Unresolved Tax Questions Dog Lame Duck Session

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The lame duck session slated to begin in mid-November leaves Congress a massive amount of unfinished business.

There’s very little time left to address some of the most important legislative issues affecting taxes. And there’s no universal optimism that it will successfully address the full legislative plate that awaits Congress upon its return.

One indicator of the unpredictability that might lie ahead is the trouble that Congress had in addressing the estate tax. Throughout 2009, there was no doubt in anyone’s mind that the expiring estate tax would be addressed before the year was over. Not only was it not acted on in 2009, a year has passed since then and it is still up in the air. This happened while both chambers of Congress as well as the executive branch were controlled by the same party. The point here is that nothing is certain, not even death and taxes.

Added to this is the uncertainty over the expiration of the Bush tax cuts of 2001 and 2003, and the normal “extender” items that expired at the end of 2009 (such as the AMT patch, the R&D credit, the state and local sales tax deduction, and a slew of others). That makes it difficult for accountants to offer a meaningful assessment of their clients’ potential tax liability.

While passing the small business bill two weeks ago won plaudits from some observers, it has already garnered its share of negatives for a variety of reasons. The bill provides a variety of favorable expensing rules, tax credits, and lending provisions, but fails to address the onerous Form 1099 reporting requirements of the health care legislation, which will require the tracking of payments for goods in addition to services, and for payments to corporations as well as individuals.

In fact, not only does the bill not lighten the burden, it actually extends the requirement to cover rental property owners who are treated as engaged in passive activities, not businesses. That alone adds hundreds of thousands of small landlords to the already controversial Form 1099 reporting requirement.

An amendment to repeal the new Form 1099 requirements was attached to the Senate version of the small business bill, but was defeated. Given the possible change in the composition of the Senate during the lame duck session (winners of seats that were appointed may be seated during this period), a compromise may be even less likely.

Added to all these are long-simmering issues that shouldn’t be issues, such as the one over tax strategy patents. The American Institute of CPAs has been lobbying for more than four years to ban them, and lately has been joined by a broad bipartisan coalition of consumer organizations, taxpayer rights groups and financial planners. Legislation to ban them currently has 45 cosponsors.

“That is five more than we had in the last Congress,” said AICPA director of congressional and political affairs Mat Young.

“It definitely will continue to be a growing problem,” he said. “The Supreme Court decision in Bilski ended up having no real impact. If anything, it made the standard of patentability more confusing.”

Consequently, the need for the legislation is greater now, according to Young.

A letter sent to Congress earlier this week by the AICPA and 18 other groups makes the point that tax strategy patents are a threat to taxpayers and should be banned before Congress adjourns for the year (see Groups Urge Congress to Ban Tax Strategy Patents).

“With the bipartisan support we have, it could be one of the things that gets done,” said Young. “That was one of the purposes of the letter – to keep the attention by the House and Senate on the issue, and remind legislators how important it is.”

So that leaves a tremendous number of loose ends to attend to for a relatively short lame duck session – and that’s just on the tax side. With luck, the session should at least lay the groundwork for addressing most of these issues by early next year.

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