resident Clinton’s rejection of congressional calls for fundamental tax reform took concrete form April 14 when he responded with a package of tax simplifications that will, in his words, "simplify our nation’s tax laws and enhance taxpayers’ rights."

The package includes more than 60 legislative proposals designed to simplify the tax process for individuals, families, and businesses. Included in the package is a "Taxpayers Bill of Rights 3" to enhance taxpayers’ rights in dealings with the Internal Revenue Service.

Some of the major items in the package are proposals to increase the standard deduction attributable to the unearned income of dependent filers; increase the de minimis threshold for payment of estimated taxes from $500 to $1,000; corporate alternative minimum tax reform for small businesses; reducing the number of taxpayers that face limitations on the use of foreign tax credits; and partnership simplification provisions.

Two months before the President unveiled his simplification package, Republican congressional leaders sent him a letter urging him to send "to the Congress by May 1, 1997, a proposal to fundamentally reform our nation’s tax system." The correspondence, sent one week after the Internal Revenue Service acknowledged that its $4 billion attempt to construct a new computer system had failed, said the President’s proposal should lead to a tax system that is fundamentally fairer, vastly simpler, and less intrusive into the daily lives of Americans.

The letter was as significant because of who sent it as for what it said. The signers were House Speaker Newt Gingrich, R-Ga.; House Majority Leader Dick Armey, R-Texas; House Ways and Means Committee Chairman Bill Archer, R-Texas; Senate Majority Leader Trent Lott, R-Miss.; Senate Majority Whip Don Nickles, R-Okla.; and Senate Finance Committee Chairman William Roth, R-Del.

When Treasury unveiled its simplification package, Chairman Archer was not impressed with the President’s proposal or his revenue offset decision. "The Administration’s proposal is not tax simplification," Archer said in a press release. "It’s yet another tax hike on the American people. The tax code can and should be simplified, but we can do so without raising taxes ... Combined with a budget proposal that further complicates the tax code through the addition of 44 tax hikes, I’m concerned that President Clinton again is solving our nation’s problems by raising taxes."

Ironically, to make the tax code less complex costs money. The Treasury Department estimates the simplification will cost about $3 billion over the five year period 1997 to 2002. The President had two real choices on how to pay this cost: He could have refrained from providing a revenue offset, for which congressional critics would have labeled him fiscally irresponsible, or he could have proposed revenue-raising measures, also politically risky.

The President decided to propose several revenue raisers, including modifying certain like-kind exchange rules, imposing a holding period requirement for certain foreign tax credits, and requiring new reporting and auditing provisions for large partnerships.

Historically, Treasury rarely has been out in front leading the tax simplification parade, making this latest endeavor a rarity. More commonly, the Treasury Department will propose relatively innocuous de minimis exceptions to certain tax rules. This minimalist response should be expected given Treasury’s traditional raison d’être: to serve as financial agent for the United States government. The department’s role has been one similar to that of the little Dutch boy who used his finger to plug a leak in the dike, except instead of water, the department has been holding back a flood of tax cuts.

The Treasury Department, generally, and the Internal Revenue Service in particular have been under increasing pressure to improve the tax system; a difficult task given that Congress is the only group with the constitutional prerogative to add or take away requirements from the Internal Revenue Code. Beyond a response to members of Congress and the public, Treasury’s simplification package is the outcome of a series of political decisions.

For example, providing small businesses with alternative minimum tax relief was a political decision to cut taxes for those businesses. This is counter to Treasury’s traditional view that presumes tax abuses potentially could be worse in the small business community given the huge number of such enterprises.

Many of the simplification proposals in the President’s plan, such as increasing the standard deduction for dependents, are political winners and Congress probably will move at the appropriate time to pass them. Difficulties lie ahead for several of the other proposals. As Archer made clear, some proposals will not be enough for those members of Congress who want a complete overhaul of the current tax system, rather than just tinkering around the edges.

Perhaps more problematic for the administration, the simplification package may have created an opening for critics of certain current tax laws to weigh in on their validity, thereby slowing down momentum for passage of many of Treasury’s relatively non-controversial proposals.

For example, by proposing a de minimis exception from the passive activity rules, Treasury has now given critics a forum for discussing the underlying rationale for having passive loss rules at all. The proposal to exempt from the alternative minimum tax corporations with gross receipts of less than $5 million inevitably leads some to ask, why not $10 million, or $15 million? Establishing a uniform reasonable cause exception for penalties will no doubt give some members of Congress a forum for blasting the IRS for what some of their constituents perceive as an abusive use of penalties.

Whether the Treasury proposals are simplifications depends on who you are. The accelerated due date for partnerships, trusts, and estates is a good rule if you want to receive a Form K-1 that provides information regarding amounts reported on the fiduciary income tax return well in advance of the income tax filing deadline. If, however, you are a preparer of the partnership return, you may not consider the accelerated due date such a great simplification.

This report organizes a list of the administration’s simplification proposals into four broad groups: (1) protection from procedural and technical traps; (2) reducing the need to file returns, schedules, or report certain income; (3) administrative process; and (4) revenue raisers. Each of these is further divided into nine subgroups as categorized by Treasury.

Taxpayer Bill of Rights 3
and Tax Simplification Proposals

I. Protection From Procedural and Technical Traps

Taxpayer Bill of Rights

• Provides uniform "reasonable cause" exception for penalties relating to filing or paying tax.
• Establishes correct limitations period for refunds in tax court.
• Clarifies statute of limitations for pass-through entities.
• Clarifies procedures for administrative cost awards.
• Provides equitable tolling of the statute of limitations for certain disabled taxpayers.

Business Tax Simplification

• Revises independent contractor rules to allow for worker reclassification.

Estate and Gift Tax Simplification

• Clarifies eligibility for extension of time for payment of estate tax.
• Clarifies waiver of rights of recovery of estate tax from a qualified terminable interest trust (QTIP trust).
• Modifies estate & gift tax treatment of short-term original issue discount (OID) instruments.

II. Reducing the Need to File Returns, Schedules, or Report Certain Income

Taxpayer Bill of Rights 3

• Allows "global" interest netting of under- and over-payments.

Individual Tax Simplification

• Increases the standard deduction attributable to dependent unearned income.
• Simplifies child dependency exemption and related rules.
• Eliminates household maintenance test for child and dependent care tax credit.
• Increases de minimis threshold for estimated tax.
• Provides de minimis exception to passive loss rules.
• Excludes from taxes $500,000 of capital gains on sale of principal residence.

Business Tax Simplification:

• Provides statutory hedging rules to ensure business property is treated as ordinary property.
• Modifies look-back method for long-term contracts.
• Excludes from alternative minimum tax (AMT) corporations with less than $5 million.

Foreign Tax Simplification:

• Exempts certain individuals from foreign tax credit limitation.
• Simplifies controlled foreign corporation rules.
• Allows election to use simplified foreign tax credit under the AMT.
• Repeals "sailing permit" requirement on departing aliens.
• Simplifies 10-50 corporation foreign tax credit limitation baskets.

Pass-Through Simplification:

• Allows tax-free conversion of subchapter S corporation to partnership

Estate & Gift Tax Simplification:

• Eliminates gift tax filing requirement for gifts to charities of over $1,000
• Closes partnership taxable year with respect to deceased partner upon the death of the partner
• Repeals certain throwback rules applicable to domestic trusts
• Amends "5 or 5 power" relating to power of appointment
• Eliminates interest deductibility on deferred payments of estate tax on closely held business assets and reduces interest rate charged by IRS

Tax-Exempt Bond Simplification:

• Creates new exception to tax-exempt bond rebate requirements.
• Repeals $100,000 limitation on unspent proceeds from tax-exempt bond issues under 6-month rebate exception.
• Excludes from arbitrage rebate requirement earnings on bona fide debt service fund under construction bond rules.
• Repeals debt service-based limitation on investment in certain non-purpose investments.

Excise Tax Simplification:

• Increases de minimis limit for after-market alterations for heavy truck and luxury car excises.
• Simplifies excise taxation of distilled spirits, wines and beer.

Other Simplification:

• Extends due date for first quarter estimated tax by private foundations.
  
  

III. Administrative Process

Taxpayer Bill of Rights:

• Repeals authority to disclose whether a prospective juror has been audited.
• Clarifies prohibition on IRS employee "browsing" of tax returns.

Individual Tax Simplification:

• Clarifies tax court jurisdiction with respect to overpayment determinations.
• Clarifies tax court jurisdiction over interest determinations.
• Clarifies net worth requirement for awards of administrative or litigation costs.

Foreign Tax Simplification:

• Simplifies rules for translating foreign tax payments into U.S. dollars.

Estate & Gift Tax Simplification:

• Clarifies waiver of certain rights of recovery of estate tax from a QTIP trust.
• Provides transitional rule relating to qualified domestic trusts.
• Clarifies rules relating to certain disclaimers.

Tax-Exempt Bond Simplification:

• Repeals expired student loan bond arbitrage rebate provisions.

Excise Tax Simplification:

• Gives IRS authority to grant exemptions from excise tax registration requirements.
• Repeals excise tax deadwood provisions.

Other Simplification:

• Clarifies authority of Treasury secretary to withhold Puerto Rico income taxes from salaries of federal employees.
• Grants IRS authority for cooperative agreements with state tax authorities.

IV. Revenue Raisers

Individual Tax Simplification:

• Provides optional Self-Employment Contributions Act computations for purposes of acquiring social security coverage.

Business Tax Simplification:

• Modifies like-kind exchange rules.

Foreign Tax Simplification:

• Simplifies formation and operation of international joint ventures.
• Provides transition rule for certain trusts.
• Allows mark-to-market election for passive foreign investment corporation shareholders.
• Simplifies the application of the stock and securities trading safe harbor.
• Imposes holding period requirement for certain foreign tax credits.

Pass-Through Simplification:

• Accelerates due date for partnerships to furnish K-1s.
• Simplifies reporting and auditing provisions for large partnerships.

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