[Congressional Record Volume 156, Number 94 (Tuesday, June 22, 2010)]
[Senate]
[Pages S5240-S5242]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
SELF-EMPLOYMENT TAX
Mr. ENZI. Mr. President, the Reid-Baucus tax extenders bill before
the Senate includes several provisions that, to my knowledge, have
never been vetted by congressional tax writers either in the Senate
Finance Committee or in the House Ways and Means Committee. As an
accountant with practical expertise in tax matters, this disturbs me
greatly. It should also disturb the small business owners because there
is a provision in this bill that would slap them in the face with a 15-
percent tax increase. I am talking about the provision that would apply
a 15.3-percent self-employment tax to the distributions of certain
subchapter S corporations. Those are the small business corporations.
This self-employment tax would apply when 80 percent of the gross
income of the small business is attributable to three or fewer
professionals in a professional services corporation. We are talking
about the smallest of the small businesses.
This is a $9.1 billion hit on a small subset of small businesses
engaged in a service trade. I wonder, the next time an offset is
needed, will the Senate go after all the small businesses, changing the
Tax Code this same way?
My colleagues on the other side of the aisle call this a ``loophole
closer'' or an ``anti-fraud provision.'' I assure my colleagues this is
neither. These words are convenient labels my colleagues use to defend
tax-and-spend policies. The small business corporation provision is,
however, a massive tax increase on small business.
This new payroll tax on nonwage income would hurt the ability of
small businesses to reinvest and to create jobs. At nearly 10 percent
unemployment, I don't think the Federal Government is in any position
to pursue job-killing tax increases. Small businesses are the lifeblood
of our economy. It is imperative that we nurture their growth, not
hinder it, so they can create jobs and get our economy back on track.
None of us is in favor of fraud, but that is not really what we are
talking about.
If the IRS wants to improve compliance with the self-employment tax,
they have the right tools. They just need to use them. For example, the
IRS Revenue Ruling 74-44 that specifically addresses the tax treatment
of dividends in lieu of compensation gives them all they need.
I ask unanimous consent to have the IRS revenue ruling printed in the
Record following my statement.
The PRESIDING OFFICER. Without objection, it is so ordered.
(See exhibit 1.)
Mr. ENZI. I also have pages and pages of case law of which the IRS
has successfully litigated the issue of dividends in lieu of
compensation and the applicability of employment taxes.
Plus, Congress has codified the economic substance doctrine which
says a transaction must have an economic purpose aside from the
reduction of tax liability in order to be considered valid. In my
opinion, this is the IRS's ace-in-the-hole card. The IRS can close any
loophole--real or imagined--with the power of the new law.
Why can't the IRS do its job with the volumes of legislative
regulatory and judicial tools it already has? For example, the IRS
revenue ruling could be codified somehow, but then it wouldn't provide
an offset for new programs, would it? Nor would it permit my colleagues
across the aisle to reduce the tax on venture capitalists for their
carried interest. I don't like the carried
[[Page S5241]]
interest provision, but to soften the impact of that policy on the
backs of small businesses is just plain wrong.
Even the Government Accountability Office agrees the IRS should be
doing more with what it has to crack down on fraud. In a 2009 report,
the GAO stated: ``IRS efforts to enforce the rules on paying adequate
wage compensation to small business shareholders have been limited,''
and the IRS provides only ``limited guidance in determining adequate
compensation'' guidelines for taxpayers.
A 2002 report by the Treasury's inspector general found that ``IRS
agents did not always address officer compensation, even when little or
no compensation was paid.''
Clearly, the IRS isn't doing its job. That is the loophole. The IRS
can and should do more with what they already have.
As a former accountant, I find this small business corporation
payroll tax totally unworkable. For example, the tax would apply when
80 percent or more of gross income of the S corporation is attributable
to three or fewer shareholders in the S corporation. How are taxpayers
supposed to track the attribution of gross income? Let me give an
example.
My friend, the senior Senator from Massachusetts, has introduced S.
144 that would exempt cell phones from the recordkeeping requirements
under the listed property rules. Why? Because the paperwork burden is
too costly and time consuming for business. I think it is a good bill,
and I am proud to be a cosponsor. In fact, the bill has 72 cosponsors.
That is a supermajority of the Senate who agree it is a good bill. But
if a supermajority of the Senate agrees the bookkeeping burden of
parcelling out an itemized cell phone bill between business and
personal use is too onerous, why would we think that itemizing the
source of gross income across shareholders and employees in an S
corporation would be any easier?
This new payroll tax on small business was written without any input
from the tax-writing committees, and it shows. Although I am sure it
was unintended, this new law has the potential to reduce Social
Security benefits. Since the new payroll tax would reclassify income
from certain small businesses as wage income, it could trigger the
earnings test for folks receiving early retirement benefits from Social
Security.
Even Senator Baucus admitted the payroll tax provision needs
``modifications.'' I remember it well because he made this statement
during a Treasury hearing a few weeks ago when I raised this issue as
an onerous tax increase.
Not only is this a job-killing tax, but the manner in which it was
concocted is appalling. The original tax extenders bill raised the
taxes on Wall Street bankers, but when their lobbyists howled,
lawmakers went looking someplace else--small businesses--for the
revenue they needed. Small businesses aren't as able to defend
themselves when the tax man cometh, and in the end it results in a new
tax that robs David to pay Goliath.
The outrageousness of this new tax led me and my colleague, Senator
Snowe from Maine, to file an amendment that would strike the S
corporation payroll tax from the underlying tax extenders bill.
If my colleagues across the aisle seriously believe that
noncompliance with the self-employment tax among S corporations is a
problem, then the best, most workable solution is to codify the
``reasonable compensation'' standard into law. This S corporation
``attribution of gross income'' basis isn't workable. If you don't
believe me, again, I refer you to the experts.
I have a letter I wish to submit for the Record. It is a letter from
the AICPA, the American Institute of Certified Public Accountants. In
the letter they say:
We are concerned that there may be unintended consequences that have
not been fully aired and discussed. Accordingly, we strongly support
the amendment being offered by Senators Snowe and Enzi which would
strike Section 413.
I ask unanimous consent this letter be printed in the Record at the
end of my statement.
The PRESIDING OFFICER. Without objection, it is so ordered.
(See exhibit 2.)
Mr. ENZI. Again, this seemingly small provision in the tax extenders
bill would have a $9 billion impact, and that is just on a subset of S
corporations, these small businesses.
This payroll tax provision ought to be stripped and sent back to the
tax-writing committees where it can be addressed in the proper fashion.
I strongly urge my colleagues to support the Snowe-Enzi amendment in
our efforts to remove this misguided, outrageous new tax. I think there
is support on both sides of the aisle for doing that.
I thank the Chair and yield the floor.
Exhibit 1
[From taxanalysts]
Federal Research Library: IRS Revenue Rulings
(Rev. Rul. 74-44; 1974-1 C.B. 287)
rev. rul. 74-44
Advice has been requested whether, under the circumstances
described below, an electing small business corporation
incurred liability for the taxes imposed by the Federal
Insurance Contributions Act, Federal Unemployment Tax Act,
and the Collection of Income Tax at Source on Wages (chapters
21, 23, and 24, respectively, subtitle C, Internal Revenue
Code of 1954).
The corporation is a small business corporation with two
shareholders, that has elected, pursuant to section 1371(a)
of the Code, not to be subject to corporate income tax, but
to have all its income taxed directly to its shareholders.
In 1972, the shareholders performed services for the
corporation. However, to avoid the payment of Federal
employment taxes, they drew no salary from the corporation
but arranged for the corporation to pay them ``dividends'' of
100x dollars, which is the amount they would have otherwise
received as reasonable compensation for services performed.
Sections 3121(a) and 3306(b) of the Federal Insurance
Contributions Act and the Federal Unemployment Tax Act,
respectively, define the term ``wages,'' with certain
specific exceptions not material here, as ``all remuneration
for employment.'' Section 3401(a) of the Code, relating to
the withholding of income tax, contains a similar definition.
In the instant case, the ``dividends'' paid to the
shareholders in 1972 were in lieu of reasonable compensation
for their services. Accordingly, the 100x dollars paid to
each of the shareholders was reasonable compensation for
services performed by him, rather than a distribution of the
corporation's earnings and profits. Such compensation was
``wages'' and liability was incurred for the taxes imposed by
the Federal Insurance Contributions Act, the Federal
Unemployment Tax Act, and the Collection of Income Tax at
Source on Wages.
____
Exhibit 2
American Institute of
Certified Public Accountants,
Washington, DC, June 14, 2010.
Hon. Max Baucus,
Chairman, Senate Committee on Finance,
Washington, DC.
Hon. Charles Grassley,
Ranking Member, Senate Committee on Finance, Washington, DC.
Amendment to H.R. 4213, Section 413--Employment Tax Treatment of
Professional Service Businesses--S. Amendment 4342
Dear Chairman Baucus and Ranking Member Grassley: The
American Institute of Certified Public Accountants (AICPA)
opposes Section 413 of the American Jobs and Closing Tax
Loopholes Act of 2010 which we believe threatens to result in
a significant increase in taxes and complexity for S
corporations and their shareholders, and for certain limited
partners. Section 413 represents a major change in
longstanding tax policy that has never been the subject of
public hearings, thus, we are concerned that there may be
unintended consequences that have not been fully aired and
discussed. Accordingly, we strongly support the amendment
being offered by Senators Snowe and Enzi, S. Amendment 4342,
which would strike Section 413. The proposed Section 413:
Fails to take into account a fair and reasonable return on
the human and investment capital of the owners; may reduce
Social Security benefits for early retirees; may create
unintended consequences to qualified and non-qualified
retirement plans of owners that would now have both wages and
self-employment income; and ignores the fact that the IRS
currently has the appropriate enforcement tools it needs to
re-characterize the distributions of S corporations as salary
subject to employment taxes under FICA.
The AICPA would like to work with Congress and the IRS to
address the best way to collect S corporation shareholders'
and partners' fair share of employment/self-employment taxes.
Such a provision should not be rushed through the legislative
process without due process and deliberation. Thank you very
much for taking time to consider our serious concerns and
suggestions regarding Section 413 of this Act, and the much
needed Snowe-Enzi amendment. If we can be of assistance,
please contact Peter Kravitz, AICPA Director of Congressional
& Political Affairs or Edward S. Karl, AICPA Vice President--
Taxation.
Sincerely,
Alan R. Einhorn,
Chair, Tax Executive Committee.
[[Page S5242]]
The PRESIDING OFFICER. The Senator from Montana.
____________________