'Tis the Season.

New Legislative and Administrative Developments

Installment Method Restored for Accrual Method Taxpayers

On Dec. 28, 2000, President Clinton signed the 2000 Installment Sale Correction Act into law, completely reversing 1999 legislation that generally banned the installment method for accrual method sellers of property for sales after Dec. 16, 1999. Thus, the 1999 ban can be treated as though it never existed. Refund claims should be considered, if appropriate.

More on New Deemed Sale and Repurchase Election

The Federal Tax article in the December 2000 California CPA, Page 27, discussed the reduced capital gain tax rates available for sales and exchanges of certain capital assets after 2000. Except for taxpayers in the 15-percent bracket, the top rate for gains on assets purchased after 2000 and held for more than five years will be 18 percent, instead of 20 percent.

However, a taxpayer holding a capital asset or an asset used in the taxpayer's trade or business on Jan. 1, 2001, may irrevocably elect to treat the asset as sold for its fair market value and re-acquired for the same amount. If this election is made, any deemed gain must be recognized but any deemed loss is disallowed.

Several readers have inquired if this election can be made for a principal residence to obtain a tax-free stepped-up basis for that residence to the extent that the deemed gain is excluded from taxable income under IRC Sec. 121.

The reduced capital gain rates and the new deemed sale and repurchase election were enacted by Sec. 311 of the 1997 Taxpayer Relief Act. (Sec. 311(e)(1) authorizes this new election.) Act Sec. 311(e)(2)(A) reads as follows:

"Any gain resulting from an election under paragraph (1) shall be treated as received or accrued on the date the asset is treated as sold under paragraph (1) and shall be recognized notwithstanding any provision of the Internal Revenue Code of 1986" (emphasis added).

Consequently, it appears that gain from an elective deemed sale of a principal residence may not be excludible under IRC Sec. 121.

The 2000 Community Renewal Tax Relief Act provides that the new deemed sale and repurchase election does not apply to assets disposed of in a transaction in which gain or loss is recognized within one year of the deemed sale date (if the election applied). Therefore, this election cannot apply to assets sold in 2001.

The instructions to the 2000 IRS Form 4797 contain the following additional information. Any readily tradable stock (that is a capital asset) not sold before Jan. 2, 2001, for which the election is made, is deemed to have been sold on Jan. 2, 2001, at its closing market price on that date and re-acquired on that date for the same amount. Any other capital asset or property used in a trade or business held on Jan. 1, 2001, for which the election is made, is deemed to have been sold and re-acquired on Jan. 1, 2001, for its fair market value on that date.

The election is made by reporting deemed gains and zero for deemed losses on a return that includes the deemed sale date. For example, a calendar year individual taxpayer makes this election on his or her 2001 return.

A statement also must be attached to that return which states that the taxpayer is making an election under "Section 311 of the Taxpayer Relief Act of 1997" and specifies the assets for which the election is being made. This return must be timely filed, including extensions.

If a return is timely filed without making the election for any asset, the election can still be made in an amended return filed within six months of the return's original due date, excluding extensions. For calendar-year taxpayers, this election could be made as late as Oct. 15, 2002. See Form 4797 instructions for more details.

Proposed Regs. Simplify IRA and Qualified Plan Distributions

On Jan. 11, the IRS proposed regulations that would:

* Provide a simple, uniform table that all employees can use to determine the required minimum distribution (RMD) during their lifetime. This makes it easier to calculate RMDs because employees would no longer need to: determine their beneficiary by their required beginning date; decide whether or not to recalculate their life expectancy each year in determining RMDs; and satisfy a separate incidental death-benefit rule.

* Permit the RMD during the employee's lifetime to be calculated without regard to the beneficiary's age (except when RMDs can be reduced by taking into account the age of a spousal beneficiary more than 10 years younger than the employee).

* Permit the beneficiary to be determined as late as the end of the year following the year of the employee's death. This allows: the employee to change designated beneficiaries after the required beginning date without increasing the RMD; and the beneficiary to be changed after the employee's death, such as a beneficiary disclaiming or cashing out.

* Permit the calculation of post-death RMDs to take into account an employee's remaining life expectancy at the time of death, thus allowing distributions in all cases to be spread over a number of years after death.

The regs. are proposed to be applicable for determining RMDs for calendar years beginning after 2001. For determining RMDs for 2001, taxpayers may rely on these proposals or on regs. proposed in 1987. If, and to the extent, future guidance is more restrictive than these proposals, the future guidance will not be retroactive.

Stuart R. Josephs, CPA, has a San Diego-based Tax Assistance Practice (TAP) that specializes in assisting practitioners in resolving their clients' tax problems, Josephs, chair of the Federal Subcommittee of CalCPA's Committee on Taxation,