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| Wednesday, April 18, 2001 |
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Government Affairs: Federal: Tax & Financial
Tax Treatment of Stock Options The Internal Revenue Service (IRS) has indicated that it no longer believes that employers should be exempt from income tax withholding or employment taxes on Employee Stock Purchase Plans (ESPPs) and Incentive Stock Options (ISOs), at least in the case of a disqualifying disposition. New regulations on these statutory stock options were on the IRS/Treasury business plan for 2000; it remains unclear whether regulations will be issued. Some in Congress have expressed opposition to the new IRS position on stock options. Unfortunately, the Joint Committee on Taxation has preliminarily estimated that clarifying the tax treatment of ESPPs would reduce federal tax revenues by approximately $1 billion. Additionally, we have heard that clarifying the treatment of ISOs would reduce federal tax revenues by approximately $10 billion. Taxation of Electronic Commerce IMRA's position (approved by the TAC and the Board of Directors) is that all retailers, regardless of physical presence, should be required to collect sales/use taxes for all taxable sales based on the destination of the item purchased-in other words, a "level playing field." To that end, IMRA has successfully persuaded Congress not to extend the Internet tax moratorium in 2000. Rather, we are working for a solution to the level playing field problem during the first half of 2001, and to extend the Internet tax moratorium only in conjunction with that action. Depreciation, Including Leasehold Improvements This year, the Treasury Department released a congressionally mandated study of depreciation recovery periods and methods. While the study was release too late for Congress to act on in 2000, there is significant interest for reforming depreciation and recovery laws next year. One particular area of interest to retailers is a proposal to reduce to 15 years the depreciation period for leasehold improvements. Proposals to Curtail Corporate Tax Shelters The Clinton Administration and several members of Congress have proposed targeting "unwarranted" benefits associated with corporate tax shelters. The proposals include imposing new penalties and sanctions by establishing new tax rules governing such transactions. They would also target specific types of transactions deemed to be "abusive." Tax practitioners and other are concerned that "corporate tax shelter," "tax avoidance transaction," and other key terms are too loosely defined; that the IRS would have too much authority to impose penalties and other sanctions; and that the lack of clear standards could group legitimate tax planning in with abusive transactions. Congressional leaders have said they will seek a way to curtail abusive transactions without affecting legitimate tax planning, and the Senate Finance Committee has written a discussion draft of possible legislation. For years, a bipartisan group of legislators has been trying to pass pension reform legislation. In general, the pension reform legislation would increase the contribution limit to $5,000 for Individual Retirement Accounts (IRAs) and to $15,000 for 401(k) and other pensions. Individuals aged 50 and above may make an additional $1,500 catch-up contribution to IRAs and $5,000 to pensions. It would also establish Roth 401(k) and 403(b) plans that, like Roth IRAs, allow employees to make after-tax contributions to the accounts, with tax-free distributions at retirement. The package would allow greater transferability between IRAs and employer plans by eliminating barriers to rollovers. It would require employers to notify their employees of plan changes and increases disclosure requirements when employers reduce future benefits. Finally, it would include many provisions designed to reduce the complexity of plan administration. State Unclaimed Property Legislation Unclaimed property can constitute a significant source of new revenues for states. Modern unclaimed property law has its roots in the common law principles of "escheat" and, therefore, is sometimes referred to as such. IMRA supports retailer interests in contesting unreasonable escheat claims by state tax officials and their agents. The issue of gift certificate and layaway unclaimed property has become a subject of great interest and controversy for retailers. Because retailers generally do not gather information identifying the ultimate recipient of a gift certificate, gift certificates are often subject to claim by the issuer's state of incorporation. During the 106th Congress, the House and Senate have each approved separate bankruptcy reform bills. Both versions generally seek to keep debtors out of Chapter 7 liquidation if they have the ability to repay a substantial portion of their debt. The bills are "needs-based" (i.e., they would impose a means test to separate debtors into those who can make repayments and those who cannot.) The House approved H.R. 833 on May 5, 1999 by a veto-proof 313-108 majority. The Senate approved S. 625 on February 2, 2000 by a veto-proof vote of 83-14, clearing the way for the House and Senate to meet in conference to reconcile the differences between the two bills. The House and Senate bills contain similar provisions on executory contracts and unexpired leases (section 205 in the House bill and section 405 in the Senate bill), which will likely be of interest to retailers. Each gives the bankruptcy trustee more time in which to decide whether to accept, assign or reject a bankrupt tenant's unexpired lease. Under current law, a bankruptcy trustee has 60 days to either assume, assign or reject an unexpired lease of nonresidential real property (e.g., a store lease) for which the debtor is the lessee. This 60-day period can be, and often is, extended by the court, for cause, for any length of time the court decides, without the consent of the landlord. The primary concern is that the proposed time limits for a bankrupt tenant to either assume or reject a lease may not provide a bankrupt entity (especially those with a number of stores) enough time to evaluate which leases to assume and which to reject, thus jeopardizing the whole reorganization plan. Landlords have an interest in getting a bankrupt tenant to commit to a lease, not only to end the uncertainty, but also because an assumed lease is treated as an administrative expense, which has priority over other claims and must be paid in full if the reorganization plan is affirmed. What is called the Klein Sleep problem, after In re Klein Sleep, 78 F.3d 18, can arise here. In that case, a debtor who assumed a lease was required to pay rent for the entire span of the lease, although the lease was later rejected. The House bill addresses this problem by limiting an assumed lease obligation to one year, after which the lease obligation would be treated as other unsecured pre-petition claims. The Senate bill does not address the issue. Action Plan:
Regulation FD (Fair Disclosure) IMRA has reported extensively on a controversial new Securities and Exchange Commission (SEC) rule--Regulation FD (fair disclosure)--that raises significant concerns for publicly held companies. The rule bans "selective disclosure," meaning that public companies may not reveal "material information" to analysts or big investors without disclosing it to the public simultaneously. IMRA has held a conference call for interested member companies to exchange information and views on the new rule. Social Security is the main source of income for two-thirds of the nation's senior citizens and the only source of income for 18%. Although currently running a surplus, the Social Security trust fund is expected to begin running deficits after 2012. By 2021, the trust fund will no longer be able to meet obligations. Due to increased life expectancy, a large baby-boom generation nearing retirement, and a steadily falling ratio of workers to beneficiaries, the trust fund will be exhausted in 2032. Governor Bush has proposed to reform Social Security by giving individuals the option of voluntarily investing a portion of their Social Security payroll taxes in personal retirement accounts. These accounts will presumably earn higher rates of return and generate wealth that, unlike Social Security, can be bequeathed. President Clinton has previously proposed using some of the projected budget surplus to strengthen the system, and investing part of the surplus in equities to raise the rate of return. Federal Reserve chairman Alan Greenspan, among others, has expressed concerns that it would be difficult to insulate fund managers from political pressures when selecting investments. Former House Ways and Means Committee chairman Bill Archer (R-TX) and Social Security Subcommittee Chairman E. Clay Shaw (R-FL) proposed a plan to set up mandatory accounts for workers. The plan will be financed with an annual refundable income tax credit equal to 2% of a worker's wages, capped at the Social Security wage base. Plan holders would select from 50 government-approved investment funds made up of 60% broadly indexed stocks and 40% bonds. The tax credit would be automatically deposited into the employee's account, and withdrawals would not be permitted until a worker becomes eligible for normal or disability retirement. Other bills would have created a private option to Social Security for current workers. Some would allow a certain percentage of payroll taxes to be deposited in private accounts; others would establish private accounts with government and private contributions, but not use payroll taxes. Other options include: raising the retirement age, reducing the cost-of-living adjustment, means testing or raising payroll taxes.
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