President-elect Donald Trump's tax choices made headlines in 2016, and not just in these pages. He ushered in weeks of mainstream press coverage of tax. The conversation might have started with his aversion to releasing his federal tax returns, but it certainly didn't end there. After a leak of his 1995 state tax returns to The New York Times, everyone got a look into the kinds of tax maneuvers the code, at least at one point, permitted. The leak made clear the gap between sophisticated and frequently wealthy taxpayers and those that don't have access to the same tax planning resources, leading many to question the fairness of our tax system. Tax Notes chose Trump as its tax person of the year partly for shedding new light on rules that must be simplified and made more equitable.
Thus far, a lot of the focus on how Trump and Congress will shape tax reform has been on the treatment of exports and imports. Whether 2017 will see a destination-based system that taxes imports and exempts exports isn't clear, but the chief architect of the House Republicans' version, Ways and Means Committee Chair Kevin Brady, remains steadfast in his support of such an arrangement. Instead of encouraging domestic manufacturing that way, improving the section 199 deduction for income attributable to domestic production is the direction that lawmakers should go, say Robert Feinschreiber and Margaret Kent. They write that both increasing the amount of the deduction and limiting it to labor costs (not providing it for the cost of raw materials) would give U.S. factory owners a better incentive for staying.
However the government resolves the manufacturing debate, it shouldn't rest on its laurels when it comes to tax issues because there is no shortage of them to address. During the presidential campaign, Trump often spoke about how he would use his extensive tax knowledge to improve the code. In that sense, Clifford Warren, special counsel in the passthroughs and special industries IRS group and another of the featured tax people in this issue, could prove a great example for Trump. Before joining the IRS, Warren applied the code in the private sector at General Electric and the private equity firm Kohlberg Kravis Roberts & Co. It's no coincidence that he has made it his business to demolish partnership loopholes that taxpayers have been using for years. In 2016 he oversaw the release of final and temporary regulations under sections 707 and 752 that spell the end of bottom-dollar guarantees. Employed by real estate partners, the technique was used to create basis (and thus the ability to take advantage of deductions) by counting guarantees to pay partnership debt as payment obligations. Warren championed the truth behind the technique, however, pointing out that those payment obligations never involved risk on the part of the partner. For that reason, the new regs allow only genuine payment obligations, so-called vertical slice guarantees, to count toward basis.
If our persons of the year can teach us anything, it's that improving the code takes tremendous resolve and the wherewithal to think outside the box. Trump's recent pledge not to touch the income exclusion for municipal bonds doesn't indicate that he's exactly ready to consider all options for tax reform. But if we've learned anything from Trump so far, it's that we shouldn't judge him too quickly.