Tuesday, May 31, 2005
Copyright © Las Vegas Review-Journal

Guinn: IRS letter backs rebate plan

Few would have to pay federal tax on state's checks, governor says

CARSON CITY -- Gov. Kenny Guinn said Monday an Internal Revenue Service memo shows few if any Nevadans would be subject to paying federal taxes on rebates provided under his plan to return $300 million to taxpayers.

"It substantiates what I have been saying all along, that the best plan we have is giving back $300 million but giving it back in a way that is not taxable," Guinn said in a morning news conference.

He said the IRS would not require the state government to send 1099 forms for miscellaneous income on the rebate checks he wants to mail to citizens late this summer.

The forms usually are sent to anyone who receives $600 or more in annual income from a source other than his or her main employer. The IRS receives copies of the forms.

Under his plan, residents would receive rebates on the car registration fees they paid to the Department of Vehicles last year.

Nevadans would receive as much as $300 in rebates on newer vehicles and as little as $41 on older ones. Those who registered multiple vehicles might receive rebates totaling more than $600.

Within hours of the announcement, both Senate Minority Leader Dina Titus, D-Las Vegas, and Assembly Minority Leader Lynn Hettrick, R-Gardnerville, said that time is running out on the 2005 Legislature and that they would support the governor's plan, introduced Monday as Senate Bill 519.

"I think we should do it," Hettrick said. "The governor is clearly going to support it, and it is not taxable. We should just do it."

Titus said, "I think we are getting to the point where we have to be able to compromise."

The Legislature is scheduled to adjourn Monday.

But Titus said she still thinks her rebate plan is a better proposal. She wants to give all 1.6 million licensed drivers in Nevada a rebate check of about $150.

She said Guinn's interpretation of the IRS letter includes a lot of "creative bookkeeping."

The letter, by George Blaine, an associate chief counsel for the IRS, said: "This advice may not be used or cited as precedent."

Although someone might get away with not reporting the car registration rebate as income now, Titus questioned what would happen if the IRS later audited that person.

"Do you get in trouble because you didn't report it?" Titus asked.

Because the 1099 miscellaneous income forms would not be sent, the IRS would not know which residents who received rebates claimed the car registration fees as an itemized deduction on their 2004 income tax returns.

The Guinn administration was worried that such people would have to pay income taxes on their rebates.

Despite Guinn's assurances, the IRS said in its letter that the taxpayer must include as income refunds of previously deducted amounts of money.

"Yes, they have an obligation" to report the rebate, said Michael Hillerby, Guinn's chief of staff. "If they are honest, they will do it, but it is a small minority of people who would have to do it."

He said fewer than one-third of the million Nevadans who filed federal income tax returns last year were eligible to itemize deductions.

Nevadans who did itemize and choose to report the rebate check as income would not pay a hefty sum.

If someone receives a $300 rebate and is in the 15 percent tax bracket, then his tax would be $45, Hillerby said.

"It may be taxable for a minority of people," Guinn said. "They will have to decide that when they fill out their tax forms. It is the green light we wanted."

But Assembly Majority Leader Barbara Buckley, D-Las Vegas, said the IRS letter confirms what she had assumed it would: that the rebate checks under Guinn's plan are taxable for people who previously claimed car registration fees as a deduction.

"That is what we have been saying all along," she said. "We have a week left. Do we use a plan that gives money to Nevadans and some money to the IRS or a plan that gives money only to Nevadans?"

Assembly Speaker Richard Perkins, D-Henderson, and Buckley want to give rebates in a plan similar to Titus' proposal.

They would give about $175 to every Nevadan over 18 who is a licensed driver or has a state ID card.

But they have said their proposal represents a return of gasoline taxes paid by consumers.

Guinn said Monday that their plan does not pass IRS muster because no relationship exists between gasoline taxes and the state surplus that will fund the rebates.

Gasoline taxes paid by residents go into the state highway construction fund. The money for the surplus comes from the state general fund.

But the letter from the IRS makes no mention of the gasoline tax rebate plan or that a connection must exist between the source of the money and the rebate.

"It doesn't address our plan at all," Buckley said.

She said lawyers have assured them their rebate plan is not taxable.