Free Response to Motion [Dispositive] - District Court of Federal Claims - federal

Case 1:05-cv-00231-EJD

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Calendar No. 346
lOBTH CONGRESS 1

I st Session f

SENATE

REPORT

106-201

TAX RELIEF EXTENSION ACT OF 1999

OCTOBER 26, 1999.-0rdered to be printed

Mr. ROTH, from the Committee on Finance,

submitted the following

REPORT
¡To accompany S. 17921

ular tax liability, and for other purposes, having considered the same, reports favorably thereon and recommends that the bil do
pass.
CONTENTS
Ptige

sions, to fully allow the nonrefundable personal credits against reg-

The Committee on Finance reported an onginal bill (S. 1792) to amend the Intemal Revenue Code of 1986 to extend expiring provi-

i. Legislative Background .................................................................................... 2 II. Explanation of the bil .................................................................................... 3 Title I. Extension of Expired and Expiring Tax Provisions .......................... 3 A Extend Minimum Tax Relief for Individuals (sec. 101) .................... 3
B. Extend Exclusion for Employer-Provided Educational Assistance

C. Extension of Research and Experientation Credit. Increase in the Rates for the Alternative Incremental Research Credit, and
D. F,xtnd Exceptions Under Subpart F for Active Financing Income

(sec. 102) ............................................................................................. 4
Expansion to Puerto Rico and U.S. Possessions (sec. 103) ............. 6

pletion From Marginal Oil and Gas Wells (sec. lOG) ...................... 11 F. Extend the Work Opportunity Tax Credit (sec. 106) ........................ 12 G. Extend the Welfare-to-Work Tax Credit (sec. 106) ........................... 13

E. Extend Suspension of Net Income Limitation on Percentage De-

(sec. 104) .............................................................................. 9

H. Extend and Modif' Tax Credit for Electricity Produced by Wind

and Closed-Loop Biomass Facilities (sec. 107) ................................. 14

I. Expansion of Qualifyng Sites for Expensing of Environmental

.J. Temporary Increase in Amount of Rum Excise Tax That is Cov-

Remediation Expenditures (sec. 108) ............................................... 17
Dyed Fuel 8S a Condition of Registration (sec. 110) ....................... 19

ered Over to Puert Rico and the U.S. Virgin Islands (sec. 109) ... 18

K. Delay Requirement That Registered Motor Fuels Terminals Offer
79-0lO

;¿ GÖVERtll,'ENT

t EXHIBIT

i ApP.'" '" Al

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the provision. For example, it is intended that reguations prevent

avoidance of thc purposcs of the provision by inappropriate or imficiares under bona fide chartable gi annuities and for certain
a chartable

proper reliance on the limited exceptions provided for certain bcnc-

noncharitable recipients of an annuity or untrust amount paid by remainder trust.
EFFECTIVE DATE

The deduction denial provision applies to transfers after February 8, 1999 (as provided in H.R. 630). The excise tax provision

ing provision applies to premiums paid after Februar 8, 1999 (determined as if the excise ta imposed under the provision applied

applies to premiums paid after the date of enactment. The report-

to premiums paid afer that date).
No inference is intended that a charitable contribution deduction

is allowed under present law with rcspect to a charitable split-dollar insurance arrangement. The provision does not change the
rules with rcspcct to fraud or criminal or civil penalties under
present law; thus, actions constituting fraud or that are subject to

ject to the penalties after enactment of the provision.

penaltics under present law would stil constitute fraud or be subSUMPTION OF CERTAIN LIAILITIES (SEC. 213 OF TIlE BILL AND
SEC. 358 OF THE CODE)
PRESENT LAW

M. PREVENT DUPLICATION OR ACCELERATION OF Loss THROUGH As-

Generally, no gain or toss is recognized when one or more persons contribute property in exchange for stock and immediately

money or other property ("boot") as part of the exchange (sec. 351). The assumption of liabilities by the controlled corporation gen-

However, the person may recognze gain to the extcnt it receives

after the exchange such person or persons control the corporation.

tion to this rule is when, "taking into consideration the nature of the liability and the circumstances in the light of which the arrangement for the assumption or acquisition was made, it appears that the principal purpose of the taxpayer * * * was a purpose to
pose, was not a bona fide business purpose" (sec. 357(b)). Another
the total of the adjusted basis of the property transferred to the

erally is not treated as boot received by the transferor. One excep-

avoid Federal income tax on the exchange, or * * * if not such pur-

exception applies to the extent that the liabilities assumed exceed
In general, the transferor's basis in the stock of the controlled

controlled corporation pursuant to the exchange (scc. 357(c)).
corporation is the same as the basis of the property contributed to the controlled corporation, increased in the amount of any gain recognized by the transferor on the exchange, and rcduced by the

ity that would give rise to a deduction. These liabilities are not taken into account in determining whether thc transferor has gain
on the exchange, and the transferor's basis in the stock of the con-

amount of any money or property received (sec. 358). For this purpose, the assumption of a liability is trcatcd as money received by the transferor. . Special rules apply in connection with the assumption of a liabil-

022

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trolled corporation is not reduced by the assumption of these liabilities. The Internet Revenue Servce has ruled that the assumption of certain contingent liabilities by an accrual basis corporation is
covered by this rule.28
REASONS FOR CHAGE

The Committee is concerned about a type of transaction in which
taxpayers seek to accelerate, and potentialy duplicate, deductions

involving certain liabilties. As an example, assume a transferor
corporation tr'ansfers assets with a fair market value basis) in ex-

change for preferred stock of the transferee corporation, plus the
transferee's assumption of a contingent liabilty that is deductible in the future. The transferor claims a basis for the stock equal to

is reduced by the amount of the liability, creating a potential loss. The transferor may then attempt to accelerate the deduction that would be attributable to the liability by sellng or exchanging the stock. Furhermore, the transferee might take the position that it
is entitled to deduct the payments on the liability, effectively dupli-

the basis of the transferred assets. However, the value of the stock

cating the deduction attributable to the liability. The conference report to the Taxpayer Refund and Relief Act of 1999 contained a provision that would have amended the "principal
purpose" aspect of the anti-abuse rule. The Committee believes
that a different approach is more appropriate; one that eliminates

any loss on the sale of stock attributable to such liabilities.
EXPLAATION OF PROVISION
The provision provides that if the basis of stock received by a

tion exceeds its fair market value (without regard to this proposal),
then the basis of the stock received is reduced (but not below the

transferor as part of a tax-free exchange with a controlled corpora-

the stock by reason of the assumption. The provision docs not apply

fair market value) by the amount (determined as of the date of the exchange) of any liabilty that (1) is assumed in exchange for such property, and (2) did not otherwise reduce the transferor's basis of

ferred to the corporation as part of the exchange. Nor does the provision change the tax treatment with respect to the transferee corporation. For this purpose, the term "liabilty" includes any obliga-

where the trade or business giving rise to the liability is trans-

fixed or contingent or otherwse taken into account under the Code. The Secretary of the Treasury shall prescribe such reguations as
may bc neccssary to carr out the purposes of this provision.

tion to make payment, without regard to whether the obligation is

The application of the provision is ilustrated in the follO\ving ex-

the corporation assumes $40 of liabilities (the payment of which would give rise to a deduction). Thus, the value of the stock received by the transferor is $60. Undcr present law, the basis of the
stock would be $100. The provision requires that the basis of the

ample: Assume a taxpayer transfers assets with an adjusted basis and fair market value of $100 to its wholly-owned corporation and

stock be reduced to $60 (i.e., a reduction of $40). The basis reduc28Rev. RuJ 95-74,1995-2 C.R. 36.

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tion would not be required if the transferred assets consisted of the trade or business with respcct to which the liability arose.

viding appropriate adjustments to prevent the acceleration or duplication of losses through the assumption of liabilities (as defined in the provision) in transactions involving partnerships.
EFFECTIV DATE

The Secretar of the Treasury is directed to prescnbe rues pro-

October 19, 1999. Except as provided by the Secretary of the Treasury, the rules addressing transactions involving partnerships would
1999.
N. REQUIRE CONSISTENT TREATMENT Al\JD PROVIE BASIS ALLOCA-

The provision is effective for assumptions of liabilities on or after

be effective for assumptions of liabilities on or after October 19,
TION RULES FOR TRASFERS OF INTANGIDLES IN CERTAI NONRECOGNITION TRASAC'IlONS (SEC. 214 OF THE BILL AND SEeS. 351
AND 721 OF THE CODE)
PRESENT LAW

Generally, no gain or loss is recognized if onc or more persons
transfer property to a corporation solely in exchange for stock in

pcrsons are in control of the corporation. Similarly, no gain or loss
the regulations provide the meaning of the requirement that a per-

the corporation and, immediately after the exchange such pcrson or

is recognized in the case of a contribution of property in exchange for a partnership interest. Neither the Internal Revenue Code nor

terest). The Internal Revenue Servce interprets the requiremcnt consistent with the "sale or other disposition of property" language
in the context of a taxable disposition of property. See, e.g., Rev.

son "transfer property" in exchange for stock (or a partnership in-

treated as payments for the use of property rather than for the property itself. These amounts arc characterized as ordinary income. However, the Claims Court has rejected the Service's position and held that the transfer of a nonexclusive license to use a

RuL. 69-156, 1969-1 tax-free exchange and stock received will be

fer" of "property" for purposes of thc nonrecognition provision. See E.I. DuPont de Nemours & Co. v. U.S., 471 F.2d 1211 (Ct. Cl.
1973).
REASONS FOR CHAGE

patent (or any transfer of "something of value") could be a "trans-

The Committee is concerned that the unccrtainty of present law may encourage transferors and transferees to attempt to take inconsistent reporting positions that may have the cffect of "whipbasis allocation rules should be provided.
EXPLAATlON OF PROVISION

sawin~" the governent. Also, the Committee believes that clear
The provision treats a transfer of an interest in intangible prop-

erty constituting less than all of the substantial rights of the trans-

feror in the property as a transfer of property for purposes of the nonrecognition provisions regarding transfers of property to con-

024