Tax and Budget Outlook Ken Kies CoManaging Partner, WNTS Chair, Federal Tax Policy Group Financial E

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Tax and Budget Outlook Ken KiesCo-Managing
Partner, WNTSChair, Federal Tax Policy Group
Financial Executives International2002 Tax
SeminarLas Vegas, NevadaFebruary 14, 2002
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Overview

• The Budget Outlook
• Election-Year Dynamics
• Economic Stimulus
• The Extenders
• Threat of Pay-Fors
• Other Tax Initiatives

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Surplus Outlook for FY 2002( Billions, CBO
estimates)
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Surplus Outlook for FY 2003( Billions, CBO
estimates)
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Ten-Year Surplus Estimates( Billions, CBO
estimates)
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Control of 107th CongressHouse of
Representatives
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Control of 107th CongressSenate
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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)

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Tax Bill in an Election Year?

• 1974 ERISA
• 1976 Tax Reform Act of 1976
• 1978 Revenue Act of 1978
• 1980 OBRA80 et al
• 1982 TEFRA
• 1984 DEFRA

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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

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Tax Bill in an Election Year?

• 1998 IRS Restructuring and Reform Act/Tax and
  Trade Relief Extension Act
• 2000 FSC Repeal/Community Renewal

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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?

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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

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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

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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

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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

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Federal Taxes as a Percent of GDP(Actual data
and CBO Projections)
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Pressure on Revenue Raisers

• Return to pay-go?
• Corporate tax shelter legislation?
• Enron fallout

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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.

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Corporate Tax ShelterLegislation?

• 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.

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Corporate Income Tax Receipts( billions)
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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.

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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. Im not saying its 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.

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IRS Audits of Individual Returns( Coverage)
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IRS Audits of Small Businesses(Corporations with
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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 cant spend forever dealing with the issues of
  the 90s.

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Corporate Tax SheltersIRS 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

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Mounting IRS Court Losses

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

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Still, Some IRS Wins

• ACM Partnership v. Commr
  (3rd Circuit, 1998)
• ASA Investerings Partnership
  (DC Circuit, 2000)
• COLI Cases
• Winn-Dixie v. Commr (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)

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The Bush Treasury Tax Team

• Bush Treasury modifications to loss disallowance
  regulations
• Bush Treasury withdraws adverse Clinton
  Administration RD credit regulations
• Bush Treasury limits reach of Clinton
  Administration anti-Morris Trust regulations
• Bush Treasury revises split-dollar life
  insurance guidance

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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

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Possible Outcomesin FSC/ETI Dispute

• EU sanctions?
• ETI replacement legislation?
• International tax reform
• U.S. compensation?
• Negotiated settlement?

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ETI Tax Expenditure(JCT billions)