TAX DIVISION
OF THE
AMERICAN INSTITUTE OF
CERTIFIED PUBLIC ACCOUNTANTS
COMMENTS ON
H.R. 5166
THE TAX SIMPLIFICATION ACT OF 2002
DECEMBER 5, 2002
AICPA COMMENTS ON H.R. 5166
TABLE OF CONTENTS
Page
INTRODUCTION
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TITLE I – ALTERNATIVE MINIMUM TAX
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Sec. 101. Repeal of Alternative Minimum Tax
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TITLE II – FAMILY-RELATED PROVISIONS
2
Subtitle A – Qualifying Child and Family Status
2
Subtitle B – Other Family-Related Provisions
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Sec. 211. Acceleration of Repeal of Phase-Out of Personal Exemptions
Sec. 212. Acceleration of Repeal of Phase-Out of Overall Limitation on
Itemized Deductions
Sec. 213. Repeal of Certain Phase-Out Provisions
Sec. 214. Simplification of Capital Gains Tax
Sec. 215. Exemption of Certain Interest and Dividend Income
from Tax
Sec. 216 Simplification of Deduction for Points on Home Mortgage
Sec. 217. Increase in Exclusion for Group-Term Life Insurance
Purchased for Employees
TITLE III – EDUCATION-RELATED PROVISIONS
Sec. 301. Uniform Definition of Qualifying Higher
Education Expenses
Sec. 302. Combining Hope and Lifetime Learning Credits
Sec. 303. Clarification of Interaction of Various Education
Tax Incentive Provisions
TITLE IV – BUSINESS PROVISIONS
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Sec. 401. Cash Method of Accounting
Sec. 402. Repeal of Collapsible Corporations
Sec. 403. Simplification of Active Business Test for Certain
Corporate Reorganizations
Sec. 404. Study on Simplification of Attribution Rules
Sec. 405. Clarification of Treatment of Contributions of Intangibles
to Corporations and Partnerships
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AICPA COMMENTS ON H.R. 5166
TABLE OF CONTENTS (cont’d)
Page
Sec. 406. Modernization of References to General and Limited
Partners
Sec. 407. Repeal of Ability to Elect Large Partnership Reporting
Rules
Sec. 408. Repeal of Personal Holding Company Tax
Sec. 409. Timing Rules for Guaranteed Payments
Sec. 410. Secretarial Authority to Prescribe Class Life for Property
Sec. 412. Consolidation of life Insurance Companies with Other
Companies Permitted
TITLE V – ESTIMATED TAX
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Sec. 501. Failure to Pay Estimated Tax Penalty by Individuals
Converted to Interest Charge on Accumulated Unpaid
Balance
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TITLE VI – REPEAL OF DEADWOOD PROVISIONS
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Sec. 601. Repeal of Deadwood Provisions
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ii
INTRODUCTION
The American Institute of Certified Public Accountants (AICPA) has long been an
advocate of simplifying the tax system. We commend Representative Rob Portman on
the initial draft of H.R. 5166, The Tax Simplification Act of 2002, and are pleased to have
the opportunity to offer our comments. This bill does an excellent job of focusing on
many areas of tax law in need of simplification. We look forward to the re-introduction
of the refined legislation during the 108th Congress.
We believe now is the time to take decisive action to simplify the Internal Revenue Code.
As H.R. 5166 proposes, Congress should first repeal the alternative minimum tax for both
individuals and corporations; then, simplify and harmonize the definitions and
qualifications associated with filing status, dependency exemptions, and credits. Finally,
the inconsistent phase-outs that make tax planning difficult for individuals and result in
confusing marginal rates should be eliminated. These changes alone  all of which are
contained in H.R. 5166  will make the Code more consistent, rational, fair, and
transparent, particularly for low- and middle-income taxpayers.
In addition, the AICPA agrees that other areas where Congress might concentrate
simplification efforts to reduce complexity for a broad range of taxpayers include: (1)
simplifying capital gains taxation; (2) harmonizing and simplifying the education
incentives; (3) repealing the collapsible corporation provisions; and (4) rationalizing the
estimated tax safe harbors.
While there are revenue costs associated with simplification reforms, it is also important
to recognize that there are significant compliance burdens that will be eliminated by such
reforms. We appreciate Rep. Portman’s leadership in this important area.
The following pages detail our constructive comments on most of the recommendations
in H.R. 5166. This bill provides a clear starting point for the task ahead. We urge
Congress to follow its blueprint and free the many adversely affected taxpayers from the
hidden tax burden imposed by the Code’s complexity.
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TITLE I – ALTERNATIVE MINIMUM TAX
Sec. 101. Repeal of Alternative Minimum Tax
The AICPA supports the repeal of the individual alternative minimum tax. The AMT no
longer serves the purposes for which it was intended. Legislative changes implemented
since its enactment have been effective in more closely conforming the regular tax base
for individual taxpayers to the AMT base. Further, the narrowing of the differential in
tax rates between the regular tax system, leaving the AMT largely to trap “ordinary “
taxpayers with little or no amounts of tax preferences.
The AICPA also believes that the corporate alternative minimum tax should be repealed,
because it suffers from the same infirmities as the individual AMT.
TITLE II – FAMILY RELATED PROVISIONS
Subtitle A – Qualifying Child and Family Status
Although we believe that H.R. 5166’s provisions for a uniform definition of child is an
excellent starting point, the legislation can be improved and public acceptance more
readily gained by incorporating the following comments, taken from the recent Tax
Simplification Recommendations Report, dated September 13, 2002, jointly issued by the
AICPA, the American Bar Association Section of Taxation, and the Tax Executives
Institute.
Relationship Test
We agree that siblings and stepsiblings and their descendants should be included in the
definition of qualifying relationships for the child tax benefits. Today’s unconventional
households, driven in part by expensive rental housing, often find siblings, nieces, and
nephews sharing the same living space and residing as part of the same family unit. In
many instances, these individuals play an important role in rearing a child.
However, H.R. 5166 states that only “a brother, sister, stepbrother, or stepsister of the
taxpayer or a descendant of any such relative, whom the taxpayer cares for as the
taxpayer’s own child” meets the relationship test. The provision includes a backdoor
support test, because “caring for” the child would require a showing of such activities as
purchasing food, clothes, school supplies, toys, medical care, entertainment, etc., as well
as paying rent for the premises in which the child and the taxpayer reside. As a general
matter, H.R. 5166 rejects “support” as a part of the “qualifying child” definition and the
“care for” requirement is vague and hard to administer (how many weekend outings or
birthday gifts are necessary to meet the test?); therefore, we recommend simply including
siblings, step-siblings and their descendants in the general description of qualified
relationships and eliminating the “care for” language. We believe that the residence and
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tiebreaker rules (which give first priority to the child’s parents in the case of dual claims)
would avoid any abuses of including these relationships as qualified.
In addition, H.R. 5166 proposes including other individuals who live with the taxpayer
during the year and who are members of the taxpayer’s family. This provision narrows
eligibility by requiring the individual to be a member of the taxpayer’s family. Current
law allows individuals who are members of the taxpayer’s household. We suggest
continuing to use that the current language, which takes current living arrangements into
consideration.
Residence Test
Dependency Exemptions: Tradability
Under H.R. 5166 the dependency exemption, like the other child-based benefits, will be
awarded based on a showing of residence rather than support. This is a dramatic shift
from existing law. H.R. 5166 further states that the dependency exemption cannot be
released to a non-custodial parent except in the case of grandfathered child support
agreements. This non-tradability feature is also included in the Study of the Overall State
of the Federal Tax System and Recommendations for Simplification, prepared by the Staff
of Joint Committee on Taxation and issued April 2001 (JCT Study).
We disagree with this approach. Divorcing couples should continue to have the ability to
bargain over the dependency exemption. Although making the dependency exemption
tradable would complicate H.R. 5166, we believe that eliminating the tradability feature
will add significantly greater complexity to divorce proceedings. Under H.R. 5166, noncustodial parents who pay substantial, non-deductible child support would be deprived of
any benefit from these expenditures, even though their tax-paying ability is clearly
affected and the custodial parent may receive no benefit from claiming the dependency
exemption. Of course, if the parties have not voluntarily assigned the dependency
exemption between them, we agree that the custodial spouse is the proper recipient of the
benefit.
We recognize that permitting tradability would undermine the uniformity of the
qualifying child definition. However, we believe this additional complexity is warranted
given the additional economic burden imposed by eliminating this flexibility on families
with dependent children who are already financially burdened by divorce. Nontradability might also create audit issues where none would exist under current law
because the recipient of the dependency deduction was designated under the support
agreement.
Shared Physical Custody of the Child
Under H.R. 5166, a custodial parent with whom the child resides would receive all the
child-based benefits. As a result, determining which parent is the custodial parent
becomes increasingly important in shared-custody situations. Under current law, when
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both parents have claimed the EITC with respect to the same child, or where one parent
claims the EITC but the child does not reside with that parent for the full year, IRS audits
require the parents to reconstruct the number of days each spent with the child during the
year to determine the availability of the EITC and/or who is the proper claimant.
Because parents normally do not keep contemporaneous records of days spent with their
children, this can be quite challenging.
Even if the child’s visitation history is readily available, determining how to count days
can be exceedingly complex. Issues include: (1) what constitutes a day, including the
day in which the child moves from one parent’s household to the other’s; (2) how to
count days that the child visits relatives or stays in friends’ homes; (3) how to count days
the child is in school and both parents are working; (4) what happens if both parents
spend time with the child on shared holidays, vacations, or days spent jointly taking the
child to camp or school; (5) how to count days when the child resides at the taxpayer’s
house, but the taxpayer is out of town.
By making all child-based benefits, not just the EITC, turn on more than six months
residency with the taxpayer, H.R. 5166 puts added pressure on counting days. Additional
guidance on this subject is needed.
To reduce disputes, we specifically recommend including safe harbors, such as the
following:
1. If one parent has been awarded physical custody of the child, the child should be
presumed to be a qualifying child as to that parent unless the presumption is
rebutted by evidence that the child spent at least 183 days of the year with the
non-custodial parent (the “six-month test”).
2. If the parents have been awarded joint physical custody and the child does not
satisfy the six-month test with respect to one parent, the child should be treated as
a qualifying child with respect to the parent who claims the child-based benefits,
provided the other parent does not also claim the child-based benefits.
3. If the parents have been awarded joint physical custody and the child does not
satisfy the six-month test with respect to one parent, the child should be treated as
a qualifying child with respect to the parent that has the higher AGI.
We also suggest clarifying that, for this purpose, a parent’s income is determined without
regard to the income of a spouse with whom that parent may file a joint return. These
safe harbors should not restrict the custodial parent from relinquishing the right to treat
the child as a dependent to the other parent, as under current law.
Age Test
H.R. 5166 does not recommend changing the age tests [most frequently 13, 17, 19, or 24]
for the various child-based benefits under existing law. Although reducing the number of
different ages involved would offer additional simplification (e.g., using the same age
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limits for the child credit and the dependency exemption), we recognize that revenue
constraints may preclude streamlining the qualification thresholds.
Continued Use of the Support and Gross Income Tests in Certain Cases
Although relegated to a significantly reduced role in H.R. 5166, the support and gross
income tests would continue to be used to permit dependency exemptions for siblings,
aunts, uncles, parents, and certain others. We agree with this more limited use of the
support and gross income tests.
Unrelated Children as Dependents
H.R. 5166 would require a taxpayer to care for a foster child “as the taxpayer's own
child” in order for the foster child to qualify under the uniform definition, even though
the bill would require placement by a state-authorized agency to be considered as a foster
child. Although the care requirement is useful when no state involvement is required to
classify a child as a foster child, we believe the care requirement is unnecessary if the
category is restricted to state authorized placements. Therefore, we believe the care
requirement should be omitted.
Public Benefits
We support not taking public assistance payments by government agencies into account
in cases requiring a support test. Including the public benefits as support would be
extremely difficult to administer. Determining how to value benefits such as Medicaid or
Section 8 housing subsidies (the latter are granted on a sliding income scale) would be
difficult, if not impossible. In addition, low-income taxpayers who spend all their
disposable income on their children simply would not understand a rule which said that
they did not support the child for tax purposes.
Household Maintenance Test
The household maintenance test is a secondary support test that, under current law,
applies to head-of-household filing status and the dependent care credit. Under this test,
the taxpayer must prove that she or he maintained a household where the child resided,
by showing that the taxpayer paid rent, made mortgage payments, paid for repairs, or
otherwise maintained the household.
We recommend that eliminating this test for both the dependent care credit and head-ofhousehold filing status. This would reduce complexity by avoiding the confusion that
would necessarily result from taxpayers believing they are entitled to head-of-household
status simply because they have a qualifying child. In addition, we believe head-ofhousehold filing status denotes family status, not a financial test.
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Conclusion
We support H.R. 5166’s plan to adopt a uniform definition of “qualifying child,” And
believe the following modifications will improve H.R. 5166 and aid in gaining public
acceptance:

Eliminate the requirement that the taxpayer care for siblings and stepsiblings and
their descendants “as the taxpayer's own child.”

Continue to allow tradability of the dependency exemption as under current law.

Provide guidance on conventions for counting days to determine periods of
residency and consider creating safe-harbors.

Continue to use the support test for siblings, aunts, uncles, disabled adult children,
and parents, along with other specified household members.

In light of the requirement for state authorized placement of foster children,
eliminate the requirement that taxpayers “care for” a foster child “as the
taxpayer's own child.”

Eliminate the household maintenance test for purposes of qualifying for head-ofhousehold filing status as well as for purposes of the dependant care credit.
Subtitle B – Other Family-Related Provisions
Sec. 211. Acceleration of Repeal of Phase-Out of Personal Exemptions
The AICPA strongly agrees with the proposal to accelerate the repeal of the phase-out of
the personal exemptions. See discussion below.
Sec. 212. Acceleration of Repeal of Phase-Out of Overall Limitation on Itemized
Deductions
The AICPA strongly agrees with the proposal to accelerate the repeal of the phase-out of
the overall limitation on itemized deductions. See discussion below.
Sec. 213. Repeal of Certain Phase-Out Provisions
To accomplish the diverse goals implemented in the Internal Revenue Code, many Code
sections “phase out” enumerated deductions and credits over various income ranges
based on differing measures of taxpayer income. Currently, these phase-out ranges are
not consistent, either in defining income, the applicable levels of income, the range of
income over which the phase-out applies, or the method of applying the phase-outs. The
phase-out ranges even differ depending on filing status, and these differences are also
inconsistent.
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For example, the deduction for contributions to a traditional IRA phases out over a
different range of income [defined as adjusted gross income (AGI) modified for adoption
assistance, tuition deductions, and student loan interest, foreign income and EE bond
interest exclusions] for single filers than it does for married-joint filers. In contrast, the
$25,000 allowance for passive losses from active participation rental activities phases out
over the same range of income for single and married-joint filers. In some cases, more
than one phase-out must be addressed, involving multiple – and often interdependent –
computations.
Phase-outs complicate tax returns immensely, result in a lack of transparency in the tax
law, and impose marriage penalties. Phase-out instructions are difficult to understand
and the average taxpayer cannot manage the complex calculations. In addition, the
differences in phase-out methods and definitions of income impose a compliance burden
on many individuals and make it difficult for taxpayers to recognize when they are
eligible for a benefit and when and how any phase-out applies. Tremendous incomelevel differences also exist across the various programs using phase-outs.
As it stands, some phase-outs are so complicated that neither the targeted taxpayers nor
those charged with explaining and administering the rules are able to accurately
understand and interpret them.
The AICPA strongly agrees with the proposal to eliminate phase-out provisions. We also
recommend eliminating the phase-outs related to the elderly and disabled credits; the
retirement savings credit; social security benefits; Coverdell Education Savings
Accounts; and the section 469 $25,000 rental exclusion and credit.
Technical Notes:

The conforming amendment to 132(m)(3) and 408(p)(2)(D)(ii) should insert the
language of 219(g)(5) into these provisions instead of referring to 219(g)(5) as
being in effect on the day before the enactment of this parenthetical. Referring to
a Code section which has been repealed is very confusing.

Section 213 (f) of H.R. 5166 refers to amending Code section 135(c). However,
the reference should be to Code section 135(b). Section 135(c) relates to
definitions that should remain in the Code.
Sec. 214. Simplification of Capital Gains Tax
H.R. 5166 would replace the current rate system for capital gains with a deduction equal
to a fixed percentage of the net capital gain. The deduction would be available to
individuals whether itemized deductions or the standard deduction is claimed.
The AICPA supports simplification of capital gains taxation. However, we believe that a
preferable approach would be to establish a single preferential rate and a single long-term
holding period for all types of capital assets.
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Sec. 215. Exemptions of Certain Interest and Dividend Income from Tax
This proposal would create a $250 ($500 in the case of a joint return) exclusion from
gross income for interest and dividends received. The AICPA supports the provision
because it provides a tax-filing break for taxpayers with moderate savings. We do,
however, disagree with the exclusion of mutual fund (regulated investment company)
capital gains distributions from this exclusion. For many taxpayers, mutual funds are the
primary means of savings. Simplification and equity would both be served by
harmonizing the treatment of all interest and dividend income.
We believe that third parties should be required to report the amount of dividends eligible
for the exclusion on Forms 1099. This additional reporting would reduce the number of
taxpayers taking the exclusion for ineligible interest and dividends.
However, we believe that disallowing an interest expense deduction for investment
interest excluded from income under the $250 provision adds unnecessary complexity.
The amount of taxpayer time needed to comply with this disallowance would far
outweigh the insignificant amount of the interest expense disallowed.
Sec. 216. Simplification of Deduction for Points on Home Mortgage
The AICPA supports the proposal.
Sec. 217. Increase in Exclusion for Group-Term Life Insurance Purchased for
Employees
The AICPA agrees with the provision to increase the exclusion amount of group-term life
insurance purchased for employees. The previous amount has not changed since the
provision was first enacted for group-term life insurance provided after December 31,
1963.
TITLE III – EDUCATION-RELATED PROVISIONS
Sec. 301. Uniform Definition of Qualifying Higher Education Expenses
The proposed legislation would adopt a uniform definition of qualifying higher education
expenses. The uniform definition would include expenses for tuition, books, fees,
supplies, and equipment required for enrollment or attendance and expands the definition
to include room and board expenses for eligible students taking a normal full-time
workload. However, other education provisions would retain the current nonqualifying
treatment of room and board expenses.
The AICPA supports this proposal as a simplification. We do, however, suggest that
qualifying higher education expenses include room and board for all education incentive
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provisions, even though this would significantly expand the scope of the current
education tax incentives that do not cover these expenses. Because “qualified tuition”
must be reduced by scholarships and like items, including room and board as a qualified
higher education expense would make the education tax incentives more broadly
available.
We oppose excluding room and board from the definition of qualified higher education
expenses for purposes of the interest on education loans. This provision would add
additional complexity in exchange for disallowing only a small amount of interest
expense. The calculations required of the taxpayer would be complicated, timeconsuming, and cause errors.
Sec. 302. Combining HOPE and Lifetime Learning Credits
The proposed legislation would combine the HOPE and Lifetime Learning credits into a
single credit which would: (1) use the present-law credit rate of the Lifetime Learning
credit; and (2) apply on a per-taxpayer basis.
The AICPA supports this proposal. Combining these credits would simplify the tax
benefits and remove the duplicative provisions relating to higher education expenses.
This position is consistent with the 2000 Joint ABA/AICPA/TEI Tax Simplification
Recommendations.
We also suggest that Code section 25A include the same definition of “eligible student”
as Code section 221(d)(3).
Sec. 303 Clarification of Interaction of Various Education Tax Incentive Provisions
The proposed legislation needs to provide further clarification of how the various
education tax incentives interact.
The AICPA suggests eliminating any restrictions on using an education tax incentive
based on using other education tax incentives and substituting an overall limitation that
the same expenses cannot qualify under more than one provision.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) included a
provision allowing taxpayers to exclude withdrawals from an Education IRA from
income in the same year that they claim a HOPE or Lifetime Learning credit, as long as
the exclusion is not used for the same expenses for which the credits were claimed. We
suggest making this provision permanent. The Joint Committee staff also recommended
that taxpayers be allowed to fund an Education IRA in the same year that a contribution
to a Section 529 plan was made on the taxpayer’s behalf. We support these provisions
because they will simplify the education incentives.
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Deduction for Student Loan Interest
The JCT Study recommends eliminating the 60-month limit on deductibility of student
loan interest.
The AICPA supports this position. EGTRRA included the temporary repeal of the 60month rule. We suggest making this provision permanent because it simplifies the
requirements for a student loan interest deduction.
Exclusion for Employer Provided Educational Assistance
The JCT Study also recommends making the exclusion for employer-provided
educational assistance permanent.
We support this position. Although EGTRRA did make this exclusion permanent, all
provisions of EGTRRA will be repealed effective January 1, 2011. Therefore, we
suggest making this provision permanent beyond 2011 to: (1) provide certainty to
taxpayers wishing to take advantage of the exclusion; (2) provide certainty to employers
interested in providing educational incentives to their employees; and (3) eliminate
administrative problems.
TITLE IV – BUSINESS PROVISIONS
Sec. 401. Cash Method of Accounting
The AICPA supports increasing the dollar limit in Code section 448 from $5 million to
$10 million. This is consistent with Rev. Proc. 2002-28 where the Internal Revenue
Service administratively adopted the higher figure.
However, we oppose the proposal to repeal the rules relating to qualified personal service
corporations (PSCs). This does not represent simplification, rather it is a substanative
change that would eliminate treatment long used by these entities. The combined effect of
the two provisions would be the creation of “winners” and “losers” among different
categories of taxpayers. We do not believe this is an appropriate outcome for a
simplification bill.
Sec. 402. Repeal of Collapsible Corporations
The AICPA supports repealing the collapsible corporation provisions as a long overdue
step in reducing complexity. These provisions were enacted in the 1950s to prevent the
use of certain corporations to avoid ordinary income treatment for the corporation’s
individual shareholders. At that time, liquidating distributions of appreciated property
were generally tax-free to the distributing corporation and individual shareholders could
claim capital gain treatment. The collapsible corporation provisions imposed ordinary
income treatment on the individual shareholders receiving these distributions. The 1986
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repeal of the General Utilities eliminated the tax-free treatment for liquidating
distributions of appreciated property, thus rendering the collapsible corporation
provisions unnecessary to the prevention of tax avoidance.
Sec. 403. Simplification of Active Business Test for Certain Corporate
Reorganizations
Current law imposes an unjustifiable burden on certain holding companies seeking to
make tax-free distributions under Code section 355: These holding companies must
engage in certain preliminary transactions – e.g., liquidations or reorganizations of
affiliates – to satisfy the “active business” test of section 355. Under present law, this test
is imposed on a separate company basis. The Joint Committee staff recommends making
this test on an affiliated group basis.
The AICPA supports this decision as a meaningful step in reducing complexity because it
would eliminate the need to undertake the uneconomic, preliminary transactions
described above.
Sec. 404. Study on Simplification of Attribution Rules
The AICPA supports simplifying the attribution rules with respect to the ownership of
stock. Currently, the Code contains 13 different definitions of “family” for purposes of
attributing stock ownership.
In the AICPA’s Tax Simplification Recommendations: Ownership Attribution Rules,
dated April 30, 1997, we recommended repealing all existing stock attribution rule,
enacting instead a single set of stock attribution rules which would greatly simplify
compliance and administration of the tax law.
The rule is divided into three primary parts:
1. Family attribution: An individual is deemed to own any stock owned by a
spouse, children, grandchildren, parents and grandparents.
2. Entity attribution: The owner of a partnership, corporation, estate, or trust is
deemed to own proportionally whatever stock the entity owns. An entity is
deemed to own proportionally whatever stock is owned by its shareholders,
partners or beneficiaries. In certain situations, entity attribution does not exist
unless the owner owns more than 50 percent of the entity.
3. Option attribution: The general rule is that options will be treated as having been
exercised unless a safe harbor test is satisfied. The safe harbor tests are similar to
rules recently promulgated in reg. section 1.1504-4. This recommended change
differs significantly from the current attribution rules under which options are
always treated as exercised, even if there is little likelihood the options will ever
be exercised.
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Sec. 405(b) Allocation of Basis on Transfers of Intangibles in Certain
Non-Recognition Transactions, Transfers to Partnerships
The AICPA supports this provision.
Sec. 406. Modernization of References to General and Limited Partners
This provision commissions a study to address and make recommendations on whether
the distinction between general and limited partners should be determined based on
liability for debts of the partnership or on the right to participate in management of the
partnership. The AICPA supports undertaking such a study.
Sec. 407. Repeal of Ability to Elect Large Partnership Reporting Rules
The AICPA opposes repealing the ability to elect the large partnership reporting rules
(ELP rules) for the following reasons:
1. The ELP rules are elective, thereby providing large partnerships with alternatives
with respect to partnership reporting and audits. The partnerships which qualify
are generally sophisticated in nature and prefer the added flexibility, even if it
results in a certain amount of complexity.
2. These rules were intended to simplify reporting for ELPs. Partners of ELPs
benefit from the simplified reporting provided.
3. Eliminating the ELP rules would add temporary complexity for those partnerships
which have already established a system for partnership reporting under the
current ELP rules.
4. Eliminating the ELP rules would not provide simplification to non-ELP
partnerships, except that they no longer need to evaluate a separate regime.
Because the ELP rules have not been widely elected, the JCT staff speculated that the
benefits probably do not outweigh the disadvantages and complexity. Rather, the AICPA
believes that the “underuse” of the ELP option is more a result of market factors: Many
of the partnerships that might have become ELPs instead became corporations in an
effort to raise capital more effectively. The existence of the ELP rules does not add any
complexity for partnerships which are ineligible or chose not to use them. Instead, the
rules facilitate simplicity by significantly reducing the tax compliance burdens of those
partnerships which elect to use them.
Sec. 408. Repeal of Personal Holding Company Tax
The AICPA supports eliminating the personal holding company tax as a significant step
towards tax simplification.
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Sec. 409. Timing Rules for Guaranteed Payments
This provision would mandate Code section 707(a) treatment for all types of partnership
payments by conforming the section 707(a) timing rule for reporting payments to partners
in transactions where they are not acting in their capacity as partners to the Code section
707(c) governing the reporting of guaranteed payments to partners acting as partners.
The AICPA opposes the proposal. There is no inherent abuse in using two rules for these
differing types of payments, nor do these rules add significant complexity. To the extent
that a partner is acting other than as a partner, then the partner's accounting method
reflects the proper policy; but when a partner is acting as a partner, then the partnership's
method reflects the proper policy.
H.R. 5166 Section 409 would result in a partner’s accounting methods and tax year
controlling the time for reporting all payments to that partner, thus adopting . the “entity”
concept of partnership taxation for all payments. As a consequence, partners with
different tax year-ends from the partnership's year-end could experience either an
acceleration or deferral of income relative to the current rules. Although the “entity”
concept of partnership taxation is appropriate for payments made to partners not acting as
partners, we believe that the current “aggregate” concept of partnership taxation is the
more appropriate approach to determining the tax treatment of payments made to partners
who are acting in that capacity.
Partners may engage in certain transactions with a partnership on an independent, thirdparty basis unrelated to their status as partners for valid business reasons. This is
comparable to shareholders of C and S corporations who are permitted to engage in
similar transactions with their corporations on an independent, third-party basis and be
bound by specific tax rules requiring them to be treated as “outsiders.” The “matching”
rules of section 267 currently provide sufficient safeguards against improper income
deferrals in related party transactions.
Sec. 410. Secretarial Authority to Prescribe Class Life for Property
The AICPA supports the proposal to grant secretarial authority to prescribe class life for
property.
Sec. 412. Consolidation of Life Insurance Companies with Other Companies
Permitted
The AICPA does not oppose the proposal.
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TITLE V – ESTIMATED TAX
Sec. 501. Failure to Pay Estimated Tax by Individuals Converted to Interest Charge
on Accumulated Unpaid Balance
H.R. 5166 would generally modify the current failure-to-pay-estimated-tax penalty by:
(1) converting the current estimated tax penalty into an interest provision for individuals,
estates, and trusts; (2) increasing the threshold for estimated tax underpayments from
$1,000 to $2,000; and (3) applying one interest rate per estimated tax underpayment
period.
Converting Estimated Tax Penalty into an Interest Provision
The AICPA supports converting this into an interest provision for individuals, estates,
and trusts, but we recommend amending the legislation to convert this penalty for
corporations as well. This conversion would be a more accurate characterization because
the penalties are essentially fees for the use of money.
Increase and Revise Estimated Tax Threshold
Under current law, taxpayers are generally not subject to an estimate tax penalty when
the tax shown on the return (reduced by withholding) is less than $1,000. H.R. 5166
would (1) increase the threshold from $1,000 to $2,000; and (2) modify threshold
calculations by taking certain estimated tax payments into account. In general, the
legislation would not impose interest on under-deposits of estimated tax if the tax shown
on the return – reduced by withholding and certain estimated tax payments – is less than
$2,000. The AICPA supports these modifications as simplifications.
One Interest Rate per Estimated Tax Underpayment Period
Section 501 would apply only one interest rate per underpayment period – the rate
applicable on the first day of the quarter in which the payment is due. Currently, if
interest rates change while an underpayment is outstanding, separate calculations are
required for the periods before and after the interest rate change. Applying only one
interest rate per underpayment period would end these multiple interest calculations. The
AICPA supports this simplification.
TITLE VI – REPEAL OF DEADWOOD PROVISIONS
Sec. 601. Repeal of Deadwood Provisions
The AICPA supports periodic review of the Internal Revenue Code for “deadwood”
provisions that should be withdrawn.
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