be significantly less than the value of the remainder interest received by the 

noncharitable beneficiaries at the end of the CLAT term.

Tax treatment of loans from a trust

The Internal Revenue Code (Code) has complex and comprehensive rules governing the income, 

GST, and sometimes gift tax consequences of distributions from trusts to trust beneficiaries. 

Generally, these rules are intended, at least in part, to ensure that those who enjoy the benefits 

from a trust share an appropriate level of tax liability related to the receipt of those benefits. 

However, except for certain loans from a foreign trust to a U.S. person, a loan from a trust does 

not carry with it any tax consequences to the borrower. 

Reasons for Change 

Modify tax rules for grantor trusts

GRATs and grantor trusts allow taxpayers to substantially reduce their combined Federal 

income, gift, and estate tax obligations through tax planning. The proposal addresses the three 

most common and significant planning techniques that allow the grantor to remove significant 

value from the taxpayer’s gross estate for Federal estate tax purposes without Federal income or 

gift tax consequences. Reform is needed to close the existing loopholes and ensure the effective 

operation of the Federal income, gift, and estate taxes. To be effective, any change in the law 

should address all of these techniques; otherwise, taxpayers will simply shift their planning from 

one technique to the other. 

35 A non-skip person is a person other than a skip person. A skip person is either (a) a natural person assigned to a 

generation which is 2 or more generations below the generation assignment of a transferor to the trust or (b) certain 

trusts. A trust is a skip person if (a) all interests in the trust are held by skip persons, or if (b) there is no person 

holding an interest in the trust, and at no time after such transfer may a distribution (including distributions on 

termination) be made from such trust to a non-skip person.
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The first technique is the funding of a GRAT with assets that are expected to appreciate. If the 

value of a GRAT’s assets appreciate at a rate that exceeds the relatively low statutory interest 

rate used to value the grantor’s retained annuity interest, that excess appreciation will have been 

transferred to the remainder beneficiaries with little or no gift tax. Because almost the entire 

value of the GRAT assets generally is includible in the grantor’s gross estate for Federal estate 

tax purposes if the grantor dies during the GRAT term, the grantor usually selects a GRAT term 

that the grantor expects to survive. To minimize the gift tax cost, the GRAT is structured to have 

a remainder interest with only a very small value and thus incurring very little gift tax. As a 

result, even if the GRAT assets do not significantly appreciate by the end of the GRAT term, the 

GRAT involved little to no cost or downside risk for the grantor. 

The second technique is the sale of an appreciating asset to a grantor trust by its deemed owner. 

Generally, when a taxpayer sells an appreciating asset to a grantor trust of which the taxpayer is 

the deemed owner for income tax purposes,36 the sale is disregarded for income tax purposes. 

Such a sale allows the taxpayer to remove the future appreciation from the taxpayer’s gross 

estate without the payment of gift or estate tax and without the recognition of any capital gain on 

the sale. 

The third technique is the deemed owner’s repurchase of an appreciated asset from the grantor 

trust for the asset’s then-fair market value, usually shortly before the deemed owner’s death. 

Generally, as with the grantor’s sale of an appreciating asset to the trust, when a grantor trust 

sells an appreciated asset back to the trust’s deemed owner, the purchase is disregarded for 

income tax purposes, so no capital gains tax is incurred. When the deemed owner dies, the 

appreciated asset is part of the grantor’s gross estate, so its basis is adjusted (usually increased) 

to its fair market value on the date of death. In this way, no gain is ever taxed, and the trust has 

the same value as immediately before the repurchase by the deemed owner but without the future 

capital gains tax liability on the appreciation that accrued before the deemed owner’s death. 

Finally, because the deemed owner’s payment of the income tax on the trust’s taxable income 

and gains each year is considered the owner’s payment of their own tax liability and therefore is 

not a taxable gift, the property in the grantor trust can grow free of income tax, without any gift 

tax cost.

Adjustment of a trust’s GST inclusion ratio on transactions with other trusts 

A popular technique for leveraging the benefit of the GST exemption is for a GST exempt trust37

to purchase either assets from a GRAT or other trust, or a remainder interest in the GRAT or 

other trust. Presumably, a taxpayer engaging in such a sale would treat the transaction as any 

other reinvestment of trust assets, which would not change the purchasing trust’s applicable 

fraction or inclusion ratio. Because the grantor of the GRAT cannot allocate GST exemption to 

36 In most cases, the taxpayer receives the sales price for the appreciating asset in the form of a note issued by the 

trust to be paid from the future income or return from the asset sold to the trust.

37 A trust can be exempt from GST tax either because it is a trust treated as having an inclusion ratio of zero under 

the grandfather rules or it is a trust with an inclusion ratio of zero due to the allocation of the donor’s GST 

exemption. 
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the GRAT until the end of the GRAT term, the GRAT is not exempt from GST tax at the time of 

such a purchase, but the purchase by the GST exempt trust, in effect, cleanses the purchased 

interest of its GST potential.38 Therefore, a purchase of the remainder interest shortly after the 

creation of the GRAT could significantly leverage the taxpayer’s GST exemption by avoiding 

the need to allocate GST exemption at the end of the GRAT term to shield the purchased 

property from GST tax. While it appears that the categories of the changes to trust principal that 

trigger a redetermination of a trust’s inclusion ratio could be expanded by regulations, it is not 

clear that regulations could adequately address the effect of sales between trusts.

Change the GST tax characterization of certain tax-exempt organizations 

Because many types of tax-exempt organizations are included in the definition of a non-skip 

person with an interest in the trust for purposes of determining taxable terminations, simply 

naming one of these organizations (other than most charities) as a potential recipient of trust 

distributions is enough to avoid the imposition of GST tax on the trust, even though that 

organization may be unlikely to ever receive a distribution from the trust. In this way, the statute 

has created a loophole being used by taxpayers to avoid GST tax. 

Modify the definition of a guaranteed annuity from a charitable lead annuity trust (CLAT) 

The term of a CLAT and the size of the annual annuity generally are structured to cause the 

deferred value of the remainder interest for transfer tax purposes to be minimal or zero even 

though the actual value of that remainder interest is expected to be substantial. The longer that 

amounts of annuity payments to the charity can be delayed, the longer the trust assets can remain 

in the trust where the expectation is that they will continue to appreciate in value. On the other 

hand, a higher annuity amount payable from the beginning of the trust term can reduce the 

appreciation that otherwise would accrue for the ultimate benefit of the remaindermen. As a 

result, taxpayers often design the CLAT to have an annuity that increases over the trust term, 

thereby largely deferring the charitable benefit until the end of the trust term. This technique can 

exponentially increase the value of the remainder without gift tax consequences. 

Modify the tax treatment of loans from a trust

Loans to trust beneficiaries are being used to avoid the income and GST tax consequences of 

trust distributions. The current widespread practice of making loans rather than distributions 

from dynastic trusts subject to the GST tax supports the conclusion that loans are an alternative 

method of obtaining beneficial enjoyment from a trust. Although a loan differs from a 

distribution because of the obligation to repay, the borrower nevertheless is receiving property 

from the trust – a benefit that the borrower is unlikely to have been able to otherwise obtain. In 

addition, these loans often are forgiven or otherwise remain unpaid, and it is difficult for the 

Internal Revenue Service (IRS) to identify those occurrences and thus to collect the taxes that 

38 In addition, if the GRAT’s assets appreciate during the GRAT term at a higher rate than the rate assumed at its 

creation, the value of the remainder interest at the creation of the GRAT (the value subject to gift tax) is 

substantially lower than the value of the remainder at the end of the GRAT term.
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should be paid in such circumstances. Thus, the use of loans allows taxpayers to divorce their 

ability to benefit from trust assets from the receipt of income for tax purposes, which allows 

them to inappropriately avoid income and GST taxes. In addition, treating loans as distributions 

would facilitate tax administration and compliance by providing the IRS with greater visibility 

into transactions with trusts and information about who is benefiting from a trust. 

Proposal 

Modify tax rules for grantor trusts 

The proposal would require that the remainder interest in a GRAT at the time the interest is 

created have a minimum value for gift tax purposes equal to the greater of 25 percent of the 

value of the assets transferred to the GRAT or $500,000 (but not more than the value of the 

assets transferred). In addition, the proposal would prohibit any decrease in the annuity during 

the GRAT term and would prohibit the grantor from acquiring in an exchange an asset held in 

the trust without recognizing gain or loss for income tax purposes. Finally, the proposal would 

require that a GRAT have a minimum term of ten years and a maximum term of the life 

expectancy of the annuitant plus ten years. These provisions would impose some downside risk 

on the use of GRATs so they are less likely to be used purely for tax avoidance purposes. 

For trusts that are not fully revocable by the deemed owner, the proposal would treat the transfer 

of an asset for consideration between a grantor trust and its deemed owner or any other person as 

one that is regarded for income tax purposes, which would result in the seller recognizing gain 

on any appreciation in the transferred asset and the basis of the transferred asset in the hands of 

the buyer being the value of the asset at the time of the transfer. Such regarded transfers would 

include sales as well as the satisfaction of an obligation (such as an annuity or unitrust payment) 

with appreciated property. However, securitization transactions would not be subject to this new 

provision. (A corresponding addition to disallowed losses would be made to section 267(b) of 

the Code).

The proposal also would provide that the payment of the income tax on the income of a grantor 

trust (other than a trust that is fully revocable by the grantor) is a gift. That gift is to occur on 

December 31 of the year in which the income tax is paid (or, if earlier, immediately before the 

owner’s death, or on the owner’s renunciation of any reimbursement right for that year) unless 

the deemed owner is reimbursed by the trust during that same year. The amount of the gift is the 

unreimbursed amount of the income tax paid. The amount of the gift cannot be reduced by a 

marital or charitable deduction or by the exclusion for present interest gifts or gifts made for the 

donee’s tuition or medical care. The gift, however, is an adjusted taxable gift. 

The GRAT portion of the proposal would apply to all trusts created on or after the date of 

enactment. The portion of the proposal characterizing the grantor’s payment of income taxes as a 

gift also would apply to all trusts created on or after the date of enactment. The gain recognition 

portion of the proposal would apply to all transactions between a grantor trust and its deemed 

owner or any other person occurring on or after the date of enactment. It is expected that the 
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legislative language providing for such an immediate effective date would appropriately detail 

the particular types of transactions to which the new rule does not apply. 

Adjust a trust’s GST inclusion ratio on transactions with other trusts

The proposal would treat a trust’s purchase of assets from, or interests in, a trust that is subject to 

GST tax (regardless of the selling trust’s inclusion ratio), as well as a purchase of any other 

property that is subject to GST tax, as a change in trust principal that would require the 

redetermination of the purchasing trust’s inclusion ratio when those assets (or trust interest) are 

purchased. Specifically, the inclusion ratio would be redetermined in the same way as in the case 

of a consolidation of trusts: the purchased assets would be included in the total value of the trust 

in the denominator of the applicable fraction, and only the portion of those assets excluded from 

GST tax immediately before the purchase would be added into the numerator of the fraction. The 

proposal similarly would apply to a trust’s receipt of assets pursuant to a decanting of another 

trust (generally, the distribution of trust property to another trust pursuant to the trustee's 

discretionary authority to make distributions to, or for the benefit of, one or more beneficiaries of 

another trust). 

The proposal would apply to all such transactions occurring after the date of enactment. 

Change the GST tax characterization of certain tax-exempt organizations 

The proposal would ignore trust interests held by additional tax-exempt organizations for 

purposes of the GST tax.39 As a result, the inclusion of such an organization as a permissible 

distributee of a trust would not prevent the occurrence of a taxable termination subject to GST 

tax.

The proposal would apply in all taxable years beginning after the date of enactment.

Modify the definition of a guaranteed annuity from a charitable lead annuity trust (CLAT) 

The proposal would require that the annuity payments made to charitable beneficiaries of a 

CLAT at least annually must be a level, fixed amount over the term of the CLAT, and that the 

value of the remainder interest at the creation of the CLAT must be at least 10 percent of the 

value of the property used to fund the CLAT, thereby ensuring a taxable gift on creation of the 

CLAT. 

The proposal would apply to all CLATs created after the date of enactment. 

39 Specifically, the proposal would treat an organization described in section 501(c)(4) through (29) other than 

(c)(10) for GST tax purposes in the same way as an organization described in section 2055(a).
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Modify the tax treatment of loans from a trust

The proposal would treat loans made by a trust to a trust beneficiary as a distribution for income 

tax purposes, carrying out each loan’s appropriate portion of distributable net income to the 

borrowing beneficiary. In addition, a loan to a trust beneficiary would be treated as a distribution 

for GST tax purposes, thus constituting either a direct skip or taxable distribution, depending 

upon the generation assignment of the borrowing beneficiary. Within one year after the final 

payment made on the loan to the trust (whether or not that constitutes full satisfaction of the 

loan), a refund of the appropriate amount of GST tax (with interest only from the date of the 

claim for refund) could be requested to be refunded to the payor of the GST tax that was incurred 

when the loan was made. 

To discourage borrowing from a trust by a person who is not a trust beneficiary but who is a 

deemed owner of the trust under the grantor trust rules, the proposal would create a special rule 

for GST tax purposes. Specifically, the repayment (regardless of the identity of the payor) of any 

loan made by a trust to a deemed owner or the spouse of a deemed owner would be treated as a 

new contribution to the trust by the borrowing deemed owner(s). Depending on the generation 

assignments of the trust’s beneficiaries at the time of the repayment, this new contribution (like 

any other contribution) would utilize GST exemption of the borrower(s), generate a GST tax 

liability in the case of a direct skip on such borrower(s) or their respective estates, or increase the 

trust’s inclusion ratio. Any GST tax payable on such a deemed direct skip that could not be 

collected from a deemed owner or a deceased deemed owner’s estate (such as, if the time for 

collecting such a debt from a decedent has expired), would be payable by the trust itself. 

The proposal includes a grant of regulatory authority to identify certain types of loans that would 

be excepted from the application of the proposal. This authority could be used to exempt shortterm loans, which do not raise the same concerns. Similarly, other exceptions might be the use of 

real or tangible property for a minimal number of days. 

The proposal would apply to loans made, as well as to existing loans renegotiated or renewed, by 

trusts after the year of enactment.
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

REVISE RULES FOR VALUATION OF CERTAIN PROPERTY

Current Law

Valuation of promissory notes 

Generally, an individual who lends money at a below-market rate of interest to another 

individual is treated as making a gift for gift tax purposes and the lender is imputed a 

commensurate amount of income for Federal income tax purposes. The Internal Revenue Code 

(Code) requires minimum rates of interest based on the duration of a note or other loan (its term); 

the Internal Revenue Service (IRS) issues monthly rates for each term. These rates effectively 

create a safe harbor: if the interest rate on a loan is at least equal to the minimum rate of interest 

specified by the IRS for a loan of the same term, the loan avoids being a “below-market loan” 

(the forgone interest on which is subject to income tax) and the loan is not treated as a gift for 

gift tax purposes. 

Valuation of partial/fractional interests in certain assets transferred intrafamily

The standard for determining the value of transferred property for transfer tax purposes is fair 

market value (FMV), which is defined as the price at which the property would change hands 

between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell 

and both having reasonable knowledge of all relevant facts. In determining the FMV of various 

forms of partial interests, appraisers generally consider several factors, such as the form of 

ownership, restrictions on transferability, and prevailing market conditions. These factors can 

increase the value of a transferred interest (in the form of a premium) or decrease the interest’s 

value by applying valuation discounts for things like lack of marketability and lack of control. 

The Code disregards the effects on FMV of liquidation restrictions on controlled partnerships 

and corporations in limited circumstances but does not modify the FMV of partial interests in 

assets.

Reasons for Change 

Valuation of promissory notes 

The rules for below-market loans allow taxpayers to take inconsistent positions regarding the 

valuation of loans to achieve tax savings. Typically, a taxpayer sells a valuable asset within their 

family for a promissory note carrying the minimum interest rate required to ensure that the loan 

is not taxed as a below-market loan for Federal income tax purposes. The taxpayer claims that 

the minimum interest rate is sufficient to avoid both the treatment of any foregone interest on the 

loan as imputed income to the lender and the treatment of any part of the transaction as a gift. 

However, in subsequently valuing that unpaid note for Federal estate tax purposes after the death 

of the taxpayer, the estate takes the position that the fair market value of the note should be 

discounted because the interest rate is well below the market rate at the time of the taxpayer’s 

death. In other words, the taxpayer relies on the statutory rules to assert that the loan is not below 
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market for gift tax purposes at the time of the transaction but relies on the underlying economic 

characteristics later to assert the loan is below market for estate tax purposes.

Alternatively, the term of a promissory note may be very lengthy, and at death, the holder’s 

estate may claim a significant discount on the value of the unpaid note based on the amount of 

time before the note will be paid in full.

Valuation of partial/fractional interests in certain assets transferred intrafamily

The valuation of partial interests in closely held entities, real estate and other personal property 

offers opportunities for tax avoidance when those interests are transferred intrafamily. Taxpayers 

regularly transfer portfolios of marketable securities and other liquid assets into partnerships or 

other entities, make intrafamily transfers of interests in those entities (instead of transferring the 

liquid assets themselves), and then claim entity-level discounts in valuing the gift. Similarly, 

taxpayers often make intrafamily transfers of partial interests in other hard-to-value assets such 

as real estate, art, or intangibles, allowing all family co-owners to claim fractional interest 

discounts. 

While valuation discounts for lack of marketability and lack of control are factors properly 

considered in determining the FMV of such interests in general, they are not appropriate when 

families are acting in concert to maximize their economic benefits. In these cases, because the 

family often ignores the restrictions that justified the discounts, the claimed FMV of the 

transferred interest is below its real economic value, artificially reducing the amount of transfer 

tax due. 

Proposal 

Require consistent valuation of promissory notes 

The proposal would impose a consistency requirement by providing that, if a taxpayer treats any 

promissory note as having a sufficient rate of interest to avoid the treatment of any foregone 

interest on the loan as income or any part of the transaction as a gift, that note subsequently must 

be valued for Federal gift and estate tax purposes by limiting the discount rate to no more than 

the greater of the actual rate of interest of the note, or the applicable minimum interest rate for 

the remaining term of the note on the date of death. The Secretary and her delegates (Secretary) 

would be granted regulatory authority to establish exceptions to account for any difference 

between the applicable minimum interest rate at the issuance of the note and actual interest rate 

of the note. In addition, the term of any note (regardless of its rate of interest) would be 

shortened for purposes of valuing that note if there is a reasonable likelihood that the note will be 

satisfied sooner than the specified payment date and in other situations as determined by the 

Secretary.40 

40 Permissible approaches could include without limitation treating the note as being short term regardless of the due 

date, valuing term loans as demand loans in which the lender can require immediate payment in full, or reducing the 

stated term to the earliest possible date on which the related property (such as an investment in a life insurance 

policy or arrangement) could be monetized by cashing in or selling the policy.
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

The proposal would apply to valuations as of a valuation date on or after the date of enactment. 

Revise the valuation of partial/fractional interests in certain assets transferred intrafamily

The proposal would replace section 2704(b) of the Code, which disregards the effect of 

liquidation restrictions on FMV, and instead provide that the value of a partial interest in nonpublicly traded property (real or personal, tangible or intangible) transferred to or for the benefit 

of a family member of the transferor would be the interest’s pro-rata share of the collective FMV 

of all interests in that property held by the transferor and the transferor’s family members, with 

that collective FMV being determined as if held by a sole individual. Family members for this 

purpose would include the transferor, the transferor’s ancestors and descendants, and the spouse 

of each described individual. 

In applying this rule to an interest in a trade or business, passive assets would be segregated and 

valued as separate from the trade or business. Thus, the FMV of the family’s collective interest 

would be the sum of the FMV of the interest allocable to a trade or business (not including its 

passive assets), and the FMV of the passive assets allocable to the family’s collective interest 

determined as if the passive assets were held directly by a sole individual. Passive assets are 

assets not actively used in the conduct of the trade or business, and thus would not be discounted 

as part of the interest in the trade or business. 

This valuation rule would apply only to intrafamily transfers of partial interests in property in 

which the family collectively has an interest of at least 25 percent of the whole.41 

The proposal would apply to valuations as of a valuation date on or after the date of enactment.

41 An attribution rule, that would be relevant only for purposes of determining whether the family’s collective 

interest meets that threshold, would attribute to a person the maximum interest held through an entity or trust that 

could be allocated to that person. However, for purposes of determining the FMV of the family’s collective interest, 

only interests held directly by a member of the family, interests held through a general partnership or wholly owned 

entity, and interests held in trusts either for the sole benefit of the family member or that are withdrawable or fully 

revocable by the family member, would be taken into consideration.
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

CLOSE LOOPHOLES

TAX CARRIED (PROFITS) INTERESTS AS ORDINARY INCOME

Current Law

A partnership is not subject to Federal income tax. Instead, an item of income or loss of the 

partnership retains its character and flows through to the partners who must include such item on 

their tax returns. Generally, certain partners receive partnership interests in exchange for 

contributions of cash and/or property, while certain partners (not necessarily other partners) 

receive partnership interests, typically interests in future partnership profits referred to as “profits 

interests” or “carried interests,” in exchange for services. Accordingly, if and to the extent a 

partnership recognizes long-term capital gain, the partners, including partners who provide 

services, will reflect their shares of such gain on their tax returns as long-term capital gain. If the 

partner is an individual, such gain would be taxed at the reduced rates for long-term capital 

gains. Gain recognized on the sale of a partnership interest, whether it was received in exchange 

for property, cash, or services, is generally capital gain. Section 1061 of the Internal Revenue 

Code (Code) generally extends the long-term holding period requirement for certain capital gains 

resulting from partnership property dispositions and from partnership interest sales, from one 

year to three years.

Under current law, income attributable to a profits interest is generally subject to selfemployment tax, except to the extent that the partnership generates types of income that are 

excluded from self-employment taxes, including capital gains, certain interest, and dividends. A 

limited partner’s distributive share is generally excluded from self-employment tax under section 

1402(a)(13) of the Code. 

Reasons for Change 

Although profits interests are structured as partnership interests, the income allocable to such 

interests is received in connection with the performance of services. A service provider’s share 

of the income of a partnership attributable to a carried interest should be taxed as ordinary 

income and subject to self-employment tax because such income is derived from the 

performance of services. By allowing service partners to receive capital gains treatment on labor 

income without limit, even with the holding period extension provided by section 1061, the 

current system creates an unfair and inefficient tax preference. Activity among large private 

equity firms and hedge funds has increased the breadth and cost of this tax preference, with some 

of the highest-income Americans benefiting from this preferential treatment.

Proposal 

The proposal would generally tax as ordinary income a partner’s share of income on an 

“investment services partnership interest” (ISPI) in an investment partnership, regardless of the 

character of the income at the partnership level, if the partner’s taxable income (from all sources) 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

exceeds $400,000. Accordingly, such income would not be eligible for the reduced rates that 

apply to long-term capital gains. In addition, the proposal would require partners in such 

investment partnerships to pay self-employment taxes on ISPI income if the partner’s taxable 

income (from all sources) exceeds $400,000. In order to prevent income derived from labor 

services from avoiding taxation at ordinary income rates, the proposal assumes that the gain 

recognized on the sale of an ISPI would generally be taxed as ordinary income, not as capital 

gain, if the partner is above the income threshold. To ensure more consistent treatment with the 

sales of other types of businesses, the Administration remains committed to working with 

Congress to develop mechanisms to assure the proper amount of income recharacterization 

where the business has goodwill or other assets unrelated to the services of the ISPI holder.

An ISPI is a profits interest in an investment partnership that is held by a person who provides 

services to the partnership. A partnership is an investment partnership if substantially all of its 

assets are investment-type assets (certain securities, real estate, interests in partnerships, 

commodities, cash or cash equivalents, or derivative contracts with respect to those assets), but 

only if over half of the partnership’s contributed capital is from partners in whose hands the 

interests constitute property not held in connection with a trade or business. To the extent (a) the

partner who holds an ISPI contributes “invested capital” (which is generally money or other 

property) to the partnership, and (b) such partner’s invested capital is a qualified capital interest, 

income attributable to the invested capital would not be recharacterized and would continue to be 

eligible for capital gain treatment. A qualified capital interest is generally one where (a) the 

partnership allocations to the invested capital are made in the same manner as allocations to 

other capital interests held by partners who do not hold an ISPI and (b) the allocations to these 

non-ISPI holders are significant. Similarly, the portion of any gain recognized on the sale of an 

ISPI that is attributable to a qualified capital interest would be treated as capital gain. However, 

“invested capital” would not include contributed capital that is attributable to the proceeds of any 

loan or advance made or guaranteed by any partner or the partnership (or any person related to 

such persons) to a person who holds an ISPI.

Also, any person who performs services for any entity and holds a “disqualified interest” in the 

entity would be subject to tax at rates applicable to ordinary income on any income or gain 

received with respect to the interest, if the person’s taxable income (from all sources) exceeds 

$400,000. A “disqualified interest” is defined as convertible or contingent debt, an option, or any 

derivative instrument with respect to the entity (but does not include a partnership interest, stock 

in certain taxable corporations, or stock in an S corporation). This would act as an anti-abuse rule 

and prevent avoidance of the proposal’s application through the use of compensatory 

arrangements other than partnership interests. Additional anti-abuse rules could be necessary.

The proposal is not intended to adversely affect qualification of a real estate investment trust 

owning a profits interest in a real estate partnership.

The proposal would repeal section 1061 for taxpayers with taxable income (from all sources) in 

excess of $400,000. 

The proposal would be effective for taxable years beginning after December 31, 2023.
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

REPEAL DEFERRAL OF GAIN FROM LIKE-KIND EXCHANGES

Current Law 

Currently, owners of appreciated real property used in a trade or business or held for investment 

can defer gain on the exchange of the property for real property of a “like-kind.” As a result, the 

tax on the gain is deferred until a later recognition event, provided that certain requirements are 

met.

Reasons for Change 

The proposal would treat the exchanges of real property used in a trade or business (or held for 

investment) similarly to sales of real property, resulting in fewer distortions. The change would 

raise revenue while increasing the progressivity of the tax system. It would also align the 

treatment of real property with other types of property. 

Proposal 

The proposal would allow the deferral of gain up to an aggregate amount of $500,000 for each 

taxpayer ($1 million in the case of married individuals filing a joint return) each year for real 

property exchanges that are like-kind. Any gains from like-kind exchanges in excess of $500,000 

(or $1 million in the case of married individuals filing a joint return) in a year would be 

recognized by the taxpayer in the year the taxpayer transfers the real property subject to the 

exchange. 

The proposal would be effective for exchanges completed in taxable years beginning after 

December 31, 2023. 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

REQUIRE 100 PERCENT RECAPTURE OF DEPRECIATION DEDUCTIONS AS 

ORDINARY INCOME FOR CERTAIN DEPRECIABLE REAL PROPERTY

Current Law 

In general, a taxpayer recognizes gain or loss upon the disposition of an asset used in a trade or 

business. Such gain or loss can have the character of a capital gain or loss or an ordinary gain or 

loss according to various provisions of the Internal Revenue Code (Code). Generally, ordinary 

losses are deductible against a taxpayer’s gross income, but capital losses may only offset capital 

gains.42 Gains and losses from the sale or exchange of capital assets that have been held for more 

than one year generally are long-term capital gains and losses. A net capital gain (the excess of a 

net long-term capital gain over a net short-term capital loss) recognized by a noncorporate 

taxpayer is generally taxed at lower tax rates than those imposed on ordinary income. 

Corporations are taxed at the same rate for net capital gains and ordinary income.

A portion of all of the gain recognized upon the disposition of property used in a trade or 

business or held for investment may be treated as ordinary income to the extent that such gain 

reflects some or all of the depreciation allowances previously deducted against the taxpayer’s 

gross ordinary income (depreciation recapture). In general, any recognized gain on “section 1245 

property” is recaptured as ordinary income up to 100 percent of the cumulative depreciation 

deductions taken with respect to the property. Section 1245 property primarily consists of 

intangible depreciable property, personal tangible depreciable property, any real property that is 

subject to special expensing or amortization rules (such as under section 179 of the Code), and 

certain real depreciable property (other than buildings and structural components) used as an 

integral part of manufacturing, production, or extraction, or of furnishing transportation, 

communications, and utility services. Buildings and certain other real property are section 1250 

property. For section 1250 property, the amount of recognized gain subject to depreciation 

recapture equals the amount by which cumulative depreciation deductions exceed the sum of 

depreciation allowances determined by using the straight-line depreciation method and the 

property’s applicable depreciation cost recovery period. 

The section 1250 property depreciation recapture rules generally have little or no effect on 

recharacterizing gain as ordinary income upon the disposition of section 1250 property, because 

most section 1250 property is ineligible for the additional first-year bonus depreciation 

allowance and already uses the straight-line depreciation method and applicable recovery 

period.43 

Property used in a trade or business is not a capital asset, and gains and losses recognized from 

the sale, exchange, or involuntary conversion of such property are generally treated as ordinary 

income and ordinary loss. However, when held for more than a year, most depreciable property 

42 Noncorporate taxpayers can deduct up to $3,000 of the excess capital losses over capital gains. 43 Section 1250 property that is “qualified improvement property” is eligible for the additional first year bonus 

depreciation allowance only if the property is placed in service after December 31, 2017. Qualified improvement 

property is an improvement made to the interior portion of a non-residential building that is placed in service after 

the building is first placed in service.
137 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

and other real property (for example, land) used in a trade or business are defined as “section 

1231 property” and subjected to additional rules that determine whether gain or loss from a sale, 

exchange, or disposition of such property is classified as capital or ordinary.44 The sum of the 

gains on section 1231 property (other than gains treated as ordinary income under the 

depreciation recapture rules) is compared to the sum of the losses on section 1231 property. If 

the taxpayer’s section 1231 losses exceed its section 1231 gains for a taxable year, then such 

section 1231 losses and section 1231 gains are treated as ordinary losses and ordinary income, 

respectively. However, if the section 1231 gains exceed the section 1231 losses for a taxable 

year, then such gains and losses are generally treated as capital gains and capital losses, 

respectively. A taxpayer’s aggregate net section 1231 gain for any taxable year is nevertheless 

treated as ordinary income to the extent that it does not exceed the amount of net section 1231 

losses incurred in the five preceding taxable years (to the extent that such losses have not already 

been “recaptured” in this manner). 

For noncorporate taxpayers, any gain on section 1250 property that represents unrecaptured 

depreciation (and is treated as capital gain after application of the above rules) is taxed using a 

maximum tax rate of 25 percent. 

Reasons for Change 

For noncorporate taxpayers, most gains on buildings or other real property used in the taxpayer’s 

trade or business are taxed at reduced rates because of the rules of sections 1250 and 1231 of the 

Code. When taxpayers are able to claim depreciation deductions against ordinary income in 

excess of the actual decline in value of real property while paying tax on any gains at reduced 

rates, they are able to convert ordinary income into preferentially taxed capital income. This 

provides a tax subsidy for noncorporate real estate businesses.45 Applying 100 percent 

depreciation recapture to the cumulative depreciation deductions on section 1250 property would 

eliminate this tax subsidy and opportunity for conversion of income. It would raise revenue 

while increasing the progressivity of the tax system. 

The 100 percent recapture of the cumulative depreciation deductions on section 1250 property 

would promote efficiency and simplification as it would gradually remove the existing disparate 

tax treatment of section 1250 and section 1245 properties. However, sales of real estate would 

continue to require an allocation of sales price between land (non-depreciable property) and 

depreciable property and separate calculations of gain.

While the 100 percent section 1250 depreciation recapture would also apply to C corporations, it 

would have minimal impact on them because there is no tax rate differential between ordinary 

net gains and capital net gains of such taxpayers. However, a reduction in capital gains from 

dispositions of depreciable real estate would result in lower net section 1231 capital gains, and 

this could lead to higher overall net capital losses for certain corporations. Such net capital losses 

44 Inventory, certain intangibles, and assets held for investment purposes are not considered property used in a trade 

or business and are not section 1231 property.

45 Approximately 75 percent of section 1231 gains distributed to individual partners or shareholders by passthrough 

businesses are in the real estate sector.
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

would not be deductible in the current taxable year and would have to be carried forward to 

future taxable years.

Proposal 

Upon disposition, any measured gain on an item of section 1250 property held for more than one 

year would be treated as ordinary income to the extent of the cumulative depreciation deductions 

taken after the effective date of the provision. Depreciation deductions taken on section 1250 

property prior to the effective date would continue to be subject to current rules and recaptured 

as ordinary income only to the extent that such depreciation exceeds the cumulative allowances 

determined under the straight-line method. Any gain recognized on the disposition of section 

1250 property in excess of recaptured depreciation would be treated as section 1231 gain. Any 

unrecaptured gain on section 1250 property would continue to be taxed to noncorporate 

taxpayers at a maximum 25 percent rate.

The proposal would not apply to noncorporate taxpayers with adjusted gross income (AGI) 

below $400,000 ($200,000 for married individuals filing separate returns).46 Partnerships and S 

corporations would be required to compute the character of gains and losses on business-use 

property (including section 1250 property, section 1245 property, and land) at the entity level 

and to report to entity owners the relevant amounts for ordinary income (loss), capital gain (loss), 

and unrecaptured section 1250 gain under both “new law” and “old law”. Those taxpayers with 

income of at least the threshold amount would use the “new law” amounts in completing their 

tax returns. 

The proposal would be effective for depreciation deductions taken on section 1250 property in 

taxable years beginning after December 31, 2023, and sales, exchanges, involuntary conversions, 

or other dispositions of section 1250 property completed in taxable years beginning after 

December 31, 2023. 

46 The taxpayer’s AGI is determined before applying the proposed change to 100-percent depreciation recapture of 

section 1250 property for purposes of calculating the $400,000 ($200,000 for married filing separate returns) 

threshold.
139 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

LIMIT USE OF DONOR ADVISED FUNDS TO AVOID A PRIVATE FOUNDATION 

PAYOUT REQUIREMENT 

Current Law

Private nonoperating foundations are generally required to annually distribute at least 5 percent 

of the total fair market value of their non-charitable use assets from the preceding taxable year. A 

foundation that fails to meet this minimum distribution requirement is subject to a 30 percent 

excise tax on the undistributed amount. 

Qualifying distributions (those that satisfy the distribution requirement) include amounts paid to 

accomplish religious, charitable, scientific, or educational purposes, as well as reasonable and 

necessary administrative expenses paid by the foundation to further its charitable purposes. 

Qualifying distributions do not include the private foundation's contributions to either an 

organization controlled directly or indirectly by the private foundation's disqualified person(s),47

or to another private nonoperating foundation, unless (a) not later than one year after the end of 

the taxable year in which the donee organization received the contribution, the receiving 

organization makes a distribution equal to the full amount of the contribution and the distribution 

is a qualifying distribution that is treated as being made out of corpus (or would be so treated if 

the donee organization were a private nonoperating foundation) and (b) the foundation making 

the contribution obtains adequate records or enough other evidence from the donee showing that 

the donee has made a qualifying distribution. 

Qualifying distributions also do not include the private foundation's contributions to a Type I, 

Type II, or functionally integrated Type III supporting organization48 if any of the private 

foundation's disqualified persons directly or indirectly control the organization or a supported 

organization of such organization. 

Finally, qualifying distributions do not include the private foundation's contributions to nonfunctionally integrated Type III supporting organizations, even though those organizations are 

subject to an annual 3.5 percent payout requirement. 

Private foundations can set up donor advised funds (DAFs). A DAF is defined as a fund or 

account which is (a) separately identified by reference to contributions of a donor or donors, (b) 

owned and controlled by a sponsoring organization, and (c) with respect to which a donor (or 

any person appointed or designated by such donor) has, or reasonably expects to have, advisory 

privileges with respect to the distribution or investment of amounts held in such fund by reason 

47 Disqualified persons are defined generally as substantial contributors to the foundation, foundation managers, 

owners of more than 20 percent of certain entities that are substantial contributors to the foundation, family 

members of the foregoing, and certain entities in which the foregoing, alone or together, own more than 35 percent.

48 A supporting organization is classified as a Type I, Type II or Type III supporting organization based on the type 

of relationship it has with its supported organization(s). Type III supporting organizations are further classified as 

functionally integrated and non-functionally integrated. For more information, see section 509(a)(3) and the 

regulations thereunder.
140 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

of the donor’s status as a donor. There is currently no requirement that amounts held in a DAF be 

distributed within any set period of time. Under current law, a distribution by a private 

foundation to a DAF is generally considered a qualifying distribution. 

Reasons for Change

Because a private foundation has advisory privileges with respect to a DAF to which it 

contributes, and because there is no requirement for a DAF to make a further distribution of 

funds for a charitable purpose within any set period of time, it is not appropriate for a private 

foundation to satisfy its distribution requirement by making a distribution to a DAF. This use of 

DAFs can subvert the goal behind requiring minimum distributions, by reducing the current 

charitable use of the associated funds.

Proposal 

The proposal would clarify that a distribution by a private foundation to a DAF is not a 

qualifying distribution unless (a) the DAF funds are expended as a qualifying distribution, which 

does not include a distribution to another DAF, by the end of the following taxable year and (b) 

the private foundation maintains adequate records or other evidence showing that the DAF has 

made a qualifying distribution within the required time frame.

The proposal would be effective after the date of enactment.
141 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

EXCLUDE PAYMENTS TO DISQUALIFIED PERSONS FROM COUNTING TOWARD 

PRIVATE FOUNDATION PAYOUT REQUIREMENT

Current Law 

Private nonoperating foundations are generally required to annually distribute at least 5 percent 

of the total fair market value of their non-charitable use assets from the preceding taxable year 

(“payout requirement”). A foundation that fails to meet this payout requirement is subject to a 30 

percent excise tax on the undistributed amount. 

Qualifying distributions (those that satisfy the payout requirement) include amounts paid to 

accomplish religious, charitable, scientific, or educational purposes, as well as reasonable and 

necessary administrative expenses paid by the foundation to further its charitable purposes. 

Paying compensation or reimbursing expenses by a private foundation to a disqualified person is 

generally an act of self-dealing. The general rule does not apply, however, to the extent that the 

payments, which cannot be excessive, are for personal services that are reasonable and necessary 

to carry out the foundation’s exempt purposes. 

Reasons for Change 

Some private foundations meet their entire payout requirement by hiring family members. The 

intent of the payout requirement is to ensure private foundations use at least 5 percent of the total 

fair market value of their non-charitable use assets from the preceding taxable year for charitable 

purposes, such as grants to needy persons or to operating charities. Allowing payments to 

disqualified persons to count towards a private foundation’s payout requirement does not meet 

this intent to directly further charitable purposes. 

Proposal 

Under the proposal, paying compensation or reimbursing expenses by a private foundation to a 

disqualified person (other than a foundation manager of such private foundation who is not a 

member of the family of any substantial contributor) is not a qualifying distribution that satisfies

the payout requirement. The self-dealing rule would not change, so a private foundation could 

still pay reasonable compensation to a disqualified person for personal services that are 

reasonable and necessary to carry out the foundation’s exempt purposes; these payments would 

just not count toward the payout requirement. 

The proposal would be effective for payments made and expenses reimbursed after the date of 

enactment.
142 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

EXTEND THE PERIOD FOR ASSESSMENT OF TAX FOR CERTAIN QUALIFIED 

OPPORTUNITY FUND INVESTORS 

Current Law 

Section 6501 of the Internal Revenue Code (Code) generally requires that the Internal Revenue 

Service (IRS) assess a tax within three years after the filing of a tax return, subject to several 

exceptions. 

If a taxpayer invests an amount of eligible gain in a Qualified Opportunity Fund (QOF) and 

elects deferral, that amount of eligible gain is excluded from the taxpayer’s income for the year 

that the gain is realized. Pursuant to statute, recognition of that gain is deferred until December 

31, 2026, or an earlier date on which there occurs any of various inclusion events.49

Reasons for Change 

Although deferral for all taxpayers must end no later than December 31, 2026, inclusion events 

may require some taxpayers to recognize the deferred gain before that date. In many cases, the 

only manifestation of the inclusion event on the taxpayer’s return is the inclusion of the deferred 

gain in gross income. Thus, inclusion events that occur prior to December 31, 2026, may not be 

readily identifiable on the taxpayer’s return and there is an increased risk that the IRS may be 

barred from assessing a deficiency arising from the inclusion event by the expiration of the 

typical three-year statute of limitations.

Proposal

The proposal would provide that if an inclusion event requires deferred gain of a taxpayer to be 

included in gross income, but the taxpayer fails to properly include that deferred gain or the 

taxpayer in any other way fails to properly reflect on one or more tax returns this required 

inclusion, then there would be an extension of the time during which IRS may assess any 

deficiency in any tax where the deficiency results directly or indirectly from these failures. The 

time during which these deficiencies may be assessed would not expire before the date that is 

three years after the date on which IRS is furnished with all of the information that it needs to 

assess these deficiencies. 

The proposal generally would be effective for inclusions of deferred gains with respect to which 

deferral elections had been based on investments in QOFs that are made after December 22, 

2017 (the date of enactment of the Tax Cuts and Jobs Act of 2017). The proposal, however, 

49 Examples of inclusion events include certain events (a) that reduce a taxpayer’s direct equity interest in a QOF, 

(b) in which a taxpayer receives property with respect to its interest in a QOF and the event is treated as a 

distribution for Federal income tax purposes, (c) in which a taxpayer claims a loss for worthless stock or otherwise 

claims a worthlessness deduction with respect to its interest in a QOF, and (d) in which an entity certified as a QOF

loses its status as a QOF.
143

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

would not apply in situations where the statute of limitations for assessment has expired before 

the date of enactment.
144 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

IMPOSE OWNERSHIP DIVERSIFICATION REQUIREMENT FOR SMALL 

INSURANCE COMPANY ELECTION

Current Law 

The taxable income of a non-life insurance company generally includes the company’s 

underwriting income (consisting of earned premiums, less incurred insurance losses, and 

expenses), investment income, gains on the disposition of property, and other income items, 

reduced by allowable deductions. However, certain small non-life insurance companies may 

elect to be taxed under an alternative tax regime. Under this alternative regime, electing 

companies are taxed only on their taxable investment income, which consists of interest, 

dividends, rents, royalties, capital gains, certain non-insurance trade or business income, and 

similar items, less deductions related to such income, including deductions for tax-exempt 

interest, capital losses, and dividends received. An election under this provision is irrevocable 

without the consent of the Secretary or her delegates (Secretary).

 

The election is available to non-life insurance companies that receive during the taxable year net 

written premiums (or, if greater, direct written premiums) that do not exceed the threshold 

amount for that year. The threshold amount for taxable years beginning in 2023 is $2.65 million. 

This amount is indexed annually for inflation. For this test, the electing company is treated as 

receiving the (net or direct) written premiums received by all other companies that are members 

of the same controlled group as the company for which the determination is being made. For this 

purpose, and for that of meeting the first diversification requirement (described below), a parentsubsidiary controlled group is defined by using a more-than-50 percent ownership threshold. 

An insurance company must meet at least one of two ownership diversification requirements to 

qualify for an election. A company meets the first diversification requirement if no more than 20 

percent of its net written premiums (or, if greater, direct written premiums) is attributable to any 

one policyholder. For this purpose, all policyholders that are related (within the meaning of 

section 267(b) or 707(b) of the Internal Revenue Code (Code)) or that are members of the same 

controlled group of corporations are treated as a single policyholder. The cited relatedness 

standard generally includes close family relationships (siblings, spouses, ancestors, and lineal 

descendants), certain trust fiduciary relationships, and certain corporate and partnership 

relationships (using a more-than-50 percent ownership threshold as an indicator of relatedness). 

In addition, any policyholder of an underlying direct written insurance contract that is reinsured 

to the potential electing company is considered to be a policyholder of that company. 

If the first diversification requirement is not met, the second requires that no person holding, 

directly or indirectly, an interest in the electing insurance company and who is a spouse or lineal 

descendent of an individual holding an interest in a business or in other assets being insured by 

the insurance company has a greater percentage interest in the insurance company than he or she 

has in the business or assets being insured. 
145 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Reasons for Change

The alternative tax regime is intended to allow electing insurance companies to provide more 

affordable insurance coverage to policyholders. However, some taxpayers have worked with 

promoters to abuse the alternative regime by benefitting themselves or related parties without 

providing insurance or by providing minimal insurance at very high premium rates unrelated to 

the expected losses associated with the insured risks. In these cases, taxpayers, or related parties, 

usually own both an electing entity characterized as an insurance company and one or more 

businesses paying amounts characterized as insurance premiums to the electing entity. Each 

business purchasing a policy from the electing entity claims tax deductions for the amounts paid 

and characterized as premiums. The electing entity, however, does not include these amounts in 

gross income and does not deduct any underwriting costs (insurance claims and associated 

expenses) in computing its taxable income. 

In many cases identified in audit by the Internal Revenue Service (IRS), the arrangements 

characterized as insurance do not satisfy the requirements for insurance contracts under Federal 

income tax law. The amounts characterized as insurance premiums in these cases are 

unreasonably high, resulting in large amounts of untaxed underwriting income that are not 

needed to pay policyholder claims and related expenses. The electing entity often uses these 

funds for purposes unrelated to the business of insurance, such as making loans to, or purchases 

for, the personal or business use of related persons, including policyholders. 

In several recent decisions, the U.S. Tax Court determined that certain fact patterns with these 

attributes do not represent insurance transactions and denied the claimed deductions. In some 

cases, the Court imposed penalties or required the electing entity to include the alleged premiums 

in income.50 Nevertheless, auditing and litigating such arrangements consumes significant scarce 

tax administration resources, and a statutory remedy would be more effective in addressing the 

pervasiveness of abuse. 

Because the abusive fact patterns described above are most likely to occur if related parties own 

both the electing entity and the entities paying the amounts characterized as premiums, an 

effective ownership diversification requirement would appropriately address this abuse. The 

current diversification requirements (described above) are ineffective because the industry has 

been able to develop ownership and payment structures that may avoid those requirements. 

Proposal

 

The proposal would curtail abuse by certain companies while preserving the alternative tax 

election for those companies that use this tax benefit to reduce the cost of insurance. 

50 Avrahami v. Commissioner, 149 T.C. 144 (2017); Caylor Land & Development, Inc. v. Commissioner, T.C. 

Memo. 2021-30 (2021) (accuracy related penalty also sustained); Syzygy Ins. Co., Inc. v. Commissioner, T.C. 

Memo 2019-34 (2019) (company also required to recognize the premiums it received as income).
146

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Under the proposal, to qualify for the alternative tax regime, an insurance company would be 

required to meet the following conditions:

1. Qualify as a non-life insurance company;

2. Have net written premiums (or, if greater, direct written premiums) for the taxable year 

that do not exceed a statutorily determined amount ($2.65 million in 2023); and

3. Have no more than 20 percent of the assets or the voting power or value of the stock of 

such company owned, attributed, or constructively owned by: (a) a policyholder of such 

company or an owner of such policyholder, or (b) collectively by a policyholder or owner 

of a policy holder and one or more persons related to that policyholder or owner.

Under requirement (2), the proposal would continue the current law requirement to attribute 

premiums received by members of a controlled group including the potential electing company 

to that company, with the controlled group determined using a more-than-50 percent ownership 

threshold.

For requirement (3), a policyholder would include any person that conducts a trade or business 

and treats amounts paid under the relevant insurance contract as insurance premiums for Federal 

income tax purposes. An owner of a policyholder would be any person with an ownership 

interest in the policyholder, determined based on constructive ownership and attribution rules 

found elsewhere in the Code. Stock owned, directly or indirectly, by or for a corporation, 

partnership, estate, or trust would be considered as being owned proportionately by or for its 

shareholders, partners, or beneficiaries. Grantor trusts would be treated as owned by the grantors, 

and “stock” would include any certificate entitling the holder to voting power in a mutual 

insurance company. An individual would be considered as owning stock owned, directly or 

indirectly, by or for his or her family, which would include any sibling, ancestor, or lineal 

descendent of the individual’s parents, and the spouses of such family members. 

The proposal would continue to maintain the current law relatedness standards under sections 

267(a) and 707(b), including the more-than-50 percent ownership threshold for corporations and 

partnerships, but would use the broader definition of family members described in the previous 

paragraph for this purpose. The proposal would also maintain the current law rule that identifies 

as a “policyholder” of the company any policyholder of an underlying direct written insurance 

contract that has been reinsured to the company.

Finally, the proposal would add an anti-abuse rule, stating that a company would fail to meet 

requirement (3) for the taxable year in the case of a transaction or arrangement that directly or 

indirectly shifts payments (including premiums) between policyholders of companies that would 

otherwise be electing companies. The Secretary would be authorized to issue regulations or other 

guidance with respect to such transactions or arrangements (including the use of a fronting 

company, an intermediary, cross insurance, reinsurance, or a pooling arrangement designed to 

facilitate the shifting of payments in order to allow companies to meet requirement (3)).
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

The Secretary would also be authorized to issue guidance regarding possible requirements for 

new elections, revocation of prior elections, and related tax consequences for companies that 

previously qualified for the election but do not qualify under the new standard. 

The proposal would be effective for taxable years beginning after December 31, 2023.
148 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

EXPAND PRO RATA INTEREST EXPENSE DISALLOWANCE FOR BUSINESSOWNED LIFE INSURANCE

Current Law

In general, no Federal income tax is imposed concurrently on a policyholder with respect to the 

earnings credited under a life insurance or endowment contract. Furthermore, amounts received 

under a life insurance contract by reason of the death of the insured generally are excluded from 

gross income of the recipient. Federal income tax generally is deferred with respect to earnings 

under an annuity contract unless the annuity contract is owned by a person other than a natural 

person. 

Interest paid or accrued on policy loans or other indebtedness with respect to life insurance, 

endowment, or annuity contracts generally is not deductible unless the contract insures the life of 

a current key person of the business and the amount of the indebtedness does not exceed $50,000 

per key person insured. The amount of such deductible interest is limited to an amount 

determined using an average corporate bond yield. A key person is an officer or 20 percent 

owner of the business, but the number of key persons is capped at between five and 20 

individuals, depending on the size of the business. This interest-disallowance rule applies only to 

the extent that the relevant indebtedness can be traced to a non-excepted life insurance, 

endowment, or annuity contract. 

The interest deductions of a business other than an insurance company are also reduced to the 

extent the general interest expense of the business is allocable to unborrowed policy cash values 

of life insurance, endowment, or annuity contracts. This allocation is based on the ratio of the 

company’s average unborrowed policy cash values to average total assets. The provision does 

not apply to a policy or contract held by a natural person unless the business (other than a sole 

proprietorship) is directly or indirectly a beneficiary under the policy, nor does it apply to 

annuity contracts not held by natural persons, the income of which is subject to current taxation. 

The provision generally applies before interest expense is capitalized into the cost of produced 

property under the uniform capitalization rules of the Internal Revenue Code (Code) but 

generally after other limitations on interest deductions are imposed. An exception to the pro rata 

interest-disallowance rule applies with respect to contracts that cover individuals who were 

officers, directors, employees, or 20 percent owners of the trade or business at the time the 

individual was first covered by the contract. There is no limit to the number of such excepted 

individuals. The unborrowed cash values of excepted contracts are not taken into account in 

either the numerator or the denominator of the interest allocation formula. 

Insurance companies are excepted from the interest allocation rule. Instead, they are subjected to

special proration rules that require taxable income adjustments to prevent or limit the funding of 

tax-deductible reserve increases with tax-preferred income, including earnings credited under life 

insurance, endowment, and annuity contracts. 
149 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Reasons for Change

Certain interest disallowance provisions of the Code are intended to deny a deduction for the cost 

of earning gross income when that income is not taxed. However, in the current instance, the 

Code allows certain exceptions to this principle that are overly broad and should be narrowed. In 

particular, if debt is directly traceable to an insurance contract covering the life of a current 

officer or 20 percent owner of the business, then interest expense may be deductible, although, in 

this case, the number of such excepted contracts is limited, and the amount of deductible interest 

may be limited. However, the exceptions are broader in the case where an entity’s interest 

expense is generally allocated to insurance contracts under a pro rata rule. Here, excepted 

contracts are those covering the lives of both past and current employees and directors, in 

addition to past and current officers and 20 percent owners, with no limit on the numbers of 

insured lives. The proposal would narrow this loophole and better ensure that interest deductions 

are limited when generating non-taxed income. 

Proposal 

The proposal would repeal the exception from the pro rata interest expense disallowance rule for 

contracts covering employees, officers, or directors. The exception for a policy covering a 20 

percent owner of a business would remain. 

The proposal would apply to contracts issued after December 31, 2023. For this purpose, a 

material increase in the death benefit or other material change in an existing contract would be 

treated as the issuance of a new contract, except that in the case of a master contract, the addition 

of covered lives would be treated as the issuance of a new contract only with respect to the 

additional covered lives. 
150 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

MODIFY RULES FOR INSURANCE PRODUCTS THAT FAIL THE STATUTORY 

DEFINITION OF A LIFE INSURANCE CONTRACT

Current Law

A life insurance contract under the applicable law (typically the insurance law of the domestic or 

foreign jurisdiction controlling the issuance and interpretation of the contract) is generally treated 

as an insurance contract under the Internal Revenue Code (Code). However, to qualify for most 

tax benefits of life insurance policies, the contract must meet the Code’s definition of a life 

insurance contract by satisfying one of two tests that serve to limit a contract’s cash value 

relative to its death benefit. In general, investment earnings credited to the cash value of a 

qualifying life insurance policy are taxable only if the income is deemed distributed to the 

policyholder. Cash distributions from a life insurance contract (other than policy loans, which are 

generally not regarded as distributions) are generally treated as coming first from the investment 

in the contract (equal to aggregate premiums paid, less aggregate untaxed distributions); that is, 

distributions are treated first as an untaxed return of basis. However, if a life insurance contract is 

determined to be a modified endowment contract (because it is funded too quickly), distributions 

are deemed to come first from the excess of a contract’s cash value over investment in the 

contract, and to that extent included in gross income. Policy loans made from a modified 

endowment contract to any person are taxed in the same way as policy distributions, but 

investment in the contract is increased to the extent such loans are treated as taxable. 

Nevertheless, accumulated investment earnings of a qualified life insurance contract (including a 

modified endowment contract) are usually exempt from tax if they are paid as a component of 

death benefits upon the insured’s death. 

In contrast, a policyholder of a life insurance contract under the applicable law that has failed 

both statutory tests (hereafter, a “failed contract”) is subject to tax on the “income on the 

contract” that has accrued during the policyholder’s taxable year, regardless of whether any 

policyholder distributions have occurred. If a life insurance contract under applicable law 

satisfies the definition of life insurance under the Code, but becomes a failed contract during a 

taxable year, the income on the contract for all prior taxable years is treated as received or 

accrued during that taxable year.

The statute defines “income on the contract” as the excess of the sum of the increase in the 

contract’s net surrender value during the taxable year and the cost of insurance protection 

provided under the contract during the taxable year over any policy premiums paid during the 

taxable year. A contract’s net surrender value is the amount currently payable under the contract, 

determined without regard to any policy loan, but net of any surrender charges. In the absence of 

relevant regulations, the cost of insurance protection equals the mortality charge (if any) stated in 

the contract, which depends on the contract’s amount at risk (generally, the difference between 

the contract death benefit and its gross investment or asset value). Premiums paid are measured 

net of any untaxed distributions of cash received by the policyholder. For a failed contract, the 

excess of any amount paid by reason of death of the insured over the policy’s net surrender value 

is exempt from tax. A failed policy’s net surrender value typically represents net premiums paid 
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and previously taxed investment earnings (the contract’s adjusted basis); therefore, these 

amounts also bear no tax if paid out as a death benefit. 

Reasons for Change 

U.S. State insurance non-forfeiture laws require that policyholders have access to most insurance 

contract income credited to their cash value policies, and policyholders in many cases want to 

maximize their ability to access the policy’s value via withdrawals of cash values, loans, or 

policy surrenders. In recent decades, however, some foreign insurance companies have designed 

contracts, typically known as “frozen cash value” (FCV) contracts, that do not allow access to 

amounts credited to the contract that are in excess of the sum of gross premiums paid, less 

amounts withdrawn or loaned. Thus, the net surrender value for these contracts never exceeds 

premiums paid, and in most cases will be less than premiums paid. An FCV contract is usually a 

flexible premium life insurance contract, whose supporting assets reflect premiums paid, 

accumulated earnings, and any unrealized appreciation or depreciation of those assets. An FCV 

contract is unlikely to have surrender charges, and its death benefit will generally equal the value 

of the supporting assets plus a small amount at risk, which reportedly equals between 2.5 percent 

and 10 percent of the policy’s assets, although certain contracts may have a smaller (or even 

zero) amount at risk. 

FCV contracts are designed to be life insurance contracts under the applicable foreign law and 

failed contracts under the Code. A U.S. policyholder of such an FCV contract is subject to tax on 

the policy’s “income on the contract” (which will typically be zero or very low), and the 

contract’s death benefit in excess of the net surrender value is tax-free to a U.S. beneficiary. 

Because the increase in the net surrender value of an FCV contract is attributable only to 

premium payments, “income on the contract” is limited, at most, to the cost of insurance 

protection. But this cost of insurance protection is determined by multiplying the FCV contract’s 

amount at risk by a mortality rate, so the amount of tax due is relatively small and could be zero. 

Increases in a contract’s asset value are not included in taxable income because they are either 

offset by a payment of premiums during the taxable year or are not part of a contract’s net 

surrender value. Furthermore, both partial withdrawals and policy loans received during the life 

of the insured are generally considered to be nontaxable because they are limited to premiums 

paid and therefore deemed to be a return of the contract’s basis.

By taxing the excess of a contract’s net surrender value over the premiums paid, the rules 

governing the taxation of failed life insurance contracts were intended to fully tax to the 

policyholder the earnings accruing on a failed contract’s underlying investments, as well as the 

mortality charges (which are generally designed to be paid out as otherwise tax-excluded 

contract death benefits). These outcomes are negated by FCV contracts, since these contracts 

manage to avoid virtually all income tax expected to be levied on earnings by excluding them 

from the contract’s net surrender value. 
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Proposal 

Rules governing failed life insurance contracts would be modified in several respects to ensure 

that taxation occurs as intended with respect to FCV contracts. First, the current law definition of 

income on the contract for a failed contract would be modified by substituting “net investment 

value” for net surrender value. A failed contract’s net investment value would be defined for a 

given date as the amount representing the contract’s death benefit, less the contract’s amount at 

risk and any specific charges that might be imposed upon a contract’s surrender, at that date. Any 

policy loan would be disregarded in the determination of a contract’s net investment value. This 

change would mean that the policyholder of any failed contract (including FCV contracts) would 

be subjected to current taxation on the earnings credited to that contract. 

Second, amounts distributed and policy loans from a failed contract would be deemed to be 

amounts distributed or loaned under a modified endowment contract. For this purpose, the 

definition of investment in the contract would be amended to include amounts of income on the 

contract that have been taxed prior to the distribution or loan date, other than amounts equal to 

the cost of life insurance protection. (These last amounts, while taxed, do not accrue to the value 

of a contract’s net investment value.) A failed contract’s adjusted basis for other Code purposes 

would be defined as equal to its investment in the contract.

Third, the excess of the amount paid by the reason of the death of the insured over the net 

investment value of the contract would be deemed to be paid under a life insurance contract for 

purposes of determining the exclusion amount of death benefit proceeds and for purposes of 

estate and gift taxes.

These changes should mean that all future earnings credited to FCV contracts owned by U.S. 

persons would be included in the U.S. policyholder’s “income on the contract” for the taxable 

year. For contracts that become failed contracts after the proposal’s effective date, any prior 

amounts of untaxed investment value would become taxable. Therefore, any distributions and 

policy loans from such contracts would come from amounts attributed to investment in the 

contract and would not be taxable. 

The proposal would be effective for life insurance contracts under the applicable law as of the 

day following the date of publication of this General Explanation of the Administration’s Fiscal 

Year 2024 Revenue Proposals. For a taxable year including this effective date, “income on the 

contract” would be defined as two quantities. The first would use the definition under current law 

but the date of publication would be treated for this purpose as the end of a taxable year, while 

the second component would use the proposal’s definition, and the effective date would be 

treated as the beginning of a taxable year.
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

CORRECT DRAFTING ERRORS IN THE TAXATION OF INSURANCE COMPANIES 

UNDER THE TAX CUTS AND JOBS ACT OF 2017

Current Law 

The Tax Cuts and Jobs Act of 2017 (TCJA) contains two drafting errors related to the taxation of 

insurance companies. 

Policy acquisition expenses

Insurance companies must capitalize, as policy acquisition expenses, a portion of their general 

deductions otherwise allowed. These capitalized amounts are generally amortized over 180 

months, although up to $5 million of such expenses may be amortized over 60 months. This $5 

million amount is reduced to the extent an insurer has annual policy acquisition expenses in 

excess of $10 million. Capitalized policy acquisition expenses generally equal a percentage of an 

insurer’s net premiums on specified contracts. Prior to TCJA, these percentages equaled 1.75 

percent of net premiums received on annuity contracts, 2.05 percent of net premiums received on 

group life insurance contracts, and 7.70 percent of net premiums received on other life insurance 

or noncancellable accident and health insurance contracts. In the TCJA, Congress not only 

extended the general amortization period for future capitalized amounts from 120 months to 180 

months, but also attempted to increase the capitalization percentages to 2.09 percent for annuity 

contracts, 2.45 percent for group life insurance contracts, and 9.20 percent for other specified 

contracts, effective for taxable years beginning in 2018. These changes represent approximately 

a 19.5 percent increase in capitalized amounts for each of the three contract categories. A 

statutory drafting error, however, misidentified the appropriate language in the Internal Revenue 

Code (Code), so that only the percentage for annuity contracts could be implemented logically. 

Consequently, a reasonable reading of the law could claim that only the percentage for annuity 

contracts was changed by TCJA, despite the intent of Congress identified in the statute’s 

legislative history. 

Discounting of unpaid losses

Insurance companies must discount their unpaid loss reserves on property and liability insurance 

contracts to reflect the fact that unpaid claims and other incurred losses may not be paid for 

several years into the future. Certain “short-tail” lines of business have relatively short payout 

profiles. These lines of business include, for example, auto physical damage, warranty insurance, 

financial guarantee insurance, and certain special property lines of business. Under the tax law, 

these lines are treated as paying out virtually all their claims by the end of the third year after the 

accident year. Other lines of business, such as workers’ compensation and liability insurance 

lines, are assumed to pay out claims over much longer periods – currently 17 years in the case of 

workers’ compensation claims. Consequently, the average discounting of the unpaid losses under 

these “long-tail” lines of business is much deeper than the discounts applied to the unpaid losses 

of “short-tail” lines. Nonproportional reinsurance and international lines of business are deemed 

to be long-tail lines under the accounting rules promulgated by the National Association of 

Insurance Commissioners and, prior to enactment of the TCJA, were treated as long-tail lines for 
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purposes of the unpaid loss discounting tax rules. The TCJA significantly modified the 

discounting rules, mainly by establishing a different method for determining the applicable 

interest rates and by lengthening the expected claim payment patterns for long-tail lines of 

business. However, in modifying the Code to enact these changes, the drafters deleted statutory 

provisions that had addressed the treatment of the nonproportional reinsurance and international 

lines of business. Under the revised statute, these lines of business must be treated as short-tail 

lines of business, and Department of the Treasury regulations now consider them as such – even 

though there is no legislative history to indicate that this change was intended by Congress. 

Reasons for Change 

The TCJA intended to align the capitalization and amortization requirements of the Code to the 

economic realities of the market. This required greater capitalization percentages and a longer 

amortization period. The drafting errors of the TCJA, however, cast doubt on whether actual law 

represented the intended changes. While preliminary analysis of post-TCJA tax data shows the 

vast majority of companies have been capitalizing amounts consistent with the described intent 

of the TCJA, this does not appear to reflect the opinion of all taxpayers. Correcting this error 

would restore certainty in the application of the tax law and result in a more even tax treatment 

of similar taxpayers. 

The TCJA drafting error regarding the discounting of unpaid losses has had relatively minor 

consequences for aggregate revenue. However, the error treats the international and 

nonproportional reinsurance lines of business more favorably than other lines of business with 

similar loss payment periods by inappropriately reducing the degree of discount for unpaid 

losses. It has therefore provided these types of insurance and reinsurance with an unwarranted 

and unintended deferral of income recognition. 

Proposal 

The proposal would make two required technical corrections to these statutory drafting errors in 

the TCJA: 

The first correction would change the capitalization rate of net premiums for group life insurance 

contracts from 2.05 percent to 2.45 percent and the capitalization rate for other non-annuity 

specified life and health contracts from 7.70 percent to 9.20 percent. 

The proposal would be effective as if it had been a part of the original TCJA and would be 

treated as a change of accounting method initiated by the taxpayer with the consent of the 

Internal Revenue Service for the taxable year beginning in 2023. 

A second technical correction would include the international and nonproportional reinsurance 

lines of business in the list of “long-tail” lines of business that are explicitly identified in the 

statute. This list currently includes various liability lines of business, medical malpractice 

insurance, workers’ compensation insurance, and multiple peril lines. 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

The proposal would be effective for taxable years beginning after December 31, 2023 for losses 

incurred and salvage recoverable in accident years beginning after 2023. New loss payment 

patterns for the international and nonproportional reinsurance lines of business would be 

determined as if they were promulgated for the 2022 determination year.
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

DEFINE THE TERM “ULTIMATE PURCHASER” FOR PURPOSES OF DIESEL FUEL 

EXPORTATION 

Current Law

If any diesel fuel or kerosene is exported, the Internal Revenue Service is required to pay to the 

“ultimate purchaser” of the diesel fuel or kerosene a rebate of any Federal excise taxes 

previously collected on that diesel fuel or kerosene. The term “ultimate purchaser” is not defined 

in the Internal Revenue Code. Under current law, it is possible in some circumstances for both 

the foreign national end user of the diesel fuel or kerosene and the last purchaser within the 

United States that exports the diesel fuel or kerosene to qualify as the ultimate purchaser for this 

purpose. 

Reasons for Change 

The ability of more than one person to qualify as the ultimate purchaser results in cases where 

IRS is required to pay as a rebate of twice the amount of Federal excise taxes collected on 

exported diesel fuel or kerosene. 

Proposal 

The proposal would define the person entitled to a rebate of Federal excise taxes as the last 

purchaser in the United States for the purposes of diesel fuel and kerosene exportation. 

The proposal would be effective for diesel fuel and kerosene exported after December 31, 2023. 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

IMPROVE TAX ADMINISTRATION 

ENHANCE ACCURACY OF TAX INFORMATION

Current Law

Electronic filing of forms and returns 

Generally, the Secretary or her delegate (Secretary) may issue regulations that require electronic 

filing of returns (as opposed to paper filing of returns) if the taxpayer files a minimum number of 

returns during a year. For example, corporations that have assets of $10 million or more and file 

at least 250 returns of any type during a calendar year are required to file electronically their 

Form 1120/1120S, U.S. Corporation Income Tax Return. Partnerships with more than 100 

partners are required to file electronically, regardless of how many returns they file. 

Before requiring electronic filing, the Internal Revenue Service (IRS) and the Department of the 

Treasury are generally required to take into account the ability of taxpayers to comply at a 

reasonable cost. Taxpayers may request waivers of the electronic filing requirement if they 

cannot meet that requirement due to technological constraints, or if compliance with the 

requirement would result in undue financial burden on the taxpayer. In general, the Secretary 

may not require individuals, estates, and trusts to file their income tax returns electronically.

Reportable payments subject to backup withholding 

Backup withholding applies to a reportable payment if a payee fails to furnish the payee’s 

taxpayer identification number (TIN) to the payor in the manner required. Currently, the IRS 

may only require that the payee furnish the TIN under penalties of perjury with respect to 

interest, dividends, patronage dividends, and amounts subject to broker reporting. Accordingly, 

payees of these reportable payments are generally required to provide payors with a certified TIN 

using a Form W-9, Request for Taxpayer Identification Number and Certification, under 

penalties of perjury. Payees of other reportable payments subject to backup withholding may 

furnish their TINs in other ways, including orally, unless the IRS has notified a payor that the 

TIN furnished is incorrect. This applies to payments under sections 6041, 6041A, 6050A, 

6050N, and 6050W of the Internal Revenue Code. 

Reasons for Change 

Facilitating more accurate tax information supports the broader goals of improving IRS service 

to taxpayers, enhancing compliance, and modernizing tax administration. 

Expanding electronic filing will help provide tax return information to the IRS in a more uniform 

electronic form, which will enhance the ability of the IRS to better target its audit activities. This 

in turn can reduce burdens on compliant taxpayers by decreasing the probability that they will be 

among those selected for audit. Consequently, increased electronic filing of returns may improve 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

satisfaction and confidence in the filing process. The proposal would provide the Secretary 

broader authority to require electronic filing that would facilitate the IRS’s compliance risk 

assessment process and allow for more efficient tax administration, particularly with respect to 

large or complex business entities and certain types of transactions that may warrant greater 

scrutiny. 

The intent of backup withholding is to serve as an enforcement tool in ensuring payors and 

payees are compliant with their reporting obligations. Requiring payees to certify their TINs to 

payors on a Form W-9 or equivalent form reduces the level of enforcement necessary to ensure 

information is accurate. Information reporting increases compliance by providing taxpayers with 

the information that they need to accurately complete their tax returns and by providing the IRS 

with information that can be used to verify taxpayer compliance. Without accurate taxpayer 

identifying information, information reporting requirements impose avoidable burdens on 

businesses and the IRS, and they cannot reach their potential to improve compliance. 

Proposal 

Expand the Secretary’s authority to require electronic filing for forms and returns

Electronic filing would be required for returns filed by taxpayers reporting larger amounts or that 

are complex business entities, including: (a) income tax returns of individuals with gross income 

of $400,000 or more; (b) income, estate, or gift tax returns of all related individuals, estates, and 

trusts with assets or gross income of $400,000 or more in any of the three preceding years; (c) 

partnership returns for partnerships with assets or any item of income of more than $10 million

in any of the three preceding years; (d) partnership returns for partnerships with more than 10 

partners; (e) returns of real estate investment trusts (REITs), real estate mortgage investment 

conduits (REMICs), regulated investment companies (RICs), and all insurance companies; and 

(f) corporate returns for corporations with $10 million or more in assets or more than 10 

shareholders. Further, electronic filing would be required for the following forms: (a) Form 

8918, Material Advisor Disclosure Statement; (b) Form 8886, Reportable Transaction Disclosure 

Statement; (c) Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign 

Persons; (d) Form 8038-CP, Return for Credit Payments to Issuers of Qualified Bonds; and (e) 

Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business. 

Return preparers who expect to prepare more than 10 corporation income tax returns or 

partnership returns would be required to file such returns electronically. 

The Secretary would also be authorized to determine which additional returns, Statements, and 

other documents must be filed in electronic form in order to ensure the efficient administration of 

the internal revenue laws without regard to the number of returns that a person files during a 

year.

The proposal would be effective for forms and returns required to be filed after December 31, 

2023. 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Improve information reporting for reportable payments subject to backup withholding 

The proposal would also treat all information returns subject to backup withholding similarly. 

Specifically, the IRS would be permitted to require payees of any reportable payments to furnish 

their TINs to payors under penalty of perjury. 

The proposal would be effective for payments made after December 31, 2023. 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

AMEND THE CENTRALIZED PARTNERSHIP AUDIT REGIME TO PERMIT THE 

CARRYOVER OF A REDUCTION IN TAX THAT EXCEEDS A PARTNER’S TAX 

LIABILITY

Current Law

Section 6226 of the Internal Revenue Code (Code) requires reviewed year partners to include in 

their reporting year taxes an amount equal to the change in tax that would have occurred for the 

reviewed year (the taxable year under audit) and all years between the reviewed year and the 

reporting year if the partnership adjustments were taken into account by the partners in those 

taxable years. The statutory formula provides, however, that for each of those years, the partners 

take into account the changes in tax liability that would have occurred in those years by 

increasing or decreasing their tax liability on their reporting year return by the sum of those 

changes in tax. If the calculation results in a net decrease, current law treats that net decrease as 

an amount that can be used by the partners to reduce their reporting year income tax liabilities to 

zero. Any excess of that amount not offset with an income tax due in the reporting year at the 

partner level does not result in an overpayment under section 6401 of the Code that can be 

refunded. The excess amount cannot be carried forward and is permanently lost.

Reasons for Change 

The inability for reviewed year partners to receive the full benefit of any reductions in tax as a 

result of partnership adjustments can lead to situations where a partner may be viewed as being 

taxed more for an adjustment made under the centralized partnership audit regime than the 

partner would have outside of the centralized partnership audit regime. 

Proposal 

The proposal would amend sections 6226 and 6401 to provide that the amount of the net 

negative change in tax that exceeds the income tax liability of a partner in the reporting year is 

considered an overpayment under section 6401 and may be refunded. 

The proposal would be effective on the date of enactment. 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

MODIFY REQUISITE SUPERVISORY APPROVAL OF PENALTY INCLUDED IN 

NOTICE

Current Law

Section 6751(b)(1) of the Internal Revenue Code (Code) provides that no penalty under Title 26 

shall be assessed unless the initial determination of such assessment is personally approved in 

writing by the immediate supervisor of the individual making such determination or such higherlevel official as the Secretary or her delegate may designate. This section applies to all civil 

penalties imposed by the Code, except for penalties under section 6651 for failure to file tax 

returns or to pay tax; section 6654 for failure by individuals to pay estimated income tax; section 

6655 for failure by corporations to pay estimated income tax; section 6662 with respect to an 

overstatement of certain qualified charitable contributions; and penalties that are automatically 

calculated through electronic means. With respect to individuals, the Internal Revenue Service

(IRS) has the burden of production in a U.S. Tax Court proceeding challenging penalties to show 

the penalties are appropriate.

Reasons for Change 

Recent court decisions have led to uncertainty concerning, among other things, the requisite 

timing of the approval and qualified approvers. Judicial opinions have required supervisory 

approval of a penalty before the penalty is communicated to a taxpayer when a taxpayer still has 

the opportunity to raise defenses to the penalty. As a result, a supervisor may not have all the 

information relevant to deciding whether a penalty is appropriate by the deadline certain 

opinions have imposed. Many judicial opinions have barred penalties that a supervisor approved 

before assessment and before any opportunity for judicial review. When supervisory approval 

did not meet judicially-created deadlines, courts have barred penalties without considering 

whether the penalties were appropriate under the facts of the particular case. These barred 

penalties have included accuracy-related penalties where the taxpayers did not show they acted 

with reasonable case for underpayments on their returns. Barred penalties have also included 

those arising from understatements attributable to reportable transactions that the IRS identified 

as tax avoidance transactions or that taxpayers entered into with a significant purpose of income 

tax avoidance or evasion. In some cases, barred penalties have even included civil fraud penalties 

where the IRS has met its burden of showing by clear and convincing evidence that an 

underpayment of tax was attributable to fraud. These cases undercut the purpose of penalties to 

deter taxpayer non-compliance with tax laws, based on unclear, hard to apply rules that often 

apply retroactively. 

Proposal 

The proposal would clarify that a penalty can be approved at any time prior to the issuance of a 

notice from which the Tax Court can review the proposed penalty and, if the taxpayer petitions 

the court, the IRS may raise a penalty in the court if there is supervisory approval before doing 

so. For any penalty not subject to Tax Court review prior to assessment, under the proposal 

supervisory approval could occur at any time before assessment. In addition, the proposal would 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

expand approval authority from an “immediate supervisor” to any supervisory official, including 

those that are at higher levels in the management chain or others responsible for review of a 

potential penalty. Finally, the proposal would eliminate the written approval requirement under 

section 6662 for underpayments of tax; section 6662A for understatements with respect to 

reportable transactions; and section 6663 for fraud penalties. 

The proposal would be effective upon enactment.
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

MODIFY THE REQUIREMENT THAT GENERAL COUNSEL REVIEW CERTAIN 

OFFERS IN COMPROMISE

Current Law

Section 7122 of the Internal Revenue Code authorizes the Secretary to enter into an agreement 

with a taxpayer that settles the taxpayer’s tax liabilities for less than the full amount owed if the 

taxpayer’s case has not been referred to the Department of Justice. Such an agreement is known 

as an offer in compromise. The Internal Revenue Service (IRS) is authorized to compromise a 

liability on grounds of doubt as to liability, doubt as to collectability, or the promotion of 

effective tax administration.

Section 7122(b) requires the General Counsel of the Department of the Treasury, or their 

delegate, to review and provide an opinion in support of offers in compromise where the unpaid 

amount of tax assessed (including any interest, additional amount, addition to tax, and assessable 

penalty) is $50,000 or more. The General Counsel has delegated legal review of offers in 

compromise to the Chief Counsel of the IRS, who has delegated that authority to the Small 

Business/Self-Employed Division (Counsel). 

Reasons for Change 

The IRS receives thousands of offers in compromise applications every year and must verify that 

the requirements for compromise are met prior to proposing acceptance. Counsel reviews offers 

in compromise to determine whether the offers meet the legal standards of doubts of liability, 

doubts as to collectability, or the promotion of effective tax administration, and to ensure offers

conform to the IRS’s policies and procedures. The time Counsel spend on reviewing offers 

already reviewed by other IRS employees may delay acceptance, which may result in financial 

uncertainty or harm to taxpayers, while providing no additional protection of taxpayer rights. 

Proposal 

The proposal would amend section 7122(b) to repeal the requirement that General Counsel 

review all offers in compromise where the unpaid amount of tax assessed (including any interest, 

additional amount, addition to tax, or assessable penalty) is $50,000 or more and instead 

authorize the Secretary to require Counsel review of offers in compromise only in cases that she 

determines present significant legal issues.

The proposal would be effective for offer in compromise applications submitted after the date of 

enactment.
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

INCORPORATE CHAPTERS 2/2A IN CENTRALIZED PARTNERSHIP AUDIT 

REGIME PROCEEDINGS

Current Law 

The centralized partnership audit regime, as enacted by the Bipartisan Budget Act of 2015 

(BBA), currently separates the treatment of Chapters 1 (income tax) and 2/2A (self-employment 

income tax/net investment income tax) adjustments for reporting, tax calculation, and assessment 

purposes. This disparate treatment requires taxpayers to file multiple tax returns to meet their 

filing obligations and/or requires the Internal Revenue Service (IRS) to apply dual proceedings 

to meet its enforcement obligations.

Partnerships report their income on Form 1065, U.S. Return of Partnership Income, in an overall 

manner and allocate that income to their partners on Schedules K-1 (Form 1065), Partner's Share 

of Income, Deductions, Credits, etc., separately stating income amounts subject to Chapters 1 

and 2/2A. The calculations of tax liability under these three chapters are intrinsically linked, and 

individual partners, including partners in partnerships that are subject to the BBA, calculate and 

pay their taxes under these three chapters in one filing: Form 1040, U.S. Individual Income Tax 

Return. A BBA proceeding requires the IRS to address adjustments impacting the Chapter 1 

liability of any person at the partnership level, meaning the IRS must follow centralized BBA 

rules and generally assess and collect from the partnership an imputed underpayment amount 

with respect to such adjustments that would increase the taxable income of its partners. In 

contrast, with respect to Chapters 2/2A taxes that result from a BBA proceeding, the IRS must 

assess and collect these taxes from individual partners, rather than the partnership. 

Reasons for Change 

Cumbersome procedures that link impacted partners’ returns to a BBA return under examination 

in addition to administering the BBA proceeding are contrary to the intent that BBA streamline 

tax administration of partnership examinations. Essentially, the partners’ returns are also 

required to be examined. For partnerships that file Administrative Adjustment Requests, make 

Amended Return Modification elections, or make Push-Out elections, partners must separately 

amend their reviewed-year Forms 1040 to pay any Chapter 2/2A taxes attributable to the 

adjustments made in the partnership proceeding. 

Proposal 

The proposal would amend the definition of a BBA Partnership-Related-Item to include items 

that affect a person’s Chapter 2/2A taxes and would apply the sum of the highest rates of tax in 

section 1401(b)(1) and (b)(2) of the Internal Revenue Code in effect for the reviewed year to 

these items.

The proposal would be effective after the date of enactment for all open taxable years.
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

SIMPLIFY FOREIGN EXCHANGE GAIN OR LOSS RULES AND EXCHANGE RATE 

RULES FOR INDIVIDUALS

Current Law

Section 988 of the Internal Revenue Code provides rules for determining the timing, amount, 

character and source of foreign exchange gain or loss from foreign currency, foreign currency 

debt, certain foreign currency expenses or foreign currency derivatives (when the foreign 

currency is a nonfunctional currency for the taxpayer). These rules apply to individuals as well as 

to businesses. 

These rules do not apply to any transaction that is a personal transaction. A personal transaction 

generally means any transaction entered into by an individual. Such transactions do not include 

those where expenses properly allocable to the transaction are deductible as trade or business 

expenses or are expenses for the production of income (subject to some exceptions). 

In addition, no gain is recognized for Federal income tax purposes for personal transactions 

involving the disposition of foreign currency where the gain is $200 or less. This exemption for 

gains of no more than $200 was enacted in 1986. 

When a U.S. individual earns income denominated in a foreign currency, the individual must 

translate such income into U.S. dollars at the spot rate when earned. This includes U.S. 

individuals living and working abroad that regularly earn income in foreign currency. 

Reasons for Change 

Under current law, U.S. individuals living and working abroad must apply complicated rules 

relating to foreign currency transactions. Simplifying certain rules relating to these transactions 

for U.S. individuals living and working abroad or with other foreign ties would improve 

compliance and better reflect the economic environment in which these individuals live and 

work. 

For example, a U.S. citizen working abroad who receives a salary denominated in euros every 

two weeks must translate each deposit into U.S. dollars at the spot rate on the date each payment 

is received. Consequently, the U.S. citizen must use 26 different spot rates to calculate annual 

compensation income to file the citizen’s U.S. tax return. 

Another example involves a mortgage on a personal residence. An individual that purchased a 

residence abroad with a mortgage on the property may have gain attributable to currency 

fluctuations when the individual sells the residence that are offset economically by currency 

losses on the individual’s mortgage. The gain, including the amount attributable to foreign 

currency fluctuations, from the sale of the residence may be taxable to the individual, while 

foreign currency losses on a mortgage of a personal residence are generally non-deductible 

personal losses. This could lead to individuals recognizing taxable gain in situations in which no 

economic gain was realized. 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Proposal 

The proposal would allow individuals living and working abroad to use an average rate for the 

year to calculate qualified compensation received in foreign currency, as well as for other items 

of income or expense of such individuals (including retired individuals) as specified in 

regulations. It is anticipated that the average rate generally would be available for ordinary 

course payments expected to recur regularly during the course of a year. 

The proposal would increase the personal exemption amount for foreign currency gain from 

$200 to $500, to reflect inflation since 1986, and would index this threshold to inflation on an 

annual basis. 

The proposal would also allow individuals to deduct foreign currency losses realized with 

respect to mortgage debt secured by a personal residence to the extent of any gain taken into 

income on the sale of the residence as a result of foreign currency fluctuations. Since an 

individual may own a personal residence outside the United States that is secured by a foreign 

currency-denominated mortgage whether or not the individual lives abroad, the proposal would 

not be limited to individuals who live and work abroad. 

The proposal would be effective for taxable years beginning after December 31, 2023. 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

INCREASE THRESHOLD FOR SIMPLIFIED FOREIGN TAX CREDIT RULES AND 

REPORTING

Current Law

U.S. individuals who pay foreign income taxes on their investment income, such as foreign 

withholding tax on dividends from foreign equities, generally are allowed a credit against their 

U.S. tax liability for the foreign income taxes, subject to complex limitation rules. Section 904(j) 

of the Internal Revenue Code provides an elective exception from these limitation rules for 

certain individuals who pay or accrue a limited amount of creditable foreign income taxes on 

their investment income. This exception is available for individuals whose only foreign income 

for the year is passive income (which includes most interest and dividends) and for whom all 

such income is reported on a qualified payee Statement. Such Statements include Form 1099-

DIV, Dividends and Distributions; Form 1099-INT, Interest Income; Schedule K-1 of Form 

1041, Beneficiary’s Share of Income, Deductions, Credits, etc.; Schedule K-3 of Form 1065, 

Partner's Share of Income, Deductions, Credits, etc. – International; Schedule K-3 of Form 1120-

S, Shareholder’s Share of Income, Deductions, Credits, etc. – International; and similar 

substitute Statements. The exception is further limited to individuals who incur $300 ($600 if 

married and filing a joint return) or less of creditable foreign income taxes for the year. 

In addition to being excepted from applying the complex foreign tax credit (FTC) limitation 

rules, individuals who elect this exception are also excepted from the requirement to file Form 

1116, Foreign Tax Credit (Individual, Estate, or Trust). 

Reasons for Change 

Increasing the $300 ($600 in the case of a joint return) threshold would simplify return 

preparation for a greater number of individual taxpayers, and approximate inflation since this 

unindexed threshold was adopted in 1997. 

Proposal 

The proposal would increase the threshold for the FTC limitation exception to $600 ($1,200 in 

the case of a joint return) and would index this threshold to inflation. 

The proposal would be effective for foreign income taxes paid or accrued in taxable years 

beginning after December 31, 2023. 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

AUTHORIZE LIMITED SHARING OF BUSINESS TAX RETURN INFORMATION TO 

MEASURE THE ECONOMY MORE ACCURATELY

Current Law

Current law authorizes the Internal Revenue Service (IRS) to disclose certain Federal Tax 

Information (FTI) for governmental statistical use. Business FTI may be disclosed to officers and 

employees of the Census Bureau for all businesses. Similarly, business FTI may be disclosed to 

officers and employees of the Bureau of Economic Analysis (BEA), but only for corporate 

businesses. Specific items permitted to be disclosed are detailed in the associated Treasury 

Regulations. The Bureau of Labor Statistics (BLS) is currently not authorized to receive FTI. 

Reasons for Change 

BEA’s limited access to business FTI and BLS’s lack of access to business FTI prevents BEA, 

BLS, and Census Bureau from synchronizing their business lists. Synchronization of business 

lists would significantly improve the consistency and quality of sensitive economic statistics 

including productivity, payroll, employment, and average hourly earnings. 

In addition, given the growth of non-corporate businesses, especially in the service sector, the 

current limitation on BEA’s access to corporate FTI impedes the measurement of income and 

international transactions in the National Accounts. The accuracy and consistency of income data 

are important to the formulation of fiscal policies.

Further, the Census Bureau’s Business Register is constructed using both FTI and non-tax 

business data derived from the Economic Census and current economic surveys. Because this 

non-tax business data is inextricably comingled with FTI, it is not possible for the Census Bureau 

to share data with BEA and BLS in any meaningful way. 

Proposal 

The proposal would give officers and employees of BEA access to FTI of those sole 

proprietorships with receipts greater than $250,000 and of all partnerships. No BEA contractor 

would have access to FTI. 

The proposal would also give BLS officers and employees access to certain business (and taxexempt entities) FTI including: Taxpayer Identification Number (TIN); name(s) of the business; 

business address (mailing address and physical location); principal industry activity (including 

business description); number of employees and total business-level wages (including wages, 

tips, and other compensation, quarterly from Form 941, Employer’s Quarterly Federal Tax 

Return, and annually from Form 943, Employer’s Annual Federal Return for Agricultural 

Employees, and Form 944, Employer’s Annual Federal Tax Return); and sales revenue for 

employer businesses only. BLS would not have access to individual employee FTI. In other 

words, the proposal would allow officers and employees of each of BLS, BEA, and the Census 

Bureau to access the same FTI for businesses, and would permit BLS, BEA, and the Census 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Bureau to share such FTI amongst themselves (subject to the restrictions described below). No 

BLS contractor would have access to FTI.

The proposal would require any FTI to which BEA and BLS would have access, either directly 

from IRS, from the Census Bureau, or from each other, to be used for statistical purposes 

consistently with the Confidential Information Protection and Statistical Efficiency Act of 2002 

(CIPSEA). The three statistical agencies would be subject to taxpayer privacy law, safeguards, 

and penalties. They would also be subject to CIPSEA confidentiality safeguard procedures, 

requirements, and penalties. Conforming amendments to applicable statutes would be made as 

necessary to apply the taxpayer privacy law, including safeguards and penalties to BLS as well 

as the Census Bureau and BEA.

The proposal would be effective on the date of enactment.
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

EXPAND TIN MATCHING AND IMPROVE CHILD SUPPORT ENFORCEMENT

Current Law

Section 6103(a) of the Internal Revenue Code (Code) prohibits the disclosure of returns and 

return information unless a provision of Title 26 provides otherwise. Section 6103 contains 

several provisions authorizing the disclosure of specific return information in specific 

circumstances.

The Internal Revenue Service (IRS) has established a Taxpayer Identification Number (TIN) 

Matching Program for payors of certain reportable payments subject to the backup withholding 

provisions of section 3406 of the Code. The TIN Matching Program allows taxpayers required to 

file certain information returns to confirm that the TIN-name pairs for which the taxpayer intends 

to file a return match IRS records. No information other than a numerical indicator for the 

validity of the match is disclosed.

Separately, section 6103 authorizes the IRS to disclose certain return information to Federal, 

State, and local child support enforcement agencies and their contractors. However, there is no 

explicit authority in section 6103 for the IRS to disclose to Tribal child support enforcement 

agencies (CSEs) or their contractors return information for purposes of child support 

enforcement.

The Federal tax refund offset program collects past-due child support payments from the tax 

refunds of parents who owe support, but the program only covers past-due child support from a 

court order or an administrative process established under State law. 

Reasons for Change 

Because the TIN Matching Program only applies to reportable payments under section 3406, the 

Program does not apply to a number of widely-used information returns, including Form 1098, 

Mortgage Interest Statement; Form 1098-T, Tuition Statement; Form 1099-R, Distributions 

From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.; 

Form 5498, IRA Contribution Information, 1099-G, Certain Government Payments; Form 1099-

S, Proceeds from Real Estate Transactions, and Form 1042-S, Foreign Person's U.S. Source 

Income Subject to Withholding. Expanding IRS authority to apply the TIN Matching Program to 

all information return filers would save the government and taxpayers significant resources and 

would result in fewer reporting errors, IRS notices, and penalties. 

Because Tribal CSEs and their contractors are not explicitly identified in section 6103, they are 

not able to use return information to establish or collect child support or locate individuals with 

child support obligations in the same way that State and local CSEs are even though they 

perform similar functions. In addition, because they are not listed in section 6402 they are not 

able to use the Federal tax refund offset program to collect past-due support. 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Proposal 

The proposal would amend section 6103 to permit TIN matching for filers of all information 

returns requiring the reporting of names and TINs. 

The proposal would also amend section 6103(l) to specifically authorize Tribal CSEs and their 

contractors the same access to the same return information as Federal, State, and local CSEs, and 

would amend section 6402(c) of the Code to provide Tribal CSEs with access to the Federal tax 

refund offset program. 

These proposals would be effective upon enactment. 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

CLARIFY THAT INFORMATION PREVIOUSLY DISCLOSED IN A JUDICIAL OR 

ADMINISTRATIVE PROCEEDING IS NOT RETURN INFORMATION

Current Law

Section 6103(a) of the Internal Revenue Code (Code) prohibits the disclosure of returns and 

return information unless a provision of Title 26 provides otherwise. Section 6103 contains 

several provisions authorizing the disclosure of specific return information in specific 

circumstances.

While section 6103(h) permits certain disclosures of returns and return information in judicial 

and administrative tax proceedings, neither this exception nor any other section 6103 exception 

explicitly creates a general authorization to redisclose return information that has previously 

been disclosed during a judicial or administrative proceeding and become public information as a 

result. 

Reasons for Change 

In abusive transaction cases where the Internal Revenue Service refers the case to the 

Department of Justice (DOJ), it is common for DOJ to issue a press release as a key tool to 

encourage taxpayer compliance. For example, by announcing the filing of a complaint in abusive 

tax transactions cases, the government alerts taxpayers that certain transactions and conduct will 

draw the attention of the government and that the government will seek to enjoin those 

transactions and conduct. Taxpayers not monitoring court filings may become aware of abusive 

tax schemes to watch out for through the government’s press releases designed to reach broader 

audiences. Disclosures for purposes of judicial and administrative proceedings are explicitly 

authorized under section 6103 but press releases or other communications relating to this 

previously disclosed information that has been made part of the public record are not explicitly 

referenced in section 6103. 

Proposal 

This proposal would amend section 6103(b)(2) to clarify that information previously disclosed 

pursuant to section 6103 in the course of any judicial or administrative tax proceeding and made 

a part of the public record thereof, including information disclosed in any Notice of Federal Tax 

Lien filed in accordance with section 6323 of the Code or related filings, is not return 

information protected from disclosure by section 6103. 

The proposal would be effective upon enactment. 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

IMPROVE TAX COMPLIANCE 

ADDRESS TAXPAYER NONCOMPLIANCE WITH LISTED TRANSACTIONS

Current Law

Generally, the Internal Revenue Service (IRS) must assess a tax within three years after the date 

the return is filed, subject to several exceptions. A special rule applies if a taxpayer fails to 

include, on any return or Statement, information that is required with respect to a listed 

transaction. A listed transaction means a reportable transaction which is the same as, or 

substantially similar to, a transaction specifically identified by the Secretary or her delegate 

(Secretary) as a tax avoidance transaction. The period for assessment of tax with respect to a 

listed transaction does not expire before one year after the earlier of the date the required 

information is furnished to the Secretary or the date that a material advisor makes the required 

disclosure. 

The Department of the Treasury and the IRS have identified Intermediary Transaction Tax 

Shelters as listed transactions that require disclosure on a tax return to avoid certain penalties. 

These transactions typically involve a sale of a controlling interest in the stock of a C corporation 

to another entity (an intermediary entity) that is undertaken as part of a plan to cause the C 

corporation to recognize income or gain from the sale of its assets shortly before or shortly after 

the sale of the C corporation’s stock. 

In a typical case, an intermediary entity borrows funds to purchase the stock of the C corporation 

from the C corporation’s shareholders, and the consideration received by the C corporation from 

the sale of its assets is effectively used to repay that loan. These transactions are structured so 

that when a C corporation’s assets are sold, the C corporation is ultimately left with insufficient 

assets from which to pay the tax owed from the asset sale. In many cases, the intermediary does 

not pay the corporate income tax liability and is judgment-proof, frustrating the IRS’s ability to 

collect taxes that are legally owed.

The transaction may yield the selling shareholders a higher sales price for their C corporation 

stock than could be supported if the corporate income tax liability were to be paid. However, 

outside of the consolidated return context, former shareholders of a C corporation generally are 

not liable for any unpaid income taxes, interest, additions to tax, or penalties owed by the C 

corporation. 

Reasons for Change 

Despite such transactions being identified by the IRS as listed transactions since 2001, 

shareholders, corporate officers, directors, and their advisors have continued to engage in 

Intermediary Transaction Tax Shelters or substantially similar transactions. Because the unpaid 

Federal tax evaded through these transactions is reflected in the price paid for the corporation’s 

stock, either the buyer or the seller could be liable for such unpaid amounts. Although the 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Federal Government generally has adequate tools under current law to collect amounts from the 

buyer or its lenders, these parties typically do not have assets in the United States against which 

the IRS can proceed to collect the unpaid taxes. The selling shareholders are typically the only 

parties with sufficient assets in the United States against which the IRS could proceed for 

collection; however, it has proven difficult for the IRS to effectively collect the unpaid Federal 

taxes from these selling shareholders under current law. Even though the IRS has pursued 

litigation to enforce collection from the selling shareholders of several corporations, these 

actions have yielded mixed results in factually similar cases. Thus, existing law does not 

adequately protect the Federal Government’s interest in collecting the amounts due from selling 

shareholders as a result of these transactions.

In addition, additional time is needed for the IRS to conduct examinations and assess taxes in 

connection with listed transactions, which may be complex in nature and require a thorough 

examination of the relevant facts. 

Proposal 

Extend statute of limitations for listed transactions

The proposal would increase the limitations period under section 6501(a) of the Internal Revenue 

Code (Code) for returns reporting benefits from listed transactions from three years to six years. 

The proposal also would increase the limitations period for listed transactions under section 

6501(c)(10) from one year to three years. 

This proposed change would be effective on the date of enactment.

Impose liability on shareholders to collect unpaid income taxes of applicable corporations 

The proposal would also add a new section to the Code that would impose on shareholders who 

sell the stock of an “applicable C corporation” secondary liability (without resort to any State 

law) for payment of the applicable C corporation’s Federal income taxes, interest, additions to 

tax, and penalties to the extent of the sales proceeds received by the shareholders. The proposal 

applies to shareholders who, directly or indirectly, dispose of a controlling interest (at least 50 

percent) in the stock of an applicable C corporation within a 12-month period in exchange for 

consideration other than stock issued by the acquirer of the applicable C corporation stock. The 

secondary liability would arise only after the applicable C corporation was assessed income 

taxes, interest, additions to tax, and penalties with respect to any taxable year within the 12-

month period before or after the date that its stock was disposed of, and the applicable C 

corporation did not pay such amounts within 180 days after assessment. 

For purposes of the proposal, an applicable C corporation is any C corporation (or successor) two 

thirds or more of whose assets consist of cash, passive investment assets, or assets that are the 

subject of a contract of sale or whose sale has been substantially negotiated on the date that a 

controlling interest in its stock is sold. The proposal would grant the Secretary authority to 

prescribe regulations necessary or appropriate to carry out the proposal. 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

The proposal would not apply with respect to dispositions of a controlling interest (a) in the stock 

of a C corporation or real estate investment trust with shares traded on an established securities 

market in the United States, (b) in the shares of a regulated investment company that offers 

shares to the public, or (c) to an acquirer whose stock or securities are publicly traded on an 

established securities market in the United States, or is consolidated for financial reporting 

purposes with such a public issuer of stock or securities. 

The proposal would close the taxable year of an applicable C corporation as of the later of a 

disposition of a controlling interest in its stock or a disposition of all of its assets. The proposal 

would also amend the Code to provide that the amount that the selling shareholder was 

secondarily liable for under the proposal would constitute a deficiency that was governed by the 

general notice and demand rules of the Code but with an additional year added to the statute of 

limitations for assessment. The proposal would not limit the government’s ability to pursue any 

cause of action available under current law against any person. 

The proposed changes in this section would be effective for sales of controlling interests in the 

stock of applicable C corporations occurring on or after April 10, 2014.
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

IMPOSE AN AFFIRMATIVE REQUIREMENT TO DISCLOSE A POSITION 

CONTRARY TO A REGULATION

Current Law

Section 6662(b)(1) of the Internal Revenue Code imposes a 20 percent accuracy-related penalty 

on underpayments attributable to disregard of a rule or regulation. In general, this portion of the 

accuracy-related penalty does not apply if the taxpayer adequately discloses, via Form 8275-R, 

Regulation Disclosure Statement, a tax position contrary to a regulation when it files its return. 

To avoid the application of this penalty, a position contrary to a regulation must represent a good 

faith challenge to the validity of the regulation, have a reasonable basis, and be properly 

substantiated. If the position contrary to a regulation relates to a reportable transaction, the 

taxpayer must also report the transaction in accordance with the reportable transaction rules. 

The accuracy-related penalty is subject to a reasonable cause and good faith exception. This 

exception applies on a case-by-case basis and requires consideration of all relevant facts and

circumstances, including whether the taxpayer reasonably relied in good faith on the opinion or 

advice of a professional tax advisor. However, a taxpayer cannot rely on a tax advisor’s opinion 

that a regulation is invalid to establish reasonable cause and good faith if the taxpayer did not 

adequately disclose the position. 

Reasons for Change 

Current law treats the disclosure of a position contrary to a regulation as a means to avoid 

imposition of the accuracy-related penalty. There is, however, no affirmative obligation for 

taxpayers to inform the Internal Revenue Service (IRS) that they are taking such a position. 

In recent years, a growing number of taxpayers – especially large multinational entities – have 

taken tax positions on their returns that are contrary to a regulation. Such positions are difficult 

for IRS to identify if the taxpayer chooses not to disclose them for penalty protection purposes. 

Some taxpayers have eschewed penalty protection by forgoing the disclosure of positions that 

are contrary to a regulation in the hopes of avoiding scrutiny. 

Proposal 

The proposal would impose an affirmative requirement on taxpayers to disclose a position on a 

return that is contrary to a regulation. Except to the extent provided in regulations for failures 

due to reasonable cause and not willful neglect, a taxpayer who fails to make the required 

disclosure would be subject to an assessable penalty that is 75 percent of the decrease in tax 

shown on the return as a result of the position. Such penalty shall not be less than $10,000 or 

more than $200,000, adjusted for inflation. The penalty would not apply if a taxpayer reasonably 

and in good faith believed that its position is consistent with the regulation. The penalty would 

apply regardless of whether the taxpayer’s interpretation of the regulation is ultimately upheld. 

The proposal would be effective for returns filed after the date of enactment.
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

REQUIRE EMPLOYERS TO WITHHOLD TAX ON FAILED NONQUALIFIED 

DEFERRED COMPENSATION PLANS

Current Law 

 

A nonqualified deferred compensation (NQDC) arrangement is a plan or agreement between an 

employer and an employee (or a service recipient and service provider) to pay the employee 

compensation at retirement or another specified future date. An employee generally does not 

recognize NQDC income and owe tax on that income until the compensation is received, 

provided the NQDC arrangement satisfies specific tax requirements. 

Under the tax rules, a NQDC arrangement must comply with election and distribution timing 

requirements that are designed to prevent taxpayers from manipulating the timing of the 

recognition of income. If a NQDC arrangement fails to comply with these requirements, then the 

employee must include vested NQDC in income currently and is subject to a 20 percent 

additional tax and, in some circumstances, an additional interest tax. 

Employers are required to withhold Federal income tax from employee’s compensation based on 

the regular income tax rates. However, employers are not required to withhold the 20 percent

additional tax or additional interest tax in the case of a NQDC arrangement that fails to comply 

with the tax requirements. 

Reasons for Change 

Internal Revenue Service (IRS) employment tax examiners can assess the regular Federal income 

tax withholding on an employer through an employment tax examination of the employer. 

However, IRS examiners are unable to collect the 20 percent additional tax or additional interest 

tax on NQDC that fails to comply with tax requirements from employers that maintain the failed 

NQDC arrangements. Instead, in the case of NQDC that fails to satisfy the tax requirements, the 

IRS examiner must assess the employee for the 20 percent additional tax and the additional 

interest tax. Initiating exams of each employee for these additional taxes is time-consuming, 

administratively impractical, burdensome, and an inefficient use of IRS resources. 

Proposal 

The proposal would require employers to withhold the 20 percent additional tax and additional 

interest tax on the NQDC included in an employee’s income due to the NQDC arrangement 

failing to comply with the tax requirements. Section 3402(a) of the Internal Revenue Code 

(Code) would be amended to include the 20 percent additional tax and the additional tax imposed 

by section 409A(a)(1)(B) of the Code. 

 

The proposal would be effective after December 31, 2023. 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

EXTEND TO SIX YEARS THE STATUTE OF LIMITATIONS FOR CERTAIN TAX 

ASSESSMENTS 

Current Law

Section 6501 of the Internal Revenue Code (Code) generally requires the Internal Revenue 

Service (IRS) to assess a tax within three years after the filing of a return, subject to several 

exceptions. For example, section 6501(c)(1) provides that there are no time limitations on the 

assessment of tax arising from a false or fraudulent return; section 6501(e)(1)(A) provides a sixyear limitations period where there is a substantial omission of gross income on a taxpayer’s 

return; and section 6501(e)(1)(C) applies a six-year limitations period if a taxpayer omits 

amounts that must be included in income under the subpart F rules. 

Reasons for Change 

Complex audits in the largest cases require extensive factual development by multidisciplinary 

teams of revenue agents, tax law specialists, economists, engineers, and other IRS personnel. 

Critical issues may not be identified until late in the process of an examination, and in many 

cases further development often cannot be pursued due to time and resource constraints, 

including the three-year statute of limitations. Although taxpayers will typically consent to 

extend their statutes of limitations, those consents may be subject to negotiations between IRS 

and taxpayers and the resulting consents may be limited to particular issues and for insufficient 

lengths of time. Extending the statute of limitations for complex cases would provide IRS with 

enhanced agility and flexibility in evaluating and staffing its case inventory and appropriately 

allocating its limited enforcement resources. These considerations are especially acute for cases

requiring the assistance of transfer pricing economists, as well as for cases involving the 

application of recently enacted statutory provisions to complex cross-border transactions. 

Proposal 

The proposal would amend section 6501 to provide a six-year statute of limitations if a taxpayer 

omits from gross income more than $100 million on a return. 

The proposal would be effective for returns required to be filed after the date of enactment.
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

INCREASE THE STATUTE OF LIMITATIONS ON ASSESSMENT OF THE COVIDRELATED PAID LEAVE AND EMPLOYEE RETENTION TAX CREDITS

Current Law

The Families First Coronavirus Response Act of 2020 (FFCRA) enacted the paid sick and family 

leave tax credit (the paid leave tax credit) entitling certain employers to a refundable tax credit 

for the payment of qualified leave wages. The Coronavirus Aid, Relief, and Economic Security 

Act of 2020 (CARES Act) enacted the employee retention tax credit (ERTC) entitling certain 

employers to a refundable tax credit for the payment of qualified wages. The paid leave tax 

credit under the FFCRA and the ERTC under the CARES Act applied to wages paid during the 

second, third, or fourth quarters of 2020. Subsequent legislation – the COVID-Related Tax 

Relief Act of 2020 (Relief Act) and American Rescue Plan Act of 2021 (ARP) – extended the 

paid leave tax credit for qualified leave wages paid during the first, second or third quarters of 

2021 and extended the ERTC for qualified wages paid during the first, second, third or fourth 

quarters of 2021. ARP also codified the paid leave credit and ERTC provisions in the Internal 

Revenue Code (Code). (The Infrastructure Investment and Jobs Act of 2021 amended the ERTC 

to apply only to wages paid prior to October 1, 2021, except for employers in limited 

circumstances.)

These credits were claimed on employment tax returns, which generally are filed quarterly on 

Form 941 (with a small number of employers, including household employers, filing annually on 

other forms). The due date for a quarterly Form 941 filing generally is the last day of the month 

following the quarter to which it applies – e.g., the due date for Form 941 in the first quarter of 

2021 was April 30, 2021. The Relief Act expanded ERTC eligibility and applied retroactively to 

quarters with filing due dates that already had passed. To claim the ERTC for a prior quarter, an 

employer is required to file an amended employment tax return, generally on Form 941-X, for 

each earlier quarter. 

In general, taxpayers must file a claim for credit or refund within the later of three years from the 

time the tax return was filed or 2 years from the time the tax was paid. For this purpose, if an 

employment tax return for a period ending with or within a calendar year is filed before April 15 

of the succeeding calendar year, the return is considered filed on April 15 of that succeeding 

calendar year. For example, all timely filed Forms 941 for any quarter of 2020 are considered 

filed on April 15, 2021. Thus, an employer that timely filed and paid employment tax may file a 

claim for ERTC with respect to any quarter of 2020 by filing an amended employment tax 

return, generally Form 941-X, until April 15, 2024. For all timely-filed Forms 941 for any 

quarter of 2021, the same deadlines apply as in the previous sentence, but one year later. 

Generally, the Internal Revenue Service (IRS) must assess taxes within three years after a 

return’s original filing date (whether or not the return was filed on or after the due date). The 

timing for when a return is considered “filed” for this purpose is similar to the rule as it pertains 

to the time for filing a claim for credit or refund on an amended return: if an employment tax

return for a period ending with or within a calendar year is filed before April 15 of the 

succeeding calendar year, the return is considered filed on April 15 of that succeeding calendar 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

year. The general period of limitations on assessment does not restart upon the filing of an 

amended return. 

As a result of these timing rules, it is often the case that the statute of limitations on assessment 

expires at the same time as the deadline for a taxpayer to submit a claim for credit or refund on 

an amended return. For example, all timely-filed employment tax returns for all four quarters of 

2020 are treated as filed on April 15, 2021 for the purpose of the statute of limitations on 

assessment. Furthermore, current law generally allows an employer that timely filed a Form 941 

for any quarter of 2020 to submit a claim for credit or refund for that quarter of 2020 as late as 

April 15, 2024 (three years after April 15, 2021); the statute of limitations on assessment for this 

taxpayer would also expire on April 15, 2024 (three years after April 15, 2021). 

ARP extended the limitation on the time period for the assessment of any amount attributable to 

the paid leave tax credit and the ERTC under the Code that was improperly claimed from three 

to five years. Thus, the limitation period for assessment of erroneous ARP paid leave credits and 

ERTC will not expire before the date that is five years after the later of (1) the date on which the 

original return that includes the calendar quarter with respect to which the paid leave credit or 

ERTC is determined is filed, or (2) the April 15 date on which the return is treated as filed. 

However, the ARP extension of the limitations period applies only for the second and third 

quarters of 2021 for the paid leave tax credit and the third and fourth quarters of 2021 for the 

ERTC. The FFCRA and the CARES Act did not include extensions of the limitations period. 

Hence, the ARP’s extended limitations period applies only for two of the six quarters in which 

an employer may claim the paid leave tax credit and only for two of the eight quarters in which 

an employer may claim the ERTC. 

Reasons for Change 

Providing a consistent rule for the limitations period to assess erroneous FFCRA paid leave 

credits and the CARES Act ERTC, as amended prior to the ARP, would assist with IRS 

compliance and enforcement efforts. Additionally, the majority of dollars of ERTC claims were 

made on amended tax returns, often with a substantial delay relative to the quarter of the 

underlying activity that generated the credit. As the current-law three-year limitations period 

applicable to the FFCRA paid leave credits and the CARES Act ERTC does not restart when an 

amended return is filed, a three-year assessment limitations period makes it difficult for the IRS 

to audit the amended returns and timely assess any tax, if warranted. 

Proposal 

The proposal would extend the limitations on the time period for the assessment of erroneous 

paid leave tax credits under the FFCRA and the ERTC under the CARES Act, as amended prior 

to the ARP, to conform with the same five-year period provided under ARP. 

The proposal would be effective on the date of enactment. 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

EXPAND AND INCREASE PENALTIES FOR NONCOMPLIANT RETURN 

PREPARATION AND E-FILING AND AUTHORIZE IRS OVERSIGHT OF PAID 

PREPARERS 

Current Law

Penalties for return preparation and e-filing 

Many taxpayers rely on paid tax return preparers to prepare their tax returns and refund claims 

each year. Paid tax return preparers are subject to statutory return preparation standards. Such 

obligations include making certain disclosures and taking certain actions with respect to returns 

they prepare. For example, by law, anyone who is paid to prepare, or assists in preparing, Federal 

tax returns must identify themselves on those returns by using the prescribed identifying number. 

Under the applicable regulations, that number is a valid Preparer Tax Identification Number 

(PTIN). Paid tax return preparers must sign and include their PTIN on the return. 

While the Internal Revenue Code authorizes the Internal Revenue Service (IRS) to issue PTINs, 

it provides no authority to revoke or rescind issued PTINs. As a result, unless a paid tax return 

preparer is enjoined by a court from preparing returns, there is no authority to preclude a paid tax 

return preparer who misuses or abuses taxpayers and/or the tax system from continuing to 

prepare returns. Additionally, there is no authority to address paid tax return preparers who are 

deemed to be unsuitable to prepare returns based upon a continual failure to comply with their 

own tax obligations. 

Civil penalties and injunctive relief may be used to address preparer noncompliance. For 

example, civil penalties apply to paid tax return preparers who fail to report all of the taxpayer’s 

income on the return that results in understatement of the taxpayer’s liability as well as paid tax 

return preparers who fail to follow rules and regulations when preparing a tax return. These 

penalties generally must be assessed within three years after the return is filed. The penalties and 

their amounts under current law are listed below in a table following the description of this

proposal. 

In addition, many taxpayers rely on e-file providers to electronically originate and transmit their 

returns to IRS. E-file providers must apply with IRS and pass a suitability check before 

becoming an authorized e-file provider and receiving an Electronic Filing Identification Number 

(EFIN), which is required to electronically file tax returns. There is no civil penalty on e-file 

provider misconduct. 

IRS oversight of paid preparers 

Under U.S. Code Title 31 (Money and Finance), Section 330 – Practice before the Department, 

the Secretary has the authority to regulate practice before IRS. Regulations under that section, 

referred to as “Circular 230,” regulate the practice of licensed attorneys, certified public 

accountants, and enrolled agents and actuaries. In 2009, in response to concerns about the lack of 

regulation of unlicensed and unenrolled paid tax return preparers, the IRS conducted a formal 
182 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

review of its regulation of paid tax return preparers. After significant consideration and input 

from taxpayers, tax professionals, and other stakeholders, Treasury and the IRS amended 

Circular 230 to regulate practice of all paid tax return preparers, including individuals who are 

unlicensed and unenrolled. Paid tax return preparers challenged these regulations in Loving v. 

Commissioner. The Court of Appeals for the District of Columbia Circuit determined that these 

regulations exceeded the IRS’s authority in 2014.51

Reasons for Change 

Expand and increase penalties for return preparation and e-filing 

Inappropriate behavior by paid tax return preparers harms taxpayers through the filing of 

inaccurate returns, erroneous refunds and credits, and personal tax return noncompliance. It may 

also diminish public confidence in the tax system, which relies on the public’s cooperation. In 

addition, the inability to immediately address issues of suitability, noncompliance, or taxpayer 

abuses by paid tax return preparers with valid identification numbers reflects poorly on tax 

administration and taxpayer confidence. Despite the penalties that may apply to paid tax return 

preparers, tax-return-preparer misconduct has continued, in part, because the amounts of the 

penalties under current law do not adequately promote voluntary compliance. 

Furthermore, it is time-consuming for the IRS to identify and investigate paid tax return 

preparers who fail to include a valid identification number on returns they prepare, generally 

referred to as “ghost preparers.” These preparers may be: (a) attempting to avoid IRS scrutiny of 

positions taken on the return; (b) already subject to a compliance action or under a Federal court 

order barring them from further return preparation; or (c) underreporting their own income from 

tax preparation, thereby increasing the tax gap. Allowing additional time for the IRS’s 

investigation will increase the effectiveness of the applicable preparer penalty. A new penalty for 

failure by a taxpayer to disclose the use of a paid tax return preparer will discourage reliance on 

incompetent and dishonest paid tax return preparers and promote compliance. With this 

disclosure, the IRS will be better positioned to identify preparers perpetuating fraud that harms 

taxpayers.

Although e-file providers must pass an initial suitability check to receive an EFIN, there have 

been instances of e-file providers improperly allowing unauthorized persons to use their EFIN to 

engage in electronic filing. Additional authority, including new penalties, is needed to regulate 

the conduct and suitability of e-file providers to prevent such abuse. 

Grant authority to IRS for oversight of paid preparers 

Paid tax return preparers have an important role in tax administration because they assist 

taxpayers in complying with their obligations under the tax laws. Incompetent and dishonest paid 

tax return preparers increase collection costs, reduce revenues, disadvantage taxpayers, and 

undermine confidence in the tax system. 

51 Loving v. Commissioner, 742 F.3d 1013 (D.C. Cir. 2014).
183 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

The current lack of authority to provide Federal oversight on paid tax return preparers results in 

greater non-compliance when taxpayers who use incompetent preparers or preparers who engage 

in unscrupulous conduct become subject to penalties, interest, or avoidable costs of litigation due 

to the poor-quality advice they receive. The lack of authority affects revenues to the IRS when 

the resulting noncompliance is not mitigated during return processing. Regulation of paid tax 

return preparers, in conjunction with diligent enforcement, will help promote high quality 

services from paid tax return preparers, will improve voluntary compliance, and will foster 

taxpayer confidence in the fairness of the tax system. 

Proposal 

Expand and increase penalties for return preparation and e-filing 

The proposal would increase the amount of the tax penalties that apply to paid tax return 

preparers for willful, reckless, or unreasonable understatements, as well as for forms of 

noncompliance that do not involve an understatement of tax. 

The proposal would also establish new penalties for the appropriation of PTINs and EFINs and 

for failing to disclose the use of a paid tax return preparer. A $1,000 penalty would apply for 

each appropriation of a PTIN, with a maximum penalty of $75,000 for a calendar year. A $250 

penalty would apply for each appropriation of an EFIN. Except for failures due to reasonable 

cause, a $500 penalty would apply for each failure by a taxpayer to disclose the use of a paid tax 

return preparer and the fees paid to such a preparer. 

For all of the new or increased penalties in the proposal, the specified dollar amounts and any 

applicable annual limitations would be adjusted for inflation. The dollar penalties under current 

law and under the proposal are summarized in the table following the description of this 

proposal. 

In addition, the proposal would expand the authority to determine the suitability of paid tax 

return preparers applying for identification numbers and the authority to revoke identification 

numbers for paid tax return preparers subsequently determined to be unsuitable. 

The proposal would increase the limitations period during which the penalty for a failure to 

furnish the paid tax return preparer's identifying number may be assessed from three years to six 

years. 

The proposal would also clarify the Secretary’s authority to regulate the conduct and suitability 

of persons who participate in the authorized e-file program, including setting standards and 

imposing sanctions to protect the integrity of the e-file program.

The proposal would be effective for returns filed after December 31, 2023. 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Grant authority to the IRS for oversight of all paid preparers 

The proposal would amend Title 31, U.S. Code (Money and Finance) to provide the Secretary 

with explicit authority to regulate all paid preparers of Federal tax returns, including by 

establishing mandatory minimum competency standards. 

The proposal would be effective on the date of enactment. 
185 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

SUMMARY OF SELECTED PENALTIES FACED BY PAID TAX RETURN PREPARERS FOR NONCOMPLIANCE

Calculation of Penalties

NONCOMPLIANT BEHAVIOR CURRENT LAW PROPOSAL

1. UPDATED PENALTIES FOR UNDERSTATEMENT OF LIABILITY

Understatement due to ... Greater of $X or X% of income derived by

preparer with respect to return or claim

unreasonable conduct $1,000 or 50% $5,000 or 50%

willful or reckless conduct $5,000 or 75% $10,000 or 100%

2. UPDATED PENALTIES FOR REASONS OTHER THAN UNDERSTATEMENT OF LIABILITY

Failure to ... Per Offence Maximum Per Offence Maximum

furnish a copy of a return or a 

claim for refund to taxpayer $55 $28,000 $250 $50,000 

sign a copy of a return or a claim 

for refund $55 $28,000 $1,000 $75,000 

furnish preparer's identifying 

number $55 $28,000 $1,000 $75,000 

retain completed copy of 

prepared return or list of 

taxpayers for whom returns were 

prepared

$55 $28,000 $250 $50,000 

file correct information returns 

identifying the return preparers 

employed by a person

$55 $28,000 $250 $50,000 

refrain from endorsing or 

negotiating a check in respect of 

taxes

$560 None $1,000 None

comply with certain due diligence 

requirements2 $560 None $1,500 None

3. NEW PENALTIES ON PREPARERS, E-FILE PROVIDERS, AND TAXPAYERS:

NONCOMPLIANT BEHAVIOR Per Offence Maximum2 Per Offence Maximum2

Appropriation of ...

a PTIN $1,000 $75,000

an EFIN $250 None

Failure to disclose use of preparer 

and fees paid to preparer by 

taxpayer.

$500 None

1

Taxpayers and the preparers they use must comply with the requirement of IRS Form 8867, Paid Preparers’ Due 

Diligence Checklist for the Earned Income Credit, American Opportunity Tax Credit, Child Credit (including the 

Additional Child Tax Credit and Credit for other Depends) and/or Head of Household Filing status. 2

Maximum is annual maximum per calendar year.
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

ADDRESS COMPLIANCE IN CONNECTION WITH TAX RESPONSIBILITIES OF 

EXPATRIATES

Current Law

An individual may become a U.S. citizen at birth either by being born in the United States (or in 

certain U.S. territories) or by having a parent who is a U.S. citizen. All U.S. citizens generally 

are subject to U.S. income taxation on their worldwide income, even if they reside abroad. 

U.S. citizens that reside abroad also may be subject to tax in their country of residence. Potential 

double taxation is generally relieved in two ways. First, U.S. citizens can credit foreign taxes 

paid against their U.S. taxes due, with certain limitations. Second, U.S. individuals may exclude 

from their U.S. taxable income a certain amount of income earned from working outside the 

United States. U.S. citizens living abroad are also eligible for the same exclusions from gross 

income and deductions as other U.S. taxpayers, and therefore may have taxable income that is 

low enough that no income tax is due. 

The Internal Revenue Code (Code) imposes special rules on certain individuals who relinquish 

their U.S. citizenship or cease to be lawful permanent residents of the United States (expatriates). 

Expatriates who are “covered expatriates” generally are required to pay a mark-to-market exit 

tax on a deemed disposition of their worldwide assets as of the day before their expatriation date. 

An expatriate is a covered expatriate if they meet at least one of the following three tests: (a) has 

an average annual net income tax liability for the five taxable years preceding the year of 

expatriation that exceeds a specified amount that is adjusted for inflation (the tax liability test);

(b) has a net worth of $2 million or more as of the expatriation date (the net worth test); or (c) 

fails to certify, under penalty of perjury, compliance with all U.S. Federal tax obligations for the 

five taxable years preceding the taxable year that includes the expatriation date (the certification

test).

The definition of covered expatriate includes a special rule for an expatriate who became at birth

a citizen of both the United States and another country and, as of the expatriation date, continues 

to be a citizen of, and taxed as a resident of, such other country. Such an expatriate will be 

treated as not meeting the tax liability or net worth tests if they have been a resident of the 

United States for not more than 10 taxable years during the 15-taxable year period ending with 

the taxable year during which the expatriation occurs. However, such an expatriate remains 

subject to the certification test.

If a taxpayer renounces U.S. citizenship or abandons lawful permanent resident status, that 

taxpayer must file Form 8854, Initial and Annual Expatriation Statement, with the taxpayer’s 

U.S. tax return to make the certification described in the preceding paragraph and provide 

information to determine whether the individual is subject to the exit tax (and to compute such 

tax, if applicable).
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Generally, the Internal Revenue Service (IRS) has three years from the date a return is filed to 

assess the tax. However, existing law extends the assessment statute of limitations in certain 

cases, such as when a taxpayer fails to furnish required information returns relating to various 

international transactions or assets. In these cases, the statute of limitations does not expire until 

three years after the information required to be reported is provided. Existing law does not 

include Form 8854 as one of the information returns that would trigger an extended statute of 

limitations. 

Under the Foreign Account Tax Compliance Act (FATCA) provisions of the Code, a foreign 

financial institution is required to collect certain information about U.S. persons who hold an 

account with the institution, including the person’s U.S. taxpayer identification number (TIN). A 

foreign financial institution that fails to comply with these rules may be subject to U.S. 

withholding tax on certain U.S. source payments. Foreign financial institutions consequently 

routinely require an account holder who is a U.S. citizen to provide a TIN. 

With some exceptions, an individual who is not a U.S. citizen is required to obtain a certificate 

from the IRS (generally referred to as a “sailing permit”) that the individual has complied with 

all of their income tax obligations before departing from the United States. 

Reasons for Change 

Form 8854 is critical to the IRS’s ability to identify expatriating taxpayers. If a person 

expatriates but fails to include the form with their tax return, it is difficult for the IRS to identify

such a failure, and consequently the IRS may not be aware that the person has expatriated. 

Although the IRS receives information on expatriating individuals from the Department of State 

or from the United States Citizenship and Immigration Service, the information is received after 

the expatriating act and does not include TINs, which means that it is more difficult and timeconsuming for the IRS to match this information with taxpayer records. In the case of long-term 

permanent residents, many are not aware of the requirement to file Form 8854 when they 

surrender their green cards, and the IRS has no established methodology of identifying such 

cases. Because of these difficulties, the IRS may not discover that an individual has expatriated 

and failed to file Form 8854 until more than three years after the individual files their tax return 

for the year of expatriation. In these circumstances, unless the IRS proves fraud, the IRS may be 

barred from making any expatriation related tax assessments because the assessment statute of 

limitation on the taxpayer’s tax return may have already expired. These cases can involve 

substantial amounts of foregone exit tax and related taxes, and high net wealth taxpayers can 

exploit the tax system by simply failing to file Form 8854 with their tax return. 

Lower-income individuals who have spent most of their lives abroad may find complying with 

these rules difficult when attempting to expatriate. A dual citizen who has spent most of their life 

outside the United States will be considered a covered expatriate despite having relatively low 

income and assets if the individual does not certify to the IRS compliance with all U.S. Federal 

tax obligations for the five preceding taxable years. Some dual citizens who have spent most of 

their lives outside the United States may not have previously filed a U.S. tax return or obtained a 

TIN. Foreign financial institutions in some countries have threatened to close bank accounts of 
188 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

U.S. citizens who do not provide a TIN. U.S. citizens who are citizens and residents of foreign 

countries and have limited contacts with the United States may wish to expatriate, but in order to 

avoid being considered covered expatriates such individuals need to be able to certify that they 

are compliant with all U.S. Federal tax obligations for the five preceding taxable years. For 

taxpayers with modest incomes who have not been filing U.S. tax returns but have been filing tax 

returns and paying tax in their countries of residence, the cost and practical difficulties of 

certifying compliance with their U.S. Federal tax obligations may impede their ability to satisfy 

the requirements for expatriation. For example, it may be difficult to find a U.S. tax advisor to 

prepare a U.S. tax return in the taxpayer’s country of residence, and the cost of doing so may be 

significant for a lower-income taxpayer. If the taxpayer would not owe any U.S. tax, the benefit 

to the IRS of the filing of such tax returns is limited.

The requirement for an alien to obtain a sailing permit is no longer necessary as the IRS has 

other tools to help ensure tax compliance, including withholding tax requirements applicable to 

payments to nonresident aliens that have been implemented since the sailing permit requirement 

was originally enacted. 

Proposal 

First, the proposal would provide that, in the case where a taxpayer is required to provide Form 

8854 to the IRS with their tax return, the time for assessment of tax will not expire until three 

years after the date on which Form 8854 is filed with the IRS. This will create parity with the 

current statute of limitation rules for tax returns when other information returns relating to 

various international transactions or assets are required to be filed with the return. The proposal 

will reduce abuse and noncompliance with respect to high net wealth expatriates. 

Second, the proposal will grant the Secretary and her delegates authority to provide relief from 

the rules for covered expatriates for a narrow class of lower-income dual citizens with limited 

U.S. ties. This relief would apply only to taxpayers that have a tax home outside the United 

States and satisfy other conditions that ensure that their contacts with the United States are 

limited, and whose income and assets are below a specified threshold. Evidence of limited 

contacts with the United States may include a demonstration that the taxpayer’s primary 

residence has been outside the United States for an extended period. Evidence of the taxpayer’s 

income and assets may include a foreign tax return, information about the value of property 

owned by the taxpayer and the taxpayer’s sources of income, or information demonstrating that a 

certain amount of income earned from working outside the United States is excludable from U.S. 

tax. No inference would be intended that the evidence acceptable to the Secretary under this 

provision constitutes the filing of a U.S. tax return. 

The requirement for an alien to obtain a sailing permit would be repealed. 

The proposal would be effective for taxable years beginning after December 31, 2023. 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

DEFINE CONTROL OF THE PAYMENT OF WAGE 

Current Law

Employers are required to pay employment taxes and withhold income tax from wages paid to 

the employees. Section 3401(d) of the Internal Revenue Code defines an “employer” generally as 

the person for whom an individual performs services as the employee. Section 3401(d)(1) 

provides an exception if the person for whom the individual performs services does not have 

control of the payment of the wages, in which case the employer is the person having “control of 

the payment of such wages”. The Internal Revenue Service’s longstanding position is that when 

the section 3401(d)(1) exception applies, the liability for employment taxes and income tax 

withholding shifts from the common law employer to the person in control of the payment of 

wages. 

In a recent decision involving a professional employer organization (PEO), the Eleventh Circuit 

created a new test for determining who has control of the payment of wages. The Circuit Court 

concluded that a contract between the PEO and its clients (the common law employers) could 

affect who controls the wage payments. The Circuit Court looked to both the language in the 

PEO’s contracts with its clients and how the relationship between the parties functioned, 

including whether the PEO generally issued wage payments before receiving payment from its 

clients. 

Reasons for Change 

If the Eleventh Circuit’s interpretation of section 3401(d)(1) were universally adopted, it would 

provide common law employers a means to avoid liability for employment taxes and income tax 

withholding merely by entering into a contractual agreement that included certain minimal terms 

with a PEO or other intermediary to issue wage payments. The Circuit Court’s interpretation of 

section 3401(d)(1) undermines the purpose and objectives of the certified professional employer 

organization (CPEO) program, enacted at the end of 2014, that requires applicants to satisfy 

rigorous tax compliance and criminal background checks before becoming CPEOs. Furthermore, 

the Circuit Court’s interpretation could be (and has been) used by PEOs to claim income tax 

credits that would otherwise belong to common law employers. In some instances, both the PEO 

and the common law employer have claimed the same tax credit.

Proposal 

The proposal would amend section 3401(d)(1) to clarify the phrase “control of the payment of 

wages” in a manner that assures that a common law employer cannot avoid liability for 

employment taxes and income tax withholding except in limited circumstances consistent with 

the original legislative history and congressional intent. The proposal would be effective after 

December 31, 2023. 
190 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

MODERNIZE RULES, INCLUDING THOSE FOR DIGITAL ASSETS 

APPLY THE WASH SALE RULES TO DIGITAL ASSETS AND ADDRESS RELATED 

PARTY TRANSACTIONS

Current Law

Section 1091 of the Internal Revenue Code disallows a loss from a sale of stock or securities if 

the same or substantially identical stock or securities are purchased within 30 days before or after 

the sale (a “wash sale”) unless the taxpayer is a dealer in stock or securities and the loss is 

sustained in the ordinary course of its dealer business. If the stock or securities are purchased at a 

price that differs from the sale price of the stock or securities sold, appropriate adjustments are 

made to the basis of the purchased stock or securities. The holding period for the purchased stock 

or securities takes into account the holding period for the sold stock or securities. As a result, the 

effect of the wash sale rules ordinarily is to defer the recognition of a loss until the taxpayer 

finally disposes of the stock or securities. The wash sale rules also apply to sales of stock or 

securities where the taxpayer enters into a contract or option to buy the same or substantially 

identical stock or securities within the 30-day window, and to certain short sales of stock or 

securities. The wash sales are intended to ensure that taxpayers cannot recognize losses without 

exiting their position in a loss asset for a meaningful period of time. 

The Internal Revenue Service treats a loss from a sale of stock or securities by a taxpayer that 

causes its individual retirement account or Roth IRA to purchase substantially identical stock or 

securities within 30 days of the sale as subject to the wash sale rule.52 

Except as otherwise provided by the Secretary or her delegates (Secretary), brokers who report 

gross proceeds and basis from the sale of stock or securities determine a customer’s adjusted 

basis without regard to the wash sale rules, unless the transaction occurs in the same account 

with respect to identical securities.

Reasons for Change 

Taxpayers with loss positions in digital assets are engaging in transactions that would be subject 

to the wash sale rules if the digital assets were subject to section 1091. For example, a taxpayer 

may sell a digital asset that is not considered a stock or security for wash sale purposes at a loss 

on one day and repurchase the same digital asset the next day. The same loss recognition rules 

should apply to digital assets held as investments or for trading as would apply for stocks and 

securities.

The wash sale rules should also be updated to provide statutory rules addressing related party 

transactions, and to reflect new types of financial instruments that have developed since the last 

amendments made to those rules. 

52 Revenue Ruling 2008-5, 2008-1 C.B. 271.
191 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Broker reporting rules should be amended to reflect these changes to the wash sale rules. 

Proposal 

The wash sales rules would be amended to add digital assets to the list of assets subject to the 

wash sale rules. Except as otherwise provided by the Secretary, the term “digital asset” means 

any digital representation of value which is recorded on a cryptographically secured distributed 

ledger or any similar technology as specified by the Secretary.

53 Regulatory authority would be 

granted to the Secretary to treat any security as defined by section 475(c)(2), or any commodity 

as defined by section 475(e)(2), or other assets traded on an established market as subject to the 

wash sale rules as necessary to prevent abuse. The basis and holding period rules applicable to 

purchased assets would be revised to reflect the expanded scope of the wash sale rules. These 

expanded rules are not intended to apply to ordinary course business transactions. The Secretary 

would have authority to prescribe regulations defining the term ‘substantially identical” and to 

provide an exception to the application of the wash sale rules for ordinary course business 

transactions (not including trading) involving digital assets. 

The wash sale rules, as they apply to all assets and not only digital assets, would be modified 

with respect to transactions involving related persons, except as otherwise provided in 

regulations prescribed by the Secretary. In the case of any loss from a sale of assets subject to the 

wash sale rules and a purchase by a related party of the same or substantially identical assets 

within 30 days of the sale, the loss would be deferred until the related party sells or otherwise 

disposes of the asset or such other time as specified by the Secretary, provided that the taxpayer 

and a related party do not reacquire the asset within 30 days before or after that sale or 

disposition, or the parties cease to be related. A related party would include members of a 

taxpayer’s family and tax-favored accounts such as individual retirement accounts controlled by 

the taxpayer or the taxpayer’s spouse. Two entities would be related to each other if one controlled 

the other, directly or indirectly, or both were under the common control of either a third entity or the 

taxpayer and one or more family members. An individual would be related to an entity if the entity is 

controlled, directly or indirectly, by the individual and the individual’s family members. The 

Secretary would have authority to issue regulations expanding this definition as necessary to prevent 

abuse, to provide rules for transactions where a taxpayer sold assets at a loss and both the 

taxpayer and a related party acquired the same or substantially similar assets, and to coordinate 

the operation of the wash sale rules with other rules dealing with sales of loss property between 

related parties (sections 267 and 707). 

The wash sale rules also would be amended to address derivative financial instruments more 

comprehensively, including modifications to the basis rules to prevent abuse. 

The Secretary would have authority to require brokers to report such information as may be 

necessary or appropriate to implement the wash sale rules. Except as otherwise provided by the 

53 This definition is the same as that provided in section 6045(g)(3)(D). It is intended that the Secretary may 

exercise her authority to provide that the term “digital asset” has a meaning for wash sale purposes that is not 

identical to its meaning for purposes of regulations issued under section 6045. 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Secretary, brokers reporting a customer’s adjusted basis on a disposition of a digital asset or 

other asset subject to the wash sale rules would report the basis of the asset without regard to the 

wash sale rules unless the sale of the loss asset and the transaction causing the wash sale rules to 

apply occur in the same account with respect to identical assets.

No inference is intended as to whether the losses claimed by taxpayers from wash sales of digital 

assets may be deducted under current law, or as to the proper treatment of transactions involving 

related parties under the wash sale rules under current law.

The proposal would be effective for taxable years beginning after December 31, 2023.
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

MODERNIZE RULES TREATING LOANS OF SECURITIES AS TAX-FREE TO 

INCLUDE OTHER ASSET CLASSES AND ADDRESS INCOME INCLUSION

Current Law

A common transaction in the securities market is a loan of securities. Owners of securities such 

as pension plans, mutual funds, insurance companies and other institutional investors lend their 

securities because they receive compensation for doing so. Persons wishing to take a trading 

position in the security (for example, to short the security as a hedge of another position or in 

order to benefit from an anticipated fall in price) will borrow the security in order to effect their 

transaction.

Loans of securities of this kind ordinarily are treated as transactions in which no gain or loss is 

recognized (nonrecognition treatment) if the transfer of a security is pursuant to an agreement 

that meets certain requirements. Gain or loss also is not recognized on the return of that security 

in exchange for rights under the agreement. The agreement must (a) provide for the return to the 

transferor of securities identical to the securities transferred; (b) require that payments be made 

to the transferor of amounts equal to all interest, dividends and distributions on the security 

during the term of the securities loan; (c) not reduce the risk of loss or opportunity for gain of the 

transferor in the transferred securities; and (d) meet such other requirements as the Secretary or 

her delegates (Secretary) may prescribe. These rules are intended to ensure that the taxpayer 

making the loan of securities remains in an economic and tax position similar to the position it 

would have been in absent the loan. For this purpose, the term “securities” means corporate 

stock, notes, bonds, debentures and other evidence of indebtedness, and any evidence of an 

interest in or right to purchase any of the foregoing. The basis of property acquired by a taxpayer 

in a securities loan when the securities are returned to the taxpayer is the same as the basis of the 

property loaned by the taxpayer. 

Several court cases have ruled that these securities loan nonrecognition rules do not apply to a 

number of tax-motivated transactions denominated as securities loans with non-market-standard

terms, and that the transactions gave rise to taxable gain or loss on the transfer of the security.54

While it is common in the securities lending market for a loan of securities to have a fixed term, 

in these cases, the security was loaned for a fixed or quasi-fixed term of unusually long duration, 

among other non-market-standard terms. In one case, the loaned security was a debt instrument 

that did not have coupons but was issued with significant original issue discount. The taxpayer 

did not take any amounts in respect of the accruing original issue discount into account during 

the term of the securities loan.

55

54 Samueli v. Commissioner, 619 F.3d 399 (9th Cir. 2011) (tax-motivated transaction in which a taxpayer ostensibly 

loaned a debt instrument for most of its remaining term and did not qualify for non-recognition treatment under 

section 1058); Sollberger v. Commissioner, 691 F.3d 1119 (9th Cir. 2011) (tax-motivated transaction in which a 

taxpayer did not receive amounts in respect of distributions where security was nominally loaned for 7 years and did 

not qualify for non-recognition treatment under section 1058); Lizzie Calloway, 135 T.C. 26 (2010) (tax-avoidance 

transaction in which securities were nominally loaned for three years and did not meet the requirements of section 

1058), affirmed on other grounds, 691 F.3d 1215 (11th Cir. 2012). 55 Samueli v. Commissioner, 619 F.3d 399 (9th Cir. 2011).
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Reasons for Change 

The market for lending of financial and other assets has expanded over time to include digital 

assets and interests in publicly traded partnerships. The securities loan nonrecognition rules 

should be amended to take this expansion into account. 

Since these rules are intended to ensure that the taxpayer making the loan of securities remains in 

an economic and tax position similar to the position it would have been in absent the loan, the 

rules should be further amended to ensure that taxpayers take income from a loan of an asset into 

account in a manner comparable to the income the taxpayer would have had if it had continued 

to hold the asset. First, taxpayers should be required to take income accruing on the asset into 

account as they would do absent the loan. Second, taxpayers should not be able to use securities 

loans to accelerate gains simply because the term of the loan is fixed.

Expansion of asset classes 

In recent years, a market for the lending of digital assets recorded on cryptographically secured 

distributed ledgers has developed, and it is now growing rapidly. Similar to the securities lending 

market, owners of these digital assets may lend them in order to receive compensation for doing 

so. These loans' yields, as a share of the underlying value of the loaned assets, may be 

substantially higher than the interest received on loans of cash. Other taxpayers borrow these 

digital assets in order to carry out various trading strategies, to take speculative positions in those 

assets, or to use those assets as collateral for other transactions. The borrower of a digital asset 

may therefore dispose of it in order to carry out its trade, at which point neither the lender nor the 

borrower holds the digital asset. 

Except in the case of digital assets that may also be treated as securities within the meaning of 

the definition described above, the securities loan nonrecognition rules do not apply to loans of 

digital assets. No other authority expressly addresses whether loans of assets other than securities 

give rise to taxable gain or loss. In light of the growing volume of loans of digital assets, rules 

addressing those transactions should be provided. Those rules should take into account 

differences between digital assets and securities. One example of those differences is that digital

assets typically do not pay dividends or interest, but ownership of digital assets may result in 

other types of transfers of property to the owner such as hard forks56 and airdrops.57

Another type of financial asset that taxpayers may lend, including pursuant to the terms of 

brokerage agreements, are equity interests in publicly traded partnerships. Although these equity 

interests function like securities for non-tax purposes, they are not securities for purposes of the 

securities loan nonrecognition rules. No rules address how such loans are treated, or how the 

partnership income that would be taken into account by the partner absent the loan is treated. The 

56 A hard fork is a significant change to the protocol of a blockchain network that effectively results in two different 

digital assets with a common history. Holders of the digital asset in the original blockchain have access to both the 

original digital asset and the digital asset on the new blockchain after the hard fork. 57 An airdrop means the transfer of a typically free digital asset to a taxpayer’s wallet, generally with no or minimal 

involvement by the transferee, for example in order to promote or market a new digital asset.
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Secretary should have authority to treat such loans as tax-free if the resulting treatment of 

partnership income is appropriate. 

Inclusion of income from loans of assets 

The securities loan nonrecognition rules do not address how the lender of a security that accrues

interest or other income during the term of the loan should take that interest or other income into 

account. If the lender of the security is an accrual method taxpayer but that lender does not take 

income on the securities loan into account in respect of the interest or other income accruing on 

the underlying security, income to the lender would be deferred compared to the timing of 

income if the lender had not loaned the security. Lenders of assets should be required to include 

income during the term of the loan in a manner comparable to the income inclusions they would 

have absent the loan.

Some taxpayers treat fixed-term securities loans as within the scope of the securities loan 

nonrecognition rules. Based on the cases described above, other taxpayers are engaging in shortterm fixed-term securities loans for the purpose of generating gains that are used to refresh 

expiring net operating losses or to give rise to future ordinary deductions. The borrowers in these 

transactions may have no business reason to borrow these securities other than to accommodate 

the lender. While a fixed term may indicate that a loan of an asset is a tax-motivated transaction, 

a fixed term of a duration customary in the market does not by itself substantially change a 

taxpayer’s economic position. Taxpayers should not be able to use such transactions to accelerate 

gains. 

Proposal 

The proposal would amend the securities loan nonrecognition rules to provide that they apply to 

loans of actively traded digital assets recorded on cryptographically secured distributed ledgers, 

provided that the loan has terms similar to those currently required for loans of securities. For 

example, if during the term of a loan the owner of the digital asset would have received other 

digital assets or other amounts if the loan had not taken place, the terms of the loan agreement 

should provide that those amounts will be transferred by the borrower to the lender, except as 

provided by the Secretary. The Secretary would have authority to determine when a digital asset 

is actively traded, and the authority to extend the rules to non-actively traded digital assets. The 

proposal also would provide authority to the Secretary to extend the securities loan 

nonrecognition rules to other assets such as interests in publicly traded partnerships. 

The proposal would require that income that would be taken into account by the lender if the 

lender had continued to hold the loaned asset must be taken into account by the lender in a 

manner that clearly reflects income. The proposal would provide for appropriate basis 

adjustments to the loan contract and when the loaned asset is returned. 

The proposal would clarify that fixed-term loans are subject to the securities loan nonrecognition 

rules if they would otherwise qualify, except as provided by the Secretary. For example, fixedterm loans entered into in the normal course of a securities lending business or the ordinary 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

management of an investment portfolio ordinarily should be treated as nonrecognition 

transactions, while a loan of a security for all or virtually all of its remaining term or an 

accommodation loan entered into to generate tax benefits should not be treated as a qualifying 

loan.

No inference would be intended regarding the treatment of loans of digital assets or equity 

interests in publicly traded partnerships under current law, or the treatment of income on loaned 

securities or fixed-term securities loans under current law.

The proposal would be effective for taxable years beginning after December 31, 2023.
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

PROVIDE FOR INFORMATION REPORTING BY CERTAIN FINANCIAL 

INSTITUTIONS AND DIGITAL ASSET BROKERS FOR PURPOSES OF EXCHANGE 

OF INFORMATION

Current Law

The Foreign Account Tax Compliance Act (FATCA) provisions of the Internal Revenue Code 

generally require foreign financial institutions to report to the Internal Revenue Service (IRS) 

comprehensive information about U.S. accounts. Foreign financial institutions that do not 

comply with these obligations may be subject to U.S. withholding tax on certain U.S. source 

payments. Under FATCA, foreign financial institutions are required to report a variety of 

information to IRS, including: the account balance or value; amounts such as dividends, interest, 

and gross proceeds paid or credited to the account without regard to the source of such payments; 

and information on any substantial U.S. owners of certain passive foreign entities. 

Under current law, U.S. source interest paid to a nonresident alien individual on deposits 

maintained at U.S. offices of certain financial institutions must be reported to IRS if the 

aggregate amount of interest paid during the calendar year is 10 dollars or more. Withholding 

agents, including financial institutions, also are required to report other payments such as U.S. 

source dividends, royalties, and annuities paid to any foreign recipient. Financial institutions 

making such payments to U.S. entities with foreign owners are in many cases not required to 

report information on the foreign owners (for example, foreign shareholders of a U.S. 

corporation, foreign partners of a U.S. partnership, or the foreign settlors or beneficiaries of a 

complex trust). 

Under current law, any person doing business as a broker is required to report certain 

information about its customers to IRS, such as the identity of each customer, the gross proceeds 

from sales of securities and certain commodities for such customer, and, for covered securities, 

cost basis information. A broker means a dealer, barter exchange, or a person who, for a 

consideration, regularly acts as a middleman with respect to property or services. Section 80603 

of the Infrastructure Investment and Jobs Act of 2021 clarifies that a broker includes any person 

who (for consideration) is responsible for regularly providing any service effectuating transfers 

of digital assets on behalf of another person. Except as otherwise provided by the Secretary or 

her delegates (Secretary), the term digital asset means any digital representation of value which 

is recorded on a cryptographically secured distributed ledger or any similar technology as 

specified by the Secretary.

Pursuant to an income tax treaty or other international agreement to which the United States is a 

party and that authorizes the exchange of tax information with a foreign jurisdiction (information 

exchange agreements), the United States may receive, as well as provide, tax information. 

Information that is foreseeably relevant for tax administration may be exchanged under these 

agreements, including information about the identity of beneficial owners of entities. 
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Reasons for Change

The United States has established a broad network of information exchange relationships with 

other jurisdictions based on established international standards. The information obtained 

through those information exchange relationships has been central to recent successful IRS 

enforcement efforts against offshore tax evasion. The strength of those information exchange 

relationships depends, however, on cooperation and reciprocity. Further, as IRS has gained more 

experience with exchange of tax information on an automatic basis with appropriate partner 

jurisdictions, it has become clear that a jurisdiction’s willingness to share information on an 

automatic basis with the United States often depends on the United States’ willingness and 

ability to reciprocate by exchanging comparable information. 

The ability to exchange information reciprocally is particularly important in connection with the 

implementation of FATCA. In many cases, foreign law would prevent foreign financial 

institutions from complying with the FATCA reporting provisions. Such legal impediments are 

addressed through intergovernmental agreements under which the foreign government (instead 

of the financial institutions) agrees to provide the information required by FATCA to IRS. Under 

many of these agreements, the United States provides some information on residents of the 

foreign country that hold accounts at a U.S. financial institution. However, the United States 

provides less information on foreign accounts at a U.S. financial institution than it receives on 

U.S. accounts at a foreign financial institution. 

The intergovernmental agreements include political commitments by the U.S. Government to 

advocate and support relevant legislation to achieve equivalent levels of reciprocal information 

exchange. In order to fulfill this commitment, legislation is needed to require U.S. financial 

institutions to report to IRS certain additional information on foreign account holders. Requiring 

financial institutions in the United States to report to IRS the comprehensive information 

required under FATCA would enable IRS to provide equivalent levels of information to 

cooperative foreign governments in appropriate circumstances to support their efforts to address 

tax evasion by their residents. 

In addition, tax evasion using digital assets is a rapidly growing problem. Since the industry is 

entirely digital, taxpayers can transact with offshore digital asset exchanges and wallet providers 

without leaving the United States. The global nature of the digital asset market offers 

opportunities for U.S. taxpayers to conceal assets and taxable income by using offshore digital 

asset exchanges and wallet providers. U.S. taxpayers also attempt to avoid U.S. tax reporting by 

creating entities through which they can act. To combat the potential for digital assets to be used 

for tax evasion, third party information reporting is critical to help identify taxpayers and bolster 

voluntary tax compliance. In order to ensure that the United States is able to benefit from a 

global automatic exchange of information framework with respect to offshore digital assets and 

receive information about U.S. beneficial owners it is essential that United States reciprocally 

provide information on foreign beneficial owners of certain entities transacting in digital assets 

with U.S. brokers. 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Proposal

The proposal would require certain financial institutions to report the account balance (including, 

in the case of a cash value insurance contract or annuity contract, the cash value or surrender 

value) for all financial accounts maintained at a U.S. office and held by foreign persons. The 

proposal also would expand the current reporting required with respect to U.S. source income 

paid to accounts held by foreign persons to include similar non-U.S. source payments. In 

addition, the proposal would require financial institutions to report the gross proceeds from the 

sale or redemption of property held in, or with respect to, a financial account held by a foreign 

person. Further, the proposal would require financial institutions to report information regarding 

certain passive entities and their substantial foreign owners. For example, a financial institution 

maintaining an account for a passive entity that is a trust would be required to obtain and report 

to IRS information on the owner(s) of the trust. 

When reporting with respect to digital assets held by passive entities, the proposal would require 

brokers, such as U.S. digital asset exchanges, to report information relating to the substantial 

foreign owners of the passive entities. The proposal, if adopted, and combined with existing law, 

would require a broker to report gross proceeds and such other information as the Secretary may 

require with respect to sales of digital assets with respect to customers, and in the case of certain 

passive entities, their substantial foreign owners. This would allow the United States to share 

such information on an automatic basis with appropriate partner jurisdictions, in order to 

reciprocally receive information on U.S. taxpayers that directly or through passive entities 

engage in digital asset transactions outside the United States pursuant to an international 

automatic exchange of information framework. 

The Secretary would be granted authority to prescribe such regulations or other guidance as may 

be necessary or appropriate to carry out the purposes of, and prevent the avoidance of, the 

proposal, including regulations requiring other information that the Secretary determines is 

necessary to carry out the purposes of the proposal. 

The proposal would be effective for returns required to be filed after December 31, 2025. 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

REQUIRE REPORTING BY CERTAIN TAXPAYERS OF FOREIGN DIGITAL ASSET

ACCOUNTS 

Current Law

Section 6038D of the Internal Revenue Code (Code) requires any individual that holds an 

interest in one or more specified foreign financial assets with an aggregate value of at least 

$50,000 during a taxable year to attach a Statement with required information (currently 

provided on Internal Revenue Service (IRS) Form 8938, Statement of Specified Foreign 

Financial Asset) to the individual’s tax return by the due date (including extensions) for that 

return. Treasury regulations under section 6038D also apply the requirements of this section to 

domestic entities formed or availed of for purposes of holding specified foreign financial assets. 

A specified foreign financial asset means (a) a financial account maintained by a foreign 

financial institution, as those terms are defined by section 1471 of the Code, and (b) certain 

specified foreign assets not held in a financial account maintained by such a financial institution. 

Information required to be reported includes the name and address of the financial institution 

where an account is maintained, the account number, as well as identifying information about 

assets not held in a financial account. 

Failure to provide the required information for a taxable year is subject to a penalty of between 

$10,000 and $60,000 for each such failure, absent reasonable cause. In addition, the accuracyrelated penalty on underpayment of tax in section 6662 of the Code, which is typically 20 

percent of the underpayment, is increased to 40 percent for an underpayment that is attributable 

to a transaction involving undisclosed foreign financial assets (defined as any asset with respect 

to which information was required to be provided under section 6038D, among other sections, 

but was not provided). In the case of any information which is required to be reported pursuant to 

section 6038D, the time for assessment of any tax with respect to any tax return, event, or period 

to which such information relates is extended to three years after the date on which the taxpayer 

provides the information required to be reported (absent reasonable cause). The statute of 

limitations in section 6501 for IRS assessment is extended from the usual three years to six years 

if a taxpayer fails to report an amount of income (above a de minimis threshold of $5,000) that is 

attributable to an asset subject to reporting under section 6038D (or would be required to be 

reported if section 6038D were applied without regard to the $50,000 threshold, and without 

regard to any exceptions identified by the Secretary or her delegates (Secretary) in regulations). 

Reasons for Change 

Tax compliance and enforcement with respect to digital assets is a rapidly growing problem. 

Since the industry is entirely digital, taxpayers can transact with offshore digital asset exchanges 

and wallet providers without leaving the United States. The global nature of the digital asset

market offers opportunities for U.S. taxpayers to conceal assets and taxable income by using 

offshore digital asset exchanges and wallet providers. U.S. taxpayers also attempt to avoid U.S. 

tax reporting by creating entities through which they can act. Requiring individuals specifically 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

to report their offshore holdings of accounts with digital assets, subject to significant penalties if 

they fail to do so, is critical to combat the potential for digital assets to be used for tax avoidance. 

Proposal 

The proposal would amend section 6038D(b) of the Code to require reporting with respect to a 

new third category of asset (i.e., in addition to (a) a financial account maintained by a financial 

institution, and (b) certain specified assets not held in a financial account maintained by such a 

financial institution). The new third category would be any account that holds digital assets 

maintained by a foreign digital asset exchange or other foreign digital asset service provider (a 

“foreign digital asset account”). Reporting will be required only for taxpayers that hold an 

aggregate value of all three categories of assets in excess of $50,000 (or such higher dollar 

amount as the Secretary may prescribe). Conforming technical amendments to the Code would 

also be made.

Except as otherwise provided by the Secretary, a foreign digital asset account would be defined 

based on where the exchange or service provider is organized or established. The Secretary may 

prescribe regulations to expand the scope of foreign digital asset accounts for purposes of this 

section. The Secretary would also have authority to prescribe regulations to coordinate this 

amendment with other rules to mitigate duplication or minimize burden with respect to other 

types of reporting rules. 

The proposal would be effective for returns required to be filed after December 31, 2023. 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

AMEND THE MARK-TO-MARKET RULES TO INCLUDE DIGITAL ASSETS

Current Law

Section 475 of the Internal Revenue Code requires dealers in securities to use the mark-to-market 

method of accounting for inventory and non-inventory securities held at year end. For this 

purpose, a security includes corporate stock, interests in widely held or publicly traded 

partnerships and trusts, debt instruments, and certain derivative financial instruments. Dealers in 

commodities and traders in securities or commodities may elect to use the mark-to-market 

method. A commodity means any commodity which is actively traded, any notional principal 

contract with respect to any such commodity, and certain other derivative financial instruments 

and hedges with respect to such commodities. 

Gain or loss on dealer securities is generally treated as ordinary income or loss, unless the 

security is (a) a security held for investment or not held for sale or a hedge of a non-security, if 

properly identified as such, or (b) is held other than in connection with securities dealer 

activities. Gain or loss on other assets that are marked to market pursuant to an election also 

generally is treated as ordinary income or loss. Limitations on the deductibility of capital losses 

therefore generally do not apply to losses on assets marked to market under these rules. Several 

anti-abuse rules addressed to timing and character arbitrage do not apply to securities that are 

marked to market under these rules. 

Reasons for Change

Mark-to-market accounting generally provides a clear reflection of income with respect to assets 

that are traded in established markets. For market-valued assets, mark-to-market accounting 

imposes few burdens and offers few opportunities for manipulation. Exchange-traded assets 

typically have reliably determinable values if they are actively traded. For financial accounting 

purposes, taxpayers may be required to mark inventory or trading positions to market, including 

at year-end. To the extent that financial accounting valuation is consistent with the determination 

of fair market value for tax purposes, allowing taxpayers to use their financial accounting 

valuations for tax purposes may reduce tax compliance costs.

Thousands of different digital assets are currently in existence. While many of them are illiquid, 

some of them are traded in high volumes and may have reliable valuations. 

Allowing taxpayers to mark actively traded digital assets to market would clearly reflect income 

and could reduce tax compliance burdens, just as current law does for other assets of 

commodities dealers and securities traders. Notably, for financial accounting purposes, taxpayers 

may be required to mark inventory or trading positions to market, including at year-end. 

Proposal 

The proposal would add a third category of assets that may be marked-to-market at the election 

of a dealer or trader in those assets. Assets in the third category would be actively traded digital 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

assets and derivatives on, or hedges of, those digital assets, under rules similar to those that apply 

to actively traded commodities. The Secretary and her delegates would have authority to 

determine which digital assets are treated as actively traded. The determination of whether a 

digital asset is actively traded would take into account relevant facts and circumstances, which 

may include whether the asset is regularly bought and sold for U.S. dollars or other fiat 

currencies, the volume of trading of the asset on exchanges that have reliable valuations, and the 

availability of reliable price quotations. 

A digital asset would not be treated as a security or commodity for purposes of the mark-tomarket rules and would therefore be eligible for mark-to-market treatment only under the rules 

applicable to the new third category of assets. No inference is intended as to the extent to which 

a digital asset may be eligible for mark-to-market treatment under current law.

The proposal would be effective for taxable years beginning after December 31, 2023.
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

IMPROVE BENEFITS TAX ADMINISTRATION 

CLARIFY TAX TREATMENT OF FIXED INDEMNITY HEALTH POLICIES 

Current Law

A fixed indemnity health policy pays covered individuals a specified amount of cash for the 

occurrence of certain health-related events, such as a medical office visit or days in the hospital. 

Similarly, a critical disease or specified disease policy pays a specified amount upon the 

diagnosis of a specific disease. Under these types of policies, the amount paid is neither based 

upon the amount of any medical expense incurred related to the event or illness that triggered 

payment nor coordinated with other health coverage. Under certain circumstances, the payment 

may be excluded from the employee’s gross income and wages to the extent that the payment 

does not exceed the employee’s actual medical care expenses.

The Internal Revenue Code (Code) generally defines gross income to include compensation for 

services, including fees, commissions, fringe benefits, and similar items, but any amount paid to 

fund employer-provided coverage under an accident or health plan generally is excluded from an 

employee’s gross income. Furthermore, an employee generally may exclude from gross income 

amounts received through an employer-provided accident or health plan if these amounts 

reimburse expenses incurred by the employee for medical care. Amounts that exceed the 

employee’s medical expenses are included in the employee’s gross income under longstanding 

Internal Revenue Service guidance. 

An individual who purchases accident or health insurance with after-tax dollars generally does 

not include in gross income the amounts paid through the policy for personal injuries or sickness. 

For example, if an individual purchases an accident or health policy with after-tax funds, the 

individual may exclude the full amount of any payment under the policy from income, even if 

that amount exceeds the individual’s medical expenses that triggered the payment. This 

exclusion from gross income does not apply, however, if the amounts are (a) attributable to 

employer contributions that were not includable in the employee’s gross income, (b) attributable 

to pre-tax salary reduction contributions an employee makes through a section 125 plan, or (c) 

paid directly by the employer. 

Finally, amounts paid to reimburse an employee’s medical care expenses for personal injuries or 

sickness are also not treated as compensation (or wages) subject to tax under the Federal 

Insurance Contribution Act (FICA) or the Federal Unemployment Tax Act (FUTA). Thus, 

amounts paid under employer-provided coverage for medical care are excluded from FICA and 

FUTA taxes, in addition to being excluded from gross income for Federal income tax purposes. 

Reasons for Change 

Employers increasingly offer employees insured fixed indemnity benefits, which provide the 

employees with a fixed payment upon the occurrence of a specified medical event, instead of or 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

in addition to traditional medical expense-based coverage. Employers typically claim a deduction 

from income taxes for the full cost of the fixed indemnity coverage and do not include the cost of 

these benefits when calculating income tax withholding and FICA and FUTA taxes on 

employees’ compensation income. Insurers, employers, and employees generally fail to track the 

amount of the employees’ medical expenses tied to the medical event that triggered the fixed 

payment, despite the importance of these amounts for determining the amount that is properly 

excludable from employees’ gross income. As a result, employers who fail to track expenses 

generally fail to include the amount of any fixed payment in excess of actual medical expenses in 

the employees’ gross income for income tax purposes or in compensation (or wages) for FICA 

and FUTA tax purposes. This leads to an underpayment of taxes owed. 

Proposal 

The proposal would amend section 105(b) of the Code to clarify that the exclusion from gross 

income for payments received through an employer-provided accident or health plan applies only 

to the amount paid directly or indirectly for a specific medical expense. Any fixed payment (in 

the form of a direct payment, reimbursement, loan, or advance reimbursement) to an employee 

under a fixed indemnity arrangement that is paid without regard to the actual cost of the medical 

expenses the employee incurred would not be excluded from gross income and would be treated 

as wages subject to FICA and FUTA taxes. Fixed indemnity arrangements would be defined to 

include certain critical disease or specified disease policies and arrangements that provide fixed 

payments for specific medical items and services according to detailed payment schedules, thus 

making payments from these policies subject to Federal income, FICA, and FUTA taxes. 

Individuals would still be able to exclude from gross income any fixed amounts paid through an 

accident or health policy purchased with after-tax dollars.

The proposal would be effective for taxable years beginning after December 31, 2023. 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

RATIONALIZE FUNDING FOR POST-RETIREMENT MEDICAL AND LIFE 

INSURANCE BENEFITS

Current Law

An employer can make deductible contributions to a welfare benefit fund, provided that the 

amount set aside does not exceed the account limit. In general, the account limit for a year is the 

amount needed to fund specified welfare benefits for the current year (including administrative 

expenses).

58 An exception to this limit allows an employer to accumulate an “additional reserve” 

for post-retirement medical and life insurance benefits. Under section 419A of the Internal 

Revenue Code, this reserve must be “funded over the working lives of the covered employees 

and actuarially determined on a level basis.” 

In Wells Fargo & Co v. Commissioner of Internal Revenue Service,

59 the U.S. Tax Court held 

that an employer establishing a reserve for post-retirement medical and life insurance benefits

may make a lump sum contribution to fund the entire liability for these benefits for current 

retirees.

Reasons for Change

The current system for funding the reserve for post-retirement benefits is vulnerable to abuse. 

Under current law, there is no mechanism to ensure that an employer that contributes to the 

reserve honor the implied promise to provide medical and life insurance benefits to retirees. In 

addition, if the employer eliminates or cuts back on the promise, there is no specific prohibition 

against using the funds that are no longer needed to provide post-retirement benefits to instead 

provide other welfare benefits. Therefore, an employer can effectively accelerate deductions for 

welfare benefits provided to current employees by making a lump sum contribution to a reserve 

for retirees’ future benefits in one year, eliminating or reducing those retiree benefits, and then in 

subsequent years directing those funds towards the cost of providing welfare benefits for current 

employees.

Proposal

The proposal would require post-retirement benefits to be funded over the longer of the working 

lives of the covered employees on a level basis or 10 years unless the employer commits to 

maintain those benefits over a period of at least 10 years. 

The proposal would be effective for taxable years beginning after December 31, 2023. 

58 The specified welfare benefits are (a) disability benefits, (b) medical benefits, (c) supplemental unemployment 

benefits or severance pay benefits, and (d) life insurance benefits. 59 120 T.C. No. 5, 120 T.C. 69, 2003 WL 301884 (U.S. Tax Ct. 2003). 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

CLARIFY TAX TREATMENT OF ON-DEMAND PAY ARRANGEMENTS 

Current Law

For purposes of employment taxes (social security and Medicare taxes, unemployment tax, and 

income tax withholding), wages are defined in the Internal Revenue Code (Code) as all 

remuneration for services performed by an employee for their employer, including the cash value 

of all remuneration paid in any medium other than cash. Employers withhold and pay 

employment taxes based on payroll periods. A payroll period is defined for employment tax 

purposes as a period for which a payment of wages is ordinarily made to the employee by the 

employer, and a miscellaneous payroll period is defined as a payroll period other than a daily, 

weekly, biweekly, semimonthly, monthly, quarterly, semiannual, or annual payroll period. 

Longstanding employment tax regulations provide that wages are considered paid when they are 

actually or constructively received by the employee. An employee is in constructive receipt of 

wages when an amount is set apart or otherwise made available so that the employee may draw 

upon that amount at any time. Furthermore, when an employee has unfettered control over the 

date on which they actually receive their wages, they are typically considered to be in 

constructive receipt of those wages. 

Reasons for Change 

Employers and third-party payors increasingly allow employees to receive payment of earned 

wages before their regularly scheduled pay dates (these arrangements are referred to here as “ondemand pay” arrangements; however, the arrangements are referred to in various ways by 

employers and third-party payors, including as “earned wage access programs”). On-demand pay 

arrangements vary significantly, but generally, employees use mobile applications to access 

accrued wages before the end of their regular pay cycle and the amounts are transferred (almost 

instantaneously) to a bank account, pre-paid debit card, or payroll card. 

Employees with access to an on-demand pay arrangement may be in constant constructive 

receipt of their wages as they are earned. Employers that offer on-demand pay arrangements 

should maintain either a daily or a miscellaneous payroll period and should withhold and pay 

employment taxes on employees’ earned wages on a daily basis. 

It is unlikely that many, if any, employers or third-party payors treat employees with access to 

on-demand pay arrangements as being in constructive receipt of their wages because it would be 

a significant financial and administrative burden on the employers or third-party payors to 

configure their payroll systems and make payroll deposits on a daily basis. To avoid treating 

employees as being in constant constructive receipt of their wages, some employers or thirdparty payors ignore the constructive receipt issue entirely or treat the arrangement as a loan from 

the employer to the employee. The result in either case is that wages are treated as paid on the 

regularly scheduled pay dates, rather than when the wages are constructively received by the 

employees. 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Legislation addressing the tax treatment of on-demand pay would provide certainty and 

uniformity for taxpayers and would establish a uniform and administrable system for the Internal 

Revenue Service. Without legislation, on-demand pay arrangements will continue to proliferate 

with some taxpayers taking aggressive tax positions on the timing of the wage payment for 

employment tax purposes and the timing of the withholding and deposit of the employment 

taxes.

Proposal 

The proposal would amend section 7701 of the Code to provide a definition of an on-demand 

pay arrangement as an arrangement that allows employees to withdraw earned wages before their 

regularly scheduled pay dates. The proposal also would amend section 3401(b) of the Code to 

provide that the payroll period for on-demand pay arrangements is treated as a weekly payroll 

period, even if employees have access to their wages during the week. Further, the proposal 

would amend sections 3102, 3111, and 3301 of the Code to clarify that on-demand pay 

arrangements are not loans for Federal tax purposes. Finally, section 6302 of the Code would be 

amended to provide special payroll deposit rules for on-demand pay arrangements. The Secretary 

and her delegates would be provided regulatory authority to implement the Code provisions 

addressing on-demand pay arrangements. 

The proposal would be effective for calendar years and quarters beginning after December 31, 

2023. 
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General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

EXTEND IRS FUNDING

EXTEND MANDATORY FUNDING PROVIDED TO THE IRS FOR FISCAL YEARS 

2032 AND 2033 

Current Law

The Inflation Reduction Act of 2022 (IRA) provides nearly $80 billion in mandatory funding to 

the Internal Revenue Service (IRS) to supplement the agency’s annual appropriations. These 

resources are divided across the four accounts that cover the IRS’s core areas of activities, 

Taxpayer Services, Enforcement, Operations Support, and Business Systems Modernization, and 

will remain available through the end of fiscal year 2031. Before the enactment of the IRA, 

nearly all the IRS’s operating costs were funded by annual appropriations. 

Reasons for Change 

The IRS’s operating budget fell by 18 percent in inflation-adjusted dollars between 2010 and 

2021. The funding provided by the IRA will enable transformative improvements in tax 

administration over the next several years. It will allow the IRS to dramatically improve 

customer service, modernize decades-old computer systems, and improve enforcement with 

respect to complex partnerships, large corporations, and high-income individuals. Together, this 

transformation will help ensure a fairer and more efficient tax system and reduce the tax gap. 

Long-term funding is essential for planning, especially to hire and train top talent to take on the 

most complex tax administration tasks, such as audits of complex partnerships and large 

corporations. The IRA provided funding through fiscal year 2031, but without further legislative 

action, the agency will be confronted with an abrupt and severe decline in its budget beginning in 

fiscal year 2032, which would force the IRS to cut back on audits of large corporations and 

complex partnerships and thereby increase the deficit. 

Proposal 

The proposal would provide mandatory funding for the IRS for fiscal years 2032 and 2033 to 

supplement the annual appropriations for the agency’s Enforcement and Operations Support 

accounts. The proposal would provide $14.3 billion in fiscal year 2032 and $14.8 billion in fiscal 

year 2033 to continue IRA-funded enforcement and compliance initiatives and investments. The 

Administration also looks forward to working with Congress to ensure the agency has the 

resources it needs to continue its focus on improving customer experience. 
210 

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

TABLE OF REVENUE ESTIMATES
REVENUE ESTIMATES OF THE ADMINISTRATION'S FISCAL YEAR 2024 REVENUE PROPOSALS 1/2/

(fiscal years, in millions of dollars)

2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2024-28 2024-33

REFORM BUSINESS TAXATION:

Raise the corporate income tax rate to 28 percent 89,130 137,068 126,786 125,160 129,655 137,689 137,514 133,428 133,851 131,646 132,962 656,358 1,325,759

3,934 20,266 20,364 21,243 22,143 23,059 24,016 25,031 26,111 27,247 28,429 107,075 237,909

0 69 110 123 129 136 144 152 161 169 178 567 1,3710 250 741 1,451 2,295 3,212 4,176 5,178 6,214 7,299 8,399 7,949 39,2150 299 507 522 538 554 570 587 605 623 642 2,420 5,4470 3,442 5,893 6,150 6,408 6,670 6,905 7,083 7,195 7,270 7,336 28,563 64,3520 370 541 556 569 579 586 592 595 598 600 2,615 5,5860 0 1,185 2,241 2,519 12,571 14,373 10,268 9,533 9,371 9,282 18,516 71,3430 2,328 792 163 1,491 2,259 1,932 1,544 1,237 1,211 1,271 7,033 14,228

Subtotal, Reform Business Taxation 93,064 164,092 156,919 157,609 165,747 186,729 190,216 183,863 185,502 185,434 189,099 831,096 1,765,210

REFORM INTERNATIONAL TAXATION:

18,461 44,951 55,091 48,450 43,750 44,943 46,935 49,007 51,154 53,378 55,682 237,185 493,341

0 0 40,219 66,414 66,022 65,205 63,540 62,897 62,360 61,559 60,821 237,860 549,037

0 9,800 16,627 12,619 9,994 10,294 10,602 10,920 11,248 11,585 11,932 59,334 115,6210 -9,800 -16,627 -12,619 -9,994 -10,294 -10,602 -10,920 -11,248 -11,585 -11,932 -59,334 -115,621

Subtotal, Repeal the deduction for foreign-derived intangible income 00000000000 0 0

0 166 294 320 344 366 388 408 427 446 465 1,490 3,624

Increase the excise tax rate on repurchase of corporate stock

negligible revenue effect

Tax corporate distributions as dividendsLimit tax avoidance through inappropriate leveraging of parties to divisive reorganizationsLimit losses recognized in liquidation transactionsPrevent basis shifting by related parties through partnershipsConform definition of "control" with corporate affiliation testStrengthen limitation on losses for noncorporate taxpayersAccelerate and tighten rules on excess employee remunerationPrevent prison facility rent payments from contributing to qualification as a REITRevise the global minimum tax regime, limit inversions, and make related reformsAdopt the undertaxed profits ruleRepeal the deduction for foreign-derived intangible income:

Provide additional support for research and experimentation expenditures

Revise the rules that allocate Subpart F income and GILTI between taxpayers to ensure that Subpart F income and GILTI are fully taxed

Repeal the deduction for foreign-derived intangible income

211 

General Explanation of the Administration's Fiscal Year 2024 Revenue Proposals 
REVENUE ESTIMATES OF THE ADMINISTRATION'S FISCAL YEAR 2024 REVENUE PROPOSALS 1/2/

(fiscal years, in millions of dollars)

2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2024-28 2024-33

0 190 321 331 341 351 362 373 384 395 407 1,534 3,4550 315 492 445 410 384 365 350 340 333 328 2,046 3,7620 2,609 4,316 4,193 4,078 4,073 4,167 4,280 4,389 4,514 4,657 19,269 41,2760 4 9 9 9 9 10 10 10 10 10 40 900 0 1 1 2 2 2 2 2 2 2 6 16

0 138 243 261 278 299 318 334 351 369 388 1,219 2,9790 2,932 5,148 5,541 5,902 6,344 6,732 7,073 7,443 7,814 8,215 25,867 63,144

Subtotal, Reform taxation of foreign fossil fuel income 0 3,070 5,391 5,802 6,180 6,643 7,050 7,407 7,794 8,183 8,603 27,086 66,123

0 -11 -12 -12 -13 -13 -14 -14 -15 -15 -16 -61 -1350 11 12 12 13 13 14 14 15 15 16 61 135

Subtotal, Provide tax incentives for locating jobs and business activity in the United States and remove tax deductions for shipping jobs overseas 00000000000 0 0

Subtotal, Reform International Taxation 18,461 51,305 106,134 125,965 121,136 121,976 122,819 124,734 126,860 128,820 130,975 526,516 1,160,724

SUPPORT HOUSING AND URBAN DEVELOPMENT:

0 0 0 -97 -278 -483 -716 -990 -1,290 -1,602 -1,792 -858 -7,2480 -18 -142 -534 -1,213 -1,894 -2,284 -2,391 -2,375 -2,351 -2,362 -3,801 -15,5640 -38 -192 -549 -1,198 -2,041 -2,944 -3,872 -4,823 -5,799 -6,803 -4,018 -28,2590 -56 -334 -1,180 -2,689 -4,418 -5,944 -7,253 -8,488 -9,752 -10,957 -8,677 -51,071

Expand access to retroactive qualified electing fund elections

Subtotal, Support Housing and Urban Development

Provide tax incentives for locating jobs and business activity in the United States and remove tax deductions for shipping jobs overseas:

Provide tax credit for inshoring jobs to the United States

Make permanent the new markets tax credit

Remove tax deductions for shipping jobs overseas

Eliminate exploited mismatch in calculation of earnings and profits of controlled foreign corporationsLimit foreign tax credits from sale of hybrid entitiesRestrict deductions of excessive interest of members of financial reporting groupsTreat payments substituting for partnership effectively connected income as U.S. source dividendsReform taxation of foreign fossil fuel income:Provide a neighborhood homes creditExpand and enhance the low-income housing credit

Modify foreign oil and gas extraction income and foreign oil related income rulesModify tax rule for dual capacity taxpayers

212 

General Explanation of the Administration's Fiscal Year 2024 Revenue Proposals 
REVENUE ESTIMATES OF THE ADMINISTRATION'S FISCAL YEAR 2024 REVENUE PROPOSALS 1/2/

(fiscal years, in millions of dollars)

2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2024-28 2024-33

MODIFY ENERGY TAXES:

Eliminate fossil fuel tax preferences:

0 1,369 2,003 1,591 1,122 599 394 383 366 337 328 6,684 8,492

included in repeal enhanced oil recovery credit

0 5 9 9 8 8 8 8 7 7 7 39 760 1,118 1,144 1,203 1,279 1,357 1,426 1,489 1,554 1,616 1,675 6,101 13,8610 51 187 320 359 353 345 336 324 301 271 1,270 2,8470 113 166 131 93 50 32 32 31 28 27 553 7030 78 77 78 79 81 83 86 87 89 91 393 8290 26 54 57 62 64 66 69 71 73 75 263 6170 0 0 0 0 0 80 159 199 236 271 0 9450 110 153 157 163 170 176 180 185 191 195 753 1,6800 13 32 50 66 82 96 110 108 98 86 243 741

Subtotal, Eliminate fossil fuel tax preferences 0 2,883 3,825 3,596 3,231 2,764 2,706 2,852 2,932 2,976 3,026 16,299 30,791

0 163 220 223 225 229 231 233 236 240 242 1,060 2,242

Impose digital asset mining energy excise tax 0 74 199 327 385 394 405 415 425 435 444 1,379 3,503

Repeal the enhanced oil recovery credit for eligible costs attributable to a qualified enhanced oil recovery projectRepeal the credit for oil and natural gas produced from marginal wellsRepeal the expensing of intangible drilling costsRepeal the deduction for costs paid or incurred for any qualified tertiary injectant used as part of tertiary recovery methodRepeal the exception to passive loss limitations provided to working interests in oil and natural gas propertiesRepeal the use of percentage depletion with respect to oil and gas wellsIncrease geological and geophysical amortization period for independent producersRepeal expensing of exploration and development costs Repeal percentage depletion for hard mineral fossil fuelsRepeal capital gains treatment for royaltiesRepeal the exemption from the corporate income tax for fossil fuel publicly traded partnershipsRepeal the Oil Spill Liability Trust Fund and Superfund excise tax exemption for crude oil derived from bitumen and kerogen-rich rockRepeal accelerated amortization of air pollution control equipmentSubtotal, Modify Energy Taxes 0 3,120 4,244 4,146 3,841 3,387 3,342 3,500 3,593 3,651 3,712 18,738 36,536

Eliminate drawbacks on petroleum taxes that finance the Oil Spill Liability Trust Fund and Superfund

no revenue effectno revenue effect

213 

General Explanation of the Administration's Fiscal Year 2024 Revenue Proposals 
REVENUE ESTIMATES OF THE ADMINISTRATION'S FISCAL YEAR 2024 REVENUE PROPOSALS 1/2/

(fiscal years, in millions of dollars)

2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2024-28 2024-33

12,342 22,839 26,245 27,381 28,606 30,298 31,589 33,004 34,162 35,348 36,472 135,369 305,94414,891 29,627 28,282 27,872 30,074 32,494 34,525 36,772 39,104 41,532 44,089 148,349 344,37120,063 53,029 52,206 28,716 11,963 12,757 13,571 14,422 15,271 16,191 17,137 158,671 235,263

Reform the taxation of capital income 0 2,306 13,211 19,230 21,135 22,086 23,205 24,600 26,066 27,455 34,561 77,968 213,855

0 0 43,698 48,977 51,620 52,507 52,093 51,533 46,084 43,616 46,481 196,802 436,609

47,296 107,801 163,642 152,176 143,398 150,142 154,983 160,331 160,687 164,142 178,740 717,159 1,536,042

0 6,633 5,887 3,266 1,915 1,231 898 749 699 702 734 18,932 22,7140 6,633 5,887 3,266 1,915 1,231 898 749 699 702 734 18,932 22,714

-5,843 -259,273 -74,899 -7,864 -9,432 -12,166 -12,520 -12,792 -13,038 -13,370 -13,802 -363,634 -429,156

-378 -13,940 -14,997 -15,354 -15,650 -15,774 -15,959 -16,027 -16,088 -16,126 -16,130 -75,715 -156,045

0 0 0 -14,791 -20,253 -21,057 -21,518 -20,618 -21,020 -22,098 -23,281 -56,101 -164,6360 0 -1,011 -1,979 -1,704 -1,655 -1,639 -1,623 -1,602 -1,594 -1,582 -6,349 -14,3890 0 0 -1 -11 -25 -164 -180 -197 -215 -235 -37 -1,0280 -41 -63 -71 -78 -82 -85 -87 -89 -92 -94 -335 -782

MODIFY RULES RELATING TO RETIREMENT PLANS:SUPPORT WORKERS, FAMILIES, AND ECONOMIC SECURITY:

Apply the net investment income tax to pass-through business income of high-income taxpayersIncrease the net investment income tax rate and additional Medicare tax rate for high-income taxpayersPrevent excessive accumulations by high-income taxpayers in tax-favored retirement accounts and make other reformsExpand the child credit, and make permanent full refundability and advanceability 3/Restore and make permanent the American Rescue Plan expansion of the earned income tax credit for workers without qualifying children 3/Make permanent the Inflation Reduction Act expansion of health insurance premium tax credits 3/Make the adoption tax credit refundable and allow certain guardianship arrangements to qualify 3/Extend tax-preferred treatment to certain Federal and tribal scholarship and education loan programs

Subtotal, Modify Rules Relating to Retirement Plans

Increase the top marginal income tax rate for highincome earnersImpose a minimum income tax on the wealthiest taxpayers

STRENGTHEN TAXATION OF HIGH-INCOME TAXPAYERS:

Make permanent the income exclusion for forgiven student debt 3/

Subtotal, Strengthen Taxation of High-Income Taxpayers

214 

General Explanation of the Administration's Fiscal Year 2024 Revenue Proposals 
REVENUE ESTIMATES OF THE ADMINISTRATION'S FISCAL YEAR 2024 REVENUE PROPOSALS 1/2/

(fiscal years, in millions of dollars)

2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2024-28 2024-33

0 -17 -35 -35 -36 -38 -39 -39 -39 -40 -40 -161 -3580 65 134 86 27 17 13 9 8 5 4 329 368

-6,221 -273,206 -90,871 -40,009 -47,137 -50,780 -51,911 -51,357 -52,065 -53,530 -55,160 -502,003 -766,026

MODIFY ESTATE AND GIFT TAXATION:

0 -3 1 1 -9 -5 -5 -1 5 12 21 -15 170 1,052 3,157 3,710 4,999 6,506 8,480 6,063 8,480 10,343 12,355 19,424 65,145

Revise rules for valuation of certain property 0 279 789 918 1,107 1,299 1,356 1,466 1,571 1,700 1,829 4,392 12,314

0 1,328 3,947 4,629 6,097 7,800 9,831 7,528 10,056 12,055 14,205 23,801 77,476

CLOSE LOOPHOLES:

Tax carried (profits) interests as ordinary income 0 398 662 661 659 657 664 677 691 705 719 3,037 6,493Repeal deferral of gain from like-kind exchanges 0 642 1,765 1,818 1,873 1,929 1,986 2,047 2,107 2,171 2,236 8,027 18,574

0 39 120 249 389 540 704 881 1,073 1,279 1,502 1,337 6,7760 20 19 13 8 4 3 4 4 4 4 64 8301211110000 6 70 5 15 18 15 11 10 8 6 2 0 64 900 245 797 873 975 1,046 1,109 1,171 1,228 1,302 1,383 3,936 10,1290 557 561 583 615 643 673 704 737 768 803 2,959 6,64424000000000 4 4

Increase the employer-provided childcare tax credit for businessesImprove the 

Require 100 percent recapture of depreciation deductions as ordinary income for certain depreciable real propertyLimit use of donor advised funds to avoid a private foundation payout requirementExclude payments to disqualified persons from counting toward private foundation payout requirementExtend the period for assessment of tax for certain Qualified Opportunity Fund investorsImpose ownership diversification requirement for small insurance company election

design of the work opportunity tax 

credit to promote longer-term employment

Subtotal, Support Workers, Families, and Economic Security

Modify income, estate, gift, and generation-skipping transfer tax rules for certain trusts

Subtotal, Modify Estate and Gift Taxation

Improve tax administration for trusts and decedents' estatesLimit duration of generation-skipping transfer tax exemptionExpand pro rata interest expense disallowance for business-owned life insuranceModify rules for insurance products that fail the statutory definition of a life insurance contract

no revenue effect

215 

General Explanation of the Administration's Fiscal Year 2024 Revenue Proposals 
REVENUE ESTIMATES OF THE ADMINISTRATION'S FISCAL YEAR 2024 REVENUE PROPOSALS 1/2/

(fiscal years, in millions of dollars)

2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2024-28 2024-33

0 65 97 101 100 73 55 48 41 37 33 436 6500 4 8 10 12 14 16 19 21 23 26 48 1532 1,980 4,046 4,327 4,647 4,918 5,221 5,559 5,908 6,291 6,706 19,918 49,603

IMPROVE TAX ADMINISTRATION:

Enhance accuracy of tax information:

0 40 91 155 211 221 231 241 252 263 288 718 1,993

Subtotal, Enhance accuracy of tax information 0 40 91 155 211 221 231 241 252 263 288 718 1,993

0 -5 -5 -5 -6 -6 -7 -7 -7 -7 -8 -27 -630 134 136 138 144 145 157 153 159 166 174 697 1,5060 6 14 9 2 2 2 2 2 2 2 33 430 -1 -2 -2 -2 -2 -2 -2 -2 -2 -3 -9 -200 -10 -29 -31 -34 -34 -34 -35 -35 -36 -40 -138 -3182 2 2 2 2 2 2 2 2 2 2 10 202 166 207 266 317 328 349 354 371 388 415 1,284 3,161

Expand the Secretary's authority to require electronic filing for forms and returnsImprove information reporting for reportable payments subject to backup withholdingSubtotal, Improve Tax Administration

Amend the centralized partnership audit regime to permit the carryover of a reduction in tax that exceeds a partner’s tax liabilityModify requisite supervisory approval of penalty included in notice

negligible revenue effect

Correct drafting errors in the taxation of insurance companies under the Tax Cuts and Jobs Act of 2017Define the term “ultimate purchaser” for purposes of diesel fuel exportation

Subtotal, Close Loopholes

negligible revenue effectnegligible revenue effect

Modify the requirement that general counsel review certain offers in compromiseIncorporate chapters 2/2A in centralized partnership audit regime proceedingsSimplify foreign exchange gain or loss rules and exchange rate rules for individualsIncrease threshold for simplified foreign tax credit rules and reportingAuthorize limited sharing of business tax return information to measure the economy more accuratelyExpand TIN matching and improve child support enforcementClarify that information previously disclosed in a judicial or administrative proceeding is not return information

no revenue effect

216 

General Explanation of the Administration's Fiscal Year 2024 Revenue Proposals 
REVENUE ESTIMATES OF THE ADMINISTRATION'S FISCAL YEAR 2024 REVENUE PROPOSALS 1/2/

(fiscal years, in millions of dollars)

2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2024-28 2024-33

IMPROVE TAX COMPLIANCE:

0 23 52 66 79 78 76 74 73 72 70 298 6630 457 477 498 519 540 563 587 613 639 667 2,491 5,560

Subtotal, Address taxpayer noncompliance with listed transactions 0 480 529 564 598 618 639 661 686 711 737 2,789 6,223

0 7 9 11 12 12 14 14 15 16 16 51 1260 198 207 217 226 237 247 258 270 283 295 1,085 2,4380 3 39 118 96 13 0 0 0 0 0 269 269

0 25 49 68 84 94 95 95 96 93 94 320 7930 37 50 47 47 51 56 62 66 73 79 232 568

Subtotal, Expand and increase penalties for noncompliant return preparation and e-filing and authorize IRS oversight of paid preparers 0 62 99 115 131 145 151 157 162 166 173 552 1,361

0 0 1 2 3 4 5 5 4 4 4 10 320 750 884 1,027 1,066 1,029 1,056 1,095 1,137 1,180 1,225 4,756 10,449

Extend to six years the statute of limitations for certain tax assessments negligible revenue effectAddress taxpayer noncompliance with listed transactions:Increase the statute of limitations on assessment of the COVID-related paid leave and employee retention tax credits 3/Expand and increase penalties for noncompliant return preparation and e-filing and authorize IRS oversight of paid preparers:

Expand and increase penalties for return preparation and e-filing 3/Grant authority to IRS for oversight of all paid preparers 3/

Address compliance in connection with tax responsibilities of expatriatesDefine control of the payment of wage

Extend statute of limitations for listed transactionsImpose liability on shareholders to collect unpaid income taxes of applicable corporations

Impose an affirmative requirement to disclose a position contrary to a regulationRequire employers to withhold tax on failed nonqualified deferred compensation plans

Subtotal, Improve Tax Compliance

negligible revenue effect

217 

General Explanation of the Administration's Fiscal Year 2024 Revenue Proposals 
REVENUE ESTIMATES OF THE ADMINISTRATION'S FISCAL YEAR 2024 REVENUE PROPOSALS 1/2/

(fiscal years, in millions of dollars)

2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2024-28 2024-33

0 1,240 1,629 1,743 2,098 2,256 2,459 2,710 2,909 3,126 3,351 8,966 23,5210 0 0 90 157 167 178 188 200 215 227 414 1,4220 37 75 141 165 176 187 198 211 226 239 594 1,6550 3,634 99 109 120 132 146 160 176 194 213 4,094 4,9830 4,911 1,803 2,083 2,540 2,731 2,970 3,256 3,496 3,761 4,030 14,068 31,581

IMPROVE BENEFITS TAX ADMINISTRATION:

0 0 0 0 0 0 0 0 0 61,425 72,721 0 134,1460 0 0 0 0 0 0 0 0 61,425 72,721 0 134,146

152,604 68,824 356,508 414,305 400,878 425,073 433,830 432,359 437,756 504,567 536,445 1,665,588 4,010,545152,714 315,738 509,254 472,988 439,153 463,151 472,613 471,076 476,852 544,341 576,998 2,200,284 4,742,164

-110 -246,914 -152,746 -58,683 -38,275 -38,078 -38,783 -38,717 -39,096 -39,774 -40,553 -534,696 -731,619

MODERNIZE RULES, INCLUDING THOSE FOR DIGITAL ASSETS:

EXTEND IRS FUNDING:TOTAL, ADMINISTRATION'S FISCAL 2024 REVENUE PROPOSALS:

Extend mandatory funding provided to the IRS for fiscal years 2032 and 2033

Subtotal, Extend IRS Funding

Total, receipt effectTotal, outlay effect

no revenue effect

Subtotal, Improve Benefits Tax Administration negligible revenue effectSubtotal, Modernize Rules, Including Those for Digital Assets

Clarify tax treatment of fixed indemnity health policiesRationalize funding for post-retirement medical and life insurance benefitsClarify tax treatment of on-demand pay arrangements

negligible revenue effectnegligible revenue effect

Provide for information reporting by certain financial institutions and digital asset brokers for purposes of exchange of informationRequire reporting by certain taxpayers of foreign digital asset accountsAmend the mark-to-market rules to include digital assets

negligible revenue effect

Apply the wash sale rules to digital assets and address related party transactionsModernize rules treating loans of securities as taxfree to include other asset classes and address income inclusion

218 

General Explanation of the Administration's Fiscal Year 2024 Revenue Proposals 
REVENUE ESTIMATES OF THE ADMINISTRATION'S FISCAL YEAR 2024 REVENUE PROPOSALS 1/2/

(fiscal years, in millions of dollars)

2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2024-28 2024-33

NOTES:

Expand the child credit, and make permanent full refundability and advanceability -108 -234,552 -138,503 -33,455 -9,700 -8,901 -8,990 -8,997 -8,934 -8,926 -8,989 -425,111 -469,947Restore and make permanent the American Rescue Plan expansion of the earned income tax credit for workers without qualifying children -2 -12,396 -13,322 -13,546 -13,527 -13,676 -13,875 -13,980 -14,064 -14,130 -14,178 -66,467 -136,694Make permanent the Inflation Reduction Act expansion of health insurance premium tax credits 0 0 0 -9,904 -13,533 -13,955 -14,352 -14,192 -14,572 -15,199 -15,879 -37,392 -111,586Make the adoption tax credit refundable and allow certain guardianship arrangements to qualify 0 0 -1,000 -1,937 -1,661 -1,608 -1,591 -1,575 -1,553 -1,544 -1,532 -6,206 -14,001Make permanent the income exclusion for forgiven student debt 0 0 0 0 -1 -1 -19 -19 -20 -22 -24 -2 -106Increase the statute of limitations on assessment of the COVID-related paid leave and employee retention tax credits 0 2 35 119 108 21 0 0 0 0 0 285 285Expand and increase penalties for return preparation and e-filing 0 9 15 18 20 22 22 22 22 19 19 84 188Grant authority to IRS for oversight of all paid preparers 0 23 29 22 19 20 22 24 25 28 30 113 242

1. Presentation in this table does not necessarily reflect the order in which these proposals were estimated.2. The FY 2024 Budget includes additional receipts effects from the proposals to: require coverage of three primary care visits and three behavioral visits without cost-sharing, improve

access to behavioral healthcare in the private insurance market, extend surprise billing protections to ground ambulances, reduce insulin cost-sharing in commercial plans, establish auser fee for the Electronic Visa Update System, increase civil monetary penalties for labor law violations, and improve Unemployment Insurance program integrity.

3. These proposals affect both receipts and outlays. Both effects are shown above. The outlay effects included in these estimates are listed below.

219 

General Explanation of the Administration's Fiscal Year 2024 Revenue Proposals