June 15—Joint Committee on Taxation releases detailed description of revenue proposals in Administration's 2012 budget – included modification of the offer in compromise 20% deposit rules

On June 14, the Joint Committee on Taxation issued a detailed, 641-page description and analysis of the revenue provisions of the Administration's 2012 budget. In large part, the document expands on Treasury's 145-page summary of these revenue provisions issued early this year (“General Explanations of the Administration's Fiscal Year 2012 Revenue Proposals,” see Weekly Alert ¶  6 02/17/2011 ).

Corporations and businesses would have to prepare for yet another round of tax changes, large and small, if the President's budget proposals were enacted. The more widely applicable proposed changes include the following:

Increasing the rate of the alternative simplified research credit from 14% to 17% and making the credit permanent.

Revamping the Federal Unemployment Tax Act (FUTA) tax. Currently, the tax is 6.2% through June of 2011, and 6.0% for the remainder of calendar year 2011 and later years. It's levied on the first $7,000 paid to each employee as wages during the calendar year. Under the budget proposal, the FUTA rate would remain at 6.2% after June of 2011, and, beginning in 2014, the FUTA wage base would be raised to $15,000.

Repealing the use of the last-in, last-out (LIFO) inventory accounting method. Taxpayers that currently use this method would be required to write up their beginning LIFO inventory to its first-in, first-out (FIFO) value in the first tax year beginning after Dec. 31, 2012, but this one-time increase in gross income would be taken into account ratably over ten years, beginning with the first tax year beginning after Dec. 31, 2012.

Barring a deduction for punitive damages. Where the liability for punitive damages is covered by insurance, such damages paid or incurred by the insurer would be included in the gross income of the insured person. These changes would apply to damages paid or incurred after Dec. 31, 2012.

Repealing the lower-of-cost-or-market inventory accounting method, and the subnormal goods method, effective for tax years beginning after Dec. 31, 2012.

Permitting IRS to require prospective reclassification of workers who are currently misclassified and whose reclassification has been prohibited under current law. This would apply upon enactment, with a transition rule.

Eliminating tax preferences (e.g., expensing of intangible drilling costs, enhanced oil recovery credit, production tax credit for marginal wells, percentage depletion) for oil, gas and coal companies.

Replacing the current Code Sec. 179D deduction for energy efficient commercial building property with a more generous and effective tax credit that will encourage building owners to retrofit their properties.

Imposing a financial crisis responsibility fee on certain liabilities of the largest firms in the financial sector. The fee would apply after 2012, would be reported on the federal income tax return, and would be deductible in computing corporate tax.

Reinstating Superfund excise taxes for periods after 2011 and before 2022, and reinstating the corporate environmental income tax for tax years beginning after 2011 and before 2022.

Making permanent the Code Sec. 179 rule allowing up to $125,000 to be expensed. (Under current law, the maximum expensing amount is $500,000 for tax years beginning in 2010 or 2011, dropping down to $125,000 for tax years beginning in 2012, and then falling to $25,000 for tax years beginning after 2012.)

Making permanent the Code Sec. 1202 rule excluding all gain on qualified small business stock. (Under current law, the exclusion applies only for disposition of qualified stock acquired before 2012.)

Extending Build America Bonds (BABs) at a 28% subsidy rate, and expanding them to cover a broader set of investments such as capital infrastructure projects and financing for nonprofit colleges and hospitals.

The Administration's proposals also carry a reform of the international tax rules, and would boost taxes for higher-earning households.

DESCRIPTION OF REVENUE PROVISIONS

CONTAINED IN THE PRESIDENT’S

FISCAL YEAR 2012 BUDGET PROPOSAL

JOINT COMMITTEE ON TAXATION

112TH CONGRESS, 1ST SESSION

________

HOUSE

Dave Camp, Michigan

 Chairman

Wally Herger, California

Sam Johnson, Texas

Sander M. Levin, Michigan

Charles B. Rangel, New York

SENATE

Max Baucus, Montana

Vice Chairman

John D. Rockefeller IV, West Virginia

Kent Conrad, North Dakota

Orrin G. Hatch, Utah 

Chuck Grassley, Iowa

Thomas A. Barthold, Chief of Staff

Bernard A. Schmitt, Deputy Chief of Staff i

CONTENTS

Page

INTRODUCTION .......................................................................................................................... 1

PART I − TAX CUTS FOR FAMILIES AND INDIVIDUALS ................................................... 2

A. Provide $250 Economic Recovery Payment and Special Tax Credit ................................. 2

B. Increase in the Earned Income Tax Credit .......................................................................... 4

C. Expand the Child and Dependent Care Tax Credit ............................................................. 7

D. Automatic Enrollment in Individual Retirement Arrangements ......................................... 9

E. Extend American Opportunity Tax Credit ........................................................................ 27

F. Provide Exclusion from Income for Certain Student Loan Forgiveness .......................... 33

G. Tax Qualified Dividends and Net Long-Term Capital Gains at a 20-Percent

Rate for Upper-Income Taxpayers .................................................................................... 35

PART II − TAX CUTS FOR BUSINESS .................................................................................... 49

A. Eliminate Capital Gains Taxation on Investments in Small Business Stock .................... 49

B. Enhance and Make the Research Credit Permanent ......................................................... 51

C. Provide Additional Tax Credits for Investment in Qualified Property Used in a 

 Qualifying Advanced Energy Manufacturing Project ...................................................... 71

D. Provide Tax Credit for Energy Efficient Commercial Building Property

Expenditures in Lieu of Existing Tax Deduction ............................................................. 75

PART III − INCENTIVES TO PROMOTE REGIONAL GROWTH ......................................... 84

A. Extend and Modify the New Markets Tax Credit ............................................................. 84

B. Reform and Extend Build America Bonds ....................................................................... 90

C. Allow Low-Income Housing Tax Credit Properties to Elect to Use Average

Tenant Incomes for Purposes of Applicable Income Tests .............................................. 96

D. Expand the Low-Income Housing Additional Basis Rule to Certain Properties

Which Also Receive Tax-Exempt Bond Financing .......................................................... 98

E. Designate Growth Zones ................................................................................................. 101

F. Restructure Transportation Infrastructure Assistance to New York City ....................... 128

PART IV − CONTINUE CERTAIN EXPIRING PROVISIONS THROUGH

CALENDAR YEAR 2012 .......................................................................................................... 130

PART V − OTHER REVENUE CHANGES AND LOOPHOLE CLOSERS ........................... 131

A. Reform Treatment of Financial Institutions and Products .............................................. 131

1. Impose a financial crisis responsibility fee ............................................................... 131

2. Require accrual of the time-value element on forward sale of corporate stock ........ 147

3. Require ordinary treatment for dealer activities with respect to section 1256

contracts .................................................................................................................... 151ii

4. Modify the definition of control for purposes of the section 249 deduction

limitation ................................................................................................................... 155

B. Reinstate Superfund Environmental Income Tax ........................................................... 158

C. Reform the U.S. International Tax System ..................................................................... 161

1. Defer deduction of interest expense related to deferred income ............................... 161

2. Determine the foreign tax credit on a pooling basis ................................................. 182

3. Tax currently excess returns associated with transfers of intangibles offshore ........ 197

4. Limit shifting of income through intangible property transfers ................................ 218

5. Disallow the deduction for nontaxed reinsurance premiums paid to affiliates ......... 236

6. Limit earnings stripping by expatriated entities ........................................................ 254

7. Proposal to modify the tax rules for dual-capacity taxpayers ................................... 267

D. Reform Treatment of Insurance Companies and Products ............................................. 274

1. Modify rules that apply to sales of life insurance contracts ...................................... 274

2. Modify dividends received deduction for life insurance company separate

accounts..................................................................................................................... 278

3. Expand pro rata interest expense disallowance for company-owned life

insurance (“COLI”) ................................................................................................... 289

E. Miscellaneous Changes ................................................................................................... 295

1. Increase Oil Spill Liability Trust Fund financing rate by one cent ........................... 295

2. Permanent extension of Federal Unemployment Surtax .......................................... 296

3. Provide short-term tax-relief to employers and expand Federal Unemployment

Tax Act base ............................................................................................................. 297

4. Expand Short-Time Compensation (“STC”) Unemployment Program .................... 299

5. Repeal last-in, first-out inventory accounting method .............................................. 300

6. Repeal gain limitation on dividends received in reorganization exchanges ............. 304

7. Treat income of partners for performing services as ordinary income ..................... 317

8. Deny deduction for punitive damages ...................................................................... 330

9. Repeal the lower-of-cost-or-market inventory accounting method .......................... 333

PART VI − ELIMINATE FOSSIL FUEL TAX PREFERENCES ............................................ 336

A. Eliminate Oil and Gas Company Preferences ................................................................. 336

PART VII − SIMPLIFY THE TAX CODE ............................................................................... 363

A. Plug-In Electric-Drive Motor Vehicle Credit ................................................................. 363

B. Eliminate Required Minimum Distribution Rules for Balances of $50,000 or Less ...... 365

C. Allow 60-Day Rollover by Nonspouse Beneficiaries of Eligible Retirement Plans ...... 376

D. Clarify Exception to Recapture of Unrecognized Gain on Sale of Stock to an ESOP ... 381

E. Repeal Nonqualified Preferred Stock (NQPS) Designation ........................................... 385

F. Revise and Simplify the “Fractions Rule” ...................................................................... 395

G. Repeal Preferential Dividend Rule for Publicly Traded Real Estate Investment

Trusts (REITs) ................................................................................................................ 410

H. Reform Excise Tax Based on Investment Income of Private Foundations .................... 415

I. Simplify Tax-Exempt Bonds .......................................................................................... 421

1. Simplify rules relating to arbitrage investment restrictions ...................................... 421

2. Simplify qualified mortgage bond targeting requirements ....................................... 424iii

3. Repeal the five percent limit on unrelated or disproportionate private business

use for governmental bonds ...................................................................................... 426

PART VIII − REDUCE THE TAX GAP AND MAKE REFORMS ......................................... 430

A. Expand Information Reporting .............

C. Strengthen Tax Administration

1. Revise offer-in-compromise application rules

Present Law

The IRS is authorized to enter into offers-in-compromise under which the taxpayer and

Federal government agree that a tax liability may be satisfied by payment of less than the full

amount owed.

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  An offer-in-compromise may be accepted on one of three grounds:  (1) doubt

as to liability, available in cases in which the validity of the actual tax liability is in question, (2)

doubt as to collectability based on lack of sufficient assets from which the tax, interest, and

penalties can be paid in full, or (3) effective tax administration, applicable in a case in which

collection in full would cause the taxpayer economic hardship such that compromise rather than

collection would better encourage tax compliance.

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  According to Policy Statement 5-100,

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the goal is to collect as much as is potentially collectible of a delinquent tax debt at the earliest

time and at the least cost to the government.  An offer-in-compromise is viewed as an alternative

to declaring the tax debt uncollectible or collectible only under protracted proceedings.  If the

unpaid tax liabilities total $50,000 or more, an offer-in-compromise can be accepted only if a

public report is filed, supported by a written opinion from the IRS Chief Counsel, stating the

reasons for the compromise, the amounts of assessed tax, penalties and interest and the amounts

actually paid pursuant to the offer-in-compromise.

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The Tax Increase Prevention Reconciliation Act of 2005 (“TIPRA”) included a provision

requiring taxpayers to make certain nonrefundable payments with any initial offer-incompromise of a tax case.

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  Taxpayers making a lump sum offer-in-compromise must include

a nonrefundable payment of 20 percent of the lump sum with the initial offer.

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  Taxpayers

seeking an offer-in-compromise involving periodic payments must provide a nonrefundable

payment of the first installment that would be due if the offer were accepted.1318

Description of Proposal

The proposal eliminates the requirement that an initial offer-in-compromise include a

nonrefundable payment of any portion of the taxpayer’s offer.

                                                

1312

  Sec. 7122.

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  Treas. Reg. sec. 1.7122-1(b).  For this purpose, economic hardship is defined under Treas. Reg. sec.

301.6343-1.

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  Policy Statement 5-100 (January 30, 1992), IRM 1.2.14.1.17.

1315

  Sec. 7122(b); Treas. Reg. sec. 1.7122-1(e)(6).  The $50,000 threshold was raised from $500 in 1996. 

Sec. 503 of the Taxpayer Bill of Rights 2, Pub. L. No. 104-168.

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  Sec. 509(a) of TIPRA, Pub. L. No. 109-222. 

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  Sec. 7122(c)(1)(A).

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  Sec. 7122(c)(1)(B). 477

Effective date.−The proposal is effective for offers-in-compromise submitted after the

date of enactment.

Analysis

  

The IRS has been criticized for its conduct of the offer-in-compromise program based on

its perceived reluctance to exercise the settlement authority provided by law.  The criticism led to

legislation that expanded the procedural protections available to taxpayers facing collection

action by the IRS and mandated regulatory changes.

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  These changes included establishment

of new guidelines for review of offers, allowances for basic living expenses, special rules on

treating offers from low-income taxpayers, and rules for processing offers based on doubt as to

liability.  These changes were intended to ensure that the authority to compromise tax debts was

exercised as often as appropriate.  The program is designed to settle cases in which taxpayers

have demonstrated an inability to pay the full amount of a tax liability by allowing the IRS the

flexibility to consider a tax liability to be paid in full upon collection of the portion of the debt

determined to be acceptable under an offer-in-compromise.  Reducing access to the offer-incompromise program arguably makes it more difficult and costly to obtain the collectable

portion of existing tax liabilities.  

Even if repeal of the down payment requirement prompts submission of a greater number

of offers, a commensurate surge in acceptances might not result.  Although awareness of the

program was heightened, and applications for offers in compromise reached a peak of 128,000

offers in FY2003, the number of offers accepted has remained relatively constant.

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  Since

2003, applications have dropped sharply, a drop accompanied with a less pronounced decline in

accepted offers.  In 2009 and 2010, the number of offers began to rise slowly, although the

amount recovered from acceptance of offers continued to decline.

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  As a result, the program

remains vulnerable to the criticism that it is underutilized, as argued by the National Taxpayer

Advocate for the past nine years.

1322

  Repeal of the down payment requirement may lead to an

increase in the number of applications, as its proponents contend, but does not address the more

general question of how the IRS exercises its authority.   

When enactment of the down payment requirement was under consideration in 2006,

some predicted that requiring nonrefundable payments with an offer-in-compromise would

substantially reduce participation in the offer-in-compromise program.

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  According to those

                                               

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  See, e.g., “The Revenue Restructuring Act of 1998,” Pub. L. No. 105-206, sec. 3462 (amended Code

sec. 7122) and Pub. L. No. 100-647, sec. 6236(a)(3) (amended Code section 6331 to require that information on

availability of alternative payment methods, such as installment agreements, be included in notice of intent to levy

on property). 

1320

  IRS 2009 Data Book, Table 16b, available at

1321

  IRS 2010 Data Book, Table 16. 

1322

  2010 Annual Report to Congress, page 311, provides a summary of past criticism of the program and a

status update on how the IRS has responded administratively to the criticism.   

1323

  See, e.g., Dennis B. Drapkin, Testimony on behalf of the ABA before the Subcommittee on Oversight,

House Committee on Ways and Means, U.S. House of Representatives, April 6, 2006, available at 478

who support the Administration proposal, the fears expressed earlier have been realized.  In her

annual report to Congress for 2008, the National Taxpayer Advocate opined that the drop in the

number of applications for offers-in-compromise was attributable to the required nonrefundable

down payment, as had been predicted.  In support, she noted the low acceptance rate of offers

and the fact that funds for many offers are provided by family members and friends.  She

concluded that friends and family would not provide the funds to pay the compromised tax debts

because “they are likely to forfeit 20 percent of the offered amount without compromising the

liability.”

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pted by the IRS in the months prior to the TIPRA effective date.  National Taxpayer

Advocate staff reviewed the closed case files to determine whether the taxpayer could have made

a down payment of the amount required by TIPRA on the actual offer submitted and accepted by

IRS had that requirement been in effect, and to determine the source of funds used to make the

payments required under the terms of the compromise accepted.

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  Based on the information

from the case files, National Taxpayer Advocate concluded that adequate funds for a down

payment would not have been available from the liquid assets (cash, bank accounts, CDs, stock

and securities) in 70 percent of the cases.  National Taxpayer Advocate further noted that family

and friends were the source of the funds for 232, or 56 percent, of the offers.   

Alternative explanations for the decline in the number of offers submitted must be

considered, because the number of offers was already declining prior to the nonrefundable

deposit requirement enacted by TIPRA.  From information in the IRS Data Book, it appears that

offers decreased from FY 1997 through FY 1999, increased from FY 1999 through FY 2003, and

declined sharply until 2009.

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  One explanation for the decline in offers is that the substantial

increase in personal wealth during FY 2004 through FY 2008 resulting from increased housing

values, stock portfolios, and retirement plan investments suppressed the number of taxpayers

meeting the offer-in-compromise requirements.  Another possible explanation is that the low

                                               

http://www.abanet.org/tax/pubpolicy/2006/060406testimony.pdf, noting that “A successful offer-in-compromise

program raises revenue both from the offer and by bringing taxpayers back into the system. Relatives and employers

of the taxpayer are often the source of funds for offers in the current system. These parties will understandably be far

less willing to commit nonrefundable monies under the regime that would be created by the Senate bill. Because the

20-percent nonrefundable down payment requirement could dramatically reduce available outside funding for

potential offers, there is a significant risk that the proposal could decrease the number of legitimate offers submitted,

the number of offers accepted and the number of individuals reentering the tax system.  The provision also marks a

change in direction from the 1998 Taxpayer Bill of Rights.”

1324

  2007 National Taxpayer Advocate report at Volume 2, section 3, “Effect of Tax Increase and

Prevention Reconciliation Act of 2005 on IRS Offer in Compromise Program.”  The National Taxpayer Advocate

has renewed her call for repeal in her annual legislative recommendations for 2010.  2009 National Taxpayer

Advocate Report to Congress, Volume 1, pp. 203-204.  

1325

  See Nina E. Olson, National Taxpayer Advocate, Written Statement of Testimony before the

Subcommittee on Oversight, Committee on Ways and Means, U.S. House of Representatives, Hearing on Tax

Compliance Challenges Facing Financially Struggling Taxpayers, February 26, 2009, available at

http://waysandmeans.house.gov/media/pdf/111/olson.pdf.

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  IRS 2008 Data Book, available at http://www.irs.gov/pub/irs-soi/08databk.pdf.

acceptance rate discouraged participation.  When the required guidelines on allowable living

expenses and the computation of reasonable collection potential were published, taxpayers may

have concluded that they would not meet the criteria for participation.  If any of these factors

caused the drop in offers, opponents of repeal of the deposit may argue that the payment

requirement may not have a significant effect on the use of the offer-in-compromise program.  

Prior Action

A similar proposal was included in the President’s fiscal years 2010 and 2011 budget

proposals.

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