The 1998 Tax Provisions:
Internet Tax Freeze, Expiring Provisions,
Technical Corrections, and Other Tax Provisions
1. Extension of Expiring Provisions
2. Revenue Offsets
2. Revenue Offsets
The House originally proposed to use 10 percent of the federal budget surplus to offset most of the cost of its $80 billion tax-cut bill. After it became clear that both Senate budget hawks and President Clinton objected to using the surplus, Senate Majority Leader Trent Lott, R-Miss., scrapped the larger bill in favor of the slimmed-down package of expired tax provision extensions. To pay for the smaller bill, Congress once again has turned to the corporate community and curtailed certain tax incentives that the tax-writers have deemed "corporate loopholes."
Deductible Liquidating RICs and REITs
Under the new legislation, any amount that a liquidating regulated investment company (RIC) or real estate investment trust (REIT) may take as a deduction for dividends paid with respect to an otherwise tax-free liquidating distribution to an 80-percent corporate owner is includible in the income of the recipient corporation. The includible amount is treated as a dividend received from the RIC or REIT.
The liquidating corporation may designate the amount distributed as a capital gain dividend or, in the case of a RIC, a dividend eligible for the 70-percent dividends-received deduction or an exempt interest dividend, to the extent provided by the RIC or REIT provisions of the tax code.
Effective date. The provision is effective for distributions on or after May 22, 1998, regardless of when the plan of liquidation was adopted. No inference is intended regarding the treatment of such transactions under present law.
Comment. The provision does not otherwise change the tax treatment of the distribution to the parent corporation or to the RIC or REIT. So, for example, the liquidating corporation will not recognize gain (if any) on the liquidating distribution and the recipient corporation will hold the assets at a carryover basis, even where the amount received is treated as a dividend.
Restrict Specified Liability Loss 10-Year Net Operating Loss Carryback Rules
Background. Under present law, that portion of a net operating loss (NOL) that qualifies as a "specified liability loss" may be carried back 10 years rather than being limited to the general two-year carryback period. A specified liability loss was defined as including amounts allowable as a deduction with respect to product liability, and also certain liabilities that arise out of a federal or state law or out of any tort of the taxpayer, if the act giving rise to the liability occurred at least three years earlier.
New Provision. Under the legislation, specified liability losses would be limited to product liability losses and amounts allowable as a deduction that are in satisfaction of a liability under a federal or state law requiring the reclamation of land, decommissioning of a nuclear power plant (or any unit thereof), dismantlement of a drilling platform, remediation of environmental contamination, or a payment under any workers' compensation act, if the act (or failure to act) giving rise to such liability occurs at least three years before the beginning of the taxable year.
Effective date. The provision is effective for net operating losses arising in taxable years ending after the date of enactment.
Comment. The new legislation severely limits which federal or state laws can be used as a basis for the 10-year NOL carryback, and eliminates liabilities arising out of tort from the list of specified liability losses. As under present law, the specified liability loss (as redefined) cannot exceed the amount of the net operating loss and is only available to taxpayers that used an accrual method of accounting throughout the period that the act (or failure to act) giving rise to the liability occurred. No inference regarding the interpretation of the specified liability loss carryback rules under prior law is intended.
Clarify and Expand Math Error Procedures
The new law authorizes the IRS to determine that an individual identified on a tax return corresponds in every aspect (including name, age, date of birth, and Social Security number) to the individual to whom the taxpayer identification number (usually the taxpayer's Social Security number) is issued. The IRS is authorized to use the mathematical and clerical error procedure to deny eligibility for the dependent care tax credit and the earned income credit even though a correct taxpayer identification number has been supplied if the IRS determines that the statutory age restrictions for eligibility for any of the respective credits are not satisfied.
Effective date. The provision is effective for taxable years ending after the date of enactment.
Vaccines against Rotavirus Gastroenteritis Added to List of Taxable Vaccines
The legislation adds vaccines against rotavirus gastroenteritis to the list of taxable vaccines taxed at the rate of 75 cents per dose.
Effective date. The provision is effective for vaccines sold by a manufacturer or importer after the date of enactment.
Treatment of Certain Prizes
A prize winner who is provided the option to choose either cash or an annuity within 60 days after becoming entitled to the prize is not required to include amounts in gross income merely by reason of having the option.
Effective date. The provision is effective for prizes to which the taxpayer first becomes entitled after the date of enactment. In addition, the provision applies to a prize to which the taxpayer became entitled before the date of enactment, if the taxpayer has the option to receive a single cash payment during the 18-month period beginning on July 1, 1999.
