He noted that in 1980, “The Berlin Wall was still intact, most business was done using snail mail – except then we just called it, ‘the mail,’ and the concept of derivatives was only familiar in a few, limited markets.” At that time, most of America did not know of the internet, there were very few cell phones except in a few expensive automobiles and the computers were “hundreds of times slower” than today’s models.
Sen. Baucus then contrasted the past with changes that affect every American today. He noted that “business is usually done using email, the internet and smart-phones.” There are new financial products that led to a major downturn in the economy. Mobile phones are widely used today and have much more power than a 1980 computer.
Similarly, tax law has changed since 1980. The last comprehensive revision of the Internal Revenue Code was in 1986. Since that time there have been “15,000 changes” in the tax code. Sen. Baucus asks whether we now have “a tax code that is more efficient, competitive and fair?”
As a result of the complexity and changes in the tax code, most businesses are now created as a subchapter S corporation or LLC. Approximately 94% of businesses operate as “pass-through entities.”
In the view of Sen. Baucus, the hearings must examine how best to efficiently tax business. There is also a “gap between the taxes owed and the taxes paid” of nearly $300 billion. Congress will need to examine methods to close this tax gap.
Finally, Sen. Baucus expressed concern about the 141 potential tax extenders each year. He suggests that it is time to reconsider the wisdom of continuing to pass tax extenders each year.
Sen. Orrin Hatch (R-UT) is the Ranking Member of the Senate Finance Committee. He responded to the opening comments by Senator Baucus with a note of caution. Sen. Hatch quoted the statements by President Obama in his State of the Union Address that called for revenue-neutral corporate taxes and simplification of individual taxes this year. Sen. Hatch agrees that tax reform should be revenue-neutral. In his view, a tax bill could “risk walking down the road to a backdoor tax increase.” If tax simplification and improvements are passed, they should be revenue-neutral and not lead to a major tax increase.
Editor’s Note: During 2011 there are two major discussions underway in Congress. The 2010 Fiscal Commission proposed addressing the budget deficit with a combination of spending reductions and modest revenue increases. However, the Fiscal Commission suggested that a major overhaul and simplification of both the corporate and individual taxes is in order. As the Senate Finance Committee members noted, when Congress is preparing to eliminate major deductions of either corporations or individual taxpayers, there will be strong opposition. Lowering rates and simplifying the code is much easier in concept than actually writing a new tax bill.
President Supports Ban on Tax Patents
The Senate is preparing to consider and vote on the Patent Reform Act of 2011 (S. 23). This week the White House published a statement of policy in support of the bill. The White House indicates, “This bill represents a fair, balanced, and necessary effort to improve patent quality, enable greater work sharing between the United States Patent and Trademark Office (USPTO) and other countries, improve service to patent applicants and the public at the USPTO and offer productive alternatives to costly and complex litigation.”
The White House supports the plan to make the U.S. a “first-to-file” system and notes that the USPTO will be able to adjust fees and operate in a deficit-neutral manner.
The American Institute of Certified Public Accountants (AICPA) has been strongly supportive of the ban on tax patents. It published a news release that stated, “Patents for tax strategies undermine the integrity, fairness and administration of the tax system and are contrary to sound policy.”
The AICPA did note that it was clear under the bill that tax software will continue to qualify for patents. AICPA indicated that financial software has “multiple, new and innovative features” that will be protected under the provisions. However, AICPA also emphasized, “As a matter of public policy, all taxpayers should have unhindered access to fully comply with the tax code and to fully utilize interpretations of tax law intended by Congress.”
Accounting firm KPMG also sent a letter to Senate Judiciary Chairman Patrick Leahy (D-VT). KPMG noted approvingly that it is appropriate to ban tax patents that could lead to “taxpayers facing fees simply for complying with the tax code.” However, KPMG noted that it also is a technology firm that develops tax software and it appreciated the “proper balance between the protection of intellectual property rights and the public policy concerns implicated by extending that protection to patents on tax planning.”
In the view of KPMG, the bill gives “proper deference” to the rights of the taxpayer and still provides a good balance through protection for software patents.
Editor’s Note: The patent act now will be submitted for a vote by the full Senate. With White House and bipartisan support now developing, there is a strong likelihood of passage.
House Votes to Repeal Expanded 1099 Reporting
Both the House and the Senate have now passed bills that repeal enhanced IRS Form 1099 reporting required under the Patent Protection and Affordable Care Act of 2010.
By a vote of 314-112, the House passed the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Over Payments Act of 2011 (H.R. 4).
The bill repeals a requirement that many business owners would have to prepare 1099s for a large number of common payments. However, the House bill included an offset that would change the tax credit under the Healthcare Act that is scheduled to go into effect in 2014. While the House leadership supports the repeal of enhanced 1099 reporting, House Democratic Leaders expressed opposition to this reduction in the healthcare credit after 2013.
House Majority Leader Eric Cantor (R-VA) stated that the vote will “make it easier for our small businesses to grow and create jobs by repealing the onerous 1099 provision.”
However, Ways and Means Ranking Member Sander Levin (D-MI) expressed concern and noted, “If this bill would become law, it would mean a tax increase for hundreds of thousands of middle-income taxpayers.” Rep. Levin is concerned that the reduction of the healthcare credit in 2014 will increase middle-income taxes and is hopeful that the final bill will remove this provision.
Editor’s Note: Both the House and Senate have passed the enhanced 1099 repeal. The Senate repeal of the 1099 reporting requirement was attached to a bill to reauthorize the Federal Aviation Administration budget. It will now be necessary for House and Senate to come to a final agreement on the bill language. Because the Senate bill included no offset, it is quite possible that the House offset provision will be removed.
Applicable Federal Rate of 3.0% for March – Rev. Rul. 2011-6; 2011-10 IRB 1 (17 Feb. 2011)
The IRS has announced the Applicable Federal Rate (AFR) for March of 2011. The AFR under Section 7520 for the month of March will be 3.0%. The rates for February of 2.8% or January of 2.4% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2011, pooled income funds in existence less than three tax years must use a 2.8% deemed rate of return. Federal rates are available by clicking here.
Filed under: Washington Hotline Tagged: | Charitable Planning, Gift Planning, Income Tax Planning, Personal Financial Planning
