Daily Tax Update - May 4, 2010

SENATE FINANCE COMMITTEE HOLDS SECOND HEARING ON BANK TAX: Today, the Senate Finance Committee held a second hearing on the Administration’s Financial Crisis Responsibility Fee (or “bank tax”) proposal. The witnesses at the hearing were: (1) Treasury Secretary Timothy Geithner; (2) Steve Bartlett, Financial Services Roundtable President and CEO; (3) John K. Sorensen, President and CEO of the Iowa Bankers Association; (4) James Chessen, Chief Economist, American Bankers Association; and (5) Patrick S. Baird, Chairman, AEGON, USA, LLC.

• Secretary Geithner stated that the Financial Crisis Responsibility Fee was designed to tax risk, stating that banks can reduce the incidence of the tax by reducing risk. Secretary Geithner stated, “We designed the fee so that it would fall most heavily on firms that fund riskier activities with less stable forms of funding. Firms would pay a fixed percentage of their assets adjusted for risk, minus their capital, insured deposits, and certain insurance policy reserves.”
• Certain comments made by Secretary Geithner suggest that Treasury will modify its proposal so that the tax is based on regulatory risk-weighted assets. Secretary Geithner stated, “the framework we are proposing is to rely on the established framework that US regulators rely on to define risk-weighted assets. There is a long and established framework for doing that, and it is our judgment that it does the best job of capturing risks of the balance sheet of banks.”
• In his announcement of the proposed tax, President Obama emphasized that the fee was designed to recoup losses from the Troubled Assets Relief Program (“TARP”). Some banks, however, did not take TARP or have repaid their TARP funds, and have argued that they should not be subject to the fee because they are not contributing to TARP losses. In his testimony today, Secretary Geithner emphasized that financial institutions benefited from a variety of government assistance programs in addition to TARP, including the FDIC’s Temporary Liquidity Guarantee Program, the Federal Reserve’s Primary Dealer Credit Facility, and other Federal Reserve liquidity facilities.
• Secretary Geithner stated in his testimony that the fee would apply to only 1% of US financial institutions. At another point, however, he observed that the banks subject to the tax do far more than 1% of the nation’s lending. He stated that the limited impact of the tax would not affect the ability of small businesses to obtain loans, stating that “[i]f covered firms try to pass on the costs of the fee to their borrowers, they will lose market share to other institutions.”
• Secretary Geithner stated that Treasury believes the tax should be implemented for at least 10 years and “should stay in place longer, if necessary, to ensure that the cost of TARP is fully recouped.”
• In response to concerns about competitiveness from Senator Grassley, Secretary Geithner stated that Treasury continues to work with other governments that are considering similar efforts.
• Senator Schumer, who has advocated including the proposed tax in financial regulatory reform legislation, asked Secretary Geithner if the Administration would like to see the tax in regulatory reform legislation. Secretary Geithner stated that it may make sense to include the tax in a financial regulatory reform bill, but that the Administration wants to see the tax included in whatever vehicle that Congress finds proper.
• Senators also asked about whether Treasury considered a profits-based tax. Secretary Geithner stated that the Treasury did consider proposing a profits-based tax, which is reportedly being considered in the House Ways & Means Committee, but ultimately concluded that an asset-based tax could better target risk.
• Senator Kerry sought to clarify that the tax would not apply to certain large financial institutions in his state, whose depository institutions or broker dealers are small in relation to their larger business. Secretary Geithner clarified that some of these would not be subject to the tax and they would need to work to try to draw a line that taxed only those who had the benefit of specified government programs.
• Several of the financial industry witnesses stated that the tax could reduce lending. Steve Bartlett, the President and Chief Executive Officer of the Financial Services Roundtable, stated that the tax “is designed to raise $90 billion over 10 years, which means a $90 billion reduction in regulatory capital. Assuming a 10% leverage ratio, this loss of capital would reduce financial industry lending capacity by $900 billion, a huge number.”
• James Chessen, Chief Economist at the American Bankers Association, pointed out that Treasury now expects to make money on its TARP investments in banks. Mr. Chessen stated, “the real costs have come from non-bank firms.”
• Patrick S. Baird, Chairman of AEGON, USA, LLC, argued that life insurance companies should not be subject to the proposed tax. He stated, “Since insurers are prohibited by state law from engaging in excess or risky leveraging, we do not believe this is justification to impose a tax on our industry. State investment laws are very clear and uniform throughout the country. They impose strict limitations on the type of investments an insurer can make.”
• For additional information, contact Philip R. West - pwest@steptoe.com or Amanda Varma - avarma@steptoe.com.
• Testimony can be accessed here.

MISCELLANEOUS GUIDANCE RELEASED:
Revenue Ruling 2010-13 publishes the State average premium rates for the small group market for purposes of calculating the section 45R tax credit for small employers. Section 45R was added to the Code by Section 1421 of the Patient Protection and Affordable Care Act.

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

STEPTOE & JOHNSON LLP - TAX PRACTICE
Steptoe & Johnson LLP has one of the largest and most diverse law firm tax practices in the country. The practice covers the entire spectrum of federal taxation, including representation of businesses before the Congress, Treasury and the national office of the IRS; transactional planning for domestic and multinational corporations; complex audit and controversy work for corporations and other business interests contesting IRS adjustments; litigation before the Tax Court, Court of Federal Claims, district courts, courts of appeals and the Supreme Court. The firm's tax practice also encompasses all aspects of employee benefits (ERISA), executive compensation, tax-exempt organizations and charitable giving. Steptoe has an extensive state and local tax practice, representing an array of business clients on complex sales and use tax, corporate income tax and property tax matters, both advising those clients and handling audits, administrative appeals, and litigation for them. Read more information on Steptoe's tax practice.

• Learn more about the members of the tax practice group.