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Congressional Study on Corporate Spin-Offs to Contain Legislative Options

Wednesday, April 9, 1997

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The congressional study of tax-free corporate spin-offs will contain "legislative options" similar in nature to the recommendations listed in the partnership study issued yesterday, Joint Committee on Taxation Chief of Staff Ken Kies said April 9.

The study on tax-free exchanges will analyze options ranging from outright repeal of Section 355 to leaving the current regime in place and other choices in between, Kies told .

It was anticipated that the corporate spin-off study would be completed soon after the release of the partnership study, but putting the final s on the study will take longer than expected, Kies said.

Like the legislative options listed in the partnership study, the options in the study on Section 355 transactions are for long-term review, rather than short-term action, congressional sources said.

Indicating the relatively slow pace at which the study will proceed, Kies said the congressional panel awaits comments from stakeholder groups, and the first significant opportunity to receive comments en masse will be the American Bar Association meeting in May.

Partnership Legislation Not Anticipated: The slow pace at which the partnership study will proceed means the recommendations included in the report probably will not be turned into bills or enacted as legislation in the near term, congressional sources said.

More likely, the study will initiate an academic-style debate over the tax treatment of partnerships and pass-through entities in general that will take months, if not years to complete, the sources said. The intent of the study is to review partnership law in general, much of which was written in the early 1950s.

Some of the proposals touch on issues that were initiated by the regulatory process such as the recommendation to codify the check-the-box regulations.

Similarly, the proposal to modify employment and self-employment tax and the income tax withholding treatment of partners is an issue addressed by recent Internal Revenue Service proposed regulations that House Speaker Newt Gingrich, R-Ga., attacked for being a hidden tax hike.

Anti-Browsing Bill Passed: The House Ways and Means Committee by voice vote April 9 passed a bill, H.R. 1226, that makes unauthorized access to taxpayer records by IRS personnel a criminal offense.

The committee approved the bill after adding an amendment, sponsored by Rep. Jennifer Dunn, R-Wash, stipulating that the Treasury Secretary notify affected taxpayers when a criminal indictment or charge is brought against an IRS employee.

The amendment also provides a "civil remedy" for the taxpayer similar to current law for unlawful disclosure under Internal Revenue Code Section 7431.

The proposed law stems from a Boston case in which an IRS employee, affiliated with the Ku Klux Klan, was convicted of improperly accessing confidential taxpayer records. A federal appeals court overturned a lower court’s conviction, citing insufficient proof that the worker passed the information to others or used it in a criminal way.

"There ought to be a law against browsing and now there will be," said House Ways and Means Committee Chairman Bill Archer, R-Texas. Committee ranking Democrat Charles Rangel, D-N.Y., also expressed support for the bill because it gives the Treasury Department "the tools to maintain their credibility."

The measure will be considered on the House floor April 15.

Time Running Out: Discussions between President Clinton’s budget team and congressional leaders continued April 9 with GOP leaders declaring that time is running out for a compromise.

"They’ve got one week now. I’m not threatening him, we’ve got work to do," said Senate Majority Leader Trent Lott, R-Miss., indicating the GOP may move ahead on their own version of the budget.

The meetings held this week have focused on Medicare spending, and not on tax issues. The Clinton Administration offered an additional $18 billion in Medicare cuts this week, according to published reports.

Gingrich said he would put a tax-cut bill on the President’s desk this year. "We will give Clinton a chance to veto a tax cut and show he is on the side of higher spending and higher taxes," said Gingrich, who is trying to repair his credentials among conservatives after expressing support for delaying tax cuts last month.

Bipartisan Support For Constitutional Amendment: A bipartisan group of more than 140 House members have agreed to cosponsor a resolution that would amend the Constitution by requiring a two-thirds majority in each House to raise taxes, the amendment’s sponsor said.

Like the anti-browsing bill, the resolution will be considered on the House floor April 15.

The super-majority requirement is premised on the fact that there is a bias in favor of tax increases embedded in the current political system, said Rep. Joe Barton, R-Texas. Government-delivered benefits go to relatively few people who "come together as special interests to effectively lobby Congress," but "taxes are spread among many millions of people across America who would find it difficult to band together," Barton said.

Mandatory Electronic Filing Studied: The National Commission on Restructuring the Internal Revenue Service announced in a press release it might recommend to Congress a 10-year plan requiring all tax returns to be filed electronically.

"Electronic filing has the potential to vastly improve customer service," said Commission Co-Chair Rep. Rob Portman, R-Ohio. Electronic filing helps both the taxpayer and the IRS by reducing the filing error rate, saving money, and speeding up return processing, he said.

The Commission is scheduled to report recommendations to Congress in July on how to improve the IRS, and a recommendation regarding electronic filing could be included in that report.

Improve Low-Income Credit Operations: A General Accounting Office report recommending changes to improve the operation of the low-income housing credit was released by the House Ways and Means Committee April 9.

"After reviewing the GAO report, it appears that the housing projects using the credit are benefiting the right people, households with very low incomes, but we have also learned that compliance and enforcement need to be strengthened," Archer said in a press release.

GAO recommended that information on sources and uses of funds submitted by developers be verified independently, on-site inspections be required, states verify spending so they do not consume more than their share of the credit, and the program be subject to an audit.