TAX NEWS - DECEMber 2009

Estate Tax: House approves permanent estate tax fix

The House of Representatives voted 225-200 on December 3 to approve legislation that would avoid a zero-estate tax year in 2010 by permanently extending the estate tax at its 2009 levels.

Under current law, the estate tax is scheduled to disappear in 2010 and return in 2011 with a top rate of 55 percent and a unified credit exemption amount of $1 million (the levels in effect before the Bush tax cuts were enacted in 2001). The Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009 (H.R. 4154), introduced by House Ways and Means Committee member Earl Pomeroy, D-N.D., on November 19, would make permanent a top rate of 45 percent and exemption amounts of $7 million for couples and $3.5 million for individuals. It also would repeal carryover basis rules. The bill would be effective for decedents dying, and gifts made after December 31, 2009.

Significantly, Democrats utilized a procedural maneuver that allowed them to attach statutory pay-as-you-go (PAYGO) legislation (H.R. 2920) to the estate tax measure. The provision would codify PAYGO budgetary rules into law, requiring any legislation that increases spending or lowers taxes to be offset by corresponding spending cuts or tax increases.

According to the Joint Committee on Taxation staff, the bill would cost $233 billion over 10 years. That cost would covered by the 10-year, $256 billion carve-out for an estate tax fix included in the FY 2010 budget agreement that the House and Senate approved on April 29.

The bill's future is uncertain in the Senate, where lawmakers back a similar but more expensive proposal that would index the exemption amounts for inflation. (The House measure does not include an indexing provision.) Further, a bipartisan group of senators, led by taxwriters Blanche L. Lincoln, D-Ark., and Jon Kyl, R-Ariz., have begun building support for a more generous bill that would impose a 35 percent rate and $5 million exemption threshold.

Timing for consideration of an estate tax bill in the Senate is also undecided, as the ongoing health care debate may consume floor time until late in the month.


House to take up extenders bill

The House is scheduled to consider legislation December 9 that would extend for one year some 45 provisions that are set to expire at the end of 2009. As expected, the Ways and Means Committee will not hold a formal markup on the bill. According to a Ways and Means Committee summary released November 20, the bill would extend, among other provisions, 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. Notably absent are a number of coal and renewable fuels energy credits also set to expire at year-end.


Revenue targets: Carried interests, offshore tax havens – The Ways and Means summary does not include revenue offsets, although House leadership has indicated that the bill would be fully paid for. As expected, House Ways and Means Committee Chairman Charles Rangel, D-N.Y., told reporters December 3 that a revenue package is likely to include:
- A tax hike on income from carried interests and
- A proposal (H.R. 3933, S. 1934) he recently introduced with Senate Finance Committee Chairman Max Baucus, DMont., aimed at preventing the use of offshore financial institutions, foreign trusts, and foreign corporations to evade U.S. tax obligations.

Rangel did not discuss how the carried interest provision would work or how much revenue it would raise. The offshore tax compliance legislation would raise an estimated $8.5 billion of the roughly $30 billion required for the extenders package.

The Senate is expected to take up its own extenders package later this month. It remains unclear whether the Finance Committee will hold a markup, or whether the legislation will be brought directly to the Senate floor. Although no proposals have yet been made public, it is generally expected that revenue offsets for a Senate extenders bill will include the Rangel-Baucus offshore transaction proposal and a $24 billion proposal to make black liquor ineligible for the cellulosic biofuel producer credit under section 40(b), but not a tax increase on carried interests.

It is possible that a bill to extend expiring provisions may be tacked on to an estate tax measure and considered jointly.


Senate health care debate begins

The Senate kicked off the formal floor debate on its comprehensive health care reform legislation November 30, but has made little progress as Democrats and Republicans remain bogged down in procedural disagreements over the scheduling of amendment votes. No tax-related amendments have been offered so far. Majority Leader Harry Reid, D-Nev., has said senators should plan to work up to the Christmas holiday, including weekends and possibly the week between Christmas and New Years Day, to complete consideration of the bill.


Technical corrections

In other developments, House Ways and Means Committee Chairman Rangel and ranking Republican Dave Camp of Michigan introduced technical corrections legislation December 2 intended to clarify various tax provisions in the American Recovery and Reinvestment Act of 2009 (ARRA), the Heroes Earnings Assistance and Relief Tax Act of 2008, the Economic Stimulus Act of 2008, and the Tax Technical Corrections Act of 2007.

Energy provisions – The bill includes a number of energy-related corrections, several of which clarify a program enacted by the ARRA that allows taxpayers to obtain cash grants from Treasury for certain renewable energy property placed in service in 2009 and 2010 in lieu of a section 45 production tax credit or a section 48 investment tax credit.

Among other things, the bill clarifies that non-taxpaying entities (such as state or local governments, nonprofit organizations, and certain partnerships) are eligible to receive grants for qualifying property if substantially all of the income derived from such property is subject to unrelated business income tax. The bill also clarifies that the grant payments are not includible in alternative minimum taxable income, including a corporation's adjusted current earnings, and provides that excessive grants would be recaptured as if they were tax underpayments by the recipients.

The bill also includes a correction to the new rules governing the determination of foreign oil and gas extraction income (FOGEI) that were enacted by the Energy Improvement and Extension Act of 2008. The correction clarifies that pre-2009 credits carried forward by companies to post-2008 years would continue to be governed by prior law for purposes of determining the amount of carryforward credits eligible to be claimed in a post-2008 year.

Senate Finance Committee leaders are expected to introduce an identical bill in the coming days. Both bills are expected to go directly to the floor in their respective chambers, bypassing a markup by the taxwriting committees.

In a news release, Rangel expressed his hope that "the House and Senate can swiftly pass this legislation." Congressional leaders have not yet offered a formal timetable for considering the bills, however.