Daily Tax Update - February 14, 2011: White House Releases FY 2012 Budget Proposal

WHITE HOUSE RELEASES FY 2012 BUDGET PROPOSAL:  Today, the White House released its fiscal year 2012 budget proposal.  The budget proposes trimming the deficit by $1.1 trillion over 10 years.  The President’s budget does not contain any specific proposals to reform the tax code.  On the issue of tax reform, the President’s budget message to Congress states, "In today’s high-tech, global economy, that means the United States must be the best place to do business and the best place to innovate.  That will take reforming our tax code, and I am calling for immediate action to rid the corporate tax code of special interest loopholes and to lower the corporate rate to restore competitiveness and encourage job creation— while not adding a dime to the deficit."

International Tax Proposals:  The Administration’s FY 2012 international tax proposals are estimated to raise $129 billion over 10 years.  The proposals largely mirror the provisions in the proposed budget for FY 2011, which were estimated to raise $122 billion.  Several proposals, however, receive significantly different revenue scores in the newly proposed FY 2012 budget.

  • Revised provisions from FY 2011 budget:
    • Tax currently excess returns associated with transfers of intangibles offshore.  Under the proposal, if a US person transfers an intangible to a related controlled foreign corporation, then certain excess income from transactions connected with or benefitting from the covered intangible would be treated as subpart F income if the income is subject to a low foreign effective tax rate.  Excess intangible income would be defined as the excess of gross income from transactions connected with or benefitting from such covered intangible over the costs properly allocated and apportioned to this income increased by a percentage mark-up (the prior year provision more broadly applied to excess returns of corporations, whether or not connected with the transferred intangible).  The proposal is estimated to raise $20.8 billion over 10 years, compared to the $15.4 billion estimated to be raised from a similar proposal in the FY 2011 budget.
    • Disallow deductions of US non-life insurance companies for certain excess non-taxed reinsurance premiums paid to affiliates.  The proposal would deny an insurance company a deduction for reinsurance premiums paid to affiliated foreign reinsurance companies to the extent that the foreign reinsurer (or its parent company) is not subject to US income tax with respect to the premiums received, and would exclude from the insurance company’s income any ceding commissions received or reinsurance recovered with respect to reinsurance policies for which a premium deduction is denied (in whole or in part) (the prior year proposal denied deductions based on a formula).  The proposal is estimated to raise $2.6 billion over 10 years, compared to $519 million for a similar provision in the FY 2011 budget proposal.
  • Other proposals previously included in the FY 2011 budget:
    • Defer the deduction of interest expenses allocable to foreign-source income to the extent the US taxation of such income is deferred ($37.6 billion over 10 years, compared to the $25.6 billion estimated to be raised from the FY 2011 proposal);
    • Require taxpayers to determine foreign tax credits from the receipt of a dividend from a foreign subsidiary based on the consolidated earnings and profits and foreign taxes of all of the taxpayer’s foreign subsidiaries, and adopt a matching rule to prevent the separation of foreign taxes and associated foreign income ($51.4 billion over 10 years, compared to the $59.3 billion estimated to be raised from the FY 2011 proposal);
    • Limit shifting of income through intangible property transfers by “clarifying” the definition of intangible property ($1.6 billion over 10 years, compared to $1.2 billion in the FY 2011 proposal);
    • Limit earnings stripping by expatriated entities ($4.2 billion over 10 years, compared to $3.5 billion in the FY 2011 proposal); and
    • Modify tax rules for dual capacity taxpayers ($10.7 billion over 10 years, compared to $8.5 billion in the FY 2011 proposal).
    • Several proposals included in the FY 2011 budget (e.g., repeal 80/20 rules, combat under-reporting through foreign accounts and entities, prevent avoidance of dividend withholding taxes) were part of legislation enacted in 2010, and are thus not included in the FY 2012 budget.

Financial Institution and Products Related Proposals:  As in the FY 2011 budget, the Administration includes a proposal to impose a fee on large financial institutions and several provisions designed to close tax loopholes in the taxation of financial institutions and products.  These proposals are estimated to raise $33.2 billion over 10 years. 

  • Impose a financial crisis responsibility fee.  The Administration is proposing to impose a tax on certain financial institutions with assets of more than $50 billion.  The tax will equal .075% of the firm’s covered liabilities.  The proposal is estimated to raise $30 billion over 10  years.  The FY 2011 budget plan contained a similar provision in which the tax was .15% and the revenue estimate was $90 billion over 10 years.
  • Require accrual of income on forward sale of corporate stock.  Under the proposal, a corporation that enters into a forward contract to sell its own stock would be required to treat a portion of the payment received when the stock is issued as a payment of interest.
  • Ordinary treatment from day-to-day dealer activities for certain dealers of equity options and commodities.  The proposal would require dealers in securities, equity options, commodities, and commodities derivatives to treat the income (or loss) from their dealer activities as ordinary.
  • Modify definition of "control" for Section 249.  Section 249 may disallow or limit a corporation’s deduction for a premium paid to repurchase a debt instrument convertible into its stock or into stock of a corporation that is control of, or controlled by, the corporation.  The proposal would amend the definition of "control" in section 249(b)(2) by referencing the definition of a controlled group in section 1563(a)(1) to include indirect control relationships. 
  • Continuation of Expiring Provisions Through Calendar Year 2012:  The Administration proposes to extend a number of temporary tax provisions through December 31, 2012, including the subpart F "active financing" and "look-through" exceptions.

Other Significant Proposals:

  • Businesses Tax Cuts:  The Administration’s FY 2012 budget contains a number of proposals designed to provide tax relief to businesses.  Some of the more significant provisions would:
    • Enhance and make permanent the R&E tax credit;
    • Provide additional tax credits for investment in qualified property used in a qualified advanced energy manufacturing project (i.e., section 48C);
    • Provide a tax credit for energy-efficient commercial building property expenditures in place of the existing deduction for such property;
    • Extend and modify the new markets tax credit; and
    • Reform and extend Build America bonds.
  • Additional Revenue Raising Provisions:  The budget contains several provisions aimed at raising revenue and closing “loopholes” in the tax code.  Many of these provisions previously appeared in the Administration’s FY 2011 budget, and include the following:
    • Tax carried (profits) interests as ordinary income ($14.8 billion over 10 years, compared to $23.9 billion for the proposal in the FY 2011 budget).
    • Reinstate Superfund taxes ($20.8 billion over 10 years, compared to $18.9 billion in FY 2011 budget);
    • Repeal the last-in, first-out ("LIFO") method of accounting for inventories ($52.8 billion over 10 years, compared to $59 billion in FY 2011 budget);
    • Repeal the boot-within-gain limitation in the case of any reorganization transaction if the exchange has the effect of the distribution of a dividend (within the meaning of section 356(a)(2)) ($849 million over 10 years, compared to $788 million in FY 2011 budget);
    • Eliminate various tax preferences available for fossil fuels ($46.1 billion over 10 years, compared to $38.8 billion in FY 2011 budget); and
  • Individual Proposals:
    • The Administration’s budget uses an adjusted baseline that permanently continues the 2001 and 2003 income tax cuts for middle-income taxpayers, i.e., individuals with income less than $250,000 (married filing a joint return) or $200,000 (single filers). 
    • For tax years beginning after December 31, 2011, the budget would limit the tax rate at which high-income taxpayers (those with income greater than the amounts listed above) can take itemized deductions to a maximum of 28 percent.  For tax years beginning after December 31, 2012, the budget would also tax net capital gains and qualified dividends at a 20-percent rate for high-income taxpayers.
    • The Administration’s adjusted baseline permanently continues estate, gift, and generation-skipping transfer taxes at 2009 parameters, and reflects the permanent extension of relief from the alternative minimum tax.
  • For additional information, contact Philip R. West at pwest@steptoe.com.
  • The budget can be accessed here

TREASURY RELEASES "GREEN BOOK" OF ADMINISTRATION’S REVENUE PROPOSALS:  Today, the Treasury Department released the "General Explanations of the Administration’s Fiscal Year 2012 Revenue Proposals."

  • The document can be accessed here.  

TAX BILLS INTRODUCED FEBRUARY 11TH:
1.  [112nd] H.R.659: To amend the Internal Revenue Code of 1986 to waive the 10-percent penalty with respect to early retirement distributions for certain unemployed individuals.
Sponsor: Rep Broun, Paul C. [GA-10] (introduced 2/11/2011)      Cosponsors (7)
Committees: House Ways and Means
Latest Major Action: 2/11/2011 Referred to House committee. Status: Referred to the House Committee on Ways and Means.

2.  [112nd] H.R.660: To amend the Internal Revenue Code of 1986 to provide individual and corporate income tax relief and to extend 100 percent bonus depreciation, and for other purposes.
Sponsor: Rep Broun, Paul C. [GA-10] (introduced 2/11/2011)      Cosponsors (6)
Committees: House Ways and Means
Latest Major Action: 2/11/2011 Referred to House committee. Status: Referred to the House Committee on Ways and Means.

3.  [112nd] H.R.661: To amend the Internal Revenue Code of 1986 to allow rollovers from other retirement plans into simple retirement accounts.
Sponsor: Rep Foxx, Virginia [NC-5] (introduced 2/11/2011)      Cosponsors (None)
Committees: House Ways and Means
Latest Major Action: 2/11/2011 Referred to House committee. Status: Referred to the House Committee on Ways and Means.

4.  [112nd] H.R.673: To amend the Internal Revenue Code of 1986 to make permanent the depreciation classification of motorsports entertainment complexes.
Sponsor: Rep Heller, Dean [NV-2] (introduced 2/11/2011)      Cosponsors (8)
Committees: House Ways and Means
Latest Major Action: 2/11/2011 Referred to House committee. Status: Referred to the House Committee on Ways and Means.

5.  [112nd] H.R.674: To amend the Internal Revenue Code of 1986 to repeal the imposition of 3 percent withholding on certain payments made to vendors by government entities.
Sponsor: Rep Herger, Wally [CA-2] (introduced 2/11/2011)      Cosponsors (10)
Committees: House Ways and Means
Latest Major Action: 2/11/2011 Referred to House committee. Status: Referred to the House Committee on Ways and Means.

6.  [112nd] H.R.682: To amend the Internal Revenue Code of 1986 to increase the contribution limits to dependent care flexible spending accounts and to provide for a carryover of unused dependent care benefits.
Sponsor: Rep Sensenbrenner, F. James, Jr. [WI-5] (introduced 2/11/2011)      Cosponsors (1)
Committees: House Ways and Means
Latest Major Action: 2/11/2011 Referred to House committee. Status: Referred to the House Committee on Ways and Means.

7.  [112nd] H.RES.89: Expressing the sense of the House of Representatives that the Internal Revenue Service should immediately update its collection policies and procedures in order to more adequately protect and assist taxpayers suffering an economic hardship.
Sponsor: Rep Waters, Maxine [CA-35] (introduced 2/11/2011)      Cosponsors (1)
Committees: House Ways and Means
Latest Major Action: 2/11/2011 Referred to House committee. Status: Referred to the House Committee on Ways and Means.

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.

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