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Treasury Notes

 Retroactive Tax Provisions, a “Quite Common” Practice

By: Mark J. Mazur
7/24/2014

As Secretary Lew wrote in his recent letter to Congress about corporate inversions, “Congress should enact legislation immediately — and make it retroactive to May 2014 — to shut down this abuse of our tax system.” These kinds of tax provisions are hardly unusual and have been enacted as part of legislation across administrations – including an anti-inversion measure enacted by a Republican Congress in 2004. In fact, the practice is so frequent that the Congressional Research Service called it “quite common” in a 2012 report. In addition to the regular extension of expiring tax cuts with an effective date prior to enactment, Congress has frequently imposed retroactive effective dates for provisions that shut down egregious tax loopholes. In these cases, backdated implementation is often important to ensure that companies do not take advantage of the lengthy legislative process to rush through transactions exploiting the loopholes they know they are about to lose.
 
Examples of such provisions include:
  • The American Jobs Creation Act of 2004 (enacted in October 2004) enacted anti-inversion provisions with an effective date of March 4, 2003.
  • The Taxpayer Relief Act of 1997 eliminated a loophole that allowed the Seagram Company to avoid taxes on its sale of DuPont in 1995. Although not enacted until 1997, the law change was backdated to May 3, 1995. 
  • In 1999, Congress limited the ability of taxpayers to generate capital gains income using certain derivative contracts with respect to pass-through entities (such as partnerships).  The bill was enacted December 17, 1999, but this provision applied to transactions entered into after July 12, 1999.
  • The same bill (The Tax Relief Extension Act of 1999) contained a provision denying the charitable contribution deduction for contributions of split dollar insurance arrangements, which was effective for transfers made after February 8, 1999 (the bill's enactment date was December 17)
  • The Community Renewal Tax Relief Act of 2000 (signed into law December 21, 2000) contained a provision that would prevent the duplication or acceleration of losses through assumption of certain liabilities that was effective for assumption of liabilities occurring after October 19, 1999.
 
Mark J. Mazur is the Assistant Secretary for Tax Policy at the U.S. Department of the Treasury.
 
Posted in:  Tax Policy
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