Which Rangel Tax Provision Affects You?

New York congressman's controversial bill frames the upcoming debate over corporate tax issues.

Increase in the amortization period for intangible assets. The bill would increase the current 15-year amortization period for intangibles to 20 years. (Estimated to raise over 10 years: $21 billion.)

Clarification of the economic substance doctrine. In any transaction that economic substance analysis is required, the doctrine would be satisfied only if: (1) the transaction changes — in a meaningful way — the corporation’s economic position (apart from federal income tax consequences); and (2) the corporation has a substantial non-federal tax purpose for entering into the transaction. The provision also imposes a 20 percent penalty on understatements that stem from a transaction lacking economic substance. The fine rises to 40 percent if relevant facts are not adequately disclosed. (Estimated to raise over 10 years: $4 billion.)

Decrease in the deductions allowed for dividends received. For 20-percent-owned corporation, the deduction would drop from 80 percent to 70 percent. For dividends currently eligible for a 70 percent reduction, the tax break would fall to 60 percent. (Estimated to raise over 10 years: $5 billion.)

Recognition of ordinary income on stock-option exercises. This provision pertains to small businesses defined as S corporations by the Internal Revenue Service. For S corporations with a tax-exempt employee stock ownership plans (ESOP), the bill would require that option holders recognize the amount of income that was shifted to the tax-free ESOP when they recognize or sell the options. (Estimated to raise in 10 years: $606 million.)

Termination of special rules for DISCs. This would end the domestic international sales corporation (DISC) provision. DISCs, which are allowed to defer recognizing income, were established in a 1971 tax law to encourage exporting. (Estimated to raise over 10 years: $881 million.)

Clarification of gain recognition in spin-off transations. The bill would force corporations to treat distribtuions of debt in a tax-free spin-off transaction in the same way as distributions of cash or other properties. Currently, when a subsidiary distributes its own debt to a parent corporation prior to a spin-off, it is considered a tax-free transaction. (Estimated to raise over 10 years: $235 million.)

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