RSM Resources

November 16, 2006 – According to a story in the BNA, Inc. Daily Tax Report, Senate Finance Committee Chairman Charles Grassley said that action on the technical corrections bill (H.R. 6264, S.4026) will be postponed until the next session of Congress because of disagreements over whether certain provisions under consideration are substantive or truly technical. RSM McGladrey shares that view and has submitted comments on those aspects of the bill to the House Ways and Means Committee and the Senate Finance Committee.

Click here to view those comments

Please read on for more background on the bill’s potential impact on IC-DISC.

On September 29, companion bills were introduced into House and Senate tax sub committees (H.R. 6264 and S. 4206). The bills set forth several “technical corrections” to previously passed laws.  One particular section of the proposed bills directly affects businesses with IC-DISC benefits.

Potential Loss of IC DISC Benefits
Specific sections of each bill potentially eliminate IC DISC benefits by disqualifying IC DISC dividend distributions from the capital gain tax rate (currently 15%).  Rather, the disqualification provisions would make the dividends subject to tax at ordinary income rates (as high as 35%).

If passed in their current form, the bills would apply to all distributions made after the proposal date of September 29, 2006, potentially affecting all IC-DISCs and their shareholders as of that date.  For IC DISCs that make annual distributions, the proposed change could affect benefits for all of 2006. 

As an example, if one assumes a distribution of $100,000 made after September 29, the tax impact to the recipient would be the difference between the ordinary and capital gain tax rates (20%) or $20,000.

From their current forms, each bill must pass through the House and Senate Committees and then through the legislative process in each house of Congress prior to becoming a law change.  At each stage of the process, legislators have an opportunity to affect items in the bills, as well as the form of the bill itself.

Congress is expected to address each measure shortly after re-starting the session in November following the elections. It is possible that the bills could be acted upon in 2006 or be delayed and re-introduced in 2007 (most likely with the same effective dates).

What is RSM McGladrey Doing to Impact This Policy?
At RSM McGladrey, we believe the proposed changes are a modification to a long-term policy to help United States businesses compete internationally.  The most adversely affected taxpayers in the proposed changes are the midsized businesses and their shareholders.

RSM McGladrey has a long history of advocating for the midsized business.  The IC DISC challenge is no exception.  Currently we are undertaking several initiatives to bring this issue to light and participate in the debate.

• We are working jointly with the National Association of Manufacturing (NAM) policy board to develop a response to the change in policy and highlight the adverse affect to businesses that have utilized the IC-DISC to invest in international business.  The National Association of Manufacturers is the nation’s largest industrial trade association and represents critical issues in Washington on behalf of  its membership and industry.
• Both bill sponsors have requested public comments prior to taking up the issue following the election recess.  RSM McGladrey has submitted comments that will address the adverse affect of the policy change to midsized businesses.
• In addition, RSM McGladrey will be working with individuals and organizations influential in affecting the discussion to ensure a proper hearing of the policy is made.

What Should I Do Now?
It is important to point out that the current law has not changed and benefits cannot be affected until the bills are acted upon.  Your client service contact from RSM McGladrey will keep you informed on the progression of this potential legislation.  Furthermore, as more information becomes available, we will be contacting you to advise you on the options available to you for the remainder of the calendar year and into the New Year.

In the interim, if you have questions or concerns, please do not hesitate to contact our office and we can discuss your specific circumstances.