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Statement of Senator Mike Enzi
 On the Snowe-Enzi Amendment #4342 to HR 4213, the Tax Extenders bill
June 22, 2010
The Reid/Baucus tax extenders bill before the Senate includes several provisions that to my knowledge have never been vetted by Congressional tax writers – either in the Senate Finance Committee or in the House Ways and Means Committee. As an accountant with practical expertise in tax matters, this disturbs me greatly.
It should also disturb small business owners because there is a provision in this bill that would slap some of them in the face with a 15 percent tax increase.
I’m talking about the provision that would apply a 15.3 percent self-employment tax to the distributions from certain Subchapter S corporations. This self-employment tax would apply when 80 percent of gross income of the small business is attributable to three or fewer professionals in a professional services corporation.
This is a 9.1 billion dollar hit on a small subset of small businesses engaged in a service trade.  I wonder… the next time an offset is needed, will the Senate go after ALL small businesses?
My colleagues on the other side of the aisle call this a “loophole closer” or an “anti-fraud provision.”  I assure you, this is neither.  These words are convenient labels my colleagues use to defend tax and spend policies.  The S corp provision IS, however, a massive tax increase on small business.
This new payroll tax on non-wage income would hurt the ability of small businesses to reinvest and create jobs. At nearly 10 percent unemployment, I don’t think the federal government is in any position to pursue job killing tax increases.  Small businesses are the lifeblood of our economy.  It is imperative that we nurture their growth, not hinder it so that they can create jobs and get our economy back on track.
None of us is in favor of fraud, but that’s not really what we’re talking about here.
If the IRS wants to improve compliance with the self-employment tax, they have the right tools, they just need to use them. For example, I have in my hand a copy of IRS Revenue Ruling 74-44 that specifically addresses the tax treatment of dividends in lieu of compensation.
Mr. President, I ask for unanimous consent to have the IRS revenue ruling printed in the record following my statement.
I also have pages and pages of case law of which the IRS has successfully litigated the issue dividends in lieu of compensation and the applicability of employment taxes.
Plus, Congress just codified the economic substance doctrine which says a transaction must have an economic purpose aside from reduction of tax liability in order to be considered valid.  In my opinion, this is the IRS’ ace-in-the-hole card. The IRS can close any loophole – real or imagined – with the power in that new law.
Why can’t the IRS do its job with the volumes of legislative, regulatory, and judicial tools it already has? For example, the IRS revenue ruling could be codified somehow.  But then it wouldn’t provide an offset for new programs, would it? Nor would it permit my colleagues across the aisle to reduce the tax on venture capitalists for their carried interest.  I don’t like the carried interest provision either, but to soften the impact of that policy on the backs of small business is just plain wrong.
Even the Government Accountability Office agrees that the IRS should be doing more with what it has to crack down on fraud. In a 2009 report the GAO stated that “IRS efforts to enforce the rules on paying adequate wage compensation to small business shareholders have been limited,” and that the IRS provides only “limited guidance in determining adequate compensation” guidelines for taxpayers. 
A 2002 report by the Treasury’s Inspector General found that “IRS agents did not always address officer compensation, even when little or no compensation was paid.”
Clearly, the IRS isn’t doing its job. THAT’s the loophole.  The IRS can and should do more with what they already have.
As a former accountant, I find this S corp payroll tax totally unworkable.  For example, the tax would apply when 80 percent or more of gross income of the S corporation is attributable to three or fewer shareholders in the S corporation.  How are taxpayers supposed to track the attribution of gross income?
Let me give you an example…
My friend, the senior Senator from Massachusetts, has introduced a bill – S.144 – that would exempt cell phones from the record-keeping requirements under the listed property rules.  Why? Because the paperwork burden is too costly and time-consuming for business.  I think it’s a good bill and I’m proud to be a co-sponsor.  In fact, the bill has 72 cosponsors so a super-majority of the Senate agrees it is a good bill. 
But if a super majority the Senate agrees that the bookkeeping burden of parceling out an itemized cell phone bill between business and personal use is too onerous, why would we think that itemizing the source of gross income across shareholders and employees in an S corporation would be any easier?
This new payroll tax on small business was written without any input from the tax writing committees and it shows.  Although I’m sure it was unintended, this new tax has the potential to reduce Social Security benefits.  Since the new payroll tax would re-classify income from certain small businesses as wage income, it could trigger the earnings test for folks receiving early retirement benefits from Social Security. 
Even Senator Baucus admitted that the payroll tax provision needs “modifications.” I remember it well because he made this statement during a Treasury hearing a few weeks ago when I raised this issue of this onerous tax increase. 
Not only is this a job-killing tax, but the manner in which it was concocted is appalling. The original tax extenders bill raised taxes on Wall Street bankers, but when their lobbyists howled, lawmakers went looking someplace else – small businesses—for the revenue they needed. Small businesses aren’t as able to defend themselves when the tax man cometh and the end result is a new tax that robs “David” to pay “Goliath.”
The outrageousness of this new tax led me and my colleague, Senator Olympia Snowe (R-ME) to file an amendment that would strike the S corporation payroll tax from the underlying tax extenders bill. 
If my colleagues across the aisle seriously believe that non-compliance with the self-employment tax among S Corporations is a problem, then the best, most workable solution is to codify the “reasonable compensation” standard into law.  This S corporation “attribution of gross income” basis is simply unworkable. 
And if you don’t believe me, again I refer you to the experts.  I have in my hand a letter I’d like to submit for the record. It’s a letter from the AICPA –the American Institute of Certified Public Accounts.  In their letter, AICPA says:
“We are concerned that there may be unintended consequences that have not been fully aired and discussed. Accordingly, we strongly support the amendment being offered by Senators Snowe and Enzi …which would strike Section 413.”
Mr. President, I ask unanimous consent to print this letter in the record at the end of my statement.
 Again, this seemingly small provision in the tax extenders bill would have 9 billion dollar impact – and that’s just on a subset of S corps.
This payroll tax provision ought to be stripped and sent back to the tax writing committees where it can be addressed in the proper fashion.  I strongly urge my colleagues to support the Snowe-Enzi amendment and our efforts to remove this misguided, outrageous new tax.  Thank you.