Tax Break

Japanese Prime Minister Yoshihiko Noda REUTERS/Yuriko Nakao

Welcome to the top tax and accounting headlines from Reuters and other sources.

* Obama faces task of selling dueling budget ideas. Jackie Calmes – The New York Times. With the election-year budget he unveils on Monday, President Barack Obama more than ever confronts the challenge of persuading voters that he has a long-term plan to reduce the deficit, even as he highlights the stimulus spending and tax cuts that increase deficits in the short term. In his budget Obama again will commit to $4 trillion in deficit reduction over 10 years, including $1.5 trillion in tax revenue from the wealthy and from closing some corporate tax breaks, and reductions in spending for a range of programs, including the military, Medicare, farm subsidies and federal pensions. But Republicans are sure to criticize the president’s proposals as heavy on gimmickry and double-counting, and reject his proposed tax increases. Link.

* EU say it’s ‘flexible’ on carbon tax. Eric Yep and Gaurav Raghuvanshi – The Wall Street Journal. The European Union is willing to be flexible with its emissions tax on airlines, but won’t suspend the tax unless countries can agree on an ambitious alternative, EU Transport Commissioner Siim Kallas said Monday. Several countries have expressed opposition to the tax, with some threatening retaliatory measures against the EU. It is unclear whether a global agreement is possible by April 2013, when the first payments are due. Link.

* Japan’s big GDP drop a worry for PM tax plan. Tetsushi Kajinoto – Reuters. Japan’s economy shrank much more-than-expected in the fourth quarter, as Thai floods, a strong yen and weak demand hurt exports, casting doubt on hopes for a quick pick up in activity that could bolster government plans to raise the sales tax. Prime Minister Yoshihiko Noda hopes to contain the rise in the debt pile – now already twice the size of the economy – by doubling the national 5 percent sales tax by late 2015, but has yet to win over a combative opposition and a skeptical public. Link.

* A year of tax-code reckoning. Jonathan Weisman – The New York Times. Taxpayers struggling with their 2011 returns can take a little solace in the knowledge that change is coming — though it may be accompanied by increasing tax bills. For two decades, politicians have promised — and failed — to overhaul the tax code to make it simpler and fairer. This time they have a deadline of sorts. On Jan. 1, 2013, a major part of the current code turns into a pumpkin. That is when income tax rate cuts — a host of expanded tax deductions and credits, and generous changes in the taxation of dividends, capital gains and inheritances — are set to disappear. That day of reckoning was supposed to have come in 2011, but President Obama signed a two-year extension of President George W. Bush’s tax cuts of 2001 and 2003, along with temporary tax cuts of his own, most notably the two-percentage-point cut to the payroll tax. Link.

* The debate over capital gains has consequences for local budgets. Abha Bhattarai – The Washington Post. The debate over capital gains taxes taking place on the national stage could have major implications for local and state governments in the Washington region, economists say, particularly if the Bush tax cuts are allowed to expire. Capital gains are not just a key source of income for the wealthy, one that critics say allows them to pay lower taxes, but they are a big source of revenue for the District, Maryland and Virginia. Link.

Treasury Secretary Timothy Geithner speaks with other Cabinet members at the State of the Union address, January 24, 2012. REUTERS/Jason Reed

Some events in the week ahead:

Tuesday, February 14

It’s not likely to be romantic, but the Senate Budget Committee is holding a hearing on President Barack Obama’s proposed budget for fiscal 2013 on Valentine’s Day.

Witnesses are Jeffrey Zients, acting director of the Office of Management and Budget and Treasury Secretary Timothy Geithner

Influential Yale economics professor Robert Shiller favors a system of taxation that would keep inequality in check. He argues that such a system would help maintain harmony in the United States and benefit all, including the well-to-do.

Shiller is especially well known as co-creator of the S&P/Case-Shiller home price indices, and for two prescient calls: a 2000 forecast of the dot-com bubble’s bust, and a 2005 prediction that the housing boom would cause a recession.

In this talk (video below) with Chrystia Freeland of Reuters, Shiller said he was not trying to abolish inequality but to keep it within limits. He sees a system that addresses the outer bounds of inequality as a way to “prevent class war” and keep a harmonious nation.

A military veterans hiring event in New York, January 19, 2012. REUTERS/Brendan McDermid

Welcome to the top tax and accounting headlines from Reuters and other sources.

* Global accounting reform ups pressure on U.S. to sign up. Huw Jones – Reuters. Plans by the accounting body responsible for global standards to make itself more answerable to the public will put pressure on the United States to sign up or risk losing influence. The International Accounting Standards Board (IASB) has drawn up the standards, which are used by listed companies in over 100 countries, including the European Union. So far the United States has delayed its decision to sign up, under pressure from companies and Congress who say they do not want to cede regulatory sovereignty to a London-based body. But Thursday’s publication by the IASB’s Trustees and Monitoring Board of plans to make themselves more open and accountable in their second decade may push the United States to think again, given the far-reaching impact that accounting rules have on financial markets and investors. Link.

* Pessimism high, Republicans warn of possible expiration of payroll tax cuts. Jennifer Steinhauer – The New York Times. Congressional Republicans said Thursday that negotiations over extending a payroll tax cut were going so poorly that it was possible the tax break – along with added unemployment benefits – could expire at the end of the month. If the benefits are allowed to lapse, it will be a stunning coda to a battle that has lasted months on Capitol Hill over whether and how to extend a two-percentage-point tax break for nearly every working American and to provide additional unemployment benefits for millions more. A temporary agreement forged in December cost Republicans politically and left both parties locked in another round of fights over how to cover the costs. In addition, Republicans are seeking numerous policy changes connected to unemployment benefits – like a mandatory high school equivalency program and possible drug testing for beneficiaries – that Democrats have rejected out of hand. They would also reduce the benefits to 59 weeks, far less than the 79 weeks sought by President Obama. Link.

The U.S. Court of Appeals ruled Wednesday against a couple who claimed a sizeable deduction after donating their house to be burned in a firefighter training. Circuit Judge David Hamilton wrote in the opinion:

“Taxpayers Theodore R. Rolfs and his wife Julia Gallagher purchased a three-acre lakefront property in the Village of Chenequa, Wisconsin. Not satisfied with the house that stood on the $675,000 property, they decided to demolish it and build another. To accomplish the demolition, the Rolfs donated the house to the local fire department to be burned down in a firefighter training exercise. The Rolfs claimed a $76,000 charitable deduction on their 1998 tax return for the value of their donated and destroyed house. The IRS disallowed the deduction, and that decision was upheld by the United States Tax Court… To support the deduction, the Rolfs needed to show a value for their donation that exceeded the substantial benefit they received in return. The Tax Court found that they had not done so. We agree and therefore affirm.”

Apparently these types of claims, though unusual, are not all together unknown, and the court found that the value of the donation would need to take into account the fact that it was made with conditions. In this case, the condition is the house being burned to the ground left the house with “essentially no value” according to the decision.

The Rolfs’ attorney, Michael Goller, declined to comment on the decisions as he was still reviewing it, though he did say it was “disappointing.” No decision has yet been made about whether or not to appeal, he said. Messages left for Ted Rolfs seeking comment on the decision were not returned.

Welcome to the top tax and accounting headlines from Reuters and other sources.

* Watchdog fines Ernst & Young $2 million over audits. Dena Aubin – Reuters. The watchdog board for corporate auditors on Wednesday said it has imposed a $2 million penalty, its largest fine ever, on accounting and consulting firm Ernst & Young LLP in a settlement involving past audits of Medicis Pharmaceutical Corp. The Public Company Accounting Oversight Board said it also sanctioned four current and former Ernst & Young partners for violating PCAOB rules in the audits of Medicis, which sells prescription drugs for asthma and skin conditions. Ernst & Young settled without admitting or denying the PCAOB’s findings. The audits in question involved Medicis’ 2005, 2006 and 2007 financial statements, the PCAOB said. Link.

* Payroll-tax cut extension talks bog down as time runs short. Siobhan Hughes and Corey Boles – The Wall Street Journal. U.S. Senate Majority Leader Harry Reid said on Tuesday lawmakers working on an extension of a popular payroll-tax cut had only until early next week to reach a deal, as the two sides negotiating the package showed few signs of compromise and spent a morning meeting digging in to their positions. House Ways and Means Committee Chairman Dave Camp said that if negotiators can’t agree on current proposals to offset the cost of the package, they may have to “begin looking at scaling back some of these core policies” or else rely on deficit spending or simply kick the issue “outside the scope of the conference.” House Republicans started the latest round of talks with a proposal to cover the cost partly with a freeze to cost-of-living pay increases for federal workers. That outraged Maryland Democrats, whose constituents include many government workers. Democrats were no happier with a proposal to gradually force more senior citizens to pay higher premiums for Medicare. Link.

* Wegelin boss gives up NZZ role after US tax probe. Emma Thomasson – Reuters. The head of Wegelin – Switzerland’s oldest private bank and which the United States has indicted for helping clients dodge taxes – is standing back from his role as chairman of the country’s influential Neue Zuercher Zeitung daily. Konrad Hummler, one of Switzerland’s most high-profile bankers, said on Thursday he needed to focus on the U.S. case against Wegelin on charges it enabled Americans to evade taxes on at least $1.2 billion in offshore bank accounts. Hummler had come under pressure to step down as NZZ chairman for fear the Wegelin case could damage the reputation of Switzerland’s oldest newspaper – the voice of the country’s business establishment. Link.

There’s been a lot of talk about tax loopholes in recent months. Now there’s a bill to go with it.

On Tuesday, two Democratic U.S. senators — Carl Levin and Kent Conrad — piled a laundry list of long-standing proposals into their “Cut Unjustified Tax Loopholes Act.”

The bill would add $155 billion to the country’s coffers over the next 10 years, according to estimates put together by the Joint Committee on Taxation and the Office of Management & Budget on earlier versions of these proposals. That’s more than enough to pay for a whole year of a payroll tax break.

Air China planes on the tarmac of the Beijing Capital International Airport. REUTERS/David Gray

Welcome to a roundup of the top tax and accounting headlines from Reuters and other sources.

* China bars airlines from EU tax plan. Simon Rabinovitch – The Financial Times. The Chinese government has barred the country’s airlines from complying with a European Union charge on carbon emissions, escalating a dispute that officials have warned could turn into a trade war. Chinese airlines had previously said they would not pay the EU carbon tax, but the formal prohibition by the State Council, or cabinet, puts Beijing in direct opposition to Brussels. China has notified all Chinese airlines that, without government approval, they cannot join the EU emissions trading scheme or charge customers extra because of it, state-agency Xinhua said. The impact on Chinese airlines with routes to Europe was unclear. Although the EU’s carbon scheme went into effect for airlines on January 1, Brussels has not started charging them yet. Link to The Financial Times.

Miss Oklahoma, Betty Thompson (R), first runner up in the Miss America contest

Oklahoma wants to abolish its state income tax. The plan, according to Governor Mary Fallin, is to achieve one of the lowest income tax rates in the country by eliminating some tax credits and closing loopholes in the tax code. Other taxes would not be increased, according to The Oklahoman.

“Our goal is to transform Oklahoma into the best place to do business, the best place to live, find a quality job, raise a family and retire in all of the United States. Not just better than average, but the very best,” state Representative Leslie Osborn said. (Cue Rodgers and Hammerstein music)

Across the United States, the average state sales tax rate has dropped, according to William Barrett at Forbes.

Some events in the week ahead:

Monday, February 6

Comment letters due on the Financial Accounting Standards Board’s proposed accounting standards updating the cumulative translation adjustment following the sale of a nonprofit or foreign business.

Tuesday, Feburary 7

The U.S. Congress Joint Economic Committee (JEC) will hold a hearing on extending the two-percentage-point payroll tax cut and continuing emergency federal unemployment insurance benefits through the end of 2012, including examining the economic impact of extending these policies versus allowing them to lapse.

Witnesses:

Dr. Mark M. Zandi, Chief Economist, Moody’s Analytics Mr. James Sherk, Senior Policy Analyst, The Heritage Foundation Ms. Judith M. Conti, Federal Advocacy Coordinator, National Employment Law Project

Wednesday, February 8