Federal Tax Legislative Update

1. Federal Tax Legislative Update • 26 January 2011/ Harry L. Gutman

2. ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change.  Applicability of the information to specific situations should be determined through consultation with your tax adviser.

3. Agenda • Some Fiscal Facts • The New Congress • Beyond 2010 • The Report of the President’s National Commission on Fiscal Responsibility • The Debt Reduction Task Force • The Prospects for Tax “Reform” • Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act • IRS Tax Risk Initiatives-- Schedule UTP • Selected Highlights of Recent Legislation

4. CBO Budget and Economic Outlook, January 26.2011 • FY 2011 DeficiT • $1.5 trillion, • 9.8% of GDP • Real GDP Growth -4th Q. to 4th Q • 2011-3.1% • 2012-2.8% • Approximately 1% inflation in 2011 and 2012 • Unemployment • 9.2% in 4th Q. 2011 • 8.2% in 4th Q. 2012 • Does not reach 5.3% until 2016 • Interest rates • 3 mo. = .3% in 2011 • 10 year = 3.4% in 2011 GO HEADER & FOOTER TO EDIT THIS TEXT

5. Total Budget Deficit – Total Dollars 2014 2011 2018 Sources: CBO, Budget and Economic Outlook, fiscal years 2011 to 2021 (January 2011); Policy baseline assumes extension of doc fix, increase in discretionary spending at the rate of GDP, extension of expiring tax provisions, and the index of AMT for inflation, as well as the extra interest costs associated with each.

6. Fiscal PictureThe Relative Numbers: Total Budget Deficit as % of GDP 2011 2018 2014 Source: CBO, Budget and Economic Outlook, fiscal years 2011 to 2021 (January 2011); Policy baseline assumes extension of doc fix, increase in discretionary spending at the rate of GDP, extension of expiring tax provisions and index AMT for inflation, as well as the extra interest costs associated with each.

7. Federal Spending, Alternative Baseline Total Revenues Percent of GDP Source: Congressional Budget Office, The Long-Term Budget Outlook, June 2009

8. U.S. Debt Held by the Public Trillions of Current Dollars Source: Treasury Department Bureau of the Public Debt, October 2010

9. Foreign Holders of U.S. Debt ($ billions) Source: U.S. Treasury Department, October 2010

10. Tax as share of GDP, 2007 • Source: OECD

11. Tax Source as Share of GDP, 2007 Source: OECD

12. Beyond 2010 • The New Congress • “The Report on Tax Reform Options” by the President’s Economic Recovery Advisory Board (August 2010) • No specific recommendations • The Report of the National Commission on Fiscal Responsibility and Reform (“Fiscal Responsibility Commission”) (December 1, 2010) • The Debt Reduction Task Force (November 2010) • The Presidents FY12 Budget • The Prospects

13. The New Congress • Senate 53 Democrats, 47 Republicans Finance Committee—13 Democrats, 11 Republicans • New ranking member—Senator Hatch • House • 242 Republicans, 193 Democrats • New Ways and Means Committee—15 Democrats, 25 Republicans • New Chairman—Dave Camp • New Procedural Rules • Exemption from “pay-go” for • Extending 2001 and 2003 tax cuts • Repealing Health Care legislation • Extending AMT “patch” • Extending transfer tax provisions of 2010 Act • Enacting a 20 percent deduction in income for small business

14. Fiscal Responsibility Commission • Individual Taxes • Three individual rates –12,22,28 • Capital gain and dividends taxed as ordinary income • Eliminate AMT, Pease and PEP • Mortgage interest deduction becomes 12% non-refundable tax credit, mortgage on primary residence only and capped at $500,000 • Employer provided health care exclusion capped at 75th percentile of premium levels in 2014, phased out from 2018 to 2038 • Charitable deduction becomes a 12% non-refundable credit for contributions above 2% of AGI • Repeals exclusion for newly issued municipal bonds • Consolidates retirement accounts, caps tax-preferred contributions and expand savers credit • Eliminate $1.1 trillion of tax expenditures • Retained tax expenditures result in higher tax rates

15. Fiscal Responsibility Commission • Business Taxes • One Bracket- 28% • Eliminate • Domestic Production Credit • LIFO • General Business Credits • “Other” tax expenditures Foreign source income • Active Income taxed on territorial basis • Current law for passive income • Other Taxes • Increase gas tax by 15 cents starting in 2013 • Proceeds dedicated to transportation funds No VAT • Tax reform “trigger”

16. The Debt Reduction Task Force • Report of Task Force established by the Bipartisan Policy Center • Center formed in 2010 by Howard Baker, Tom Daschle, Bob Dole and George Mitchell • Task Force chaired by Pete Domenici and Alice Rivlin • Principal Tax Recommendations • Two individual rates—15 and 27% • No capital gain preference • Corporate rate of 27% • Eliminate most deductions and credits • Convert home mortgage interest and charitable deductions to 15% credit • Restructure and simplify provisions affecting low income taxpayers • Establish a 6.5% VAT

17. The Prospects • Individual Tax • Transfer Tax • Business Tax • Rate • Foreign source income • Repatriation holiday • Consumption tax • Energy Tax • CO2 Tax • Carbon tax • Cap and Trade • Gas Tax

18. Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act • Two year extension of 2001 and 2003 tax relief • Two year AMT “patch” • Estate tax extension at $5 million exemption level and maximum 35% rate through 2012, • Election for no estate tax, carryover basis for 2012 • GST rate of zero in 2010 • Gift tax exclusion of $1 million, 35% maximum rate for 2010 • Portability of exemption for decedents dying after 2010 • Extension of certain filing deadlines and dates for disclaimers • Provisions that expired at end of 2009 extended for two years • Expensing for property eligible for bonus depreciation acquired before 2012 • Two percent payroll tax reduction from employee share for 2011 • Extension of employment benefits through 2011 • No repeal of expanded section 1099 reporting for corporations • No revenue offsets • Carried interests

19. IRS Tax Risk Initiatives • Board oversight of tax risk • “We…want to engage corporate leaders about their roles and responsibilities in conducting appropriate assessment and oversight of tax risk. “ IRS Commissioner Douglas Shulman, NACD Corporate Governance Conference, October 19, 2009 • Information gathering- Uncertain Tax Positions • Announcements-2010-9, 2010-17, 2010-30, 2010-75, 2010-76, Directive for all LB&I Personnel (9/24/2010), Schedule UTP • “Guided by the fundamental principle that transparency is essential to achieving an effective and efficient self-assessment tax system, the IRS [proposed requiring] business taxpayers to report basic information regarding their uncertain tax positions when they filed their tax returns.” IRS Commissioner Doug Shulman, American Bar Association Tax Section, September 24, 2010 • Schedule will be required for certain corporate returns for calendar 2010 and fiscal years beginning in 2010 • Draft Schedule released on April 19, 2010 • Final Schedule and instructions released September 24, 2010

20. Schedule UTP • Will be filed – initially by business taxpayers with total assets in excess of $100 million with Form 1120, 1120-F, 1120-L and 1120-PC • Will require – concise description, in rank order of magnitude of the reserve, of: • each uncertain tax position (UTP) for which the taxpayer or a related entity has recorded a reserve in an audited financial statement • any position related to determination of any US federal income tax liability for which no reserve is recorded because taxpayer expects to litigate the position

21. Selected Highlights of Recent Legislation • Small Business Jobs Act • Education, Jobs and Medicaid Assistance Act • International “loophole closers” • Hiring Incentives to Restore Employment Act • Foreign Account Tax Compliance Act (“FATCA”) • Health Care Reform • Codification of “economic substance doctrine” • Information reporting by corporations for payments made for property or services aggregating $600 (effective 2012)

22. Codification of the “Economic Substance” Doctrine • Adds definition of “economic substance” to the Internal Revenue Code • Adds a strict liability penalty for tax underpayments attributable to transactions lacking economic substance • Toughens erroneous refund penalty in the case of transactions lacking economic substance • Effective for transactions entered into after March 30, 2010

23. Codification of the “Economic Substance” Doctrine • If the economic substance doctrine is relevant to a transaction, the transaction will be treated as having economic substance only if • the transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer’s economic position, and • the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into the transaction • Interim guidance issued in Notice 2010-62

24. Presentation by: Hank Gutman KPMG LLP(202) 533-3044hgutman@kpmg.comwww.kpmg.com