long-term capital gain properly taken into account by the partnership on the installment method during the partnership's fiscal year ending January 31, 1987, regardless of whether the installment sale occurred in an earlier partnership fiscal year. Revenue Effect The revenue effect of this provision is included with the revenue effect for the corporate rate changes (Title VI, Part A). C. Incentive Stock Options (Sec. 321 of the Act and sec. 422A of the Code) 5 Prior Law Under present and prior law, an employee is not taxed on the grant or exercise of an incentive stock option, and the employee is generally taxed at capital gains rates when the stock received on the exercise of the option is sold. No deduction is taken by the employer when the option is granted or exercised. Under prior law, in order to qualify as an incentive stock option, among other requirements, the options must have been exercisable in the order granted, and the employer could not grant the employee such options to acquire stock with a value of more than $100,000 (increased by certain carryover amounts) in any one year. Reasons for Change The Congress wished to eliminate certain restrictions on incentive stock options so that it will be easier for employers, particularly small and relatively new companies, to use the options as a means of attracting and motivating talented employees. The rule requiring options to be exercisable only in the order granted can make incentive stock options unavailable to companies which have experienced a decline in stock prices. The Congress believed that limiting the amount of incentive stock options an employer may grant to an employee in a year unnecessarily restricts the ability of smaller companies to offer a comprehensive compensation package which it may need to offer talented employees if it is to compete with larger, more established corporations for such employees. Explanation of Provision The Act repeals the requirement that incentive stock options must be exercisable in the order granted. The Act also changes the $100,000 limit to provide that under the terms of the plan the aggregate fair market value (determined at the time the option is granted) of the stock with respect to which incentive stock options are exercisable for the first time by any individual during any calendar year may not exceed $100,000. Effective Date The provision applies to options granted after December 31, 1986. 5 For legislative background of the provision, see: H.R. 3838 as reported by the Senate Committee on Finance on May 29, 1986, sec. 411; S.Rep. 99-313, p. 171; and H.Rep. 99-841, Vol. II (September 18, 1986), p. 107 (Conference Report). Revenue Effect The provision is estimated to reduce fiscal year budget receipts for 1987 through 1991 by less than $5 million annually. D. Tax Straddles (Sec. 331 of the Act and sec. 1092 of the Code) 6 Prior Law In general, if a taxpayer realizes a loss on the disposition of one or more positions in a straddle, the amount of the loss that can be deducted is limited to the excess of the loss over the unrecognized gain (if any) in offsetting positions (sec. 1092). An exception to the loss deferral rule applies to a straddle consisting of stock that is offset by a qualified covered call. For purposes of this exception, a call option is not treated as qualified if gain from the disposition of the underlying stock is included in gross income in a taxable year subsequent to the year in which the option is closed, and the stock is not held for more than 30 days following the date on which the option is closed. This rule is intended to prevent taxpayers from using covered call options to defer tax on income from unrelated transactions (by realizing a loss on the option in one year, and deferring realizing any gain on the related stock until the next year). Reasons for Change Under prior law, the exception to the loss deferral rule for qualified covered call options applies even where the straddle is used to defer tax on income from unrelated transactions. Such deferral may occur where gain from closing the option is included in gross income in a taxable year subsequent to the year in which the stock is disposed of at a loss. The Act amends the definition of a qualified covered call to exclude a covered call option in these circumstances. Explanation of Provision Under the Act, the qualified covered call exception to the loss deferral rule is denied to a taxpayer who fails to hold a covered call option for 30 days after the related stock is disposed of at a loss, where gain on the option is included in the subsequent year. Effective Date The provision applies to positions established after December 31, 1986. Revenue Effect This provision is estimated to increase fiscal year budget receipts by less than $5 million in each of fiscal years 1987 through 1991. • For legislative background of the provision, see: H.R. 3838 as reported by the Senate Committee on Finance on May 29, 1986, sec. 422; S.Rep. 99-313, pp. 172-173; and H.Rep. 99-841, Vol. II (September 18, 1986), p. 108 (Conference Report). TITLE IV-AGRICULTURE, NATURAL RESOURCES, AND ENERGY A. Agriculture Provisions 1. Special expensing provisions: soil and water conservation; clearing land (secs. 401 and 402 of the Act and secs. 175 and 182 of the Code) 1 Prior Law Expenditures for soil and water conservation Under prior (and present) law, a taxpayer may elect to deduct certain expenditures for the purpose of soil or water conservation that would otherwise be added to the taxpayer's basis in the land on which the conservation activities occur (Code section 175). This deduction is limited in any one year to 25 percent of the gross income derived by the taxpayer from farming. Any excess amount is carried forward to succeeding taxable years. Under prior law, expenditures deductible under section 175 included amounts paid for grading, terracing, and contour furrowing, the construction of drainage ditches, irrigation ditches, dams and ponds, and the planting of wind breaks. Also, assessments levied by a soil or water conservation drainage district were deductible under this provision to the extent those expenditures would have constituted deductible expenditures if paid directly by the taxpayer. The cost of acquiring or constructing depreciable machinery and facilities, however, were not eligible for expensing under this provision. In the case of depreciable items such as irrigation pumps, concrete dams, or concrete ditches, the taxpayer was allowed to recover costs only through cost recovery allowances, and only if the taxpayer owned the asset. Expenditures for clearing land Under prior law, a taxpayer engaged in the business of farming could elect to deduct currently amounts paid or incurred during the taxable year to clear land for use in farming (section 182). For any taxable year, this deduction could not exceed the lesser of $5,000 or 25 percent of the taxable income derived from farming. Reasons for Change Congress was concerned that certain Federal income tax provisions might be affecting prudent farming decisions. In particular, 1 For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, secs. 921-922; H. Rep. 99-426, pp. 649-651; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, secs. 701-702; S. Rep. 99-313, 264-265; Senate floor amendment, 132 Cong. Rec. S7827 (June 18, 1986); and H. Rep. 99-841, Vol. II (September 18, 1986), pp. 110-111 (Conference Report). |