Daily Tax Update - August 1, 2012: House Passes Bill to Extend Tax Cuts for All Taxpayers

August 1, 2012

HOUSE PASSES BILL TO EXTEND TAX CUTS FOR ALL TAXPAYERS:  Today, the House passed a bill (H.R.8 - The Jobs Protection and Recession Prevention Act) that would extend the Bush-era tax cuts for all taxpayers.  The vote was 256 to 171.  A vote on the Senate-passed Democratic alternative tax cut bill, which would allow the tax cuts to expire for families earning more than $250,000, was rejected by a vote of 170 to 257.

  • In remarks on the House floor today, Ways and Means Committee Chairman Dave Camp said, "The Jobs Protection and Recession Prevention Act stops the tax hike we face at the end of the year and provides a one-year extension of the low-tax policies originally enacted in 2001 and 2003 and then extended again in 2010.  The 2010 bill was supported by 85 current House Democrats, 40 current Senate Democrats and President Obama.  Importantly, this legislation allows Congress time to pass and enact comprehensive tax reform without causing undue harm to our fragile economy.  Economists have noted that comprehensive tax reform, when paired with appropriate government spending cuts, could lead to the creation of 1 million American jobs in the first year alone.  The choice House Republicans have made is to pass this bill, work toward comprehensive tax reform, and create jobs."
  • Tomorrow, the House is scheduled to consider the "Pathway to Job Creation Through a Simpler, Fairer Tax Code Act of 2012" (H.R. 6169), which would set up an expedited process for moving a tax reform bill through the House and Senate.

SENATE TAX WRITERS REACH AGREEMENT ON TAX EXTENDERS:  According to a statement by Finance Committee Chairman Max Baucus and Ranking Member Orrin Hatch, an agreement has been reached on the extension of a package of expiring tax provisions.  The Senators said that the number of extenders has been reduced by 25%.  The Committee is scheduled to vote tomorrow.  Rep. Patrick Tiberi, a member of the House Ways and Means Committee, said that the House will not consider the tax breaks until after the November 6 election.

  • The legislation includes benefits for small businesses, working families, research and development, and renewable energy initiatives.  The proposal also includes a key provision to deal with the alternative minimum tax.
  • Baucus said, "The Senate Finance Committee worked together to craft a bipartisan extenders package.  This effort has proven that legislating can still be done if both sides work together.  Extending these tax-cutting provisions gives certainty to middle-class families and businesses across the country, and it helps support the jobs our economy needs.  We’re facing serious challenges with the fiscal cliff at the end of the year, and this win shows we’re able to come together to tackle tough problems.  This is exactly the kind of work it will take to address the fiscal cliff."
  • Hatch said, "This legislation demonstrates that there is a will to subject long-standing tax policies to the full and much-needed public scrutiny of the American people.  This is a first step towards the ultimate goal of comprehensive tax reform that shows that there is a path to resolving the challenges we face as a nation."
  • A summary of the provisions can be accessed here:

HEARING EXAMINES THE VARIED TAX TREATMENT OF BUSINESS ENTITIES:  Today, the Senate Finance Committee held a hearing entitled "Tax Reform:  Examining the Taxation of Business Entities" to explore the different methods of taxing business entities and  proposals to alter the current rules.  The hearing considered the history of the two-tiered corporate tax system, compare the US taxation of passthroughs to the systems of other countries and consider whether the current system distorts business decisions in ways that hurt job creation and economic growth.

  • The witnesses were:
    • Mr. Harrison T. LeFrak, Vice Chairman, The LeFrak Organization
    • Mr. Dana L. Trier, Adjunct Professor in Taxation, University of Miami School of Law and Columbia Law School
    • Mr. Alvin C. Warren, Ropes & Gray Professor of Law, Harvard Law School
    • Mr. Fred C. De Hosson, Partner, Baker & McKenzie
  • In his opening remarks, Chairman Baucus said, "Ideally, our tax code should cause as few distortions in business as possible.  Businesses should plan and organize based on growth and job creation – not the tax code. One of my main goals of tax reform is to make the system more competitive, but also keep it fair.  Our hearing this morning will examine the difference between corporate and pass-through taxation and whether current rules strike the right balance in our diverse economy."
  • Ranking Member Orrin Hatch said, "There seems to be a lot of interest in corporate tax reform, which is understandable given that the top US corporate tax rate of 35 percent is about ten percentage points higher than the average top corporate tax rate of the OECD countries. But corporate tax reform should really be viewed as part of business tax reform, which is the subject of our hearing today."  Hatch continued, "It makes no sense today to have two levels of taxation of corporate earnings. In fact, I am not sure it ever made sense to have two levels of taxation even in the early years of our income tax system. Earlier this year, President Obama released his framework for business tax reform. One of the really bad ideas in there was to double-tax certain pass-through entities. Like all bad ideas, this one should be rejected. All business income, whether earned by a C corporation, a large pass-through entity, or a small business, should be subject to a single level of tax — either at the entity level or at the owner level."
  • Mr. LeFrak testified, "Partnerships allow our business to establish discrete entities for each enterprise. Each project, building or oil field is in its own partnership. The ownership of each project or business reflects the objectives, risk tolerance and liquidity needs of various family members and investors. In addition, each partnership provides a discrete way to measure the success or failure of outcomes and to limit risk on a project-by-project basis. Furthermore, our lenders demand separate partnerships for each activity they are financing. Lenders want a guarantee that the assets they are financing are protected and not subject to third party claims arising from unrelated business activities. Lenders demand that the assets are compartmentalized, especially in the event of bankruptcy."  He added, "Any imposition of new taxes on pass-through entity will have disastrous results not only on my family’s enterprises but also on many American jobs. I strongly urge Congress and the Administration to abandon the proposal in the President’s Framework for Business Tax Reform."
  • Mr. Trier stated, "In my testimony I will focus on business entity taxation in five different settings. First, of course, is that of the publicly traded US corporation, the type of business entity that tends to receive the most attention in the tax academic and public finance literature. The second is the closely-held business engaged in small or medium size businesses, both businesses like those of my grandfather and father in the Midwest manufacturing goods or equipment or distributing products, and businesses like today’s emerging high technology enterprises in fields ranging from information technology to energy and biotechnology. The third context is that of the personal services business, such as management consulting, healthcare and my own former business of law. Fourth, I will discuss the publicly traded partnership. Finally, I will address various hybrid entity configurations in which multiple types of entities are employed to conduct a business enterprise, a type of structure that is extraordinarily common today."
  • Mr. Warren discussed three points: (1) the need to reform U.S. taxation of corporate and investor income to reduce economic distortions; (2) the need to rethink the boundary between taxable and pass-through entities in light of changes in the legal environment and in the capital markets; and (3) the complexity of reforming the taxation of business entities due to a large array of different combinations of domestic and foreign income, entities, and investors.
  • Mr. De Hosson testified that he sees four possible reasons for why pass-through entities for regular business ventures are used less in Western Europe than in the United States: "1. In some jurisdictions, the less defined legal position of pass-through entities with respect to legal ownership and protection against liabilities is a major obstacle for their use as business entity; 2. The international environment wherein most European businesses operate requires more certainty with respect to the tax and legal treatment of the entities by the countries involved; 3. The relatively low corporate tax rates in Europe as compared to individual income tax rates make the use of corporations more attractive; and 4. The availability of tax facilities for corporations as a result of EU direct tax measures makes corporations the most suitable entities for expansion in the EU internal market."
  • Testimony can be accessed here:
  • In connection with the hearing, the Joint Committee on Taxation has released Selected Issues Relating to Choice of Business Entity
  • For additional information, contact Philip R. West - mailto:pwest@steptoe.com or  Amanda Varma - avarma@steptoe.com

TAX BILLS INTRODUCED JULY 31:

1. [112th] S.3460 : A bill to amend the Internal Revenue Code of 1986 to provide for startup businesses to use a portion of the research and development credit to offset payroll taxes.
Sponsor: Sen Coons, Christopher A. [DE] (introduced 7/31/2012)   Cosponsors (3)Committees: Senate Finance
Latest Major Action: 7/31/2012 Referred to Senate committee. Status: Read twice and referred to the Committee on Finance.

2. [112th] S.J.RES.48 : A joint resolution disapproving the rule submitted by the Internal Revenue Service relating to the health insurance premium tax credit.
Sponsor: Sen Johnson, Ron [WI] (introduced 7/31/2012)   Cosponsors (None)Committees: Senate Finance
Latest Major Action: 7/31/2012 Referred to Senate committee. Status: Read twice and referred to the Committee on Finance.

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