**DESCRIPTION OF REVENUE PROVISIONS INCLUDED IN THE AFRICAN GROWTH AND OPPORTUNITY 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-33-99

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**CONTENTS**

**INTRODUCTION**

**DESCRIPTION OF REVENUE PROVISIONS**

A.  Limit Use of Non-Accrual Experience Method of Accounting to Amounts to be Received for the Performance of Qualified Personal Services

B.  Expand Reporting of Cancellation of Indebtedness Income

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**INTRODUCTION**

	This document,(1) prepared by the staff of the Joint Committee on Taxation, provides adescription of revenue provisions included in the African Growth and Opportunity Act.  The Actis an original bill to be considered by the Senate Committee on Finance on June 22, 1999. 

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**DESCRIPTION OF REVENUE PROVISIONS**

	The following revenue provisions would be included in the "African Growth andOpportunity Act."

**A.  Limit Use of Non-Accrual Experience Method of Accounting to Amounts to be Received for the Performance of Qualified Personal Services**

**Present Law**

	An accrual method taxpayer generally must recognize income when all the events haveoccurred that fix the right to receive the income and the amount of the income can be determinedwith reasonable accuracy.  An accrual method taxpayer may deduct the amount of any receivablethat was previously included in income that becomes worthless during the year.

	Accrual method taxpayers are not required to include in income amounts to be receivedfor the performance of services which, on the basis of experience, will not be collected (the "non-accrual experience method").  The availability of this method is conditioned on the taxpayer notcharging interest or a penalty for failure to timely pay the amount charged.

	A cash method taxpayer is not required to include an amount in income until it isreceived.  A taxpayer may not use the cash method if the purchase, production, or sale ofmerchandise is a material income producing factor.  Such taxpayers are generally required tokeep inventories and use the accrual method of accounting.  In addition, corporations (andpartnerships with corporate partners) generally may not use the cash method of accounting iftheir average annual gross receipts exceed $5 million.  An exception to this $5 million rule isprovided for qualified personal service corporations, which are corporations (1) substantially allof whose activities involve the performance of services in the fields of health, law, engineering,architecture, accounting, actuarial science, performing arts or consulting and (2) substantially allof the stock of which is owned by current or former employees performing such services, theirestates or heirs.  Qualified personal service corporations are allowed to use the cash methodwithout regard to whether their average annual gross receipts exceed $5 million.

**Description of Proposal**

	The proposal would limit the use of the non-accrual experience method to amounts thatare to be received for the performance of qualified personal services.  Amounts to be received forthe performance of all other services would be subject to the general rule regarding inclusion inincome.  Qualified personal services are personal services in the fields of health, law,engineering, architecture, accounting, actuarial science, performing arts or consulting.  As underpresent law, the availability of the non-accrual experience method would be conditioned on thetaxpayer not charging interest or a penalty for failure to timely pay the amount.

**Effective Date**

	The proposal would be effective for taxable years ending after the date of enactment.  Any change in the taxpayer's method of accounting necessitated as a result of the proposal wouldbe treated as a voluntary change initiated by the taxpayer with the consent of the Secretary of theTreasury.  Any required section 481(a) adjustment would be taken into account over a period notto exceed four years under principles consistent with those in Rev. Proc. 98-60.(2)

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**B.  Expand Reporting of Cancellation of Indebtedness Income**

**Present Law**

	Under section 61(a)(12), a taxpayer's gross income includes income from the dischargeof indebtedness.  Section 6050P requires "applicable entities" to file information returns with theIRS regarding any discharge of indebtedness of $600 or more.

	The information return must set forth the name, address, and taxpayer identificationnumber of the person whose debt was discharged, the amount of debt discharged, the date onwhich the debt was discharged, and any other information that the IRS requires to be provided. The information return must be filed in the manner and at the time specified by the IRS.  Thesame information also must be provided to the person whose debt is discharged by January 31 ofthe year following the discharge.

	"Applicable entities" include: (1) the FDIC, the RTC, the National Credit UnionAdministration, and any successor or subunit of any of them; (2) any financial institution (asdescribed in sec. 581 (relating to banks) or sec. 591(a) (relating to savings institutions)); (3) anycredit union; (4) any corporation that is a direct or indirect subsidiary of an entity described in (2)or (3) which, by virtue of being affiliated with such entity, is subject to supervision andexamination by a Federal or State agency regulating such entities; and (5) an executive, judicial,or legislative agency (as defined in 31 U.S.C. sec. 3701(a)(4)).

	The penalties for failure to file correct information reports with the IRS and to furnishstatements to taxpayers are similar to those imposed with respect to a failure to provide otherinformation returns.  For example, the penalty for failure to furnish statements to taxpayers isgenerally $50 per failure, subject to a maximum of $100,000 for any calendar year.  Thesepenalties are not applicable if the failure is due to reasonable cause and not to willful neglect.

**Description of Proposal**

	The proposal would require that information reporting on discharges of indebtedness alsobe done by any organization a significant trade or business of which is the lending of money(such as finance companies and credit card companies whether or not affiliated with financialinstitutions).

**Effective Date**

	The proposal would be effective with respect to discharges of indebtedness afterDecember 31, 1999.

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****FOOTNOTES****

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1.   This document may be cited as follows:  Joint Committee on Taxation, *Description ofRevenue Provisions Included in the African Growth and Opportunity Act* (JCX-33-99), June 18,1999.
2.   1998-51 I.R.B. 16.