TAX NEWS - 2010

U.S. Tax: Senate extenders amendments pile up as Baucus eyes changes to S corp offset

As senators lined up to file amendments to recently introduced legislation that would extend expired tax incentives, Finance Committee Chairman Max Baucus, D-Mont., indicated on June 10 that changes could be in store for a revenue offset that would subject certain S corporation income to employment taxes.

The Senate could vote on amendments as early as June 15 and expects to move to final passage of the bill later in the week.


S corporations

The Senate version of the American Jobs and Closing Tax Loopholes Act of 2010, which Baucus unveiled June 8, generally mirrors a House extenders bill that was approved late last month – including a provision that would require shareholderemployees of a personal service S corporation to pay employment tax on their full share of allocated earnings and prevent individuals engaged in professional services businesses from avoiding employment taxes by routing earnings through a limited partnership or limited liability company. The provision, which would be effective for taxable years beginning after December 31, 2010, would raise an estimated $11.25 billion over 10 years, according to the Joint Committee on Taxation staff.

But during a June 10 Finance Committee hearing on economic relations between the United States and China, taxwriter Mike Enzi, R-Wyo., said the provision would be detrimental to small businesses and would "affect their ability to reinvest in new jobs."

In response, Baucus told Enzi that "the provision needs some work to address some of the concerns you mentioned." Baucus did not identify specific changes, however, and had not filed an amendment at press time.

An amendment offered by Finance Committee member Olympia Snowe, R-Maine, would strike the provision (section 413 of the bill) outright. (Snowe is also the ranking Republican on the Senate Small Business & Entrepreneurship Committee.)


Proposed amendments

In addition to Snowe's amendment, several proposals that would add new tax provisions to the bill have been filed since it was unveiled, although there is no guarantee that any of them will be brought up for a vote on the Senate floor. Notable pending tax amendments would:

- Repeal several oil and gas industry tax incentives, including expensing and 60-month amortization of intangible drilling costs, percentage depletion for oil and gas wells, and the deduction for income attributable to domestic production of oil, natural gas, or primary products derived from them.
- Impose a tax on income of controlled foreign corporations attributable to certain imported property.
- Provide a five-year net operating loss carryback for certain losses related to the Gulf oil spill.
- Impose a minimum tax of 35 percent on net book income on any public corporation incorporated in any one of 34 specified countries designated as tax havens.
- Ensure that any new revenues to the Oil Spill Liability Trust Fund will be used for the purposes of the fund and not as offsets for other portions of the bill.
- Impose a uniform excise tax rate of 1.39 percent on investment income of private foundations for taxable years beginning after December 31, 2009 and before January 1, 2015. (Current law imposes a 2 percent excise tax on investment income of private foundations, but that rate is reduced to 1 percent for foundations whose qualifying distributions exceed a specified threshold.)
- Modify the penalty for failure to disclose reportable transactions so that the penalty is in proportion to the tax benefits resulting from the transaction.
- Extend the closing date for purposes of the first-time homebuyer tax credit to September 30, 2010 (from June 30).


GOP substitute – Additionally, a comprehensive Republican substitute was offered by Sen. John Thune of South Dakota on June 10 that contains many of the same tax incentives as the Democratic extenders bill, but drops the bill's carried interest and S corporation provisions. The substitute, which is unlikely to pass if it is brought up for a vote, is offset primarily by spending cuts and is projected to reduce the deficit by $54.9 billion over 10 years.


Change = Delay?

The Senate bill as introduced has already received a tepid response in the House, where leaders have expressed concern about a carve-out for oil and gas partnerships from a provision that would modify the tax treatment of income from carried interests.

Under the House-approved bill, 50 percent of carried interest would be treated as ordinary income, and 50 percent would receive capital gain treatment for 2011 and 2012. Beginning on January 1, 2013, that ratio would increase to 75 percent ordinary income treatment and 25 percent capital gain. Those provisions would apply across the board, with no industry carve-outs. (The Senate bill, in addition to providing the exception for oil and gas partnerships, would lower the ordinary/capital gain treatment ratios in the House bill and provide special treatment for assets held at least seven years.) Ways and Means Committee Chairman Sander Levin, D-Mich., indicated on June 9 that he prefers the more "generic" carried interest provision in the House bill.

If the Senate makes changes to the S corporation provision or modifies the bill in other significant ways, it runs the risk of exacerbating tensions with the House and further delaying passage of a compromise agreement.

Congressional leaders have already missed a self-imposed Memorial Day deadline for sending a final bill to President Obama and currently hope to complete work by the Independence Day recess, which begins July 2.