House Financial Services Committee Approves Stock Options Bill

6/15. The House Financial Services Committee amended and approved HR 3574, the "Stock Option Accounting Reform Act", by a vote of 45-13.

This bill requires public companies to expense only those stock options granted to the CEO and the next four highest paid officers. It also provides an exemption for small businesses. As for the top five employees, the bill requires companies to follow the FASB standards, but with a zero volatility assumption.

The Committee approved an amendment in the nature of a substitute offered by Rep. Mike Oxley (R-OH), the Chairman of the Committee. Rep. Richard Baker (R-LA), is the lead sponsor of the bill, and the Chairman of the Capitol Markets Subcommittee. He led the debate in support of the bill.

Rep. Baker (at right) and others introduced the bill on November 21, 2003. The Capitol Markets Subcommittee held a hearing on March 3, 2004. The Subcommittee amended and approved the bill on May 12. See, story titled "Capital Markets Subcommittee Approves Stock Options Bill" in TLJ Daily E-Mail Alert No. 897, May 13, 2004.

Rep. Baker spoke with reporters during a break for voting on the House floor, and again after the Committee meeting. He offered this summary of the bill, and what it accomplishes. "It addresses the identified abuse that started the whole reform process. The abuse was a handful of executives exercised their authority and control, with whomever might have been responsible for their pay considerations, and were able to garner an inordinate amount of options, that they were able to exercise to the disinterest of the broader class of shareholders, for its own enrichment. I think those actions were unwarranted, and by saying to those top five, you can no longer avail yourself of that opportunity, is a good reform."

He continued, "Now, I am still unsettled by the fact that we don't describe accurately a method of valuation. But, we respond to what was identified in the press and by observers as being the abuse. The biggest thing that we gained, is that thousands of employees, I mean, hundreds of thousands of employees, annually are given an ability to invest in their own company, with their own intellect, and own hard work. And if it pays off, and the company's value is enhanced, you share in that growth, without the corporation having to expense the cost of that granting at the time of the granting. That has been highly overlooked in the course of the debate. There are an infinitesimally small percentage of executives who abuse, and there are hundreds of thousands of employees who benefit. And keeping that structure is a good thing. Now, do I favor accurate disclosure? Yes. Can FASB tell me how to do it accurately today? No. So, we are doing the best we can with an imperfect disclosure regime, and I think that the bill is an appropriate response."

Opposition to the bill during the June 15 meeting was led by Rep. Barney Frank (D-MA), the ranking Democrat on the Committee, Rep. Paul Kanjorsky (D-PA), the ranking Democrat on the Capital Markets Subcommittee, Rep. Carolyn Maloney (D-NY), and Rep. Brad Sherman (D-CA).

Rep. Frank argued that this bill is turning the Committee into "the super accounting board", and reducing the FASB's role to "a rule making hobby". He added, "I don't believe for one minute that this will be the last time that we overrule FASB."

Rep. Baker responded that "we started this process with the passage of Sarbanes Oxley." He added, "we are standard setters."

FASB. On March 31, 2004, the Financial Accounting Standards Board (FASB) released a document titled "Exposure Draft, Share-Based Payment, an Amendment of FASB Statements No. 123 and 95" that proposes that companies must expense stock option plans for all employees.

The FASB stated that "The exposure draft covers a wide range of equity-based compensation arrangements. Under the Board's proposal, all forms of share-based payments to employees, including employee stock options, would be treated the same as other forms of compensation by recognizing the related cost in the income statement. The expense of the award would generally be measured at fair value at the grant date. Current accounting guidance requires that the expense relating to so-called fixed plan employee stock options only be disclosed in the footnotes to the financial statements."

The FASB's comment period for the exposure draft ends June 30, 2004. See, story titled "FASB Proposes Expensing of Stock Options" in TLJ Daily E-Mail Alert No. 867, April 1, 2004.

The FASB opposes and has lobbied against HR 3574.

Technology companies that provide employee stock options have been active in lobbying for the bill.

Transparency and Disclosure. The amendment in the nature of a substitute adds a new section, that was not in the version of the bill approved by the Subcommittee on Capitol Markets on May 12. The new section is titled "Improved Employee Stock Option Transparency and Reporting Disclosures".

Rep. Bob Ney (R-OH), offered, but then withdrew, an amendment on this subject at the May 12 markup. Rep. Baker represented on May 12 that he would work with Rep. Ney on new language for the bill.

The new language provides that the Securities and Exchange Commission (SEC) shall within 180 days promulgate a rule that requires each issuer filing a report under Sections 13(a) or 15(d) of the Securities Exchange Act "to include in such report more detailed information regarding stock option plans, stock purchase plans, and other arrangements involving an employee acquisition of an equity interest in the company ..."

Such information must include a "plain English" discussion of "the dilutive effect of stock option plans". It must also include an "expanded disclosure of the dilutive effect of employee stock options on the issuer's earnings per share", "the number of outstanding stock options", "the weighted average exercise price of all outstanding stock options", and "the estimated number of stock options outstanding that will vest in each year".

Baker and Maloney Amendments. The Committee also approved an amendment offered by Rep. Baker regarding preserving FASB authority.

This amendment adds a new Section 5 to the bill, titled "Preservation of Authority". It provides that "Nothing in this Act shall be construed to limit the authority over the setting of accounting principles by any accounting standard setting body whose principles are recognized by the Securities and Exchange Commission under section 19(b)(1) of the Securities Act of 1933 (15 U.S.C. 77s(b)(1))."

The Committee rejected an amendment offered by Rep. Maloney (at left) regarding SEC authority. The vote was 14-45.

This amendment would have added a new Section 5 to the bill titled "Confirmation of S.E.C. Authority". It would have provided that "Nothing in this Act shall be construed to impair or limit the authority of the Commission to establish accounting principles or standards on its own initiative as the Commission deems necessary in the public interest or for the protection of investors."

Rep. Baker stated that his amendment preserves FASB's independent authority, but with Congressional authority to instruct, while Rep. Maloney's amendment would give the SEC authority over FASB. He argued that the SEC then would not answer to either the FASB or the Congress.

Other Amendments. The Committee rejected an amendment offered by Rep. Sherman that would have eliminated the zero volatility assumption. The vote was 14-43. He offered a similar amendment during Subcommittee consideration on May 12. This amendment pertains to the bill's provisions regarding the valuation of the stock options of the top five employees. The bill basically follows the FASB method, but then assumes zero volatility. This Sherman amendment would have removed the language regarding zero volatility.

The Committee also rejected an amendment offered by Rep. Sherman that would have applied FASB standards to that portion of options exceeding $100,000 per employee. The vote was 12-47. This amendment would have allowed companies not to expense employee stock options, but only for the first $100,000 per year for each employee. It would have required the expensing of any stock option amount over $100,000.

The Committee rejected an amendment in the nature of a substitute offered by Rep. Kanjorski, without a roll call vote. It would have, among other things, let stand the FASB standard regarding expensing of stock options.

Final Vote. The vote in favor of the bill was overwhelming and bipartisan. Almost all Republicans who voted, voted for the bill. Only Rep. Michael Castle (R-DE) and Rep. Paul Gillmor (R-OH) voted against the bill. Several others were not present.

A majority of Democrats also supported the bill. 20 voted yes; 11 voted no. There was a distinct pattern. Democrats with seniority on the Committee opposed the bill, while the junior members voted overwhelmingly for the bill. The six most senior Democrats all voted no. 4 of the next 12 members in seniority voted no. Only one of the 15 most junior members voted no -- Rep. Rahm Emanuel (D-IL).

The bill does enjoy the support of one senior Democrat -- Rep. Nancy Pelosi (D-CA), the House Minority Leader.

Rick White, in his capacity as Chairman of the International Employee Stock Options Coalition, praised the bill in a release after the markup. He stated that "Employee stock options fuel innovation and economic growth in this country." White represented a Seattle area district in the House from 1995 until 1998, and was a member of the House Commerce Committee.

Rep. Anna Eshoo (D-CA), who represents a Silicon Valley district, is an initial cosponsor of the bill, and a member of the House Commerce Committee, stated in a release that "We have really gained momentum and I'm hopeful that this critical legislation will be brought to the House floor very soon".

Further Consideration of HR 3574. One obstacle that the bill faces is that the House Commerce Committee has asserted jurisdiction. Rep. Baker stated that he has attempted to draft the bill, and its amendments, with language that avoids Commerce Committee jurisdiction. He told reporters that "I would have to defer you to the legal consultants on the matter. I was informed that the construction of the amendment achieved that goal. We are going to have to wait for the House Parliamentarian, I guess, to make that judgment."

Rep. Baker also predicted that the full House will take up the bill, noting that one of its strong supporters is Rep. David Dreier (R-CA), the Chairman of the House Rules Committee. He stated after the hearing, "Knowing of Chairman Dreier's interest in the matter, I think our prospects of getting a rule for floor consideration is probably pretty good. But, I don't know the bigger schedule that leadership might be contemplating between now and the recess."

Rep. Roy Blunt (R-MO), the Republican Whip, is also a cosponsor of the bill.

The bill would then have to pass the Senate. There is a similar bill pending in the Senate, S 1890. Several Senators have announced their opposition to the bill.

Rep. Baker was asked what he will have accomplished if the Senate does not pass the bill. He answered, "There is two things. One, I am hopeful that the Senate will take a House passed bill, and I am jumping ahead of myself, of course, and consider it as they would consider any other legislative proposal. Secondly, we are in the midst of a public comment period. And, in light of the fact that FASB has not established a valuation methodology, and secondly, that the current methodologies appear to be highly inaccurate, will take the House actions into consideration is promulgating whatever final rule they may adopt. So, there is still the prospect of Senate consideration at some point. There is still the hope that the FASB will take a look at what the House has done. And, you know, it is much the same as any other letter of public comment. I hope they will read it."

He added that the FASB "should should recognize that there are elements of the current rule which are very indeterminate, unreliable, inaccurate, and that is no better than having the disclosure in the footnotes. In fact, it may be worse. Leading someone to conclude that your financial condition is worse than it is, is no more helpful than saying your financial condition is better than it is."

11th Circuit Limits Private Suits by DBS Providers Against Pirates

6/15. The U.S. Court of Appeals (11thCir) issued its opinion [12 pages in PDF] in Directv v. Treworgy, holding that 18 U.S.C. § 2520(a) does not provide a private right of action against persons who possess devices used to intercept satellite transmissions in violation of 18 U.S.C. § 2512(1)(b), a criminal offense.

Directv provides satellite television programming. It encrypts its transmissions to prevent unauthorized viewing of pay per view and premium programs. Its customers purchase access devices from it to decrypt the satellite transmissions.

Mike Treworgy purchased and possesses two pirate access devices. However, the District Court did not make a finding that he used these devices to intercept Directv's programming.

Directv filed a complaint in U.S. District Court (MDFl) against Treworgy alleging violation of 18 U.S.C. § 2520(a). The District Court held that this section does not create a private right of action for mer possession of pirate access devices.

18 U.S.C. § 2512(1)(b) provides criminal penalties against anyone who intentionally "manufactures, assembles, possesses, or sells any electronic, mechanical, or other device, knowing or having reason to know that the design of such device renders it primarily useful for the purpose of the surreptitious interception of wire, oral, or electronic communications ..."

18 U.S.C. § 2520, among other things, creates a private right of action for violation of § 2512. It provides, in part, that "Except as provided in section 2511(2)(a)(ii), any person whose wire, oral, or electronic communication is intercepted, disclosed, or intentionally used in violation of this chapter may in a civil action recover from the person or entity, other than the United States, which engaged in that violation such relief as may be appropriate."

The Court of Appeals explained that "The plain language of these provisions addresses two distinct concerns. Section 2520(a) provides a civil remedy for the victim of the theft of an electronic communication. Section 2512(1)(b) provides a criminal punishment for those involved in trafficking devices used for the theft of electronic communications without need of proof that any person has yet been injured by that illegal commerce."

In other words, "Possession of a pirate access device alone, although a criminal offense, creates nothing more than conjectural or hypothetical harm to DTV."

This opinion will make it harder for Directv, and other direct broadcast satellite (DBS) providers, to sue, and hence, deter, theft of their programming. For example, obtaining records from the manufacturers or distributors of pirate access devices regarding purchasers of the devices will be insufficient, at least in the 11th Circuit, to sustain actions against those purchasers. Directv will also have to prove that the purchasers actually used the products that they purchased.

The Court of Appeals based its holding solely on a literal interpretation of the language of the statutes. It did not speculate as to why someone would commit the crime of purchasing a pirate access device, but not then use that device to obtain DBS programming for free.

This case is Directv, Inc. v. Mike Treworgy, U.S. Court of Appeals for the 11th Circuit, App. Ct. No. 03-15313, an appeal from the U.S. District Court for the Middle District of Florida, D.C. No. 03-00428-CV-FTM-29.

FTC Recommends Against National Do Not E-Mail Registry

6/15. The Federal Trade Commission (FTC) released a report [60 pages in PDF] titled "National Do Not Email Registry: A Report to Congress".

The report concludes that "a National Do Not Email Registry, without a system in place to authenticate the origin of email messages, would fail to reduce the burden of spam and may even increase the amount of spam received by consumers. Therefore, the Commission proposes a plan that first requires authentication -- strengthening of the email system so that the origin of email messages cannot be falsified -- as a first step and a prerequisite to any type of Registry."

June 16 was the deadline for the FTC to submit its report to the Congress, pursuant to Section 9 of S 877, the "Controlling the Assault of Non-Solicited Pormography and Marketing Act of 2003" (CAN-SPAM Act). See, story titled "FTC Announces CAN-SPAM Act Rulemaking" in TLJ Daily E-Mail Alert No. 855, March 15, 2004.

The report further states that "spammers would most likely use a Registry as a mechanism for verifying the validity of email addresses and, without authentication, the Commission would be largely powerless to identify those responsible for misusing the Registry. Moreover, a Registry-type solution to spam would raise serious security, privacy, and enforcement difficulties. The Commission’s concerns with the security, privacy, and enforcement challenges surrounding a Registry reach a zenith with respect to children’s email accounts. A Registry that identified accounts used by children, for example, could assist legitimate marketers to avoid sending inappropriate messages to children. At the same time, however, the Internet’s most dangerous users, including pedophiles, also could use this information to target children."

In short, "implementation of a National Do Not Email Registry would not reduce the volume of spam".

Sen. Conrad Burns (R-MT), the sponsor of the CAN SPAM Act, stated in a release that the FTC "thoroughly examined the ability to successfully implement such a list at this point and the report has confirmed my concerns regarding the serious risks involved should the wrong person ever get their hands on a Do-Not-Spam list. All along I have stressed the need for continued oversight, both for enforcement purposes and to make sure we stay one step ahead of these big time spammers. Things change quickly in the cyber-world, and we have to work hard to keep up, but I believe we are doing a good job and I will continue working with my colleagues to make sure we continue coming down hard on these guys and continue making smart decisions to protect consumers from unwanted spam."

The FTC report "proposes a program to encourage the widespread adoption of email authentication standards that would help law enforcement and ISPs better identify spammers."

It adds that if "after allowing the private market sufficient time to develop, test, and widely implement an authentication standard, no single standard emerges, the Commission could begin the process of convening a Federal Advisory Committee to help it determine an appropriate email authentication system that could be federally required. If the Commission were to mandate such a standard, after a reasonable period of time following the effective date of such a standard, the Commission will consider studying whether an authentication system combined with enforcement or other mechanisms (e.g., better filters) had substantially reduced the burden of spam. If spam continued to be a substantial problem, if a Registry could significantly reduce it once an authentication system is in place, and if other technological developments removed the security and privacy risks associated with a Registry, the Commission will consider issuing an ANPR proposing the creation of a National Do Not Email Registry."

People and Appointments

6/15. David Cavicke was promoted to Chief Counsel for the House Commerce Committee's Subcommittee on Commerce, Trade and Consumer Protection. He has worked for the Committee since 1995. See, release.

6/15. The Senate confirmed Gene Pratter to be a Judge of the U.S. District Court for the Eastern District of Pennsylvania, by a vote of 98-0. See, Roll Call No. 117.

6/15. The Senate confirmed Ricardo Martinez to be a Judge of the U.S. District Court for the Western District of Washington, by a vote of 98-0. See, Roll Call No. 116.

6/15. The Senate confirmed Virginia Hopkins to be a Judge of the U.S. District Court for the Northern District of Alabama, by a vote of 98-0. See, Roll Call No. 115.

6/15. John Morabito was named Comcast's Senior Director/Policy Counsel, Federal Government Affairs, effective June 21. Comcast stated in a release that he will be "one of Comcast's senior lobbyists focused on Congress and the Administration". He is currently VP for Regulatory and Legislative Affairs at Qwest. Before that, he worked for Global Crossing. He has also worked for the House Commerce Committee, and for the Federal Communications Commission's (FCC) Common Carrier Bureau.

6/15. Michael Hickey was named Verizon's VP of Government Affairs for National Security Policy. Verizon stated in a release that he "will be based in Washington, D.C., where he will represent Verizon's interests on policy matters relating to national security, law enforcement and emergency preparedness." He was previously President of Verizon New Hampshire. New Hampshire legislators now hold key assignments in Congress for legislation that is of concern to Verizon. Rep. Charles Bass (R-NH) is a new member of the House Commerce Committee and its Subcommittee on Telecommunications and the Internet. Sen. John Sununu (R-NH) is a new member of the Senate Commerce Committee and its Communications Subcommittee. He is a also the sponsor of S 2281, the "VOIP Regulatory Freedom Act of 2004", a bill that would, among other things, address CALEA obligations. See, stories titled "Sununu and Pickering Introduce VOIP Regulatory Freedom Bills" and "Summary of VOIP Regulatory Freedom Bills" in TLJ Daily E-Mail Alert No. 872, April 8, 2004. Verizon has advocated positions that are different from those of Sen. Sununu. See for example, Verizon's comment [PDF] in response to the Department of Justice's petition to the Federal Communications Commission (FCC) regarding the CALEA. This is RM-10865.

More News

6/15. The Senate Finance Committee held a hearing to examine the U.S. Australia and U.S. Morocco free trade agreements. See, opening statement [PDF] of Sen. Charles Grassley (R-IA), the Chairman of the Committee. See also, prepared testimony [4 pages in PDF] of Peter Allgeier (Deputy U.S. Trade Representative), prepared testimony [6 pages in PDF] of Josette Shiner (Deputy USTR), and prepared testimony [11 pages in PDF] of John Schulman (Time Warner and the Entertainment Industry Coalition for Free Trade).

6/15. U.S. Trade Representative (USTR) Robert Zoellick and Taib Fassi-Fihri of Morocco signed the U.S.-Morocco Free Trade Agreement. Zoellick stated at a press conference that "Morocco has made broad commitments to open its service sector, creating new opportunities for U.S. banking, insurance, telecommunications, and technology companies." He continued that "With this agreement -- and in the exchange of technologies, investments, skills, that it will surely promote -- Morocco will find some of the tools with which prosperity can be produced and its benefit multiplied." He added that "I alluded a moment ago to the exchange that necessarily accompany free trade -- investment, and the sharing of technologies and skills. But, most importantly, there is the free flow of people and ideas." See, transcript [7 pages in PDF]. See also, USTR release.

6/15. James Loy, Deputy Secretary of Homeland Security, gave a speech at the National Cargo Security Council Annual Convention in Las Vegas, Nevada. He stated that the Department of Homeland Security (DHS) is in the process of "evaluating available technologies in the real world environment to help increase container security and prevent their use as vehicles to transport illicit materials. In addition to sealing standards and techniques, we are testing and evaluating the technology and design of a Container Security Device -- a kind of electronic seal that would further guard against tampering."

6/15. The Federal Communications Commission (FCC) released a report [18 pages in PDF] titled "FCC Report To Congress As Required By The ORBIT Act".

6/15. The National Institute of Standards and Technology (NIST) released a report [4.2 MB in PDF] titled "Computer Security Division - 2003 Annual Report". This is NIST Interagency Report 7111.

House Ways and Means Committee Approves Tax Bill that Repeals ETI

6/14. The House Ways and Means Committee amended and approved HR 4520, the "American Jobs Creation Act of 2004". This bill would, among other things, repeal the extraterritorial income (ETI) tax regime.

The World Trade Organization (WTO) ruled that the Foreign Sales Corporation (FSC) tax regime, and its replacement, the ETI tax regime, constitute illegal export subsidies, and authorized the EU to impose up to $4 Billion in retaliatory tariffs. U.S. technology companies have benefited from the FSC and ETI tax regimes. On the other hand, U.S. technology companies that sell products and services abroad are harmed by trade tariffs, trade barriers and trade wars.

See, story titled "EU Imposes FSC/ETI Sanctions" in TLJ Daily E-Mail Alert No. 847, March 2, 2004.

The Committee was in session from 5:30 PM until shortly before midnight, with one break for voting on the House floor. The Committee approved an amendment in the nature of a substitute [424 pages in PDF] offered by Rep. Bill Thomas (R-CA), the Chairman of the Committee.

The Committee also approved, by unanimous voice vote, an amendment to Rep. Thomas's amendment the removed Section 692 of the Chairman's amendment, which pertained to churches. The Committee considered numerous other amendments, all of which were offered by Democrats; all of these were either withdrawn or defeated.

Rep. Thomas (at left) read an opening statement at the outset. He stated that "Our immediate goal is to end European sanctions on thousands of U.S. products -- these trade barriers are hurting American farmers, manufacturing workers and consumers. This legislation will end the escalating tariffs by repealing the FSC-ETI tax regime."

He continued that "But repealing FSC-ETI alone would result in a tax increase on U.S. businesses when economic growth and job creation is strong, but fragile. By ending this tax benefit for American business, we would be shortsighted if we did not also provide a tax relief alternative to American producers -- both large and small. This is why this bill reduces the top corporate tax rate from 35 percent to 32 for domestic manufacturers and small corporations. We also provide significant help to small businesses with important S-Corp reforms and investment incentives, among other provisions."

"A third important component of this bill is that it minimizes double taxation and simplifies complex international tax law. By doing so, it levels the playing field for American businesses competing in a worldwide economy, and encourages them to keep jobs in the United States", concluded Rep. Thomas.

While the original purpose of the bill is to address rulings of the WTO, there was little debate over the necessity of remedying the WTO identified aspects of the tax code. Rather, Democrats argued at length that the bill has also become a vehicle for a large number of tax breaks that are unrelated to the international trade problem at hand.

Rep. Jim McDermott (D-WA) said that the bill is a "Christmas tree", and that ornaments are continually being added to win more votes in support of the bill. He brought a small Christmas tree to the meeting. Rep. McDermott has a long history of being theatrical.

Rep. Charles Rangel (D-NY), the ranking Democrat on the Committee, also read an opening statement at the beginning of the meeting. He stated that "The last I remembered, we were faced with a World Trade Organization problem and that, because we refused to fix it, we were going to be penalized some $4 billion dollars in tariffs -- which they already started placing against our exporters. You have taken this $4 billion problem and turned it into a $140 billion tax cut."

He mocked Rep. Thomas for the rushed consideration of the bill, but added, "I want this bill to reach the floor as fast as possible, because it stinks to high heaven ..."

This bill would repeal the exclusion for extraterritorial income. The Joint Committee on Taxation (JCT) estimates that this will result in increased tax revenues of over $49 Billion over ten years.

It would also reduce the top corporate tax rate from 35% to 32%, over several years, for domestic manufacturers, producers, farmers, and small corporations. The JCT estimates that this will result in decreased tax revenues of over $78 Billion over ten years.

However, the bill also contains numerous changes to current tax law that would increase tax revenues. One of these is the provision limiting the deduction for contributions of intellectual property, which the JCT estimates will result in increased tax revenues of over $3.6 Billion over ten years. See, story titled "Ways and Means Committee Approves Bill to Limit Deductions for IP Contributions" in TLJ Daily E-Mail Alert No. 918, June 15, 2004.

The Senate has already passed a bill that the addressed the rulings of the WTO. On May 11, 2004, the Senate passed S 1637, the "Jumpstart Our Business Strength (JOBS) Act".

The Thomas amendment was adopted by a voice vote. Then, the bill, as amended, was passed on a roll call vote of 27-9. All Republicans voted for the bill. Three Democrats voted for the bill -- Rep. William Jefferson (D-LA), Rep. John Tanner (D-TN), and Rep. Max Sandlin (D-TX). Several other Democrats did not vote.

Rep. Thomas spoke with reporters after the meeting. He predicted that the full House will consider the bill on Thursday, June 17. He added, "Oh, I think it will pass."

Rep. Thomas commented after the meeting that Rep. Jefferson and Rep. Tanner have a record of being supportive of international trade. See, for example, story titled "House Passes Trade Promotion Authority Bill" in TLJ Daily E-Mail Alert No. 323, December 7, 2001.

See also, stories titled "Grassley and Baucus Organize Meeting on FSC/ETI Issue" in TLJ Daily E-Mail Alert No. 511, September 18, 2002; "Deputy Treasury Secretary Addresses FSC/ETI and WTO Rulings" in TLJ Daily E-Mail Alert No. 526, October 9, 2002; "Rep. Thomas Writes Colleagues Re FSC Dispute" in TLJ Daily E-Mail Alert No. 622, March 13, 2003; "WTO Authorizes FSC/ETI Related Tariffs" in TLJ Daily E-Mail Alert No. 657, May 8, 2003; "Legislators Introduce Bills to Repeal ETI Regime and Extend R&D Tax Credit" in TLJ Daily E-Mail Alert No. 715, August 11, 2003; "Senate Finance Committee Approves FSC/ETI Replacement Bill" in TLJ Daily E-Mail Alert No. 753, October 6, 2003; and "Sen. Grassley Meets with Lamy Re FSC/ETI" in TLJ Daily E-Mail Alert No. 771, November 4, 2003.

See also, TLJ news analysis titled "The FSC Tax Bill and Technology Exporters", November 17, 2000.

Ways and Means Committee Approves Bill to Limit Deductions for IP Contributions

6/14. The House Ways and Means Committee amended and approved HR 4520, the "American Jobs Creation Act of 2004", a bill that would, among other things, limit the deduction available under Section 170 of the Internal Revenue Code for contributions of intellectual property. See, full story.

Ways and Means Committee Votes to Extend Research and Development Tax Credit

6/14. The House Ways and Means Committee amended and approved HR 4520, the "American Jobs Creation Act of 2004", a bill that would, among other things, extend for 18 months the research and development tax credit.

HR 4520 extends the research and development tax credit, which is scheduled to expire on June 30, 2004, through December 31, 2005. The R&D tax credit is found at 26 U.S.C. § 41. The sunset provision is found at Section 41(h)(1). The R&D tax credit is a perennial issue in Congress. The credit was first enacted in 1981 as a temporary measure, and has been extended every few years since then.

Rep. Bill Thomas's (D-CA) amendment in the nature of a substitute [424 pages in PDF], which was approved by the Committee, further provides that the extension of the R&D tax credit is effective for expenditures paid or incurred after June 30, 2004.

The Joint Committee on Taxation estimates that this extension will result in decreased tax revenues of $7,560 Million over ten years, with most of the decrease coming in FY 2005 and FY 2006.

Three members of the Committee, Rep. Thomas, Rep. Ben Cardin (D-MD), and Rep. Nancy Johnson (R-CT) spoke in support of the extension.

The bill merely extends the tax credit. Rep. Cardin advocated revising the credit to take into consideration biotechnology research and development. He also referenced a bill pertaining to biotechnology -- perhaps HR 2968, the "Biotechnology Future Investment Expansion Act of 2003".

Rep. Thomas pointed out that the administration is studying this issue and preparing a report. He urged the administration to speed its work on this study. He said that since the extension is for only 18 months, the Congress will revisit this issue in less that 18 months, and should have the administration's report by that time.

George Jenner, the acting Assistant Secretary for Tax Policy at the Treasury Department, said that the administration has no deadline for the report.

Rep. Johnson pressured Jenner to complete the report. She has for many years sponsored legislation in the House to make the R&D tax credit permanent. Her bills have obtained many cosponsors, but have never become law.

Ways and Means Committee Debates Private Tax Collectors and Information Privacy

6/14. The House Ways and Means Committee amended and approved HR 4520, the "American Jobs Creation Act of 2004", a bill that would, among other things, provide for collection of taxes by private sector entities.

The Committee approved an amendment in the nature of a substitute [PDF] offered by Rep. Bill Thomas (R-CA), the Chairman of the Committee.

This was one of the most debated issues at the meeting. The opponents, Democrats all, articulated several different reasons for opposing this section. Some argued that it would transfer a core governmental function to the private sector. Some argued that private tax collectors would be unaccountable and would violate taxpayer rights and the Fair Debt Collection Practices Act (FDCPA). Some argued that this section is unfair to IRS workers. Some argued that the Internal Revenue Service (IRS) could collect taxes on a more cost effective basis that private collectors, who would receive 25% contingency fees.

However, one recurring theme of opposition was technology related. Proponents argued that the proposal makes sense because private sectors will be more effective because they possess and maintain electronic databases that will enable them to track down taxpayers. Opponents responded that this proposal will result in the transfer of a large amount of personally identifying information, including names, addresses, phone numbers, taxpayer identification numbers, and social security numbers, to private companies, without effective controls. The consequence, some argued, will be loss of privacy, loss of reputation, and identity theft.

George Jenner, the acting Assistant Secretary for Tax Policy at the Treasury Department, explained and defended this proposal on behalf of the Treasury Department. He said, "we strongly favor this position."

Jenner did not expressly mention private sector databases. However, during a long debate over why private collection agencies would do a better job than the IRS, Rep. Thomas interjected that "private debt collectors have a number of ways that they can locate someone", while the IRS generally only has the addresses provided on tax returns. He added that "it is in essence a locating structure".

At another point, Rep. Amo Houghton (R-NY), a leading supporter of this proposal, explained that "we are just falling behind" on "electronic transition" at the IRS.

Rep. Xavier Becerra (D-CA) questioned Jenner about the proposal. He asked "What happens to all of that confidential, private, taxpayer information that these contractors have possessed and learned about during the period of the contract, after the contract?" Jenner then spoke, but did not provide a responsive answer.

Rep. Becerra also questioned Jenner about the information that would be transferred. For example, he asked if the taxpayer's tax identification number would be transferred. Jenner said "Um, probably, yes." He added, "That is correct." Jenner also indicated in response to Rep. Becerra's questions that names, phone numbers and addresses would be transferred.

Rep. Becerra also pointed out that for most individual taxpayers, the taxpayer identification number is the taxpayer's social security number.

He also asked what would be the consequences of disclosure of this information.

Rep. Rob Portman (R-OH) defended the proposal. He said, "It is not accurate to say that these private collection agencies would have this sensitive information. The only information that they would be allowed to have under law, would be the amount of unpaid tax debt, the type of taxes, the tax year, payment history, and the due date. Period." Rep. Portman did not offer an explanation, if this were the only information transferred to collectors, of how these collectors would know from whom to seek payment.

Rep. Portman also said that 26 U.S.C. § 6103, regarding confidentiality of tax returns, would apply to private sector collectors.

The bill also provides that there would be no cause of action against the United States.

Rep. Thomas, speaking with reporters after the meeting, said that the "I often find that some of the smallest provisions generate the most discussion". He added that much of the discussion "was not well founded" and was "without an understanding of provisions that are in statute".

Rep. Bob McDermott (D-WA) offered an amendment that would have removed Section 681 from the bill. It failed on a roll call vote of 12-24. It was a straight party line vote, with several Democrats not casting votes.

The Ways and Means Committee's Subcommittee on Social Security will hold a hearing titled "Enhancing Social Security Number Privacy" on Tuesday, June 15 at 11:00 AM. No one from the Internal Revenue Service is scheduled to testify.

FCC Commissioners Address Local Telephone Competition Rules

6/14. The Federal Communications Commission (FCC) issued a release [PDF] that states that FCC Chairman Michael Powell "announced today that the Commission will strive to adopt a final order on local telephone competition rules as soon as possible."

This release quotes Powell: "My fellow Commissioners and I will promptly turn to writing a set of sound rules that ensure access to incumbent networks where competition is truly impaired ... I am committed to developing competition rules that comply with the court's mandate and are faithful to the statutory objectives of the Telecommunications Act. Moreover, the Commission is prepared to consider interim, transitional protections to bridge the gap that exists in the period preceding adoption of our final rules."

Powell also stated that "Fair and sustainable competition is our goal and I am fully confident that consumers will reap the benefits ... Facilities-based competition brings the innovation and value that consumers demand. These new rules will also encourage increased investment in infrastructure that will continue to drive down prices for advanced services. In this interim period, I also strongly encourage carriers to find common ground through negotiation. Commercial agreements remain the best way for all parties to control their destiny."

FCC Commissioner Kathleen Abernathy also issued a brief statement [PDF]: "I am pleased that we are turning a corner and putting litigation behind us by commencing a rulemaking in response to the D.C. Circuit’s USTA II decision. In fact, I have argued over the last few months that writing new rules consistent with the Court’s directives is essential to bringing certainty to the market and ensuring appropriate investment incentives. I also join my colleagues in encouraging all parties to continue marketplace negotiations during the pendency of this proceeding."

FCC Commissioner Kevin Martin also issued a statement [PDF]: "I support the Chairman’s efforts to commence a proceeding to adopt local telephone competition rules. In the interim, I encourage carriers to continue their efforts to negotiate commercial arrangement for wholesale access."

The FCC also published in its website copies of letters [5 pages in PDF] from four incumbent local exchange carriers (ILECs), BellSouth, Qwest, SBC, and Verizon, on this subject.

Supreme Court Denies Cert for Law Firm Seeking Consumer Complaints to FTC

6/14. The Supreme Court denied certiorari in Lakin Law Firm v. FTC, a Freedom of Information Act (FOIA) case in which a plaintiffs personal injury law firm sought copies of complaints submitted to the Federal Trade Commission (FTC) by consumers about credit card cramming. The Lakin Law Firm sought the names of the individual complainants. The FTC produced copies of complaints, with the names and addresses redacted.

The District Court dismissed. The Appeals Court affirmed. And now, the Supreme Court has let stand the Appeals Court opinion. See, Order List [11 pages in PDF] at page 3.

The U.S. Court of Appeals (7thCir) wrote in its December 16, 2003 opinion [PDF] that when people complain to the FTC "they probably think their names and addresses will not be released to a firm of private lawyers seeking fuel to propel a possible class-action lawsuit."

The Appeals Court also wrote that "The FOIA has a noble goal: it contemplates a policy of broad disclosure of government documents to serve the ``basic purpose of ensuring an informed citizenry, vital to the functioning of a democratic society.´´ ... Stated another way, the FOIA’s central purpose is to guarantee ``that the Government’s activities be opened to the sharp eye of public scrutiny, not that information about private citizens that happens to be in the warehouse of the Government be so disclosed.´´" (Emphasis in original. Citations omitted.)

The Court applied FOIA exemption 6. It wrote that "Exemption 6 requires a balancing of individual privacy interests of consumer complainants against the public interest in disclosure to determine whether disclosure is ``clearly unwarranted.´´ The Supreme Court has repeatedly held that the only public interest that is relevant to this balancing test is the shining of a light on an agency’s performance of its statutory duties." It added that "Compelling disclosure of the identity of consumers' complaints about cramming would not further the core purpose of the FOIA."

The FOIA is codified at 5 U.S.C. § 552. Section 552(b)(6), which the Courts relied upon, provides that "This section does not apply to matters that are ... personnel and medical files and similar files the disclosure of which would constitute a clearly unwarranted invasion of personal privacy".

This case is The Lakin Law Firm v. Federal Trade Commission, Sup. Ct. No. 03-1468, a petition for writ of certiorari to the U.S. Court of Appeals for the 7th Circuit, App. Ct. No. 03-1689, an appeal from the U.S. District Court for the Southern District of Illinois, D.C. No. 02-CV-1121-DRH, Judge David Herndon presiding.

See, story titled "Court Holds That FOIA Does Not Require FTC to Produce Unredacted Copies of Consumer Complaints" in TLJ Daily E-Mail Alert No. 802, December 18, 2003. See also, story titled "Telemarketers Sue FCC To Get Names, Addresses, and Phone Numbers of Consumers Who Complained to FCC" in TLJ Daily E-Mail Alert No. 741, September 17, 2003.

More Supreme Court News

6/14. The Supreme Court issued an order in KP Permanent Make-Up v. Lasting Impressions. It ordered that "The motion of the Solicitor General for leave to participate in oral argument as amicus curiae and for divided argument is granted." See, Order List [11 pages in PDF] at page 2. This case involves a trademark dispute. The U.S. Court of Appeals (9thCir) issued its opinion [20 pages in PDF] on April 30, 2003. The Supreme Court granted certiorari on January 9, 2004. See, story titled "Supreme Court Grants Cert in Trademark Case" in TLJ Daily E-Mail Alert No. 813, January 12, 2004. This case is No. 03-409.

6/14. The Supreme Court announced that "The Court will take a recess from today until Monday, June 21, 2004." See, Order List [11 pages in PDF] at page 11.

People and Appointments

6/14. Monica Luechtefeld, and others, were appointed to the Private Sector Senior Advisory Committee (PVTSAC) of the Homeland Security Advisory Council (HSAC). See, Department of Homeland Security (DHS) release. She is EVP of Global E-commerce for Office Depot.

House to Take Up Tax Bill with ETI Repeal and Tech Provisions

6/11. The House Ways and Means Committee has scheduled a meeting to mark up HR 4520, the "American Jobs Creation Act of 2004", on Monday, June 14 at 5:00 PM. The House is scheduled to consider the bill later in the week. The bill contains technology related provisions, including repeal of the ETI regime, and a limitation on deductions for charitable contributions of patents and other IP.

This bill would revise federal tax law to bring it into compliance with World Trade Organization (WTO) rulings that the US Foreign Sales Corporation (FSC) tax regime, and its replacement, the Extraterritorial Income (ETI) tax regime, constitute illegal export subsidies.

Rep. Bill Thomas (R-CA), the Chairman of the Ways and Means Committee, stated in a release on June 4, 2004 that this bill "will put an end to escalating sanctions against American products. It will also provide tax relief to U.S. manufacturers to help create more American jobs and help U.S.-based businesses succeed in the worldwide market while building jobs at home".

See also, Ways and Means Committee's summary [2 pages in PDF] of the FSC/ETI related provisions of the bill.

Charitable Contributions of IP. The bill would also limit deductions for charitable contributions of intellectual property.

In 1958, Internal Revenue Service (IRS) Revenue Ruling 58-260 confirmed the deductibility of donated patents. However, in recent years, some legislators, and especially Sen. Charles Grassley (R-IA), the Chairman of the Senate Finance Committee, have argued that the regime has been abused.

In addition, the Internal Revenue Service announced in December of 2003 that it will crack down on excessive claims of deductions. The IRS issued an undated notice [3 pages in PDF] that states that the IRS "is aware that some taxpayers that transfer patents or other intellectual property to charitable organizations are claiming charitable contribution deductions in excess of the amounts to which they are entitled under § 170 of the Internal Revenue Code." See, story titled "IRS Plans Crack Down on Charitable Contributions Deductions Involving Transfers of Intellectual Property" in TLJ Daily E-Mail Alert No. 805, December 23, 2003.

Section 682 of HR 4520 contains language limiting deductions for charitable contributions of intellectual property, including patents and copyrights, to non-profit entities, such as universities.

For a discussion of the issues involved, see the February 2, 2004 paper [48 pages in PDF] titled "IP Donations: A Policy Review". This was written by Ron Layton and Peter Bloch for the International Intellectual Property Institute (IIPI). See also, story titled "IIPI Paper Examines Tax Deductions for IP Donations" in TLJ Daily E-Mail Alert No. 837, February 16, 2004.

Senate Bill. Sen. Grassley has been trying to pass a limitation for several years. First, he succeeded in adding language to the Senate's version of HR 2, the "Jobs and Growth Tax Relief Reconciliation Act of 2003", a major tax cut bill. See, "Senate Passes Tax Bill with Limitation of Deduction for Charitable Contributions of Intellectual Property" in TLJ Daily E-Mail Alert No. 664, May 19, 2003. This bill ultimately became law (Public Law No. 108-27) on May 28, 2003, but without Sen. Grassley's IP language.

Sen. Grassley has also inserted language addressing this issue into S 1637, the "Jumpstart Our Business Strength (JOBS) Act". This is a huge tax bill, the primary purpose of which is to revise tax law to bring it into compliance with World Trade Organization (WTO) rulings that the FSC and ETI tax regimes constitute illegal export subsidies.

Sen. Grassley introduced the bill on September 18, 2003. The Senate Finance Committee amended and approved the bill on October 2, 2003. See also, Committee Report, No. 108-192. The full Senate passed this bill on May 11, 2004. Section 494 of S 1637 has language that is similar, but not identical, to Section 682 of the HR 4520.

Other Tech Related Provisions of HR 4520. This is a huge bill with numerous provisions, including many that may be of interest to the technology sector, including the following.

Section 261 excludes incentive stock options and employee stock purchase plan stock options from wages.

Section 402 extends the research and development tax credit, which is scheduled to expire on June 30, 2004, through December 31, 2005. The R&D tax credit is found at 26 U.S.C. § 41. The sunset provision is found at Section 41(h)(1). The R&D tax credit is a perennial issue in Congress. The credit was first enacted in 1981 as a temporary measure, and has been extended every few years since then.

Section 409 extends the provision of the Internal Revenue Code pertaining to charitable contributions of computer technology and equipment for educational purposes. 26 U.S.C. § 170 pertains to charitable contributions. 26 U.S.C. § 170(e)(6) is a special rule for contributions of computer technology and equipment for educational purposes. Section 170(e)(6)(G) provides that it expired on December 31, 2003. HR 4520, at Section 409, would extend this expiration date to December 31, 2005.

Section 647 pertains to the limitation on the depreciation period for software leased to tax exempt entities.

Go to News from June 6-10, 2004.