One week after Ways and Means Committee Chairman Rep. Charles Rangel, D-N.Y., introduced his massive, dream tax reform proposal, and after acknowledging that that proposal had no chance of passage this year, Chairman Rangel introduced a more modest stop-gap proposal, H.R. 3996, including primarily one-year fixes for expiring provisions and some proposals to address the mortgage crisis.Most commentators seem to feel that this legislation has a fairly good chance of passing this year in something close to its present form.

The main controversies will probably come on the revenue-raising side. The Internal Revenue Service has said that the alternative minimum tax fix must be finalized by the middle of November in order to have the changes reflected in the final 2007 tax forms.

AMT FIX

The most urgent need in the current legislative proposal is the AMT fix. Absent action by Congress, the AMT exemption amount for 2007 would fall from $62,550 for joint filers in 2006 to $45,000 in 2007. Also, a number of nonrefundable personal credits would not be allowed for AMT purposes in 2007. These changes are projected to make an additional 23 million taxpayers subject to the AMT in 2007.

The legislative proposal would increase the AMT exemption amount to $66,250 for 2007 for joint filers and $44,350 (from $42,500 in 2006) for single filers, which is calculated to keep the number of taxpayers falling into the AMT constant at about the same number as in 2006.

Nonrefundable personal credits would also be allowed for AMT purposes in 2007, except that the credits for alternative-fuel motor vehicles would continue to be excluded from this treatment.

MORTGAGE DEBT

A set of provisions is included in the legislation related to the sub-prime mortgage credit crisis. The key tax break would be a provision permanently excluding from gross income up to $2 million of discharges of indebtedness related to a qualified mortgage on a principal residence.

The amount excluded would reduce the basis in the taxpayer's principal residence, which either would be absorbed by the $250,000/$500,000 exclusion on the home's eventual sale, or would work to defer debt forgiveness income and have it converted into capital gain when taxed.

A provision in the tax law that is effective for the first time in 2007, and only for 2007, permitting a deduction for mortgage insurance premiums would receive an extension of seven years, through the end of 2014.

A provision is also included to make it easier to qualify as a cooperative housing corporation. In order to pay for these provisions, a provision is included that would require an allocation of gain for purposes of the principal residence sale exclusion where the property was not initially used as a principal residence.

Taxpayers, however, would get somewhat of a break on the effective date of this provision, which allows gain up until Jan. 1, 2008, to qualify for the home sale exclusion should the property be converted from rental to principal residence before sale.

ADDITIONAL TAX BREAKS

Also new to this legislation is a provision making the refundable child tax credit more widely available, and a provision providing a more generous allowance for state legislators' travel expenses. One controversial provision would repeal the IRS's authority to enter into private debt collection contracts. Another would delay for one year a requirement otherwise scheduled to become effective after Dec. 31, 2010, with respect to the withholding requirements of certain governmental payments for goods and services.

The legislation would clarify the entitlement of U.S. Virgin Islands residents to taxpayer statute-of-limitations protections. It would also tighten the expatriation rules, requiring recognition of built-in gain on expatriation to the extent that the aggregate gain exceeds $600,000, adjusted for inflation.

The legislation would also repeal a provision suspending certain penalties and interest where the IRS has failed to give timely notice to a taxpayer. In addition, the legislation would increase information return penalties. Wine of the same color would also be deemed to be commercially interchangeable for purposes of the unused merchandise duty drawback.

NEW EXTENDED PROVISION

In addition to the first-time extension of the mortgage insurance premium deduction, the legislation also would provide the first one-year extension of the provision permitting IRA distributions directly to a charity for taxpayers over age 70-1/2.

OTHER EXPIRING PROVISIONS

The increasingly familiar but growing list of regularly expiring provisions generally get picked up and renewed for another year in this legislation.

* Individuals. For individuals, those provisions proposed to be extended through 2008 include the deduction for sales taxes, the above-the-line deduction for qualified tuition and fees, and the above-the-line deduction for out-of-pocket educator expenses.

* Businesses. For businesses, the legislation would extend for one year the research and development credit, the new markets tax credit, the 15-year amortization of qualified leasehold improvements, and the expensing of "brownfield" environmental remediation costs.

Also included are more obscure extensions related to the Indian employment credit, accelerated depreciation for business property on an Indian reservation, the railroad track maintenance credit, the seven-year cost recovery for motor sports entertainment complexes, the Code Section 199 deduction for Puerto Rico activities, the re-authorization of qualified zone academy bonds, the extension of tax incentives for investment in the District of Columbia, and the American Samoa economic development credit.

* Charity. One-year extensions related to charity include the enhanced deduction for contributions of food inventory, contributions of book inventories to public schools and contributions of computer equipment for educational purposes.

Also included is an extension of a provision encouraging contributions of capital-gain real property made for conservation purposes, extension of the special rule for S corporations making charitable contributions of property, and extension of the special tax treatment of certain payments to controlling exempt organizations.

* Military. One-year extensions are provided for the inclusion of combat pay as earned income under the Earned Income Credit, the special rules for qualified mortgage bonds for veterans, and the special rules for distributions from retirement plans to individuals called to active duty.

* Hurricane Katrina. The legislation would extend for one year the work opportunity tax credit for Hurricane Katrina employees.

A Miscellaneous. Other one-year extensions relate to special rules for regulated investment companies, the tax on failure to comply with mental health parity requirements for group health plans, extension of the provision permitting disclosure of certain tax return information, extension of the authority for IRS undercover operations, and the temporary increase in the limit on cover over of rum excise tax revenues related to Puerto Rico and the Virgin Islands.

THE REVENUE RAISERS

It's the revenue raisers that may yet do in the legislation. The administration and many Republicans in Congress are suggesting that the AMT legislation does not need revenue offsets because it was never the intent that the AMT reach so many taxpayers.

The Democrats, however, have adopted pay-go rules that require tax breaks to be paid for with spending cuts elsewhere or revenue increases.

Ways and Means has approved a revenue raiser that would change the taxation of carried interests of investment managers from capital gain to ordinary income. An additional revenue raiser would change the tax deduction of deferred compensation paid to certain executives and other employees. The inclusion of these revenue raisers may make it difficult to obtain a veto-proof margin, particularly in the Senate.

SUMMARY

Readers of this column will have the advantage of almost an additional month for events to have transpired. As you read this, the IRS's deadline for finalizing tax forms for the 2007 year without delaying the normal filing process will have passed.

Congressional leaders have tried to assure the IRS that they can assume that 2007 AMT relief will be passed and that the IRS can proceed accordingly in preparing tax forms. The IRS, however, has responded that they must proceed to prepare the forms based on the law as enacted at the time.

With the indications that Congress may not be able to resolve issues on the AMT legislation until December, we may well face a situation, like last year, where the tax forms have been issued in final form but do not reflect changes made in year-end tax legislation.

George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst, at CCH, a Wolters Kluwer business.

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