E. Shaw

Mr. SHAW

Mr. SHAW. Mr. Speaker, today I am introducing a bill that will lead to fairer tax treatment of small businesses and will help relieve the compressed workload forced on CPA's by enactment of the Tax Reform Act of 1986 [TRA '86]. Prior to passage of TRA '86, S corporations, partnerships, and personal service corporations, like today's C corporations, were allowed to pick any fiscal year they wished. Often these entities chose a year ending other than December 31 because their natural business year ended at some other time. For example, retailers could choose January 31 or July 31, after all the holiday or white sale figures were in; and suppliers of ski equipment could select May 31 after the ski season ended. Congress abruptly halted the fiscal-year election for these entities because it needed revenue to pay for an amendment to the low-income housing credit as part of TRA '86. That law accelerated income to the U.S. Treasury by requiring fiscal year S corporations, partnerships, and personal service corporations to adopt calendar years for tax purposes thus flowing through earnings to owners at an earlier date and speeding up tax payments to the IRS. The loss of the election for some small businesses that are formed as S corporations and partnerships has proven to be a major disruption to their business operations because the calendar year end can fall in the middle of their busiest seasons. Taking time out to comply with this arbitrary requirement hamstrings their ability to maximize production, generate revenues, and create jobs. In addition, because these businesses also adopted the calendar year for financial reporting, they had to close their books as of December 31; and their independent accountants were faced with the need to undertake year-end audits and credit compliance reviews for shareholders and creditors in the same few months as required for the preparation of tax returns. Consequently, these entities have found their accountants are least available at the time they are most needed. As a CPA, I can personally speak to the havoc TRA '86 has caused the accounting profession. The 1986 tax law has spawned a practice management problem of major proportions, with many CPA firms, especially small and medium-sized ones, finding 65 to 75 percent of their annual workload falling between January 1 and April 15. Furthermore, as Members of the U.S. House of Representatives this year, we learned firsthand the meaning of the phrase workload compression, as we raced to meet the 100-day deadline for voting on all 10 items in the Contract With America. I don't think any of us would describe the working conditions at the beginning of this Congress as ideal or even desirable. But they were similar to the conditions the accounting profession has faced since 1986--every year. Congress attempted to provide some relief from the burdens of TRA '86 in 1987 when it enacted section 444 of the Internal Revenue Code, which permits electing entities to have a fiscal year ending in September, October or November. The price exacted in return was that the electing entity pay a deposit to the U.S. Government which approximated the amount of tax to be deferred through election of the fiscal year. The calculation for the deposit--of what amounted to an interest-free loan to the Government--essentially required the amount of deferred entity income to be multiplied by the top statutory tax rate applicable to individuals, plus one percentage point. In 1988, therefore, when the top individual rate was 28 percent, the deposit would have been calculated at 29 percent. The current situation illustrates the limited value of section 444. The great majority of S corporations and partnerships on fiscal years in 1986, and those coming into existence thereafter, which would have elected fiscal years are now operating on a calendar year. Furthermore, the 1993 increase in individual tax rates exacerbated the situation. By the administration's own projections, approximately 1.2 percent of individual taxpayers are expected to be in the 36 percent bracket and only 0.3 percent in the 39.6 percent brackets. Yet, because of the mechanics of section 444, the deposit presently payable on deferred income is at a 40.6 percent rate, even though most owners of electing entities will themselves be in the 31 or 36 percent brackets. Simple financial self-interest dictates, then, that many affected entities terminated the fiscal year election. The stumbling block to greater relief in the past has always been revenue neutrality. The legislation I am introducing today overcomes that problem. It's designed to maintain the cash flow to the U.S. Treasury, but still be an affordable option for S corporations and partnerships. The bill also would return to S corporations and partnerships the right to elect any fiscal year and would ease the compressed workload facing the accounting profession. A description of the bill is included below, but briefly it would ensure a steady cash flow by requiring S corporations and partnerships electing a fiscal year to pay quarterly estimated taxes to the IRS on behalf of their owners. Certain statutory rates will be required to be paid on the business's quarterly income, instead of determining an individual owner's tax bracket. The statutory rates are determined by revenue needs, but this bill provides a de minimis rule for the smallest companies. Those businesses with a tax liability of less than $5,000 on the defined income of the business will not be required to make an estimated payment. Businesses with income defined above the de minimis level but less than $250,000 per owner will be required to pay estimated tax of 34 percent. For entities with incomes above that level, where the owners are themselves likely to be in the 39.6 percent bracket, the estimated tax rate will be 39.6 percent. Owners will take credit for the entity-paid estimated tax on their income tax returns, which will eliminate the non-interest-bearing loan approach of present law. I urge my colleagues to cosponsor this bill. We have a rare opportunity to support legislation under which everyone wins. The detailed description of the bill follows: General Provision Under current law, a partnership or S corporation, except where an election is made under present Internal Revenue Code section 444, must use a tax year which ends December 31st. As a result of making an election under new Code section 444, an entity would be able to use any fiscal year it desired. (Present section 444, which permits the use of a September, October or November tax year, would be renumbered as section 445.) The election would be made by the 15th day of the third month of the first 12-month year using the new fiscal year end. For example, a 1995 calendar year entity wishing to change to a June 30 year in 1996 would file its election by September 15, 1996. effect on entity Because of the nature of fiscal year passthrough entities, a deferral of tax is created on the tax returns of the owners. To alleviate the negative revenue impact of this deferral, the entity would make quarterly payments of estimated tax timed with the earning of income, the first of which would be due by the due date of the election. The entity income used in making the calculations is the amount currently reported on 1994 Schedule K, line 23(a) of the partnership return or 1994 Schedule K, line 23 of the S Corporation return. This amount is the aggregate of entity income less deductions without accounting for the character of each separately stated item on Schedule K. Anti-abuse measures are included to prevent post-December 31 payments to partners or S Corporation shareholders to reduce the entity level tax (for example, an S corporation electing a May 31 year end, and ``zeroing out'' its line 23 income by salary payments in May). In order to provide revenue neutrality, a 2-rate estimated tax system will be required. Most entities will pay estimated taxes for their owners at a flat 34% rate. However, those whose owners will, themselves, likely pay individual tax at the 39.6% top statutory rate will have to make entity-level estimated tax payments at 39.6%. These ``high average income entities'' are those where the prior year average entity income of owners with at least a 2-percent interest in the entity is $250,000 or more. They also include partnerships whose prior year income is at least $10,000,000. The entity may use one of three methods to calculate the quarterly estimated tax payments. The first method is similar to that for high-income individuals, and bases the tax payments on 110% of the prior year income. That income is multiplied by the statutory estimated tax rate, then multiplied by quarterly estimated payment amount. The second method allows the entity to calculate estimated tax based on the current year income. Estimated current year income is multiplied by the same 34% or 39.6% statutory tax rate and divided into four quarterly estimated payments. The third method uses similar calculations to calculate its payments based upon annualized current year quarterly income, similar to the rules presently applicable to individuals or C corporations. The payments of tax are due on the 15th day of the 3rd, 5th, 8th, and 12th months of the taxable year of the entity. In addition, the entity makes a one-time payment with its fiscal year election that applies to the short period created (if any) by moving from a calendar year to a fiscal year. This payment is at the same statutory rate and is based on short period income. The election terminates if the owners of more than half the entity's equity consent to such revocation, or when the entity itself terminates. (``Inadvertent terminations'' of an S corporation however, will not terminate the election.) Subsequent re-elections may not be made by that same entity for 5 tax years unless the entity obtains consent from the Internal Revenue Service. Rules will also be provided under regulations for successor entities. A penalty for underpayment will be due from the entity if it does not make the required level of estimated tax payments. The penalty is based on the amount of underpayment and continues until appropriate payment is made or until the April 15th that the owners report their share of entity income. At that point, the owners become liable for the tax and any existing underpayment penalties that may be imposed. An exception to the entity level penalty is provided which parallels the analogous exception for individual taxpayers (casualty, unusual circumstances, etc.) effect on owner The quarterly estimated payments made by the entity are ``passed through'' to the owners of the entity as a credit on their individual tax returns. Since the entity is making these payments on behalf of the owners, they may reduce their quarterly estimated payments for their shares of the entity level payment. When they receive an annual information report from the entity (Schedule K-1), it will list their share of fiscal year income as well as their annual share of the credit. The amount of the credit allocated to each owner is based upon his or her share of the entity income (no special allocations of the credit are allowed). The credit is reported on an owner's individual income tax return as if it were estimated taxes paid by the owner. In making their own quarterly estimated payments, the owners may rely on amounts reported by the entity as paid, even if errors occur or payments are not made, so that penalties accrue only at the entity level. If payments are overpaid or underpaid compared with those reported to the owners, such amounts are treated as any other tax due or overpaid under Subtitle A of the Internal Revenue Code. tiered structures No election may be made by an entity that is part of a tiered structure under this proposal. Additionally, if an entity becomes part of a tiered structure the election is terminated. The tiered structure rules do not apply, however, if all of the owners are partnerships and S corporations that elect the same fiscal year. alternative tax years Nothing in this provision will affect an entity's right to a fiscal year that exists under current law; for example, under the natural business year tests. The provision also allows for retention of fiscal years by any entities that currently use a fiscal year under Rev. Proc. 87-32. old section 444 The new provision would preclude any new elections under the old section 444. However, existing 444 elections would be allowed to continue if the entity so desired. Alternatively, an entity with an existing section 444 election, may elect instead under this new provision thereby entitling it to a refund of its current 444 required payments, or a credit of such required payments toward its new estimated tax payment requirements. de minimis and reasonable cause exception The provision provides for an exception to payment of any entity level tax if such tax would be below $5,000. The provision also provides for the relief of section 7519 penalties if reasonable cause can be shown.

Mr. SHAW

Mr. SHAW. Mr. Speaker, I rise today to introduce timely legislation that will allow Medicare dependent hospitals, defined as hospitals with Medicare patient loads of 60 percent or more, to be reimbursed more fairly under the Prospective Payment System [PPS]. These hospitals, both rural and urban, have significantly higher Medicare losses and lower overall Medicare margins than other hospitals. This disparity threatens the viability of these hospitals and the access to, and the quality of, care for Medicare beneficiaries. This legislation, which I am introducing in conjunction with my good friend from Florida, Senator Bob Graham, is titled the Medicare Dependent Hospital Relief Act of 1995. To remedy the problem facing Medicare dependent hospitals, this bill includes three main provisions. First, Medicare dependent hospitals will be statutorily defined as hospitals with Medicare patients loads representing 60 percent or more of total patient days. Second, each year the Prospective Payment Assessment Commission [ProPAC] will compute, and the Health Care Financing Administration [HCFA] will implement, separate PPS updates for Medicare dependent hospitals and other hospitals. The update for Medicare dependent hospitals will have to make the average Medicare loss for those hospitals equal to the average Medicare loss for all hospitals. The computation and implementation will be budget neutral, thus this bill will not create additional costs. Third, ProPAC's annual report to Congress will include recommendations to ensure that beneficiaries served by Medicare dependent hospitals retain the same access and quality of care as Medicare hospital patients nationwide. The need for this legislation is simple. Between 1983 and 1988, Medicare phased in the PPS to replace cost-based reimbursements with prospective, or pre-determined, payments to contain costs and encourage efficiency. Various PPS adjustments have produced wide variations in hospital profits and losses from Medicare. Medicare dependent hospitals, as a group, have been at a distinct disadvantage. While hospitals on average lose 2.73 percent on their Medicare business, Medicare dependent hospitals lose much more: on average, those Medicare dependent hospitals with 60-64 percent Medicare loads lose 4.57 percent, while those with 65 percent or greater Medicare loads lose 5.45 percent. Medicare dependent hospitals have less ability to offset of their high Medicare patient loads. With such low margins, Medicare dependent hospitals are faced with only two choices: either close or reduce services. In either case, the ultimate losers will be the Medicare beneficiaries these hospitals serve. I urge my colleagues to support this legislation and ask that this bill and these remarks be inserted into the Record.

Mr. SHAW

Mr. SHAW. Mr. Chairman, I thank the gentleman for yielding time to me. I also thank him for his leadership in getting this to the House, and I thank the gentleman from Michigan [Mr. Conyers], the ranking minority member. I also want to recognize the gentleman from Massachusetts [Mr. Frank], who had a hearing on this last year, when he was chairing the committee, and made a commitment at that time that this would come back to the floor, which the new majority has honored. So I very much appreciate this. It is a bipartisan piece of legislation, and it is one that I think is well thought out. And I think it is very protective of the rights of families and of children. In 1988, Congress passed the Fair Housing Amendments Act of 1988, which attempted to bar discrimination based on familial status. The 1988 act tried to provide an adequate exemption for those housing communities or developments intended as senior or retirement communities. Up until then, States regulated senior housing through State legislation. The 1988 act requires communities that qualify as senior housing under the provision, to quote from the rule, that ``at least 80 percent of the households have in residence at least one person 55 years of age or older,'' and to provide ``significant facilities and services designed to meet the needs of older persons.'' Significant facilities is currently the most problematic requirement for exemption from the familial status provision. Seniors' communities throughout the country have been faced with a barrage of lawsuits challenging their qualifications under this provision. This litigation is costly and burdensome to the communities and unwelcome to the seniors who reside in them. No seniors community which has been challenged in court has ever retained its exemption. The Housing and Community Development Act of 1992 required HUD to issue a revised rule defining the term ``significant facilities.'' On July 7, 1994, HUD issued proposed regulations to define the meaning of ``significant facilities.'' On November 30, 1994, HUD withdrew the proposed regulations. Once again, HUD has attempted to provide a rule to define ``significant facilities'' and has released new regulations. Unfortunately, as drafted, the new rules will impose expensive and unnecessary burdens on seniors-only housing communities. For example, a provision that requires a staff member assigned to read to the elderly. H.R. 660 will make it easier for adult communities to satisfy the Fair Housing regulations. The bill would repeal the ``significant facilities and services'' requirement that is one of the troublesome and unreasonable tests seniors' communities have had to meet to qualify for an exemption from the 1988 Fair Housing Act. Under this bill, if a community publicly states and can prove that 80 percent of its units have one or more occupants aged 55 or older and shows an intent to serve the 55 and older population through its advertising, rules and regulations, it passes the adults-only housing test. These two tests are sufficient to protect families with children against discrimination. I want to be perfectly clear on what I am not trying to do. I am not repealing the protection for persons discriminated against based on familial status, but merely trying to establish communities around the country. The Fair Housing Amendments Act recognized that senior have a right to live in bona fide retirement communities if they choose. It is time the legal language reflects that worthy goal. I believe, however, that these most recent guidelines are vague and still fail to provide a reasonable certainty of compliance for senior communities that attempt to comply with the 1988 act. I believe older Americans deserve to have the senior-only housing option preserved. The should not be required to add requirements of communal and rehabilitative services that are not appropriate to the active lifestyle of some senior-only communities. The elimination of the significant facilities from the 1988 act is of vital concern to seniors throughout Florida and indeed throughout the country. It is vital to every apartment building, every condominium association and every homeowners' association that wishes to retain the senior-only status. I have heard from and continue to hear from hundreds of my constituents about this issue. I continue to receive calls from other States as well, so this is definitely not a problem unique to Florida. Let's take this opportunity today to provide peace of mind for senior citizens in 55 and older communities by passing H.R. 660. Let's provide assurances that they can continue to live in their 55 and older retirement communities without having to pay for expensive facilities and services they don't want and don't need. Let us pass this final portion of the Contract With America which responds to the outcry from senior citizens on this issue from every corner of the country.

Mr. SHAW

Mr. SHAW. Mr. Chairman, I thank the gentleman for yielding time to me. Mr. Chairman, I rise in support of helping this country's senior citizens continue to live their American dream. And I mean all senior citizens, Mr. Chairman, not just wealthy senior citizens. Since 1993, the Clinton tax hike on Social Security benefits has meant that a senior citizen who lives on a fixed income as low as $34,000 must pay income taxes on 85 percent of his or her benefits. This was a 70- percent income tax hike on Social Security benefits. Today, we are going to repeal this ill-conceived tax hike and reassure our senior citizens that this Congress has not forgotten the hard work they contributed to their country. We are also not going to forget that many citizens over the age 65 have no intention of settling into retirement, or that others are in the situation where they must continue to work beyond age 65 because their fixed Social Security income does not provide adequate financial security. For these people we are offering to increase the amount senior citizens can earn before being taxed on the benefits they have already earned. The current earnings limit of only $211,280 punishes senior citizens by hitting them with an additional effective tax of 33 percent. This is not fair, and this is why we owe it to our senior citizens to gradually increase the earnings limit to $30,000 per year over a 5-year period. Finally, Mr. Chairman, I support helping millions of Americans plan now to avoid potential financial hardships, later in life, by encouraging private solutions to long-term health care. One of the biggest fears of senior citizens is that they may lose most of what they own if they are confronted with a long-termillness. This fear will be felt by younger Americans when they reach the age of retirement. By allowing accelerated death benefits to be paid tax-free from life insurance policies, by providing employers with incentives to offer long-term care coverage, and by allowing tax-free withdrawals from IRA's and other pension plans in order to buy long-term care coverage will provide financial security to all Americans who worry about being able to take care of their long-term care needs. Mr. Chairman, my main concern is for the well-being of this country's senior citizens. The provisions of H.R. 1215 speak of today will help empower encourage a vote of ``yes'' for this bill.

Mr. SHAW

Mr. SHAW. Mr. Chairman, I thank the gentlewoman for yielding and allowing me to close on this debate. The hollering and shouting, the innuendoes and name calling are hopefully now over, and we will be asked in not too long to decide between the status quo and the Republican welfare reform bill. History tells us that they came from farms, they came from all over this Nation in search of a better life for themselves and their families. They settled in the cities, they settled in the coal mines, and they were hard-working because there was a hard-work ethic. Then the jobs went away, after these people who they themselves and their ancestors built the greatest economic machine on the face of this Earth. So when the jobs left the big cities and the mines closed, why did not the same people who were the children of the ones who came to the factories, who came to the cities seeking a better way of life, why did they not follow suit? Why did they not go where there were better jobs and better opportunities? They did not because the Congress of the United States, this Government, put into place a welfare system that was corrupt, although well-meaning, was destructive, although thought to be kind and gentle, and for generations now, we have seen this destructive welfare system stay in place and keep people where they are, a system that is destructive of future self-esteem, destructive of family, destructive of the basic moral fiber that has held this Nation together and the work ethic that we have been so proud of as Americans. Now is the time to sweep this away. The gentleman from Georgia yesterday and again the day before said that now the Republicans are coming for the poor and the children. Yes, they are. We are coming for them to pull them out of the life of dependency and poverty, and we are going to ask you the Democrat side, after the passage of welfare reform, hopefully some before, to join with us, because we are only on the first step to the road of doing something about taking people out of poverty. We are sweeping away a destructive system, and we are putting in a system that can work. But we cannot now walk away from it, because the road of the poor is going to be a tough road. It is going to be a treacherous road. It is going to be a road that we in the Congress are going to have to do more after the passage of welfare reform to take people out of poverty in this country. For once, after we pass this, let us join together in a new meaning of the American spirit and solve the problem of poverty in this country to give people back self-dignity, to discourage illegitimacy, to promote the family and to promote the values that have made this country great. I urge a ``yes'' vote on H.R. 4. I urge a ``no'' vote on the Mink substitute.

Mr. SHAW. Mr. Speaker, I demand a recorded vote.

Mr. SHAW

Mr. SHAW. Mr. Chairman, I yield 2 minutes to the gentleman from Michigan [Mr. Camp], another member of the committee.

Mr. SHAW. Mr. Chairman, I yield 3 minutes to the gentlewoman from Connecticut [Mrs. Johnson], a member of the Committee on Ways and Means.

Mr. SHAW. Mr. Chairman, I yield 5 minutes to the gentleman from Texas [Mr. Archer], the chairman of the full Committee on Ways and Means.

Mr. SHAW. Mr. Chairman, I yield 30 seconds to the gentleman from Texas [Mr. Archer].

Mr. SHAW. Mr. Chairman, I yield 2 minutes to the majority whip, the gentleman from Texas [Mr. DeLay].

Mr. SHAW. Mr. Chairman, in the Committee on Ways and Means I do not believe we have the statutory language, so it is different, but the intent is the same. I think I made that very clear in my short statement on the floor, in which I addressed the gentlewoman from Connecticut [Mrs. Kennelly].

Mr. SHAW. Mr. Chairman, will the gentleman yield?

Mr. SHAW. I yield to the gentlewoman from Connecticut.

Mr. SHAW. Mr. Chairman, I thank the gentleman for yielding. Mr. Chairman. I would like to stand in support of the amendment, and I want to direct my remarks to the gentlewoman from Connecticut [Mrs. Kennelly] who offered this in the committee, at which time I did vote against it. We concocted a variation of it, a much weaker one which expressed the desire of the Congress to put this, for the States to put this in their own bill. It is effective and it is. I would like to say to the gentlewoman I have come along to your way of thinking on this and intend to support it, and wanted to be sure that I did come forward and congratulate you for being as persistent as you were, and also to congratulate the gentlewoman from New Jersey [Mr. Roukema] as well as other Members of this Congress, who did work hard to see that this became a part of the bill.

Mr. SHAW. A parliamentary inquiry, Mr. Chairman.

Mr. SHAW. I thank the chairman for yielding to me. Mr. Chairman, I would say to my friend from Missouri, who has just consumed a great deal of time, do not trivialize the amendment that is presently on the floor. This is a very important amendment. There is nothing more frightening today than what is going on of the trend toward fathers not taking care of their children; fathers would have kids with unwed mothers and then disappear. In fact, we find they are having kids with a number of women and then disappearing and leaving the poor mothers to fend for themselves, to depend upon the life of dependence on welfare. This is an important amendment, and this deserves the time of this committee, and I am proud to support it. I say to my friend, the gentleman from Florida [Mr. Gibbons] that this amendment process, these are not unimportant amendments. We just passed an amendment a few hours ago on a voice vote, I might say, that was very important, in which we put $750 million more in child care. If you need child care, that is an important amendment. It is an important amendment, and that is why we supported it.

Mr. SHAW. I know you have been working on this for sometime and you and I may have spoken with regard to the noncitizen portion of the bill, which I know gives you and a few other Members great concern. I would just like to echo the words of my chairman, the gentleman from Texas [Mr. Archer], in saying we will be working closely during the conference process, and hopefully this is something that we can work together on. I see that our colleague from south Florida has also come onto the floor, who has expressed great concern with regard to this portion of the bill, and I can assure you that we will do everything we can to be cooperative during the conference process. I am sorry that we were unable to change the amendment by unanimous consent, but we did run it by the minority, and they were not inclined to allow the change at this point. So we will continue to work with you and the minority and the Senate in trying to resolve this problem.

Mr. SHAW. Mr. Chairman, will the gentlewoman yield?

Mr. SHAW. Mr. Chairman, I thank the gentlewoman for yielding, and compliment her on a most-needed amendment. Mr. Chairman, we have discussed this in the subcommittee, we have discussed this in the full committee, that the success of the jobs program in providing real jobs in H.R. 4 would require the necessity for additional money to be put into child care. I would like to also point out to the committee that under the Deal bill, the child care provision is $8.3 billion over 5 years. That H.R. 4 will be $10.5 billion. So these are the figures. The Johnson amendment brings H.R. 4 far ahead of the Deal bill in the amount of money that is put into child care. The figures are plain, the figures are there, and you cannot argue with them. So this bill is much richer in child care and recognizes the need for additional child care much more than the Deal bill. I certainly would urge all the Members to support the amendment.

Mr. SHAW. Mr. Chairman, I have noticed during the debate on at least one occasion, if not more, that a Member of this body has stood up to claim the time on the negative side of the amendment, and has not voted that way. Is it the Chair's interpretation that those who claim to be voting or are against the amendment must have every intention to vote against it, also?

Mr. SHAW. Mr. Chairman, I move that the Committee do now rise.

Mr. SHAW. Mr. Chairman, I reserve the balance of my time.

Mr. SHAW. Mr. Chairman, I yield 1\1/2\ minutes to the gentleman from Georgia [Mr. Collins], a member of the committee.

Mr. SHAW. Mr. Chairman, I yield 1 minute to the gentleman from Iowa [Mr. Latham].