Tax News

CCH (cch.taxgroup.com) reports:

Congress has passed a new SCHIP bill, but President Bush has issued a veto threat because it is funded by an increase in federal tax on tobacco products. Other new legislation includes the Tax Reduction and Reform Bill of 2007 (HR 3970), which would cut corporate tax rates, eliminate the alternative minimum tax (AMT) and lower the standard deduction. In addition, Ways and Means Chairman Charles B. Rangel, D-N.Y., plans to pass, in separate legislation, the provisions in HR 3970 that would provide a one year patch for the AMT and extend a group of expiring tax provision. At the IRS two developments dominated the news: the extension of transition relief for the final 409A
regulations and the as yet undetermined relief for victims of the California wildfires. Other IRS developments included final regulations regarding corporate reorganizations, tip reporting guidance and requests for a charter safe-harbor for the entertainment use of a business aircraft.
Congress
President Bush promised to veto a new bill expanding the State Children's Health Insurance Program (SCHIP), in part because it would raise the federal tax on tobacco products. The House passed the new legislation (HR 3963) on October 24 by a 265-to-142 vote (TAXDAY, 2007/10/26, C.4). But that tally is short of the two-thirds that would be needed to override a presidential veto. Bush vetoed a similar bill (HR 976) in early October (TAXDAY, 2007/10/04, W.1). The House later that month failed to override the veto (TAXDAY, 2007/10/19, C.1).
The new bill mirrors the version vetoed by Bush, but contains a number of changes made by Democratic leaders to attract broader support for the measure. Like the vetoed bill, the new bill would add $35 billion to the program over five years to insure more children whose parents do not qualify for Medicaid but cannot afford private insurance. Total funding for SCHIP would be $60 billion.
The extra funding contained in the bill would be raised by a federal tax increase on tobacco products. Most significantly, the bill would increase the tax on cigarettes by 61 cents --to $1 per pack. It would impose additional tax increases on other tobacco products. In promising to veto the bill, the administration cited several objections, including a statement that the new bill "still raises taxes to move 2 million children from private health insurance to a government-run program."
House Ways and Means Committee Chairman Charles B. Rangel, D-N.Y., introduced sweeping tax overhaul legislation on October 25 (TAXDAY, 2007/10/26, C.1). The Tax Reduction and Reform Bill of 2007 (HR 3970), would cut corporate tax rates, eliminate the alternative minimum tax (AMT) and lower the standard deduction. Rangel said he plans to pass, in separate legislation, the provisions in HR 3970 that would provide a one year patch for the AMT and extend a group of expiring tax provision. The House will pass that smaller legislation before Congress adjourns in November, Rangel predicted. The other provisions in the larger comprehensive tax reform measure might see action in 2008. Republican lawmakers like ranking Ways and Means member Jim McCrery, R-La., agreed that the House will likely pass legislation patching the AMT for one year as well as the extenders. However, Republicans do not support Rangel's plan to pay for tax relief by imposing higher taxes on hedge fund managers, S corporations and a wide range of other businesses.
Senate Finance Committee ranking member Charles E. Grassley, R-Iowa told reporters on October 23 that a "vast majority" of Republicans were willing to help the Democrats pass a one-year patch of the AMT without revenue offsets, under the condition that Democrats also enact tax policy which aids the economy. According to one GOP senator, his party is looking at an extension of the rate cuts for capital gains, dividends and the estate tax as well.
A bipartisan majority of the House Ways and Means Committee on October 24 passed HR 3920, the Trade and Globalization Assistance Bill of 2007 by a vote of 26 to 14 and the House could begin considering the legislation as soon as October 29 (TAXDAY, 2007/10/26, C.3). The $5.8 billion revenue raising provision included in the House version of trade adjustment assistance legislation would delay tax relief for multinational corporations by three years, but the measure faces strong resistance in the Senate where one senior tax writer has vowed to strip the language when the bill hits the Senate floor. Senate Finance Committee Chairman Max Baucus, D-Mont.,) on October 24 filed the committee report (SRepNo 110-205) for the land conservation bill (Sen 2223) and the committee report (SRepNo 110-206) for the agriculture tax bill (Sen 2242)) on October 25.
IRS
Two developments dominated IRS news during the week of October 22: the extension of transition relief for the final 409A
regulations and the wildfires in California. As we go to press, the IRS has indicated it will be issuing special relief for victims of the California fires but no official announcement has yet been made.
Extended 409A Transition Relief. The IRS responded favorably to calls by practitioners and employee plans for more time to adapt to the final Code Sec. 409A regulations. The Service extended transition relief for an additional year (TDNR HP-631; Notice 2007-86; TAXDAY, 2007/10/23, I.3).
The news was immediately greeted with relief by practitioners. "The Notice is well received. It helps alleviate much of the pressure to make final decisions by year end and the December 31, 2008 effective date will allow employers to more fully consider their options and make better plan design decisions," Catherine Creech of Davis & Harman LLP, Washington, D.C. told CCH. "This is useful and helps us to get over the hump," Fred Oliphant of Miller & Chevalier in Washington, D.C. added.
Reporting requirements. At the same time, the IRS also granted payroll professionals more time to comply with the reporting requirements of Code Sec. 409A (Notice 2007-89; TAXDAY, 2007/10/24, I.1). The American Payroll Association had asked the IRS to waive the requirement to report deferrals and earnings under Code Sec. 409A for the 2007 tax year (TAXDAY, 2007/10/17, M.2).
California Wildfires. Late on October 25, the IRS announced on its website late that help for victims would be issued very soon (TAXDAY, 2007/10/26, I.4). The IRS is expected to offer individuals and businesses extended time to file returns and make payments as it has done in past disasters. The Service also posted frequently asked questions (FAQs) for disaster victims on its website. The California Franchise Tax Board has already granted special relief to taxpayers in Santa Barbara, Ventura, Los Angeles, San Bernardino, Orange, Riverside and San Diego Counties.
More Developments
Corporate Reorganizations. The IRS finalized, with some modifications, proposed regulations (NPRM REG-130863-04) concerning the continuing tax-free status of a reorganization when assets or stock of the acquired corporation are distributed to a corporation or partnership following the reorganization (T.D. 9361; TAXDAY, 2007/10/25, I.1).
Business aircraft. Witnesses at an October 25 IRS hearing in Washington, D.C., urged the Service to create a charter rate safe harbor under the regulations for the business use of aircraft for entertainment (NPRM REG-147171-05, I.R.B. 2007-32, 334; TAXDAY, 2007/10/26, I.2). A charter rate safe harbor would reduce the burden on taxpayers when complying with the proposed regulations. Witnesses also asked the IRS to clarify the rules governing charitable use of an aircraft.
Tip Income. Underreporting of tip income is a "severe compliance problem in the tip reporting area," an IRS official said during a phone forum sponsored by the Service on October 24 (TAXDAY, 2007/10/25, I.3). Many taxpayers think that if they report eight percent of their tips, they have satisfied the reporting requirements under Code Sec. 6053(a), the official said. Form 8027 was meant to be a "floor, not a ceiling." Employees must report 100 percent of tips received.
Withholding Agents. An official from the IRS Large and Mid-Size Division (LMS said on October 25 in Arlington, Va. that a recent voluntary compliance initiative for withholding agents was a success but indicated that the IRS is unlikely to offer a similar program in the future (TAXDAY, 2007/10/26, I.3). "It is always better to come forward voluntarily than address issues on audit," Kathy Robbins, LMSB director of field operations for financial services, cautioned.
By Jeff Carlson, Stephen K. Cooper, John Scorza and George L. Yaksick, Jr., CCH News Staff