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|Tax Week in ReviewMonday, May 7, 2001 Deloitte & Touche OnLine Jump to any article by clicking on the headline link. Missing Pages Delay Budget Vote The GOP's push to pass a budget agreement hammered out between House and Senate leaders hit a snag May 3 when the budget document turned up two pages short. Without the full document, the House could not vote on the budget. As a result, the votes in both chambers were delayed until at least May 8 in the House and probably May 9 in the Senate. The leadership agreement includes a 10-year, $1.25 trillion tax cut for the years 2002-2011. It also provides for an immediate $100 billion tax cut to serve as an economic stimulus. The lower ceiling -- $350 billion less than the president wanted -- reflects the reality that a majority of the Senate will go no higher than the $1.25 trillion tax-cut target put forward by Sen. John Breaux, D-La., and other moderates. The delay allows Senate Democrats to hammer away at the agreement, charging that it will return the country to deficit spending and that it ignores the president's intention to raise spending on defense and other needs. How to handle the $100 billion in up-front tax cuts, a provision the Democrats favor, is a growing technical problem. Of late, Senate Finance Committee Chairman Charles Grassley, R-Iowa, has suggested that the $100 billion stimulus may not need to happen so fast and that it could be rolled into the larger tax package. Should that happen, the Democrats would attack it as well. The Clock is Ticking -- Grassley's plan to unveil his bipartisan tax cut plan with Senate Finance Committee ranking Democrat Max Baucus of Montana could be pushed back, given the delay on the budget vote. |
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Pension Reform Wins Big in House The House May 2 overwhelmingly approved by a vote of
407-24 legislation designed to expand
employer-provided pension coverage and encourage more individuals to save
for retirement. The Comprehensive Retirement Security and Pension
Reform Act of 2001 (H.R. 10) would cost $51.5
billion over 10 years. The bill would raise
contribution limitations for individual retirement arrangements (IRAs) for
the first time since 1981. It would also increase limitations for
employer-sponsored retirement plans, allow for "catch up"
contributions for individuals nearing retirement age, provide greater
portability of retirement benefits for workers who change jobs, and
accelerate vesting schedules for employer matching contributions. (For
prior coverage, see Tax News & Views, Vol. 2, No. 29, April 27,
2001.) Outlook Uncertain -- The bill's future is unclear, given the smaller tax cut target included in the proposed budget resolution. Senate Finance Committee Chairman Charles Grassley, R-Iowa, who introduced a similar pension bill (S. 742) in the Senate with ranking Democrat Max Baucus of Montana, said April 30 that pension reform "could be a part of the big reconciliation tax bill on May 18. [But] at $1.25 trillion, there's some doubt." House Subcommittee Grills O'Neill on Tax Cuts Treasury Secretary Paul O'Neill thought he was appearing before a House Appropriations Subcommittee on May 3 to talk about Treasury's budget for fiscal year 2002. Instead, he found himself answering questions from subcommittee Democrats about the strength of the president's support for the $1.35 trillion tax cut in the budget resolution Congress is set to consider. '81 Redux? -- In lengthy questioning, Rep. Steny Hoyer, D-Md., reminded O'Neill that the 1981 tax cut -- which was not offset by spending cuts -- fueled a growth in the deficit. Americans are concerned about "'81 repeating itself," Hoyer said. O'Neill replied that although he sympathized with the concerns, he has "more confidence than in the past" that Congress would stay within its spending constraints. Following up on Hoyer's questions, fellow Democrat David Price of North Carolina asked if the administration considers the $1.35 trillion tax cut to be the floor or a ceiling and if it supports other measures such as marriage penalty relief, estate tax repeal, and extending expiring provisions. O'Neill said that the administration's priority is marginal rate cuts and that consideration of other tax-related bills is "the way I understand Congress works." Spending, Rebates -- O'Neill did not rule out a presidential veto of additional spending, but said the administration was going to try to work with Congress on the additional tax bills. O'Neill also said that he expects surpluses to continue and that the government will collect up to $300 billion more than is needed for "agreed public purposes." On the issue of immediate tax rebates, O'Neill said it would cost the Financial Management Service $48 million and the Internal Revenue Service $67 million to distribute rebate checks to taxpayers -- money that neither agency has.
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Mikrut Pushes White House Energy Production Tax Breaks "Tax incentives can offset the failure of market prices to signal the desirable level of investment in energy saving and alternative energy technologies," Treasury Tax Legislative Counsel Joseph Mikrut said May 3. Testifying before a House Ways and Means Select Revenue Measures Subcommittee hearing on the Bush administration's proposed tax incentives for encouraging energy production, Mikrut cautioned that "incentives should be designed to minimize windfalls." While noting that Vice President Dick Cheney's commission should finish its energy-production plan by the end of May, Mikrut cited tax incentives already in the administration's proposed budget:
Committee Members Comment -- Subcommittee ranking Democrat Michael McNulty of New York asked Mikrut why the Bush administration does not put a greater emphasis on energy conservation. Mikrut responded that the administration's immediate concern is to increase production. Subcommittee Chairman Jim McCrery, R-La., asked private sector witnesses whether tax incentives are needed given the current high prices of gas and other energy products. Robert Morrison, vice president of FPL Energy, Juno Beach, Fla., responded that the current high prices will not last. McCrery asked Dan Wallace, of Columbus Oil Company, Seminole, Okla., about the impact of the alternative minimum tax (AMT) on independent oil producers, saying "we need to take a look at the AMT and the effect it has on independent producers, because it is an impediment." Industry Wish List -- Industry witnesses argued in favor of extending both the section 29 tax credit to produce fuel from non-conventional sources and the wind energy production tax credit; expanding the definition of biomass to allow power plants to qualify for the existing section 45 tax credit; and continuing the suspension of the 100 percent net income limitation for marginal oil and gas wells. |
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Tax Court Is Reversed on Valuation of Closely Held Corporation The Ninth Circuit has vacated a valuation decision by the Tax Court in an estate tax case involving the valuation of a closely held corporation (Estate of Mitchell v. Commissioner, No. 99-70421 (9th Cir. May 2, 2001)). As it has before, the Ninth Circuit concluded that the Tax Court failed to adequately explain its valuation. The corporation at issue was John Paul Mitchell Systems, the hair-care products company of Paul Mitchell. The estate had valued its shares at $28.5 million, and the IRS determined the value to be $105 million. The Tax Court decided that the value was $41.5 million, but the appeals court ordered the lower court to explain its valuation. The Ninth Circuit has ordered the Tax Court to provide such explanations in the past, in Leonard Pipeline Contractors v. Commissioner, 142 F.3d 1133 (9th Cir. 1998), and in Estate of Magnin v. Commissioner, 184 F.3d 1074 (9th Cir. 1999). The issue in Leonard Pipeline was the amount of reasonable compensation paid by a company to its sole shareholder/president. The issue in Estate of Magnin was whether a decedent received "adequate and full consideration" for the property he transferred (stock of a closely held corporation). The Sixth Circuit has also faulted the Tax Court for failing to explain its valuations. See Alpha Med. Inc. v. Commissioner, 172 F.3d 942 (1999). The current case does not suggest that the Tax Court has not learned its lesson, since its 1997 opinion in Estate of Mitchell predates all three of those appellate decisions. Nevertheless, it is worth bearing in mind that the court has been accused of reaching valuations by simply taking the middle position between the government's and the taxpayer's estimates.
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