Daily Tax Update - July 14, 2010

LINCOLN, KYL INTRODUCE ESTATE TAX REFORM PROPOSAL: Yesterday, Senators Blanche Lincoln (D-AR) and Jon Kyl (R-AZ) introduced a proposal to reform permanently the federal estate tax and announced their intention to offer the provision as an amendment to a small business bill pending before the Senate. The Senate could begin consideration of the small business bill next week. However, Senate Majority Leader Harry Reid previously said that he was opposed to attaching an estate tax fix to the bill.

  • The Lincoln-Kyl proposal would require the Senate Finance Committee to amend H.R. 5297, the Small Business Lending bill, to set the estate tax rate permanently at 35 percent, with a $5 million exemption amount phased in over 10 years and indexed for inflation. It would also provide a “stepped up basis” for inherited assets. The proposal provides an election for deceased taxpayers to either retain this year’s estate tax rate, which is zero percent, with “carry over basis,” or file under the provisions of the new bill. According to their press release, “Their proposal also instructs the Senate Finance Committee to offset the difference in revenue loss between the Obama administration’s proposed 45 percent estate tax rate with a $3.5 million exemption amount and their proposed reform. If Congress does not act this year, the federal estate tax is scheduled to increase to 55 percent with only a $1 million exemption at the beginning of 2011.”
  • Kyl said, “If the Small Business Lending bill is intended to help small business create jobs, wouldn’t it make sense to provide small business owners with the certainty that their tax rates aren’t going to skyrocket at the beginning of next year?” said Kyl. “In just six short months, American taxpayers will face the largest tax hike in history unless Congress acts. It is estimated that more than a half million American families will pay the estate tax over the next decade, and the lack of congressional action creates a tremendous amount of uncertainty for these families, small-business owners, and farmers. This uncertainty is one of several factors acting to prevent a strong economic recovery from taking hold.”

SELECT REVENUE MEASURES SUBCOMMITTEE HOLDS HEARING ON REINSURANCE: Today, the House Ways and Means Select Revenue Measures Subcommittee held a hearing on reinsurance. The hearing focused on the issue of reinsurance between affiliated entities and recent proposals, including a bill (H.R. 3424) by Ways and Means Select Revenue Measures Chairman Richard Neal (D-MA) and a FY 2011 Obama Administration budget proposal, that would deny a deduction for reinsurance premiums to related foreign reinsurance companies if certain conditions were met.

  • Treasury Deputy Assistant Secretary for International Tax Affairs Stephen Shay testified that “[a]lthough reinsurance, including affiliate reinsurance, is often used for legitimate business purposes, the ability of a foreign-owned group to reduce or eliminate US income tax on US risks reinsured with its foreign affiliates (including the US tax on associated investment income) creates a significant tax incentive for a foreign-owned group to use affiliate reinsurance to move income from insurance of US risks offshore to low tax jurisdictions.” Shay also discussed the President’s budget proposal, “The Budget Proposal would reduce the incentive to use reinsurance to move profits offshore and thereby reduce US tax, by reducing the US tax benefit for doing so in cases in which a US insurer enters into excessive reinsurance with foreign affiliates not subject to US tax. Reducing this inappropriate incentive will help ensure that US tax rules do not facilitate the avoidance of US tax by insurers of US risks. The Administration believes that it is important to level the playing field between US-owned and foreign-owned insurance companies. We have put forward one specific proposal to do so but remain open to other proposals to achieve this goal.”
  • William R. Berkley, Chairman of the Board and CEO of the W.R. Berkley Corporation, stated that legislation is necessary to "close a loophole in current law allowing foreign insurance groups to avoid paying US tax on business written in the United States...If left unchecked, much more of the US insurance capital base will eventually migrate abroad."
  • Sean M. Shaw, Insurance Consumer Advocate for the State of Florida, spoke against the proposals. Mr. Shaw stated that "[c]onsumers can expect to pay an additional $11 billion to $13 billion every year because of this tax increase. That would be a bad idea, even in the best of times. And that is a terrible idea now, in the midst of a serious recession and a disastrous oil spill."
  • Testimony can be accessed here
  • For additional information, contact Philip R. West - pwest@steptoe.com, Amanda Varma - avarma@steptoe.com, or Scott A. Sinder - ssinder@steptoe.com.

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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