federal tax legislative update 26 january 2011/ harry l. gutman

Federal Tax Legislative Update

26 January 2011/ Harry L. Gutman

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Agenda

Some Fiscal Facts

The New Congress

Beyond 2010• The Report of the President’s National Commission on Fiscal Responsibility

• The Debt Reduction Task Force

• The Prospects for Tax “Reform”

Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act

IRS Tax Risk Initiatives-- Schedule UTP

Selected Highlights of Recent Legislation

3


CBO Budget and Economic Outlook, January 26.2011

FY 2011 DeficiT

$1.5 trillion,

9.8% of GDP

Real GDP Growth -4th Q. to 4th Q

2011-3.1%

2012-2.8%

Approximately 1% inflation in 2011 and 2012

Unemployment

9.2% in 4th Q. 2011

8.2% in 4th Q. 2012

Does not reach 5.3% until 2016

Interest rates

3 mo. = .3% in 2011

10 year = 3.4% in 2011

04/21/23GO HEADER & FOOTER TO EDIT THIS TEXT 4


Total Budget Deficit – Total Dollars

-2500

-2000

-1500

-1000

-500

0

500

CBO Statutory Baseline (-7 trillion over 10 years)

CBO Policy Baseline (-15 trillion over 10 years)

2011 2014

Sources: CBO, Budget and Economic Outlook, fiscal years 2011 to 2021 (January 2011); Policy baseline assumes extension of doc fix, increase in discretionary spending at the rate of GDP, extension of expiring tax provisions, and the index of AMT for inflation, as well as the extra interest costs associated with each.

2018


Source: CBO, Budget and Economic Outlook, fiscal years 2011 to 2021 (January 2011); Policy baseline assumes extension of doc fix, increase in discretionary spending at the rate of GDP, extension of expiring tax provisions and index AMT for inflation, as well as the extra interest costs associated with each.

Fiscal PictureThe Relative Numbers: Total Budget Deficit as % of GDP

-15

-12

-9

-6

-3

0

2010

CBO Statutory Baseline

CBO Policy Baseline

2011 2014 2018


Federal Spending, Alternative Baseline

7

Source: Congressional Budget Office, The Long-Term Budget Outlook, June 2009

Per

cen

t of

GD

P

Total Revenues


U.S. Debt Held by the Public

0123456789

2001 2003 2005 2007 2010

Domestically held

Foreign-held

1

Source: Treasury Department Bureau of the Public Debt, October 2010


Foreign Holders of U.S. Debt ($ billions)

2

Source: U.S. Treasury Department, October 2010


Tax as share of GDP, 2007

Source: OECD


0%2%4%6%8%

10%12%14%

OECD

EU

United States

Tax Source as Share of GDP, 2007Tax Source as Share of GDP, 2007

Source: OECD


Beyond 2010

The New Congress

“The Report on Tax Reform Options” by the President’s Economic Recovery Advisory Board (August 2010)

•No specific recommendations

The Report of the National Commission on Fiscal Responsibility and Reform (“Fiscal Responsibility Commission”) (December 1, 2010)

The Debt Reduction Task Force (November 2010)

The Presidents FY12 Budget

The Prospects

12


The New Congress

13

Senate

53 Democrats, 47 Republicans

Finance Committee—13 Democrats, 11 RepublicansNew ranking member—Senator Hatch

House

242 Republicans, 193 Democrats

New Ways and Means Committee—15 Democrats, 25 RepublicansNew Chairman—Dave Camp

New Procedural Rules

Exemption from “pay-go” for─ Extending 2001 and 2003 tax cuts─ Repealing Health Care legislation─ Extending AMT “patch”─ Extending transfer tax provisions of 2010 Act─ Enacting a 20 percent deduction in income for small business


Fiscal Responsibility Commission

Individual Taxes

Three individual rates –12,22,28

• Capital gain and dividends taxed as ordinary income

Eliminate AMT, Pease and PEP

Mortgage interest deduction becomes 12% non-refundable tax credit, mortgage on primary residence only and capped at $500,000

Employer provided health care exclusion capped at 75th percentile of premium levels in 2014, phased out from 2018 to 2038

Charitable deduction becomes a 12% non-refundable credit for contributions above 2% of AGI

Repeals exclusion for newly issued municipal bonds

Consolidates retirement accounts, caps tax-preferred contributions and expand savers credit

Eliminate $1.1 trillion of tax expenditures

• Retained tax expenditures result in higher tax rates

14


Fiscal Responsibility Commission

Business Taxes

One Bracket- 28%

Eliminate

● Domestic Production Credit

● LIFO

● General Business Credits

● “Other” tax expenditures

Foreign source income

● Active Income taxed on territorial basis

● Current law for passive income

Other Taxes

Increase gas tax by 15 cents starting in 2013

● Proceeds dedicated to transportation funds

No VAT

Tax reform “trigger”15


The Debt Reduction Task Force

Report of Task Force established by the Bipartisan Policy Center

Center formed in 2010 by Howard Baker, Tom Daschle, Bob Dole and George Mitchell

Task Force chaired by Pete Domenici and Alice Rivlin

Principal Tax Recommendations

Two individual rates—15 and 27%

• No capital gain preference

Corporate rate of 27%

Eliminate most deductions and credits

Convert home mortgage interest and charitable deductions to 15% credit

Restructure and simplify provisions affecting low income taxpayers

Establish a 6.5% VAT

16


The Prospects

Individual Tax

Transfer Tax

Business Tax

• Rate

• Foreign source income

Repatriation holiday

Consumption tax

Energy Tax

• CO2 Tax

• Carbon tax

• Cap and Trade

• Gas Tax

17


Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act

Two year extension of 2001 and 2003 tax relief

Two year AMT “patch”

Estate tax extension at $5 million exemption level and maximum 35% rate through 2012,

• Election for no estate tax, carryover basis for 2012

• GST rate of zero in 2010

• Gift tax exclusion of $1 million, 35% maximum rate for 2010

• Portability of exemption for decedents dying after 2010

• Extension of certain filing deadlines and dates for disclaimers

Provisions that expired at end of 2009 extended for two years

Expensing for property eligible for bonus depreciation acquired before 2012

Two percent payroll tax reduction from employee share for 2011

Extension of employment benefits through 2011

No repeal of expanded section 1099 reporting for corporations

No revenue offsets

• Carried interests

18


IRS Tax Risk Initiatives

Board oversight of tax risk

“We…want to engage corporate leaders about their roles and responsibilities in conducting appropriate assessment and oversight of tax risk. “ IRS Commissioner Douglas Shulman, NACD Corporate Governance Conference, October 19, 2009

Information gathering- Uncertain Tax Positions

Announcements-2010-9, 2010-17, 2010-30, 2010-75, 2010-76, Directive for all LB&I Personnel (9/24/2010), Schedule UTP

• “Guided by the fundamental principle that transparency is essential to achieving an effective and efficient self-assessment tax system, the IRS [proposed requiring] business taxpayers to report basic information regarding their uncertain tax positions when they filed their tax returns.” IRS Commissioner Doug Shulman, American Bar Association Tax Section, September 24, 2010

• Schedule will be required for certain corporate returns for calendar 2010 and fiscal years beginning in 2010

• Draft Schedule released on April 19, 2010

• Final Schedule and instructions released September 24, 2010

19


Schedule UTP

Will be filed – initially by business taxpayers with total assets in excess of $100 million with Form 1120, 1120-F, 1120-L and 1120-PC

Will require – concise description, in rank order of magnitude of the reserve, of:

•each uncertain tax position (UTP) for which the taxpayer or a related entity has recorded a reserve in an audited financial statement

•any position related to determination of any US federal income tax liability for which no reserve is recorded because taxpayer expects to litigate the position


Selected Highlights of Recent Legislation

Small Business Jobs Act

Education, Jobs and Medicaid Assistance Act

• International “loophole closers”

Hiring Incentives to Restore Employment Act

• Foreign Account Tax Compliance Act (“FATCA”)

Health Care Reform

• Codification of “economic substance doctrine”

• Information reporting by corporations for payments made for property or services aggregating $600 (effective 2012)

21


Codification of the “Economic Substance” Doctrine

Adds definition of “economic substance” to the Internal Revenue Code

Adds a strict liability penalty for tax underpayments attributable to transactions lacking economic substance

Toughens erroneous refund penalty in the case of transactions lacking economic substance

Effective for transactions entered into after March 30, 2010

22


Codification of the “Economic Substance” Doctrine

If the economic substance doctrine is relevant to a transaction, the transaction will be treated as having economic substance only if

● the transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer’s economic position, and

● the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into the transaction

Interim guidance issued in Notice 2010-62

23

Presentation by:

Hank GutmanKPMG LLP(202) [email protected]

federal tax legislative update 26 january 2011/ harry l. gutman

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