**DESCRIPTION OF REVENUE PROVISION INCLUDED INTHE GENERALIZED SYSTEM OF PREFERENCES EXTENSION ACT**

Scheduled for Markup

By the

SENATE COMMITTEE ON FINANCE

on June 22, 1999

Prepared by the Staff

of the

JOINT COMMITTEE ON TAXATION

June 18, 1999

JCX-37-99

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**INTRODUCTION**

	This document,(1) prepared by the staff of the Joint Committee on Taxation, provides adescription of a revenue provision included in the "Generalized System of Preferences ExtensionAct."  The Act is an original bill to be considered by the Senate Committee on Finance on June22, 1999.

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**DESCRIPTION OF REVENUE PROVISION**

	The following revenue provision would be included in the "Generalized System ofPreferences Extension Act."

**Modify Installment Method and Prohibit Its UseBy Accrual Method Taxpayers**

**Present Law**

	An accrual method taxpayer is generally required to recognize income when all the eventshave occurred that fix the right to the receipt of the income and the amount of the income can bedetermined with reasonable accuracy.  The installment method of accounting provides anexception to this general principle of income recognition by allowing a taxpayer to defer therecognition of income from the disposition of certain property until payment is received.  Salesto customers in the ordinary course of business are not eligible for the installment method, exceptfor sales of property that is used or produced in the trade or business of farming  and sales oftimeshares and residential lots if an election to pay interest under section 453(l)(2)(B)) is made.

	A pledge rule provides that if an installment obligation is pledged as security for anyindebtedness, the net proceeds(2) of such indebtedness are treated as a payment on the obligation,triggering the recognition of income.  Actual payments received on the installment obligationsubsequent to the receipt of the loan proceeds are not taken into account until such subsequentpayments exceed the loan proceeds that were treated as payments.  The pledge rule does notapply to sales of property used or produced in the trade or business of farming, to sales oftimeshares and residential lots where the taxpayer elects to pay interest under section453(l)(2)(B), or to dispositions where the sales price does not exceed $150,000.

	An additional rule requires the payment of interest on the deferred tax that is attributableto most large installment sales.

**Description of Proposal**

**Prohibit use of installment method for accrual method dispositions**

	The proposal generally would prohibit the use of the installment method of accountingfor dispositions of property that would otherwise be reported for Federal income tax purposesusing an accrual method of accounting.  The proposal would not change present law regardingthe availability of the installment method for dispositions of property used or produced in thetrade or business of farming.  The proposal also would not change present law regarding theavailability of the installment method for dispositions of timeshares or residential lots if thetaxpayer elects to pay interest under section 453(l).

	The proposal does not change the ability of a cash method taxpayer to use the installmentmethod.  For example, a cash method individual owns all of the stock of a closely held accrualmethod corporation.  This individual sells his stock for cash, a ten year note, and a percentage ofthe gross revenues of the company for the next ten years.   The proposal would not change theability of this individual to use the installment method in reporting the gain on the sale of thestock.

**Modify pledge rule**

	The proposal would also modify the pledge rule to provide that entering into anyarrangement that gives the taxpayer the right to satisfy an obligation with an installment note willbe treated in the same manner as the direct pledge of the installment note.  For example, ataxpayer disposes of property for an installment note.  The disposition is properly reported using the installment method.  The taxpayer only recognizes gain as it receives the deferred payment.However, were the taxpayer to pledge the installment note as security for a loan, it would berequired to treat the proceeds of such loan  as a payment on the installment note, and recognizethe appropriate amount of gain.  Under the proposal, the taxpayer would also be required to treatthe proceeds of a loan as payment on the installment note to the extent the taxpayer had the rightto "put" or repay the loan by transferring the installment note to the taxpayer's creditor.  Otherarrangements that have a similar effect would be treated in the same manner.

	The proposed modification of the pledge rule would only apply to installment sales wherethe pledge rule of present law applies.  Accordingly, the proposal would not apply to installmentmethod sales made by a dealer in timeshares and residential lots where the taxpayer elects to payinterest under section 453(l)(2)(B), to sales of property used or produced in the trade or businessof farming, or to dispositions where the sales price does not exceed $150,000, since such salesare not subject to the pledge rule under present law.

**Effective Date**

	The proposal would be effective for installment sales entered into on or after the date ofenactment.

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****FOOTNOTES****

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1.   This document may be cited as follows:  Joint Committee on Taxation, *Description ofRevenue Provision Included in the Generalized System of Preferences Extension Act* (JCX-37-99), June 18, 1999.
2.   The net proceeds equal the gross loan proceeds less the direct expenses of obtaining theloan.