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Tax Week in ReviewMonday, February 26, 2001 Deloitte & Touche OnLine Bush Tax Plan Squeezed by Competing Congressional Priorities, Extension of Expiring Tax Provisions President Bush is set to address a joint session of Congress on Tuesday, February 27, when he will officially present his budget to the nation. The speech is not expected to include extensive detail on his plan for $1.6 trillion in tax cuts over 10 years, beyond touching on key provisions such as income tax cuts, marriage penalty relief, and estate tax relief. Congress, however, has tax cut priorities of its own, and when it takes up the president’s budget, there will be a mounting pressure to revisit popular proposals left over from last year -- such as pension reform, the telephone excise tax repeal, Social Security tax relief, and small business tax breaks -- that were not included in the Bush plan. Moreover, lawmakers also will have to address certain tax provisions -- such as the subpart F active financing exception and employer-provided educational assistance -- that are set to expire at the end of this year. The issue at the center of the tax cut tractor-pull is cost. Bush has signaled that he will not accept a 10-year tax relief package larger than $1.6 trillion. The 10-year cost of congressional initiatives that enjoyed significant support but did not get enacted last year is estimated at over $400 billion, however. And according to the Congressional Budget Office, the cost of extending this year’s 12 expiring tax provisions through 2011 would lower tax revenues by a total of $81.6 billion. Pension Reform -- House Ways and Means Committee members Rep.Rob Portman, R-Ohio, and Benjamin Cardin, D-Md., plan to reintroduce the Comprehensive Retirement Security and Pension Reform Act, which passed the House last year by a vote of 401-25, and cleared the Senate Finance Committee 16-0. Last year’s bill included provisions to ease hurdles to creating pension plans, make benefits under existing plans more portable, and raise the contribution limits for workers over age 50. It would also have phased in an increase in the annual contribution limits to individual retirement accounts from $2,000 to $5,000, and increased contribution limits on all types of employer-sponsored pension plans -- including raising the limit for 401(k) plans from $10,500 to $15,000. The bill was scored by the Joint Committee on Taxation (JCT) to lose $65 billion over 10 years. In the Senate Majority Leader Trent Lott, R-Miss., has said that he will push for pension reforms this year. Expiring Tax Provisions -- Among the tax provisions set to expire on December 31 is the exception under subpart F for active financing income. This exception applies to certain foreign personal holding income, foreign base company services income, and insurance income that is derived from the active conduct of a banking, financing, insurance, or similar business. Another significant expiring tax provision allows an employee to exclude from gross income up to $5,250 in employer-paid education benefits. The Employee Educational Assistance Act (S. 133) would permanently extend the exclusion. The legislation, sponsored by Finance Committee ranking Democrat, Sen. Max Baucus, D-Mont. , also would expand the exclusion to cover benefits for graduate-level courses. Other expiring tax provisions include the Work Opportunity Tax Credit and the Welfare-to-Work Tax Credit, both of which are important to the retail industry. Phone Tax Repeal -- Senate Finance Committee Chairman, Sen. Charles Grassley, R-Iowa, introduced a bill (S.234) on February 1 that would repeal the 3 percent telephone excise tax beginning 30 days after enactment. Portman introduced a similar bill (H.R. 236) in the House on January 6. Two major phone tax repeal bills introduced in the 106th Congress
enjoyed broad support. Alternative Minimum Tax -- Lawmakers also have raised the issue of relief for both businesses and individuals hit by the alternative minimum tax (AMT). Under current law, the number of returns subject to AMT would reach 1.6 million in 2002, and grow to 10.5 million by 2010, the JCT has said. An existing provision that allows individuals to claim certain personal credits against the AMT is scheduled to sunset at the end of this year. Absent that provision, which costs an estimated $42 billion over 10 years, some taxpayers would be unable to claim the child and education tax credits enacted in the Taxpayer Relief Act of 1997. For Bush, the issue is complicated by the fact that his tax cut plan would exacerbate the growth in the number of individuals subject to the AMT. The JCT has estimated that the number of returns with AMT liability would grow to 13.6 million by 2010 under the Bush plan. Bush’s child care proposals "would be expected to reduce the number of individuals affected by the alternative minimum tax, but the interactive effects of other Bush proposals would be expected to increase the number of individuals affected," the JCT said. The 10-year cost of fixing the Bush AMT problem comes to about $200 billion, the JCT has noted. Members of Congress aware of this potentially volatile situation have introduced legislation to help resolve the problem. Ways and Means Committee member Philip English, R-Pa., introduced H.R. 437, the Alternative Minimum Tax Repeal Act of 2001, which would repeal the AMT, effective December 31, 2000. Ways and Means member Sam Johnson, R-Texas introduced H.R. 275 to repeal the individual AMT. Capital Gains -- Lott has said he will push for a cut in the capital gains tax as an economic stimulus, while Senate Majority Whip Sen. Don Nickles, R-Okla. , has said he would like to see the individual capital gains tax rate cut from 20 to 15 percent. House Majority Leader Dick Armey, R-Texas, also advocates capital gains relief. The Bush campaign plan would have created a special tax break for farmers, including a 1-time exemption from capital gains tax on the sale of a farm. |
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IRS Wins Third Consecutive COLI Case The U.S. District Court for the Southern District of Ohio has held that the IRS properly disallowed deductions claimed for interest on policy loans from a leveraged, broad-based corporate-owned life insurance (COLI) program. (American Electric Power Inc. v. United States, Nos. C2-99-724 and C2-98-304 (S.D. Ohio Feb. 20, 2001) (AEP).) The district court found that the subject COLI plan as a whole was a sham in substance and that the following components of the plan were shams in fact: a portion of the first-year policy loans; the first-year loading dividend and the premium charges satisfied with the dividend; and the loading dividends and corresponding premium charges in years four through seven. This is the third COLI case in which the lower courts have denied claimed interest deductions. The first two were Winn-Dixie Inc. v. Commissioner, 113 T.C. 254 (1999), and IRS v. CM Holdings Inc., 254 B.R. 578 (D. Del. 2000). Both of these cases involved facts that were distinguishable from those of AEP. The analysis by the AEP court was similar to the reasoning of the court in CM Holdings, but the taxpayer in AEP presented facts and arguments that were not addressed in the court’s opinion. American Electric Power has indicated that it will file an appeal, and has expressed confidence that its arguments and the facts of its case will ultimately vindicate its position. Winn-Dixie and CM Holdings have also appealed. |
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