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TAX NEWS - June 2010

162 House Republicans Voted Against Small Business Jobs & Tax Relief

The House  passed the Small Business Jobs Tax Relief Act of 2010 yesterday, with 162 Republicans voting against it. What would this legislation do?

The legislation would provide tax cuts for small businesses to help them grow and create new jobs.  H.R. 5486 is companion legislation to H.R. 5297, the Small Business Jobs and Credit Act, which will enhance lending opportunities for small businesses. Both pieces of legislation are offset by closing some existing tax loopholes.

"This bill represents a continuation of our work to spur job creation and improve the quality of life in our communities," said Ways and Means Committee Chairman Sander M. Levin, D-Mich., in a statement.  "Small businesses need capital to create jobs and lead our economic recovery and these bills contain important tax cuts and lending opportunities that will help give small business owners the resources and flexibility they need to help their businesses grow."

But, what about the deficit? Surely Republicans are concerned about that, right? That's why they voted against small businesses? That's why they voted against this, right? Nope. The bill was paid for:

To pay for the cost of the legislation, the bill would require a minimum 10-year term for grantor retained annuity trusts, or GRATs, that allow taxpayers to structure a transfer of assets to another individual in such a way that substantial gift taxes may be avoided. This provision is estimated to raise $5.297 billion over 10 years.

In addition, the bill would make crude tall oil, a waste byproduct of the paper-manufacturing process, ineligible for cellulosic biofuel producer credit. This proposal is estimated to raise $1.849 billion over 10 years.

Let's break these down to basic terms. What exactly is a GRAT?

Dad holds $1,000,000 of a stock that pays a 10% dividend. Dad establishes a GRAT with a 13 year term and transfers the $1,000,000 of stock to this GRAT. Each year the $100,000 dividend is paid to the GRAT and the GRAT then pays the required $100,000 annuity to Dad/grantor. The value of the gift may be as low as $13,710. This is a gift of the future interest and does not qualify for the annual exclusion. Dad/grantor must use part of his $1,000,000 lifetime gift exemption or pay a gift tax.

At the end of the GRAT term or 13 years, Dad would have received $1,300,000 ($100,000 per year x 13 years) in annuity payments. The remainder value in the GRAT is the stock and would still be valued at $1,000,000 assuming no appreciation. The stock would then be distributed to the remainder beneficiaries, usually Dad's children. In this case, the children will have received an asset worth $1,000,000 but Dad only had to report a gift of $13,710.

Interestingly enough, a group called the Wealth Transfer Group was granted a patent for a procedure they set up under the GRAT law. Who is the Wealth Transfer Group?

The Wealth Transfer Group is a consulting firm that provides estate planning services. They serve only clients with estates worth more than US$ 10,000,000.

In 2006, the Wealth Transfer Group sued former Aetna CEO John W. Rowe for infringement of a tax patent.[1] The patent, U.S. Patent 6,567,790, entitled "Establishing and managing grantor retained annuity trusts funded by nonqualified stock options", covers WTG's SOGRAT (Stock Option Grantor Retained Annuity Trust) system of minimizing gift tax.[2] The case has been settled for undisclosed terms.[3]

The SOGRAT case is often cited both by those that favor tax patents[4] as well as those that seek to have them banned.[5]

Interestingly enough, this is where J.D. Hayworth comes in. John McCain is using the Wealth Transfer Group against Hayworth in the "who's the wingnuttiest" Republican primary.

Congressman Hayworth apparently couldn't wait to launch his lobbying career, registering with the federal government in February 2008, just one month after his mandatory year-long ban on lobbying as a former member of Congress expired. Hayworth registered to lobby the U.S. House of Representatives on tax issues, the very issue set he worked closely on as a member of the House Ways and Means Committee from 1997 to 2006.

While the exact details of Congressman Hayworth's lobbying activities are still cloaked in secrecy, what is known is that Hayworth's client, an estate planning firm called the Wealth Transfer Group, has been fighting to keep a dubious tax patent scheme. The scheme allows the company to force anyone in the country seeking to use a certain tax-saving technique to exercise one of three options: (1) hire the Wealth Transfer Group, (2) pay the company a fee to use the technique, or (3) pay higher taxes to the government. Legislation has been proposed in Congress that would force the company to abandon the scheme, though none has passed to this date.

I'm not sure what's more amusing - that John McCain is surprised that Hayworth would become a lobbyist (I don't know why that's shocking to him), or that McCain is implying here that he's actually against what the Wealth Transfer Group is doing and would vote for a tax increase for the wealthy. We all know how much McCain loves tax increases for the wealthy. McCain clearly isn't taking the typical path to winning a Republican primary. McCain also forgot to mention that Hayworth received contributions from Wealth Transfer Group during his 2004 campaign.

How does this fit in with the Small Business Jobs Tax Relief Act of 2010?

House Republicans voted against small businesses and the middle class and in favor of tax breaks for the wealthy and their lumber/paper company lobbyist friends to continue to receive the cellulosic biofuel producer tax credit.

Republicans are incredibly talented at looking out for their friends - too bad small businesses aren't their friends. This bill will be combined with another bill that will boost lending to small businesses and then they will both move on to the Senate. We'll have to wait and see how McCain reacts to the bill once it arrives in the Senate.
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