Other Revenue Raisers

LIFO Repeal

Many companies use the last-in, first-out (LIFO) method to determine the value of its inventory and its cost of goods sold (COGS). The LIFO method provides a tax benefit to companies facing rising inventory costs, since the COGS is based on more recent, higher values, resulting in lower taxable income. The administration proposes to repeal the availability of the LIFO method. Companies would be required to revalue their beginning LIFO inventory to its FIFO (first-in, first-out) value in the first taxable year beginning after 2011. Companies would be allowed to take into account this one-time increase in income ratably over 10 years (the FY 2010 budget proposed a seven-year period for recognizing the income).

IMPACT: LIFO repeal would eliminate a tax deferral opportunity for taxpayers with inventories and would simplify the tax code. Repeal would also remove a possible impediment to conforming to the International Financial Reporting Standards (IFRS), which may be adopted by the Securities and Exchange Commission and which do not permit the use of LIFO accounting.

Dividends on Reorganization

Current law requires a shareholder receiving boot for stock in a reorganization to recognize gain equal to the lesser of the gain realized or the boot received (the “boot-within-gain” limitation). If the exchange has the effect of a dividend, part or all of the gain is treated as a dividend. The administration would repeal the boot-within-gain limitation for a transaction with dividend effect. The proposal would apply to taxable years after 2010.

IMPACT: This will provide more uniform treatment of dividends, regardless of context. It also will eliminate transactions in cross-border reorganizations that allow U.S. shareholders to repatriate previously untaxed earnings and profits of foreign subsidiaries with little or no U.S. tax.

Information Reporting

The president proposes to expand information reporting to help reduce the tax gap. The president has asked Congress to:

• Require information reporting by businesses that make payments to corporations of $600 or more in a calendar year effective for payments made to corporations after December 31, 2010;
• Require information reporting for rental property expense payments of $600 or more effective for tax years beginning after December 31, 2010;
• Require information reporting for private separate accounts of life insurance companies effective for tax years beginning after December 31, 2010;
• Require a certified Taxpayer Identification Number (TIN) from contractors receiving payments of $600 in a calendar year from a particular business, effective for payments made to contractors after December 31, 2010; and
• Authorize the IRS and Treasury Department to require information reporting on all non-wage payments by federal, state, and local governments to procure property and services effective for payments made after December 31, 2010.

COMMENT: If a contractor fails to provide an accurate certified TIN, the business making the payment would be required to withhold at a flat-rate percentage of gross payments. The flat-rate percentage (of 15, 25, 30, or 35 percent) would be selected by the contractor.

IMPACT: The proposed information reporting requirements for rental property expense payments would be similar to the reporting requirements applicable to taxpayers engaged in a trade or business.

Punitive Damages

Deductions are currently allowed for both compensatory and punitive damages. The president proposes to eliminate the deduction for punitive damages, to emphasize the punitive aspect of the penalty. The proposal would apply to damages paid or incurred after 2011.

Lower of Cost or Market Inventory Accounting

Taxpayers may write down the carrying value of their inventories by applying the lower of cost or market inventory accounting method (LCM). The president proposes to repeal the LCM method and the ability to write down the cost of “subnormal” goods. Any accounting adjustment would be included in income ratably over four years, beginning with the year of change. The proposal would apply to tax years beginning after 12 months from the date of enactment.

Cellulosic Biofuel Producer Credit

The president proposes to exclude so called black liquor (liquid byproducts from processing paper or pulp) from qualifying for the income tax credit for cellulosic biofuel. Otherwise, allowing a credit for black liquor would result in substantial revenue losses and a windfall for the paper industry. The proposal would apply on the date of enactment.

Source: CCH, a Wolters Kluwer business