DESCRIPTION OF EXPIRING TAX PROVISIONS

IN H.R. 2923

Scheduled for Markup

by the

HOUSE COMMITTEE ON WAYS AND MEANS

on September 24, 1999

Prepared by the Staff

of the

JOINT COMMITTEE ON TAXATION

September 23, 1999

JCX-64-99
(i)

CONTENTS

Page

INTRODUCTION .......................................................... 1

A. Extend Minimum Tax Relief for Individuals ................................. 2

B. Extension of Research Tax Credit ......................................... 3

C. Extend Exceptions under Subpart F for Active Financing Income ............... 6

D. Extend Suspension of Net Income Limitation on Percentage Depletion from

Marginal Oil and Gas Wells .............................................. 8

E. Extend the Work Opportunity Tax Credit ................................... 8

F. Extend the Welfare-to-Work Tax Credit .................................... 9
1

 This document may be cited as follows: Joint Committee on Taxation, Description of

Expiring Tax Provisions in H.R. 2923 (JCX-64-99), September 23, 1999.

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INTRODUCTION

This document,1 prepared by the staff of the Joint Committee on Taxation, provides a

description of expiring tax provisions in H.R. 2923 scheduled for markup in the House

Committee on Ways and Means on September 24, 1999.
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A. Extend Minimum Tax Relief for Individuals

Present Law

Present law provides for certain nonrefundable personal tax credits (i.e., the dependent

care credit, the credit for the elderly and disabled, the adoption credit, the child tax credit, the

credit for interest on certain home mortgages, the HOPE Scholarship and Lifetime Learning

credits, and the D.C. homebuyer’s credit). Except for taxable years beginning during 1998, these

credits are allowed only to the extent that the individual’s regular income tax liability exceeds the

individual’s tentative minimum tax, determined without regard to the minimum tax foreign tax

credit. For taxable years beginning during 1998, these credits are allowed to the extent of the full

amount of the individual’s regular tax (without regard to the tentative minimum tax).

An individual’s tentative minimum tax is an amount equal to (1) 26 percent of the first

$175,000 ($87,500 in the case of a married individual filing a separate return) of alternative

minimum taxable income (“AMTI”) in excess of a phased-out exemption amount and (2) 28

percent of the remaining AMTI. The maximum tax rates on net capital gain used in computing

the tentative minimum tax are the same as under the regular tax. AMTI is the individual’s taxable

income adjusted to take account of specified preferences and adjustments. The exemption

amounts are: (1) $45,000 in the case of married individuals filing a joint return and surviving

spouses; (2) $33,750 in the case of other unmarried individuals; and (3) $22,500 in the case of

married individuals filing a separate return, estates and trusts. The exemption amounts are

phased out by an amount equal to 25 percent of the amount by which the individual's AMTI

exceeds (1) $150,000 in the case of married individuals filing a joint return and surviving spouses,

(2) $112,500 in the case of other unmarried individuals, and (3) $75,000 in the case of married

individuals filing separate returns or an estate or a trust. These amounts are not indexed for

inflation.

For families with three or more qualifying children, a refundable child credit is provided,

up to the amount by which the liability for social security taxes exceeds the amount of the earned

income credit (sec. 24(d)). For taxable years beginning after 1998, the refundable child credit is

reduced by the amount of the individual’s minimum tax liability (i.e., the amount by which the

tentative minimum tax exceeds the regular tax liability). 

Description of Proposal

The proposal would allow an individual to offset the entire regular tax liability (without

regard to the minimum tax) by the personal nonrefundable credits.

The proposal would also repeal the provision that reduces the refundable child credit by

the amount of an individual’s minimum tax.
2

 A special rule is designed to gradually recompute a start-up firm's fixed-base percentage

based on its actual research experience. Under this special rule, a start-up firm will be assigned a

fixed-base percentage of 3 percent for each of its first five taxable years after 1993 in which it

incurs qualified research expenditures. In the event that the research credit is extended beyond

the scheduled expiration date, a start-up firm's fixed-based percentage for its sixth through tenth

taxable years after 1993 in which it incurs qualified research expenditures will be a phased-in ratio

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Effective Date

The proposal would be effective for taxable years beginning after December 31, 1998.

B. Extension of Research Tax Credit

Present Law

General rule

Section 41 provides for a research tax credit equal to 20 percent of the amount by which a

taxpayer's qualified research expenditures for a taxable year exceeded its base amount for that

year. The research tax credit expired and generally does not apply to amounts paid or incurred

after June 30, 1999.

A 20-percent research tax credit also applied to the excess of (1) 100 percent of corporate

cash expenditures (including grants or contributions) paid for basic research conducted by

universities (and certain nonprofit scientific research organizations) over (2) the sum of (a) the

greater of two minimum basic research floors plus (b) an amount reflecting any decrease in

nonresearch giving to universities by the corporation as compared to such giving during a

fixed-base period, as adjusted for inflation. This separate credit computation is commonly

referred to as the “university basic research credit” (see sec. 41(e)).

Computation of allowable credit

Except for certain university basic research payments made by corporations, the research

tax credit applies only to the extent that the taxpayer's qualified research expenditures for the

current taxable year exceed its base amount. The base amount for the current year generally is

computed by multiplying the taxpayer's “fixed-base percentage” by the average amount of the

taxpayer's gross receipts for the four preceding years. If a taxpayer both incurred qualified

research expenditures and had gross receipts during each of at least three years from 1984

through 1988, then its “fixed-base percentage” is the ratio that its total qualified research

expenditures for the 1984-1988 period bears to its total gross receipts for that period (subject to a

maximum ratio of .16). All other taxpayers (so-called “start-up firms”) are assigned a fixed-base

percentage of 3 percent.2
based on its actual research experience. For all subsequent taxable years, the taxpayer's

fixed-based percentage will be its actual ratio of qualified research expenditures to gross receipts

for any five years selected by the taxpayer from its fifth through tenth taxable years after 1993

(sec. 41(c)(3)(B)). 

3

 Under a special rule, 75 percent of amounts paid or incurred by a taxpayer to a research

consortium for qualified research is treated as qualified research expenses eligible for the research

credit (rather than 65 percent under the general rule under sec. 41(b)(3) governing contract

research expenses) if (1) such research consortium is a tax-exempt organization that is described

in section 501(c)(3) (other than a private foundation) or section 501(c)(6) and is organized and

operated primarily to conduct scientific research, and (2) such qualified research is conducted by

the consortium on behalf of the taxpayer and one or more persons not related to the taxpayer. 

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In computing the credit, a taxpayer's base amount may not be less than 50 percent of its

current-year qualified research expenditures.

Alternative incremental research credit regime

Taxpayers are allowed to elect an alternative incremental research credit regime. If a

taxpayer elects to be subject to this alternative regime, the taxpayer is assigned a three-tiered

fixed-base percentage (that is lower than the fixed-base percentage otherwise applicable under

present law) and the credit rate likewise is reduced. Under the alternative credit regime, a credit

rate of 1.65 percent applies to the extent that a taxpayer's current-year research expenses exceed a

base amount computed by using a fixed-base percentage of 1 percent (i.e., the base amount

equals 1 percent of the taxpayer's average gross receipts for the four preceding years) but do not

exceed a base amount computed by using a fixed-base percentage of 1.5 percent. A credit rate of

2.2 percent applies to the extent that a taxpayer's current-year research expenses exceed a base

amount computed by using a fixed-base percentage of 1.5 percent but do not exceed a base

amount computed by using a fixed-base percentage of 2 percent. A credit rate of 2.75 percent

applies to the extent that a taxpayer's current-year research expenses exceed a base amount

computed by using a fixed-base percentage of 2 percent. An election to be subject to this

alternative incremental credit regime applies to the taxable year in which the election is made and

all subsequent years (in the event that the credit subsequently is extended by Congress) unless

revoked with the consent of the Secretary of the Treasury.

Eligible expenditures

Qualified research expenditures eligible for the research tax credit consist of: (1)

“in-house” expenses of the taxpayer for wages and supplies attributable to qualified research; (2)

certain time-sharing costs for computer use in qualified research; and (3) 65 percent of amounts

paid by the taxpayer for qualified research conducted on the taxpayer's behalf (so-called

“contract research expenses”).3
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To be eligible for the credit, the research must not only satisfy the requirements of

present-law section 174 but must be undertaken for the purpose of discovering information that is

technological in nature, the application of which is intended to be useful in the development of a

new or improved business component of the taxpayer, and must pertain to functional aspects,

performance, reliability, or quality of a business component.

Expenditures attributable to research that is conducted outside the United States do not

enter into the credit computation. In addition, the credit is not available for research in the social

sciences, arts, or humanities, nor is it available for research to the extent funded by any grant,

contract, or otherwise by another person (or governmental entity).

Relation to deduction

Deductions allowed to a taxpayer under section 174 (or any other section) are reduced by

an amount equal to 100 percent of the taxpayer's research tax credit determined for the taxable

year. Taxpayers may alternatively elect to claim a reduced research tax credit amount under

section 41 in lieu of reducing deductions otherwise allowed (sec. 280C(c)(3)).

Description of Proposal

The research tax credit would be extended for five years--i.e., generally, for the period

July 1, 1999, through June 30, 2004.

In addition, the credit rate applicable under the alternative incremental credit would be

increased by one percentage point per step, that is, from 1.65 percent to 2.65 percent when a

taxpayer's current-year research expenses exceed a base amount of 1 percent but do not exceed a

base amount of 1.5 percent; from 2.2 percent to 3.2 percent when a taxpayer's current-year

research expenses exceed a base amount of 1.5 percent but do not exceed a base amount of 2

percent; and from 2.75 percent to 3.75 percent when a taxpayer's current-year research expenses

exceed a base amount of 2 percent.

Credits earned by taxpayers for expenditures incurred after June 30, 1999, shall not be

claimed or taken into account for estimated taxes or otherwise prior to October 1, 2000. For this

purpose, the credits will be earned in equal monthly amounts. For example, assume a calendar

year taxpayer which would otherwise claim $24 of research tax credits for the 1999 taxable year. 

The proposal provides that the credit is earned in twelve equal monthly installments ($2 per

month). As a result, half of the credit is earned prior to July 1, 1999, and the taxpayer may claim

$12 of research credit (half of the $24 otherwise allowable) against his tax liability for the taxable

year 1999 with the remaining $12 suspended until after September 30, 2000. The proposal

provides that taxpayers may file for expedited refunds after September 30, 2000.
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Effective Date

Extension of the research credit would be effective for qualified research expenditures

paid or incurred during the period July 1, 1999, through June 30, 2004. The increase in the credit

rate under the alternative incremental credit would be effective for taxable years beginning after

June 30, 1999.

C. Extend Exceptions under Subpart F for Active Financing Income

Present Law

Under the subpart F rules, 10-percent U.S. shareholders of a controlled foreign

corporation (“CFC”) are subject to U.S. tax currently on certain income earned by the CFC,

whether or not such income is distributed to the shareholders. The income subject to current

inclusion under the subpart F rules includes, among other things, foreign personal holding

company income and insurance income. In addition, 10-percent U.S. shareholders of a CFC are

subject to current inclusion with respect to their shares of the CFC's foreign base company

services income (i.e., income derived from services performed for a related person outside the

country in which the CFC is organized).

Foreign personal holding company income generally consists of the following: (1)

dividends, interest, royalties, rents, and annuities; (2) net gains from the sale or exchange of (a)

property that gives rise to the preceding types of income, (b) property that does not give rise to

income, and (c) interests in trusts, partnerships, and REMICs; (3) net gains from commodities

transactions; (4) net gains from foreign currency transactions; (5) income that is equivalent to

interest; (6) income from notional principal contracts; and (7) payments in lieu of dividends.

Insurance income subject to current inclusion under the subpart F rules includes any

income of a CFC attributable to the issuing or reinsuring of any insurance or annuity contract in

connection with risks located in a country other than the CFC's country of organization. Subpart

F insurance income also includes income attributable to an insurance contract in connection with

risks located within the CFC's country of organization, as the result of an arrangement under

which another corporation receives a substantially equal amount of consideration for insurance of

other-country risks. Investment income of a CFC that is allocable to any insurance or annuity

contract related to risks located outside the CFC's country of organization is taxable as subpart F

insurance income (Prop. Treas. Reg. sec. 1.953-1(a)).

Temporary exceptions from foreign personal holding company income, foreign base

company services income, and insurance income apply for subpart F purposes for certain income

that is derived in the active conduct of a banking, financing, or similar business, or in the conduct
4

 Temporary exceptions from the subpart F provisions for certain active financing income

applied only for taxable years beginning in 1998. Those exceptions were extended and modified

as part of the present-law provision.

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of an insurance business (so-called “active financing income”). These exceptions are applicable

only for taxable years beginning in 1999.4

With respect to income derived in the active conduct of a banking, financing, or similar

business, a CFC is required to be predominantly engaged in such business and to conduct

substantial activity with respect to such business in order to qualify for the exceptions. In

addition, certain nexus requirements apply, which provide that income derived by a CFC or a

qualified business unit (“QBU”) of a CFC from transactions with customers is eligible for the

exceptions if, among other things, substantially all of the activities in connection with such

transactions are conducted directly by the CFC or QBU in its home country, and such income is

treated as earned by the CFC or QBU in its home country for purposes of such country's tax

laws. Moreover, the exceptions apply to income derived from certain cross border transactions,

provided that certain requirements are met. Additional exceptions from foreign personal holding

company income apply for certain income derived by a securities dealer within the meaning of

section 475 and for gain from the sale of active financing assets.

In the case of insurance, in addition to a temporary exception from foreign personal

holding company income for certain income of a qualifying insurance company with respect to

risks located within the CFC's country of creation or organization, certain temporary exceptions

from insurance income and from foreign personal holding company income apply for certain

income of a qualifying branch of a qualifying insurance company with respect to risks located

within the home country of the branch, provided certain requirements are met under each of the

exceptions. Further, additional temporary exceptions from insurance income and from foreign

personal holding company income apply for certain income of certain CFCs or branches with

respect to risks located in a country other than the United States, provided that the requirements

for these exceptions are met.

Description of Proposal

The proposal would extend for five years the present-law temporary exceptions from

subpart F foreign personal holding company income, foreign base company services income, and

insurance income for certain income that is derived in the active conduct of a banking, financing,

or similar business, or in the conduct of an insurance business.

Effective Date
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The proposal would be effective for taxable years of a foreign corporation beginning after

December 31, 1999, and before January 1, 2005, and for taxable years of U.S. shareholders with

or within which such taxable years of such foreign corporation end.

D. Extend Suspension of Income Limitation on Percentage

Depletion from Marginal Oil and Gas Wells

Present Law

The Code permits taxpayers to recover their investments in oil and gas wells through

depletion deductions. In the case of certain properties, the deductions may be determined using

the percentage depletion method. Among the limitations that apply in calculating percentage

depletion deductions is a restriction that, for oil and gas properties, the amount deducted may not

exceed 100 percent of the net income from that property in any year (sec. 613(a)).

Special percentage depletion rules apply to oil and gas production from “marginal”

properties (sec. 613A(c)(6)). Marginal production is defined as domestic crude oil and natural gas

production from stripper well property or from property substantially all of the production from

which during the calendar year is heavy oil. Stripper well property is property from which the

average daily production is 15 barrel equivalents or less, determined by dividing the average daily

production of domestic crude oil and domestic natural gas from producing wells on the property

for the calendar year by the number of wells. Heavy oil is domestic crude oil with a weighted

average gravity of 20 degrees API or less (corrected to 60 degrees Farenheit). Under one such

special rule, the 100-percent-of-net-income limitation does not apply to domestic oil and gas

production from marginal properties during taxable years beginning after December 31, 1997,

and before January 1, 2000.

Description of Proposal

The proposal would extend the present-law rule suspending the 100-percent-of-netincome limitation with respect to oil and gas production from marginal wells to include taxable

years beginning after December 31, 1999, and before January 1, 2005.

Effective Date

The proposal would be effective for taxable years beginning after December 31, 1999.

E. Extend the Work Opportunity Tax Credit

Present Law

The work opportunity tax credit (“WOTC”) is available on an elective basis for employers

hiring individuals from one or more of eight targeted groups. The credit generally is equal to a
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percentage of qualified wages. The credit percentage is 25 percent for employment of at least 120

hours but less than 400 hours and 40 percent for employment of 400 hours or more. Qualified

wages consist of wages attributable to service rendered by a member of a targeted group during

the one-year period beginning with the day the individual begins work for the employer.

Generally, no more than $6,000 of wages during the first year of employment is permitted

to be taken into account with respect to any individual. Thus, the maximum credit per individual

is $2,400. With respect to qualified summer youth employees, the maximum credit is 40 percent

of up to $3,000 of qualified first-year wages, for a maximum credit of $1,200. The credit is only

effective for wages paid to, or incurred with respect to, qualified individuals who began work for

the employer before July 1, 1999.

The employer's deduction for wages is reduced by the amount of the credit.

Description of Proposal

The proposal would extend the WOTC for 30 months (through December 31, 2001).

The proposal would also include a direction to the Secretary of the Treasury to expedite

procedures to allow taxpayers to satisfy their WOTC filing requirements (e.g., Form 8850) by

electronic means.

Effective Date

Generally, the proposal would be effective for wages paid to, or incurred with respect to,

qualified individuals who begin work for the employer on or after July 1, 1999, and before

January 1, 2002.

F. Extend the Welfare-To-Work Tax Credit

Present Law

The Code provides a tax credit to employers on the first $20,000 of eligible wages paid to

qualified long-term family assistance (“TANF”) recipients during the first two years of

employment. The credit is 35 percent of the first $10,000 of eligible wages in the first year of

employment and 50 percent of the first $10,000 of eligible wages in the second year of

employment. The maximum credit is $8,500 per qualified employee.

Qualified long-term family assistance recipients are: (1) members of a family that has

received family assistance for at least 18 consecutive months ending on the hiring date; (2)

members of a family that has received family assistance for a total of at least 18 months (whether

or not consecutive) after August 5, 1997 (the date of enactment of this credit) if they are hired

within 2 years after the date that the 18-month total is reached; and (3) members of a family who
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are no longer eligible for family assistance because of either Federal or State time limits, if they

are hired within 2 years after the Federal or State time limits made the family ineligible for family

assistance.

Eligible wages include cash wages paid to an employee plus amounts paid by the

employer for the following: (1) educational assistance excludable under a section 127 program (or

that would be excludable but for the expiration of sec. 127); (2) health plan coverage for the

employee, but not more than the applicable premium defined under section 4980B(f)(4); and (3)

dependent care assistance excludable under section 129.

The welfare to work credit is effective for wages paid or incurred to a qualified individual

who begins work for an employer on or after January 1, 1998, and before June 30, 1999.

Description of Proposal

The proposal would extend the welfare-to-work credit for 30 months, so that the credit

would be available for eligible individuals who begin work for an employer before January 1,

2002.

Effective Date

The proposal would be effective for wages paid or incurred to a qualified individual who

begins work for an employer on or after July 1, 1999, and before January 1, 2002.