Corporate Finance Law Blog : Corporate Finance Lawyer & Attorney : Davis Wright Tremaine Law Firm

The Washington Post is reporting some details on what Obama's first budget will do with respect to taxes.  The current speculation is as follows:

• it will allow the temporary tax cuts of 2001 and 2003 to expire and not be re-enacted;
• families earning more than $250,000 per year will see their tax rates rise;
• the top individual income tax rate will rise from 35% to 39.6%;
• capital gains tax rates will increase to 20% for wealthy tax filers; and
• for hedge funds, carried interest will be taxed as ordinary income, not capital gains.

I have not heard anything yet with respect to the FICA wage base cap and whether that will be repealed entirely or in part.

Of course, this is preliminary.  We will report more as we learn more.

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House Democrats are apparently pushing for a corporate level tax cut that would reduce the corporate level tax rate from 35% to 30.5%, or even lower.  See here.  Last year, House Ways & Means Chair Charles Rangel proposed cuts in corporate tax rates in a simplification effort that would have taken away tax breaks available to corporations.

It remains to be seen how this will be received or interact with Obama administration tax proposals.

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From Jefferson vs. United States (No. 06-4082, 7th Cir. Ct. of Appeals, Oct. 8, 2008):

“Charles E. Jefferson previously served as the president of the board of directors of a day care center that owed substantial back taxes to the Internal Revenue Service. After Jefferson was personally assessed for the back taxes, he filed suit to recover the amounts he paid to the IRS. The district court granted the government’s motion for summary judgment, finding that Jefferson could be assessed for the day care’s tax liability. Because Jefferson is a “responsible person” under 26 U.S.C. 2 No. 06-4082 § 6672(a) who “willfully” failed to pay the day care’s taxes, we agree with the district court, and we affirm.”

“Jefferson’s position as board president from the early 1980s until June 2001 was voluntary and uncompensated. He and the other board members were responsible for the direction of the day care, while Velma Hayes, the paid director of New Zion from 1982 until 2001, ran New Zion’s day-to-day operations. As a board member, Jefferson had the authority to direct and authorize payment of New Zion’s bills, to authorize payment of its federal tax deposits, to determine its financial policy, and to obtain loans for New Zion, such as the loan he obtained in 1998 for a new day care building. Jefferson was also a signatory on New Zion’s bank accounts and co-signed checks on behalf of New Zion.”

Lesson:  Directors of corporations need to be especially careful about their companies' payroll reporting compliance.

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The Wall Street Journal published an editorial on Saturday, October 25, 2008, which made some predictions about what we could expect in terms of federal income and employment taxes for high income earners if Senator Obama was elected President.  Of course, it is impossible to say what will happen, especially with the economy slumping, but the predictions were as follows:

• a roll back of the 2001 and 2003 tax rate reductions for taxpayers in the top two income tax brackets, raising the top two income tax brackets to 36% and 39.6% from 33% and 35%. The 33% rate currently kicks in at incomes of $164,550 for individuals and $200,300 for joint filers.  This would seem to be very likely.
• reinstatement of the phaseout of the personal exemptions and itemized deductions for married couples making more than $250,000 a year.  Again, this seems likely.
• an increase in capital gains tax rates to 20% from 15% for those making more than $250,000 per year; although an exemption on capital gains taxes on start up companies is contemplated, it is unclear how this will work with high income taxpayers, who in general are the only persons entitled under the securities law to make these types of investments.
• an increase in social security taxes on wages and self employment income.  If you make more than $250,000 in wages or self employment income, President-elect Obama has indicated that he wants to increase the social security tax by 2 to 4 percentage points.  It is unclear whether this increase would apply to both employer and employee, or to both sides of the SECA equation.

We will of course be watching developments.

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It would appear that if you could accelerate income into 2008 you might avoid the higher tax rates that will come into effect next year.

Professional athletes and their agents are already considering this strategy, as discussed in the article you can find here.

Query whether this will work, or whether Congress will make the point moot by making the tax increases retroactive!

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The Committee for a Responsible Federal Budget has released a helpful guide to current tax policy and how it might change depending on who is elected.  You can find the guide here.  Regardless of who is elected, taxes are going to be a top legislative priority next year.  The guide is helpful to understanding current law, including which tax rates are currently set to expire and when.

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Section 201 of the Emergency Economic Stabilization Act of 2008 extends the life the state and local tax deduction for two years, until January 1, 2010. 

Section 201, in all its glory, reads as follows:  "(a) IN GENERAL.—Subparagraph (I) of section 164(b)(5) is amended by striking ‘‘January 1, 2008’’ and inserting ‘‘January 1, 2010’’.  (b) EFFECTIVE DATE.—The amendment made by this section shall apply to taxable years beginning after December 31, 2007."

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