Daily Tax Update - March 7, 2012: Ways & Means Tax Reform Hearing: Closely Held Businesses

WAYS & MEANS HEARING ON TREATMENT OF CLOSELY-HELD BUSINESSES IN THE CONTEXT OF TAX REFORM:  Today, the House Ways and Means Committee held a hearing on how accounting rules cause different types of businesses – specifically, publicly-traded and closely-held businesses – to evaluate tax policy choices differently.  This hearing "focused on the special challenges faced by small and closely-held businesses that are less concerned with financial accounting rules but must confront tremendous complexity in dealing with tax accounting and various choice of entity regimes." 

  • The witnesses were:
    • Mr. Mark Smetan
      Chief Financial Officer, Eby-Brown Company
    • Mr. Dewey W. Martin, CPA
      Testifying on the behalf of the National Federation of Independent Businesses
    • Mr. Stefan F. Tucke
      Partner, Venable, LLP
    • Mr. Jeffrey L. Kwal
      Kathleen and Bernard Beazley Professor of Law, Loyola University School of Law
    • Mr. Tom Nicho
      Meissner Tierney Fisher & Nichols S.C.
    • Mr. Martin A. Sullivan
      Contributing Editor, Tax Analysts
  • In his opening remarks, Committee Chairman Camp said, "In this hearing, we will examine the rules that dictate how these entities should be organized for purposes of taxation, as well as general burdens imposed on closely-held businesses such as high compliance costs and tax rates.  The difference between individual and corporate tax rates has an important effect on a business and how it is organized . . . . As we move forward on reform, this Committee should ask when it is appropriate to tax business income on a pass-through basis and when, if ever, it is appropriate to subject business income to entity-level taxation.  Given the importance of pass-through entities to the US economy and the prevalence of closely-held businesses, the treatment of these job creators is critical to tax reform.  Our goal with comprehensive tax reform remains clear – to create an environment that is ripe for economic growth and job creation."
  • Mr. Smetana said, "In order to fairly treat all businesses and provide a consistent policy with which business can operate in the US economy, tax reform must address both forms of organization.  The stated goal of providing a competitive business tax environment is important, however, it should not result in discriminating against closely-held businesses by: widening the amount of marginal tax rates they pay on business sourced income; forcing them into an inappropriate investor/owner relationship with their business; double taxing their business income as if they were merely an investor trader of the business; or forcing them to pay a second level tax on the sale of their business."
  • Mr. Martin testified, "The current tax code has become a confusing and unpredictable challenge for the vast majority of small business owners.  Our tax laws should not deter or hinder the ability of small business owners to create or expand their businesses.  Taxes are a major issue for all small business owners.  Tax law can dictate the business decision that an owner will make, whether it is the type of structure to adopt or whether to make an investment.  After decades of patchwork changes to the tax code, Congress needs to make major adjustments to our tax laws to reduce complexity and confusion and encourage business growth."
  • Mr. Kwall said, "Quite clearly, a pass-through regime for all closely-held enterprises would be the ideal.  In light of recent developments, the time is ripe for establishing this result where such a system can be effectively administered."
  • Mr. Nichols stated, "[I]t important to note that the vast majority of costs involved in establishing and maintaining such a two-track system have already been incurred.  The Treasury Department has already promulgated comprehensive regulations for both partnerships and S corporations, and the Service has developed detailed tax forms and instructions for both types of entities.  Moreover, individual taxpayers have already made their choice of entity, and they will not need to learn another system unless they voluntarily elect to change their tax treatment.  As a consequence, the bulk of the ongoing cost of this two-track system is effectively borne by law and accounting students and tax advisors who have to learn and apply both sets of rules.  However, no significant long-term benefit would seem to accrue to the economy as a whole by forcing all pass-through taxpayers into a single regime."
  • Mr. Sullivan testified, "Of course, everybody wants a simpler tax system. But lawmakers need to understand that tax simplification is especially important to small businesses.  In particular, the instability of the code caused by frequent tax changes and expiring tax provisions is a drain on the limited resources of a small business.  Simplification of provisions that particularly affect small businesses should also be a priority.  Along these lines, Congress should consider simplifying entity choices.  Currently, the small business owner must consider the advantages and disadvantages of choosing among four different forms: sole proprietorship, partnership, Subchapter S, and Subchapter C.  Proposals are already on the table that would give businesses the choice of a simple partnership or, if circumstances warrant, a more complicated partnership regime.  Graduated corporate rates should be entirely eliminated, or small businesses simply should not be allowed to adopt Subchapter C status."
  • Testimony can be accessed here.
  • In conjunction with today’s hearing, the Joint Committee on Taxation has issued a report
  • For additional information, contact Philip R. West - pwest@steptoe.com or Amanda Varma - avarma@steptoe.com

MISCELLANEOUS GUIDANCE RELEASED:

Notice 2012-20 provides guidance relating to the portfolio interest exception, the short term debt exception under section 1.6049-5(b)(10), and the excise tax under section 4701 in connection with the repeal of section 163(f)(2)(B)(the bearer debt repeal).

Revenue Procedure 2012-19 addresses the repair & maintenance, materials & supplies, and related method changes resulting from the tangible property temporary regulations.  Specifically, it provides the procedures by which a taxpayer may obtain the automatic consent of the Commissioner of Internal Revenue to change to the methods of accounting provided in §§ 1.162-3T, 1.162-4T, 1.263(a)-1T, 1.263(a)-2T, and 1.263(a)-3T of the temporary Income Tax Regulations (T.D. 9564) for taxable years beginning on or after January 1, 2012.

Revenue Procedure 2012-20 addresses the depreciation, disposition, and related method changes resulting from the tangible property temporary regulations.  Specifically, it provides the procedures by which a taxpayer may obtain the automatic consent of the Commissioner of Internal Revenue to change to the methods of accounting provided in §§ 1.167(a)-4T, 1.168(i)-1T, 1.168(i)-7T, and 1.168(i)-8T of the temporary Income Tax Regulations (T.D. 9564) for taxable years beginning on or after January 1, 2012.

IR-2011-20: IRS Announces New Effort to Help Struggling Taxpayers Get a Fresh Start; Major Changes Made to Lien Process

TAX BILL INTRODUCED MARCH 6TH:

S..2161 - A bill to amend the Internal Revenue Code of 1986 to extend and modify the credit for certain plug-in vehicles.
Sponsor: Sen Merkley, Jeff [OR] (introduced 3/6/2012)      Cosponsors (None)
Latest Major Action: 3/6/2012 Referred to Senate committee. Status: Read twice and referred to the Committee on Finance.

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
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