Economic Stabilization Act Extends Expired Provisions and Repeals MLTN Standard

By Alistair M. Nevius, J.D.

On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act, P.L. 110-343. Included in this act were the Energy Improvement and Extension Act of 2008 (Energy Act) and the Tax Extenders and AMT Relief Act of 2008 (Tax Extenders Act), which extends various tax benefits that expired at the end of 2007. Following are the highlights of the legislation (a full analysis of the many tax provisions in the act is beyond the scope of this column).

In addition to the tax items discussed below, the act also repealed the "more likely than not" standard for return preparers, which had been the subject of much controversy since its enactment in May 2007. Return preparers will now generally be subject to a "substantial authority" standard for undisclosed positions. The "reasonable basis" standard for disclosed positions remains. For discussion of this topic, see Tax Trends on p. 847.

Tax Benefits for Individuals

The Mortgage Forgiveness Debt Relief Act of 2007, P.L. 110-142, allowed individuals to exclude discharge of indebtedness from income when their home mortgage debt was forgiven by the lender (Sec. 108(a)(1)(E)). This relief originally applied only to discharges in 2007–2009. The Economic Stabilization Act extends this relief for three years, through the end of 2012.

The Tax Extenders Act increases the refundable amount of the Sec. 24 child tax credit for 2008 only. The threshold income amount for calculating the credit is reduced from $12,050 to $8,500. This means that for 2008, eligible taxpayers will receive a credit in the amount of 15% of their income over $8,500. The phaseout of the credit is unaffected.

The Sec. 165(h)(1) per-casualty floor for taxpayers who are eligible to deduct casualty or theft losses is increased from $100 to $500 for 2009.

The Pension Protection Act of 2006, P.L. 109-280, allowed taxpayers over age 70½ to instruct their IRA trustee to make direct gifts of up to $100,000 to qualified charities without having to report the IRA distributions as income on their federal tax returns (Sec. 408(d)(8)). This provision originally expired at the end of 2007, but the Tax Extenders Act extends this rule to distributions made in 2008 and 2009.

The Tax Extenders Act extends through 2009 the election under Sec. 164(b)(5) to claim an itemized deduction for state and local sales taxes.

The Housing Assistance Tax Act, P.L. 110-289, which was enacted at the end of July, allowed nonitemizing homeowners to take an additional standard deduction of up to $500 ($1,000 for married taxpayers filing jointly) for state and local real property taxes in 2008. The Tax Extenders Act extends this treatment through 2009.

Finally, the Tax Extenders Act extends the Sec. 222 above-the-line deduction for higher education expenses for two years through 2009, and also extends numerous other expiring provisions.

Alternative Minimum Tax

The Tax Extenders Act increases the alternative minimum tax (AMT) exemption amount for 2008 to $46,200 for single taxpayers and to $69,950 for married couples filing jointly (Sec. 55(d)). The exemption for married individuals filing separately will increase to $34,975 (onehalf of the married filing jointly amount).

The act also extends the AMT offset rule to tax years beginning in 2008 (Sec. 26(a)(2)). This means that nonrefundable credits can be used to offset AMT as well as regular tax in 2008 (as well as in 2000 through 2007).

The act also changes the method for determining the amount of the refundable AMT credit for individuals with longterm minimum tax credits (MTCs). The prior $5,000 alternative is repealed, and an individual's AMT refundable credit amount equals the greater of:

  1. 50% of the long-term unused MTC for the year; or
  2. The amount (if any) of the AMT refundable credit amount for the taxpayer's preceding year (Sec. 53(e)(2)).

Business Provisions

The act extended various business credits. The Sec. 41 research credit was extended to apply to amounts incurred after December 31, 2007, and before January 1, 2010.

Also extended were the Sec. 45D new markets tax credit, the Sec. 45G railroad track maintenance credit, the Sec. 45N mine rescue team training credit, the Sec. 30A possessions tax credit for American Samoa, and the Sec. 199(d)(8) deduction for Puerto Rico domestic production activities.

The DC Enterprise Zone designation under Sec. 1400 was extended for one year, through 2009.

The rule under Sec. 1367(a)(2) that an S corporation's charitable contribution of property reduces shareholder basis only by the amount of the contributed property's basis was extended to apply in tax years beginning in 2008 and 2009.

For corporations that sell more than $300 million in troubled assets as part of the bailout program, the executive compensation deduction is capped at $500,000 (Sec. 162(m)(5)). In addition, golden parachute rules apply to limit severance payments to top executives of such companies (Sec. 280G(e)). On November 3, the IRS issued guidance on these provisions (Notice 2008-94).


The act also contained a large number of energy provisions for individuals and businesses. Among them are the following:

For individuals, the Energy Act reinstated the Sec. 25C(g) nonbusiness energy property credit for one year for energyefficient property placed in service in 2009. Biomass fuel stoves were added to the list of nonbusiness energy property, and geothermal heat pumps were removed from the list.

The Sec. 25D(g) residential energy efficient property credit for qualified solar and fuel cell property expenditures has been extended for eight years, through 2016. In addition, the residential energy efficient property credit may now be claimed against AMT.

The act removed the $2,000 limit on the credit for solar electric property expenditures; the credit is allowed without limit, effective for tax years beginning after December 31, 2008. The act also added residential wind property expenditures to the credit, as well as expenditures for geothermal heat pumps (which were removed from the nonbusiness energy property credit).

The act makes the Sec. 48 business energy credit a specified credit that can be used to offset AMT. The credit for expenditures for solar energy property, qualified fuel cell property, and microturbine property is extended through 2016. (For more on fuel cell and microturbine property, see Sasaki, "IRS Issues Guidance on Energy Credit," Tax Clinic, p. 795.)

The act increased the Sec. 48(c)(1) credit limitation for qualified fuel cell property from $500 to $1,500 for each 0.5 kilowatt of capacity.

The 10% business energy tax credit under Sec. 48 is expanded to apply to "combined heat and power system property," defined as a system that "uses the same energy source for the simultaneous or sequential generation of electrical power, mechanical shaft power, or both, in combination with the generation of steam or other forms of useful thermal energy," which generates at least 20% of its total useful energy in the form of thermal energy and at least 20% of its total useful energy in the form of electrical or mechanical power and which has an energy efficiency percentage of greater than 60% (Sec. 48(c)(3)(A)).

The act allows a 30% energy credit for qualified small wind energy property and for geothermal heat pump systems.

The Sec. 45L(g) energy-efficient home credit for eligible contractors is extended one year through 2008.

Disaster Relief

The act contains many disaster relief provisions and creates a new definition for "federally declared disasters." (Previous tax legislation has referred to "presidentially declared disasters.") A federally declared disaster is "any disaster subsequently determined by the President of the United States to warrant assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act" (Sec. 165(h)(3)(C)(i)).

Perhaps the most significant change is that the 10%-of-AGI limit on personal casualty losses is waived for federally declared disasters in 2008 and 2009 (Sec. 165(h)(3)(A)). This means that an eligible individual's losses are allowed to the extent of the sum of: (1) the amount of the personal casualty gains for the tax year, plus (2) the net disaster loss, plus (3) so much of the excess of personal casualty losses over personal casualty gains (reduced by the net disaster loss) as exceeds 10% of the individual's adjusted gross income. Personal casualty gains are recognized gains from the involuntary conversion of property arising from a casualty. Net disaster losses equal the excess of personal casualty losses attributable to a federally declared disaster occurring before January 1, 2010, in a disaster area over personal casualty gains.

The act allows taxpayers who do not itemize to take an additional standard deduction for losses from federally declared disasters (Sec. 63(c)(1)(D)). This deduction applies for both regular tax and AMT. The added deduction equals the excess of the taxpayer's personal casualty losses attributable to a federally declared disaster over the taxpayer's personal casualty gains.

Taxpayers are allowed to carry back "qualified disaster losses" (as defined in Sec. 172(j)(1)(A)) for five years and deduct them for AMT purposes. Taxpayers may deduct qualified disaster expenses in the year in which they are paid or incurred (Sec. 198A(a)). A qualified disaster expense is paid or incurred in connection with a trade or business for abatement or control of hazardous substances that were released on account of a federally declared disaster occurring before January 1, 2010; for the removal of debris from, or the demolition of structures on, real property that is businessrelated property damaged or destroyed as a result of a federally declared disaster occurring before that date; or for the repair of business-related property damaged as a result of a federally declared disaster occurring before that date that otherwise would have to be capitalized.

The 50% bonus depreciation and AMT depreciation relief are allowed for federally declared disasters that occur after 2007 and before 2010 (Sec. 168(n)).


The Energy Act extends the 0.2% FUTA surtax in Sec. 3301(1) through 2009. The Tax Extenders Act permanently extends the IRS’s authority to disclose tax information in terrorism investigations (Sec. 6013(i)).
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