By Jay Heflin - 06/16/10 10:24 PM EDT
Reduce Medicare physician payment update from 19 to 6 months. Medicare physician payment rates are scheduled to be reduced by more than 20 percent in June. This provision would reverse that reduction and provide a 2.2 percent update to physician payment rates through November 30, 2010. This change will reduce the cost of the bill by $16.4 billion over 10 years.
Reduce Medicare physician payment update from 19 to 6 months. Medicare physician
payment rates are scheduled to be reduced by more than 20 percent in June. This provision
would reverse that reduction and provide a 2.2 percent update to physician payment rates
through November 30, 2010. This change will reduce the cost of the bill by $16.4 billion over 10
Eliminate the Extension of Federal Additional Compensation (FAC). Federal Additional
Compensation, which increases unemployment benefits by $25 a week, was phased-out at the
end of May 2010. The original Baucus substitute would have extended FAC through November
2010. This modification eliminates that extension of FAC. Under this bill, individuals that are
currently receiving FAC will continue to receive FAC until the exhaustion of all benefit
programs, but no later than the end of the week beginning December 7, 2010. The non-reduction
rule for FAC also continues to apply through the end of the week beginning December 7, 2010.
In addition, the “non-reduction rule” has been attached to the Emergency Unemployment
Compensation (EUC) provision. This change will reduce the cost of the bill by $5.8 billion over
Changes to the taxation of carried interest. The bill would prevent investment fund managers
from paying taxes entirely at capital gains rates on investment management services income
received as carried interest in an investment fund. To the extent that carried interest reflects a
return on invested capital, the bill would continue to tax carried interest at capital gain tax rates.
However, to the extent that carried interest does not reflect a return on invested capital, this
amendment would require investment fund managers to treat seventy-five percent (75%) of the
remaining carried interest as ordinary income beginning on January 1, 2011. The amount that
will be treated as ordinary income is reduced to fifty percent (50%) for carried interest that does
not reflect a return on invested capital but which is attributable to the sale of assets which are
held for 5 or more years. This amendment provides that the lower recharacterization percentage
also applies to the gain or loss attributable to the underlying assets held for 5 or more years when
a partnership interest is sold as well as to gain attributable to section 197 intangibles of a
partnership whose principal activity is providing specific investment management services with
respect to the assets of the partnership when the partnership interest has been held for 5 or more
years. This amendment also provides that, on selling an interest in any publicly traded
partnership, a person who is not an investment service provider will be exempt from the rule that
recharacterizes as ordinary income under Internal Revenue Code section 751(a) that portion of
the gain or loss attributable to an investment services partnership interest. This proposal, as
amended, is estimated to raise $13.905 billion over 10 years.
Changes to Employment Taxes on Earning of Certain Service Professionals. Social Security
taxes are imposed on compensation and self-employment income up to the Social Security Wage
Base (currently $106,800) and the Medicare tax is imposed on all self-employment and
compensation income. Some service professionals have been avoiding Medicare and Social
Security taxes by routing their self-employment income through an S corporation. These
taxpayers then pay themselves a nominal salary and take the position that the remaining earnings
are exempt from employment taxes. A provision passed by the House and included in the
original Baucus substitute would address this abuse in situations where (1) an S corporation is a
partner in a professional service business or (2) an S corporation is engaged in a professional
service business that is principally based on the reputation and skill of 3 or fewer individuals.
This provision does not change the ability of S corporations to use some income to make
business investments or deduct those small business investments. To make the second
alternative more administrable and more targeted, this amendment changes the language so that
the policy applies only if 80 percent or more of the professional service income of the
corporation is attributable to the services of 3 or fewer owners of the corporation. This proposal,
as amended, is estimated to raise $9.15 billion over 10 years.
Increase Oil Spill Liability Trust Fund solvency. The Oil Spill Liability Trust fund is financed
by an 8-cent-per-barrel tax on the oil industry. There is approximately $1.5 billion available in
this trust fund. The nonpartisan Congressional Research Service has stated, “a major spill,
particularly one in a sensitive environment, could threaten the viability of the fund.” To ensure
the continued solvency of the Oil Spill Liability Trust Fund, the bill would increase the per-
barrel amount that oil companies are required to pay into the fund to 49 cents. This proposal, as
amended, is estimated to raise $18.3 billion over 10 years.
Addition of the Modification to the Section 6707A Penalty. The bill revises section 6707A of
the Internal Revenue Code to make the penalty for failing to disclose a reportable transaction
proportionate to the underlying tax savings. The purpose of this change is to prevent small
businesses from paying a penalty significantly greater than the benefit they would receive from
their investment. The penalty for failure to disclose reportable transactions to the IRS would be
set at 75 percent of the tax benefit received. Reportable transactions are defined as investments
in transactions that the IRS has identified as listed tax shelters or that have characteristics of tax
shelters, including large losses or confidentiality agreements. The minimum penalty under this
bill is $10,000 for corporations and $5,000 for individuals, and the maximum penalty is
$200,000 for corporations and $100,000 for individuals. The bill also requires the IRS to
provide an annual report to the Senate Finance Committee and to the House Ways and Means
Committee giving an account of certain tax-shelter related penalties asserted during the year.
This proposal, which passed the Senate by unanimous consent in December of 2009, is estimated
to cost $176 million over ten years.
Addition of Clarification for Affiliated Hospitals for Distribution of Residency Positions.
The bill would make a technical correction to clarify that residency positions being used as part
of an affiliation agreement between teaching hospitals would not be considered unused residency
positions, for the purpose of the redistribution of GME slots under current law. This provision is
estimated to save approximately $50 million over 10 years.
Addition of Disaster Low-Income Housing Tax Credits. Under current law, every year states
receive allocations of low-income housing tax credits (LIHTC) based on population or a small
state set-aside. In response to Hurricane Katrina in 2005, as well as the floods in the Midwest in
2007, the LIHTC was expanded to allow for additional credits, called “disaster credits”, to help
affected states rebuild. This amount is on top of what States receive under current law. As part
of the American Recovery and Reinvestment Act of 2009, LIHTCs are eligible to be exchanged
for grants. This exchange program only applies to LIHTCs allocated based on population – it
did not apply to disaster credits. In the underlying bill, LITHCs allocated in 2010 are eligible to
be refundable credits. This provision also allows disaster credits from the Katrina and
Midwestern flood disasters to be exchanged for either grants or refundable credits. The
provision is estimated to cost $91 million over 10 years.
Addition of Extension of Closing Date for Homebuyer Tax Credit. As part of the Worker,
Homeownership, and Business Assistance Act of 2009, the homebuyer tax credit was expanded
and extended to allow homebuyers to receive a tax credit for the purchase of a qualifying home
through April 30, 2010. Homebuyers can benefit from the tax credit up to July 1, 2010 if they
entered into a binding contract by April 30, 2010 and close on the home within 60 days. This
provision extends the closing date for homebuyers who entered into a binding contract by April
30, 2010, allowing them to be eligible for the tax credit if they close on the home before October
1, 2010. The provision is estimated to cost $140 million over 10 years.
Addition of Denial of Deductions for Punitive Damages. Under current law, a deduction is
allowed for damages paid or incurred as ordinary and necessary expense in the course of a trade
or business. However, no deduction is allowed for a fine or penalty paid to a government for the
violation of any law. If a taxpayer is convicted in violation of antitrust laws, no deduction is
allowed for two-thirds of any amount paid or incurred on a judgment or settlement. This
provision denies a tax deduction for payments made for punitive damages in connection with any
legal judgment or settlement. Additionally, in the case that a taxpayer’s punitive damages are
paid by an insurer, the amounts paid on behalf of the taxpayer are included in the taxpayer’s
gross income. This provision applies to damages paid or incurred after December 31, 2011. The
provision is estimated to raise $315 million over 10 years.
Foreign tax loophole closer clarification regarding the source rules for income on
guarantees. The provision would reverse a recent Tax Court decision to provide that guarantee
payments made to foreign persons are treated like interest, rather than services, and therefore
subject to U.S. withholding tax when paid by a U.S. person to a foreign person. The
modification would clarify that the provision only applies to guarantees of indebtedness (rather
than to guarantees of obligations). The clarification has no revenue effect.
Foreign tax loophole closer clarification regarding the provision that would terminate the
special rules for interest and dividends received from “80/20 companies”. The provision
would eliminate the withholding and foreign tax credit benefit for 80/20 companies
prospectively, subject to a “grandfather” rule that would continue to provide favorable
withholding tax treatment to payments made by existing legitimate 80/20 companies. The
modification would clarify that for purposes of applying the grandfather provision for periods
prior to January 1, 2011, the 80/20 rules then in effect shall apply. The clarification has no