Summary of the Tax Relief Extension Act of 1999

Monday, November 29, 1999

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Congress gave final approval November 19 to tax legislation (H.R. 1180) extending several expiring or expired tax provisions, most notably the research and experimentation tax credit. This report is a summary of the provisions in that legislation, the Tax Relief Extension Act of 1999.

The bill contains several revenue offset provisions, including prohibiting the use of the installment method of accounting by accrual method taxpayers. The legislation now goes to the President, who has indicated he will sign it in the near future. After nearly a year of haggling over tax cuts and uses of the surplus (including congressional plans for a $792 billion tax cut), Congress and the President quietly agreed to a tiny $18.4 billion 10-year tax cut focused on extenders. The larger tax policy debate over such things as individual rate cuts, further capital gains cuts, and corporate tax relief was deferred.

Research and Experimentation Tax Credit

The bill extends the research credit five years through June 30, 2004, and increases the credit rate for the alternative incremental credit by one percentage point for each step in the three-tiered fixed-base system. The definition of qualified research is expanded to include research undertaken in Puerto Rico and possessions of the United States.

To lower the cost of the extension, the bill delays the availability of the tax credits. The research tax credits attributable to the period beginning July 1, 1999, and ending on September 30, 2000, in effect, cannot be claimed until October 1, 2000. Likewise, research tax credits attributable to the period October 1, 2000 through September 30, 2001, in effect, cannot be claimed before October 1, 2001.

Comment -- The rules on when the credits may be claimed merely work to transfer the cost of extending the tax credit to later fiscal years. This made it easier for Congress to claim that the tax cuts in the extenders bill were "paid for in the first year." Of course, the rules make things harder for taxpayers claiming the credit. They must now make what amounts to interest-free loans to the government and then file additional tax returns to collect on those loans.

The legislation generally extends the following expiring provisions through December 31, 2001:

• Alternative minimum tax relief allowing individuals to use non-refundable credits to offset regular tax liability in full (as opposed to only the amount by which the regular tax exceeds the tentative minimum tax) to taxable years beginning in 1999. For taxable years beginning in 2000 and 2001, the personal nonrefundable credits may offset both the regular tax and the minimum tax;
• Exclusion from employees’ income for employer-provided educational assistance (undergraduate courses only);
• Exception from subpart F tax rules for certain income derived in the active conduct of a banking, financing, or similar business, or in the conduct of an insurance business;
• Work Opportunity and Welfare-to-Work Credits;
• Election to expense certain environmental remediation expenditures;
• Suspension of a rule limiting percentage depletion deductions for oil and gas independent producers to 100 percent of the net income from the mineral property;
• Tax credit for electricity produced from wind and closed-loop biomass facilities, including making the credit available to facilities producing electricity from poultry waste;
• Authority to issue up to $400 million of qualified zone academy bonds;
• Tax credit for first-time homebuyers in the District of Columbia;
• Increase in the rum coverover rate for Puerto Rico and the Virgin Islands;
• Generalized System of Preferences (through September 30, 2001).

Revenue Offsets

The tax cuts in this legislation cost $21.4 billion over ten years. This cost is offset by $2.9 billion in targeted tax increases. Two of these will be effective on the date the President signs the legislation:

• Repeal of the installment method for accrual method taxpayers, and
• Rules classifying as ordinary income, income from sales of certain commodity derivatives, hedging transactions, and trade or business supplies.

The other revenue offsets used to pay for the extensions, most of which were taken from the vetoed $792 billion tax bill (H.R. 2488), would --

• Prevent the use of constructive ownership transactions to convert ordinary income or short-term capital gains into income eligible for long-term capital gain rates;
• Deny the charitable deduction on charitable split-dollar life insurance transactions;
• Prevent the use of a subsidiary corporation to avoid a basis step-down on the distribution of partnership assets to a partner who will control the corporation after the distribution;
• Increase the individual estimated tax safe harbor based on a percentage of prior year tax for individuals with AGI over $150,000 from 106 percent in 2000 and 2001 to 108.5 percent and 110 percent, respectively;
• Extend information reporting on cancellation of indebtedness to non-bank lending institutions; and
• Extend and expand the present-law provisions allowing employers to transfer excess defined benefit plan assets to a special account for health benefits of retirees.

REIT Proposals Included

The bill also includes a series of real estate investment trust (REIT) modernization provisions, and a modification to the estimated tax rules for closely held REIT dividends. The legislation does not, however, include a proposal from the vetoed tax-cut bill relating to closely held REITs that would have imposed additional requirements for REIT qualification.

The legislation also contains measures to address several other time-sensitive tax-related provisions, including the following:

• Prohibit the disclosure of advance pricing agreements (APAs) and APA background files;
• Provide the Treasury Secretary with the authority to postpone certain tax-related deadlines on a taxpayer-by-taxpayer basis if the taxpayer is determined to be affected by year 2000 failures;
• Delay the requirement that registered motor fuels terminals offer dyed fuel as a condition of registration;
• Add certain vaccines against streptococcus pneumoniae to the list of taxable vaccines; and,
• Provide that Federal production payments to farmers are taxable in the year received rather than in a year into which the payment could have been accelerated at the taxpayer’s election

Unused Revenue Raisers Still at Risk

Taxpayers should not take comfort in the fact that many of the revenue raisers from the vetoed tax bill were not used as part of the extenders package. Congressional tax writers already have indicated they will use several of them in the next session of Congress to offset the cost of the Africa/ Caribbean Basin Initiative. These revenue-raising provisions, which likely will retain their current proposed effective dates, include, but are not limited to, the following:

• Limit the use of the non-accrual experience method of accounting to amounts to be received for the performance of qualified professional services;
• Prevent the duplication of loss through the assumption of certain liabilities;
• Require consistent treatment and provide basis allocation rules for transfers of intangibles in certain nonrecognition transaction;
• Increase the optional withholding rates for nonperiodic payments from deferred compensation plans; and
• Impose limitation on prefunding of certain employee benefits.

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