From Chevron to Crypto: D.C. Bar Tax Conference Tackles the Latest in Regulation and Legislation
January 27, 2023
More than 350 attendees gathered at the D.C. Bar and online for the 2023 Tax Legislative and Regulatory Update, the Bar’s annual comprehensive look at current and emerging issues in tax law.
The conference, hosted by the D.C. Bar Taxation Community, featured a rich roster of panelists representing the congressional committees and agencies responsible for crafting and implementing U.S. tax law, including U.S. Representative Kevin R. Hern (R–Oklahoma), majority member of the House Ways and Means Committee.
Updates From the Hill
On day one of the conference, Pamela Olson, principal at PricewaterhouseCoopers, moderated a bipartisan panel on the latest in tax legislation. Mike Quickel, policy director for Republican staff on the Senate Finance Committee, suggested that measures intended to address inflation enjoy broad support in both parties, which could result in action during this congressional session.
But with Congress divided along partisan lines, Andrew Grossman, chief tax counsel for the Democratic staff of the House Ways and Means Committee, said he “can’t see tax being a part of a bill to raise the debt ceiling.”
“It’s really high politics at this point, and whatever is decided will probably not result in a piece of tax legislation, per se,” he added.
Thomas Barthold, chief of staff of the Joint Committee on Taxation, said the 2022 “Bluebook” of general explanations of tax legislation passed in the 116th Congress is forthcoming. In the process, his staff is collecting information that will be compiled into a list of technical corrections.
Grossman expressed concern that partisanship might interfere with the normally nonacrimonious process of identifying and addressing technical corrections. “It’s a little disappointing that technicals have become politicized,” he said.
Grossman also described ongoing political deadlock relating to provisions of the Tax Cuts and Jobs Act approaching expiration. An agreement wasn’t reached in 2022, and Grossman indicated that little has changed in the interim. “We’re genuinely stuck. Maybe it says something about the time-honored strategy of legislative advocacy of making things expire in the hopes that Congress will extend it when the time comes. It really didn’t happen in 2022, and I think it will be a rocky path moving forward,” Grossman said.
The Future of Chevron
Unpredictability was also a theme in the plenary session “Tax Controversy: Exploring Tax Issues Related to Regulatory Authority, Chevron Deference, and the Administrative Procedure Act.” Skadden, Arps, Slate, Meagher & Flom LLP partner Shay Dvoretzky described the current uncertainty surrounding the doctrine of judicial deference to federal agency action established in the 1984 landmark U.S. Supreme case Chevron v. Natural Resources Defense Council.
“Last year, the Supreme Court had several administrative law cases where you would think that the starting point is the framework I just articulated, Chevron,” Dvoretzky said. “And, in the oral argument there was a lot of discussion of Chevron and . . . whether [it] should be overruled. In all of those opinions, across the board, the Supreme Court took a consistent approach. It did not cite Chevron at all. They just totally ignored it.”
The Supreme Court’s shift is reflective of a dramatic change in conservative attitudes toward the doctrine, Dvoretzky said. In the past, conservative jurists such as Justice Antonin Scalia and Judge Laurence Silberman of the U.S. Court of Appeals for the District of Columbia Circuit favored Chevron, but their position on the doctrine evolved over time.
“They thought it was better [for] agencies, which are democratically accountable, or at least closer to being democratically accountable, than judges to be making decisions. Nowadays that pendulum has really shifted,” Dvoretzky said. He attributed this change to increasing boldness by agencies in interpreting their mandates and a desire by conservative judges to assert their statutory interpretations.
Foreign Tax Credits
In another plenary session, Rep. Hern sat down with Scott Levine, a partner at Jones Day and adjunct professor at Georgetown University, to explore the future of U.S. international tax policy.
Hern advocated for keeping U.S. jobs in the country while, at the same time, not punishing companies that go abroad. In a bipartisan letter to U.S. Secretary of the Treasury Janet Yellen, Hern and other members of Congress expressed concerns about new regulations regarding foreign tax credits, touching upon double taxation by the United States and foreign countries.
“The letter basically talked about keeping our jobs and our economy robust, but then we have a tax code that disallows us trying to explore into nations that are not necessarily in the Organization for Economic Cooperation and Development regime,” Hern said.
“We have to look at how we keep our companies here, because in the global marketplace it is the fiduciary responsibility of our CEOs to have the ability to move if the [foreign tax-related] pain gets too great,” he continued. “We have to be thoughtful about what it is that we are trying to gain. In a hearing, Yellen said that you can’t tax labor anymore, you have to tax capital. What that means is we don’t care where or how the dollar is generated or where the labor is generated; we just want our tax dollars off of that. I half agree. We want our tax dollars off of that. But we could really double dip into that if we had our employees in the United States contributing to society.”
When asked what the United States should do to ensure that it remains a multinational competitor while simultaneously preserving the U.S. tax base and sovereignty over its tax laws, Hern replied that the country needs to examine why job creation matters in the free market enterprise.
“If we keep shipping our jobs around the world, we are going to lose our tax base,” Hern said. “And when we lose our tax base, we have a real problem, as we are seeing right now. Then we have to find other creative ways to fund the government. Hopefully we can find a bipartisan solution to stop the [financial] bleeding.”
In a breakout session focused on the taxation of cryptocurrency and related reporting issues, Jones Day partner Lori Hellkamp noted that at last year’s tax conference, the cryptocurrency panelists did not discuss losses. But now, considering the recent fallouts, “it’s obvious that it is a very relevant and poignant topic,” Hellkamp said.
Hellkamp cited various ways in which someone can lose a digital asset and also touched upon the concept of a digital asset’s “worthlessness.” To meet that standard, the asset must have zero current value as well as no foreseeable future potential value. “That’s a pretty tall hurdle to clear,” she said. “A fraction of a penny is still of value. So, the digital asset needs to be totally worthless. You have to show when it became worthless.” The tax deduction rules are similar for “abandoned” digital assets, even if they’re worth a fraction of a penny, Hellkamp said.
Another scenario involves rehypothecation, that is, when banks and brokers use assets that have been posted as collateral by their clients to make additional loans or investments. A default within that chain can create a ripple effect.
Finally, Hellkamp discussed the termination of contracts, which she said usually involves derivatives contracts. “If you terminate a contract, and if that digital asset is a capital asset, it results in capital loss,” she said.
Chris Wrobel, special counsel at the Internal Revenue Service (IRS), provided guidance on the agency’s treatment of cryptocurrency. He reported that the IRS issued two Chief Counsel Advice (CCA) memoranda on cryptocurrency earlier this month.
CCA 202302011 addressed a fact pattern where a taxpayer holds cryptocurrency that diminishes significantly in value down to about half a cent but retains ownership of the cryptocurrency, which is still traded. The CCA concluded that the taxpayer would not be able to claim “worthlessness deductions” under IRS Code § 165. Similarly, the taxpayer would not be able to claim “abandonment loss.” CCA 202302012 states that a qualified appraisal is required when a taxpayer claims a deduction for a charitable donation of cryptocurrency greater than $5,000.
Rebecca Lee, a principal at Pricewaterhouse Coopers, mentioned that the IRS–Treasury Department’s 2022–2023 Priority Guidance Plan lists “staking” as an area of focus. Staking involves locking in a portion of your cryptocurrency for a period of time to contribute to a blockchain network. In exchange, stakers can earn rewards such as additional coins or tokens.
Blockchain uses a decentralized ledger of different computers to mine the transaction. “The benefits are that it is faster and more energy efficient,” Lee said. “But to have fewer nodes validating and/or processing transactions, you lose the benefit of what distributor technology is supposed to do, which is to have a distribution of the record keeping. When you have fewer validators providing that service, you have to somehow make them accountable. So, the validator has to put up a stake — tokens or coins — which is at risk. And if there is bad behavior, everyone loses a portion of their tokens.”
Moderator Lisa Zarlenga, a partner at Steptoe & Johnson LLP, noted that a new tax form — 1099-DA — will be forthcoming for digital assets. She also mentioned OECD’s 2022 Crypto-Asset Reporting Framework (CARF), which aligns somewhat with U.S. policy. Lee asked Erika Nijenhuis, senior counsel at the Treasury Department’s Office of Tax Policy, if the United States has the authority to implement CARF.
“We at the Treasury and IRS are currently considering how the United States can implement CARF,” said Nijenhuis. “The Infrastructure Investment [and Jobs] Act provides authority to the IRS to require reporting of most of the information under CARF. That includes authority to require brokers to report information on non-U.S. customs. In the [General Explanations of the Administration’s Fiscal Year 2023 Revenue Proposals], the U.S. Treasury proposed legislation that would allow the IRS to require brokers to report information on the substantial foreign beneficial owners of passive entities holding digital assets.”
In addition to digital assets and international taxation, breakout sessions covered numerous issues in corporate, partnership, and individual taxation, as well as topics affecting tax-exempt organizations.