Agenda Summary – Taxation CommitteeGrand Ballroom Salon C/D
Marriott Hotel
Wednesday, October 10, 2007
2:00 p.m. – 4:00 p.m.

Presiding:
Robert Kevane, Chair
Ann Throckmorton, Vice Chair
Skip Zeleny, Vice Chair
Susan Tilling, Executive Committee Liaison
Raymond Karpe, NAR Committee Representative

CAR Staff:
Christopher Carlisle, Legislative Advocate
Jeff Keller, Public Policy AnalystI. Opening CommentsII. State Taxation IssuesA. Action Items:

1. Private Transfer Taxes: Next Steps
“Private” transfer taxes are being imposed by developers on homebuyers to fund everything from environmental mitigation to the development of affordable housing.  Moreover, the political will does not exist within the legislature to prohibit the imposition of PTTs.  Nor is there the will to place reasonable restrictions on their imposition.  Consequently, absent some other solution, PTTs will continue to be imposed by developers.  One possible solution would be to expand the purposes for which Mello-Roos districts may be formed to include the funding of environmental mitigation and/or affordable housing – the primary purposes for which PTTs are now imposed – such an expansion of Mello-Roos would be a limitation on the unfettered use of PTTs that occurs today.  While there is no political will to prohibit or restrict the imposition of PTTs by developers there appears to be almost universal agreement that the establishment of a PTT by an individual homeowner should be prohibited.

2. Safeguarding Investors Utilizing 1031 Exchange Accommodators
If a real estate investor utilizes a 1031 exchange, the profits from thesale of one property are directly used to purchase a second property and capital gains taxes are deferred until that property is sold.  However, the business of 1031 exchange accommodators is largely unregulated at the federal and statelevels of government with hundreds of independent exchange accommodators across the country.  The California Legislature will consider a measure next year which currently requires the licensing of exchange accommodators, as well as requiring a fidelity bond and errors and omissions insurance.  Congress will likely move slowly on establishing regulations pertaining to exchange accommodators.  At this moment, NAR is allowing the Federation of Exchange Accommodators (FEA) to make the first moves, but is keeping a close eye on their actions. 

3. The Unanticipated Tax Consequences in a Short Sale or Foreclosure
In a short sale or foreclosure, the homeowner notonly loses their home but may also end up being taxed on income they never received.  In both instances, the lender ends up getting less than the full amount of the outstanding balance and, consequently, the amount the borrower is no longer responsible for paying to the lender is considered cancellation of debt (COD) income and, thus, income to the borrower and subject to income tax.  This scenario cannot happen if the outstanding mortgage debt is from the original mortgage because under state law the borrower can “walk away” from the mortgage with no personal liability.  However, if the homeowner refinanced their mortgage, the nature of the debt was changed and the homeowner is personallyliable for payment of the debt.  Conceivably, since the borrower is already losing their home they should not also have to pay income tax.  At a minimum, should consideration be given to requiring a disclosure from lenders to homeowners who are refinancing, taking out a second mortgage or a home equity line of credit as to the potential tax implications that may occur in the event of a short sale or foreclosure?

4. February 8, 2008, Presidential Primary Election Ballot Propositions

a. Proposition Number Pending: Transportation Funding. Initiative Constitutional Amendment and Statute.
Proposition 1A, approved by the voters in 2006, allows the General Fund to “borrow” or suspend the Transportation Investment Fund (TIF) transfer for three years when the Governor declares that the transfer would cause a “significant negative fiscal impact on governmental functions” in conjunction with the enactment of an authorizing statute by the Legislature. This ballot measure would prohibit the retention of funds earmarked for the TIF by the General Fund for use unrelated to transportation after July 1, 2008.

Furthermore, this initiative would eliminate General Fund “borrowing” of transportation funds, except for cash-flow purposes, and would require repayment to the TIF within 30 days of the adoption of a state budget. The proposition would also require all funds not transferred to the TIF priorto July 1, 2007, be repaid by June 30, 2017. Finally, the initiative would re-affirm the TIF allocation formula for the distribution of the revenues established by Propositions 42 and 1A

B. Proposition Number Pending: Community Colleges; Funding, Governance, Fees.  Initiative Constitutional Amendment and Statute.
This proposition establishes a system of independent public community college districts and a Board of Governors (BOG), consisting of 19 members appointed by the Governor, in the state constitution. Beginning in 2007-08, the total amount of General Fund and local property tax revenues allocated to school districts and community colleges would be calculated separately for each system. K-12 funding would increase according to the existing Proposition 98 formula that is based on growth in the economy and K-12 attendance. Community colleges districts funding from Proposition 98 would increase a minimum of 1 percent, witha cap at 5 percent, in any year based on economic growth and changes in the college-age population. The initiative allocates 10.46 percent of any funds the Legislature allocates as repayment of Proposition 98 to community colleges and reduces community college fees to $15 per unit, instead of the current $26 per unit. The initiative limits future fee increases to ten percent or, if it is lower, the percent change in personal income in California. The Legislative Analyst and Director of Finance estimate an annual loss of fee revenue to community colleges of $85 million in 2007-08 but the revenue loss will partially be offset by the minimum funding guarantee.

C. Discussion/Reporting Items:1. Property Tax Basisa. Property Tax Basis Portability Task Force – Whether property tax basis portability can be expanded depends on how much it will cost government in lost property tax revenues – if the losses are significant, any proposed expansion of portability will be vehemently opposed.  Figuring out how much expansion will cost requires several steps.  First, it requires knowing the extent to which Propositions 60 and 90are now used.  Second, it requires determining the extent to which expansion will actually be used homeowners and what changes to the existing program could increase participation in the program.  To that end, $20,000 was appropriated at the June business meetings to conduct a survey.  However, due to unforeseen circumstances, that survey has not yet been conducted; it is anticipated that the survey will soon be put “into the field.”  Finally, it requires determining how much the cost of expansion can be mitigated which will necessitate conducting some fairly complex computer modeling.  Once the task force has ascertained the costs of conducting a surveyand of performing the necessary computer modeling, it will make recommendations as to how to proceed.b. SB 984 (Ashburn) Property Tax Basis Adjustments - Existing law allows a person who is over 55 years of age or severelydisabled to transfer the base year value of their property to a replacement dwelling of equal or lesser value if that property is located within the same county as the original property, and is purchased or newly constructed within 2 years of the sale ofthe original property. A replacement dwelling purchased under this provision may not exceed 105% or 110% of the full cash value of the original property during the first and second year, respectively, after the sale of the original property. SB 984 wouldinstead give counties the option of using changes in the Housing Price Index for California to determine if the replacement dwelling is of equal or lesser value then the original home. C.A.R. supports this bill because the use of the Housing Price Indexwill more accurately reflect the increased cost of purchasing or constructing a replacement dwelling.Position:

Support Status: Senate Revenue and Taxation Committee

2. Private Transfer Taxesa. AB 980 (Calderon) Disclosure of Already Imposed Private Transfer Taxes – This bill will require recordation of a separate document, as well as a seller-provided disclosure, to inform potential home buyers as to whether the home they are considering purchasing requires the payment of a private transfer tax (PTT), the percentage of the home price constituting the PTT, the duration of the payment obligation, and the use to which the PTT funds will be put. If the separate document is not recorded, the homebuyer will not have to pay the PTT.Position:

Sponsor Status: On the Governor’s Deskb. AB 1574 (Houston) Private Transfer Tax – An interim hearing may be held during the fall to investigate the imposition of private transfer taxes (PTTs) by developers. AB 1574 was the builder-sponsored response to C.A.R. sponsored SB 670.  A loophole in California law lets developers and other non-government entities impose PTTs on homes every time the property is sold – with no oversight, no accountability and no limit on the number of separate private transfer taxes that can be piled onto a home. As introduced, AB 1574 legitimizedthe practice of imposing these “taxes” by making that loophole permanent. As amended, AB 1574 requires that the Department of Real Estate provide oversight of the imposition of PTTs and allows PTT revenue to only be directed to a public entityor a nonprofit organization providing a public benefit within the property’s region. AB 1574 allows the PTT to be imposed for a period up to 99 years, allocates a maximum of 10 percent of the proceeds for administrative costs, caps the amount of the PTT at two percent of the home sale price and prohibits the use of PTT funds for lobbying. C.A.R. continues to oppose AB 1574 because it legitimizes PTTs without providing adequate safeguards.Position: Oppose
Status: Stalled in Senate Judiciary Committee3. AB 239 (DeSaulnier) Recording Fee Increase Authorization - Originally a re-introduction of SB 521 (Torlakson) from 2006, AB 239 would have authorized Contra Costa County to impose a document recording fee of $1 per page after the first page on the recordation of real estate related documents. As recently amended, AB 239 would authorize Contra Costa County, as well as SanMateo County, to impose a flat $25 document recording fee on all real estate related documents that are longer then one page. The revenue collected would be used for the development of affordable housing for extremely low, very low, lower and moderate income households. C.A.R. has historically viewed document recording fees as a “transfer tax” if they apply to the recording of documents facilitating the transfer of property. C.A.R. opposes AB 239 because it imposes a document recording fee without exempting documents already subject to the documentary transfer tax, and because the funds generated by the document recording fee would be used for purposes which bear no relation to document recording.

Position:Oppose
Status: Stalled in Senate Local Government Committee4. Homeowner’s Property Tax Exemption Increases – Existing property tax law provides for a homeowners' exemption in theamount of $7,000 from the full value of the dwelling.  Additionally, the existing Personal Income Tax Law authorizes a $120 credit for married couples or heads of households renting a unit, and a $60 credit for those renters whose adjusted gross income is $25,000 or less.  The state constitution requires that any increase in the Homeowners’ Property Tax Exemption be matched by an increase in the Renters’ Credit.  Several measures have beenintroduced this year which would increase the amount of the exemption.  C.A.R. supports these attempts because they will benefit both homeowners and renters with a reduction in their taxes. Furthermore, the current exemption of $7,000 results in a minimal reduction in property taxes because homes in California generally cost in the hundreds of thousands of dollars.a. AB 293 (Strickland) Increase and Annual Adjustment - AB 293 proposes to increase this exemptionto $22,000 and would adjust this exemption annually based on changes in the Housing Price Index in California. This measure also makes the constitutionally required comparable change to the personal income tax renter’s credit.

Position: Support
Status: Held in Assembly Revenue and Taxation Committeeb. AB 351 (Smyth) Senior Citizen Increases - AB 351 would increase this exemption to $27,000 for individuals 62 years of age and older. Additionally, the existing Personal Income Tax Law authorizes a $120 credit for married couples or heads of households renting a unit, and a $60 credit for those renters whose adjusted gross income is $25,000 or less. AB 351 also seeks to increase this credit to $151 for senior citizen couples that are at least 62 years of age renting a unit with an adjusted gross income of $50,000, and would authorize a $75 credit for senior citizen renters, at least 62 years or age, whose adjusted gross income is $25,000 or less.Position: Support
Status: Held in Assembly Revenue and Taxation Committeec. AB 388 (Gains) Increase - AB 388 would increase this exemption to $25,000, and provides for a comparable change to the personal income tax renter’s credit.Position:

Support Status: Held in Assembly Revenue and Taxation Committeed. AB 495 (Tran) SeniorCitizens Increases - AB 495 would increase the exemption to $25,000 for individuals 62 years of age and older. The bill also provides for a comparable change to the personal income tax renter’s credit.Position: Support
Status: Held in Assembly Revenue and Taxation Committeee. AB 972 (Walters) Annual Adjustment of Renter’s Credit – AB 972 would increase the amount of the property tax exemptionto 25% of the full value of a dwelling’s purchase price. This measure also seeks to increase the renter’s credit to $1,000 for couples with an adjusted gross income of $50,000, and would authorize a $500 credit for renters whose adjusted gross income is $25,000 or less.Position: Support
Status: Held in Assembly Revenue and Taxation Committee5. AB 393 (Coto) Mortgage Insurance Tax Deduction - Current law allowsfor qualified residence interest to be tax deductible. AB 393 would bring California into conformance with federal law by treating premiums paid for qualified mortgage insurance in 2007 as a qualified residence interest. C.A.R. supports this bill becausehomeowners would be able to also deduct mortgage insurance premiums on their income tax returns.Position: Support
Status: Held in Assembly Revenue and Taxation CommitteeIII. Federal Taxation Issues

A. Action Items:1.  Carried Interest
In order to enact AMT and other tax reforms, Congress, and specifically Ways and Means Chairman Rangel (D-NY), have been looking forways to offset the losses of revenue without having to raise overall tax rates.  One option that they have focused on is the practice of carried interest.  Attention became focused on carried interest partially due toa private equity firm, Blackstone, having an IPO and announcing the extraordinarily large amounts of profits that Blackstone was able to realize using carried interest.  This prompted Congress to examine the practice of carried interestand whether or not it should continue at capital gain rates or be changed to normal income rates, which is what current legislation is attempting to do. (Please see attached Issues Briefing Paper)B. Discussion/Reporting Items:1.Mortgage CancellationC.A.R. Policy: C.A.R. has previously taken the policy: “that C.A.R., in conjunction with NAR, pursue changes in federal law or regulation to exempt from unfair taxation relief of indebtedness income from short sales of principal residences.”In today's market, some individuals are "upside down" on their mortgages (i.e., they owe more on the mortgage than the fair market value of the property). If they should sell the property and be unable to repay the full amount of any outstanding mortgage debt, the lender may forgive some or the entire shortfall (this is known as a "short sale").  Similarly, in foreclosures a borrower might be forgiven some portion of a mortgage debt if the lender is not able to satisfy the mortgage liability from the sale proceeds. When some portion of a debt is forgiven, income tax is imposed on any amount that a lender forgives.Under current law, if a mortgage lender forgives or cancels a debt, the taxpayer/borrower is required to recognize income and pay tax on the amount of the canceled debt. Exceptions are provided to this rule in the case of bankrupt or insolvent taxpayers. Rules are also provided that defertaxation for relief of debt on loans for commercial and investment property, but the tax laws have never extended relief to an individual who sells a personal residence for an amount that is less than the outstanding debt on the property.

Example: Assume that an individual purchased a home for $450,000. At the time of a subsequent sale, the outstanding mortgage balance might be $415,000. If the home sells for $400,000, the individual has incurred a non-recognizable capital loss of $50,000 andis short $15,000 to pay off the outstanding mortgage. If the lender forgives this $15,000 debt, then the homeowner must recognize the $15,000 as ordinary income and pay tax on it.

Legislation is needed to assure that mortgage debt that is canceled or forgiven is not treated as income and taxed on primary residences.  The House introduced H.R. 1876, the Mortgage Cancellation Relief Act of 2007, which would allow for residential mortgage debt relief to be excluded from gross income.  The Senate introduced a companion bill, S. 1394. S. 1394 is currently in the Senate Committee on Finance and has eight (8) cosponsors. H.R. 1876 is currently in the House Ways & Means Committee and has 30 cosponsors, includingReps. Eshoo and Filner. 

On September 25, 2007 Chairman of the House Ways & Means Committee, Rep. Rangel (D-NY) introduced his own mortgage cancellation relief bill, H.R. 3648, the Mortgage Forgiveness Debt Relief Act of 2007.  On September 26, 2007, H.R. 3648 passed out of the House Ways & Means Committee by a unanimous voice vote.H.R. 3648 would remove taxes from mortgage cancellation relief provided on a mortgage on a primary residence.  The tax relief would only apply to the original purchase price, plus personal improvements of a primary residence and would not cover any amount over the original purchase price if a loan has been refinanced with a “cash out” option.  The relief would also only apply to first mortgages, not second mortgages or home equity lines of credit.  The relief would apply to any forgiveness given on or after January 1, 2007.H.R. 3648 was marked up to cost $2 billion over 10-years.  Under PAYGO rules, to offset this lost in revenue, H.R. 3648 made changes to corporate estimated tax rates and to rules governing second homes that are converted into primaryresidences.  Currently, if a second home is converted to a primary residence and lives in for at least two out of the past five years, this home is allowed to use the $250,000/$500,000 capital gains exemption.  H.R. 3648 would allow gain received once the house became a primary residence to be excluded from capital gains taxes (up to the same limits), but would tax gains attributed to the time when the house was not a primary residence, up to the previous 15 years.  However, this rule will not count against any gain prior to January 1, 2008.Additionally, the IRS has added a special section to their website concerning tax issues and consequences with foreclosures and debt cancellation.  This information can be found on the IRS webpage (www.irs.gov) or directly at: http://www.irs.gov/newsroom/article/0,,id=174034,00.html

2. Qualified Veteran Mortgage Bonds
C.A.R. Policy: C.A.R. supports eliminating the pre-1977 service requirement for QVMB eligibility.As home prices have risen in California, only a fewselect veterans in California and four other states have benefited from low-interest rate mortgages secured by Qualified Veterans’ Mortgage Bonds (QVMB).  The bonds are tax exempt government obligations and are backed by the full faith and credit of the issuing state.  Veterans who finance their homes through QVMBs can receive an interest rate of .50-.75 percentage points less than that of a conventional loan. Under current law, to qualify for a QVMB a veteran must have served on active duty prior to January 1, 1977 and applied for financing before their thirty-year anniversary of leaving the service.  This prohibits veterans of more recent or ongoing military conflicts such as Operation Iraqi Freedom, Operation Enduring Freedom, Kosovo, Somalia, and the 1991 Persian Gulf War from being able to benefit from these loans.H.R. 551, the Home Ownership for America’s Veterans Act of 2007, was introduced on January 18, 2007 by Rep. Davis (D-CA).  H.R. 551 is currently in the House Committee on Ways & Means and has 65 cosponsors, including 50 from California.  H.R. 551 would eliminate the requirement that you serve before January 1, 1977 and replaces it with “who applied for the financing before the date 25 years after the last on which such veteran left active service.”  It would also use the Conventional Mortgage Home Price Index compiled by Freddie Mac to help determine inflation rates and after 2010 the limit of the amount a state is allowed to use would be adjusted based off this inflation rate (multiply the limit by the inflation adjustment factor).

3. FIRPTA
C.A.R. Policy: In the January 2005 meetings C.A.R. adopted policy which stated, “That C.A.R. in conjunction with N.A.R., ‘SUPPORT’ legislation that would permit a seller to provide the information required by the Foreign Investment in Real Property Tax Act (FIRPTA) toescrow or another settlement provider as an alternative to providing that information to the buyer.”Over the past several years as identity theft has become more of a concern for everyone, sellers have grown increasingly uneasy with providing their taxpayer identification numbers.  The concern has become so great that some sellers are refusing to provide the required non-foreign affidavit to the buyer or are providing an affidavit with the seller’s taxpayer identification number removed.  This creates a dilemma for buyers’ who may be liable for the sellers’ tax liability from the sale of the real property if they do not receive a fully completed sellers’ affidavit. On April 17, 2007 the House passed H.R. 1677, The Taxpayer Protection Act by a vote of 407-7.  Included in H.R. 1677 was the FIRPTA fix that C.A.R. has been working on.  C.A.R. has been working diligently with NAR and House Ways & Means staff on getting a FIRPTA fix introduced that would allow the seller to provide the non-foreign affidavit to a settlement provider instead of the buyer.  As you know, this has been a long standing issue that has had trouble gaining traction in Congress.  Thanks to the help and efforts of Congressman Mike Thompson (D-CA), C.A.R. was able to get language attached as an amendment to H.R. 1677. C.A.R.and NAR are still working on some minor changes to the language.  However, these changes will have to be in the Senate version of the bill as H.R. 1677 was put on the House calendar under suspension rules, which means no further amendments were allowed.

4. 1031 ExchangesThe like-kind exchange provisions of Internal Revenue Code Section 1031 permits a taxpayer to defer taxation on capital gains if within 45 days of selling a "relinquished property," the taxpayer identifies a "replacement property" and closes on the acquisition of that property within 180 days of the sale of the “relinquished property”. The regulations for these rules provide a roadmap for securing the benefits of deferral and a well-established body of law governs these transactions.

The exchange rules have not been modified since 1991. Two developments; however, have brought new scrutiny of the rules. The first of these is an effort to repeal the exchange rulesthat has been mounted by farmers located primarily in Iowa and Illinois. They believe that the exchange rules have the effect of driving up the price of farmland. A second development is the rise of the Tenant-in-Common (TIC) market since 2002.

In the 110^th Congress, the Senate Finance Committee is likely to review several aspects of Section 1031. There are numerous areas they will examine, ranging from the basic to the more complicated of matters concerning 1031 exchanges.  The more basic issues to be examined are whether the IRS Form 8828, which is used to figure and report the recapture tax on a federal mortgage subsidy, should be made a mandatory filing; and examining how long a 1031 exchange must be held beforea replacement property can be purchased.  They may also examine the issue of withholdings on boot.  Boot is any part of a 1031 exchange that is not like-kind property.  This can be either property orcash. 

More complicated issues that may be addressed are the deferral of fees and collection of fees involved in TIC properties.  The fees associated with TICs are said to range as high as 25% of the acquisition cost. Congress may examine whether taxpayers engaged in exchanges should be permitted deferral treatment for these fees. Congress will also examine whether deferral treatment is appropriate for collectibles.

C.A.R. will lobby to keep like-kind exchanges unchanged and retain the current laws.  C.A.R. will also continue to lobby to have the 45-day deferral for finding a “replacement” property removed in accordance with our 2004 policy.Additionally, in May 2007 NAR’s Tax Committee decided to form an internal, informal task force that will explore issues concerning 1031 qualified intermediary (QI) (also known as exchange accommodators) as well as: risk management for real estate professionals who make QI referrals, new disclosures applicable to QIs, additional restrictions of QI funds, state v. federal regulation, and increased fiduciary standards for QIs.  We are expecting a report from this task force during the November NAR meetings.There have recently been some possibly unlawful activities in the like-kind exchange marketplaces that are creating challenges.  Individuals and investors with funds on deposit with these companies havebeen unable to complete their exchanges in a timely manner because the funds had, in effect, disappeared.  Those individuals could face serious tax consequences because of their inability to satisfy the 180-day test.  Real estate professionals associated with those transactions are thus exposed to additional liabilities as well.

5. Mortgage Insurance Premium Deduction

C.A.R. Policy: “That C.A.R., in conjunction with NAR, ‘OPPOSE’ the introduction of income limitations on the proposed mortgage insurance deduction provisions of the Internal Revenue Code.”

In the last hours of the 109^th Congress, H.R. 6111, the Tax Relief and Health Care Actof 2006, was passed.  Inside this tax extenders and Medicare bill, a new tax deduction for mortgage insurance premiums was included.  This is a one-year-only provision that would allow some 2007 home buyers to deduct the cost of their mortgage insurance premiums (PMI).  In order to qualify, the loan must originate in 2007 and can be applied to private mortgage insurance, FHA insurance, and VA and Rural Housing premiums as well.  Thenew deduction is available to those with less than $100,000 adjusted gross income on a joint or single tax return ($50,000 for married filing separately) and phases out for incomes above $110,000 ($55,000 for married filing separately). Individuals who claim the deduction are not permitted to prepay premiums that are otherwise due after 2007.  Currently this provision expires on December 31, 2007.

H.R. 1813 was introduced by Rep. Levin (D-MI) onMarch 29, 2007.  H.R. 1813 currently has 36 cosponsors, including Reps. Calvert and Herger, and is in the House Ways & Means Committee.  H.R. 1813 would allow for PMI to be permanently deductible and would remove any income limitations. The Senate companion bill is S. 1416, which was introduced by Senator Smith (D-OR) on May 16, 2007.  S. 1416 is currently in the Senate Committee on Finance and has 12 cosponsors.Additionally, an extension of the current PMI deduction was added to H.R. 3648, the Mortgage Forgiveness Debt Relief Act of 2007.  H.R. 3648 would extend the PMI deduction through December 31, 2014.  H.R. 3648 passed the House Ways & Means Committee on September 26, 2007 by a unanimous voice vote.

6.  Employee Housing Downpayment AssistanceC.A.R. Policy: “That C.A.R., in conjunction with NAR, support income tax-based incentives for employer-assisted housing as part of a housing affordability strategy.”Due to the high cost of housing, employee downpayment assistance programs are becoming more frequent among employers as a means of attracting and retaining employees. However, under current law there are no incentives for employers to offer this benefit and this type of assistance is often treated as taxable income to the employee. H.R. 1850, Housing America’s Workforce Act, was introduced by Rep. Velazquez (D-NY) on March 29, 2007.  H.R. 1850 has been referred to the House Ways & Means and the House Financial Services Committees.  H.R. 1850 currently has 10 cosponsors, including Rep Baca andRep. Loretta Sanchez.  S. 1078, Housing America’s Workforce Act, was introduced by Senator Clinton (D-NY) on April 10, 2007.  S. 1078 is currently in the Senate Committee on Finance and has seven (7) cosponsors.

H.R. 1850 and S. 1078 would allow an employer a business tax credit for up to 50% of the qualified housing expenses paid for the benefit of their employees.  The credit would be limited to the lesser of $10,000 or6% of an employees home purchase price, or up to $2000 in rental assistance.  The housing assistance would also be excluded from the employee’s gross income. 

7. Tax Reform and AMT
The issue of fundamental tax reform has been in a lull since the release of the recommendations by the President’s Advisory Panel on Tax Reform.  At this time, most talks concerning fundamental tax reform are taking place in the Presidential debates.  Nonetheless, discussions concerning an AMT patch, AMT reform, and the repeal of the AMT are still hotly being debated in the Congress. So far no consensus has come out on what to do concerning the AMT.  Possible solutions include: a one-year patch (at a cost of around $55 billion), full repeal without offsets (projected to cost $1.2 trillion over ten years) full repeal with offsets (the elimination of other tax breaks to off-set the costs), and reforming the AMT by raising the tax bracket (topping out at 39.6%) and raising the trigger level so that no couple making less than $250,000 would be caught in the AMT. 

No firm stances have been developed yet and both parties claim that the AMT is one of their top tax priorities and are diligently working on a solution.  As is the case with most taxation issues, the major issue is what to do about the lost revenue from either modifying or repealing the AMT. Most pundits believe that the Democrats will be forced to do a one or two year patch to the AMT in order to keep more middle class families from falling prey to this stealth tax, but still stayingwithin the budget limitations and PAYGO.  However, Democrats have been diligently attempting to find a more permanent fix that they can pass this year and gain a large tax victory before the elections.  House Ways &Means Chairman Rangel (D-NY) has not ruled out a more permanent AMT reform, especially since he started to focus on changing the tax rules concerning carried interest as a potential large offset for AMT reform.  C.A.R. will continue tomonitor issues concerning the AMT and keep you updated on any changes.

8. Internet TaxationC.A.R. Policy: In 2000 C.A.R. took the policy that there should be no state/local taxes on internet access and that there should not be federal efforts to preempt states’ efforts to address sales and use tax issues.In 1998 the Internet Tax Freedom Act was passed, which created a moratorium on federal, state, and local government from imposing taxeson internet access, creating “internet only taxes” such as taxes on bandwidth or emails, and also restricted multiple taxes on e-commerce.  Since 1998 the moratorium has been extended twice and is currently set to expire inNovember 2007. 

There are two tracts of legislation concerning internet taxation.  The first is an extension of the moratorium.  S. 1453 was introduced by Senators Carper (D-DE) and Alexander (R-TN) on May 23, 2007.  S. 1453 would extend the moratorium for four more years and eliminate a tax loop-hole that allowed carriers to bundle internet access with other features, all tax free.  S. 1453 is currently in the Senate Committee on Commerce, Science, & Transportation with four (4) cosponsors, including Senator Feinstein.The second tract would make the ban permanent.  H.R. 743, the Internet Access Moratorium Tax Bill, was introduced on January 31, 2007 by Rep. Eshoo (R-CA).  H.R. 743 is currently in the House Judiciary Committee and has 149 cosponsors, including 22 California Representatives.  The Senate companion bill is S. 156, was introduced on January 4, 2007 by Sen. Wyden (D-OR).  S. 156 is currently in the Senate Committee on Commerce, Science, and Transportation with 19 cosponsors. In late September Republicans made a push for the Senate to pass legislation, as the current moratorium expires on November 1, 2007.  On September 27, 2007 the Senate Commerce, Science, and Transportation Committee was supposed to mark up S. 1453, but the mark up was delayed over a dispute concerning a compromise on the length of the moratorium extension.  Republicans are pushing for a permanent ban while Democrats are looking for an extension of the moratorium.  There was a compromise proposed that would extend the moratorium for 6-years; however, the details were not able to be worked out.  The Senate has postponed action on S. 1453 for now, but the delay should be fairly short as the deadline to pass a new moratorium is fast approaching.

9. Tax Gap
The Internal Revenue Service developed the concept of the tax gap as a way to gauge taxpayers’ compliance with their federal tax obligations. The tax gap measures the extent to which taxpayers do not file their taxreturns and pay the correct tax on time.

The tax gap can be divided into three components: non-filing, underreporting and underpayment.Currently, Congress is pushing the IRS to close the “tax gap” in order to generate more revenue to cover the cost of programs.  While no official decisions have been made as to how to close the “tax gap”, it seems that the ideas could mean more compliance rules being issued, which could prove to be a furtherburden on small businesses, as well as an increase in audits.IV. Other BusinessV. Adjourment