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TAX NEWS - DECEMber 2009 | |||||||||||||||||||||||||||||||||||||||
United States: House recesses for the holidays without extending estate tax or expiring provisions- Expiring provisions will not be extended until sometime in 2010. These include extension of the R&D tax credit, extension of the 15-year straight-line recovery of leasehold improvements and the subpart F rules relating to active financing income and look-through treatment of payments between related controlled foreign companies. We would expect the ultimate extension of expiring provisions to be retroactive. - Action on tax increases to pay for these initiatives also will be delayed. These include carried interest, tax haven reporting and black liquor changes. - The estate tax and the generation skipping tax will expire at the end of 2009. Chairmen Baucus and Rangel have reportedly stated that they intend to reinstate the tax retroactively. - Completion of health care legislation is now impossible before 2010. This means that various proposals that would have been effective in 2010 will have later effective dates if they are enacted. These include special industry fees, additional W-2 reporting and changes to flexible spending account rules. Congress will return in January with a crowded list of "must do" early action items; however, until action on health care reform is resolved or completed it will be very difficult to move other priority legislation. Estate tax Once calendar time is available, the likely first tax issue will be to craft a bill to reinstate the estate tax and the generation skipping tax, which now seems likely to expire at the end of 2009. The same disagreements over the future substance of the estate tax that stalled negotiations this winter will make this difficult to move quickly in the Senate and for the House and Senate to reach a compromise. Between the end of 2009 and the time that Congress reinstates these taxes, some deaths, trust terminations or trust distributions involving substantial amounts inevitably will occur. Since scholars are divided in their opinions on whether the Constitution allows Congress to retroactively re-impose these taxes, litigation will result. The lapse of the estate tax also brings with it a repeal of the step-up in basis at death. In theory, this would expose taxpayers who are currently shielded from any tax by the combination of the estate tax exemption and the step-up to capital gains tax on inherited property to capital gains tax. We would expect Congress to retroactively re-instate the step-up in basis. The alternative, carryover basis, has been repealed twice before. Expiring provisions Although House and Senate leaders have said they intend to move quickly to extend expired or expiring tax provisions, many of the political impediments that have stalled Senate action on many fronts will follow the legislation into the New Year. Action on extending other expired or expiring provisions will trigger a renewed debate on whether, and to what extent, the cost of these measures should be paid for with offsetting tax increases. In that context, we would expect the House to renew its efforts to tax income from profits interest as earned income. However, the Senate is likely to resist changes in carried interest treatment as part of a stand-alone extenders bill, and has already identified less controversial revenue raising options. Conclusion The seeming chaos created by the inability of Congress to address necessary legislation in a timely manner requires the application of both calm and common sense. Some will fear that they face unanticipated tax increase while others will be tempted to hope that revenue raising provisions aimed at them have now lost momentum. When the dust settles next year, it is likely that expiring provisions will have been extended retroactively, that estate taxes will be re-instated, and perhaps reduced, and that additional revenue raisers will have been adopted to pay for various tax cuts. | |||||||||||||||||||||||||||||||||||||||
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