TAX NEWS - 2010

US Tax: Levin proposes tougher GRAT rules to bankroll small-business tax incentives

House Ways and Means Committee Chairman Sander Levin, D-Mich., unveiled a $3.5 billion package of small-business tax incentives June 9 that would be paid for in part by changes to grantor retained annuity trust (GRAT) rules and a provision making a processed fuel known as "crude tall oil" ineligible for the cellulosic biofuel producer credit.

The new measure draws heavily from another Levin-sponsored bill (H.R. 4849), which passed the House in March of this year but saw no Senate action.


GRAT restrictions & other offsets

The bill includes an expanded version of a provision in the Obama administration's FY 2011 budget and Levin's prior smallbusiness bill that would require a GRAT to have a minimum term of 10 years, instead of a more typical term of two years.

The longer life would increase the chance that the grantor's death occurs during the annuity period, resulting in the GRAT assets being included in the grantor's estate rather than being transferred to the beneficiaries of the GRAT if the grantor dies after the term.

Further, the bill adds two limitations not included in previous proposals that would require that the value of the remaining interest be greater than zero and the annuity not decrease during the first 10 years of the GRAT term. These changes are intended to limit a taxpayer's ability to use GRATs for generation-skipping transfer tax planning.

This provision would apply to transfers made after the date of enactment, and would raise $5.3 billion over 10 years, according to the Joint Committee on Taxation (JCT) staff.

Cellulosic biofuel producer credit – The bill also revives a provision from Levin's previous small-business legislation that would exclude certain processed fuels with an acid number exceeding 25 from the cellulosic biofuel producer credit under section 40(b)(6). Effectively, this revenue offset targets the highly corrosive fuel known as "crude tall oil," another byproduct of the paper manufacturing process from which "black liquor" is derived. (Black liquor became ineligible for the cellulosic biofuel producer credit in March when the Patient Protection and Affordable Care Act was signed into law.)

This provision would be effective for fuels sold or used on or after January 1, 2010, and would raise nearly $1.9 billion over
10 years.

Corporate estimated tax payments – For pay-as-you-go budgeting purposes, the legislation would increase by 7.75 percentage points the required corporate estimated tax payment factor for corporations with assets of at least $1 billion for July, August, and September 2015. The payment factor would be reduced by an identical amount in 2016. This provision would raise slightly more than $5 billion in 2015 but would be revenue neutral over 10 years.


Small-business tax incentives

On the incentive side, the bill includes provisions that would:

- Increase the amount of the capital gains exclusion under section 1202 to 100 percent for qualifying stock acquired after March 15, 2010, and before January 1, 2012. The American Recovery and Reinvestment Act (P.L. 111-5) temporarily increased the exclusion to 75 percent for qualifying stock acquired in 2009 and 2010. The JCT staff estimates the provision would cost $1.96 billion over 10 years.

- Allow businesses to deduct up to $20,000 for trade or business start-up expenditures and increase the threshold amount for reducing that limit to $75,000, for taxable years beginning in 2010 or 2011 (estimated 10-year cost: $508 million). Current law allows a start-up to deduct $5,000 for trade or start-up expenditures, and reduces that amount when start-up expenditures exceed $50,000.

- Generally make the penalty for failing to disclose reportable transactions (including listed transactions) proportionate to the underlying tax savings that were the object of the transaction (estimated 10-year cost: $176 million).

The legislation also would allow small businesses that are at risk of defaulting on obligations to creditors to exclude from gross income any amounts that are received under the Small Business Borrower Assistance Program. The bill would also provide an exception to the "at-risk" rules for nonrecourse loans that are guaranteed by the Small Business Administration, although passive loss rules would remain unchanged. Finally, the bill would require the IRS to report annually to the Senate Finance and House Ways and Means committees any penalties assessed, and enforcement activities with respect to tax shelters.


Outlook

Although the measure includes $3.5 billion worth of small-business tax incentives, its offsets would raise approximately $7.1 billion. House Democratic leaders plan to couple Levin's tax package with a small-business lending measure currently on tap in the House, and use the excess revenue to help offset this second bill.

Across the Capitol, Senate Finance Committee Chairman Max Baucus, D-Mont., indicated June 10 that his committee would take up its own small-business tax bill after the Senate completes work on legislation to extend expired tax provisions. A final vote on the Senate extenders bill could take place as early as the week of June 14.