Daily Tax Update - December 3, 2012: House Republicans Make Counterproposal to Avert "Fiscal Cliff"

HOUSE REPUBLICANS MAKE COUNTERPROPOSAL TO AVERT “FISCAL CLIFF”:  Today, House Speaker John Boehner and key Republican leadership officials presented a counteroffer to President Obama modeled around a proposal by former senator and Clinton White House chief of staff, Erskine Bowles. The framework would raise $800 billion in new tax revenue, cut $600 billion from federal health programs, and apply a slower measure of inflation to Social Security benefits.  Boehner called his offer "a credible plan that deserves serious consideration from the White House."  The plan does not specify which tax breaks would be curtailed.

  • The Bowles plan was presented in 2011 to the Joint Select Committee on Deficit Reduction.  The Republicans’ letter to President Obama said that the Bowles plan represented a "balanced package that includes significant spending cuts as well as $800 billion in new revenue. Notably, the new revenue in the Bowles plan would not be achieved through higher tax rates, which we continue to oppose and will not agree to in order to protect small businesses and our economy.  Instead, new revenue would be generated through pro-growth tax reform that closes special-interest loopholes and deductions while lowering rates.  On the spending side, the Bowles recommendation would cut more than $900 billion in mandatory spending and another $300 billion in discretionary spending. These cuts would be over and above the spending reductions enacted in the Budget Control Act."  Their letter continued, "This is by no means an adequate long-term solution, as resolving our long-term fiscal crisis will require fundamental entitlement reform.  Indeed, the Bowles plan is exactly the kind of imperfect, but fair middle ground that allows us to avert the fiscal cliff without hurting our economy and destroying jobs.  We believe it warrants immediate consideration. If you are agreeable to this framework, we are ready and eager to begin discussions about how to structure these reforms so that the American people can be confident that these targets will be reached."
  • A copy of the letter can be downloaded here.

TREASURY AND IRS ISSUE PROPOSED REGULATIONS ON SECTION 1411 NET INVESTMENT INCOME TAX:  On November 30, Treasury and the IRS issued proposed regulations that provide guidance on the new net investment income tax under section 1411.

  • Section 1411, enacted in the Health Care and Education Reconciliation Act of 2010, generally imposes an additional 3.8% tax on certain individuals, estates, and trusts.  The new tax is effective for tax years beginning after December 31, 2012.
    • For individuals, the 3.8% tax applies to the lesser of (i) the individual’s net investment income (defined in section 1411(c)), or (ii) the excess (if any) of the individual’s modified adjusted gross income over the applicable threshold amount (generally $200,000; $250,000 for joint filers).
    • With respect to an estate or trust, the 3.8% tax applies to the lesser of (i) the undistributed net investment income of the estate or trust, or (ii) the excess (if any) of the adjusted gross income of the estate or trust over the dollar amount at which the highest tax bracket in section 1(e) begins.
  • The proposed regulations provide general operating rules applicable to section 1411, including specific rules for individuals, estates, and trusts, as well as the calculation of net investment income.
    • The proposed regulations clarify that, for purposes of section 1411, the term individual includes any natural person, except for natural persons who are nonresident aliens. 
    • The proposed regulations provide rules regarding the application of section 1411 to grantor trusts, electing small business trusts, charitable remainder trusts, foreign estates and trusts, and bankruptcy estates.  The proposed regulations also provide guidance on the calculation of the undistributed net investment income of a trust or estate.
    • The proposed regulations provide detailed guidance on the determination of net investment income.
      • The proposed regulations clarify the calculation of the gross income items described in section 1411(c)(1)(A)(i) (interest, dividends, annuities, royalties, and rents), as well as the exclusion of such items from section 1411 under the ordinary course of a trade or business exception.
      • The proposed regulations also provide rules on the determination of other trade or business gross income under section 1411(c)(1)(A)(ii) and the net gain from the disposition of property described in section 1411(c)(1)(A)(iii).
      • Additionally, the proposed regulations provide guidance on the proper allocation of deductions in calculating net investment income.
    • The proposed regulations clarify the definition of a section 1411(c)(2) trade or business (i.e., a trade or business that is a passive activity under section 469 or a trade or business in financial instruments or commodities (as defined in section 475(e)(2)), and provide rules for determining the existence of such a trade or business.
      • The proposed regulations allow taxpayers to redetermine groupings previously made under Treas. Reg. § 1.469-4 (such rules are used to define an activity for purposes of applying the section 469 passive activity loss rules, and determine the scope of a taxpayer’s trade or business in order to establish whether such trade or business is a passive activity).
    • The proposed regulations provide rules relating to dispositions of interests in partnerships and S corporations, distributions from certain qualified plans, items taken into account in determining self-employed income, and amounts derived from controlled foreign corporations and passive foreign investment companies.
  • The proposed regulations are generally proposed to be effective for tax years beginning after December 31, 2013.
    • However, taxpayers are permitted to rely on the proposed regulations for purposes of compliance with section 1411 until the effective date of the final regulations.
    • Treasury and the IRS indicated that they intend to finalize regulations under section 1411 in 2013. 
  • The regs can be accessed here.
  • For additional information, contact  -Aaron P. Nocjar -   anocjar@steptoe.com

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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