On Dec. 20, 2006, the “Tax Relief and Health Care Act of 2006” was signed into law by the President. Among other changes, the Act extended a number of provisions, modified others, and created some new provisions. The President's signature sets the effective date for various Act provisions with an effective date geared to the Dec. 20, 2006 date of enactment. These provisions (other than those involving excises taxes) are as follows:

One-time-only rollovers from health FSAs and HRAs into HSAs. For distributions and contributions on or after Dec. 20, 2006, and before Jan. 1, 2012, a limited amount may be distributed from a health FSA or HRA and contributed through a direct transfer to an HSA. (Code Sec. 106(e), as amended by Act Sec. 302) The amount can't exceed an amount equal to the lesser of:

(1) the balance in the health FSA or HRA as of Sept. 21, 2006; or
(2) the balance the health FSA or HRA as of the date of the distribution.

Only one distribution with respect to each health FSA or HRA of the individual is allowed.
Opportunity for fiscal year taxpayers to make certain revived elections. Act Sec. 122 gives fiscal year taxpayers with tax years ending after Dec. 31, 2005 and before Oct. 20, 2006, an opportunity to change elections already made on their originally filed returns to take into account the Act's extension of provisions that expired at the end of 2005. Under Act Sec. 122, an election under Code Sec. 41(c)(4) (election of the alternative incremental credit in lieu of the regular research credit) or Code Sec. Code Sec. 280C(c)(3)(C) (election of reduced research expense credit) for a tax year ending after Dec. 31, 2005 and before Dec. 20, 2006, is treated as having been timely made for the tax year if it is made not later than the later of Apr. 15, 2007 or such time as IRS may specify. Similar rules apply for elections under any provisions that had expired and were revived by the Act.

Refundable credit for unused AMT credit. For tax years beginning after Dec. 20, 2006, if an individual has a “long-term unused minimum tax credit” for any tax year beginning before Jan. 1, 2013, the amount determined under the Code Sec. 53(c) limit on the minimum tax credit for the tax year can't be less than “the AMT refundable credit” amount for that tax year. (Code Sec. 53(e)(1), as amended by Act Sec. 402(a)) This credit is subject to a phaseout and is refundable. While the statute itself doesn't apply the new relief provision specifically to the AMT treatment of incentive stock options (ISOs), the legislative history indicates that this is the motivation for the refundable credit.

Information reporting of stock transfers from option exercises. Effective for calendar years beginning after Dec. 20, 2006, corporations must report to IRS the transfer of stock from exercises of incentive stock options or purchases from employee stock purchase plans. (Code Sec. 6039, as amended by Act Sec. 403)

Tax Court jurisdiction in innocent spouse relief. Effective for a liability for taxes arising or remaining unpaid on or after Dec. 20, 2006, the Tax Court has jurisdiction to review IRS's denial of equitable innocent spouse relief from joint liability even if no deficiency was asserted against the requestor of relief. (Code Sec. 6015(e)(1), as amended by Sec. 408(a) (Div. C, Title IV))

Whistleblower awards. Effective for information provided on or after Dec. 20, 2006:

• an above-the-line deduction is allowed for attorneys' fees and court costs related to whistleblower rewards (Code Sec. 62(a)(21), as amended by Act Sec. 406(a)(3)); and
• whistleblower rewards are increased to a maximum of 30% of collected proceeds, interest, penalties, and additional amounts. ( Code Sec. 7623(a) , Code Sec. 7623(b), as amended by Act Sec. 406(a))

Qualified mortgage bonds. Private activity bonds issued after Aug. 15, '86 that are qualified mortgage bonds or qualified veterans' mortgage bonds are tax-exempt qualified bonds. In general, qualified mortgage bonds must meet a number of requirements, including the first-time homebuyer requirement (also known as the three-year requirement), under which at least 95% of the net proceeds of the issue must be used to finance the residences of mortgagors who had no present ownership interest in their principal residences during the three-year period ending on the date the mortgage is executed. Effective for bonds issued after Dec. 20, 2006, and before Jan. 1, 2008, the first-time homebuyer requirement for qualified mortgage bonds is treated as satisfied for financing of any residence for a veteran (as defined in 38 USCS 101), if the veteran hasn't previously qualified for and received financing under this exception. (Code Sec. 143(d)(2)(D), as amended by Act Sec. 416(a))

50% expensing of mine safety equipment. Effective for qualifying costs paid or incurred after Dec. 20, 2006, taxpayers may elect to expense 50% of the cost of qualified advanced mine safety equipment property placed in service after Dec. 20, 2006, and before Jan. 1, 2009. The original use of the property must commence with the taxpayer. (Code Sec. 179E, as added by Act Sec. 404)

Partial exclusion of gain from conservation sales of qualifying mineral or geothermal interests. Gross income does not include 25% of the “qualifying gain” from a conservation sale on or after Dec. 20, 2006, of a qualifying mineral or geothermal interest (an interest in any mineral or geothermal deposit located on eligible federal land which constitutes a taxpayer's entire interest in that deposit). (Act Sec. 403(c)(1) (Div. C, Title IV)) The conservation sale must be made to an eligible entity that intends that the acquired property be used exclusively for qualified conservation purposes in perpetuity. Eligible entities are certain governments, government agencies, and organizations eligible to receive deductible charitable contributions. At the time of the sale, the transferee must provide the taxpayer with a qualifying letter of intent and the sale can't be made under an order of condemnation or eminent domain. A penalty excise tax applies if an eligible entity fails to take steps consistent with the protection of conservation purposes.

Home sales by employees in the intelligence community. Effective for home sales (or exchanges) by employees in the intelligence community after Dec. 20, 2006, and before Jan. 1, 2011, the Code Sec. 121 home sale exclusion five-year test period for ownership and use of a principal residence does not include any period up to ten years during which the taxpayer or the taxpayer's spouse is on qualified official extended duty. (Code Sec. 121(d)(9), as amended by Act Sec. 417)

Sales by federal judges. Effective for sales after Dec. 20, 2006, Federal judges may defer gain on sales made to comply with the conflict-of-interest laws. ( Code Sec. 1034(b), as amended by Act Sec. 418(a)(1))

Source:  Federal Taxes Weekly Alert, 12/21/2006, Volume 52, No. 51