Numerous Tax Provisions Expired at End of 2009

The ringing in of the new year at midnight on Dec. 31 also signaled the expiration of several tax provisions. The biggest was the estate and generation-skipping tax regime, which is repealed for 2010. Various bills have been introduced that would revive the estate tax in its 2009 form, but as of Jan. 1 no extension has been enacted, and the estate and generation-skipping taxes, at least temporarily,no longer exist.

In addition, a number of temporary tax provisions, often referred to as “extenders,” have expired as of Jan. 1. They include tax credits, deductions and various tax incentives. Many of the provisions have been extended several times in the past, and a bill to extend them again is pending in Congress (HR 4213). It passed the House on Dec. 9, 2009, and has been referred to the Senate Finance Committee.

Estate and Generation-Skipping Taxes

In 2001, Congress enacted the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), which resulted in the gradual repeal of the estate and generation-skipping transfer (GST) taxes over the next decade, resulting in no tax in 2010. However, under EGTRRA’s sunset provision, the repeal will be in effect for 2010 only. After that, the estate and GST regime in place before the passage of EGTRRA will spring back to life, as if EGTRRA had never been enacted. This means that in 2011 the estate tax exemption will be $1 million (adjusted for inflation), the tax rate will be 55%, and the state death tax credit will be revived.

EGTRRA also repealed for 2010 the step-up in basis for assets passing at death. Instead, inherited assets are subject to a modified carryover basis rule. Under this new rule, a recipient’s basis in property acquired from a decedent will be the lesser of the adjusted basis of the property at death or its fair market value on the date of death. The carryover basis provision is also scheduled to sunset after 2010.

A number of bills have been introduced that would restore the estate tax. In his budget proposal for fiscal 2010, President Obama proposed keeping the estate and GST tax rules in their 2009 form. The Taxpayer Certainty and Relief Act of 2009, S. 722, introduced in March, would make the estate tax permanent at a 45% top rate and would reunify it with the gift tax by restoring the unified credit at $3.5 million. It would also provide portability of the exemption between spouses. A similar bill, HR 4154, passed the House on Dec. 3.

Expired Tax Credits

The expired temporary tax credits include:

IRC § 30B alternative motor vehicle credit for hybrids weighing more than 8,500 pounds;

IRC § 40A credit for biodiesel and renewable diesel fuel;

IRC § 41 credit for research and experimentation;

IRC § 45A Indian employment tax credit;

IRC § 45D new markets tax credit;

IRC § 45G credit for certain railroad track expenditures;

IRC § 45N mine rescue team training credit;

IRC § 45P employer wage credit for active-duty members of the uniformed services;

IRC §§ 936 and 27(b) possession tax credit with respect to American Samoa;

IRC § 1397E credit for holders of qualified zone academy bonds; and

IRC § 1400C credit for first-time District of Columbia homebuyers.

Note that the possession tax credit with respect to American Samoa and the credit for holders of qualified zone academy bonds would not be extended by HR 4213.

Expired Deductions

The expired temporary deductions include:

IRC § 62(a)(2)(D) deduction for elementary and secondary schoolteachers;

IRC § 63(c)(1) additional standard deduction for state and local real property taxes;

IRC § 164 state and local sales tax deduction;

IRC § 165(h) deduction for personal casualty losses in federally declared disasters;

IRC § 168(e)(3)(E)(iv) 15-year straight-line cost recovery for qualified leasehold improvements;

IRC § 168(e)(3)(E)(v) 15-year straight-line cost recovery for qualified restaurant improvements;

IRC § 168(j) accelerated depreciation for property on Indian reservations;

IRC § 168(i)(15)(D) seven-year cost recovery period for motor sports entertainment complexes;

IRC § 168(n) expensing and special depreciation allowance for qualified disaster assistance property;

IRC § 170(b)(1)(E)(vi) contributions of capital gain real property made for conservation purposes;

IRC § 170(e)(3)(C)(iv)enhanced deduction for contributions of food inventory;

IRC § 170(e)(3)(D)(iv)enhanced deduction for contributions of book inventory to public schools;

IRC § 170(e)(6)(G) enhanced deduction for corporate contributions of computer equipment for educational purposes;

IRC § 179E(g) election to expense advanced mine safety equipment;

IRC § 181(f) expensing treatment for certain film and television productions;

IRC § 198(h) expensing of environmental remediation costs;

IRC § 199(d)(8) deduction for income attributable to domestic production activities in Puerto Rico; and

IRC § 222 deduction for tuition and related expenses.

Other Provisions

Other expired provisions include:

IRC § 172(j) carryback of net operating losses attributable to federally declared disasters;

IRC § 408(d)(8) allowance for tax-free distributions from individual retirement plans for charitable purposes;

IRC § 613A(c) suspension of limitation on percentage depletion for oil and gas from marginal wells;

IRC § 871(k) treatment of regulated investment company dividends and assets;

IRC § 897(h) qualified investment entity treatment of regulated investment companies under the Foreign Investment in Real Property Tax Act of 1980;

IRC §§ 953(e) and 954(h) exceptions for active financing income;

IRC § 954(c) look-through treatment of payments between related controlled foreign corporations;

IRC § 2105(d) look-through of certain regulated investment company stock in determining gross estate of nonresidents;

IRC § 1367(a) basis adjustment to stock of S corporations making charitable contributions of property;

IRC § 1391 empowerment zone designations;

IRC §§ 1400, 1400A and 1400B District of Columbia Enterprise Zone incentives;

IRC § 1400E renewal community tax incentives;

IRC § 1400L(b) New York Liberty Zone bonus depreciation and 1400L(d) tax-exempt bond financing;

IRC § 1400N Gulf Opportunity Zone rehabilitation credit; and

IRC § 7652(f) “cover over” of tax on distilled spirits to Puerto Rico and the U.S. Virgin Islands.