PUBLIC HEARING: HB 2542

 

TAPES 102, 103 A-B

 

SENATE REVENUE COMMITTEE

APRIL 25, 2005   9:00 AM   STATE CAPITOL BUILDING

 

Members Present:                  Senator Ryan Deckert, Chair

                                                Senator Gary George

                                                Senator Rick Metsger

                                                Senator Floyd Prozanski

                                                Senator Charles Starr, Vice Chair

 

Witnesses Present:                Rob Douglas, OSCPA

                                                Kim Spaulding, Moss Adams, LLP, Portland

                                                Robert K. Carus, CPA, Clackamas                                                   

                                                Bruce Krohn, The Morrissey Group LLC, Oregon City

                                               

Staff Present:                          Paul Warner, Legislative Revenue Officer

                                                Lizbeth Martin-Mahar

                                                Barbara Guardino, Committee Assistant

 

 

TAPE 102, SIDE A

005

Chair C. Starr

Calls meeting to order at 9:09 a.m.

 

PUBLIC HEARING: HB 2542

011

Rob Douglas

Oregon Society of Certified Public Accountants comes before the revenue committees each session to describe what is taking place at the federal level, policy issues, how they affect Oregon income taxes, and stating what changes need to be made for Oregon to conform to the federal definition of income. Panelists will be working from the booklet, An Analysis of Changes (EXHIBIT 1).

 

024

Lizbeth Martin-Mahar

Notes, the numbers associated with these changes will be reviewed on Tuesday. Today is just an overview of the changes.

 

029

Kim Spaulding

Begins overview of An Act to Amend Section 527 of the Internal Revenue Code. See page 40, Recommendations C, section 4: Other provisions.

 

044

Spaulding

Medicare Prescription Drug, Improvement and Modernization Act of 2003, Section 1201(h): Health savings accounts

 

055

Spaulding

Clarifies, this is a minor section of health savings accounts; it does not cover all of it. Relates specifically to acquisition expenses.

 

066

Spaulding

Page 41, section 1202: Exclusion from gross income of certain federal subsidies for prescription drug plans

 

077

Spaulding

Military Family Tax Relief Act of 2003

Section 101: Military family tax relief act of 2003

Page 42, section 102: Exclusion from gross income of certain death gratuity payments

Section 103: Exclusion for amounts received under Department of Defense Homeowners Assistance Program

Section 104: Expansion of combat zone filing rules to contingency operations

Page 43, sections 105 – 108

Section 108: Suspension of tax-exempt status of terrorist organizations

 

107

Spaulding

Page 44, section 109: Above-the-line deduction for travel expenses of National Guard and Reservists

Section 110: Extension of certain tax relief provisions to astronauts

 

 

 

111

Robert Carus

Begins discussion on page 45, which analyses the American Jobs Creation Act of 2004.

Section 101: Repeal of exclusion for extraterritorial income

 

133

Carus

Section 102: Deduction relating to income attributable to domestic production activities

 

142

Sen. George

Asks questions concerning section 101. Is curious what Congress did by providing a tax incentive for corporations producing goods outside the United States.

 

146

Carus

Responds, this was for goods produced inside the United States. Apologizes if this is misleading. Answers follow-up questions. Repeal of 101 gets the United States back in line with its foreign trading partners; enactment of 102 continues a benefit for manufacturing activities in the U.S.

 

171

Sen. Deckert

Asks, what are the mechanics of the ETI (extraterritorial income)? If an Oregon company wanted to claim a deduction, how would that work?

 

176

Carus

Explains the workings of a product manufactured in the U.S. and being sold overseas. There’s a deduction taken against taxable income.

 

208

Sen. Deckert

The decision before the committee is whether to connect with the deduction that Congress enacted or not. One question is whether huge accounting problems would be created. Is this a deduction that can be easily dealt with on people’s tax forms?

 

215

Carus

The process of identifying foreign trading gross receipts, etc., was extremely elaborate. OSCPA is biased in favor of conformity. It simplifies the tax system and makes the administration simpler.

 

245

Spaulding

Adds, this new deduction doesn’t come into play until 2005, so none of the CPAs have done the calculation. The federal calculation will be completely different from the old method.

 

256

Bruce Krohn

Testifies, the exclusion isn’t completely gone, it’s just phased out, so that adds to the complication of the calculation.

 

265

Martin-Mahar

Clarifies concerning the exclusion for extraterritorial income. Companies that don’t connect with this will face WTO sanctions. There is no question that the ETI needed to be excluded. Section 102 is an add-back.

 

287

Carus

Continues discussion on page 46, section 231, 232: S-Corporation reform and simplification: Members of family treated as one shareholder; number of shareholders increased to 100

Discusses definition of S-Corporation under Oregon law

 

341

Carus

Page 47, Section 233: Expansion of eligible bank S-Corporation shareholders to include IRAs

Sections 234 – 240

 

380

Carus

Section 243: Improvements (liberalization) related to real estate investment trusts

 

395

Carus

Page 48, section 247: Modification of unrelated business income limitation on investment in certain small business investment companies

Section 251: Exclusion of incentive stock options and employee stock purchase plan stock options from wages

 

443

Krohn

Page 49, Will cover the agricultural section of reconnect.

Section 311: Rules for deferring gain from involuntary conversion of livestock eased

Section 312: No reduction of patronage income for co-op dividends distributed on capital stock

Section 314: Income averaging extended to fishermen and coordinated with the AMT (alternative minimum tax)

 

463

Krohn

Gives a definition of income averaging.

 

TAPE 103, SIDE A

035

Krohn

Page 50, section 315: Capital gain for outright sales of timber by landowners

Section 316: Cooperative marketing includes value added processing of animals

Section 318: Rural mail carrier’s un-reimbursed vehicle expenses are deductible as a miscellaneous itemized deduction

 

059

Krohn

Section 319: Income from “open access, nuclear decommissioning, asset exchange or conversion” and “load loss” transactions for pre-2007 tax years

 

070

Krohn

Page 51, section 320: Individuals whose student loans are repaid under National Health Service Corps loan repayment program or similar state programs

Section 321: Safe harbor for timber REITs

 

083

Krohn

Page 52, section 331: Net income from publicly traded partnerships treated as qualified income for regulated investment companies (RICs)

Section 335: Whaling captains may claim charitable deduction for up to $10,000 of expenses incurred each year after 2004

 

102

Sen. Deckert

Asks Paul Warner if there is a fiscal impact on the whaling provision.

 

105

Warner

Has not identified one.

 

109

Krohn

Page 53: section 340: Allowance of additional $10 million capital expenditures for small issue bonds issued after September 30, 2009

 

112

Carus

Section 407: United States property not to include certain assets of controlled foreign corporations

Section 411: Treatment of certain dividends of regulated investment trusts

 

130

Carus

Page 54, section 412: Look-thru treatment for sales of partnership interests

Section 413: Repeal of foreign personal holding company rules and foreign investment company rules

 

149

Carus

Page 55, section 414: Determination of foreign personal holding company income with respect to transactions in commodities

Sections 415-416

 

159

Carus

Section 418: Modification of the treatment of certain REIT distributions attributable to gain from sales or exchanges of US real property interests

 

175

Carus

Page 56, section 419: Income derived from certain bets on horse and dog racing made outside US is excluded from gross income of nonresident alien individuals

Section 422: Incentives to reinvest foreign earnings in the US. Points out incorrect text under “Oregon Law” subsection. Will suggest a change.

 

225

Sen. Deckert

Asks questions in regard to section 422, repatriation of income. Follow-up questions concerning the current 70-80% or bump that up to the federal 85% figure.

 

236

Carus

Responds by explaining what companies can and cannot do. This 85% dividend deduction only applies for one tax year for any given taxpayer. The statute requires a significant up-tick in the number of dividends being repatriated in order to qualify for this deduction.

276

Sen. George

Seems this is intended to bring home foreign profits and invest in in-state jobs.

 

282

Carus

Section 501: Deduction of state and local general sales taxes in lieu of state and local income taxes

 

319

Carus

Page 57, section 701: Brownfields demonstration program for qualified green building and sustainable design projects

Section 702: Exclusion of gain or loss on sale or exchange of certain brownfield sites from unrelated business taxable income

 

355

Carus

Section 703: Civil rights tax relief

 

376

Carus

Page 58, section 708: Method of accounting for naval shipbuilders

Section 801:Tax treatment of expatriated entities and their foreign parents

 

417

Carus

Page 59, section 803: Reinsurance of United States risks in foreign jurisdictions

Section 833: Disallowance of certain partnership loss transfers

 

TAPE 102, SIDE B

020

Carus

Page 60, section 834: No reduction of basis under Section 734 in stock held by partnership in corporate partner

Section 835: Repeal of special rules for FASITs and changes to REMIC rules

Section 836: Limitation on transfer or importation of built-in losses

 

039

Carus

Page 61, section 837: Clarification of banking business for purposes of determining investment of earnings in US property

Section 838: Denial of deduction for interest on underpayments attributable to non-disclosed reportable transactions

 

075

Spaulding

Section 840: Recognition of gain from the sale of a principal residence acquired in a like-kind exchange within five years of sale

 

085

Spaulding

Page 62, section 841: Prevention of mismatching of interest and original issue discount deductions and income inclusions

Section 845: Expanded disallowance of deduction for interest on convertible debt

Section 848: Limitation on deductions allocable to property used by governments or other tax-exempt entities

 

091

Spaulding

Page 63, sections 882, 883

Section 884: Donations of motor vehicles, boats and airplanes

Page 64, sections 888, 893, 896

 

115

Spaulding

Page 65, sections 897, 898, 899

Page 66, sections 905, 907, 909

125

Krohn

Museum and Library Services Act of 2003

Page 67, section 503

Pension Funding Act of 2004

Section 205: Repeal of reduction of deductions for Mutual Life Insurance Company

Page 68, section 206: Clarification of exemption from tax for small property and casualty insurance company

 

141

Krohn

Working Families Tax Relief Act of 2004

Section 104: Earned income includes combat pay

Page 69, section 105: Application of EGTRRA sunset to this title

Section 201, uniform definition of child, etc.

 

155

Krohn

Page 70, section 202, modifications of the definition of head of household

 

170

Krohn

Page 71, section 205: Modifications of Earned Income Credit (EIC)

Section 206: Modifications of deduction for personal exemptions for dependents

Page 72, section 207:Technical and conforming amendments

Section 302: Parity in the application of certain limits to mental health benefits

Section 306: Deduction for donations of scientific property and computer technology

Section 307: Deduction for certain expenses of school teachers

 

188

Krohn

Page 73, section 308: Expensing of environmental remediation costs

Section 314: Taxable income limit on percentage depletion for oil and natural gas produced from marginal properties

 

210

Krohn

Directs members’ attention to handout (EXHIBIT 2) dealing with bills that passed after the American Jobs Creation Act.

Recommendation A: Church plan bill for YMCA retirement fund

Recommendation B: Excise tax on arrows; Internet tax nondiscrimination act

Recommendation C: Tsunami tax relief act

 

246

Spaulding

Begins discussion of section A of booklet. An Act to Amend Section 527 of the Internal Revenue Code

Page 1, section 1: Notice of formation

Clergy Housing Allowance Clarification Act of 2002

Page 2, section 2: Clarification of parsonage allowance exclusion

Holocaust Restitution Tax Fairness Act of 2002

Page 3, section 2: Repeal of sunset of EGTRRA with respect to exclusion for restitution received by victims of Nazi regime

 

266

Spaulding

Jobs and Growth Tax Relief Reconciliation Act of 2003

Section 201: Increase and extension of bonus depreciation

Section 202: Increased expensing for small business

276

Spaulding

Medicare Prescription Drug, Improvement and Modernization Act of 2003

Page 4, 1201(a-d): Health Savings Accounts

 

287

Spaulding

Page 5: American Jobs Creation Act of 2004

Section 201: Two-year extension of increased expensing for small business

Page 6, section 211: Recovery period for depreciation of certain leasehold improvements and restaurant property

Section 222: Expansion of designated renewal community area based on 2000 census data

Section 242: Income forecast method of depreciation – application modified

 

303

Carus

Page 7, section 244: Special rules for certain film and television productions

Section 245: Credit for maintenance of railroad track

 

332

Carus

Page 8, section 322: Up to $10,000 of reforestation expenditures for each qualified timber property can be expanded: dollar limitations on seven-year amortization eliminated

Requests clarification of what is intended by a reconnect.

 

363

Carus

Section 336: Placed in-service-deadline for “bonus depreciation” is extended for certain aircraft

Section 337: Rule for whether syndicated property satisfies the “original use” requirement for “bonus depreciation” is modified for multiple-property leases.

 

390

Carus

Page 9, sections 338, 339: Small refiners are permitted to expense up to 75% of the qualified capital costs of complying with certain EPA diesel fuel sulfur control requirements

Section 704: Modification of class life for certain motor sports race track facilities

 

413

Carus

Page 10, section 706: Certain Alaska Natural Gas Pipeline property treated as seven-year property

Section 709: Modification of minimum cost requirements for transfers of excess pension assets

Page 11, section 847: Reform of tax treatment of certain leasing arrangements

Section 885: Treatment of nonqualified deferred compensation plans

Section 886: Extension of amortization of intangibles to sports franchises

Section 901: Class lives for utility grading costs

 

TAPE 103, SIDE B

031

Carus

Page 12, section 902: Consistent amortization periods for intangibles

Section 910: Depreciation of certain passenger automobiles – limitation expanded

 

053

Sen. Deckert

Asks, what is the policy for sports utility vehicles beginning January 1, 2005?

 

060

Carus

Responds, effective October 22, 2004, an SUV under 6,000 pounds is subject to the limitations of any other automobile. If it weighs 6,000 – 14,000 pounds, there would be the $25,000 cap. The 50% bonus is gone. Those rules were repealed for SUVs but not for pickups.

 

082

Krohn

Continues testimony with background of Pension Funding Equity Act of 2004, federal legislation meant to assist industries meet their pension obligations.

Section 101: Temporary replacement of 30-year treasury rate

 

105

Krohn

Page 13, section 102: Election of alternative deficit reduction contribution

Section 103: Multiemployer plan funding notices

Section 104: Election for deferral of charge for portion of net experience loss

 

120

Krohn

Page 14, section 201: Two-year extension of transition rule to pension funding requirements

Section 202: Disputes involving pension plan withdrawal liability

Section 203: Congress and defined benefit pension system reform

Section 204: Extension of transfers of excess pension assets to retiree health accounts

 

147

Krohn

Page 15: Working Families Tax Relief Act of 2004

Section 316: Accelerated depreciation of business property on Indian reservations

Section 319: Accelerated depreciation of business property on Indian reservations

Section 322: Availability of medical savings accounts

Sections 401 – 408: Tax technical corrections

 

191

Spaulding

Comments, the panel will not discuss Section B.

 

197

Sen. Deckert

Asks panel, if they were the lawmakers, what questions should they be asking themselves in terms of connecting and disconnecting.

 

211

Krohn

Suggests, consider compliance and how taxpayers completing their own returns will track all these differences. State returns shouldn’t be as complicated as federal. Taxpayers should be able to figure it out.

 

228

Carus

Adds, DOR could probably speak more effectively to this. Believes that a system that is relatively easy to administer is more effective and derives predictable revenues. From the perspective of taxpayers and DOR, the simpler the better.

 

242

Chair C. Starr

Closes public hearing. Adjourns meeting at 10:48 a.m.

 

 

 

Tape Log Submitted by,

 

 

 

Barbara Guardino, Committee Assistant                                                      

 

Exhibit Summary:

1.      HB 2542-A, An Analysis of Changes Resulting from The:, Douglas, 93 pp.

2.      HB 2542-A, recommendations supplement to analysis publication, Krohn, 2 pp.