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Joint Committee on Taxation Description of Revenue Provisions

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Joint Committee on Taxation Description of Revenue Provisions [JOINT COMMITTEE PRINT] DESCRIPTION OF REVENUE PROVISIONS CONTAINED IN THE PRESIDENT’S FISCAL YEAR 2010 BUDGET PROPOSAL PART TWO: BUSINESS TAX PROVISIONS Prepared by the Staff of the JOINT COMMITTEE ON TAXATION September 2009 U.S. Government Printing Office Washington: 2009 JCS-3-09 JOINT COMMITTEE ON TAXATION 111TH CONGRESS, 1ST SESSION ________ HOUSE SENATE Charles B. Rangel, New York Max Baucus, Montana Chairman Vice Chairman Fortney Pete Stark, California John D. Rockefeller IV, West Virginia Sander M. Levin, Michigan Kent Conrad, North Dakota Dave Camp, Michigan Chuck Grassley, Iowa Wally Herger, California Orrin G. Hatch, Utah Thomas A. Barthold, Chief of Staff Emily S. McMahon, Deputy Chief of Staff Bernard A. Schmitt, Deputy Chief of Staff CONTENTS Page INTRODUCTION .......................................................................................................................... 1 I. TAX INCENTIVES AND OTHER TAX REDUCTIONS ................................................ 2 A. Increase in Limitations on Expensing of Certain Depreciable Business Assets ........... 2 B. Qualified Small Business Stock .................................................................................... 5 C. Make the Research Credit Permanent ........................................................................... 7 D. Expand Net Operating Loss Carryback ...................................................................... 25 E. Restructure Transportation Infrastructure Assistance to New York City ................... 30 II. REVENUE RAISING PROPOSALS ............................................................................... 34 A. Codify Economic Substance Doctrine ........................................................................ 34 1. Codify economic substance doctrine .................................................................... 34 2. Penalty for understatements attributable to transactions lacking economic substance ............................................................................................................... 53 3. Deny interest deduction for interest attributable to lack of economic substance . 70 B. Repeal Last-In, First-Out Inventory Method of Accounting ...................................... 72 C. Deny Deduction for Punitive Damages ...................................................................... 76 D. Repeal the Lower of Cost or Market Inventory Accounting Method ......................... 78 E. Modify Alternative Fuel Mixture Credit ..................................................................... 80 III. OIL AND GAS PRODUCTION PROPOSALS ............................................................... 85 A. Levy Tax on Certain Offshore Oil and Gas Production ............................................. 85 B. Repeal Oil and Gas Production Incentives ................................................................. 87 IV. FINANCIAL INSTITUTIONS, INSURANCE COMPANIES, AND PRODUCTS ..... 107 A. Require Accrual of the Time Value Element on Forward Sale of Corporate Stock ......................................................................................................................... 107 B. Require Ordinary Treatment for Options Dealers and Commodities Dealers .......... 111 C. Modify the Definition of Control for Purposes of the Section 249 Deduction Limitation .................................................................................................................. 116 D. Modify Rules That Apply to Sales of Life Insurance Contracts ............................... 118 E. Modify Dividends Received Deduction for Life Insurance Company Separate Accounts ................................................................................................................... 123 F. Expand Pro Rata Interest Expense Disallowance for Company-Owned Life Insurance (COLI) ...................................................................................................... 131 i INTRODUCTION This document,1 prepared by the staff of the Joint Committee on Taxation, provides a description and analysis of the business tax provisions that are included in the President’s fiscal year 2010 budget proposal, as submitted to the Congress on May 7, 2009.2 The document generally follows the order in which the provisions are set forth in the table providing estimates of the revenue effects of all the revenue proposals contained in the President’s budget proposals.3 For each provision, there is a description of present law and the proposal (including effective date), a reference to relevant prior budget proposals or recent significant legislative action, and an analysis of policy issues related to the proposal. 1 This document may be cited as follows: Joint Committee on Taxation, Description of Revenue Provisions Contained in the President’s Fiscal Year 2010 Budget Proposal; Part Two: Business Tax Provisions (JCS-3-09), September 2009. For part one of the document, see Joint Committee on Taxation, Description of Revenue Provisions Contained in the President’s Fiscal Year 2010 Budget Proposal; Part One: Individual Income Tax and Estate and Gift Tax Provisions (JCS-2-09), September 2009. Subsequent parts of the document will describe international and other tax provisions. The staff of the Joint Committee on Taxation has provided estimates of the revenue effects of each of the provisions described herein. See, Joint Committee on Taxation, Estimated Budget Effects of the Revenue Provisions Contained in the President’s Fiscal Year 2010 Budget Proposal as Described by the Department of the Treasury, May 2009, (JCX-28-09), June 11, 2009. 2 See Office of Management and Budget, Budget of the U.S. Government, Fiscal Year 2010: Analytical Perspectives (H. Doc. 111-3, Vol. III), pp. 265-273. See also Department of the Treasury, General Explanations of the Administration’s Fiscal Year 2010 Revenue Proposals, May 2009. 3 See Joint Committee on Taxation, Estimated Budget Effects of the Revenue Provisions Contained in the President’s Fiscal Year 2010 Budget Proposal as Described by the Department of the Treasury, (JCX-28-09), June 11, 2009. 1 I. TAX INCENTIVES AND OTHER TAX REDUCTIONS A. Increase in Limitations on Expensing of Certain Depreciable Business Assets Present Law A taxpayer that satisfies limitations on annual investment may elect under section 179 to deduct (or “expense”) the cost of qualifying property, rather than to recover such costs through depreciation deductions.4 For taxable years beginning in 2009, the maximum amount that a taxpayer may expense is $250,000 of the cost of qualifying property placed in service for the taxable year. The $250,000 amount is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the taxable year exceeds $800,000.5 For taxable years beginning in 2010, the maximum amount that a taxpayer may expense is $125,000 of the cost of qualifying property placed in service for the taxable year. The $125,000 amount is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the taxable year exceeds $500,000. The $125,000 and $500,000 amounts are indexed for inflation. In general, qualifying property is defined as depreciable tangible personal property that is purchased for use in the active conduct of a trade or business. Off-the-shelf computer software placed in service in taxable years beginning before 2011 is treated as qualifying property. The amount eligible to be expensed for a taxable year may not exceed the taxable income for a taxable year that is derived from the active conduct of a trade or business (determined without regard to this provision). Any amount that is not allowed as a deduction because of the taxable income limitation may be carried forward to succeeding taxable years (subject to similar limitations). No general business credit under section 38 is allowed with respect to any amount for which a deduction is allowed under section 179. An expensing election is made under rules 6 prescribed by the Secretary. 4 Additional section 179 incentives are provided with respect to qualified property meeting applicable requirements that is used by a business in an empowerment zone (sec. 1397A), a renewal community (sec. 1400J), or the Gulf Opportunity Zone (sec. 1400N(e)). 5 The temporary $250,000 and $800,000 amounts were enacted in the Economic Stimulus Act of 2008, Pub. L. No. 110-185, and extended for taxable years beginning in 2009 by the American Recovery and Reinvestment Act of 2009, Pub. L. No. 111-5. 6 Sec. 179(c)(1). Under Treas. Reg. sec. 1.179-5, applicable to property placed in service in taxable years beginning after 2002 and before 2008, a taxpayer is permitted to make or revoke an election under section 179 without the consent of the Commissioner on an amended Federal tax return for that taxable year. This amended return must be filed within the time prescribed by law for filing an amended return for the taxable year. T.D. 9209, July 12, 2005. 2 For taxable years beginning in 2011 and thereafter, other rules apply.7 Description of Proposal The proposal increases permanently the amount a taxpayer may deduct under section 179. The proposal provides that the maximum amount a taxpayer may expense, for taxable years beginning after 2010, is $125,000 of the cost of qualifying property placed in service for the taxable year. The $125,000 amount is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service
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