February 13, 2013
Cut Tax Loopholes Act Introduced in the Senate
On February 11, 2013, Senator Carl Levin (D-Mich.) introduced the Cut Unjustified Tax Loopholes Act (the "Act") designed to end perceived excessive corporate tax loopholes in an effort to raise revenue and avert drastic budget cuts. The Act focuses on perceived abuses that, when remedied, should generate significant tax revenue. The Act's provisions are complex, because the subject areas addressed are complex.
The main focus of the Act includes:
1. Ending Offshore Tax Abuses: The Act proposes numerous provisions exposing offshore tax abuses while closing certain loopholes. Some of these provisions include:
- Penalizing offshore financial institutions and countries to improve U.S. tax enforcement;
- Requiring deferral of tax deductions for U.S. corporations moving jobs and operations offshore, until profits are repatriated;
- Ending certain transfer pricing abuses;
- Revising earnings stripping rules;
- Changing the way foreign tax credits are calculated to prevent manipulation to reduce U.S. liabilities;
- Preventing corporations managed and controlled in the United States from claiming foreign status;
- Including certain derivative payments made from the U.S. to offshore recipients as U.S. source income;
- Ending certain check-the-box abuses as well as foreign to U.S. loan abuses;
- Requiring certain disclosure of foreign employees, revenue, and tax payments on a country by country basis.
2. Strengthening Tax Enforcement: The Act toughens the rules for tax shelter promoters, increases penalties for aiders and abettors of tax evasion, and modernizes the Federal tax lien system.
3. Ending Excessive Corporate Tax Deductions For Stock Options: The Act seeks to reduce the tax benefit corporations receive from deductions for stock options expense, whereby profitable corporations report higher book earnings, while using significant stock option deductions to reduce or eliminate taxable income. The Act would also limit stock option compensation deductions, now exempt from the above $1 million limitation per employee.
4. Closing the Derivative Blended Rate Loophole: Under current law, certain derivatives are entitled to a blended tax rate, whereby what is otherwise short-term capital gain is taxed, not at the short-term capital gains rate, but at a rate which is 60% long-term capital gain and 40% short-term capital gain. This blended rate can apply to derivatives held only for moments, not for a minimum threshold of one-year as is required for other investments to be entitled to this preferential tax rate. This Act would eliminate the blended rate for all derivatives.
5. Ending the Carried Interest Loophole: The Carried Interest Loophole, whereby investment managers structure transactions to create capital gains income from what are essentially management services, would be ended under this Act. This issue has been addressed in the media and Congress for quite some time. The Act would ensure that investment managers, including private equity and hedge fund managers, pay ordinary income tax rates on all income derived from investment and management services.
The proposals in this Act are not new and have been addressed for months in the media and Congress, as they have also struggled through the debt ceiling and sequestration debates. Senator Levin's introduction of this Act is an important development and will be monitored closely by Marcum's National Office. The impact of the proposals will vary by taxpayer, but if enacted, the tax landscape will be forever changed. As this bill winds its way through Congress, we will update our Tax Flashes and continue to bring our best thinking to you.