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News & Views |Tax Week in ReviewMonday, April 30, 2001 Deloitte & Touche OnLine JCT Staff Releases Sweeping Tax Simplification Proposals The staff of the Joint Committee on Taxation (JCT) on April 26 released a wide-ranging, aggressive set of proposals aimed at simplifying the federal tax system. Mandated by the Internal Revenue Service Restructuring and Reform Act of 1998, the study does not take revenue into account in making bold recommendations such as
The study also recommends a number of other industry-specific, corporate, and international tax proposals. Although this is just a study, the forcefulness and the
clarity of JCT staff's thinking make this an important first step toward
simplification. Members of Congress will likely use this report as a
source of proposals that move in the direction of simplification. While
wholesale adoption of the recommendations is difficult to imagine, their
piecemeal adoption over several years is possible. In the short term, the study will provide fodder for politicians and interest groups that favor particular changes outlined by the JCT staff. Signs of this were evident at an April 26 hearing on the study held by the Senate Finance Committee. Witnesses Call AMT Repeal Their Top Priority JCT Staff Director Lindy Paull testified that the study identifies the following changes as the most urgent for short term: elimination of the alternative minimum tax; reducing the number of income phaseout rules; replacing the capital gains rate system with a deduction; simplifying the anti-deferral rules for U.S. owners of foreign entities; and expanding the use of cash method accounting for small businesses. Claudia Hill of the National Association of Enrolled Agents called for AMT repeal and simplification of both phaseouts and tax penalties. Richard Lipton, chairman of the tax section of the American Bar Association said that his priorities include individual AMT repeal and repeal of stealth taxes such as the PEASE limitation provision. Pamela Pecarich of the American Institute of Certified Public Accountants supported AMT repeal and simplification of phaseouts. Betty Wilson of the Tax Executives Institute said her priorities include corporate AMT repeal, simplification of the depreciation rules, and making the research and development (R&D) tax credit permanent. Grassley Weighs In Senate Finance Committee Chairman Charles Grassley, R-Iowa, asked Paull whether S. 629 a bill sponsored by Senate Minority Leader Tom Daschle, D-S.D., that would provide a refund of individual taxes in 2001 and establish a 10 percent income tax rate would do anything to reduce the growing ranks of taxpayers that will be affected by the AMT over the next decade. "Our Democratic colleagues have correctly criticized President Bush's tax plan because it does not deal with this issue," Grassley said. Paull replied that the Daschle bill would not fix the worsening AMT problem in total. Grassley also asked whether the overall limitation on itemized deductions the so-called PEASE limitation makes the marriage penalty problem worse, and about the elimination of the phaseout for personal exemptions. The study recommended the elimination of the PEASE and personal-exemption phaseouts, among others. "Phaseouts have a hidden marginal rate associate with them," Paull said. It's another big problem with the code." Grassley, who recently introduced a pension reform bill in the Senate, brought up a number of pension-related issues, including the effect of the top-heavy rules on small business pension plans, top-heavy pension vesting schedules, and the need for shorter vesting schedules. "We gave consideration to that, but stayed away from policy discussions," Paull said. We picked the top-heavy vesting rule to be the uniform rule rather than keeping multiple rules to force simplification on that section [of the code]." On the issue of capital gains simplification, Grassley asked Pecarich if the current capital gains laws are detrimental to ordinary taxpayers as well as wealthy individuals. Pecarich replied that almost half of all taxpayers hold stock and are affected by capital gains rules. "They have a broad effect on many taxpayers. It would be better to unwind them sooner rather than later," she said. Lipton agreed, saying, "this is preceisely the sort of area that complicates the code. The complexity of rates and holding periods doesn't result in the policy goals I think you want to achieve." Is it Enough? Finance Committee ranking Democrat Max Baucus of Montana asked panelists whether the most effective way to address the complexity of the federal estate tax would be through outright repeal, a step-up in basis, an increase in the unified credit, or lowering rates. Lipton responded that the ABA has no official position on the issue, but acknowledged that "whichever way you go, there is a major simplification problem." Baucus indicated that he thinks even if the study's many recommendations were implemented, they would not go far enough to simplify the code. He also warned that new laws tend to make the problem worse. "I still think we should look at the complexity of new tax provisions before they are enacted. It isn't any help to do it afterwards," he said. Baucus called for a high-level, bipartisan commission to design a simplification plan for the tax laws, saying that it is time "to stop talking about the undue complexity in the code and start doing something about it. I couldn't figure out my own tax returns and that is just wrong." Get it Done Committee member and Majority Whip Don Nickles, R-Okla., criticized capital gains tax complexity, and said there should be a flat or uniform capital gains tax rate. He also called for the repeal of both corporate and individual AMT and simplification of foreign tax issues. "I have a real interest in getting a lot of these recommendations done this year even if we can't do it in the tax bill at the end of May. I especially think a flat capital gains rate would be helpful," Nickles said. "There is great potential with this Congress and this president to get this done in subsequent tax bills or separate simplification measures." How About the Cost? Sen. Jeff Bingaman, D-N.M., asked about the revenue costs of simplification and whether simplifying the code would affect its progressivity. "Do we know what the loss of revenue would be from eliminating the phaseouts, for example? Repealing the [individual] AMT at $215 billion over 10 years is not just simplification, it's a major policy change," Bingaman said. Sen. Olympia Snowe, R-Maine, asked whether any of the tax breaks under consideration this year including the marginal income tax rate cuts the president wants would "enhance the complexity" of the tax code. Paull replied that they would not, but added that "because the AMT structure is not touched or indexed for inflation, more people will fall into the AMT, which will lead to much more complication." |
Bush Signals Compromise on Tax Cuts As House and Senate budget negotiators continue to work on reconciling their competing tax and spending blueprints for next year, President Bush signaled on April 25 that he may be willing to compromise on his 10-year, $1.6 trillion tax cut package. The president said that he recognizes his tax plan will have to be trimmed in order to pass the House and Senate. Just before Easter, the Senate sent Bush a clear signal that he would not reach his target. On April 6, the Senate approved a budget resolution with $1.2 trillion in tax cuts, shaving about 25 percent off the president's proposal. Although he refused to commit to a specific figure for a new tax cut target, Bush urged negotiators to make across-the-board rate cuts for individuals a priority. "First of all, define the size of the pie and then we can figure out the slices," Bush said. "But let's get as much as possible for the American people." (For prior coverage, see Tax News & Views, April 26, 2001, and April 24, 2001.) Pension Reform Legislation Sails Through Ways & Means The House Ways and Means Committee on April 25 voted 35-6 to approve the Comprehensive Retirement Security and Pension Reform Act of 2001 (H.R. 10), legislation designed to expand employer-provided pension coverage and encourage more individuals to save for retirement. The measure which would cost $51.5 billion over 10 years is based almost entirely on a pension bill introduced last year by committee members Rob Portman, R-Ohio, and Ben Cardin, D-Md., which the House passed overwhelmingly. Consideration by the full House is expected in the next few weeks. The bill would raise contribution limitations for individual retirement arrangements for the first time since 1981. It would also increase limitations for other types of deferred compensation plans, allow for "catch up" contributions for individuals nearing retirement age, provide greater portability for workers, and accelerate vesting schedules for employer matching contributions. "The personal savings rate in this country is too low, and far too many individuals are not covered by an employer-provided retirement plan or IRA," said Ways and Means Committee Chairman Bill Thomas, R-Calif. "This pension and retirement savings reform legislation will address these problems by raising contribution limits, allowing workers to roll over their retirement assets when they change jobs, and simplifying the pension laws so that small businesses will be more likely to offer retirement plans for their employees." (For prior coverage, see Tax News & Views, April 26, 2001.)
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IRS and Treasury Reveal Guidance Plan for 2001 The Internal Revenue Service and Treasury on April 26 released their business plan for 2001. The plan is fairly ambitious, considering the staffing and budget issues facing the IRS. It contains 299 guidance projects for 2001 56 more than the 2000 plan and 66 more than the 1999 plan. What's on the List Included in the 2001 plan are two projects dealing with the research credit. One project calls for a reconsideration of the final research credit regulations that were issued in December 2000. The other calls for final regulations on the computation of the research credit in a controlled group. As in previous years, most of the projects (67) are in the employee benefits area. These projects include guidance relating to sections 401(k) and 401(m) in mergers and acquisitions and guidance under section 422 on incentive stock options. The plan includes 20 projects in the international area down three from last year. Those projects include guidance on the extraterritorial income regime that recently replaced the foreign sales corporation (FSC) regime, guidance relating to global dealing, proposed regulations on mark-to-market procedures for passive foreign investment companies, and guidance on international restructurings. There are 51 projects listed in the tax administration area, including guidance regarding the registration, disclosure, and investor list maintenance requirement for corporate tax shelters; guidance on the professional standards for practice before the IRS; proposed regulations on the use of third-party and John Doe summonses; and proposed regulations on the penalties related to tax shelter. Happy New Year Starting with this year's plan, the business plan year will end June 30, rather than December 31. Consequently, for 2001, the plan year will end June 30, 2002. The change is intended to alleviate the late December deluge of guidance that usually occurred when the business plan operated on a calendar year. At an April 25 IRS hearing on temporary and proposed regulations on the qualification and treatment of electing small business trusts (ESBTs), Kevin Anderson and Larry Rabun of Deloitte & Touche expressed concern over provisions regarding the definition of potential current beneficiaries and the deductibility of interest expense. ESBTs were created by the Small Business Job Protection Act of 1996 to provide greater flexibility in family financial planning by expanding the types of trusts that are allowed to hold stock in S corporations. Any trust can qualify as an ESBT if (1) its beneficiaries are individuals, estates, or certain tax-exempt organizations; (2) no interest in the trust was acquired by purchase; and (3) an ESBT election was made. Prior to the Act only certain grantor trusts, voting trusts, and qualified subchapter S trusts were permitted S corporation shareholders. Potential Current Beneficiaries The temporary and proposed regulations, issued in December 2000, would treat any person who receives property under a currently exercisable power of appointment as a "potential current beneficiary" of the ESBT regardless of whether the power actually had been exercised in the holder's favor. At the hearing, Anderson and Rabun argued that the rule is overly broad and could sweep in as potential current beneficiaries persons who are not eligible to be S corporation shareholders, thereby causing the S corporation election to be terminated. "We do not believe the statutory structure contemplated that a person could be treated as a potential current beneficiary without first being treated as a beneficiary," said Anderson. He suggested that the IRS change the rule so that no person would be treated as a potential current beneficiary unless the person is also treated as a beneficiary. IRS and Treasury representatives appeared willing to consider a narrower definition of potential current beneficiary. IRS Attorney-Advisor J. Thomas Hines asked if the proposed rule would present a planning problem for new trusts. Rabun responded that although new trust instruments could be drafted to take into account the way an exercisable power of appointment is treated in the regulations, the rule "creates a trap for the unwary." Deductibility of Interest Expense Anderson also expressed concern about the treatment of interest expense in the proposed regulations. Under the regulations, an ESBT is not allowed to deduct the interest expense incurred on loans used to purchase S corporation stock. Anderson stated that the Service's position is incorrect and that interest expense should be treated as a deductible administrative expense. As a result of the comments received by the IRS, there may a change in the government's position on this issue. In a related development, the staff of the Joint Committee on Taxation has recommended that the special rates for the taxation of ESBTs should be eliminated. "The presence of different rules for taxing S corporation income allocated to a trust from the taxation of all other trust income creates complexity," the study concluded. (See related story above.)
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