United States: House approves extenders legislation; Senate action on hold

The House of Representatives voted 215-204 on May 28 to approve legislation that would retroactively extend through the end of this year dozens of business and individual tax incentives that expired in 2009. The extenders provisions as well as additional temporary infrastructure incentives, which the Joint Committee on Taxation (JCT) staff estimates will cost nearly $39.5 billion over 10 years, are paid for by nearly $56 billion in revenue offsets that would, among other things, significantly tighten the foreign tax credit rules, modify the tax treatment of income from carried interests, and subject certain S-corporation income to employment taxes.

The American Jobs and Closing Tax Loopholes Act now travels to the Senate, although that chamber will not consider the bill until after lawmakers return from the Memorial Day recess. That pushes the possibility for any further action to June 7 at the earliest.

House Democratic leaders had hoped to bring the bill to the floor soon after it was unveiled on May 20, but they spent much of the past week modifying it in an effort to garner the votes of skittish members concerned about its size and cost. After dumping several nontax provisions that were not offset, leaders decided late May 27 to split the bill into two separate measures – the larger extenders package and a smaller nontax measure addressing Medicare physician reimbursements.


Effective date change for carried interest, but not foreign tax provisions

In a last-minute tweak on the revenue side, leaders modified a phased-in provision that would tax 75 percent of income from carried interests as ordinary income and 25 percent as capital gain, making it effective for taxable years ending after December 31, 2010. As originally proposed, the provision would have been effective for taxable years ending after the date of enactment.

The modified provision would raise an estimated $17.7 billion over 10 years, according to the Joint Committee on Taxation (JCT) staff. The original provision was scored at $18.7 billion.

No changes were made to a $14.5 billion package of provisions intended to tighten foreign tax credit rules and close perceived foreign tax loopholes. Several of these provisions – related to foreign tax credit splitting, covered asset acquisitions, use of section 956 for foreign tax credit planning, and redemptions by foreign subsidiaries – would be effective
retroactively.


Other revenue offsets in the bill would:

- Subject certain S-corporation income to employment taxes and clarify that individuals engaged in professional services businesses may not avoid employment taxes by routing earnings through a limited partnership or limited liability company (estimated 10-year revenue gain: $11.25 billion).

- Treat distributions of debt securities in a tax-free spin-off transaction in the same manner as distributions of cash or other property (estimated 10-year revenue gain: $255 million).

- Repeal the boot-within-gain limitation in the case of any reorganization transaction if the exchange has the effect of the distribution of a dividend, and ensure that an appropriate amount of earnings is taken into account in determining the amount of the dividend (estimated 10-year revenue gain: $510 million). A manager's amendment to the bill released May 26 clarifies that the Treasury Department may add to the types of reorganizations in which the earnings and profits of each party to the transaction are taken into account in determining dividend treatment.

- Increase the required corporate estimated tax payments factor for corporations with assets of $1 billion or more by 36 percentage points for payments due in July, August, and September of 2015, with an offsetting reduction in 2016 (estimated revenue gain: $21.23 billion in 2015, revenue neutral over 10 years). The bill as introduced would have increased the required payments factor by 30.5 percentage points; the higher rate reflects a change made in the manager's amendment.

- Increase the Oil Spill Liability Trust Fund tax to 34 cents per barrel (sunset December 31, 2020), and increase the single-incident expenditure caps for the trust fund (estimated 10-year revenue gain: $11.78 billion). The original version of the bill would have increased the tax to 32 cents per barrel; the higher rate reflects a change made in the manager's amendment. The rate under current law is 8 cents per barrel.

- Ease pension funding requirements for certain cash-strapped companies that offer defined benefit plans (estimated 10-year revenue gain: $2 billion).


Incentives

Notable business provisions that would be extended under the bill include, among others, the research and experimentation tax credit, the New Markets Tax Credit, 15-year straight-line cost recovery for qualified leasehold improvements, the exception for active financing income under subpart F, and lookthrough treatment of payments between related controlled foreign corporations.

Among the individual incentives extended under the bill are the itemized deduction for state and local general sales taxes, the additional standard deduction for state and local real property taxes, and the above-the-line deduction for qualified tuition and related expenses. The deduction for qualified tuition expenses was modified in the manager's amendment to provide that it would not be available to taxpayers who would have received a greater tax benefit under the Hope Scholarship and Lifetime Learning credits.

The bill also would extend an array of charitable-giving provisions and infrastructure and economic development tax incentives.


Changes likely in the Senate

Senate Majority Leader Harry Reid, D-Nev., said May 28 that his chamber intends to amend the bill after the recess, but did not discuss specific changes. Several Senate Democrats as well as Republicans, however, have supported exempting venture capital firms from the carried interest provision.

Based on reactions as the current bill moved through the House, Senate leaders also may feel pressure in the coming days to revisit a carried interest provision that would require gain recognized on the disposition of an investment service partnership interest to be treated as ordinary.

For its part, the business community has voiced concern about the foreign tax credit provisions, noting that several have not been offered in previous legislation or debated by congressional taxwriters in public hearings, and that the retroactive effective dates would impose compliance burdens on taxpayers.