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Overview

Tax and Budget Outlook Ken Kies Co-Managing Partner, WNTS Chair, Federal Tax Policy Group Financial Executives International 2002 Tax Seminar Las Vegas, Nevada February 14, 2002 . Overview. The Budget Outlook Election-Year Dynamics Economic Stimulus The “Extenders” Threat of “Pay-Fors”

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Overview

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  1. Tax and Budget OutlookKen KiesCo-Managing Partner, WNTSChair, Federal Tax Policy Group Financial Executives International2002 Tax SeminarLas Vegas, NevadaFebruary 14, 2002

  2. Overview • The Budget Outlook • Election-Year Dynamics • Economic Stimulus • The “Extenders” • Threat of “Pay-Fors” • Other Tax Initiatives

  3. Surplus Outlook for FY 2002($ Billions, CBO estimates)

  4. Surplus Outlook for FY 2003($ Billions, CBO estimates)

  5. Ten-Year Surplus Estimates($ Billions, CBO estimates)

  6. Republicans Democrats Independents 221 212 2 Control of 107th Congress:House of Representatives

  7. Republicans Democrats Independent 49 50 1 Control of 107th Congress:Senate

  8. Five Key Senate Races • Minnesota (Wellstone v. Coleman) • South Dakota (Johnson v. Thune) • Missouri (Carnahan v. Talent) • Arkansas (Hutchinson v. Pryor) • New Hampshire (Smith/Sununu v. Shaheen)

  9. Tax Bill in an Election Year? • 1974: ERISA • 1976: Tax Reform Act of 1976 • 1978: Revenue Act of 1978 • 1980: OBRA’80 et al • 1982: TEFRA • 1984: DEFRA

  10. Tax Bill in an Election Year? • 1986: Tax Reform Act of 1986 • 1988: TAMRA • 1990: OBRA ’90 • 1992: Tax Fairness and Economic Growth Act (H.R. 4210) VETOED • 1996: Small Business/HIPAA et al

  11. Tax Bill in an Election Year? • 1998: IRS Restructuring and Reform Act/Tax and Trade Relief Extension Act • 2000: FSC Repeal/Community Renewal

  12. Stimulus Outlook • House-passed bill (H.R. 3529) • Administration FY 2003 budget • Senate gridlock • Daschle “least common denominator” bill fails to get 60 votes • Senate approves stand-alone extension of unemployment benefits • Next steps?

  13. House-Passed Stimulus Bill • Approved December 20 (H.R. 3529) ($90B FY 2002/$157B FY 2002-11) • Corporate AMT relief • Repeal depreciation adjustment • Repeal 90% FTC, NOL limitations • Five-year NOL carryback (24 mos.) • 30% bonus depreciation (36 mos.) • Five-year extension of subpart F exception

  14. House-Passed Stimulus Bill • Two-year extension of other expiring provisions (e.g., Work Opportunity Tax Credit) • 25% individual tax rate to take effect in 2002 • Temporary increase in pension funding interest rates • Revenue raisers: (1) Gitlitz, (2) limit use of nonaccrual experience method of accounting

  15. House-Passed Stimulus Bill • “Supplemental stimulus payments” ($300 single/$600 for married couples) • 13-week extension of UI benefits • 60% refundable tax credit for health insurance purchased by unemployed

  16. Other Tax-Related Initiatives • Energy legislation • Tax incentives for charitable giving • Pension reforms • “Patients Bill of Rights” • Tax simplification • Eliminate “sunset” of 2001 tax cuts

  17. Federal Taxes as a Percent of GDP(Actual data and CBO Projections)

  18. Pressure on Revenue Raisers • Return to “pay-go”? • “Corporate tax shelter” legislation? • Enron fallout

  19. “Corporate Tax Shelter” Legislation? • Rep. Lloyd Doggett • H.R. 2520 would codify economic substance doctrine. • Estimated to raise $7.5B over 10 years. • Senate Finance Committee staff • 40% penalty for understatements in transactions where significant purpose is tax avoidance.

  20. “Corporate Tax Shelter”Legislation? • Senate Finance Committee staff (cont.) • Penalty avoided if there is (1) substantial authority, (2) disclosure, (3) reasonable belief that treatment of transaction was more likely than not correct. • Opinions must be “independent.” • Minimum $100K penalty for failure to disclose reportable transactions. • Penalty on promoters equal to 50% of fees.

  21. Corporate Income Tax Receipts($ billions)

  22. The Bush Treasury and “Corporate Tax Shelters” • Opposes new legislation • Narrowed Clinton Administration tax shelter regulations: • Deleted “different foreign tax treatment” as indicator of transaction requiring disclosure. • Eliminated “economic profit” test under “confidential corporate tax shelter” registration regulations and list maintenance regulations.

  23. The Bush Treasury and “Corporate Tax Shelters” • Deputy Assistant Secretary (Tax Policy) Pam Olson (10/2/01): • “The tax shelter problem on the corporate level has diminished. I’m not saying it’s gone but it has rapidly declined.” • “There is growing empirical evidence that it has moved beyond the corporate world and has taken hold in the small business area and among individuals.”

  24. IRS Audits of Individual Returns(% Coverage)

  25. IRS Audits of Small Businesses(Corporations with Assets <$10M)

  26. The Bush Treasury and “Corporate Tax Shelters” • Deputy Assistant Secretary (Tax Policy) Pam Olson (10/2/01): • “We need strategies for resolving the issues. … We can’t spend forever dealing with the issues of the ‘90s.”

  27. “Corporate Tax Shelters”:IRS Initiatives • Shelter disclosure initiative • Taxpayers disclose shelter transactions, marketing materials • IRS waives accuracy-related penalties • IRS Office of Tax Shelter Analysis • Leasing transactions • Corporate-owned life insurance • Updates to IRS “listed transactions”

  28. Mounting IRS Court Losses • Compaq Computer Corporation v. Comm’r(Fifth Circuit, 2001) • United Parcel Service v. Comm’r(Eleventh Circuit, 2001) • IES Industries, Inc. v. Comm’r(Eighth Circuit , 2001) • Rite Aid v. U.S.(Federal Circuit , 2001) • Boca Investerings Partnership (U.S. District Court for the District of Columbia, 2001)

  29. Still, Some IRS Wins … • ACM Partnership v. Comm’r (3rd Circuit, 1998) • ASA Investerings Partnership (DC Circuit, 2000) • COLI Cases: • Winn-Dixie v. Comm’r (Tax Court, 1999) • CM Holdings, Inc (U.S. Dist. Ct. for Dist. of Delaware, 2000) • American Electric Power (U.S. Dist. Ct. for So. Dist. Ohio, 2001) • The Limited (Tax Court, 1999)

  30. The Bush Treasury Tax Team • Bush Treasury modifications to loss disallowance regulations • Bush Treasury withdraws adverse Clinton Administration R&D credit regulations • Bush Treasury limits reach of Clinton Administration anti-“Morris Trust” regulations • Bush Treasury revises “split-dollar” life insurance guidance

  31. FSC/ETI Saga Continues • July 2001: WTO rules that ETI regime does not bring U.S. into compliance with 1998 FSC ruling • October 2001: U.S. launches appeal • November 2001: Oral arguments before WTO panel • January 14, 2002: WTO rejects U.S. appeal

  32. Possible Outcomesin FSC/ETI Dispute • EU sanctions? • ETI replacement legislation? • International tax reform • U.S. compensation? • Negotiated settlement?

  33. ETI Tax Expenditure(JCT; $billions)

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