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Tax Update – Tax Legislative Topics for 2010 as of April 15, 2010

Tax update – tax legislative topics for 2010
 as of April 15, 2010

Congress has returned from its Easter recess and now faces a number of difficult tax issues, including tax extenders, estate tax, job stimulus legislation, and expiring Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, P.L. 107-16 ) tax cuts. Here's a progress report on how things stand on these legislative topics.

Tax Extender Legislation
Both the House and Senate have passed extender legislation, but the Senate's bill is bigger than the House version, and both carry offsets that have been used up in other legislation that has been passed by Congress and signed into law.

House bill. On Dec. 9, 2009, the House of Representatives, by a vote of 241-181, approved H.R. 4213, the “Tax Extenders Act of 2009.” The bill would revive and extend for one year 40-plus provisions that expired at the end of 2009, including the research credit and a number of important tax breaks for individuals, such as the election to take an itemized deduction for State and local general sales taxes in lieu of the itemized deduction permitted for State and local income taxes, the additional standard deduction for State and local real property taxes, and the above-the-line tax deduction for qualified tuition and related expenses.

One problem with the House-passed bill is that its revenue offsets include a Foreign Account Tax Compliance title that was used as a revenue offset for the hiring incentive legislation passed by Congress and signed into law last month.

Senate bill. On Mar. 10, 2010, the Senate by a vote of 66-33 passed H.R. 4213, carrying the “American Workers, State, and Business Relief Act” (AWSBRA). The Senate bill retroactively reinstates and extends through 2010 a number of provisions that expired at the end of 2009. However, it also carries a number of new provisions that have no parallel in the House-passed bill, such as special funding relief for pension plans that suffered losses due to recent stock market reversals, and a provision allowing corporations to elect to utilize unused alternative minimum tax (AMT) credits. It also would extend unemployment insurance benefits, and the 65% COBRA premium subsidy, through the end of 2010. The revenue offsets in the Senate-passed bill include a modification of the cellulosic biofuel producer credit to exclude fuels with significant water, sediment, or ash content, such as black liquor, and codification of the economic substance doctrine and the imposition of penalty provisions, but both of these offsets were used as “pay fors” by the health care legislation passed by Congress and signed into law last month.

Estate Tax Legislation
EGTRRA repealed the estate tax for 2010, technically, for individuals dying in 2010, and then brings it back in harsher terms for those dying after 2010. Many had thought that Congress would undo the repeal and permanently or temporarily keep the tax at 2009 levels ($3.5 million per person exemption and 45% top rate), perhaps with inflation adjustments to the exemption amount, but that has not happened yet. Estate tax repeal for 2010 includes changes to the income tax basis rules for property acquired from a decedent.

House-passed bill, no action in Senate. On December 3, the House by a vote of 225-200 approved H.R. 4154, the “Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009.” The bill would make permanent the estate, gift, and generation skipping transfer (GST) tax laws in effect for 2009. To date, the Senate has not taken up H.R. 4154.

Under the House-passed bill, the unified credit effective exemption amount for estate tax purposes would be $3.5 million for decedents dying during 2010 and later years. The unified credit effective exemption amount for gift tax purposes would be $1 million for 2010 and later years. The highest estate and gift tax rate would be 45%.

The GST tax exemption would equal the unified credit effective exemption amount for estate tax purposes ($3.5 million), and the GST tax rate would be determined using the highest estate and gift tax rate.

Finally, the House-passed bill would repeal the modified carryover basis rules that apply for purposes of determining basis in property acquired from a decedent who dies in 2010. Under the bill, property acquired from a decedent who dies after Dec. 31, 2009, generally would receive date-of-death fair market value basis (i.e., “stepped up” basis) under the basis rules in effect in 2009.

The House-passed bill would make permanent EGTRRA's repeal of the State death tax credit; as under the law in effect for 2009, the bill would allow a deduction for death taxes paid to any State or the District of Columbia. In addition, the bill would make permanent the 2001 Act's repeal of the qualified family-owned business deduction.

The House-passed bill would repeal the sunset of the EGTRRA estate, gift, and generation skipping transfer tax provisions scheduled to occur for decedents dying, gifts made, and generation skipping transfers made after Dec. 31, 2010. As a result, the bill would make permanent EGTRRA modifications to the rules regarding (1) qualified conservation easements, (2) installment payment of estate taxes, and (3) various technical aspects of the GST tax.

Job Stimulus Legislation
On Mar. 24, 2010, the House by a vote of 246-178 approved H.R. 4849, “the Small Business and Infrastructure Jobs Tax Act,” as amended. The bill was sent to the Senate for consideration, but it's not likely to be a high priority there.

The bill would extend Build America Bonds (BABs) through Mar. 31, 2013, and extend the exemption from the AMT for private activity bonds; the exemption would apply for such bonds issued in 2011. It would provide for a 100% Code Sec. 1202 exclusion of gain from the sale of small business stock for qualifying stock acquired after Mar. 15, 2010 and before Jan. 1, 2011. The bill also would place a limitation on the Code Sec. 6707A penalty for failure to disclose certain reportable transactions (including listed transactions) on a return. Generally, the penalty would be proportionate to the underlying tax savings, effective for penalties assessed under Code Sec. 6707A after 2006.

Tax Cuts Expiring at the End of 2010
If Congress does not act, the federal income tax landscape will change dramatically next year under automatic sunset provisions in EGTRRA. However, as of yet, there has been no concerted effort in Congress to address the sunset provisions, and some say this effort won't materialize until after the elections this fall.

On Mar. 26, 2009, Senate Finance Chair Max Baucus (D-MT) introduced S. 722, the “Taxpayer Certainty and Relief Act of 2009,” but the bill got nowhere. S. 722 would make permanent the 2009 alternative minimum tax exemption amounts (which expired at the end of 2009) and index them for inflation in future years. It also would make permanent a number of rules slated to sunset at the end of this year, such as the 10%, 25%, and 28% individual tax rates, and, for taxpayers in these brackets, the reduced tax rates for capital gains and dividend income, and marriage penalty relief.

The President's FY 2011 budget proposals released in February of this year included changes that would adopt or modify EGTRRA automatic sunsets.

Please call us if you would like to discuss any of these pending tax legislative matters further.