Daily Tax Update - February 11, 2010


BAUCUS, GRASSLEY RELEASE DRAFT “HIRE ACT” -- REID FAVORS SMALLER BILL:  Today, Senate Finance Chairman Max Baucus and Ranking member Charles Grassley released a draft of the “Hiring Incentives to Restore Employment (HIRE) Act.” Their joint statement said, “The draft contains proposals we would expect to be included in an initial bill. We offer it as the first step in the Senate process for consideration of these time-sensitive proposals. We present these proposals today in the interest of transparency and open government. It is especially important that all members and the public have sufficient time – at least 72 hours – to review and comment on this package before the Senate begins voting on the bill because it has not gone through the regular committee process. The package includes matters within the Finance Committee’s jurisdiction and matters outside its jurisdiction. The Finance Committee proposals are the result of several weeks of staff and member consultation. We believe they reflect a balanced set of member views and priorities. We do not express a view on the proposals that are outside the Finance Committee’s jurisdiction. In addition, while not addressed in the proposals in this package, there are two process agreements that are essential to completing action on it. Fulfilling these agreements has been a condition precedent to the bipartisan discussions that have occurred. First we will work to ensure that the scope of the Finance Committee package retains its bipartisan character. Second we are committed to timely consideration of permanent bipartisan estate and gift tax reform.”

  • However, this afternoon, Senate Majority Leader Harry Reid said when the Senate returns from the Presidents’ Day recess on February 22, “we will move to a smaller package than has been talked about in the press,” and that package would only include a one-year extension of the highway act, a Build America Bonds provision, a small-business tax program and a small-business tax credit proposal. Reid said that the tax extenders “confuse” the bill, and said other provisions in the Baucus-Grassley draft would be addressed in later measures. Reid added, “We don’t have a jobs bill. We have a jobs agenda.”
  • The Baucus-Grassley draft bill contains (1) a jobs payroll tax exemption that would offer an exemption from Social Security payroll taxes for every worker hired in 2010 that has been unemployed for at least 60 days, (2) an extension of Section 179 expensing, (3) an election to convert tax credit bonds to Build America Bonds, and (4) an extension of the highway trust fund. The draft HIRE Act would also extend several tax provisions that expired at the end of 2009, providing much needed tax relief for individuals and businesses. These provisions include (1) the research and development credit, (2) the 15-year recovery period for leasehold, restaurant, and retail improvements, (3) the new markets tax credit, (4) the active finance exception under Subpart F, and (5) the CFC look-through rules. The draft HIRE Act would also extend several energy tax provisions, including credits for home efficiency and alternative fuel vehicles, as well as for biodiesel, renewable diesel and other alternative fuels. 
  • The Baucus-Grassley draft bill also contains several offsets:
  • Foreign Account Tax Compliance: These provisions include a comprehensive set of measures to reduce offshore noncompliance by giving the IRS new administrative tools to detect, deter, and discourage offshore tax abuses. The proposals include 30% withholding on US source payments to foreign financial institutions, foreign trusts, and foreign corporations that do not agree to disclose their US account holders and owners to the IRS; requiring taxpayers to disclose their foreign accounts on their US tax returns; increasing the statute of limitations to 6 years for failure to report certain offshore transactions and income; clarifying when a foreign trust is considered to have a US beneficiary; and treating substitute dividend and dividend equivalent payments to foreign persons as dividends for purposes of US withholding;
  • A provision dealing with Cellulosic Biofuels;
  • Clarification of the Economic Substance Doctrine and Penalty for Underpayments Attributable to Transactions Lacking Economic Substance: This provision would clarify the application of the economic substance doctrine, which has been used by courts to deny tax benefits for transactions lacking economic substance. The provision would impose a 40% strict liability penalty on underpayments attributable to a transaction lacking economic substance (unless the transaction was disclosed, in which case the penalty is 20%); and
  • Reduction in the Medicare Improvement Fund.
  • Additional information can be accessed here.

SENATE APPROVES BILL TO LIMIT PENALTIES ON SMALL BUSINESSES:  Before leaving town this week, the Senate passed legislation (“The Small Business Penalty Fairness Act, S. 2917”) designed to prevent small businesses from incurring undue tax penalties aimed at large corporations and wealthy individuals investing in tax shelters. The bill revises section 6707A of the IRS code to set the penalty for failure to disclose reportable transactions to the IRS at 75 percent of the tax benefit received. Reportable transactions are defined as investments in transactions that the IRS has identified as listed tax shelters or that have characteristics of tax shelters, including large losses or confidentiality agreements. The minimum penalty under this legislation is $10,000 for corporations and $5,000 for individuals, and the maximum penalty is $200,000 for corporations and $100,000 for individuals. The bill also requires the IRS to submit an annual report to the Senate Finance Committee and the House Ways and Means Committee regarding tax shelter penalties assessed during the preceding year.


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.

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