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Legislative Update

Week Ending May 19, 2006

• Week in Review
• Political News & Notes
• Labor & Industry Dept. Clarifies UC Tax Bulletin
• Pa’s Legal System Ranked One of Nation’s Worst
• GASB Wants Derivatives in Financial Statements
• U.S. Supreme Court Rejects Taxpayer Challenger
• Clarification Issued on SE Health Insurance

Week in Review

Polls across the state closed for business Tuesday evening and as primary election results rolled in it became clear that the unthinkable was happening. First Senate leaders conceded to their opponents in a matter of hours; House Republican incumbents were locked in dead heats with veritable unknown challengers; and as the numbers were tallied, the likelihood of their survival, too, became less and less likely. One by one official announcements superseded the rumors, and sixteen incumbent legislators had been declared defeated. (For complete election results go to Department of State.)

Impacting future elections will be legislation signed into law this week by Gov. Rendell. The new law changes current regulations governing where polling places may be located. It will require dozens of historic polling places in private homes and businesses to be moved to public buildings. Apparently nearly 100 polling places will have to be relocated.

Political News & Notes

Rendell Officially Kicks Off Re-Election. Gov. Ed Rendell this week officially kicked-off his re-election campaign in a four day, nine city "Progress for Pennsylvania" tour. The statewide tour began with a rally in Wilkes-Barre and then took the Governor across the Commonwealth. Gov. Rendell touted his administration's accomplishments and vision for Pennsylvania's future.

Richter Scale Jolt. State Senate President Pro Temp Robert Jubelirer and Senate Majority Leader David "Chip" Brightbill both suffered stunning defeats Tuesday in their Republican Primary elections. Sen. Jubelirer was defeated by Blair County Commissioner John Eichelberger, and Sen. Brightbill lost to Mike Folmer. Democrat Andrew Dinniman easily won the state Senate Special Election in Chester County over Republican Carol Aichele. Dinniman will serve the remainder of the Senate term of the late Sen. Robert Thompson, who died earlier this year.

Involuntary Retirements In the House. The two GOP Senate Leaders were not alone in defeat as incumbent Republican state House members Dennis Leh, Bob Allen, Steve Maitland, Teresa Forcier, Tom Stevenson, Sue Cornell, Gib Armstrong, Paul Semmel, Roy Baldwin, Pat Fleagle and Peter Zug all wound up on the losing side in Tuesday's Primary. Incumbent Democrats Frank Pistella, Fred Belardi, Ken Ruffing, and Frank LaGrotta also fell to their Primary opponents, making a total of 15 House members not returning to their seats in 2007. House Democratic leaders Bill DeWeese and Mike Veon both won handily in what had been thought to be close contests.

Labor & Industry Dept. Clarifies UC Tax Bulletin

The Department of Labor and Industry's Office of Unemployment Compensation Tax Services this week provided the PICPA with a revised Unemployment Compensation Tax Bulletin. The PICPA met with the Department May 3 to discuss the matter and to get clarification on the pronouncement. We appreciate the Department's willingness to work in cooperation with the PICPA and to correct this matter.

The previous bulletin, which appeared in the Department's Spring 2006 UC Issues Update, entitled "Limited Liability Companies," should be disregarded. The article was intended to summarize the existing law concerning the unemployment compensation (UC) tax treatment of payments received by members of Limited Liability Companies (LLC) and Restricted Professional Companies (RPC) for services rendered to the entity. The article was not intended to describe a change in law or Department regulations regarding LLCs and RPCs. Specifically, there has been no increase in UC taxes or expansion of tax liability for these types of business entities.

When a member of an LLC or RPC receives a distribution based upon his ownership interest, such distributions are not taxable as UC covered wages because the distribution is a return on the member's investment in the entity. Payments to members for services rendered to the entity are also not subject to state UC tax, unless the entity has elected to be treated as a corporation for federal tax purposes and to pay federal FUTA tax on wages they pay to members. In those circumstances, the wages are also covered under state UC law. This allows the entity to claim the 5.4% state UC tax credit and effectively reduces their federal FUTA tax liability from 6.2% to 0.8%.

Questions about this bulletin should be directed to local Field Accounting Service office listed in the blue pages of the telephone directory or visit www.state.pa.us, PA Keyword: "labor and industry." Click on your local area of the state map, select the county where your business is headquartered, and scroll down to "UC Employer Tax Services." The office covering that county will be listed.

Pa's Legal System Ranked One of Nation's Worst

A new study conducted by the Pacific Research Institute on behalf of the American Justice Partnership ranked Pennsylvania 47th worst for the performance of its legal system. Only three states - New York, Rhode Island and Vermont - fared worse than Pennsylvania.

Gov. Ed Rendell's recent veto of a bill (as reported in March 24, 2006 Legislative Update) that would have modified the unfair legal doctrine of joint and several liability by re-enacting the Fair Share Act is reflected in Pennsylvania's deplorable ranking among the 50 states for the health of its civil-justice system.

The US Tort Liability Index considered 39 factors in five categories: Monetary Tort Losses; Threats; Caps; Substantive Law Rules; and Reform. Four of the states in the top 10 were also in the top 10 in the 2004 US Economic Freedom Index, which ranks states according to how friendly or unfriendly they are toward free enterprise and consumer choice. Five states, including Pennsylvania, are in the bottom 10 of both indexes.

Pennsylvania was included in a small list of states poised to drop in future rankings or stay at the bottom because they have relatively high monetary tort losses and significant threats, and have enacted few, if any, comprehensive reforms. Joining Pennsylvania on that list are Alabama, Florida, Illinois and Vermont.

GASB Wants Derivatives in Financial Statements

The Governmental Accounting Standards Board is proposing that the fair value of derivatives be reported as assets or liabilities in the financial statements. The Preliminary Views document can be downloaded from the GASB's Web site. The comment deadline is July 28, 2006.

U.S. Supreme Court Rejects Taxpayer Challenger

The United States Supreme Court this week rejected a taxpayer challenge to Ohio's use of tax credits to entice DaimlerChrysler AG to build a new plant in Toledo. Writing for the Court in DaimlerChrysler Corp. v. CUNO, Chief Justice John Roberts said, "State taxpayers have no standing . to challenge state tax or spending decisions simply by virtue of their status as taxpayers."

"A taxpayer-plaintiff has no right to insist that the government dispose of any increased revenue it might experience as a result of his suit by decreasing his tax liability or bolstering programs that benefit him," Roberts wrote. "To the contrary, the decision of how to allocate any such savings is the very epitome of a policy judgment."

The high court's unanimous decision could have had a significant impact nationally because nearly every state, including Pennsylvania, uses tax credits or similar incentives to attract companies. The ruling, however, did not address the merits of whether tax incentive laws and programs are constitutional.

Clarification of SE Health Insurance

In many solely owned businesses, the owner of the business will purchase health insurance in his or her own name versus the name of the business. The type of entity may greatly affect where this insurance premium expense may be deducted on the individual's personal income tax return.

In IRS Chief Counsel Advice (CCA) 200524001, it was held that a self-employed individual who is a sole proprietor and who purchases health insurance in his or her own name may treat that as health insurance purchased in the name of the sole proprietor business. As such, the insurance would qualify under the provisions of IRC §162(l). Assuming the self-employed individual meets the other provisions of IRC §162(l), the individual may claim a deduction for the insurance premiums in arriving at his or her adjusted gross income; also referred to as an above-the-line deduction.

IRS Headliner 163 provides additional clarification on the treatment of health insurance covering S corporation shareholders.