May 18, 2007

New tax proposal.

U.S. lawmakers, searching for new sources of revenue, are reviving a proposal that would impose penalties on tax-saving financial transactions that don't otherwise have a clear business purpose.
The proposal, if enacted, may have a wide impact on business. It would potentially penalize common tax-saving transactions, such as those taken to minimize liability in mergers and acquisitions. The Bush administration and the legal and accounting professions have opposed similar measures in the past, claiming such rules would impede commerce.
The measure would require business transactions to have a purpose other than tax reduction and set new penalties for those that fail the test. The measure would write into law a series of rulings on tax shelters that courts have handed down over the past 70 years on a case-by-case basis.
Congressional aides said they are working to modify the 2005 proposal that passed the Senate, 95-5, which would have doubled penalties for bogus transactions to 40 percent. The 2005 proposal was projected by the congressional Joint Committee on Taxation to generate about $15 billion in additional revenue over a 10-year period. A congressional aide said this week that the new proposal may not target that much revenue.
Opponents of the new tax rules say the Supreme Court's refusal to consider the two cases indicates the court system is successfully applying the economic-substance test on a case-by- case basis. They say writing a definition of economic substance into the law will only hinder enforcement efforts.

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