Tax Watch Archive

9/22/09 -- Bill extending unemployment coverage also would extend FUTA surtax through 2010.
On September 22, the House of Representatives was expected to consider H.R. 3548, the Unemployment Compensation Extension Act of 2009. The bill was to come to the House floor by way of the House Suspension Calendar. The measure provides for an additional 13 weeks of extended unemployment benefits in states with high unemployment. The bill also would amend the Code to extend from 2009 through 2010 the 6.2% tax on employers under the Federal Unemployment Tax Act (FUTA)--namely, the 6% permanent tax rate, plus the temporary 0.2% surtax. The repeal of the temporary 0.2% surtax, and the scheduled reduction in the FUTA tax to 6%, would be delayed from 2010 until 2011.

9/17/09 -- Rangel bill would ease homeownership tax rules for service members.
On September 17, Ways and Means Chair Charles B. Rangel (D-NY) introduced the "Service Members Home Ownership Tax Act of 2009." The bill would make the following changes to improve how the homebuyer credit and Homeowner's Assistance Program (HAP) provisions apply to service members (i.e., members of the uniformed services, members of the Foreign Service, and intelligence employees):

The tax credit claimed on qualifying first-time home purchases in 2009 must be recaptured if the home is sold (or ceased to be used as a principal residence) within three years of the purchase. A more restrictive recapture rule applies to qualifying first-home purchases in 2008. The bill would provide that the first-time homebuyer credit does not need to be paid back if the home is sold (or stops being used as a principal residence) by a service member in connection with a government order for qualified official extended duty service.
The first-time homebuyer credit won't be available for purchases after Nov. 30, 2009 (unless Congress extends this tax break). Rangel's bill would provide service members with an additional year to qualify for the first-time homebuyer credit if they served on qualified official extended duty service outside of the U.S. for at least 90 days in calendar year 2009.
The bill would ensure that certain payments under HAP are exempt from tax. This would apply to HAP payments to (1) wounded members (and their spouses) of the Armed Forces, Department of Defense, or the United States Coast Guard and (2) members of the Armed Forces that bought a home before July 1, 2006 and are subsequently permanently reassigned between July 1, 2006 and Sept. 30, 2012.

To pay for these expanded tax breaks, the bill would increase the penalties for failure to file a partnership return or an S corporation return. For tax years beginning after 2010, the penalty would be increased by $21 (from $89 to $110).

The following material can also be found on Checkpoint:

a Ways & Means press release on the introduction of the "Service Members Home Ownership Tax Act of 2009;"
a Ways & Means press release on the introduction of the "Service Members Home Ownership Tax Act of 2009;"
a summary of the "Service Members Home Ownership Tax Act of 2009;" and
the bill text of the "Service Members Home Ownership Tax Act of 2009."

9/16/09 -- Senate Finance Chair releases Chairman's Mark of the "America's Healthy Future Act of 2009."
On September 16, Senate Finance Committee Chair Max Baucus (D-MT) released the much-anticipated Chairman's Mark of his health care reform bill, called the "America's Healthy Future Act of 2009." The Mark is similar to the preliminary proposal that Baucus circulated last week (see Article #1614), and is scheduled to be marked up by the Senate Finance Committee on September 22.

The Mark, which does not include a public health care option, includes the following features:

Beginning in 2013, with limited exceptions, all US citizens and legal residents would be required to purchase health insurance or have health coverage from an employer, through a public program or through some other source that meets the minimum creditable coverage standard. For taxpayers between 100-300% of the poverty level, the penalty for failing to obtain health coverage would be $750 per year with a maximum penalty per family of $1,500. For taxpayers with incomes above 300% of the poverty level, the penalty for failing to obtain coverage would be $950 per year with a maximum penalty per family of $3,800.
State-based web portals, or "exchanges" would direct consumers purchasing plans on the individual market to every health coverage option available in their zip code. The exchanges would offer standardized health insurance enrollment applications, a standard format companies would use to present their insurance plans, and standardized marketing materials. Small businesses would have access to state-based Small Business Health Options Program (SHOP) exchanges. These exchanges, like the individual market exchanges, would be web portals that make comparing and purchasing health care coverage easier for small businesses.
Employers wouldn't be required to provide health care coverage to employees. However, beginning in 2013, all employers with more than 50 full-time employees (30 hours and above) that do not offer health coverage would have to pay a fee for each employee who receives a tax credit for health insurance through an "exchange."
Low income families would get tax credits to help make health care coverage affordable.
Beginning in 2011, small businesses (fewer than 25 workers and average wages below $40,000) that offer health care would get tax credits.
Beginning in 2011, small businesses would be able to provide tax-free benefits to their employees via a "Simple Cafeteria Plan." Participation restrictions would be eased and self-employed individuals could be included as qualified employees. Employers that make contributions for employees under a simple cafeteria plan would be exempted from the pension plan nondiscrimination requirements that apply to highly compensated and key employees. Additionally, qualified long-term care insurance could be provided under a cafeteria plan to the extent the amount of such contributions does not exceed the eligible long-term care premiums for the contract.
Beginning in 2013, a 35% excise tax would be levied on insurance companies and insurance administrators for any health insurance plan that is above $8,000 for singles and $21,000 for family plans. The tax would apply to self-insured plans and plans sold in the group market, but not to plans sold in the individual market.
Beginning in 2010, employers would have to disclose on Form W-2 the value of the benefit provided by the employer for each employee's health insurance coverage.
Contributions to health Flexible Savings Accounts (FSAs) would be limited to $2,000 per year, beginning in 2013.
The exclusion from gross income for the subsidy for employers that maintain prescription drug plans for their Medicare Part D eligible retirees would be eliminated, beginning in 2011.
The definition of qualified medical expenses for Health Savings Accounts (HSAs), Flexible Savings Accounts (FSAs), and Health Reimbursement Arrangements (HRAs) would be conformed to the definition used for itemized deduction purposes. An exception provides that amounts paid for over-the-counter medicine with a prescription would still qualify as medical expenses.
The additional tax for Health Savings Account (HSA) withdrawals before age 65 that are not used for qualified medical expenses would be increased from 10% to 20%.
Businesses that pay more than $600 annually to corporate providers of property and services would have to file an information report with each provider and with IRS.

The Chairman's Mark to the "America's Healthy Future Act of 2009" also would impose beginning in 2010 a variety of fees on the pharmaceutical manufacturers, medical device manufacturers, health insurers, and clinical laboratories.

The following material can also be found on Checkpoint:

the text of a press release announcing the broad outlines of the Chairman's Mark to the "America's Healthy Future Act of 2009;"
the text of the Chairman's Mark to the "America's Healthy Future Act of 2009;"
the text of the joint Congressional Budget Office/Joint Committee on Taxation preliminary analysis of the Chairman's Mark to the "America's Healthy Future Act of 2009;" and
the text of JCX-35–09, the Joint Committee on Taxation's Estimated Revenue Effects of the Revenue Provisions Contained in the Chairman's Mark of the "America's Healthy Future Act of 2009," scheduled for Markup by the Committee on Finance on September 22, 2009.

9/14/09 -- Joint Committee on Taxation releases detailed study of international tax reform measures in President's 2010 budget.
The staff of the Joint Committee on Taxation (JCT) has released a comprehensive study of the reform of international tax provisions included in the President's FY 2010 budget proposal, as submitted to Congress on May 7, 2009.

The 230-plus page description of the proposed reform measures discusses many topics, including the following:

Modification of the check-the-box regs. The Administration's proposal provides that a foreign eligible entity may be treated as a disregarded entity if the single owner of the eligible entity is created or organized in the jurisdiction that the foreign eligible entity is created or organized. Thus, a foreign eligible entity with a single owner created or organized in a different country would be treated as a corporation for federal tax purposes. The proposal would generally not apply to a first-tier foreign eligible entity, except in cases of U.S. tax avoidance. The JCT found that the proposal would address opportunities to avoid subpart F and manipulate the foreign tax credit while retaining the basic regime of the entity classification rules. The proposal would provide that single-member business entities organized under foreign law would generally be required to be treated as corporations for federal tax purposes.
Deferral of deductions related to deferred income. According to the JCT report, the Administration's proposal seeks to defer deductions pertaining to expenses, other than research and experimentation expenditures, of U.S. persons that are allocated to non-repatriated foreign-source income. The JCT report found that the administration's proposal did not address the effect of the current deferral regime on U.S. multinationals' decisions to repatriate foreign-source income. Additionally, since the proposal does not affect research and experimentation costs, it would have little effect on shifting certain intangibles-related income offshore and would treat U.S. firms differently on the basis of industry.
Intangible property transfers. The Administration's proposal "clarifies" the definition of intangible property for Code Sec. 367(d) and Code Sec. 482 to include workforce in place, goodwill and going concern value. The proposal also clarifies that: transfers of multiple intangible properties may be valued on an aggregate basis where doing so achieves a more reliable result; and intangible property must be valued at its highest and best use. The JCT found that the administration's proposal did not modify the basic approach of the application of the transfer pricing rules to intangible property but rather clarified certain definitions and various methodological issues that have arisen in IRS exams on intangible property.

Other broad topic categories explained in detail in the JCT report include withholding tax enforcement problems and possible solutions, cross-border asset transfers by U.S. persons, cross-border enforcement actions, and international agreements.

The text of JCS-4-09, the Joint Committee on Taxation Staff's "Description of Revenue Provisions Contained In The President's Fiscal Year 2010 Budget Proposal, Part Three: Provisions Related To The Taxation Of Cross-Border Income And Investment" can be found on Checkpoint.

9/9/09 -- Senate Finance Chair releases "unofficial" outline of health care reform proposal and plans quick action.
Senate Finance Committee Chair Max Baucus (D-MT) has released an unofficial copy of his health care reform proposal, called "Framework for Comprehensive Health Care Reform." Baucus wants to unveil his chairman's mark during the week of September 14, followed by a markup of his bill one week later.

The "unofficial" Baucus proposal does not include a public health care option. According to Baucus, the public option was omitted from his proposal in order to reach a bipartisan agreement. Instead, it includes co-op proposal.

The "Framework for Comprehensive Health Care Reform" includes the following tax features:

Beginning in 2013, with limited exceptions, all US citizens and legal residents would be required to purchase health insurance or have health coverage from an employer, through a public program or through some other source that meets the minimum creditable coverage standard. For taxpayers between 100-300% of the poverty level, the penalty for failing to obtain health coverage would be $750 per year with a maximum penalty per family of $1500. For taxpayers with incomes above 300% of the poverty level, the penalty for failing to obtain coverage would be $950 per year with a maximum penalty per family of $3,800.
Employers with 200 or more employees would have to automatically enroll employees into health insurance plans. Employers with more than 50 full-time employees (30 hours and above) that do not offer health coverage would have to pay a fee for each employee who receives a tax credit for health insurance through an "exchange."
Low income families would get tax credits to help make health care coverage affordable.
Small businesses (fewer than 25 workers and average wages below $40,000) that offer health care would get tax credits.
A 35% excise tax would be levied on insurance companies and insurance administrators for any health insurance plan that is above $8,000 for singles and $21,000 for family plans. The tax would apply to self-insured plans and plans sold in the group market, but not to plans sold in the individual market.
Employers would have to disclose on Form W-2 the value of the benefit provided by the employer for each employee's health insurance coverage.
Contributions to health Flexible Savings Accounts (FSAs) would be limited to $2,000 per year.
The exclusion from gross income for the subsidy for employers that maintain prescription drug plans for their Medicare Part D eligible retirees would be eliminated.
The definition of qualified medical expenses for Health Savings Accounts (HSAs), Flexible Savings Accounts (FSAs), and Health Reimbursement Arrangements (HRAs) would be conformed to the definition used for itemized deduction purposes. An exception to this rule provides that amounts paid for over-the-counter medicine with a prescription would still qualify as medical expenses.
The additional tax for Health Savings Account (HSA) withdrawals before age 65 that are not used for qualified medical expenses would be increased from 10% to 20%.
Businesses that pay more than $600 annually to corporate providers of property and services would have to file an information report with each provider and with IRS.

The "Framework for Comprehensive Health Care Reform" also would impose a variety of fees on the pharmaceutical manufacturing sector, the health insurance sector, and on clinical laboratories. The text of the "Framework for Comprehensive Health Care Reform" can be found on Checkpoint.

9/9/09 -- Joint Committee on Taxation details business tax changes proposed in President's 2010 budget.
The staff of the Joint Committee on Taxation has released a comprehensive study on the business tax changes included in the President's FY 2010 budget proposal, as submitted to Congress on May 7, 2009.

The proposed business tax changes include the following:

For tax years beginning after 2010, keeping the Code Sec. 179 expensing amount and investment-based phaseout at $125,000 and $500,000 respectively (under current law, after 2010, the amounts will fall to $25,000 and $200,000, respectively).
For qualified small business stock issued after Feb. 17, 2009, all gain from the sale or exchange of qualified small business stock would be excluded from gross income, and the alternative minimum tax (AMT) preference would be eliminated.
The research credit would be made permanent (under current law, the research credit, including the university basic research credit and the energy research credit, expires for amounts paid or incurred after Dec. 31, 2009).
The Administration proposes to work with Congress to make an extended NOL carryback period available to more taxpayers.
For transactions entered into after the date of enactment a transaction would satisfy the economic substance doctrine only if (i) it changes in a meaningful way (apart from federal tax effects) the taxpayer's economic position, and (ii) the taxpayer has a substantial purpose (other than a federal tax purpose) for entering into the transaction. A transaction would not be treated as having economic substance solely by reason of a profit potential unless the present value of the reasonably expected pre-tax profit is substantial in relation to the present value of the net federal tax benefits arising from the transaction.
For transactions entered into after the date of enactment, a 30% penalty would apply to an understatement of tax attributable to a transaction that lacks economic substance, reduced to 20% if there were adequate disclosure of the relevant facts in the taxpayer's return. The proposed penalty would be imposed with regard to an understatement due to a transaction's lack of economic substance in lieu of other accuracy-related penalties that might be levied with respect to the tax understatement. Also, there would be no deduction for interest attributable to an understatement of federal income tax arising from the application of the economic substance doctrine.
For tax years beginning after 2011, the LIFO inventory accounting method would be repealed. Taxpayers that currently use LIFO would be required to write up their beginning LIFO inventory to its FIFO value in the first tax year beginning after Dec. 31, 2011. The resulting increase in income would be taken into account ratably over eight tax years beginning with the first tax year the taxpayer is required to use FIFO.
For amounts paid or incurred after the date of enactment, the deduction for punitive damages paid or incurred as a judgment or in settlement of a claim would be repealed. If a liability for punitive damages is covered by insurance, any such damages paid by the insurer would be included in gross income of the insured person, and the insurer would be required to report such amounts to both the insured person and IRS.
For tax years beginning after 12 months from the date of enactment, the "lower of cost or market" (LCM) method and the write-down for subnormal goods would be repealed.
All of the following oil and gas tax breaks would be repealed: (1) the enhanced oil recovery credit, (2) the marginal wells credit, (3) the expensing of IDCs, (4) the deduction for tertiary injectants, (5) the exception for passive losses from working interests in oil and gas properties, (6) percentage depletion for oil and gas, and (7) the domestic manufacturing deduction for income derived from the domestic production of oil, gas, or primary products thereof.
For forward contracts entered into on or after Dec. 31, 2010, a corporation that enters into a forward contract for the sale of its own stock would have to treat a portion of the payment received with respect to the forward contract as a payment of interest.
For tax years beginning after the date of enactment, commodities dealers, commodities derivatives dealers, dealers in securities, and options dealers would have to treat the income from their day-to-day dealer activities with respect to Code Sec. 1256 contracts as ordinary in character, not capital. This would not affect the application of the mark-to-market rules with respect to such gains and losses.
Other proposals would modify the rules that apply to sales of life insurance contracts, modify the dividends received deduction for life insurance company separate accounts, and expand the pro rata interest expense disallowance for company-owned life insurance (COLI).

The text of JCS-3--09, the Joint Committee on Taxation Staff's "Description of Revenue Provisions Contained In The President's Fiscal Year 2010 Budget Proposal, Part Two: Business Tax Provisions can be found on Checkpoint.

8/19/09 -- Health insurers probed by House Energy & Commerce Committee.
On August 17, House Energy and Commerce Chair Henry Waxman (D-CA) and Subcommittee on Oversight and Investigations Chair Bart Stupak (D-MI), wrote 52 health insurance companies and asked that they provide details on compensation for higher-paid employees and board members, and on their business operations. The letter no doubt is connected to the ongoing effort to put together a health reform package.

The letter asks for detailed information, to be submitted by September 4, on the 2003 to 2008 pay package of employees or officers earning more than $500,000 a year, the makeup and compensation of board members, the cost and purpose of all off-premises retreats, and total revenues, net income, and total dividend payments.

By September 14, the letter asks health insurers to submit (1) documents related to how compensation plans were developed for 2003 through 2008, and (2) detailed information (including revenue, claims payments, and expenses) for their 2003 through 2008 business operations in each of their business segments (e.g., self insured employer market segment, insured employer market segment, individual market segment).

The following material can also be found on Checkpoint:

the text of the August 17 Waxman-Stupak letter to health insurers; and
the list of companies that received the August 17 Waxman-Stupak letter to health insurers.

8/11/09 -- Public law number assigned to cash-for-clunkers additional funding bill.
A public law number has been assigned to H.R. 3435, a supplemental appropriations measure that provides an additional $2 billion for the "cash for clunkers" program (or, technically, the "Consumer Assistance to Recycle and Save Act"). It is P.L. 111-47.

A total of $1 billion was allocated to the trade-in initiative by P.L. 111-32, which enacted the cash for clunkers program. However, interest in the initiative was so strong that it was immediately clear that this allocation would not be enough. P.L. 111-47 provides $2 billion more to the trade-in initiative.

RIA caution: Sec. 1302(c)(1)(A) of P.L. 111-32 provides that vouchers issued under the program " shall be used only in connection with the purchase or qualifying lease of new fuel efficient automobiles that occur between July 1, 2009 and November 1, 2009." However, P.L. 111-47 provides that the $2 billion in additional funding is to remain available only until Sept. 30, 2010.

For an in-depth discussion of this "cash for clunkers" initiative, see Weekly Alert - 06/25/2009. For an article describing the tax consequences of the vouchers to dealers, see Weekly Alert - 08/06/2009.

8/7/09 -- President signs law funneling $2 billion more into cash for clunkers program.
On August 7, the President signed into law H.R. 3435, a supplemental appropriations measure that provides an additional $2 billion for the "cash for clunkers" program (or, technically, the "Consumer Assistance to Recycle and Save Act," which was enacted as part of P.L. 111-32).

The "cash for clunkers" provision gives a cash incentive for individuals and businesses to trade in older gas-hogging vehicles for new, more fuel-efficient ones. The incentive comes in the form of a voucher of $3,500 or $4,500 depending on the type of vehicle traded in and the fuel efficiency of the vehicle purchased. Different rules apply to passenger cars, and various categories of trucks. The $3,500 or $4,500 voucher is not treated as gross income for purposes of the Code, or for federal or state assistance programs.

A total of $1 billion was allocated to the trade-in initiative by P.L. 111-32. However, the interest in the initiative was so strong that it was immediately clear that this allocation would not be enough. H.R. 3435 provides $2 billion more to the trade-in initiative.

RIA caution: Sec. 1302(c)(1)(A) of P.L. 111-32 provides that vouchers issued under the program " shall be used only in connection with the purchase or qualifying lease of new fuel efficient automobiles that occur between July 1, 2009 and November 1, 2009." However, H.R. 3435 provides that the $2 billion in additional funding is to remain available only until Sept. 30, 2010.

In general, eligible trade-in vehicles are those that at trade-in time: are in drivable condition; have been continuously insured and registered to the same owner for at least one year; were manufactured less than 25 years before the trade-in date; and in the case of an auto, achieve a combined fuel economy of 18 mpg or less. A single person may get only one trade-in voucher and only one voucher is available for joint registered owners of a single eligible trade-in vehicle.

8/3/09 -- House Energy & Commerce Committee OKs health reform bill; House and Senate to consider bill in September.
Late on July 31, the House Energy and Commerce Committee by a vote of 31-28 favorably reported out of committee H.R. 3200, the Affordable Health Choices Act. House Majority Leader Steny Hoyer (D-MD) said the House will consider the measure the week of Sept. 14. House Democratic leaders are expected to work over the recess to mold the tri-committee (Ways and Means, Energy and Commerce, and Education and Labor) bills into one cohesive package. The final product is expected to look different than what was passed by the three committees of jurisdiction, with a change expected in the revenue package favorably reported out of the House Ways and Means Committee (see Article #1604).

The Senate also has deferred consideration of the health reform bill until September. Meanwhile, bipartisan negotiations on health care reform are expected to resume this week with the "gang of 6" (a "centrist" bipartisan group of Senators). Finance Committee Chair Max Baucus (D-MT) announced July 30 that negotiators had not yet reached agreement on their proposal, and that a committee markup of a bipartisan bill would take place when Congress returns from the August recess. Senate Democratic conference Chair Chuck Schumer (D-NY) told reporters during a teleconference on August 3 that Senate Finance Committee Chair Max Baucus (D-MT) has set a deadline of September 15 for the "gang of 6" to reach a bipartisan agreement on health care reform. Schumer said that if an agreement is not reached by that date, Democrats will look at other options, if necessary, to move forward with their health care proposal. According to Schumer, one of the options being considered to move the bill forward is to use the reconciliation process, which requires a simple majority to pass a bill in the Senate.

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