Emergency Economic Stabilization Act of 2008

Transcription

1 Emergency Ecnmic Stabilizatin Act f N. Lp Drive, Ste 200 Ames, Iwa Updated Nvember 17, by Rger McEwen Overview Over the weekend f September 27-28, it appeared that the U.S. Huse had reached agreement n a massive bill, the Emergency Ecnmic Stabilizatin Act f 2008 (Act), designed t help put the U.S. financial sectr back n its feet and calm Wall Street s fears. Hwever, the Huse failed t pass the Act n September 29 by a vte. The vte came after a five-minute partisan speech by Huse Speaker Pelsi wh blamed the current prblem in the financial markets n the Bush Administratin. The Senate tk up its wn versin f the Act and passed it n Octber 1 by a margin. The tw bills are similar in many respects, but the Senate versin als cntained language that extends expired r expiring tax prvisins, and Midwestern disaster relief. The Huse then cnsidered the Senate versin f the legislatin (H.R. 1424, Pub.L. N ) and passed it by a margin. The President immediately signed the bill. Hw did Iwans vte? Yes: Harkin, Grassley; Braley, Bswell, Lebsack N: Latham, King The Act (bth Huse and Senate versins) authrizes the federal gvernment t buy trubled assets and acquire equity in distressed financial firms, and requires the Treasury Department t make rules t prevent excessive cmpensatin fr executives whse cmpanies benefit frm the legislatin. The Act als sets up an versight bard with the authrity t halt the prgram, a special investigatr general t mnitr the prgram and regular gvernmental audits. The Act als requires the gvernment t renegtiate mrtgages that it acquires under the prgram. Mney t acquire the trubled assets will be phased in with $250 billin immediately available, an additinal $100 billin t be apprpriated if the Treasury Secretary certifies its need, and a final $350 billin available upn additinal certificatin and Cngressinal apprval. Nn-Tax Prvisins On the Huse side, the Act was riginally drafted as a three-page bill. But, it quickly mrphed int a 110-page bill. The Act cntains numerus nn-tax prvisins. While sme questinable and likely unnecessary prvisins gt added t the bill, ther bad prvisins gt stripped ut during negtiatins. The Act grants extrardinary pwers t the Treasury Secretary basically a blank check rather than legislative directin cncerning what is permissible actin. In essence, the Secretary can hire, fire, cntract, issue regulatins, establish vehicles t hld assets, with the Secretary s decisins nly subject t limited judicial review. The Secretary must cnsult with varius agencies, t issue regulatins and take necessary steps t prevent unjust enrichment whatever that means. The Act als states that the Secretary is t take int cnsideratin nine wrthy factrs 1

2 when implementing the prgram, and must prmulgate cnflict f interest regulatins. Als, the Act prvides fr limits n executive cmpensatin (n glden parachute payments t a senir executive fficer during the perid that the Secretary hlds an equity r debt psitin in the financial institutin), and establishes an versight bard cnsisting f Treasury, the Securities and Exchange Cmmissin, the Federal Reserve, an bscure husing regulatr and the Secretary f the Department f Husing and Urban Develpment. These persns can nly be fired fr cause which limits the President s versight ability (and is prbably uncnstitutinal as in vilatin f Article II f the Cnstitutin). The Act specifies that the pwers given the Secretary are nt subject t injunctive r equitable relief, and yet the Act carefully limits injunctive relief in sme situatins (nt sure what that is all abut). Tax Prvisins The Act cntains several imprtant tax prvisins: percent excise tax n payments ver a threshld amunt that is due if the executive leaves fr reasns ther than a standard retirement fr which the executive is eligible (applicable t cmpanies that have mre than $300 millin f assets purchased by the Treasury). Nte: The deductin ceiling was added by Rep. Barney Frank (D- Mass.) and Sen. Chris Ddd (D- CT.) wh did nt bject t executive cmpensatin packages n prir ccasins. A ptential prblem with this prvisin is that trubled financial institutins are nt likely t be able t attract the cream f the crp, and this prvisin culd create a perverse incentive t nt hire tp talent. An extensin f the nn-taxability f cancelled debt n hme mrtgages (up t $2 millin) thrugh Senate Versin Ordinary lss treatment n Fannie Mae and Freddie Mac preferred stck held by financial institutins if the stck was held n September 6, 2008, r if it was sld frm January 1, 2008 thrugh September 6, Nte: This is designed t help smaller banks that had verinvested in Fannie Mae and Freddie Mac. Withut the change in the tax rule, these banks (which are typically C crpratins) wuld nt have been able t deduct much f the lsses. That s because capital lsses f C crpratins are deductible nly t the extent f capital gains, and expire if nt used in five years. $500,000 annual cmpensatin deductin ceiling fr the tp CEO and tp three emplyees f institutins that participate in the prgram, and a 20 The Senate versin (ver 400 pages lng) cmbines the financial bailut prvisins that failed in the Huse with ne additinal item a temprary increase in the Federal Depsitry Insurance Crpratin s (FDIC) insurance limit frm $100,000 t $250,000 per bank accunt (effective frm Oct. 3, 2008, thrugh Dec. 31, 2009). The bill als includes the three tax prvisins that were in the Huse versin and includes numerus extender prvisins (including the 0.2 percent FUTA surcharge) and disaster-related tax relief fr the Midwest. Als included in the bill is apprximately $17 billin in tax cuts fr renewable energy, and a neyear patch t the alternative minimum tax. The bill cnsists f three majr Divisins, with each Divisin cntaining sme tax prvisins. Each Divisin has its wn shrt title with sectin numbers beginning at 101 in each Divisin. Divisin A is the Emergency Ecnmic Stabilizatin Act f 2008, Divisin B is the Energy Imprvement and Extensin 2

3 Act f 2008 and Divisin C is the Tax Extenders and Alternative Minimum Tax Relief Act f The fllwing is a summary f the mst significant tax prvisins cntained in H.R. 1424, Pub.L. N (which became law n Octber 3, 2008): Divisin A The Emergency Ecnmic Stabilizatin Act f 2008 Ordinary lss treatment n Fannie Mae and Freddie Mac preferred stck held by financial institutins if the stck was held n September 6, 2008, r if it was sld frm January 1, 2008 thrugh September 6, Act, Divisin A, Title III, Sec Effective fr sales r exchanges ccurring after December 31, 2007, in tax years ending after $500,000 annual cmpensatin deductin ceiling fr the tp CEO and tp three emplyees f institutins that participate in the prgram, and a 20 percent excise tax n payments ver a threshld amunt that is due if the executive leaves fr reasns ther than a standard retirement fr which the executive is eligible (applicable t cmpanies that have mre than $300 millin f assets purchased by the Treasury). Act, Divisin A, Title III, Sec. 302, amending I.R.C. 162(m). An extensin f the nn-taxability f cancelled debt n hme mrtgages (up t $2 millin n a jint return) thrugh Act, Divisin A, Title III. Sec. 303, amending I.R.C. 108(a)(1)(E). Divisin B The Energy Imprvement and Extensin Act f 2008 Extensin f the renewable energy credit thrugh 2009, fr wind and refined cal, and thrugh 2010 fr ther surces f renewable energy. Act, Divisin B, Title I, Subtitle A, Sec. 101, amending I.R.C. 45(d). Nte: The Act als expands the types f facilities qualifying fr the credit t new bimass facilities and t thse that generate electricity frm marine renewables (e.g., waves and tides). Act, Divisin B, Title I, Subtitle A, Sec. 102, amending I.R.C. 45(d). Extensin f the 30 percent energy-efficient prperty credit thrugh 2016, with the credit ffsetting AMT liability. Act, Divisin B, Title I, Subtitle A, Sec. 103, amending I.R.C. 48(a), (c)(1) and (c)(2). Qualified slar energy prperty (and remval f the $2,000 maximum limit), and qualified fuel cell prperty. 10 percent credit fr micr-turbines. Credit fr the building f small wind turbines (nameplate capacity f nt mre than 100 kw) used t generate electricity, capped at $4,000 per year. Act, Divisin B, Title I, Subtitle A, Sec. 104, amending I.R.C. 48(c). Effective fr perids after Octber 3, 2008, in tax years ending after Oct. 4, 2008, thrugh Credit wrth 30 percent f the cst (capped at $2,000 per year), fr gethermal heat pump systems thrugh Act, Divisin B, Title I, Subtitle A, Sec. 105, amending I.R.C. 48(a) by adding new subsectin vii. Effective fr perids after Octber 3, 2008, in tax years ending after Octber 3, Extensin f the residential energy efficient prperty credit t prperty placed in service n r befre December 21, Act, Divisin B, Subtitle A, Sec. 106, amending I.R.C. 250D(g). The creatin f a credit fr carbn dixide sequestratin in the amunt f $20 per metric tn f qualified carbn dixide (captured frm an industrial surce) which the taxpayer captures at a qualified facility (an industrial facility at which carbn 3

4 capture equipment is placed in service which captures nt less than 500,000 metric tns f carbn dixide during the tax year) the taxpayer wns and dispses f in secure gelgical strage, and $10 per metric tn f qualified carbn dixide which the taxpayer captures at a qualified facility and uses as a tertiary injectant in a qualified il r natural gas recvery prject. Act, Divisin B, Title I, Subtitle B, Sec. 115, adding I.R.C. 45Q. Effective fr carbn dixide captured after Octber 3, Expansin f the 50 percent bnus depreciatin allwance fr cellulsic bifuels prperty t cellulsic bifuels ther than ethanl. Act, Divisin B, Title II, Sec. 201, amending I.R.C. 168(l). Effective fr prperty placed in service after Octber 3, 2008, and befre 2013, and fr tax years ending after Octber 3, Extensin f the credit fr bidiesel and renewable diesel thrugh 2009, and increasing the credit frm $.50 t $1.00, fr fuel prduced, sld r used in Act, Divisin B, Title II, Sec. 202, amending I.R.C. 40A(g); 6426(c)(6) and 6427(e)(5)(B). Clarificatin that fuel credits are designed t prvide an incentive fr dmestic prductin by specifying that imprted bidiesel that is immediately resld is ineligible fr the bidiesel fuel credit. Act, Divisin B, Title II, Sec. 203, amending I.R.C. 40A(d). Effective fr claims fr credit r payment made n r after May 15, amunt n the credit based n the GVW rating f the vehicle). Act, Divisin B, Title II, Sec. 205, creating I.R.C. 30D. Effective fr tax years beginning after 2008 and fr eligible prperty purchased befre The credit is subject t a ceiling amunt f $7,500 fr qualified vehicles with a grss vehicle weight (GVW) rating f 10,000 punds r less (higher limits apply t heavier vehicles). The credit is subject t a phaseut perid beginning with the secnd calendar quarter fllwing the calendar quarter which includes the first date n which the ttal number f a qualified vehicle sld fr use in the U.S. is at least 250,000. The rate f reductin f the credit is 50 percent fr the first tw calendar quarters f the phaseut perid, and 25 percent fr the third and furth calendar quarters f the phaseut perid. A vehicle that qualifies fr the credit is ne that draws prpulsin using a tractin battery using at least 4 KwH f capacity, uses an ffbard surce f energy t recharge the battery, has a GVW rate (fr passenger vehicles) f 8,500 punds r less, and cnfrms t applicable Clean Air Act standards. The credit can be used t ffset AMT. Fr a qualified vehicle used by a taxexempt entity, the seller f the vehicle is treated as the taxpayer with respect t the vehicle. A three-mnth extensin, thrugh 2009, and mdificatin f the alternative fuel credit. Act, Divisin B, Title II, Sec. 204, amending I.R.C. 6426(d). Effective t fuel sld r used after Octber 3, Creatin f a credit fr new qualified plugin electric drive mtr vehicles in the amunt f $2,500 plus $417 fr each kilwatt hur f tractin battery capacity in excess f 4 KwH (subject t a ceiling The taxpayer must reduce their basis in the vehicle by the amunt f the credit allwed. A taxpayer may elect t nt have the credit apply. The credit is part f the general business credit. 4

5 Nte: The Chevrlet Vlt (frthcming) is prjected t be eligible fr the full $7,500 credit by virtue f using a 16 KwH capacity Lithium-In battery. Extensin f the alternative fuel vehicle refueling prperty credit thrugh 2010 (2014 fr hydrgen fueled vehicles). Act, Divisin B, Title II, Sec Effective fr prperty placed in service after Octber 3, 2008, in taxable years ending after Octber 3, Extensin thrugh 2009 f the suspensin n the taxable incme limit fr purpses f percentage depletin f a marginal il r natural gas well. Act, Divisin B, Title II, Sec A prvisin allwing emplyers t prvide emplyees wh cmmute t wrk by bicycle limited fringe benefits (up t $20 per mnth as an exclusin frm incme) t ffset the cst f such cmmuting. Act, Divisin B, Title II, Sec. 211, amending I.R.C. S 132(f). Effective fr tax years beginning after Nte: The prvisin is nt indexed fr inflatin. Extensin f the credit fr nn-business energy-saving prperty (such as windws, insulatin and HVAC systems) thrugh 2009, and inclusin f energy-efficient bimass fuel stves (with a thermal efficiency rating f 75 percent r mre) and asphalt rfs with cling granules as new classes f energy-efficient prperty eligible fr a cnsumer tax credit up t $500. Act, Divisin B, Title III, Sec Effective fr expenditures made after December 31, 2008, and befre Nte: The bill clarifies that water heaters must have either an energy factr f at least.80 r a thermal efficiency rating f at least 90 percent t qualify fr the credit. Als, while the credit is generally wrth up t $500 fr varius imprvements, it is limited t $200 fr windws and $300 fr bimass fuel stves. Extensin f the energy-efficient cmmercial buildings deductin thrugh Act, Divisin B, Title III, Sec Fr eligible cntractrs, extensin f the credit fr energy-efficient imprvements t new hmes acquired frm eligible cntractrs fr use as a residence befre Act, Divisin B, Title III, Sec Mdificatin and extensin f the energyefficient appliance credit thrugh Act, Divisin B, Title III. Sec A limitatin n the deductin fr incme attributable t dmestic prductin f il and gas (capping the deductin at 6 percent), while extending the deductin t strategic film and televisin prductin. Effective fr tax years beginning after 2008 (with the reductin taking effect in 2010). Act, Divisin B, Title IV, Sec. 401, amending I.R.C. 199(d). A prvisin requiring brker reprting f custmer basis and gain in securities transactins stcks, bnds, mutual funds and ther securities using either the FIFO methd r the average cst methd (beginning in 2011 n a phased-in basis) n Frm 1099-B. In additin, a brker must specify whether the gains are lng-term r shrt-term. The applicable dates are as fllws: 1) crprate stck-jan. 1, 2011; (2) mutual funds-jan. 1, 2012; (3) ther securities-jan.1, Nte: The prvisin als extends the timeframe in which Frm 1099-B (r statements) must be sent t custmers by brkers frm Jan. 31 t Feb. 15 fr statements furnished after Dec. 31, In additin, fr peple wh transfer their securities frm ne brkerage t anther, the ld brker will need t prvide the new brker with the required cst basis and acquisitin date 5

6 infrmatin. Act, Divisin B, Title IV, Sec. 403, amending I.R.C A prvisin extending the.2 percent FUTA surcharge n the first $7,000 f wages (r salary) paid after December 31, 2008, thrugh calendar year 2009 (e.g., 6.2 percent; 6.0 percent beginning Jan. 1, 2010 and thereafter). Act, Divisin B, Title IV, Sec. 404, amending I.R.C Divisin C - Tax Extenders and Alternative Minimum Tax Relief Act f 2008 An extensin fr 2008 f the prvisin allwing individuals t ffset their entire regular tax liability and alternative minimum tax (AMT) liability by the nn-refundable persnal credits (such as the dependent care credit, educatin credits (Hpe, Lifetime Learning Credit), adptin credit, child tax credit, retirement savers credit, credit fr energy-efficient imprvements t a principal residence, credit fr certain slar and fuel cell equipment added t a principal residence, mrtgage tax credit and the firsttime D.C. hmebuyer tax credit). Act, Divisin C, 101, amending I.R.C. 26. Effective fr tax years beginning in Pegs the 2008 Alternative Minimum Tax (AMT) exemptin at $69,950 fr jint filers and $46,200 fr single filers, and $34,975 fr married persns filing separately. Act, Divisin C, Title I, Sec. 102, amending I.R.C. 55(d). Nte: In 2009, withut further legislatin the AMT exemptin amunt will be $45,000 fr married persns filing jintly (r fr a surviving spuse), $33,750 fr a single persn (r head f husehld) and $22,500 fr a married persn filing separately. Cash refunds fr taxpayers that exercised an incentive stck ptin (ISO) and gt hit with alternative minimum tax f up t 50 percent f any unused lng-term AMT credits (beginning in 2008), cupled with the abatement f interest and penalties attributable t unpaid taxes n ISOs, with a credit fr taxpayers that have already paid such interest and penalties. Act, Divisin C, Title I, Sec. 103(b), amending I.R.C. 53 by adding new subsectin (f). Effective fr tax years beginning after December 31, Explanatin: Fr regular tax purpses, the exercise f an ISO is nt taxable. The tax event ccurs when the resulting stck is sld. But, fr AMT purpses, the exercise is a taxable event as rdinary incme. If a taxpayer has an underpayment f tax utstanding n Octber 3, 2008 due t the AMT n an ISO, this tax is abated (alng with interest and penalties n the underpayment). Taxpayers that paid their tax liability, but had interest and penalties because they were nt able t raise the funds n time, received an increase in their Minimum Tax Credit by the already-paid interest and penalties. Thus, thse wh paid n time, in accrdance with the law then in effect, are nt prvided relief. Restratin fr 2008 and extensin thrugh 2009 f the ptinal itemized deductin fr state and lcal sales taxes in lieu f state and lcal incme taxes. Act, Divisin C, Title II, Sec. 201, amending I.R.C. 164(b)(5)(I). Restratin fr 2008 and extensin thrugh 2009 f the abve-the-line deductin fr qualified tuitin and related expenses (up t $4,000). Act, Divisin C, Title II, Sec. 202, amending I.R.C. 222(e). Restratin fr 2008 and extensin thrugh 2009 f the abve-the-line deductin (up t $250) fr certain expenditures incurred by elementary and secndary schl teachers. Act, Divisin C, Title II, Sec. 203, amending I.R.C. 62(a)(2)(D). Extensin thrugh 2009 f the additinal standard deductin fr real prperty taxes fr taxpayers that d nt itemize (e.g., up t $500 fr single filers, $1,000 fr MFJ) in additin t the taxpayer s standard 6

7 deductin. Act, Divisin C, Title II, Sec. 204, amending 63(c)(1)(C). Restratin fr 2008 and extensin thrugh 2009 f the rule allwing tax-free distributins frm IRAs fr charitable purpses. Act, Divisin C, Title II, Sec. 205, amending I.R.C. 403(d)(8)(F). Nte: The privilege is nly allwed t IRA wners wh have reached age 70½ by the end f the applicable year (2008 r 2009). Such distributins are nt subject t federal incme tax. Restratin fr 2008 and extensin fr 2009 f the research credit. Act, Divisin C, Title III, Sec. 301, amending I.R.C. 41(h)(1)(B). Restratin fr 2008 and extensin thrugh 2009 f the rule prviding fr a basis adjustment fr S crpratins making charitable cntributins. Act, Divisin C, Title III, Sec. 307, amending I.R.C. 1367(a)(2). Effective fr cntributins made in tax years in A tw-year extensin, thrugh 2009, f the ecnmic develpment credit fr America Sama. Act, Divisin C, Title III, Sec. 309, amending 119(d), Divisin A f the Tax Relief and Health Care Act f 2006, Pub. L. N , amending I.R.C. 30A. Nte: The prvisin is an ear-mark by Huse speaker Pelsi (D-CA) whse hme district is als the headquarters f Star-Kist Tuna which has been a majr cntributr t Pelsi. Star-Kist is a majr emplyer in American Sama, and the federal minimum wage law des nt apply t American Sama (by specific exemptin cntained in the 2007 legislatin increasing the minimum wage-it des therwise apply t the Nrthern Mariana Islands). On average, the tuna industry pays labrers $3.60/hur. Restratin fr tax years beginning in 2008, and extensin fr tax years beginning in 2009, f the business tax credit fr emplyers f qualified emplyees that live and wrk n r near Indian reservatins. Act, Divisin C, Title III, Sec. 314, amending I.R.C. 45A(f). Effective fr tax years beginning after December 31, Extensin f the placed-in-service date fr the special depreciatin recvery perid fr qualified Indian reservatin prperty thrugh 2009 fr prperty placed in service after Act, Divisin C, Title III, Sec. 315, amending I.R.C. 168(j)(8). Effective fr prperty placed in service after December 31, Restratin fr 2008 and extensin thrugh 2009 f the prvisin allwing fr the expensing f csts assciated with cleaning up envirnmentally cntaminated sites. Act, Divisin C, Title III, Sec. 318, amending I.R.C. 198(h). Effective fr expenditures paid r incurred after December 31, Restratin fr 2008 and extensin thrugh 2009 f the enhanced charitable deductin f fd inventry prvisin, with eliminatin f the percentage limitatin fr cntributins made by certain farmers and ranchers after December 31, 2007, but befre January 1, Act, Divisin C, Title III, Sec. 323, amending I.R.C. 170(e)(3)(C)(iv). Effective fr cntributins made after Nte: Because the deductin is limited t twice the taxpayer s basis in the fd inventry, it prvides n benefit fr the vast majrity f farmers (wh utilize cash basis). A reductin in the refundable threshld fr the child tax credit t $8,500 (dwn frm $12,050) fr Act, Divisin C, Title V, Subtitle A, Sec. 501, amending I.R.C. 24(d). Effective fr tax years beginning in Fr prperty placed in service in 2009, classificatin f farm machinery and equipment (ther than grain bins, cttn 7

8 ginning assets, fences r land imprvements) fr depreciatin purpses as 5-year prperty (rather than 7-year prperty). Act, Divisin C, Title V, Subtitle A, Sec. 505, amending I.R.C. 168(e)(3)(B). Effective fr prperty placed in service after December 31, 2008, and befre Nte: While farm structures such as machine sheds, hg cnfinements and similar structures will nt qualify, the equipment in thse facilities can qualify. In additin, qualified equipment must be new. The new equipment will be depreciated as five-year prperty, while used equipment is depreciated as sevenyear prperty. The ADS life remains at 10 years. Thus, if the electin is made t use ADS depreciatin, the 10-year schedule is t be used. The preparer standard fr mst undisclsed psitins is reduced t substantial authrity, which cnfrms t the taxpayer standard under I.R.C The preparer standard fr disclsed psitins is set at reasnable basis. Hwever, the preparer standard fr listed transactins and reprtable transactins with significant avidance r evasin purpses is nt amended the preparer must have a reasnable belief that the psitin wuld mre likely than nt be sustained n its merits. The preparer standards fr disclsed and undisclsed psitins are retractively effective fr returns prepared after May 25, The standard fr listed and reprtable transactins is effective fr returns prepared after Octber 3, Act, Divisin C, Title V, Subtitle A, Sec. 506, amending I.R.C Effective retractively t May 25, Numerus tax relief prvisins fr taxpayers in any lcatin that the President declares t be a disaster area in 2008 r Act, Divisin C, Title VII, Subtitle B. Nte: Fr purpses f this Subtitle, a federally declared disaster is any disaster that is determined by the President t warrant assistance by the federal gvernment under the Rbert T. Staffrd Disaster Relief and Emergency Assistance Act. Pub. L. N The prvisins f this Subtitle are effective fr amunts paid r incurred after 2007 in cnnectin with federally declared disasters declared after 2007 and befre Disaster lss deductin. Act, Divisin C, Title VII, Secs. 706 and 712, amending I.R.C. 56, 63 and 165. Effective fr lsses incurred in 2008 and Net disaster lsses are treated as a separate deductin frm nndisaster casualty and theft lsses, and the 10 percent f AGI limitatin is waived fr a net disaster lss. In ther wrds, all taxpayers cvered by the prvisin (rather than just thse that itemize) can claim the casualty lss deductin regardless f the taxpayer s adjusted grss incme. A net disaster lss is the excess f persnal casualty lsses attributable t a presidentially declared disaster ccurring after December 31, 2007 and befre January 1, 2010, ver persnal casualty gains. In additin, an individual s standard deductin is increased by the disaster lss deductin (i.e., the net disaster lss). The disaster lss cmpnent f the standard deductin is allwed in cmputing AMTI. These changes apply t the taxpayer s last tax year beginning befre 2008 slely fr determining the amunt allwable as a net disaster lss deductin fr that year if the prir year lss deductin is elected. 8

9 Nte: These prvisins d nt apply t casualty lsses sustained by taxpayers in the Midwestern disaster areas declared during the timeframe May 20, 2008 thrugh July 31, Act, Divisin C, Title VII, Subtitle B, 712. Business cleanup expenses. Act, Divisin C, Title VII, Secs. 707 and 712, amending I.R.C. 198A. Effective fr amunts paid after A taxpayer may elect t deduct any qualified disaster expense fr the tax year that it is paid r incurred. Nte: A qualified disaster expense is any expenditure that the taxpayer pays r incurs in cnnectin with a trade r business r with businessrelated prperty that therwise wuld have t be capitalized, and that is: (1) fr the abatement r cntrl f hazardus substances that were released n accunt f a federally declared disaster; (2) debris remval r demlitin f structures n real prperty damaged r destryed by a federally declared disaster; r (3) fr the repair f businessrelated prperty that is damaged by a federally declared disaster. Assistance Act, Pub. L. N Net perating lsses. The Act allws taxpayers cvered by the prvisin t carry back a qualified disaster lss five years. Act, Divisin C, Title VII, Subtitle B, 708. A qualified disaster lss is defined as the lesser f the taxpayer s net perating lss fr the tax year r the sum f: (1) the taxpayer s lsses attributable t a federally declared disaster ccurring befre Jan. 1, 2010, and ccurring in a disaster area; and (2) the taxpayer s deductin fr the tax year fr qualified disaster expenses allwable under I.R.C. 198A(a) (r the amunt that wuld have been allwable if the taxpayer deducted qualified disaster expenses). A qualified disaster lss is treated as a net perating lss that is separate frm the taxpayer s regular NOL. In general, a taxpayer may use an AMT NOL deductin t ffset nly 90 percent f the taxpayer s AMTI. Hwever, under this prvisin f the Act, the 90 percent limit des nt apply t the prtin f the AMT NOL deductin that is attributable t a qualified disaster lss. Nte: This prvisin des nt apply t taxpayers in the Midwestern disaster areas declared during the timeframe May 20, 2008 thrugh July 31, Act, Divisin C, Title VII, Subtitle B, 712. A federally declared disaster is any disaster ccurring after 2007 and befre 2012 that is determined by the President t warrant assistance under the Rbert T. Staffrd Disaster Relief and Emergency This prvisin des nt apply t taxpayers in the Midwestern disaster areas as declared frm May 20, 2008 thrugh July 31, Act, Divisin C, Title VII, Subtitle B, 712. Waiver f Certain Mrtgage Revenue Bnd Requirements. The Act, fr taxpayers cvered by the prvisin, waives certain revenue mrtgage bnd requirements that wuld therwise apply in situatins where the taxpayer s principal residence is destryed r 9

10 damaged as a result f a federally declared disaster. Act, Divisin C, Title VII, Subtitle B, 709, adding I.R.C. 143(k)(12) t pre-existing I.R.C. 143(k)(12) [nte: there are nw tw different I.R.C. 143(k)(12) subsectins in the Cde]. At the taxpayer s electin, if the taxpayer s principal residence is destryed, rendered unsafe fr use r relcated as a result f a federally declared disaster in 2008 r 2009, then fr tw years fllwing the date f the disaster, the three year requirement f I.R.C. 143(d)(1) des nt apply and the purchase price requirement is relaxed. Thus, the taxpayer may receive a mrtgage lan financed with the prceeds f tax-exempt qualified mrtgage bnds. The electin, nce made, cannt be revked withut the cnsent f the Cmmissiner. I.R.C. 143(k)(12)(A). At the taxpayer s electin, if the taxpayer s principal residence is damaged as a result f a federally declared disaster in 2008 r 2009, any lan the taxpayer takes ut t repair r recnstruct the residence in an amunt that is equal t the lesser f the cst f the repair r recnstructin r $150,000 may be treated as a qualified rehabilitatin lan. Thus, the lan may be financed with the prceeds f tax-exempt qualified mrtgage bnds. The electin is irrevcable unless the Cmmissiner cnsents. I.R.C. 143(k)(12)(B). Either f the abve electins, nce made, prevent the taxpayer frm als electing t utilize the rules cntained in I.R.C. 143(k)(11). This prvisin des nt apply t taxpayers in the Midwestern disaster areas as declared frm May 20, 2008 thrugh July 31, Act, Divisin C, Title VII, Subtitle B, 712. Special Depreciatin Allwance fr rehabilitatin prperty. Act, Divisin C, Title VII, Subtitle B, Sec. 710, amending I.R.C Effective fr disasters in 2008 and New I.R.C. 168(n) allws businesses that suffered damages due t a qualifying disaster t claim an additinal 50 percent first-year bnus depreciatin amunt fr new qualifying real and persnal prperty placed in service in a presidentially-declared disaster area. The prvisin is allwed fr bth regular tax and AMT purpses. T qualify, 80 percent r mre f the use f the prperty must be in the disaster area and be utilized in the active cnduct f the taxpayer s trade r business, and the taxpayer must rehabilitate prperty that was damaged r replace prperty that was destryed r cndemned as a result f the disaster. The prperty must be similar in nature t the damaged r destryed prperty, and be lcated in the same cunty as the prperty that was damaged r destryed. In additin, the prperty must be placed in service befre December 31 f the third year after the date n which the federally declared disaster ccurs. Likewise, the prvisin applies t mst nnresidential real prperty and residential rental prperty acquired n r after the date n which the federally declared disaster ccurs, that is placed in service n r befre 10

11 December 31 f the furth year fllwing the date n which the federally declared disaster ccurs. Increased expensing (fr future disasters). Act, Divisin C, Title VII, Subtitle B, Sec. 711, amending I.R.C Effective fr disasters declared after New I.R.C. 179(e) increases by $100,000 the I.R.C. 179 amunt available fr qualifying expenditures made in the disaster area thrugh Dec. 31, Further, the phase ut is increased by $600,000 during the same timeframe. trnad r fld damage. I.R.C. 7508A authrizes IRS t prvide administrative relief and suspend the perfrmance f acts such as filing incme, estate r gift tax returns, paying taxes r filing claims fr credits r refunds, fr a perid f up t ne year in the case f a presidentially declared disaster r terrrist r military actin. This relief was granted t taxpayers affected by Katrina fr a perid ending nt earlier than February 28, The relief is extended t taxpayers affected by presidentially declared disasters in the Midwestern disaster area defined in I.R.C. 1400S(c). Qualified I.R.C. 179 prperty fr this purpse is defined as qualified disaster assistance prperty that meets the qualificatin requirements fr the bnus depreciatin rules under the Act cntained in Divisin C, Title VII, Subtitle B, 711. The prvisin leaves unchanged the amunt that a taxpayer can elect t expense fr certain sprt utility vehicles and ther vehicles placed in service during a tax year (expense electin capped at $25,000). Numerus temprary tax relief prvisins fr all cunties declared eligible fr disaster assistance in AR, IL, IN, IA, KS, MI, MN, MO, NE and WI, as declared by FEMA n r after May 20, 2008 and befre August 1, Act, Divisin C, Title VII, Subtitle A. [General summary f prvisins] Temprary relief prvisins incrprate a number f the Hurricane Katrina and GO Zne tax relief measures. Mst benefits are limited t areas within the states that were determined t warrant either individual r individual and public assistance frm the federal gvernment because f the strm, Fr 2008 and 2009, an expansin f the Hpe and Lifetime Learning Credits t individuals wh attend an eligible educatinal institutin lcated in a Midwestern disaster area in any tax year beginning in 2008 and The dubled Hpe Credit is 100 percent f the first $2,400 f qualified tuitin and related expenses and 50 percent f the next $2,400 f qualified expenses, fr a maximum Hpe credit f $3,600. The Lifetime Learning credit is 40 percent f up t $10,000 f qualified expenses fr a maximum f $4,000. Act, Divisin C, Subtitle A, Sec. 702(d)(8), amending I.R.C. 1400(O). Nte: Qualified expenses include tuitin, fees, bks, supplies, equipment, fees fr special services and rm and bard. I.R.C. 1400S(a) allws an individual t deduct qualified disaster relief cntributins up t the full amunt f the cntributin base and a crpratin t deduct qualified cntributins up t its entire taxable incme. Cngress extended this prvisin t qualified Midwestern disaster area cntributins fr cntributins paid in cash during the perid beginning n the earliest 11

12 applicable disaster date fr all states and ending n Dec. 31, 2008, t a taxexempt charity fr relief effrts in ne r mre Midwestern disaster areas. An expansin f the charitable standard mileage rate fr persns prviding relief fr the Midwestern disaster area during a perid beginning n the applicable disaster date and ending n Dec. 31, Unreimbursed expenses incurred in perfrming services fr a charitable rganizatin are generally deductible. A taxpayer wh uses his r her car t prvide charitable services may deduct actual expenses r the increased charitable standard mileage rate as set by I.R.C. 302 f the Katrina Tax Relief Act f 2005 (36 cents per mile fr Jan. 1 t June 30, 2008 and 41 cents per mile fr Jul. 1, 2008 t Dec. 31, 2008). An additinal exemptin (applicable in 2008, 2009 tax years) fr taxpayers husing a Midwestern displaced individual frm a Midwestern disaster area. If the taxpayer prvided a displaced persn with husing free f charge fr a perid f 60 cnsecutive days ending in that tax year, then the taxpayer is entitled t an additinal exemptin f $500 fr each displaced individual hused. Taxpayers are allwed t claim the exemptin fr up t fur individuals and the displaced individual may nt be a spuse r dependent. I.R.C. 1400P(a) has been expanded and prvides a temprary exclusin fr the value f ldging furnished in-kind t a qualified emplyee and the emplyee s family by an emplyer in the Midwestern disaster area. The exclusin is limited t $600 a mnth and is effective fr ldging furnished beginning n the first day f the first mnth beginning after Oct. 3, 2008 and 6 mnths later. The Act prvides a husing credit as part f the general business credit fr qualified emplyers (I.R.C. 1400P(b) wh prvided pst-disaster husing in the Midwestern disaster area t qualified emplyees. The credit available t the emplyer is equal t 30% f any amunt that is excludable frm the grss incme f a qualified emplyee. An expansin f I.R.C. 1400S(b), prviding that an individual s casualty lsses attributable t the Midwestern disaster were nt subject t the $100- per-casualty flr and 10%-f-AGI threshld limits n casualty lss deductins. An additinal exceptin under I.R.C. 108, excluding frm grss incme cancellatin f nn-business debt by individuals in the Midwestern disaster area. It applies t all individuals with a principal residence in an area determined by the president t warrant individual r public assistance frm the federal gvernment under the Staffrd Act, and t individuals wh live utside the designated assistance area but actually incurred an ecnmic lss because f the disaster. The Act extends the invluntary replacement perid fr taxpayers wh receive insurance prceeds r ther cmpensatin fr prperty that was cmpulsrily r invluntarily cnverted as a result f the Midwestern disaster. The replacement perid is extended frm fur years t five years if substantially all f the use f the replacement prperty is in the Midwest disaster area. The lk-back electin is extended fr calculating EIC and the refundable child credit is extended t qualified individuals in the Midwestern disaster area fr tax years that include the date f the disaster. 12

13 Fr tax years beginning in 2008 and 2009, the IRS is authrized t adjust the applicatin f federal tax laws t ensure that taxpayers d nt lse any deductin r credit, r experience a change f filing status, because f temprary relcatins due t severe strms, trnads, r flding in the Midwestern disaster area. I.R.C. 1400Q prvides that any distributin frm an eligible retirement plan made during a specific perid t an individual living in the Midwestern disaster area n the disaster date is includible in incme ratably ver three years, instead f being entirely taxed in the year f distributin. In additin, the 10 percent early withdrawal penalty is waived. Further, the taxpayers must have sustained an ecnmic lss attributable t the 2008 Midwestern strms, trnades r flding and distributins are limited t $100,000. Effective fr distributins frm the disaster date thugh The Act extends lan treatment t qualified strm damage individuals wh incurred lsses frm the 2008 Midwestern disaster and withdrew mney frm qualified emplyer plans. Nrmally, direct r indirect lans frm qualified emplyer plans t a participant r beneficiary are treated as distributins. Hwever, I.R.C. 1400Q allws a dubling f the maximum amunt that can be withdrawn as a lan and prvides a 1-year pstpnement f payments fr existing plan lans fr individuals living in the Midwestern disaster area n the disaster date and sustained a lss as a result. Distributins are limited t $100,000. The Act permits certain individuals wh received retirement plan distributins earmarked fr hme purchases that were canceled due t the Midwestern disaster, t be recntributed t the plan tax-free and withut penalty. The distributin must have been received as a 401(k) r 403(b) plan hardship distributin r as a first-time hmebuyer distributin frm an IRA n earlier than six mnths befre the applicable disaster date and n later than the disaster date. I.R.C. 1400Q(d) permits retractive changes t a retirement plan in respnse t changes in the law related t the Midwestern disaster. Taxpayers can elect t deduct 50% f qualified clean-up csts and capitalize the remaining 50% f the csts, fr remval f debris r demlitin f any structure that is necessary because f damage attributable t the Midwestern disaster. Qualified clean-up csts must be paid r incurred during a perid that begins n the disaster date and ends Dec. 31, Nte: The prvisin applies fr bth regular tax and AMT. The Act prvides fr an extensin f I.R.C. 198 expensing f qualified envirnmental remediatin expenditures paid r incurred in the Midwestern disaster area n r after the applicable disaster date and befre Jan. 1, A site is treated as a qualified cntaminated site nly if the release r dispsal f a hazardus substance at the site was caused by the Midwestern disaster. The Act allws a 5-year, rather than 2- year, carryback perid fr a Net- Operating Lss (NOL) that is a qualified Midwestern disaster lss. Expenses qualify if they are paid r incurred n earlier than the disaster date and befre Jan. 1, Qualified expenses are mving expense, temprary husing expenses, and repair expenses. If elected, the 5-year carryback applies fr bth regular tax and AMTI. A taxpayer may elect ut f the 5-year carryback perid s that the NOL is subject t the 13

14 therwise applicable carryback perid (2 years). Fr Midwestern disaster area lsses subject t the 5-year carryback perid, I.R.C. 1400N(k)(1)(B) remves the 90% limitatin n an alternative tax net perating lss deductin (ATNOLD). Nrmally, a taxpayer wh is calculating AMTI must cmpute an ATNOLD instead f deducting the regular tax NOL frm AMTI and the ATNOLD cannt exceed 90% f AMTI. Emplyers in the Midwestern disaster area wh emplyed an average f n mre than 200 emplyees n business days during the tax year befre the disaster date, are eligible fr an emplyee retentin credit. The credit is equal t 40% f qualified wages fr each eligible emplyee. The business must be inperable n any date after the disaster date and befre Jan. 1, 2009 and wages must be paid r incurred after the applicable disaster date and befre Jan. 1, The Act increases the rehabilitatin credit t 13% fr qualified rehabilitated buildings and 26% fr certified histric structures lcated in the Midwestern disaster area fr qualified rehabilitatin expenditures paid r incurred between the perid f the disaster date and Dec. 31, The Act prvides additinal lw-incme husing credit amunts fr qualified buildings fr states within the Midwestern disaster area fr the calendar hears. The credit amunt yearly is $8 multiplied by the prtin f the state s ppulatin in the Midwestern disaster area. The IRC 1400N(n) rules are extended and prvide that a prject peratr culd rely n representatins abut qualifying incme made by an individual displaced by the Midwestern disaster in determining whether the prject meets requirements fr the issuance f taxexempt bnds. The tax-exempt bnds are issued t finance qualified residential rental prjects with incme restrictins. I.R.C. 1400N(a) which authrizes the issuance f tax-exempt bnds t finance cnstructin and rehabilitatin f residential and nnresidential prperty in the Gulf Opprtunity Zne has been extended t the Midwestern disaster area. Qualified bnds are treated as exempt-facility bnds r qualified mrtgage bnds, rather than as taxable private activity bnds used fr private business use. The rules apply t bnds issued in the disaster area after Oct. 3, 2008, and befre Jan. 1, An increase in the $100 per casualty limitatin t $500 fr tax years beginning in 2009, with a reversin t $100 after Act, Divisin C, Title VII, Subtitle B, Secs. 706 and 712, amending I.R.C Effective fr tax years beginning in What Shuld the Cngress Have Dne? Many years f bad lending practices (encuraged by federal legislatin that inserted scial plicy int lending practices) have largely cntributed t the present prblem, and adding $700 billin in new debt (r having the Fed take the inflatinary rute f printing new mney) desn t address that prblem. As presently structured, the Act desn t address the pssibility f a new batch f bad lans being made, desn t regulate credit, and desn t rein in the Cmmunity Reinvestment Act (a Jimmy Carter era law requiring banks t make lans t its entire cmmunity even pr brrwers with limited ability t repay; Bill Clintn rdered new regulatins t the Act in 1995 that increased access t lans by even mre brrwers with the inability t repay. The Act encuraged mrtgage lending thrugh Fannie Mae and Freddie Mac). The Act als desn t stp cmpanies frm selling as an unregulated security smething which is really regulated 14

15 insurance. In 2005, the Administratin pushed fr refrms f Fannie Mae and Freddie Mac, with Senatr McCain (R-Ariz.) spnsring the legislatin. But, the Administratin s effrts were rebuffed by Senatr Ddd (D-CT) and Representative Frank (D-MA) wh were majr recipients f campaign cntributins frm Fannie Mae and Freddie Mac (interestingly, Senatr and presidential candidate Obama (D- IL) is the secnd highest recipient f such campaign cntributins). Nte: Als cntributing t the prblem was that the Clintn Administratin, in 1993, capped business deductins fr executive pay at $1 millin (via enactment f I.R.C. Sec. 162(m)). An exceptin t the cap was included fr perfrmance-based pay. That exceptin had the effect f incentivizing the creatin f cmpensatin packages that rewarded risk, and made stck ptins a ppular element f cmpensatin packages - ptin incme was nt cvered. Thus, executives benefitted when the stck value went up, but suffered n lss when stck values declined. After Clintn signed the bill int law, CEO cmpensatin explded during the balance f the 1990s - eventually reaching apprximately 300 times the average wrker's salary in 2000 (up frm 100 times the average in 1993). The bill represents the creatin f the largest gvernmental department in the histry f the natin, all created in a shrt perid f time and based n fear. The Administratin and the Cngress chse t ignre sme basic, cmmnsense steps that culd have been taken t calm the markets namely, eliminatin f the mark-t-market accunting rules (the Act des, hwever, give the Securities and Exchange Cmmissin the pwer t suspend the mark-tmarket accunting rules and directs the SEC and Treasury Secretary t cnduct a study n the mark-t-market accunting standards) and the capital gains tax. Thse tw steps wuld cause mney t literally fld int the market immediately. Als, there appears t be n need fr the gvernment t purchase all f the trubled bnds. Only abut 7 percent f them are in freclsure which means that 93 percent f them are still paying. S, there is n need t buy them all. Insuring the trubled nes wuld be a mre prudent apprach. A Better Apprach? Here's what I believe the Cngress shuld have dne t deal with the cre prblem and let the market wrk things ut: 1. Repeal the Cmmunity Reinvestment Act, such that lans are made based slely n a brrwer s ability t repay. 2. T create a wrldwide market and immediate liquidity, insure trubled bnds and mrtgages with FHA-type insurance, with the fllwing backstps: Require that any delinquent mrtgage t be rewritten as a fixedrate mrtgage with a market rate f interest. In the rewrite, all payments shuld be rlled int the balance due n the lan and all prepayment penalties shuld be cancelled. Als, cnsistent with current FHA practice, if there is a freclsure r shrt-sale (hme is sld fr less than the existing mrtgage balance), the brrwer shuld nt be liable fr any remaining balance. That will minimize the impact n the brrwer's credit histry, and the cancelled debt incme wuld be treated under the existing rules fr discharge f indebtedness incme (numerus exceptins frm incme recgnitin exist). 3. Eliminate the mark-t-market accunting rules, at least n a temprary basis, as applied t trubled bnds r mrtgages. That will prevent the cmpanies frm having t artificially mark dwn the bnds and mrtgages belw the value f the underlying 15

16 mrtgages and real estate. That will calm the markets and trubled banks. 4. Eliminate the capital gains tax in its entirety. That will cause a fld f investment capital int the real estate and stck market and prvide immediate liquidity. 5. Refrm banking laws. present state, is inflatinary it drives up prices (and cnsequently, drives up the demand fr mre credit, thus further feeding the inflatinary effect). But, fractinal reserves are a necessary effect f lending. S, hw can the inflatinary effect be cntrlled? The key is t prhibit the use f demand depsits as lending capital. Mdify the fractinal reserve banking rules t eliminate all inflatinary effect. Explanatin: Banks are required t keep in reserve nly a small fractin f the mney depsited in them sme as lw as 5 percent. The rest f the mney can be laned ut. Thus, there is a multiplying effect n mney. Fr example, assume Derrick Depsitr depsits $1,000 in his checking accunt at Usurius State Bank and that the bank has a 5 percent reserve requirement. Derrick can nw write checks against that $1,000. The bank can als lend $950 t Becky Brrwer wh can depsit that mney in her accunt at her bank and write checks against it. Becky s bank can lan $ t anther brrwer wh can depsit that mney in that brrwer s bank, etc., etc. This prcess can g n until the entire $1,000 f initial depsit is used up in reserves rather than in lans. After 25 steps, the lans against the initial depsit will be $14, S, nce there was nly $1,000 t be spent n gds in the marketplace, but nw there is suddenly there is $1,000 plus $14,451,15 cmpeting fr thse same gds. That means that the price f the gds must g up because the supply f the gds has nt risen alng with the supply f the dllars bidding fr them. Thus, fractinal reserve banking, in its Prhibit the lending f mney received as demand depsits. Cnsequently, demand depsits wuld nt bear interest and wuld simply amunt t safe strage (fr which banks wuld charge a slight fee). Prhibit interest-bearing accunts frm being demand depsits and limit withdrawals t a pre-arranged term. Tie the term f lans frm banks t the term f the depsits that fund lans. The effect wuld be that mney depsited t be laned ut again culd nt circulate in tw places at nce. The depsitr culd nt use depsited funds t purchase assets at the same time a brrwer used the brrwed funds t purchase assets. Eliminate FDIC insurance banks guarantees t repay depsits shuld be based n their wn assets and trustwrthiness, r n their wn participatin in a real insurance prgram in which they pay premiums t a cmpany that insures their depsits. FDIC desn t really insure anything. The mney that is used t pay ff member-bank s lsses des nt cme frm premiums that banks pay. It cmes frm the printing f new mney by the Federal Reserve. That is, by definitin, inflatinary. S, an FDIC depsit guarantee, when 16

17 implemented, amunts t theft frm everyne in the ecnmy (except, f curse, thse depsitrs that get reimbursed) by devaluing existing mney that is circulating in the ecnmy. 6. On a phased-in basis, refrm tax laws t remve incentives fr taxpayers t verinvest and/r ver-leverage in the husing market. 7. Pass legislatin placing reasnable cntrls n speculatin in the financial markets. President Clintn signed legislatin in 1999 (the Gramm-Leach- Bliley Act) which deregulated the banking and finance industries thereby making mergers much easier in these industries. While that is nt necessarily bad in and f itself, the Act als repealed the Glass-Steagall Act f 1933 which cntrlled speculatin. The adverse impact f that part f the Act was unfreseen. Cnclusin In a larger sense, the current prblem has been brewing fr a lng time and was nt unexpected. The current Administratin tried t warn f frthcming prblems with Fannie Mae and Freddie Mac, but clearly shuld have pushed harder fr refrms. In additin, there are many nted ecnmists that have been saying fr years that the New Deal prgrams f the 1930s dealt the American ecnmy a death blw that wuld ne day fully surface. Whether that is nw taking place is hard t say, but tremrs in the ecnmy have been evident fr several decades an increase in public and private debt, the savings and lan cllapse, inslvent banks, inslvent insurance cmpanies, and the inability t privatize the retirement side f Scial Security. The Act desn t address thse prblems. 8. Pass legislatin that actually deals with the built-in incentives fr CEOs f financial institutins t cheat. CEOs and tp managers receive stck as cmpensatin. Thus, they have incentive t verstate prfits, which raise the value f stck when they sell stcks. They als have the incentive t invest in assets that will increase shrtrun prfits, but nt necessarily in the lng-run. Clearly, the stck-ptin prtin f CEO cmpensatin shuld be dealt with. Perhaps sme prtin f cmpensatin shuld be paid later and be tied t cmpany perfrmance fr a few years. In reality, the abve-mentined steps have little chance f ever being cnsidered, much less being enacted. T much plitics is invlved in the current situatin and nt enugh ecnmic (and cmmn) sense. 17