[Congressional Record Volume 143, Number 74 (Tuesday, June 3, 1997)]
[House]
[Pages H3250-H3256]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                      THE INTERNAL REVENUE SERVICE

  The SPEAKER pro tempore. Under the Speaker's announced policy of 
January 7, 1997, the gentleman from Texas [Mr. Sessions] is recognized 
for 60 minutes as the designee of the majority leader.
  Mr. SESSIONS. Mr. Speaker, tonight I rise to talk, with several of my 
colleagues, about the Internal Revenue Service. The Internal Revenue 
Service, through a series of laws that have been passed for many years, 
has what is called the Internal Revenue Code. What this code is is it 
consists of two huge books that I am showing the audience tonight that 
are very thick with very fine print that talk about the tax laws of 
this country.
  Tonight myself and my colleagues stand to talk about not only the Tax 
Code but the application of that Tax Code by citizens of this country, 
and also how they are judged in that Tax Code by the Internal Revenue 
Service.
  Tonight we stand to talk about H.R. 1145, the Home-based Business 
Fairness Act of 1997. It allows self-employed entrepreneurs, which are 
the fastest growing and most dynamic sector of our economy, and as a 
simple matter of fairness, to deduct the expenses of a home office and 
100 percent of their health insurance costs. H.R. 1145 also provides a 
clear definition of an independent contractor to help entrepreneurs 
avoid crippling IRS costs and fines.
  This year small business cited the cost of health insurance as the 
No. 1 concern, and tax demands accounted for 6 of the 10 most severe 
problems confronting small business.
  H.R. 1145 deals with both of these concerns, addressing the high cost 
of a home office and of health care. Because many small businesses use 
independent contractors, their business status is critical to the 
success of entrepreneurs all over this country.
  An independent contractor is one who does work with the help of 
someone but who is not under that person's control. This allows 
entrepreneurs to work for themselves but with the assistance of a 
primary contractor, as a primary contractor does not have to withhold 
taxes for his independent contractors, and that is why this issue is so 
important.
  What we would like to discuss tonight is H.R. 1145 and how this is 
going to play out. We have any number of issues to discuss, including 
factors and criteria which the IRS uses to determine these independent 
contractors. But as I talk tonight, what we would like to do is further 
examine what is happening in the marketplace. As we talk about the 
marketplace, what we are talking about is small businesses, men and 
women who are attempting not only to do work out of their home, but 
also work in industry and work in business.
  What we would like to do is to provide several examples of how the 
factors that are based upon the 20-point

[[Page H3251]]

criteria, the 20 factors, how they play out with the IRS.
  Mr. HILL. Mr. Speaker, will the gentleman yield?
  Mr. SESSIONS. I yield to the gentleman from Montana.
  Mr. HILL. Mr. Speaker, I am proud to join with the gentleman and be a 
cosponsor of the Home-based Business Fairness Act, H.R. 1145. One of 
the saddest things I think that we have is the fact that small business 
owners, people who operate a business out of their home, people who are 
just trying to get started in business, are discriminated against in 
the Internal Revenue Service Code.
  I think a lot of folks do not realize that today if you are an 
employee, if you work for someone or if you have a large corporation, 
you are an employee of your own corporation, you get to deduct health 
insurance, but if you happen to be self-employed and you want to buy 
health insurance for you or your family, you do not get a deduction for 
it. It is a discrimination against small businesses and against small 
business owners.
  The same thing is true of the home office deduction. If you happen to 
keep your accounts receiveable ledger in a file cabinet at home, or if, 
as when I started my business, if you happen to do your books at night 
at the kitchen table, you do not get to take a deduction for the 
business operating expenses that are associated with operating from 
your home. Again, it is a discrimination against people who are 
starting a business.
  I think a lot of folks do not realize that Bill Gates got started 
with Microsoft in his garage. Henry Ford built the prototype of the 
Model A in his garage. Most small businesses today get started in 
somebody's home or in somebody's garage. The idea is that we want to 
encourage that, because the energy, the creativeness of our society 
comes from people with an idea who are willing to take a risk and get 
started at home.
  The same thing is true with this independent contractors issue 
incorporated into H.R. 1145. The thing is that if you are going to get 
started in offering services as your business, you offer that service 
as an independent contractor. That is, I go out or someone would go out 
and contract with someone to offer a service. But today the Internal 
Revenue Service Code has so many tests in order to qualify as an 
independent contractor it is almost an absolute barrier for someone who 
wants to get started in the service sector of our economy.

  What is the fastest growing sector of our economy? It is the service 
sector of the economy. So just for example, I have a list of the tests 
that are here, and I do not think all of my colleagues understand all 
the tests.
  Just for example. If a person hires another person or if I wanted to 
offer my services, and the person I was offering them to wanted to give 
me some instructions on how to do that or wanted me to have some 
specific training or wanted to provide some of the tools, or wanted to 
tell me what hours of the day that I might be able to do those 
services, all of those criteria, any one of them, not in combination 
but any one of those criteria, would make that person ineligible to 
offer their services as an independent contractor. The list goes on and 
on. If the person doing the hiring offers tools or the place of 
business, it almost makes it impossible today to offer services and in 
starting a business.
  What is worse about that is if someone takes the risk of hiring an 
independent contractor that has started in business and an audit is 
conducted 3 years later, the tax penalties can be horrendous, so it 
creates more risk for that business enterprise who might want to start 
hiring a new business enterprise.
  So H.R. 1145 also redefines independent contractor. It clarifies the 
definition, and it creates a safe harbor. What a safe harbor means is 
that if somebody hires an independent contractor to help somebody get 
started in business and it is later determined that it did not meet all 
of the tests, there are not any tax penalties in the past. It is 
prospective.
  In other words, we can say that person did not qualify as an 
independent contractor for the future, but there are no tax penalties 
going to the past. This is a really good bill, it is a good bill for 
America.
  In Montana I have 26,000 people who are self-employed operating from 
their homes, trying to get started in business, trying to provide for 
their families. What this measure will do is it will treat them fairly, 
like every other business and every other worker in America.
  Mr. FOX of Pennsylvania. Mr. Speaker, will the gentleman yield?
  Mr. SESSIONS. I yield to the gentleman from Pennsylvania.
  Mr. FOX of Pennsylvania. Mr. Speaker, I must congratulate the 
gentleman from Texas [Mr. Sessions] and the gentleman from Montana [Mr. 
Hill] for their leadership on this issue, which is going to help small 
business and is going to help the economy, frankly. Ninety percent of 
jobs, as I understand it, are jobs through small business, from the 
individual talent and enthusiasm and creativity of individuals who are 
really trying to make a difference.
  So I would urge that my colleagues on both sides of the aisle, 
Republicans and Democrats, support H.R. 1145. This home office 
deduction and assistance with health care will help more jobs be 
created, and with our overall goal of having more people employed, 
stabilizing the tax base, we know small business is the engine of our 
economy, and I really believe this is a step in the right direction.
  Furthermore, I have to applaud the gentlemen again, because frankly, 
IRS reform is an idea whose time has arrived, not only here as far as 
the home office deduction, which will create more jobs and create 
economic growth, but I believe it is a step in the right direction of 
making IRS more taxpayer-friendly, if that is possible.
  I would like to see us actually change the burden of proof, that the 
taxpayer is presumed to be correct and the IRS commissioner would have 
the burden of proof. That is probably in another bill. But frankly, the 
American public would like to see this kind of bill move forward, and 
on any other sections the gentleman would identify where there is 
positive change making the Tax Code more clear, and maybe some day even 
having a flat tax would certainly be an idea we should move forward on 
as well.
  Mr. SESSIONS. Mr. Speaker, I would like to continue this discussion 
so we can make sure that those people who are at home really understand 
what we are talking about when we talk about people who are out in the 
marketplace, people who are trying to comply with the law, honest 
Americans.
  What I would like to do is, if I could, read some statements from 
congressional testimony that has been given one this year. It is a 
statement of Dale Frey. Dale Frey is a small business owner. I would 
like to read from that testimony, if I can.
  It says,

       D.E. Frey & Company, a full-service broker-dealer, was 
     organized in 1989. The company is privately held with offices 
     in 22 States. The company has approximately 200 registered 
     representatives that are independent contractors. The company 
     provides administrative support for the transactions 
     involving bonds, equities, insurance products, mutual funds, 
     and unit investment trusts that are initiated by registered 
     representatives for their individual clients.
       The registered representatives are individual entrepreneur 
     business owners that are financially responsible for their 
     own occupancy, telecommunications, information systems, 
     registration, and all other operating expenses associated 
     with offering their services to clients.

  The Internal Revenue Service examined Mr. Frey's records for tax 
years 1993 and 1994. The company is a broker dealing with the 
Securities and Exchange Commission, known as the SEC, and a member of 
the National Association of Securities Dealers, NASD.
  The Internal Revenue Service determined that each registered 
representative is an employee of the company, and that the company 
failed to withhold or pay taxes imposed by FICA and FUTA and income tax 
withholding provisions with respect to pay to such individuals. The IRS 
then assessed employment taxes of $1,160,884 and $2,113,614 for 1993 
and 1994. This came on the heels of an IRS audit just 2 years earlier 
that determined that they were following the independent contractor 
status, that they were following the laws.
  I also have a statement that was read by Mr. Raymond Peter Kane. Mr. 
Kane

[[Page H3252]]

gave his testimony before the Committee on Small Business and the 
Subcommittee on Tax, Finance and Exports on independent contractors on 
July 26, 1995.

                              {time}  1930

  Here is what Mr. Kane said. In August 1991, he received a notice from 
the IRS that they wanted to conduct an audit for the fiscal year 1989. 
The audit took place over a period of several months and resulted in a 
finding on February 18, 1992 of no change, which, as we know, means 
that the auditor found nothing wrong. During the 6 months that the IRS 
auditor was in the office, the contacts between his agent, between his 
agency and those of his independent contractors were carefully 
scrutinized and found to be in compliance with IRS rules and 
regulations regarding independent contractor status. However, 2 years 
later, with no change in IRS rules and no change in any contract that 
he had with the independent contractors, the IRS decided that these 
same independent contractors were really not independent contractors 
all along but that they were employees, and for the years 1992, 1993 
and 1994, the IRS then demanded $274,000 in penalties.
  This is the type of egregious action as a result of the IRS that we 
are talking about, why we have a problem, why we need 1145.
  Mr. FOX of Pennsylvania. Mr. Speaker, if the gentleman will continue 
to yield, will H.R. 1145 ameliorate and solve the problems those two 
companies faced?
  Mr. SESSIONS. We believe that what it will do is put very clearly 
and, let me get to the language, if I can, that will talk about this 
instance. What we are going to do is to make sure that codified within 
the law that we talk about what is an independent contractor, what are 
those tests that need to be done. How can the IRS, and should the IRS, 
look at an independent contractor. But what it is going to do is to 
reaffirm the 20-point test that the IRS has been working along this 
entire period of time.
  Mr. FOX of Pennsylvania. Mr. Speaker, not only will it make sure that 
jobs are saved but they will not have needless lawsuits with the 
Federal Government to justify what they have been doing, which is 
correct to begin with under the original IRS examination; am I correct?
  Mr. SESSIONS. This is correct, Mr. Speaker. So what we are talking 
about tonight, and I thank the gentleman for that insight that he 
offered, what we are trying to do is to make sure that the IRS gets it. 
Our independent contractors have already been following the law, people 
who are out conducting themselves as honest and fair Americans. 
Unfortunately what we are talking about tonight is an IRS that does not 
get it and so we are going to codify this into law, critical for the 
success of not only independent contractors but all Americans who may 
have these type of situations where they work out of their home and 
work as interested contractors.
  Mr. HILL. Mr. Speaker, if the gentleman will continue to yield, H.R. 
1145 does two things to help those folks that wrote to the gentleman.
  First, it clarifies this definition of independent contractor because 
now it is a very confusing thing. Obviously in the case that my 
colleague has just described, one IRS agent thought they met the 
conditions; the next agent says that they did not. But I think that one 
of the other elements that are so important here is the safe harbor 
provision, so that if people are acting under the assumption that what 
they are doing based upon previous decisions or previous audits or 
previous consultations is the appropriate thing, that someone cannot 
come along later and not only force them to pay the taxes but impose 
these dreadful penalties on top of it.
  So, it is very important here that folks understand that what we are 
trying to do in this bill is to make a clear definition of independent 
contractor so that it will eliminate the confusion but also in that 
process eliminate a safe harbor where people can be protected from 
having these huge penalties that would put them out of business.
  I make note of the fact that, when you start a business there are two 
things most important to you. The first is to get customers, to get 
cash flow, business coming into your business. That is, most businesses 
fail because they do not get enough customers. The second thing is to 
generate cash flow. And this bill is in its entirety intended to help 
those small businesses, the most vulnerable businesses, the ones that 
are most critical to the future economy of this country to help them 
secure business by clarifying this independent contractor issue and 
creating a safe harbor but, in addition to that, helping them with 
their cash flow by giving them a fair treatment on the Tax Code with 
regard to business deductions.
  Mr. SESSIONS. Mr. Speaker, as we talk about people who are in the 
marketplace, this growing part of the business, and we talk about the 
safe harbor, I believe that what we should do as a Congress is deal 
with problems in America. I believe that there is no problem in America 
that we cannot solve. But many times, public opinion polls feel like 
that all Congress is trying to do is to deal with something that would 
help us or special interest. Do you not believe that this deals with 
millions of Americans and what we know as the middle class and the guts 
of the problem where people who are trying to comply with the law, 
people who are putting their own capital at risk, people who are 
putting their name on the door, people who are worried about whether 
they can pay themselves and make that home payment and whether they can 
pay for their kids to go to school, this is the essence of what this is 
all about, that we will codify in law those things that honest, hard-
working Americans want to have, wish to have and it is only fair for 
them to have.
  Mr. HILL. Mr. Speaker, to me the American dream is the opportunity to 
do what you want to do or be what you want to be. And to be in business 
for yourself is one of those things. But we are in an economy in 
transition. Companies are downsizing. People are being laid off. People 
with a lot of skills who, if given the opportunity, can go out and 
start a business and often it is a service oriented business. And 
generally speaking they are going to operate that business from their 
home.
  But just think about this, those people who would oppose this are the 
people who think that those folks ought to go on welfare or those 
people who think that they ought to collect unemployment benefits 
rather than to go out and provide for themselves and for their families 
on an equal basis. I hear a lot of discussion in the Congress about the 
lack of health insurance for families. Half of the children who are not 
covered by health insurance have parents who are temporarily 
unemployed. So what this bill would allow is important, those people 
who find themselves in that situation to be able to provide for their 
families by taking a deduction for their health insurance if they want 
to seek self-employment.
  Mr. SESSIONS. Mr. Speaker, this deduction that I believe the 
gentleman is talking about is one that we would call pretax. This is 
the exact same pretax tax treatment that is given by corporations. So 
what we are trying to say is, these people who are self-employed, these 
people who are honest, hard-working, taxpaying families across this 
country would then have the advantage, the same tax advantage that 
would be given by law to someone who worked for a corporation.

  Mr. HILL. Mr. Speaker, that is exactly right. Every employee out 
there whose employer offers health insurance to them receives that 
health insurance without paying taxes on it. The employer gets a tax 
deduction for that. We are talking about the self-employed.
  The irony of this is that a person can be self-employed and have 
employees and be able to take a tax deduction for their employees' 
health insurance but they cannot take that tax deduction for their 
family's health insurance. What this would do is to make it fair so 
that those people who are out there taking risks, trying to develop new 
opportunities in the economy are treated the same as everyone else.
  Mr. SESSIONS. Mr. Speaker, further, we find that another part of what 
this bill is to do is to clarify the definition of a principal place of 
business. So many times I hear people from Texas as the Representative 
from the Fifth District of Texas, I hear from people who are working 
out of their own

[[Page H3253]]

home, trying to honestly and legitimately make a living without being 
on welfare, might we add, people who are trying to contribute something 
back to their community and what they are asking for is, why can we not 
have this home mortgage deduction?
  What this 1145 would do is it would clarify this place of business, 
this home, this person, this place or where these people might have 
their business. What I would like to do is clarify exactly what we are 
going to codify. We would talk about a principal place of business, and 
for the purposes we are talking about a home office that would qualify 
for a business deduction if the office is in the location where the 
taxpayer did all of their management and business activities and 
conducted themselves on a regular basis; and that the office is 
necessary because the taxpayer has no other location for the 
performance of essential administrative or management duties that they 
have in their business.
  This is what happens every single day by families who by 
circumstances may have been laid off from their company, by 
circumstances may have an opportunity because of children, children 
that they have to take care of and watch on a regular basis. These are 
the kinds of things that we have got to see the tax code evolve to. We 
have to see the tax code become responsible, not only as it evolves 
into the 1990s and the year 2000, but also as we evolve around life as 
we know it.
  Mr. PAPPAS. Mr. Speaker, if the gentleman will continue to yield, I 
am very encouraged by my colleagues' discussion here tonight about what 
1145 would do if enacted into law.
  Most of us that are here are members of the Committee on Small 
Business, and even those that may not be, I know, are very committed to 
fostering the kind of opportunities for small business men and women in 
our country. Later this week, on Thursday in fact, the committee that 
we serve on will be holding a hearing regarding yet another piece of 
legislation which, if this had been enacted more than 20 years ago, I 
believe much of what we are talking about here tonight would not have 
to consume our time and our attention.
  The piece of legislation that I speak of is called the Small Business 
Regulatory Enforcement Fairness Act, [SBREFA], another acronym for us 
to add to our lengthy list.
  What this would do for certainly the public that may not be aware of 
this, this would require that each Federal agency consider the effect 
of any proposed regulations that they would write in order to enforce 
this particular piece of legislation. Had this piece of legislation 
been in existence prior to even the last year or so, there would be a 
couple of examples that I would like to give that would have really 
made a difference in the ability of small business people to survive.
  The first, it even received some attention today in some of the 
periodicals that we read here, the filing of the payroll taxes 
electronically. Many small business people do not have the ability to 
do that. It is an unnecessary expense and I am very glad to see that 
that is at least being delayed. I certainly hope that it is going to be 
a permanent delay. The other is the 2.9 percent tax that limited 
partnerships are being expected to pay for Medicare. Some have referred 
to this as a stealth tax because of the way in which once again the IRS 
has interpreted some other actions.
  Whether it is through the IRS's interpretation, through determining 
what an independent contractor is, then certainly the ability of that 
independent contractor to take a home office deduction is being 
determined. I would just like to comment on one specific part of this 
bill that was referred to a number of times that I have been active in 
the last several months, the home office deduction.
  Again, for the benefit of those who are here in the gallery and those 
that are viewing, it has been just a little over 20 years since the 
Federal tax code was required to define the home office as a principal 
place of business and those people could qualify for the deduction. But 
through a period of time, the IRS's interpretation of what a principal 
place of business is, and then a subsequent court ruling by the U.S. 
Supreme Court, which was prompted by a specific case, I would just like 
to briefly describe it, a physician or an anesthesiologist by the name 
of Dr. Nader Soliman had obviously serviced his patients not in his 
home office but in various hospitals in the communities near where he 
resided. But his billing, the administrative part of his business was 
conducted from his home office. He believed, as I certainly do, that 
that was a part of the carrying out of his duties as an 
anesthesiologist, carrying out the function of his business.
  The IRS challenged the interpretation that he made that that was a 
legitimate home based office, home based business. Through a court 
proceeding the Supreme Court in my opinion legislated and ruled against 
his ability to take that deduction. There are many other examples, 
there are people who are general contractors, painting contractors, 
that are landscapers, obviously cannot perform what most people or many 
people would view as their principal, the principal part of their 
business. Obviously a house painter has to go to someone else's home to 
paint their house, but who could argue that a part of his or her 
business is sitting in their office, sitting at their kitchen table, as 
the gentleman from Montana (Mr. Hill) said, and writing bills out and 
dealing with other paperwork, whether it is with an accountant. I am 
certainly hopeful and encouraged that this kind of piece of legislation 
would restore what I believe was the original intent.

                              {time}  1945

  Mr. HILL. If the gentleman will yield, I think it is really important 
for our colleagues to understand exactly this point with this 
physician. Had that physician had an office that he rented somewhere, 
the cost of the rent of that office, the utilities for that office, the 
telephone service for that office, the janitorial service for that 
office all would have been tax deductible, no question. But by virtue 
of the fact that that physician had that in his home, that is what 
brought it into question.
  The important point here is that we have an economy that is moving 
toward services, and when we deliver services we go to other places to 
deliver services. So, in essence, what the IRS ruling is saying is that 
if we provide services at a place other than our principal office, then 
we cannot take a deduction for a home office. It discriminates against 
the greatest sector of new entrepreneurial businesses that are being 
created out there.
  Mr. SESSIONS. If the gentleman would yield, I also believe that from 
what I have seen in the Fifth District of Texas, that many of the 
people who are at home, who are operating these home businesses, are 
women, women who are trying to not only make a go of it with their 
marriage and family and children and the needs that come upon the 
business, but they are upstart women who have the ability to get out 
and to compete in the marketplace. I think this home office deduction 
really finds that the people that are discriminated against most are 
women, women trying to do these type of things.
  I believe that H.R. 1145 will offer us a clear definition, one that 
the IRS cannot only understand but also that these taxpayers and these 
people who wish to make a go of it can have and avoid the IRS coming on 
them.
  Mr. FOX of Pennsylvania. If the gentleman will yield, I think the 
discussion of my colleagues, the gentleman from New Jersey and the 
gentleman from Texas, all center on the fact that we want a reality 
check for IRS when it comes to being reasonable about regulations, 
which will help more people be employed, to start jobs.
  I know from back home in Pennsylvania the chambers of commerce 
everywhere support this kind of legislation, H.R. 1145, which will in 
fact make sure the home office deduction is taken care of and that 
those who are self-employed will be able to have assistance on the 
health care.
  And everyone knows that the best job is a private sector, newly 
created job. If it is a government job, it will end up, maybe, 
possibly, not helping our economy. We have seen that in a few 
instances. Does not mean every job. But I know that all the chambers of 
commerce, NFIB, every major organization that evaluates new employment, 
the private sector job is one that is lasting, one that helps the 
economy.
  And like the gentleman from Texas said before, it certainly is with 
many

[[Page H3254]]

of the new entrepreneur female-owned businesses that this will be a 
definite incentive for new businesses to be started.
  Mr. SESSIONS. We also could, I am sure, include in there that they 
are doing this at their own risk. They are putting their own money 
right at risk. They think of that as a business. They think of that as 
an opportunity to go out. And it is incredible that the IRS would not 
even recognize this; that they would put that at risk.
  Which goes back to the point that the gentleman from Montana was 
speaking about, this safe harbor, that is so important for people who 
are attempting to not only follow the law without being a tax expert, 
to follow the law and file complete and accurate tax records, but also 
to run their business. It is this huge burden that is not only on these 
types of people but I think upon all Americans to know and understand 
this magnificent document that is known as the Tax Code, but that yet 
is a burden to each one of us as Americans.
  Mr. HILL. If the gentleman will yield on that point, having been a 
business owner myself, and starting in my own living room, I have some 
sense of this. But as the gentleman from New Jersey, Mr. Pappas, 
pointed out about business regulations, the burden of those regulations 
falls heavier on small businesses than it does on big business.
  Big businesses can hire lawyers and C.P.A.'s and they can have full-
time bookkeepers and people to understand that. This is just one volume 
of the Tax Code I am holding right here, and if we are starting a small 
business out of our living room, we do not have time to commit this to 
memory. Yet, if we do not, we can be at risk, at risk financially and 
our whole business enterprise can be at risk.
  I want to give my colleagues a couple of statistics to put this in 
perspective. There are now 9 million, 9 million home-based businesses. 
Fourteen million Americans are earning their living from home-based 
businesses. From 1988 to 1994, the IRS retroactively reclassed 438,000 
independent contractors as employees, and the fines and penalties 
totaled $751 million.
  I can tell my colleagues right now that I believe the majority of 
those businesses were put at risk, perhaps put out of business because 
of the level of those penalties that nobody could possibly have 
anticipated.
  There are 5.1 million self-employed head of households with 1.4 
million children who are uninsured because they cannot take a tax 
deduction on their health insurance. We are talking about a lot of 
Americans, hard-working Americans. As the President would say, these 
are people out there playing by the rules, but the rules are working 
against them.
  Mr. PAPPAS. The gentleman mentioned about families, individuals with 
children and the pressure that they are experiencing every day. Another 
benefit to H.R. 1145, and again the home office deduction, and before 
that maybe determining who is an independent contractor, which then 
would hopefully make them eligible for that home office deduction, but 
the cost of day care that so many families in our country are faced 
with.
  The difficulty in finding adequate day care sometimes can be even 
more of a challenge with the many lengthy waiting lists that people 
encounter trying to place their children in a safe environment. But 
having the ability to work out of their homes, getting the deduction 
that I believe that these folks are entitled to, that it is not the 
U.S. Government doing them a favor by providing this deduction but 
doing something that is fair. As was said, if they had their business 
at another location, they would be entitled to these deductions.
  But to have the flexibility to work from our home, a gentleman or a 
woman working from their home, being there when their kids get home 
from school, not having to worry about where the young people are going 
to go, whether there is a place for them to go, having that would be 
such a benefit.
  Mr. SESSIONS. As we talk about these men and women who have their 
businesses out of their own home, I think it should be mentioned that 
they have to pay taxes also. They have to pay taxes as a result of 
being self-employed. They have to, in essence, double down, what I call 
double down, where they have to pay an employer's side and an 
employee's side: Social Security, what is known as FICA, unemployment, 
and all of these things.

  So it is not as though this home business that we are talking about 
is not done within compliance of the law. In fact, there is a huge 
burden, I would suggest a bigger burden, that is on these people who 
must maintain records, must be able to run their own business while at 
the same time trying to survive with an onslaught of agencies and rules 
and regulations who are coming after them.
  Mr. PAPPAS. If the gentleman would yield, just getting back to that, 
the gentleman from Montana holding up one of the two volumes, and 
people that may be watching this and contemplating their business and 
seeing just one of those might be discouraging them, and hopefully 
people will realize that people like the gentleman from Texas are 
trying to change that.
  By putting in perspective again what it would mean, what a home 
office deduction could mean, using the scenario I mentioned, having the 
ability to take that home office deduction and saving the expense of 
child care, we are literally talking, for even a family or an 
individual with one child, several hundred dollars a month, conceivably 
maybe even more than that, with the potential savings from not having 
to place a child in day care and getting the home office deduction, it 
could really make a tremendous difference in someone's ability to start 
a business and continue over the first year or so when it is so 
critical for so many businesses that are really on the edge of 
collapsing.
  Mr. FOX of Pennsylvania. I think the gentleman from New Jersey 
eloquently stated the importance of H.R. 1145 with regard to the home 
office deduction and raises a very important point; that for many of 
our families that are trying to make their own businesses, who are 
sometimes having multiple jobs and taking care of children, that day 
care becomes very important.
  This week we will be introducing legislation which will raise from 30 
percent to 50 percent the tax credit for employers that will be 
providing day care for their employees, and hopefully as well for the 
self-employed, thus allowing people who have to be working and raising 
their families to be able to make sure their children are in fact in 
quality day care.
  And this is certainly an idea that has evolved from the leadership of 
individuals who are sharing the time here with our colleagues this 
evening, and I appreciate the point the gentleman makes about day care 
being of great assistance.
  Mr. HILL. I think it is important for us to keep in mind that one of 
the problems, when IRS makes one of these determinations, retroactive 
determinations, is that this cascades down into some State government 
decisions too. Because it does not just impact the Internal Revenue 
Service and the penalties and the taxes that could be due, it also will 
impact the State revenue departments, which could also then have taxes 
due and penalties, often the State department of labor, which usually 
is the mechanism to deal with unemployment insurance premiums and can 
even go into the workers compensation and general liability problems. 
So it pyramids down or cascades down on these businesses, the 
penalties.
  One of the interesting things I wanted to point out to my colleagues, 
coming from Montana as I do, with agriculture our No. 1 industry, this 
is a particularly interesting issue for folks in agriculture, because 
we have people like ditch riders, who are out there making sure the 
irrigation ditches are clear and clean and flowing; we have farriers, 
those are the people who shoe horses, who often operate as independent 
contractors; we have what we call calf pullers, that come out in the 
spring and help folks pull calves during calving season; sheep 
shearers; custom combiners; custom farmers. Those are all examples, 
just in the area of agriculture, of folks who often offer their 
services as an independent contractor.
  But under the current test of the IRS, one could hire folks to do 
that and not meet the test of an independent contractor because the 
provisions are so narrowly defined. And out of the 20-part test, if an 
individual misses one

[[Page H3255]]

part, that could disqualify them as an independent contractor.
  So that is an example of one industry, a very important industry to 
my State, very important industry to all of America, where this 
independent contractor issue and the lack of safe harbor today can 
cause some very serious problems.
  Mr. SESSIONS. So when we talk about H.R. 1145, I believe what we are 
taking about is that we have to codify the law, the law that is being 
misapplied by the IRS. We have to take into account that America has 
changed; that we now have not only a great amount of people who are at 
work either because they have been laid off or downsized or whatever 
the word might become associated with them leaving their work, or on 
their own they might have decided to do this.
  So H.R. 1145 will take into account the changing climate that we have 
that will allow a deduction of home business expenses, that will be a 
safe harbor for those people who believe and expect and are trying to 
not only follow the law but to do that with the greatest of intent. We 
are going to have the law say that the IRS now would look at those 
people and not hit them for back taxes and penalties but rather to 
acknowledge that they were attempting to follow the law.
  We will come in with H.R. 1145 and say that we will allow expenses 
related to health care to be treated as a pretax expense, which will 
put these people who are independent contractors and those people who 
work at home and those people who are self-employed with the 
opportunity to have health care, to have the opportunity to take care 
of their families, the opportunity to be able to comply with the tax 
law that would be consistent with what corporations are allowed.
  And then, lastly, that we are going to look at the independent 
contractor status that would say that the 20-point test that is used by 
the IRS, that we are going to look at and codify that, or make changes 
in the law so that the IRS would have to say that what that independent 
contractor had been doing as they followed the law they would not be 
liable for taxes and penalties related to their performance under law.
  Mr. FOX of Pennsylvania. If the gentleman will yield, what is the 
status of this legislation now within his committee?
  Mr. SESSIONS. The status of this legislation is that, and I am not on 
the Committee on Small Business, but the status is that we are debating 
this tonight with the full expectation within the next week and a half 
or two that we will be debating this on the floor.
  Mr. PAPPAS. I think what we are talking about, and was said a number 
of times, is that we need to be cognizant of the changes that are going 
on all around us in our economy. The American people certainly are 
aware, and maybe more than folks in Washington, DC are.
  I am very encouraged by the discussion here tonight and proud to tell 
my colleagues a story about what is going on in my State. In the State 
of New Jersey, there is a member of the State legislature, the lower 
house, which is called the General Assembly, a legislator from my 
district whose name is Joseph Azzolina, a long-time businessman, very 
successful businessman, and he has recently introduced a bill in the 
State legislature that would amend the State municipal land use laws 
which deals with zoning.

                              {time}  2000

  What it would do is recognize that many people work from their homes, 
and that zoning ordinances not be a hindrance for those that would want 
to use a very small portion of their home in order to conduct their 
business from it.
  Currently, many municipalities in our State have somewhat restrictive 
ordinances. With the changes to our economy, Joe Azzolina's initiative 
I think really goes hand-in-hand, or hand-in-glove, with what we are 
discussing here tonight. And it was very coincidental that this piece 
of legislation and another one that I authored dealing with the home 
office deduction and his introduction in New Jersey were, I think, 
within a couple weeks of one another.
  Back home in New Jersey, people are very, very much encouraged; the 
chambers of commerce, the NFIB, and just independent business men and 
women throughout central New Jersey are very encouraged that it seems 
that those of us that are in Washington and those in our State capital 
in Trenton really seem to be getting it and coordinating their efforts 
to really make a difference in the lives of the business owners of our 
State and our Nation.
  Mr. HILL. If the gentleman would yield, he knows, and he serves on 
the Committee on Small Business, as do I, that we have a lot of 
programs that we fund, advocacy programs for small business. We have 
small business development centers where we help people that are 
thinking about going into business develop business plans and 
understand the issues associated. We have micro business loan programs. 
We have got community block grant programs that are loan programs that 
businesses can participate in to help expand and grow their business. 
We have procurement provisions and rules with regard to how Government 
buys things that are oriented to helping small businesses participate. 
We have programs in the area of research to fund people who are trying 
to start small research companies.
  There are all kinds of things that we are doing on the one hand to 
try to promote small businesses because it is a good thing to do. Small 
business, we all know it is the engine of our economy, it is what 
creates opportunity, it is what renews the American dream. So we have 
all these programs out here that we are helping fund, that we are 
helping to promote small business. Then, on the other hand, we have IRS 
regulations and a punitive Tax Code that is making it difficult or 
impossible for those small businesses to succeed and prosper.
  What this issue really boils down to, in my judgment, is just one 
word and that is ``fairness.'' All we are asking here is that small 
businesses, micro businesses, the most vulnerable businesses but the 
most important businesses because they are new businesses, be treated 
fairly, that they be treated like any other business would be treated 
with regard to tax policy, dealing with the health insurance deduction, 
the deduction for legitimate business operations.
  We are not suggesting here that a business would be able to take a 
deduction for something that is not a legitimate business expense. We 
are just saying that a legitimate business expense incurred in the home 
ought to be deductible, and that they have some clear definition they 
can offer to their customers and to other contractors that they might 
associate with or hire so that everybody can feel secure.
  Mr. FOX. The fact is that everything that has been discussed 
certainly is key about how we are going to move forward in this 
country. I know in Pennsylvania, where our No. 1 business is 
agriculture, we also have in the Delaware Valley in southeastern 
Pennsylvania what we call the Ben Franklin partnership, which is the 
universities, the businesses, and the government working together to 
have business incubators, entrepreneurship, new jobs. How can we take 
all of that effort from the universities, the government, and the 
schools and industry and not save it?
  We have to find ways, not only this bill, H.R. 1145, which is going 
to do a great deal with the business expense for home office, we also 
need to be looking at things that will help farmers, for instance, be 
able to pass their business down to the next generation without having 
to sell the family farm to pay for taxes. So the inheritance tax 
reduction that my colleague has been fighting for for his residence is 
going to be going a long way in the right direction, as well as H.R. 
1145.
  Mr. HILL. If the gentleman would yield, he is absolutely correct 
about agriculture. The greatest threat to agriculture, the family farm 
in America, is the death tax. As my colleague knows, many, many farms 
and ranches today cannot produce the cash flow necessary to pay the tax 
burden to pass that business on to another generation, whether it be 
done by selling it or gifting it or the death tax.
  This is a tremendous threat to family agriculture in Montana. I know 
and my colleagues know that part of the budget agreement and part of 
the effort of our conference has been to put a focus on the importance 
of bringing the death tax down or eliminating the

[[Page H3256]]

death tax so that business enterprises and farms and ranches can 
continue to stay in business, continue to put people to work, continue 
to provide important products and services to build our exports, to 
build the strength of our economy.
  Mr. PAPPAS. If the gentleman would yield, the death tax that he 
referred to is even important to agriculture in a State such as mine. 
It is the Garden State, and we are very fortunate in central New Jersey 
to have many very productive and active farms, and farms that are owned 
by families for generations.
  But the elimination of the death tax, I believe, is an environmental 
issue, certainly in an area such as mine where there is such pressure 
for development, and that many of these family-owned farms where 
certainly it is the desire for these farms to be passed from one 
generation to the next, that the heirs sometimes are not in a position 
of determining whether they even want to continue to farm because they 
cannot pay the estate tax bill.
  There was an instance in my district just last year that a longtime, 
very prominent farmer had passed away and his daughter wanted to keep 
the farm from being developed and she was not able to pay it. But we 
have a farm preservation program in our State where development rights 
are purchased by the counties and the State and paid to the landowner, 
so the farm has been preserved in perpetuity. But that is not always 
the case and those options are not always available.
  I personally just want to conclude my participation here tonight by 
saying how privileged I am to be serving with these three gentlemen. I 
know the commitment that they have to fostering an economic environment 
that can help the little guy and the little gal, and that is what we 
are talking about here tonight. We are talking about fairness, we are 
talking about really helping those that just want the opportunity to 
pursue the American dream in their own way. That is all they are 
looking for. They are looking to be treated fairly, looking for the 
chance, and some of these things that we have spoken about tonight 
would just provide that chance to so many people in our great country.

  Mr. HILL. If the gentleman would yield, I just want to compliment him 
for his work on the Committee on Small Business and his work with 
regard to the issue of capital gains tax. I do not know about him, but 
I think I have cosponsored several capital gains and death tax bills. I 
also am the original sponsor of one bill that would completely 
eliminate the estate tax and treat estates like a capital gain at a 
substantially reduced rate.
  The key thing here is that we have got to reform our Tax Code so that 
it is not interfering with the decisions that people make to go into 
business or stay in business, so it does not discourage people from 
putting people to work.
  One of the things as I travel about Montana, I hear small business 
people saying to me, ``You know, I do not know that I want to hire any 
more employees.'' There are too many liabilities, too many obligations. 
That is the worst thing that we could have happen in this country 
because it is small businesses that are creating the jobs, and those 
businesses are growing into bigger businesses and growing into larger 
businesses, and they are putting millions of Americans to work and they 
are renewing our economy.
  This is just one measure. But I know all four of us, and I want to 
compliment all of my colleagues here for their work in this area 
because we all understand that it is those small businesses that we 
need to help, the businesses that are most vulnerable that we need to 
work for.
  So, as I conclude my remarks here tonight, I just want to thank all 
three of my colleagues for their work with me and with others in trying 
to accomplish that in this Congress.
  Mr. FOX. If the gentleman would yield, I also want to conclude by 
saying that H.R. 1145 is key legislation in this Congress. It is 
bipartisan. It is pro business. It is pro jobs. It is pro family. And 
it is long overdue to be passed.
  I have to give my proper gratitude to the gentleman from New Jersey 
(Mr. Pappas), the gentleman from Texas (Mr. Sessions), and the 
gentleman from Montana (Mr. Hill) for their leadership, not only on 
this kind of legislation and moving it forward, but as Members of the 
freshman class and showing real leadership within the whole body in a 
bipartisan fashion, which I think is going to be the kind of example 
for having legislation passed which is going to be not only helpful to 
their constituents but the whole country. I appreciate the work that 
the gentleman from Texas is doing on the Results Act. I think we need 
to come back here for further discussion on other changes to the IRS 
that are going to help businesses, help individuals, and help our 
families back home.
  Mr. SESSIONS. I thank the gentleman from Pennsylvania (Mr. Fox) so 
much for being here, the people of Pennsylvania are well served, and 
the gentleman from New Jersey (Mr. Pappas) for his participation here 
tonight, the people of New Jersey have done very well, and also to the 
gentleman from Montana (Mr. Hill), those voters are well served, also.
  I think that what our discussion tonight has been about is that we 
want to be probably just a beacon, albeit just a small beacon, that is 
speaking on the floor of the House of Representatives to try to be that 
voice, that voice to people, Americans, who are out there in the 
heartland, who are trying to make a go of it, people who do own their 
own business, who are independent contractors, those people who do have 
to worry about paying for their health insurance out of their own 
pocket, those people who are trying to make a go of it that are not 
given a home business deduction that they should have.
  We stand up tonight as a voice to those people and say, ``We hear you 
in Washington, DC. We know what you are struggling with.'' I hear it in 
the fifth district of Texas. H.R. 1145 is not all-encompassing, it is 
not that magic bullet that will give tax relief to all Americans, but 
what it is is an opportunity for us to not only clarify and codify law 
but to give a reintention to the IRS and to these small business owners 
so that they recognize that someone does hear them in Washington, DC.
  I would like to go through this, if I can, just to summarize once 
again what H.R. 1145 does. It allows for the deductibility of expenses 
for a home business deduction. It offers a safe harbor, an opportunity 
for those people who are attempting to comply with the law, that when 
they do come into contact with the IRS, that they can prove to the IRS 
that they are attempting to follow the law even if they might have not 
have done so exactly to the full intent, that they are attempting to do 
that. It gives them an opportunity to be safe without having these back 
penalties.
  It will also allow for the expenses related to health care to be 
treated the same on a pretax basis as corporations have. And, lastly, 
it is going to codify rules that are related to the tax status of 
independent contractors.
  I think this is important for America. I hope that tonight we have 
talked about things that represent the heart of problems in the 
heartland, that we are talking about important things, not talking 
about something that would be good just for a Member of Congress or a 
special interest but, rather, for the working middle class of America.

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