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HR 105-148 "Taxpayer Relief Act of 1997"
105 th Congress 1st Session
HOUSE OF REPRESENTATIVES
Report
105-148
REVENUE RECONCILIATION ACT OF 1997
R E P O R T
of the
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
to accompany
H.R. 2014
A BILL TO PROVIDE FOR RECONCILIATION PURSUANT TO SUBSECTIONS (b)(2) AND
(d) OF SECTION 105 OF THE CONCURRENT RESOLUTION ON THE BUDGET FOR FISCAL
YEAR 1998
together with
ADDITIONAL AND DISSENTING VIEWS
[Graphic Image Not Available]
June 24, 1997.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
REVENUE RECONCILIATION ACT OF 1997
41 480
1997
105 th Congress 1st Session
HOUSE OF REPRESENTATIVES
E
Report
105 148
REVENUE RECONCILIATION ACT OF 1997
R E P O R T
of the
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
to accompany
H.R. 2014
A BILL TO PROVIDE FOR RECONCILIATION PURSUANT TO SUBSECTIONS (b)(2) AND
(d) OF SECTION 105 OF THE CONCURRENT RESOLUTION ON THE BUDGET FOR FISCAL
YEAR 1998
together with
ADDITIONAL AND DISSENTING VIEWS
[Graphic Image Not Available]
June 24, 1997.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
COMMITTEE ON THE BUDGET
JOHN R. KASICH, Ohio, Chairman
DAVID L. HOBSON, Ohio, JOHN M. SPRATT, Jr., South Carolina,
Speaker's Designee Ranking Minority Member
CHRISTOPHER SHAYS, Connecticut JIM M c DERMOTT, Washington,
WALLY HERGER, California Leadership Designee
JIM BUNNING, Kentucky ALAN B. MOLLOHAN, West Virginia
LAMAR S. SMITH, Texas JERRY F. COSTELLO, Illinois
DAN MILLER, Florida PATSY T. MINK, Hawaii
BOB FRANKS, New Jersey EARL POMEROY, North Dakota
NICK SMITH, Michigan LYNN C. WOOLSEY, California
BOB INGLIS, South Carolina LUCILLE ROYBAL-ALLARD, California
SUSAN MOLINARI, New York LYNN N. RIVERS, Michigan
JIM NUSSLE, Iowa LLOYD DOGGETT, Texas
PETER HOEKSTRA, Michigan BENNIE G. THOMPSON, Mississippi
JOHN SHADEGG, Arizona BENJAMIN L. CARDIN, Maryland
GEORGE P. RADANOVICH, California DAVID MINGE, Minnesota
CHARLES F. BASS, New Hampshire SCOTTY BAESLER, Kentucky
MARK W. NEUMANN, Wisconsin KEN BENTSEN, Texas
MIKE PARKER, Mississippi JIM DAVIS, Florida
BOB EHRLICH, Maryland BRAD SHERMAN, California
GIL GUTKNECHT, Minnesota ROBERT A. WEYGAND, Rhode Island
VAN HILLEARY, Tennessee EVA M. CLAYTON, North Carolina
KAY GRANGER, Texas
JOHN E. SUNUNU, New Hampshire
JOSEPH PITTS, Pennsylvania
PROFESSIONAL STAFF
Richard E. May, Staff Director
Thomas S. Kahn, Minority Staff Director and Chief Counsel
C O N T E N T S
Legislative Language 1
Report Language:
I. Introduction
287
II. Explanation of the Bill
309
III. Votes of the Committee
670
IV. Budget Effects of the Bill
678
V. Other Matters to be Discussed Under the Rules of the House
700
Miscellaneous House Report Requirements
703
Additional and Dissenting Views
731
105 th Congress
Report
HOUSE OF REPRESENTATIVES
1st Session
105 148
PROVIDING FOR RECONCILIATION PURSUANT TO SUBSECTIONS (b)(2) AND (d) OF
SECTION 105 OF THE CONCURRENT RESOLUTION ON THE BUDGET FOR FISCAL YEAR
1998
June 24, 1997.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
Mr. Kasich, from the Committee on the Budget, submitted the following
R E P O R T
together with
ADDITIONAL AND DISSENTING VIEWS
[To accompany H.R. 2014]
[Including cost estimate of the Congressional Budget Office]
The Committee on the Budget, to whom reconciliation recommendations
were submitted pursuant to subsections (b)(2) and (d) of section 105 of
House Concurrent Resolution 84, the concurrent resolution on the budget
for fiscal year 1998, having considered the same, reports favorably
thereon without amendment and recommends that the bill do pass.
A BILL To provide for reconciliation pursuant to subsections
(b)(2) and (d) of section 105 of the concurrent resolution on the budget
for fiscal year 1998.
Be it enacted by the Senate and House of Representatives of the United
States of America in Congress assembled,
SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.
(a) Short Title.--This Act may be cited as the ``Revenue
Reconciliation Act of 1997''.
(b) Amendment of 1986 Code.--Except as otherwise expressly provided,
whenever in this Act an amendment or repeal is expressed in terms of an
amendment to, or repeal of, a section or other provision, the reference
shall be considered to be made to a section or other provision of the
Internal Revenue Code of 1986.
(c) Table of Contents.--The table of contents for this Act is as
follows:
Sec. 1. Short title; amendment of 1986 Code.
TITLE I--CHILD TAX CREDIT; TAX INCENTIVES FOR DEPENDENT CARE AND HEALTH
CARE FOR CHILDREN
Sec. 101. Child tax credit.
Sec. 102. Inflation adjustment of limits and other modifications
of dependent care credit.
TITLE II--EDUCATION INCENTIVES
SUBTITLE A--TAX BENEFITS RELATING TO EDUCATION EXPENSES
Sec. 201. Hope credit for higher education tuition and related expenses.
Sec. 202. Deduction for qualified higher education expenses.
Sec. 203. Penalty-free withdrawals from individual retirement
plans for higher education expenses.
Sec. 204. Expenses for education which supplements elementary and
secondary education.
SUBTITLE B--EXPANDED EDUCATION INVESTMENT SAVINGS OPPORTUNITIES
Sec. 211. Eligible educational institutions permitted to maintain
qualified tuition programs; other modifications of qualified State
tuition programs.
Sec. 212. Education investment accounts.
SUBTITLE C--OTHER EDUCATION INITIATIVES
Sec. 221. Extension of exclusion for employer-provided educational
assistance.
Sec. 222. Increase in limitation on qualified 501(c)(3) bonds
other than hospital bonds.
Sec. 223. Contributions of computer technology and equipment for
elementary or secondary school purposes.
Sec. 224. Treatment of cancellation of certain student loans.
TITLE III--SAVINGS AND INVESTMENT INCENTIVES
SUBTITLE A--RETIREMENT SAVINGS
Sec. 301. Establishment of American Dream IRA.
SUBTITLE B--CAPITAL GAINS
PART I--INDIVIDUAL CAPITAL GAINS
Sec. 311. 20 percent maximum capital gains rate for individuals.
Sec. 312. Indexing of certain assets acquired after December 31,
2000, for purposes of determining gain.
Sec. 313. Exemption from tax for gain on sale of principal residence.
PART II--CORPORATE CAPITAL GAINS
Sec. 321. Reduction of alternative capital gain tax for corporations.
TITLE IV--ALTERNATIVE MINIMUM TAX REFORM
Sec. 401. Adjustment of exemption amounts for taxpayers other than
corporations.
Sec. 402. Exemption from alternative minimum tax for small corporations.
Sec. 403. Repeal of adjustment for depreciation.
Sec. 404. Minimum tax not to apply to farmers' installment sales.
TITLE V--ESTATE, GIFT, AND GENERATION-SKIPPING TAX PROVISIONS
SUBTITLE A--ESTATE AND GIFT TAX PROVISIONS
Sec. 501. Cost-of-living adjustments relating to estate and gift
tax provisions.
Sec. 502. 20-year installment payment where estate consists
largely of interest in closely held business.
Sec. 503. No interest on certain portion of estate tax extended
under section 6166, reduced interest on remaining portion, and no
deduction for such reduced interest.
Sec. 504. Extension of treatment of certain rents under section
2032A to lineal descendants.
Sec. 505. Clarification of judicial review of eligibility for
extension of time for payment of estate tax.
Sec. 506. Gifts may not be revalued for estate tax purposes after
expiration of statute of limitations.
Sec. 507. Termination of throwback rules for domestic trusts.
Sec. 508. Unified credit of decedent increased by unified credit
of spouse used on split gift included in decedent's gross estate.
Sec. 509. Reformation of defective bequests, etc., to spouse of
decedent.
SUBTITLE B--GENERATION-SKIPPING TAX PROVISIONS
Sec. 511. Severing of trusts holding property having an inclusion
ratio of greater than zero.
Sec. 512. Expansion of exception from generation-skipping transfer
tax for transfers to individuals with deceased parents.
TITLE VI--EXTENSION AND MODIFICATION OF CERTAIN EXPIRING PROVISIONS
Sec. 601. Research tax credit.
Sec. 602. Contributions of stock to private foundations.
Sec. 603. Work opportunity tax credit.
Sec. 604. Orphan drug tax credit.
TITLE VII--INCENTIVES FOR REVITALIZATION OF THE DISTRICT OF COLUMBIA
Sec. 701. Tax incentives for revitalization of the District of Columbia.
Sec. 702. Incentives conditioned on other DC reform.
TITLE VIII--WELFARE-TO-WORK INCENTIVES
Sec. 801. Incentives for employing long-term family assistance
recipients.
TITLE IX--MISCELLANEOUS PROVISIONS
SUBTITLE A--PROVISIONS RELATING TO EXCISE TAXES
Sec. 901. Repeal of tax on diesel fuel used in recreational boats.
Sec. 902. Continued application of tax on imported recycled Halon-1211.
Sec. 903. Uniform rate of tax on vaccines.
Sec. 904. Operators of multiple gasoline retail outlets treated as
wholesale distributor for refund purposes.
Sec. 905. Exemption of electric and other clean-fuel motor
vehicles from luxury automobile classification.
SUBTITLE B--PROVISIONS RELATING TO PENSIONS AND FRINGE BENEFITS
Sec. 911. Section 401(k) plans for certain irrigation and drainage
entities.
Sec. 912. Extension of moratorium on application of certain
nondiscrimination rules to State and local governments.
Sec. 913. Treatment of certain disability benefits received by
former police officers or firefighters.
Sec. 914. Portability of permissive service credit under
governmental pension plans.
Sec. 915. Gratuitous transfers for the benefit of employees.
Sec. 916. Treatment of certain transportation on non-commercially
operated aircraft as a fringe benefit excludable from gross income.
Sec. 917. Minimum pension accrued benefit distributable without
consent increased to $5,000.
Sec. 918. Clarification of certain rules relating to employee
stock ownership plans of S corporations.
SUBTITLE C--REVISIONS RELATING TO DISASTERS
Sec. 921. Authority to postpone certain tax-related deadlines by
reason of presidentially declared disaster.
Sec. 922. Use of certain appraisals to establish amount of
disaster loss.
Sec. 923. Treatment of livestock sold on account of
weather-related conditions.
Sec. 924. Mortgage financing for residences located in disaster areas.
SUBTITLE D--PROVISIONS RELATING TO EMPLOYMENT TAXES
Sec. 931. Clarification of employment tax status of individuals
distributing bakery products.
Sec. 932. Clarification of standard to be used in determining
employment tax status of retail securities brokers.
Sec. 933. Clarification of exemption from self-employment tax for
certain termination payments received by former insurance salesmen.
Sec. 934. Standards for determining whether individuals are not
employees.
SUBTITLE E--PROVISIONS RELATING TO SMALL BUSINESSES
Sec. 941. Waiver of penalty through 1998 on small businesses
failing to make electronic fund transfers of taxes.
Sec. 942. Clarification of treatment of home office use for
administrative and management activities.
SUBTITLE F--OTHER PROVISIONS
Sec. 951. Use of estimates of shrinkage for inventory accounting.
Sec. 952. Assignment of workmen's compensation liability eligible
for exclusion relating to personal injury liability assignments.
Sec. 953. Tax-exempt status for certain State worker's
compensation act companies.
Sec. 954. Election to continue exception from treatment of
publicly traded partnerships as corporations.
Sec. 955. Exclusion from unrelated business taxable income for
certain sponsorship payments.
Sec. 956. Associations of holders of timeshare interests to be
taxed like other homeowners associations.
Sec. 957. Additional advance refunding of certain Virgin Island bonds.
Sec. 958. Nonrecognition of gain on sale of stock to certain
farmers' cooperatives.
Sec. 959. Exception from reporting of real estate transactions for
sales and exchanges of certain principal residences.
Sec. 960. Increased deductibility of business meal expenses for
individuals subject to Federal hours of service.
Sec. 961. Qualified lessee construction allowances for short-term
leases.
Sec. 962. Tax treatment of consolidations of life insurance
departments of mutual savings banks.
Sec. 963. Offset of past-due, legally enforceable State tax
obligations against overpayments.
Sec. 964. Exemption of the incremental cost of a clean fuel
vehicle from the limits on depreciation for vehicles.
Sec. 965. Tax benefits for law enforcement officers killed in the
line of duty.
Sec. 966. Temporary suspension of taxable income limit on
percentage depletion for marginal production.
SUBTITLE G--EXTENSION OF DUTY-FREE TREATMENT UNDER GENERALIZED SYSTEM
OF PREFERENCES; TARIFF TREATMENT OF CERTAIN EQUIPMENT AND REPAIR OF VESSELS
Sec. 971. Generalized system of preferences.
Sec. 972. Equipment and repair of vessels.
SUBTITLE H--UNITED STATES-CARIBBEAN BASIN TRADE PARTNERSHIP ACT
Sec. 981. Short title.
Sec. 982. Findings and policy.
Sec. 983. Definitions.
Sec. 984. Temporary provisions to provide NAFTA parity to
partnership countries.
Sec. 985. Effect of NAFTA on sugar imports from beneficiary countries.
Sec. 986. Duty-free treatment for certain beverages made with
Caribbean rum.
Sec. 987. Meetings of trade ministers and USTR.
Sec. 988. Report on economic development and market oriented
reforms in the Caribbean.
TITLE X--REVENUES
SUBTITLE A--FINANCIAL PRODUCTS
Sec. 1001. Constructive sales treatment for appreciated financial
positions.
Sec. 1002. Limitation on exception for investment companies under
section 351.
Sec. 1003. Modification of rules for allocating interest expense
to tax-exempt interest.
Sec. 1004. Gains and losses from certain terminations with respect
to property.
Sec. 1005. Determination of original issue discount where pooled
debt obligations subject to acceleration.
Sec. 1006. Denial of interest deductions on certain debt instruments.
SUBTITLE B--CORPORATE ORGANIZATIONS AND REORGANIZATIONS
Sec. 1011. Tax treatment of certain extraordinary dividends.
Sec. 1012. Application of section 355 to distributions followed by
acquisitions and to intragroup transactions.
Sec. 1013. Tax treatment of redemptions involving related corporations.
Sec. 1014. Modification of holding period applicable to dividends
received deduction.
SUBTITLE C--OTHER CORPORATE PROVISIONS
Sec. 1021. Registration and other provisions relating to
confidential corporate tax shelters.
Sec. 1022. Certain preferred stock treated as boot.
SUBTITLE D--ADMINISTRATIVE PROVISIONS
Sec. 1031. Reporting of certain payments made to attorneys.
Sec. 1032. Decrease of threshold for reporting payments to
corporations performing services for Federal agencies.
Sec. 1033. Disclosure of return information for administration of
certain veterans programs.
Sec. 1034. Continuous levy on certain payments.
Sec. 1035. Modification of levy exemption.
Sec. 1036. Confidentiality and disclosure of returns and return
information.
Sec. 1037. Returns of beneficiaries of estates and trusts required
to file returns consistent with estate or trust return or to notify
secretary of inconsistency.
SUBTITLE E--EXCISE TAX PROVISIONS
Sec. 1041. Extension and modification of Airport and Airway Trust
Fund taxes.
Sec. 1042. Kerosene taxed as diesel fuel.
Sec. 1043. Reduction of incentives for alcohol fuels.
Sec. 1044. Restoration of Leaking Underground Storage Tank Trust
Fund taxes.
Sec. 1045. Application of communications tax to long-distance
prepaid telephone cards.
SUBTITLE F--PROVISIONS RELATING TO TAX-EXEMPT ENTITIES
Sec. 1051. Expansion of look-thru rule for interest, annuities,
royalties, and rents derived by subsidiaries of tax-exempt
organizations.
Sec. 1052. Limitation on increase in basis of property resulting
from sale by tax-exempt entity to a related person.
Sec. 1053. Modifications to exception from reporting, etc. of
lobbying activities.
Sec. 1054. Termination of certain exceptions from rules relating
to exempt organizations which provide commercial-type insurance.
SUBTITLE G--OTHER REVENUE PROVISIONS
Sec. 1061. Termination of suspense accounts for family
corporations required to use accrual method of accounting.
Sec. 1062. Modification of taxable years to which net operating
losses may be carried.
Sec. 1063. Expansion of denial of deduction for certain amounts
paid in connection with insurance.
Sec. 1064. Allocation of basis among properties distributed by
partnership.
Sec. 1065. Repeal of requirement that inventory be substantially
appreciated.
Sec. 1066. Extension of time for taxing precontribution gain.
Sec. 1067. Restrictions on availability of earned income credit
for taxpayers who improperly claimed credit in prior year.
Sec. 1068. Limitation on property for which income forecast method
may be used.
Sec. 1069. Repeal of special rule for rental use of vacation
homes, etc., for less than 15 days.
Sec. 1070. Expansion of requirement that involuntarily converted
property be replaced with property acquired from an unrelated person.
Sec. 1071. Treatment of exception from installment sales rules for
sales of property by a manufacturer to a dealer.
TITLE XI--SIMPLIFICATION AND OTHER FOREIGN-RELATED PROVISIONS
SUBTITLE A--GENERAL PROVISIONS
Sec. 1101. Treatment of computer software as FSC export property.
Sec. 1102. Adjustment of dollar limitation on section 911 exclusion.
Sec. 1103. Certain individuals exempt from foreign tax credit
limitation.
Sec. 1104. Exchange rate used in translating foreign taxes.
Sec. 1105. Election to use simplified section 904 limitation for
alternative minimum tax.
Sec. 1106. Treatment of personal transactions by individuals under
foreign currency rules.
Sec. 1107. All noncontrolled section 902 corporations which are
not passive foreign investment companies in one foreign tax limitation
basket.
SUBTITLE B--TREATMENT OF CONTROLLED FOREIGN CORPORATIONS
Sec. 1111. Gain on certain stock sales by controlled foreign
corporations treated as dividends.
Sec. 1112. Miscellaneous modifications to subpart F.
Sec. 1113. Indirect foreign tax credit allowed for certain lower
tier companies.
SUBTITLE C--TREATMENT OF PASSIVE FOREIGN INVESTMENT COMPANIES
Sec. 1121. United States shareholders of controlled foreign
corporations not subject to PFIC inclusion.
Sec. 1122. Election of mark to market for marketable stock in
passive foreign investment company.
Sec. 1123. Effective date.
SUBTITLE D--REPEAL OF EXCISE TAX ON TRANSFERS TO FOREIGN ENTITIES
Sec. 1131. Repeal of excise tax on transfers to foreign entities;
recognition of gain on certain transfers to foreign trusts and estates.
SUBTITLE E--INFORMATION REPORTING
Sec. 1141. Clarification of application of return requirement to
foreign partnerships.
Sec. 1142. Controlled foreign partnerships subject to information
reporting comparable to information reporting for controlled foreign
corporations.
Sec. 1143. Modifications relating to returns required to be filed
by reason of changes in ownership interests in foreign partnership.
Sec. 1144. Transfers of property to foreign partnerships subject
to information reporting comparable to information reporting for such
transfers to foreign corporations.
Sec. 1145. Extension of statute of limitation for foreign transfers.
Sec. 1146. Increase in filing thresholds for returns as to
organization of foreign corporations and acquisitions of stock in such
corporations.
SUBTITLE F--DETERMINATION OF FOREIGN OR DOMESTIC STATUS OF PARTNERSHIPS
Sec. 1151. Determination of foreign or domestic status of partnerships.
SUBTITLE G--OTHER SIMPLIFICATION PROVISIONS
Sec. 1161. Transition rule for certain trusts.
Sec. 1162. Repeal of stock and securities safe harbor requirement
that principal office be outside the United States.
SUBTITLE H--OTHER PROVISIONS
Sec. 1171. Definition of foreign personal holding company income.
Sec. 1172. Personal property used predominantly in the United
States treated as not property of a like kind with respect to property
used predominantly outside the United States.
Sec. 1173. Holding period requirement for certain foreign taxes.
Sec. 1174. Penalties for failure to disclose position that certain
international transportation income is not includible in gross income.
Sec. 1175. Denial of treaty benefits for certain payments through
hybrid entities.
Sec. 1176. Interest on underpayments not reduced by foreign tax
credit carrybacks.
Sec. 1177. Clarification of period of limitations on claim for
credit or refund attributable to foreign tax credit carryforward.
Sec. 1178. Miscellaneous clarifications.
TITLE XII--SIMPLIFICATION PROVISIONS RELATING TO INDIVIDUALS AND
BUSINESSES
SUBTITLE A--PROVISIONS RELATING TO INDIVIDUALS
Sec. 1201. Basic standard deduction and minimum tax exemption
amount for certain dependents.
Sec. 1202. Increase in amount of tax exempt from estimated tax
requirements.
Sec. 1203. Optional methods for computing SECA tax combined.
Sec. 1204. Treatment of certain reimbursed expenses of rural mail
carriers.
Sec. 1205. Treatment of traveling expenses of certain Federal
employees engaged in criminal investigations.
Sec. 1206. Payment of tax by commercially acceptable means.
SUBTITLE B--PROVISIONS RELATING TO BUSINESSES GENERALLY
Sec. 1211. Modifications to look-back method for long-term contracts.
Sec. 1212. Minimum tax treatment of certain property and casualty
insurance companies.
SUBTITLE C--SIMPLIFICATION RELATING TO ELECTING LARGE PARTNERSHIPS
PART I--GENERAL PROVISIONS
Sec. 1221. Simplified flow-through for electing large partnerships.
Sec. 1222. Simplified audit procedures for electing large partnerships.
Sec. 1223. Due date for furnishing information to partners of
electing large partnerships.
Sec. 1224. Returns may be required on magnetic media.
Sec. 1225. Treatment of partnership items of individual retirement
accounts.
Sec. 1226. Effective date.
PART II--PROVISIONS RELATED TO TEFRA PARTNERSHIP PROCEEDINGS
Sec. 1231. Treatment of partnership items in deficiency proceedings.
Sec. 1232. Partnership return to be determinative of audit
procedures to be followed.
Sec. 1233. Provisions relating to statute of limitations.
Sec. 1234. Expansion of small partnership exception.
Sec. 1235. Exclusion of partial settlements from 1-year limitation
on assessment.
Sec. 1236. Extension of time for filing a request for
administrative adjustment.
Sec. 1237. Availability of innocent spouse relief in context of
partnership proceedings.
Sec. 1238. Determination of penalties at partnership level.
Sec. 1239. Provisions relating to court jurisdiction, etc.
Sec. 1240. Treatment of premature petitions filed by notice
partners or 5-percent groups.
Sec. 1241. Bonds in case of appeals from certain proceeding.
Sec. 1242. Suspension of interest where delay in computational
adjustment resulting from certain settlements.
Sec. 1243. Special rules for administrative adjustment requests
with respect to bad debts or worthless securities.
PART III--PROVISION RELATING TO CLOSING OF PARTNERSHIP TAXABLE YEAR WITH
RESPECT TO DECEASED PARTNER, ETC.
Sec. 1246. Closing of partnership taxable year with respect to
deceased partner, etc.
SUBTITLE D--PROVISIONS RELATING TO REAL ESTATE INVESTMENT TRUSTS
Sec. 1251. Clarification of limitation on maximum number of
shareholders.
Sec. 1252. De minimis rule for tenant services income.
Sec. 1253. Attribution rules applicable to tenant ownership.
Sec. 1254. Credit for tax paid by REIT on retained capital gains.
Sec. 1255. Repeal of 30-percent gross income requirement.
Sec. 1256. Modification of earnings and profits rules for
determining whether REIT has earnings and profits from non-REIT year.
Sec. 1257. Treatment of foreclosure property.
Sec. 1258. Payments under hedging instruments.
Sec. 1259. Excess noncash income.
Sec. 1260. Prohibited transaction safe harbor.
Sec. 1261. Shared appreciation mortgages.
Sec. 1262. Wholly owned subsidiaries.
Sec. 1263. Effective date.
SUBTITLE E--PROVISIONS RELATING TO REGULATED INVESTMENT COMPANIES
Sec. 1271. Repeal of 30-percent gross income limitation.
SUBTITLE F--TAXPAYER PROTECTIONS
Sec. 1281. Reasonable cause exception for certain penalties.
Sec. 1282. Clarification of period for filing claims for refunds.
Sec. 1283. Repeal of authority to disclose whether prospective
juror has been audited.
Sec. 1284. Clarification of statute of limitations.
Sec. 1285. Awarding of administrative costs.
Sec. 1286. Penalty for unauthorized inspection of tax returns or
tax return information.
Sec. 1287. Civil damages for unauthorized inspection of returns
and return information; notification of unlawful inspection or
disclosure.
TITLE XIII--SIMPLIFICATION PROVISIONS RELATING TO ESTATE AND GIFT TAXES
Sec. 1301. Gifts to charities exempt from gift tax filing requirements.
Sec. 1302. Clarification of waiver of certain rights of recovery.
Sec. 1303. Transitional rule under section 2056A.
Sec. 1304. Clarifications relating to disclaimers.
Sec. 1305. Increase of amount of lapse of general power of
appointment not treated as release for purposes of estate and gift tax
(5 or 5 power).
Sec. 1306. Treatment for estate tax purposes of short-term
obligations held by nonresident aliens.
Sec. 1307. Certain revocable trusts treated as part of estate.
Sec. 1308. Distributions during first 65 days of taxable year of
estate.
Sec. 1309. Separate share rules available to estates.
Sec. 1310. Executor of estate and beneficiaries treated as related
persons for disallowance of losses, etc.
Sec. 1311. Limitation on taxable year of estates.
Sec. 1312. Treatment of funeral trusts.
Sec. 1313. Adjustments for gifts within 3 years of decedent's death.
Sec. 1314. Clarification of treatment of survivor annuities under
qualified terminable interest rules.
Sec. 1315. Treatment under qualified domestic trust rules of forms
of ownership which are not trusts.
Sec. 1316. Opportunity to correct certain failures under section 2032A.
Sec. 1317. Authority to waive requirement of United States trustee
for qualified domestic trusts.
TITLE XIV--SIMPLIFICATION PROVISIONS RELATING TO EXCISE TAXES,
TAX-EXEMPT BONDS, AND OTHER MATTERS
SUBTITLE A--EXCISE TAX SIMPLIFICATION
PART I--EXCISE TAXES ON HEAVY TRUCKS AND LUXURY CARS
Sec. 1401. Increase in de minimis limit for after-market
alterations for heavy trucks and luxury cars.
Sec. 1402. Credit for tire tax in lieu of exclusion of value of
tires in computing price.
PART II--PROVISIONS RELATED TO DISTILLED SPIRITS, WINES, AND BEER
Sec. 1411. Credit or refund for imported bottled distilled spirits
returned to distilled spirits plant.
Sec. 1412. Authority to cancel or credit export bonds without
submission of records.
Sec. 1413. Repeal of required maintenance of records on premises
of distilled spirits plant.
Sec. 1414. Fermented material from any brewery may be received at
a distilled spirits plant.
Sec. 1415. Repeal of requirement for wholesale dealers in liquors
to post sign.
Sec. 1416. Refund of tax to wine returned to bond not limited to
unmerchantable wine.
Sec. 1417. Use of additional ameliorating material in certain wines.
Sec. 1418. Domestically produced beer may be withdrawn free of tax
for use of foreign embassies, legations, etc.
Sec. 1419. Beer may be withdrawn free of tax for destruction.
Sec. 1420. Authority to allow drawback on exported beer without
submission of records.
Sec. 1421. Transfer to brewery of beer imported in bulk without
payment of tax.
Sec. 1422. Transfer to bonded wine cellars of wine imported in
bulk without payment of tax.
PART III--OTHER EXCISE TAX PROVISIONS
Sec. 1431. Authority to grant exemptions from registration requirements.
Sec. 1432. Repeal of expired provisions.
SUBTITLE B--TAX-EXEMPT BOND PROVISIONS
Sec. 1441. Repeal of $100,000 limitation on unspent proceeds under
1-year exception from rebate.
Sec. 1442. Exception from rebate for earnings on bona fide debt
service fund under construction bond rules.
Sec. 1443. Repeal of debt service-based limitation on investment
in certain nonpurpose investments.
Sec. 1444. Repeal of expired provisions.
Sec. 1445. Effective date.
SUBTITLE C--TAX COURT PROCEDURES
Sec. 1451. Overpayment determinations of Tax Court.
Sec. 1452. Redetermination of interest pursuant to motion.
Sec. 1453. Application of net worth requirement for awards of
litigation costs.
Sec. 1454. Proceedings for determination of employment status.
SUBTITLE D--OTHER PROVISIONS
Sec. 1461. Extension of due date of first quarter estimated tax
payment by private foundations.
Sec. 1462. Clarification of authority to withhold Puerto Rico
income taxes from salaries of Federal employees.
Sec. 1463. Certain notices disregarded under provision increasing
interest rate on large corporate underpayments.
TITLE XV--TECHNICAL AMENDMENTS RELATED TO SMALL BUSINESS JOB PROTECTION
ACT OF 1996 AND OTHER LEGISLATION
Sec. 1501. Amendments related to Small Business Job Protection Act
of 1996.
Sec. 1502. Amendments related to Health Insurance Portability and
Accountability Act of 1996.
Sec. 1503. Amendments related to Taxpayer Bill of Rights 2.
Sec. 1504. Miscellaneous provisions.
TITLE I--CHILD TAX CREDIT; MODIFICATION OF DEPENDENT CARE CREDIT
SEC. 101. CHILD TAX CREDIT.
(a) In General.--Subpart A of part IV of subchapter A of chapter 1
(relating to nonrefundable personal credits) is amended by inserting
after section 23 the following new section:
``SEC. 24. CHILD TAX CREDIT.
``(a) Allowance of Credit.--There shall be allowed as a credit
against the tax imposed by this chapter for the taxable year an amount
equal to $500 multiplied by the number of qualifying children of the
taxpayer.
``(b) Limitations.--
``(1) Limitation based on adjusted gross income.--For limitation
based on adjusted gross income, see section 26(c).
``(2) Reduction for dependent care credit.--In the case of taxable
years beginning after December 31, 2001--
``(A) In general.--The credit allowed by subsection (a) for the
taxable year (determined after paragraph (1) but before paragraph (3))
shall be reduced by the amount equal to 50 percent of the credit allowed
under section 21 for such taxable year (determined after section 26(c)).
``(B) No reduction for dependent care of individuals incapable of
self-care.--Subparagraph (A) shall not apply to so much of the credit
which would have been allowed under section 21 (determined without
regard to section 26(c)) if only qualifying individuals described in
subparagraph (B) or (C) of section 21(b)(1) were taken into account.
``(3) Limitation based on amount of tax.--The credit allowed by
subsection (a) (determined after paragraphs (1) and (2)) shall not
exceed the excess (if any) of--
``(A) the taxpayer's regular tax liability for the taxable year
reduced by the credits allowable against such tax under this subpart
(other than this section), over
``(B) the sum of--
``(i) the taxpayer's tentative minimum tax for such taxable year
(determined without regard to the alternative minimum tax foreign tax
credit), plus
``(ii) the credit allowed for the taxable year under section 32.
``(c) Qualifying Child.--For purposes of this section--
``(1) In general.--The term `qualifying child' means any individual
if--
``(A) the taxpayer is allowed a deduction under section 151 with
respect to such individual for the taxable year,
``(B) such individual has not attained the age of 17 as of the close
of the calendar year in which the taxable year of the taxpayer begins,
and
``(C) such individual bears a relationship to the taxpayer described
in section 32(c)(3)(B).
``(2) Exception for certain noncitizens.--The term `qualifying
child' shall not include any individual who would not be a dependent if
the first sentence of section 152(b)(3) were applied without regard to
all that follows `resident of the United States'.
``(d) Taxable Year Must Be Full Taxable Year.--Except in the case of
a taxable year closed by reason of the death of the taxpayer, no credit
shall be allowable under this section in the case of a taxable year
covering a period of less than 12 months.
``(e) Phasein of Credit.--In the case of taxable years beginning in
1998, subsection (a) shall be applied by substituting `$400' for
`$500'.''
(b) High Risk Pools Permitted To Cover Dependents of High Risk
Individuals.--Paragraph (26) of section 501(c) is amended by adding at
the end the following flush sentence:
``A qualifying child (as defined in section 24(c)) of an individual
described in subparagraph (B) (without regard to this sentence) shall be
treated as described in subparagraph (B).''
(c) Conforming Amendments.--
(1) Subsection (a) of section 26 is amended by inserting ``(other
than the credit allowed by section 24)'' after ``credits allowed by this
subpart''.
(2) The table of sections for subpart A of part IV of subchapter A
of chapter 1 is amended by inserting after the item relating to section
23 the following new item:
``Sec. 24. Child tax credit.''
(d) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 1997.
SEC. 102. INFLATION ADJUSTMENT OF LIMITS AND OTHER
MODIFICATIONS OF DEPENDENT CARE CREDIT.
(a) Inflation Adjustment.--
(1) In general.--Subsection (c) of section 21 (relating to expenses
for household and dependent care services necessary for gainful
employment) is amended to read as follows:
``(c) Dollar Limit on Amount Creditable.--
``(1) In general.--The amount of the employment-related expenses
incurred during any taxable year which may be taken into account under
subsection (a) shall not exceed--
``(A) $2,400 if there is 1 qualifying individual with respect to the
taxpayer for such taxable year, or
``(B) $4,800 if there are 2 or more qualifying individuals with
respect to the taxpayer for such taxable year.
The amount determined under subparagraph (A) or (B) (whichever is
applicable) shall be reduced by the aggregate amount excludable from
gross income under section 129 for the taxable year.
``(2) Inflation adjustment.--In the case of taxable years beginning
in a calendar year after 1997, each of the dollar amounts contained in
paragraph (1) shall be increased by an amount equal to--
``(A) such dollar amount, multiplied by
``(B) the cost-of-living adjustment determined under section 1(f)(3)
for such calendar year by substituting `calendar year 1996' for
`calendar year 1992' in subparagraph (B) thereof.
If any amount as adjusted under the preceding sentence is not a
multiple of $50, such amount shall be rounded to the next lowest
multiple of $50.''
(2) Conforming amendment.--Paragraph (2) of section 21(d) is amended
by striking ``(c)(1)'' and inserting ``(c)(1)(A)'' and by striking
``(c)(2)'' and inserting ``(c)(1)(B)''.
(b) Reduction of Benefit Based on Adjusted Gross Income.--
(1) In general.--Section 26 is amended by redesignating subsection
(c) as subsection (d) and by inserting after subsection (b) the
following new subsection:
``(c) Reduction of Dependent Care Credit and Child Credit Based on
Adjusted Gross Income.--
``(1) In general.--The aggregate amount which would (but for
subsection (a), this subsection, and paragraphs (2) and (3) of section
24(b)) be allowed under sections 21 and 24 shall be reduced (but not
below zero) by
$25 for each $1,000 (or fraction thereof) by which the
taxpayer's modified adjusted gross income exceeds the threshold amount.
For purposes of the preceding sentence, the term `modified adjusted
gross income' means adjusted gross income increased by any amount
excluded from gross income under section 911, 931, or 933.
``(2) Threshold amount.--For purposes of paragraph (1), the term
`threshold amount' means--
``(A) $110,000 in the case of a joint return,
``(B) $75,000 in the case of an individual who is not married, and
``(C) $55,000 in the case of a married individual filing a separate
return.
For purposes of this paragraph, marital status shall be determined
under section 7703.
``(3) Remaining credit treated as attributable to dependent care tax
credit.--The aggregate amount allowable under sections 21 and 24 after
the application of paragraph (1) shall be treated as allowable solely
under section 21 to the extent such amount does not exceed the amount
allowable under section 21 (determined without regard to section
21(a)(3)).''
(2) Conforming amendments.--
(A) Subsection (a) of section 21 is amended by adding at the end the
following new paragraph:
``(3) Limitation based on adjusted gross income.--
``For limitation based on adjusted gross income, see section 26(c).''
(B) The section heading for section 26 is amended by inserting
before the period `` ; PHASEOUT OF CERTAIN CREDITS BASED ON INCOME ''.
(C) The item relating to section 26 in the table of sections for
subpart A of part IV of subchapter A of chapter 1 is amended by
inserting before the period ``; phaseout of certain credits based on
income''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 1997.
TITLE II--EDUCATION INCENTIVES
Subtitle A--Tax Benefits Relating to Education Expenses
SEC. 201. HOPE CREDIT FOR HIGHER EDUCATION TUITION AND RELATED EXPENSES.
(a) In General.--Subpart A of part IV of subchapter A of chapter 1
(relating to nonrefundable personal credits) is amended by inserting
after section 25 the following new section:
``SEC. 25A. HIGHER EDUCATION TUITION AND RELATED EXPENSES.
``(a) Allowance of Credit.--In the case of an individual, there shall
be allowed as a credit against the tax imposed by this chapter for the
taxable year the amount equal to 50 percent of qualified tuition and
related expenses paid by the taxpayer during such taxable year for
education furnished during any academic period beginning in such year.
``(b) Limitations.--
``(1) Dollar limitation.--The amount allowed as a credit under
subsection (a) for any taxable year with respect to the qualified
tuition and related expenses of any 1 individual shall not exceed
$1,500.
``(2) Credit allowed only for 2 taxable years.--No credit shall be
allowed under subsection (a) for a taxable year with respect to the
qualified tuition and related expenses of an individual unless the
taxpayer elects to have this section apply with respect to such
individual for such year. An election under this paragraph shall not
take effect with respect to an individual for any taxable year if an
election under this paragraph (by the taxpayer or any other individual)
is in effect with respect to such individual for any 2 prior taxable
years.
``(3) Credit allowed for year only if individual is at least \1/2\
time student for portion of year.--No credit shall be allowed under
subsection (a) for a taxable year with respect to the qualified tuition
and related expenses of an individual unless such individual is an
eligible student for at least one academic period which begins during
such year.
``(4) Credit allowed only for first two years of postsecondary
education.--No credit shall be allowed under subsection (a) for a
taxable year with respect to the qualified tuition and related expenses
of an individual if the individual has completed (before the beginning
of such taxable year) the first 2 years of postsecondary education at an
eligible educational institution.
``(c) Limitation Based on Modified Adjusted Gross Income.--
``(1) In general.--The amount which would (but for this subsection)
be taken into account under subsection (a) for the taxable year shall be
reduced (but not below zero) by the amount determined under paragraph
(2).
``(2) Amount of reduction.--The amount determined under this
paragraph is the amount which bears the same ratio to the amount which
would be so taken into account as--
``(A) the excess of--
``(i) the taxpayer's modified adjusted gross income for such taxable
year, over
``(ii) $40,000 ($80,000 in the case of a joint return), bears to
``(B) $10,000 ($20,000 in the case of a joint return).
``(3) Modified adjusted gross income.--The term `modified adjusted
gross income' means the adjusted gross income of the taxpayer for the
taxable year increased by any amount excluded from gross income under
section 911, 931, or 933.
``(d) Definitions.--For purposes of this section--
``(1) Qualified tuition and related expenses.--
``(A) In general.--The term `qualified tuition and related expenses'
means tuition and fees required for the enrollment or attendance of--
``(i) the taxpayer,
``(ii) the taxpayer's spouse, or
``(iii) any dependent of the taxpayer with respect to whom the
taxpayer is allowed a deduction under section 151,
at an eligible educational institution and books required for courses
of instruction of such individual at such institution.
``(B) Exception for education involving sports, etc.--Such term does
not include expenses with respect to any course or other education
involving sports, games, or hobbies, unless such course or other
education is part of the individual's degree program.
``(C) Exception for nonacademic fees.--Such term does not include
student activity fees, athletic fees, insurance expenses, or other
expenses unrelated to an individual's academic course of instruction.
``(2) Eligible educational institution.--The term `eligible
educational institution' means an institution--
``(A) which is described in section 481 of the Higher Education Act
of 1965 (20 U.S.C. 1088), as in effect on the date of the enactment of
this section, and
``(B) which is eligible to participate in a program under title IV
of such Act.
``(3) Eligible student.--The term `eligible student' means, with
respect to any academic period, a student who--
``(A) meets the requirements of section 484(a)(1) of the Higher
Education Act of 1965 (20 U.S.C.
1091(a)(1)), as in effect on the date of the enactment of this
section, and
``(B) is carrying at least \1/2\ the normal full-time work load for
the course of study the student is pursuing.
``(4) Other terms relating to the higher education act.--The
following terms shall have the meanings prescribed in regulations under
section 481(g) of the Higher Education Act of 1965 (20 U.S.C. 1088(g)),
as added by the Student Financial Aid Improvements Act of 1997:
``(A) Academic period.
``(B) Normal full-time workload.
``(C) First two years of postsecondary education.
``(e) Treatment of Expenses Paid by Dependent.--If a deduction under
section 151 with respect to an individual is allowed to another taxpayer
for a taxable year beginning in the calendar year in which such
individual's taxable year begins--
``(1) no credit shall be allowed under subsection (a) to such
individual for such individual's taxable year, and
``(2) qualified tuition and related expenses paid by such individual
during such individual's taxable year shall be treated for purposes of
this section as paid by such other taxpayer.
``(f) Treatment of Certain Prepayments.--If qualified tuition and
related expenses are paid by the taxpayer during a taxable year for an
academic period which begins during the first 3 months following such
taxable year, such academic period shall be treated for purposes of this
section as beginning during such taxable year.
``(g) Special Rules.--
``(1) Identification requirement.--No credit shall be allowed under
subsection (a) to a taxpayer with respect to the qualified tuition and
related expenses of an individual unless the taxpayer includes the name
and taxpayer identification number of such individual on the return of
tax for the taxable year.
``(2) Adjustment for certain scholarships, etc.--The amount of
qualified tuition and related expenses otherwise taken into account
under subsection (a) with respect to an individual for an academic
period shall be reduced (before the application of subsections (b) and
(c)) by the sum of any amounts paid for the benefit of such individual
which are allocable to such period as--
``(A) a qualified scholarship which is excludable from gross income
under section 117,
``(B) an educational assistance allowance under chapter 30, 31, 32,
34, or 35 of title 38, United States Code, or under chapter 1606 of
title 10, United States Code, and
``(C) a payment (other than a gift, bequest, devise, or inheritance
within the meaning of section 102(a)) for such individual's educational
expenses, or attributable to such individual's enrollment at an eligible
educational institution, which is excludable from gross income under any
law of the United States.
``(3) Denial of credit if student convicted of a felony drug
offense.--No credit shall be allowed under subsection (a) for qualified
tuition and related expenses for the enrollment or attendance of a
student for any academic period if such student has been convicted of a
Federal or State felony offense consisting of the possession or
distribution of a controlled substance before the end of the taxable
year with or within which such period ends.
``(4) Denial of double benefit.--No credit shall be allowed under
this section for any expense for which a deduction is allowed under any
other provision of this chapter.
``(5) No credit for married individuals filing separate returns.--If
the taxpayer is a married individual (within the meaning of section
7703), this section shall apply only if the taxpayer and the taxpayer's
spouse file a joint return for the taxable year.
``(6) Nonresident aliens.--If the taxpayer is a nonresident alien
individual for any portion of the taxable year, this section shall apply
only if such individual is treated as a resident alien of the United
States for purposes of this chapter by reason of an election under
subsection (g) or (h) of section 6013.
``(h) Inflation Adjustments.--
``(1) Dollar limitation on amount of credit.--
``(A) In general.--In the case of a taxable year beginning after
1998, the $1,500 amount in subsection (b)(1) shall be increased by an
amount equal to--
``(i) such dollar amount, multiplied by
``(ii) the cost-of-living adjustment determined under section
1(f)(3) for the calendar year in which the taxable year begins,
determined by substituting `calendar year 1997' for `calendar year 1992'
in subparagraph (B) thereof.
``(B) Rounding.--If any amount as adjusted under subparagraph (A) is
not a multiple of $50, such amount shall be rounded to the next lowest
multiple of $50.
``(2) Income limits.--
``(A) In general.--In the case of a taxable year beginning after
2000, the $40,000 and $80,000 amounts in subsection (c)(2) shall each be
increased by an amount equal to--
``(i) such dollar amount, multiplied by
``(ii) the cost-of-living adjustment determined under section
1(f)(3) for the calendar year in which the taxable year begins,
determined by substituting `calendar year 1999' for `calendar year 1992'
in subparagraph (B) thereof.
``(B) Rounding.--If any amount as adjusted under subparagraph (A) is
not a multiple of $5,000, such amount shall be rounded to the next
lowest multiple of $5,000.
``(i) Regulations.--The Secretary may prescribe such regulations as
may be necessary or appropriate to carry out this section, including
regulations providing for a recapture of credit allowed under this
section in cases where there is a refund in a subsequent taxable year of
any amount which was taken into account in determining the amount of
such credit.''
(b) Extension of Procedures Applicable to Mathematical or Clerical
Errors.--Paragraph (2) of section 6213(g) (relating to the definition of
mathematical or clerical errors) is amended by striking ``and'' at the
end of subparagraph (G), by striking the period at the end of
subparagraph (H) and inserting ``, and'', and by inserting after
subparagraph (H) the following new subparagraph:
``(I) an omission of a correct TIN required under section 25A(g)(1)
(relating to higher education tuition and related expenses) to be
included on a return.''
(c) Returns Relating to Tuition and Related Expenses.--
(1) In general.--Subpart B of part III of subchapter A of chapter 61
(relating to information concerning transactions with other persons) is
amended by inserting after section 6050R the following new section:
``SEC. 6050S. RETURNS RELATING TO HIGHER EDUCATION TUITION AND
RELATED EXPENSES.
``(a) In General.--Any person--
``(1) which is an eligible educational institution which receives
payments for qualified tuition and related expenses with respect to any
individual for any calendar year, or
``(2) which is engaged in a trade or business and which, in the
course of such trade or business, makes payments during any calendar
year to any individual which constitute reimbursements or refunds (or
similar amounts) of qualified tuition and related expenses of such
individual,
shall make the return described in subsection (b) with respect
to the individual at such time as the Secretary may by regulations
prescribe.
``(b) Form and Manner of Returns.--A return is described in this
subsection if such return--
``(1) is in such form as the Secretary may prescribe,
``(2) contains--
``(A) the name, address, and TIN of the individual with respect to
whom payments described in subsection (a) were received from (or were
paid to),
``(B) the name, address, and TIN of any individual certified by the
individual described in subparagraph (A) as the taxpayer who will claim
the individual as a dependent for purposes of the deduction allowable
under section 151 for any taxable year ending with or within the
calendar year, and
``(C) the--
``(i) aggregate amount of payments for qualified tuition and related
expenses received with respect to the individual described in
subparagraph (A) during the calendar year, and
``(ii) aggregate amount of reimbursements or refunds (or similar
amounts) paid to such individual during the calendar year, and
``(D) such other information as the Secretary may prescribe.
``(c) Application to Governmental Units.--For purposes of this
section--
``(1) a governmental unit or any agency or instrumentality thereof
shall be treated as a person, and
``(2) any return required under subsection (a) by such governmental
entity shall be made by the officer or employee appropriately designated
for the purpose of making such return.
``(d) Statements To Be Furnished to Individuals With Respect to Whom
Information Is Required.--Every person required to make a return under
subsection (a) shall furnish to each individual whose name is required
to be set forth in such return under subparagraph (A) or (B) of
subsection (b)(2) a written statement showing--
``(1) the name, address, and phone number of the information contact
of the person required to make such return, and
``(2) the aggregate amounts described in subsection (b)(2)(C).
The written statement required under the preceding sentence shall be
furnished on or before January 31 of the year following the calendar
year for which the return under subsection (a) was required to be made.
``(e) Definitions.--For purposes of this section, the terms `eligible
educational institution' and `qualified tuition and related expenses'
have the meanings given such terms by section 25A.
``(f) Returns Which Would Be Required To Be Made by 2 or More
Persons.--Except to the extent provided in regulations prescribed by the
Secretary, in the case of any amount received by any person on behalf of
another person, only the person first receiving such amount shall be
required to make the return under subsection (a).
``(g) Regulations.--The Secretary shall prescribe such regulations as
may be necessary to carry out the provisions of this section. No
penalties shall be imposed under section 6724 with respect to any return
or statement required under this section until such time as such
regulations are issued.''
(2) Assessable penalties.--
(A) Subparagraph (B) of section 6724(d)(1) (relating to definitions)
is amended by redesignating clauses (ix) through (xiv) as clauses (x)
through (xv), respectively, and by inserting after clause (viii) the
following new clause:
``(ix) section 6050S (relating to returns relating to payments for
qualified tuition and related expenses),''.
(B) Paragraph (2) of section 6724(d) is amended by striking ``or''
at the end of the next to last subparagraph, by striking the period at
the end of the last subparagraph and inserting ``, or'', and by adding
at the end the following new subparagraph:
``(Z) section 6050S(d) (relating to returns relating to qualified
tuition and related expenses).''
(3) Clerical amendment.--The table of sections for subpart B of part
III of subchapter A of chapter 61 is amended by inserting after the item
relating to section 6050R the following new item:
``Sec. 6050S. Returns relating to higher education tuition and
related expenses.''
(d) Coordination With Section 135.--Subsection (d) of section 135 is
amended by redesignating paragraphs (2) and (3) as paragraphs (3) and
(4), respectively, and by inserting after paragraph (1) the following
new paragraph:
``(2) Coordination with higher education credit.--The amount of the
qualified higher education expenses otherwise taken into account under
subsection (a) with respect to the education of an individual shall be
reduced (before the application of subsection (b)) by the amount of such
expenses which are taken into account in determining the credit
allowable to the taxpayer or any other person under section 25A with
respect to such expenses.''
(e) Clerical Amendment.--The table of sections for subpart A of part
IV of subchapter A of chapter 1 is amended by inserting after the item
relating to section 25 the following new item:
``Sec. 25A. Higher education tuition and related expenses.''
(f) Effective Date.--The amendments made by this section shall apply
to expenses paid after December 31, 1997 (in taxable years ending after
such date), for education furnished in academic periods beginning after
such date.
SEC. 202. DEDUCTION FOR QUALIFIED HIGHER EDUCATION EXPENSES.
(a) Deduction Allowed.-- Part VII of subchapter B of chapter 1
(relating to additional itemized deductions for individuals) is amended
by redesignating section 221 as section 222 and by inserting after
section 220 the following new section:
``SEC. 221. QUALIFIED HIGHER EDUCATION EXPENSES.
``(a) Allowance of Deduction.--In the case of an individual, there
shall be allowed as a deduction the amount of qualified higher education
expenses paid by the taxpayer during the taxable year for education
furnished during any academic period (within the meaning of section 25A)
beginning in such year.
``(b) Limitations.--
``(1) Annual limit.--The amount allowed as a deduction under
subsection (a) for any taxable year with respect to expenses paid for
education furnished to any 1 individual shall not exceed the lesser of--
``(A) $10,000, or
``(B) the amount includible in the taxpayer's gross income for such
taxable year by reason of a distribution from a qualified tuition
program (as defined in section 529), or an education investment account
(as defined in section 530), the beneficiary of which is such
individual.
``(2) Aggregate limit.--The amount allowed as a deduction under
subsection (a) to the taxpayer or any other individual with respect to
expenses paid for education furnished to any 1 individual shall not
exceed $40,000 for all taxable years.
``(3) Deduction allowed for year only if individual is at least
\1/2\ time student for portion of year.--No deduction shall be allowed
under subsection (a)
for a taxable year with respect to the qualified higher
education expenses of an individual unless such individual is an
eligible student (as defined in section 25A(d)(3)) for at least one
academic period which begins during such year.
``(4) Deduction allowed only for first 4 years of postsecondary
education.--No deduction shall be allowed under subsection (a) for a
taxable year with respect to the qualified higher education expenses of
an individual if the individual has completed (before the beginning of
such taxable year) the equivalent of the first 4 years of postsecondary
education at an eligible educational institution (determined under the
rules of section 25A).
``(5) Coordination with credit for higher education expenses.--No
deduction shall be allowed under this section for a taxable year with
respect to the qualified higher education expenses of an individual if
an election is in effect under section 25A with respect to such
individual for such taxable year.
``(c) Qualified Higher Education Expenses.--The term `qualified
higher education expenses' means qualified higher education expenses (as
defined in section 529) for the education of--
``(1) the taxpayer,
``(2) the taxpayer's spouse, or
``(3) any dependent of the taxpayer with respect to whom the
taxpayer is allowed a deduction under section 151,
at an eligible educational institution (as defined in section
529(e)(5)).
``(d) Treatment of Expenses Paid by Dependent.--If a deduction under
section 151 with respect to an individual is allowed to another taxpayer
for a taxable year beginning in the calendar year in which such
individual's taxable year begins--
``(1) no deduction shall be allowed under subsection (a) to such
individual for such individual's taxable year, and
``(2) qualified higher education expenses paid by such individual
during such individual's taxable year shall be treated for purposes of
this section as paid by such other taxpayer.
``(e) Coordination With Amounts Includible in Gross Income Under
Section 529 or 530.--If any deduction is allowed under subsection (a)
with respect to the qualified higher education expenses of an individual
with respect to whom the taxpayer is allowed a deduction under section
151(c), any amount which would (but for this subsection) be includible
in such individual's gross income by reason of section 529 or section
530 shall be includible in the gross income of the taxpayer and not such
individual.
``(f) Adjustment for Certain Scholarships, Etc.--The amount of
qualified higher education expenses otherwise taken into account under
subsection (a) with respect to an individual for an academic period
shall be reduced (before the application of subsection (b)) by the sum
of--
``(1) the aggregate amount of the reductions under section 25A(g)(2)
for the benefit of such individual for such period, and
``(2) the amount excludable from gross income under section 135 by
reason of such expenses with respect to such individual which are
allocable to such period.
``(g) Denial of Deduction if Student Convicted of a Felony Drug
Offense.--No deduction shall be allowed under subsection (a) for
qualified higher education expenses for the enrollment or attendance of
a student for any academic period if such student has been convicted of
a Federal or State felony offense consisting of the possession or
distribution of a controlled substance before the end of the taxable
year with or within which such period ends.
``(h) Denial of Double Benefit.--No deduction shall be allowed under
subsection (a) for any expense for which a deduction is allowed to the
taxpayer under any other provision of this chapter.''
(b) Deduction Allowed Whether or Not Taxpayer Itemizes Other
Deductions.--
(1) In general.--Subsection (b) of section 63 is amended by striking
``and'' at the end of paragraph (1), by striking the period at the end
of paragraph (2) and inserting ``, and'', and by adding at the end the
following new paragraph:
``(3) the deduction allowed by section 221 (relating to deduction
for qualified higher education expenses).''
(2) Conforming amendment.--Subsection (d) of section 63 is amended
by striking ``and'' at the end of paragraph (1), by striking the period
at the end of paragraph (2) and inserting ``, and'', and by adding at
the end the following new paragraph:
``(3) the deduction allowed by section 221 (relating to deduction
for qualified higher education expenses).''
(c) Phaseout of Exclusion for Qualified Tuition
Reductions.--Subsection (d) of section 117 is amended by redesignating
the last paragraph as paragraph (4) and by adding at the end the
following new paragraph:
``(5) Phaseout of exclusion.--
``(A) Termination.--Paragraph (1) shall not apply to any qualified
tuition reduction for any course of instruction beginning after December
31, 2001.
``(B) Phaseout.--The amount excludable from gross income under
paragraph (1) for any course of instruction beginning in a calendar year
after 1997 and before 2002 shall not exceed the applicable percentage
(determined in accordance with the following table) for such calendar
year of the amount which would be so excludable but for this
subparagraph:
In the case of
The applicable
calendar year:
percentage is:
1998 8014
1999 6014
2000 4014
2001 20.''
(d) Technical Amendments.--
(1) Subparagraph (A) of section 529(e)(3) is amended by inserting
``(except as provided in section 221(e))'' after ``distributee''.
(2) The table of sections for part VII of subchapter B of chapter 1
is amended by striking the item relating to section 221 and inserting:
``Sec. 221. Qualified higher education expenses.
``Sec. 222. Cross reference.''
(e) Effective Date.--The amendments made by this section shall apply
to expenses paid after December 31, 1997 (in taxable years ending after
such date), for education furnished in academic periods beginning after
such date.
SEC. 203. PENALTY-FREE WITHDRAWALS FROM INDIVIDUAL RETIREMENT
PLANS FOR HIGHER EDUCATION EXPENSES.
(a) In General.--Paragraph (2) of section 72(t) (relating to
exceptions to 10-percent additional tax on early distributions from
qualified retirement plans) is amended by adding at the end the
following new subparagraph:
``(E) Distributions from individual retirement plans for higher
education expenses.--Distributions to an individual from an individual
retirement plan to the extent such distributions do not exceed the
qualified higher education expenses (as defined in paragraph (7)) of the
taxpayer for the taxable year. Distributions shall not be taken into
account under the preceding sentence if such distributions are described
in subparagraph (A), (C), or (D) or to the extent paragraph (1) does not
apply to such distributions by reason of subparagraph (B).''
(b) Definition.--Section 72(t) is amended by adding at the end the
following new paragraph:
``(7) Qualified higher education expenses.--For purposes of
paragraph (2)(E)--
``(A) In general.--The term `qualified higher education expenses'
means qualified higher education expenses (as defined in section
529(e)(3) without regard to subparagraph (C) thereof) for education
furnished to--
``(i) the taxpayer,
``(ii) the taxpayer's spouse, or
``(iii) any child (as defined in section 151(c)(3)) or grandchild of
the taxpayer or the taxpayer's spouse,
at an eligible educational institution (as defined in section
529(e)(5)).
``(B) Coordination with other benefits.--The amount of qualified
higher education expenses for any taxable year shall be reduced as
provided in section 25A(g)(2).''
(c) Effective Date.--The amendments made by this section shall apply
to distributions after December 31, 1997, with respect to expenses paid
after such date (in taxable years ending after such date), for education
furnished in academic periods beginning after such date.
SEC. 204. EXPENSES FOR EDUCATION WHICH SUPPLEMENTS ELEMENTARY
AND SECONDARY EDUCATION.
(a) In General.--Subpart A of part IV of subchapter A of chapter 1
(relating to nonrefundable personal credits) is amended by inserting
after section 25A, as added by this title, the following new section:
``SEC. 25B. EXPENSES FOR EDUCATION WHICH SUPPLEMENTS
ELEMENTARY AND SECONDARY EDUCATION.
``(a) Allowance of Credit.--In the case of an individual, there shall
be allowed a credit against the tax imposed by this chapter for the
taxable year an amount equal to 50 percent of the qualifying educational
assistance expenses paid by the taxpayer during the taxable year.
``(b) Limitations.--
``(1) Dollar limitation.--The amount allowed as a credit under
subsection (a) for any taxable year with respect to the qualified
educational assistance expenses of any 1 individual shall not exceed
$150.
``(2) Reduction of credit based on adjusted gross income.--
``(A) In general.--The aggregate amount which would (but for this
paragraph) be allowed by this section shall be reduced (but not below
zero) by $25 for each $1,000 (or fraction thereof) by which the
taxpayer's modified adjusted gross income exceeds the threshold amount.
For purposes of the preceding sentence, the term `modified adjusted
gross income' means adjusted gross income increased by any amount
excluded from gross income under section 911, 931, or 933.
``(B) Threshold amount.--For purposes of subparagraph (A), the term
`threshold amount' means--
``(i) $80,000 in the case of a joint return,
``(ii) $50,000 in the case of an individual who is not married, and
``(iii) $40,000 in the case of a married individual filing a
separate return.
For purposes of this subparagraph, marital status shall be determined
under section 7703.
``(c) Qualified Educational Assistance Expenses.--For purposes of
this section--
``(1) In general.--The term `qualified educational assistance
expenses' means amounts paid to a qualified entity to provide
supplementary education to any dependent (within the meaning of section
152) of the taxpayer--
``(A) who is less than 18 years of age as of the close of the
taxable year, and
``(B) who is enrolled as a full-time student in an elementary or
secondary school.
``(2) Supplementary education.--For purposes of paragraph (1),
supplementary education is education provided with respect to reading,
mathematics, or any subject that the dependent student is studying at
the time in elementary or secondary school classes. Eligible courses of
study shall not include courses providing assistance with respect to
preparation for college entrance examinations.
``(3) Qualified entity.--The term `qualified entity' means a person
that is accredited as a supplementary education service provider by an
accreditation organization that is recognized by the Secretary of
Education or by any other agency, association, or group that is
certified by the Secretary for purposes of this section.''
(b) Clerical Amendment.--The table of sections for subpart A of part
IV of subchapter A of chapter 1 is amended by inserting after the item
relating to section 25A the following new item:
``Sec. 25B. Expenses for education which supplements elementary
and secondary education.''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 1997.
Subtitle B--Expanded Education Investment Savings Opportunities
SEC. 211. ELIGIBLE EDUCATIONAL INSTITUTIONS PERMITTED TO
MAINTAIN QUALIFIED TUITION PROGRAMS; OTHER MODIFICATIONS OF QUALIFIED
STATE TUITION PROGRAMS.
(a) Eligible Educational Institutions Permitted to Maintain Qualified
Tuition Programs.--Paragraph (1) of section 529(b) (defining qualified
State tuition program) is amended by inserting ``or by one or more
eligible educational institutions'' after ``maintained by a State or
agency or instrumentality thereof''.
(b) Qualified Higher Education Expenses To Include Room and
Board.--Paragraph (3) of section 529(e) (defining qualified higher
education expenses) is amended to read as follows:
``(3) Qualified higher education expenses.--
``(A) In general.--The term `qualified higher education expenses'
means tuition, fees, books, supplies, and equipment required for the
enrollment or attendance of a designated beneficiary at an eligible
education institution.
``(B) Room and board included for students who are at least
half-time.--In the case of an individual who is an eligible student (as
defined in section 25A(d)(3)) for any academic period, such term shall
also include reasonable costs for such period (as determined under the
qualified tuition program) incurred by the designated beneficiary for
room and board while attending such institution. The amount treated as
qualified higher education expenses by reason of the preceding sentence
shall not exceed the minimum amount (applicable to the student) included
for room and board for such period in the cost of attendance (as defined
in section 472 of the Higher Education Act of 1965, 20 U.S.C. 1087ll, as
in effect on the date of the enactment of this paragraph) for the
eligible educational institution for such period.
``(C) Exclusion for graduate level courses.--Such term shall not
include expenses for any graduate level course of a kind normally taken
by an individual pursuing a program leading to a law, business, medical,
or other advanced academic or professional degree. Such courses shall
not be taken into account in determining whether an individual is
described in subsection (f)(3)(A).''
(c) Additional Modifications.--
(1) Member of family.--Paragraph (2) of section 529(e) (relating to
other definitions and special rules) is amended to read as follows:
``(2) Member of family.--The term `member of the family' means--
``(A) an individual who bears a relationship to another individual
which is a relationship described in paragraphs (1) through (8) of
section 152(a), and
``(B) the spouse of any individual described in subparagraph (A).''
(2) Eligible educational institution.--Section 529(e) is amended by
adding at the end the following:
``(5) Eligible educational institution.--The term `eligible
educational institution' means an institution--
``(A) which is described in section 481 of the Higher Education Act
of 1965 (20 U.S.C. 1088), as in effect on the date of the enactment of
this paragraph, and
``(B) which is eligible to participate in a program under title IV
of such Act.''
(3) No contributions after beneficiary attains age 18; distributions
required in certain cases.--Subsection (b) of section 529 (as amended by
subsection (f) of this section) is amended by adding at the end the
following new paragraph:
``(7) Restrictions relating to age of beneficiary; completion of
education.--
``(A) In general.--A program shall be treated as a qualified tuition
program only if--
``(i) no contribution is accepted on behalf of a designated
beneficiary after the date on which such beneficiary attains age 18, and
``(ii) any balance to the credit of a designated beneficiary (if
any) on the account termination date shall be distributed within 30 days
after such date to such beneficiary (or in the case of death, the estate
of the beneficiary).
``(B) Account termination date.--For purposes of subparagraph (A),
the term `account termination date' means whichever of the following
dates is the earliest:
``(i) The date on which the designated beneficiary completes the
equivalent of 4 years of post-secondary education (whether or not at the
same eligible educational institution).
``(ii) The date on which the designated beneficiary attains age 30.
``(iii) The date on which the designated beneficiary dies.''
(4) Estate and gift tax treatment.--
(A) Gift tax treatment.--
(i) Paragraph (2) of section 529(c) is amended to read as follows:
``(2) Gift tax treatment of contributions.--For purposes of chapters
12 and 13, any contribution to a qualified tuition program on behalf of
any designated beneficiary--
``(A) shall be treated as a completed gift to such beneficiary which
is not a future interest in property, and
``(B) shall not be treated as a qualified transfer under section
2503(e).''
(ii) Paragraph (5) of section 529(c) is amended to read as follows:
``(5) Other gift tax rules.--For purposes of chapters 12 and 13--
``(A) Treatment of distributions.--In no event shall a distribution
from a qualified tuition program be treated as a taxable gift.
``(B) Treatment of designation of new beneficiary.--The taxes
imposed by chapters 12 and 13 shall apply to a transfer by reason of a
change in the designated beneficiary under the program (or a rollover to
the account of a new beneficiary) only if the new beneficiary is a
generation below the generation of the old beneficiary (determined in
accordance with section 2651).''
(B) Estate tax treatment.--Paragraph (4) of section 529(c) is
amended to read as follows:
``(4) Estate tax treatment.--
``(A) In general.--No amount shall be includible in the gross estate
of any individual for purposes of chapter 11 by reason of an interest in
a qualified tuition program.
``(B) Amounts includible in estate of designated beneficiary in
certain cases.--Subparagraph (A) shall not apply to amounts distributed
on account of the death of a beneficiary.''
(5) Limitation on contributions to qualified tuition programs not
maintained by a state.--Subsection (b) of section 529 is amended by
adding at the end the following new paragraph:
``(9) Limitation on contributions to qualified tuition programs not
maintained by a state.--In the case of a program not maintained by a
State or agency or instrumentality thereof, such program shall not be
treated as a qualified tuition program unless it limits the annual
contribution to the program on behalf of a designated beneficiary to an
amount equal to the lesser of--
``(A) $5,000, or
``(B) the excess of--
``(i) $50,000, over
``(ii) the aggregate amount contributed to such program on behalf of
such beneficiary for all prior taxable years.''
(d) Additional Tax on Amounts Not Used For Higher Education
Expenses.--Section 529 is amended by adding at the end the following new
subsection:
``(f) Imposition of Additional Tax.--
``(1) In general.--The tax imposed by this chapter for any taxable
year on any taxpayer who receives a payment or distribution from a
qualified tuition program which is includible in gross income shall be
increased by 10 percent of the amount which is so includible.
``(2) Exceptions.--Paragraph (1) shall not apply if the payment or
distribution is--
``(A) used for qualified higher education expenses of the designated
beneficiary,
``(B) made to a beneficiary (or to the estate of the designated
beneficiary) on or after the death of the designated beneficiary,
``(C) attributable to the designated beneficiary's being disabled
(within the meaning of section 72(m)(7)), or
``(D) made on account of a scholarship, allowance, or payment
described in subparagraph (A), (B), or (C) of section 135(d)(1) received
by the account holder to the extent the amount of the payment or
distribution does not exceed the amount of the scholarship, allowance,
or payment.
``(3) Excess contributions returned before due date of return.--In
the case of a qualified tuition program not maintained by a State or any
agency or instrumentality thereof, paragraph (1) shall not apply to the
distribution to a contributor of any contribution made during a taxable
year on behalf of a designated beneficiary to the extent that such
contribution exceeds the limitation in section 4973(e) if--
``(A) such distribution is received on or before the day prescribed
by law (including extensions of time) for
filing such contributor's return for such taxable year, and
``(B) such distribution is accompanied by the amount of net income
attributable to such excess contribution.
Any net income described in subparagraph (B) shall be included in the
gross income of the contributor for the taxable year in which such
excess contribution was made.''
(e) Coordination With Education Savings Bond.--Section 135(c)(2)
(defining qualified higher education expenses) is amended by adding at
the end the following:
``(C) Contributions to qualified tuition program.--Such term shall
include any contribution to a qualified tuition program (as defined in
section 529) on behalf of a designated beneficiary (as defined in such
section) who is an individual described in subparagraph (A); but there
shall be no increase in the investment in the contract for purposes of
applying section 72 by reason of the portion of such contribution which
is not includible in gross income by reason of this subparagraph.''
(f) Tax on Excess Contributions.--
(1) In general.--Subsection (a) of section 4973 is amended by
striking ``or'' at the end of paragraph (2) and by inserting after
paragraph (3) the following new paragraphs:
``(4) a qualified tuition program (as defined in section 529) not
maintained by a State or any agency or instrumentality thereof, or
``(5) an education investment account (as defined in section 530),''.
(2) Excess contributions defined.--Section 4973 is amended by adding
at the end the following new subsection:
``(e) Excess Contributions to Private Qualified Tuition Program and
Education Investment Accounts.--For purposes of this section--
``(1) In general.--In the case of private education investment
accounts maintained for the benefit of any 1 beneficiary, the term
`excess contributions' means the amount by which the amount contributed
for the taxable year to such accounts exceeds the lesser of--
``(A) the excess of--
``(i) $5,000, over
``(ii) the aggregate amount contributed to all qualified tuition
programs (as defined in section 529) maintained by a State or any agency
or instrumentality thereof on behalf of such beneficiary for such
taxable year, or
``(B) the excess of--
``(i) $50,000, over
``(ii) the sum of--
``(I) the aggregate amount contributed to such accounts for all
prior taxable years, and
``(II) the aggregate amount contributed to all qualified tuition
programs (as defined in section 529) maintained by a State or any agency
or instrumentality thereof on behalf of such beneficiary for such
taxable year and all prior taxable years.
``(2) Private education investment account.--For purposes of
paragraph (1), the term `private education investment account' means--
``(A) a qualified tuition program (as defined in section 529) not
maintained by a State or any agency or instrumentality thereof, and
``(B) an education investment account (as defined in section 530).
``(3) Special rules.--For purposes of paragraph (1), the following
contributions shall not be taken into account:
``(A) Any contribution which is distributed out of the education
investment account in a distribution to which section 530(c)(3)(B)
applies.
``(B) Any contribution to a qualified tuition program (as so
defined) described in section 530(b)(2)(B) from any such account.
``(C) Any rollover contribution.''
(g) Technical Amendments.--
(1) Paragraph (2) of section 26(b) is amended by redesignating
subparagraphs (E) through (P) as subparagraphs (F) through (Q),
respectively, and by inserting after subparagraph (D) the following new
subparagraph:
``(E) section 529(f) (relating to additional tax on certain
distributions from qualified tuition programs),''.
(2) The text of section 529 is amended by striking ``qualified State
tuition program'' each place it appears and inserting ``qualified
tuition program''.
(3) Subsection (b) of section 529 is amended by striking paragraph
(3) and by redesignating paragraphs (4) through (7) as paragraphs (3)
through (6), respectively.
(4)(A) The section heading of section 529 is amended to read as
follows:
``SEC. 529. QUALIFIED TUITION PROGRAMS.''
(B) The item relating to section 529 in the table of sections for
part VIII of subchapter F of chapter 1 is amended by striking ``State''.
(5)(A) The heading for part VIII of subchapter F of chapter 1 is
amended to read as follows:
``PART VIII--HIGHER EDUCATION SAVINGS ENTITIES''.
(B) The table of parts for subchapter F of chapter 1 is amended by
striking the item relating to part VIII and inserting:
``Part VIII. Higher education savings entities.''
(h) Effective Dates.--
(1) In general.--Except as otherwise provided in this subsection,
the amendments made by this section shall take effect on January 1,
1998.
(2) Expenses to include room and board, etc.--The amendments made by
subsection (b) and (c)(2) shall apply to distributions after December
31, 1997, with respect to expenses paid after such date (in taxable
years ending after such date), for education furnished in academic
periods beginning after such date.
(3) Penalty for noneducation withdrawals.--The amendment made by
subsection (d) shall apply to distributions after December 31, 1997.
(4) Coordination with education savings bonds.--The amendment made
by subsection (e) shall apply to taxable years beginning after December
31, 1997.
(5) Estate and gift tax changes.--
(A) Gift tax changes.--Paragraphs (2) and (5) of section 529(c) of
the Internal Revenue Code of 1986, as amended by this section, shall
apply to transfers (including designations of new beneficiaries) made
after the date of the enactment of this Act.
(B) Estate tax changes.--Paragraph (4) of such section 529(c) shall
apply to estates of decedents dying after June 8, 1997.
SEC. 212. EDUCATION INVESTMENT ACCOUNTS.
(a) In General.--Part VIII of subchapter F of chapter 1 (relating to
qualified State tuition programs) is amended by adding at the end the
following new section:
``SEC. 530. EDUCATION INVESTMENT ACCOUNTS.
``(a) General Rule.--An education investment account shall be exempt
from taxation under this subtitle. Notwithstanding the preceding
sentence, the education investment account shall be subject to the taxes
imposed by section 511 (relating to imposition of tax on unrelated
business income of charitable organizations).
``(b) Definitions and Special Rules.--For purposes of this section--
``(1) Education investment account.--The term `education investment
account' means a trust created or organized in the United States
exclusively for the purpose of paying the qualified higher education
expenses of the account holder, but only if the written governing
instrument creating the trust meets the following requirements:
``(A) No contribution will be accepted--
``(i) unless it is in cash,
``(ii) after the date on which the account holder attains age 18, or
``(iii) in excess of $5,000 for the taxable year.
``(B) The trustee is a bank (as defined in section 408(n)) or
another person who demonstrates to the satisfaction of the Secretary
that the manner in which that person will administer the trust will be
consistent with the requirements of this section.
``(C) No part of the trust assets will be invested in life insurance
contracts.
``(D) The assets of the trust shall not be commingled with other
property except in a common trust fund or common investment fund.
``(E) Any balance in the account will be distributed as required
under section 529(b)(8)(B) (as if such account were a qualified tuition
program).
For $50,000 limit on aggregate contributions to accounts, see section
4973(e).
``(2) Qualified higher education expenses.--
``(A) In general.--The term `qualified higher education expenses'
has the same meaning given such term by section 529(e)(3).
``(B) Qualified tuition programs.--Such term shall include amounts
paid or incurred to purchase tuition credits or certificates, or to make
contributions to an account, under a qualified tuition program (as
defined in section 529(b)) for the benefit of the account holder.
``(3) Eligible educational institution.--The term `eligible
educational institution' has the meaning given such term by section
529(e)(5).
``(4) Account holder.--The term `account holder' means the
individual for whose benefit the education investment account is
established.
``(c) Tax Treatment of Distributions.--
``(1) In general.--Any amount paid or distributed shall be
includible in gross income as required by section 529(c)(3) (determined
as if such account were a qualified tuition program).
``(2) Special rules for applying estate and gift taxes with respect
to account.--Rules similar to the rules of paragraphs (2), (4), and (5)
of section 529(c) shall apply for purposes of this section.
``(3) Additional tax for distributions not used for educational
expenses.--
``(A) In general.--The tax imposed by section 529(f) shall apply to
payments and distributions from an education investment account in the
same manner as such tax applies to qualified tuition programs (as
defined in section 529).
``(B) Excess contributions returned before due date of
return.--Subparagraph (A) shall not apply to the distribution to a
contributor of any contribution paid during a taxable year to an
education investment account to the extent that such contribution
exceeds the limitation in section 4973(e) if such distribution (and the
net income with respect to such excess contribution) meet requirements
comparable to the requirements of section 529(f)(3).
``(4) Rollover contributions.--Paragraph (1) shall not apply to any
amount paid or distributed from an education investment account to the
extent that the amount received is paid into another education
investment account for the benefit of the account holder or a member of
the family (within the meaning of section 529(e)(2)) of the account
holder not later than the 60th day after the date of such payment or
distribution. The preceding sentence shall not apply to any payment or
distribution if it applied to any prior payment or distribution during
the 12-month period ending on the date of the payment or distribution.
``(5) Change in account holder.--Any change in the account holder of
an education investment account shall not be treated as a distribution
for purposes of paragraph (1) if the new account holder is a member of
the family (as so defined) of the old account holder.
``(6) Special rules for death and divorce.--Rules similar to the
rules of paragraphs (7) and (8) of section 220(f) shall apply.
``(d) Tax Treatment of Accounts.--Rules similar to the rules of
paragraphs (2) and (4) of section 408(e) shall apply to any education
investment account.
``(e) Community Property Laws.--This section shall be applied without
regard to any community property laws.
``(f) Custodial Accounts.--For purposes of this section, a custodial
account shall be treated as a trust if the assets of such account are
held by a bank (as defined in section 408(n)) or another person who
demonstrates, to the satisfaction of the Secretary, that the manner in
which he will administer the account will be consistent with the
requirements of this section, and if the custodial account would, except
for the fact that it is not a trust, constitute an account described in
subsection (b)(1). For purposes of this title, in the case of a
custodial account treated as a trust by reason of the preceding
sentence, the custodian of such account shall be treated as the trustee
thereof.
``(g) Reports.--The trustee of an education investment account shall
make such reports regarding such account to the Secretary and to the
account holder with respect to contributions, distributions, and such
other matters as the Secretary may require under regulations. The
reports required by this subsection shall be filed at such time and in
such manner and furnished to such individuals at such time and in such
manner as may be required by those regulations.''
(b) Tax on Prohibited Transactions.--
(1) In general.--Paragraph (1) of section 4975(e) (relating to
prohibited transactions) is amended by striking ``or'' at the end of
subparagraph (D), by redesignating subparagraph (E) as subparagraph (F),
and by inserting after subparagraph (D) the following new subparagraph:
``(E) an education investment account described in section 530, or''.
(2) Special rule.--Subsection (c) of section 4975 is amended by
adding at the end of subsection (c) the following new paragraph:
``(5) Special rule for education investment accounts.--An individual
for whose benefit an education investment account is established and any
contributor to such account shall be exempt from the tax imposed by this
section with respect to any transaction concerning such account (which
would otherwise be taxable under this section) if section 530(d) applies
with respect to such transaction.''
(c) Failure To Provide Reports on Education Investment Accounts.--
(1) In general.--Paragraph (2) of section 6693(a) (relating to
failure to provide reports on individual retirement accounts or
annuities) is amended by striking ``and'' at the end of subparagraph
(A), by striking the period at
the end of subparagraph (B) and inserting ``, and'', and by
adding at the end the following new subparagraph:
``(C) section 530(g) (relating to education investment accounts).''
(2) Clerical amendment.--The section heading for section 6693 is
amended by striking `` INDIVIDUAL RETIREMENT'' and inserting `` CERTAIN
TAX-FAVORED''.
(d) Technical Amendments.--
(1) Subparagraph (F) of section 26(b)(2), as added by the preceding
section, is amended by inserting before the comma ``and section
530(c)(3) (relating to additional tax on certain distributions from
education investment accounts)''.
(2) Subparagraph (C) of section 135(c)(2), as added by the preceding
section, is amended by inserting ``, or to an education investment
account (as defined in section 530) on behalf of an account holder (as
defined in such section),'' after ``(as defined in such section)''.
(3) The table of sections for part VIII of subchapter F of chapter 1
is amended by adding at the end the following new item:
``Sec. 530. Education investment accounts.''
(4) The item relating to section 6693 in the table of sections for
part I of subchapter B of chapter 68 is amended by striking ``individual
retirement'' and inserting ``certain tax-favored''.
(e) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 1997.
Subtitle C--Other Education Initiatives
SEC. 221. EXTENSION OF EXCLUSION FOR EMPLOYER-PROVIDED
EDUCATIONAL ASSISTANCE.
(a) In General.--Subsection (d) of section 127 (relating to
educational assistance programs) is amended to read as follows:
``(d) Termination.--This section shall not apply to expenses paid
with respect to courses of instruction beginning after December 31,
1997.''
(b) Effective Date.--The amendment made by subsection (a) shall apply
to taxable years beginning after December 31, 1996.
SEC. 222. INCREASE IN LIMITATION ON QUALIFIED 501(C)(3) BONDS
OTHER THAN HOSPITAL BONDS.
(a) In General.--The text of paragraph (1) of section 145(b) is
amended by striking ``$150,000,000.'' and inserting ``the limitation
determined in accordance with the following table:
In the case of
calendar year:
The limitation is:
1998 $160,000,00014
1999 170,000,00014
2000 180,000,00014
2001 190,000,00014
2002 or thereafter 200,000,000.''
(b) Conforming Amendment.--The heading for subsection (b) of section
145 is amended by striking ``$150,000,000''.
(c) Effective Date.--The amendments made by this section shall take
effect on January 1, 1998.
SEC. 223. CONTRIBUTIONS OF COMPUTER TECHNOLOGY AND EQUIPMENT
FOR ELEMENTARY OR SECONDARY SCHOOL PURPOSES.
(a) Contributions of Computer Technology and Equipment for Elementary
or Secondary School Purposes.--Subsection (e) of section 170 is amended
by adding at the end the following new paragraph:
``(6) Special rule for contributions of computer technology and
equipment for elementary or secondary school purposes.--
``(A) Limit on reduction.--In the case of a qualified elementary or
secondary educational contribution, the reduction under paragraph (1)(A)
shall be no greater than the amount determined under paragraph (3)(B).
``(B) Qualified elementary or secondary educational
contribution.--For purposes of this paragraph, the term `qualified
elementary or secondary educational contribution' means a charitable
contribution by a corporation of any computer technology or equipment,
but only if--
``(i) the contribution is to--
``(I) an educational organization described in subsection
(b)(1)(A)(ii), or
``(II) an entity described in section 501(c)(3) and exempt from tax
under section 501(a) (other than an entity described in subclause (I))
that is organized primarily for purposes of supporting elementary and
secondary education,
``(ii) the contribution is made not later than 2 years after the
date the taxpayer acquired the property (or in the case of property
constructed by the taxpayer, the date the construction of the property
is substantially completed),
``(iii) substantially all of the use of the property by the donee is
for use within the United States for educational purposes in any of the
grades K 12 that are related to the purpose or function of the
organization or entity,
``(iv) the property is not transferred by the donee in exchange for
money, other property, or services, except for shipping, installation
and transfer costs,
``(v) the property will fit productively into the entity's education
plan, and
``(vi) the entity's use and disposition of the property will be in
accordance with the provisions of clauses (iii) and (iv).
``(C) Contribution to private foundation.--A contribution by a
corporation of any computer technology or equipment to a private
foundation (as defined in section 509) shall be treated as a qualified
elementary or secondary educational contribution for purposes of this
paragraph if--
``(i) the contribution to the private foundation satisfies the
requirements of clauses (ii) and (iv) of subparagraph (B), and
``(ii) within 30 days after such contribution, the private foundation--
``(I) contributes the property to an entity described in clause (i)
of subparagraph (B) that satisfies the requirements of clauses (iii)
through (vi) of subparagraph (B), and
``(II) notifies the donor of such contribution.
``(D) Special rule relating to construction of property.--For the
purposes of this paragraph, the rules of paragraph (4)(C) shall apply.
``(E) Definitions.--For the purposes of this paragraph--
``(i) Computer technology or equipment.--The term `computer
technology or equipment' means computer software (as defined by section
197(e)(3)(B)), computer or peripheral equipment (as defined by section
168(i)(2)(B)), and fiber optic cable related to computer use.
``(ii) Corporation.--The term `corporation' has the meaning given to
such term by paragraph (4)(D).''
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after the calendar year in which this Act is
enacted.
SEC. 224. TREATMENT OF CANCELLATION OF CERTAIN STUDENT LOANS.
(a) Certain Direct Student Loans the Repayment of Which Is Income
Contingent.--Paragraph (1) of section 108(f) is amended by striking
``any student loan if'' and all that follows and inserting ``any student
loan if--
``(A) such discharge was pursuant to a provision of such loan under
which all or part of the indebtedness of the individual would be
discharged if the individual worked for a certain period of time in
certain professions for any of a broad class of employers, or
``(B) in the case of a loan made under part D of title IV of the
Higher Education Act of 1965 which has a repayment schedule established
under section 455(e)(4) of such Act (relating to income contingent
repayments), such discharge is after the maximum repayment period under
such loan (as prescribed under such part).''
(b) Certain Loans by Exempt Organizations.--
(1) In general.--Paragraph (2) of section 108(f) (defining student
loan) is amended by striking ``or'' at the end of subparagraph (B) and
by striking subparagraph (D) and inserting the following:
``(D) any educational organization described in section
170(b)(1)(A)(ii) if such loan is made--
``(i) pursuant to an agreement with any entity described in
subparagraph (A), (B), or (C) under which the funds from which the loan
was made were provided to such educational organization, or
``(ii) pursuant to a program of such educational organization which
is designed to encourage its students to serve in occupations with unmet
needs or in areas with unmet needs and under which the services provided
by the students (or former students) are for or under the direction of a
governmental unit or an organization described in section 501(c)(3) and
exempt from tax under section 501(a).
The term `student loan' includes any loan made by an educational
organization so described or by an organization exempt from tax under
section 501(a) to refinance a loan meeting the requirements of the
preceding sentence.''
(2) Exception for discharges on account of services performed for
certain lenders.--Subsection (f) of section 108 is amended by adding at
the end the following new paragraph:
``(3) Exception for discharges on account of services performed for
certain lenders.--Paragraph (1) shall not apply to the discharge of a
loan made by an organization described in paragraph (2)(D) (or by an
organization described in paragraph (2)(E) from funds provided by an
organization described in paragraph (2)(D)) if the discharge is on
account of services performed for either such organization.''
(c) Effective Date.--The amendments made by this section shall apply
to discharges of indebtedness after the date of the enactment of this
Act.
TITLE III--SAVINGS AND INVESTMENT INCENTIVES
Subtitle A--Retirement Savings
SEC. 301. ESTABLISHMENT OF AMERICAN DREAM IRA.
(a) In General.--Subpart A of part I of subchapter D of chapter 1
(relating to pension, profit-sharing, stock bonus plans, etc.) is
amended by inserting after section 408 the following new section:
``SEC. 408A. AMERICAN DREAM IRA.
``(a) General Rule.--Except as provided in this section, an American
Dream IRA shall be treated for purposes of this title in the same manner
as an individual retirement plan.
``(b) American Dream IRA.--For purposes of this title, the term
`American Dream IRA' or `AD IRA' means an individual retirement plan (as
defined in section 7701(a)(37)) which is designated at the time of the
establishment of the plan as an American Dream IRA. Such designation
shall be made in such manner as the Secretary may prescribe.
``(c) Treatment of Contributions.--
``(1) No deduction allowed.--No deduction shall be allowed under
section 219 for a contribution to an AD IRA.
``(2) Contribution limit.--
``(A) In general.--The aggregate amount of contributions for any
taxable year to all AD IRAs maintained for the benefit of an individual
shall not exceed $2,000.
``(B) Inflation adjustment.--In the case of taxable years beginning
in a calendar year after 1998, the $2,000 amount contained in
subparagraph (A) shall be increased by an amount equal to--
``(i) such dollar amount, multiplied by
``(ii) the cost-of-living adjustment determined under section
1(f)(3) for such calendar year by substituting `calendar year 1997' for
`calendar year 1992' in subparagraph (B) thereof.
If the amount as adjusted under the preceding sentence is not a
multiple of $50, such amount shall be rounded to the next lowest
multiple of $50.
``(3) Contributions permitted after age 70 \1/2\.-- Contributions to
an AD IRA may be made even after the individual for whom the account is
maintained has attained age 70\1/2\.
``(4) Mandatory distribution rules not to apply, etc.--
``(A) In general.--Except as provided in subparagraph (B),
subsections (a)(6) and (b)(3) of section 408 (relating to required
distributions) and section 4974 (relating to excise tax on certain
accumulations in qualified retirement plans) shall not apply to any AD
IRA.
``(B) Post-death distributions.--Rules similar to the rules of
section 401(a)(9) (other than subparagraph (A) thereof) shall apply for
purposes of this section.
``(5) Rules relating to rollover contributions.--
``(A) In general.--No rollover contribution may be made to an AD IRA
unless it is a qualified rollover contribution.
``(B) Coordination with limit.--A qualified rollover contribution
shall not be taken into account for purposes of paragraph (2).
``(6) Time when contributions made.--For purposes of this section,
the rule of section 219(f)(3) shall apply.
``(d) Distribution Rules.--For purposes of this title--
``(1) General rules.--
``(A) Exclusions from gross income.--Any qualified distribution from
an AD IRA shall not be includible in gross income.
``(B) Nonqualified distributions.--In applying section 72 to any
distribution from an AD IRA which is not a qualified distribution, such
distribution shall be treated as made from contributions to the AD IRA
to the extent that such distribution, when added to all previous
distributions from the AD IRA, does not exceed the aggregate amount of
contributions to the AD IRA. For purposes of the preceding sentence, all
AD IRAs maintained for the benefit of an individual shall be treated as
1 account.
``(C) Exception from penalty tax.--Section 72(t) shall not apply to--
``(i) any qualified distribution from an AD IRA, and
``(ii) any qualified first-time homebuyer distribution (whether or
not a qualified distribution) from an AD IRA.
``(2) Qualified distribution.--For purposes of this subsection--
``(A) In general.--The term `qualified distribution' means any
payment or distribution--
``(i) made on or after the date on which the individual attains age
59\1/2\,
``(ii) made to a beneficiary (or to the estate of the individual) on
or after the death of the individual,
``(iii) attributable to the individual's being disabled (within the
meaning of section 72(m)(7)), or
``(iv) which is a qualified first-time homebuyer distribution.
``(B) Distributions within 5 years.--No payment or distribution
shall be treated as a qualified distribution if--
``(i) it is made within the 5-taxable year period beginning with the
1st taxable year for which the individual made a contribution to an AD
IRA (or such individual's spouse made a contribution to an AD IRA)
established for such individual, or
``(ii) in the case of a payment or distribution properly allocable
(as determined in the manner prescribed by the Secretary) to a qualified
rollover contribution (or income allocable thereto), it is made within
the 5-taxable year period beginning with the taxable year in which the
rollover contribution was made.
Clause (ii) shall not apply to a qualified rollover contribution from
an AD IRA.
``(3) Rollovers.--
``(A) In general.--Paragraph (1) shall not apply to any distribution
which is transferred in a qualified rollover contribution to an AD IRA.
``(B) Income inclusion for rollovers from non-ad iras.--
``(i) In general.--In the case of any distribution to which this
subparagraph applies--
``(I) sections 72(t) and 408(d)(3) shall not apply (but section
4980A shall apply), and
``(II) any amount required to be included in gross income by reason
of this paragraph shall be so included ratably over the 4-taxable year
period beginning with the taxable year in which the distribution is
made.
``(ii) Distributions to which subparagraph applies.--This
subparagraph shall apply to a distribution before January 1, 1999, from
an individual retirement plan (other than an AD IRA) maintained for the
benefit of an individual to an AD IRA maintained for the benefit of such
individual if such distribution would be a qualified rollover
contribution were such individual retirement plan an AD IRA.
``(iii) Conversions.--The conversion of an individual retirement
plan (other than an AD IRA) to an AD IRA shall be treated for purposes
of this subparagraph as a distribution from such plan to such AD IRA.
``(C) Additional reporting requirements.--The Secretary shall
require that trustees of AD IRAs, trustees of individual retirement
plans, or both, whichever is appropriate, shall include such additional
information in reports required under section 408(i) as is necessary to
ensure that amounts required to be included in gross income under
subparagraph (B) are so included.
``(4) Qualified first-time homebuyer distribution.--For purposes of
this section--
``(A) In general.--The term `qualified first-time homebuyer
distribution' means any payment or distribution received by an
individual to the extent such payment or distribution is used by the
individual before the close of the 60th day after the day on which such
payment or distribution is received to pay qualified acquisition costs
with respect to a principal residence of a first-time homebuyer who is
such individual, the spouse of such individual, or any child,
grandchild, or ancestor of such individual or the individual's spouse.
``(B) Lifetime dollar limitation.--The aggregate amount of payments
or distributions received by an individual which may be treated as
qualified first-time homebuyer distributions for any taxable year shall
not exceed the excess (if any) of--
``(i) $10,000, over
``(ii) the aggregate amounts treated as qualified first-time
homebuyer distributions with respect to such individual for all prior
taxable years.
``(C) Qualified acquisition costs.--For purposes of this paragraph,
the term `qualified acquisition costs' means the costs of acquiring,
constructing, or reconstructing a residence. Such term includes any
usual or reasonable settlement, financing, or other closing costs.
``(D) First-time homebuyer; other definitions.--For purposes of this
paragraph--
``(i) First-time homebuyer.--The term `first-time homebuyer' means
any individual if--
``(I) such individual (and if married, such individual's spouse)
had no present ownership interest in a principal residence during the
2-year period ending on the date of acquisition of the principal
residence to which this paragraph applies, and
``(II) subsection (h) or (k) of section 1034 (as in effect on the
day before the date of the enactment of this section) did not suspend
the running of any period of time specified in section 1034 (as so in
effect) with respect to such individual on the day before the date the
distribution is applied pursuant to subparagraph (A).
``(ii) Principal residence.--The term `principal residence' has the
same meaning as when used in section 121.
``(iii) Date of acquisition.--The term `date of acquisition' means
the date--
``(I) on which a binding contract to acquire the principal
residence to which subparagraph (A) applies is entered into, or
``(II) on which construction or reconstruction of such a principal
residence is commenced.
``(E) Special rule where delay in acquisition.--If any distribution
from any individual retirement plan fails to meet the requirements of
subparagraph (A) solely by reason of a delay or cancellation of the
purchase or construction of the residence, the amount of the
distribution may be contributed to an individual retirement plan as
provided in section 408(d)(3)(A)(i) (determined by substituting `120
days' for `60 days' in such section), except that--
``(i) section 408(d)(3)(B) shall not be applied to such
contribution, and
``(ii) such amount shall not be taken into account in determining
whether section 408(d)(3)(A)(i) applies to any other amount.
``(e) Qualified Rollover Contribution.--For purposes of this section,
the term `qualified rollover contribution' means a rollover contribution
to an AD IRA from another such account, but only if such rollover
contribution meets the requirements of section 408(d)(3).''
(b) Repeal of Nondeductible Contributions.--
(1) Subsection (f) of section 219 is amended by striking paragraph (7).
(2) Paragraph (5) of section 408(d) is amended by striking the last
sentence.
(3) Section 408(o) is amended by adding at the end the following new
paragraph:
``(5) Termination.--This subsection shall not apply to any
designated nondeductible contribution for any taxable year beginning
after December 31, 1997.''
(4) Subsection (b) of section 4973 is amended by striking the last
sentence.
(c) Excess Distributions Tax Not To Apply.--
(1) Subparagraph (A) of section 4980A(d)(3) is amended by inserting
``(other than AD IRAs, as defined in section 4980A(b))'' after
``individual retirement plans''.
(2) Subparagraph (B) of section 4980A(e)(1) is amended by inserting
``other than an AD IRA (as defined in section 408A(b))'' after
``retirement plan''.
(d) Excess Contributions.--
(1) Section 4973 is amended by adding at the end the following new
subsection:
``(f) Excess Contributions to American Dream IRAs.--For purposes of
this section, in the case of American Dream IRAs, the term `excess
contributions' means the amount by which the amount contributed for the
taxable year to such IRAs exceeds the limitation in section
408A(c)(2).''
(2) Subsection (b) of section 4973 is amended by adding at the end
the following new sentence: ``For purposes of this subsection, an
American Dream IRA shall not be treated as an individual retirement
plan.''
(e) Clerical Amendment.--The table of sections for subpart A of part
I of subchapter D of chapter 1 is amended by inserting after the item
relating to section 408 the following new item:
``Sec. 408A. American Dream IRA.''
(f) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 1997.
Subtitle B--Capital Gains
PART I--INDIVIDUAL CAPITAL GAINS
SEC. 311. 20 PERCENT MAXIMUM CAPITAL GAINS RATE FOR INDIVIDUALS.
(a) In General.--Subsection (h) of section 1 (relating to maximum
capital gains rate) is amended to read as follows:
``(h) Maximum Capital Gains Rate.--
``(1) In general.--If a taxpayer has a net capital gain for any
taxable year, the tax imposed by this section for such taxable year
shall not exceed the sum of--
``(A) the base tax amount,
``(B) 10 percent of so much of the taxpayer's adjusted net capital
gain (or, if less, taxable income) as does not exceed the excess (if
any) of--
``(i) the amount of taxable income which would (without regard to
this paragraph) be taxed at a rate of 15 percent or less, over
``(ii) the taxable income reduced by the adjusted net capital gain,
plus
``(C) 20 percent of the taxpayer's adjusted net capital gain (or, if
less, taxable income) in excess of the amount on which a tax is
determined under subparagraph (B).
``(2) Net capital gain taken into account as investment income.--For
purposes of this subsection, the net capital gain for any taxable year
shall be reduced (but not below zero) by the amount which the taxpayer
takes into account as investment income under section 163(d)(4)(B)(iii).
``(3) Base tax amount.--For purposes of paragraph (1), the base tax
amount is the lesser of--
``(A) a tax computed at the rates and in the same manner as if this
subsection had not been enacted on taxable income reduced by the
adjusted net capital gain, or
``(B) the sum of--
``(i) a tax computed at the rates and in the same manner as if this
subsection had not been enacted on the greater of--
``(I) taxable income reduced by the net capital gain, or
``(II) the amount of taxable income taxed at a rate below 28 percent,
``(ii) a tax of 26 percent of the lesser of--
``(I) the section 1250 gain, or
``(II) the amount of taxable income in excess of the sum of the
amount on which tax is determined under clause (i) plus the net capital
gain determined without regard to section 1250 gain, plus
``(iii) a tax of 28 percent of the amount of taxable income in
excess of the sum of--
``(I) the adjusted net capital gain, plus
``(II) the sum of the amounts on which tax is determined under
clauses (i) and (ii).
``(4) Adjusted net capital gain.--For purposes of this subsection,
the term `adjusted net capital gain' means net capital gain determined
without regard to--
``(A) collectibles gain,
``(B) section 1202 gain, and
``(C) section 1250 gain.
``(5) Collectibles gain.--For purposes of paragraph (4)--
``(A) In general.--The term `collectibles gain' means gain from the
sale or exchange of a collectible (as defined in section 408(m) without
regard to paragraph (3) thereof) which is a capital asset held for more
than 1 year but only to the extent such gain is taken into account in
computing gross income.
``(B) Coordination with section 1022.--Gain from the disposition of
a collectible which is an indexed asset to which section 1022(a) applies
shall be disregarded for purposes of this subsection. A taxpayer may
elect to treat any collectible specified in such election as not being
an indexed asset for purposes of section 1022. Any such election, and
any specification therein, once made, shall be irrevocable.
``(C) Partnerships, etc.--For purposes of subparagraph (A), any gain
from the sale of an interest in a partnership, S corporation, or trust
which is attributable to unrealized appreciation in the value of
collectibles shall be treated as gain from the sale or exchange of a
collectible. Rules similar to the rules of section 751 shall apply for
purposes of the preceding sentence.
``(6) Section 1202 gain.--For purposes of paragraph (4), the term
`section 1202 gain' means gain from the sale or exchange of any
qualified small business stock (as defined in section 1202(c)) held more
than 5 years which is taken into account in computing gross income.
``(7) Section 1250 gain.--For purposes of paragraph (4), the term
`section 1250 gain' means the excess (if any) of--
``(A) the amount which would be treated as ordinary income under
section 1245 if all section 1250 property disposed of by the taxpayer
were section 1245 property, over
``(B) the amount treated as ordinary income under section 1250.
In the case of a taxable year which includes May 7, 1997, section
1250 gain shall be determined by taking into account only the gain
properly taken into account for the portion of the taxable year after
May 6, 1997.
``(8) Pre-effective date gain.--
``(A) In general.--In the case of a taxable year which includes May
7, 1997, adjusted net capital gain shall be determined without regard to
pre-May 7, 1997, gain.
``(B) Pre-may 7, 1997, gain.--The term `pre-May 7, 1997, gain' means
the amount which would be adjusted net capital gain for the taxable year
if adjusted net capital gain were determined by taking into account only
the gain or loss properly taken into account for the portion of the
taxable year before May 7, 1997.
``(C) Special rules for pass-thru entities.--In applying
subparagraph (A) with respect to any pass-thru entity, the determination
of when gains and loss are properly taken into account shall be made at
the entity level.
``(D) Pass-thru entity defined.--For purposes of subparagraph (C),
the term `pass-thru entity' means--
``(i) a regulated investment company,
``(ii) a real estate investment trust,
``(iii) an S corporation,
``(iv) a partnership,
``(v) an estate or trust, and
``(vi) a common trust fund.''
(b) Minimum tax.--
(1) In general.--Subsection (b) of section 55 is amended by adding
at the end the following new paragraph:
``(3) Maximum rate of tax on net capital gain of noncorporate
taxpayers.--The amount determined under the first sentence of paragraph
(1)(A)(i) shall not exceed the sum of--
``(A) the lesser of--
``(i) the amount determined under such first sentence computed at
the rates and in the same manner as if this paragraph had not been
enacted on the taxable excess reduced by the adjusted net capital gain
(as defined in section 1(h)(4)), or
``(ii) the sum of--
``(I) the amount determined under such first sentence computed at
the rates and in the same manner as if this paragraph had not been
enacted on the taxable excess reduced by the sum of the adjusted net
capital gain (as so defined) and the section 1250 gain (as defined in
section 1(h)(7)), plus
``(II) 26 percent of the lesser of the section 1250 gain (as so
defined) or the taxable excess reduced by the adjusted net capital gain
(as so defined),
``(B) a tax of 10 percent of so much of the taxpayer's adjusted net
capital gain (or, if less, taxable excess) as does not exceed the amount
on which a tax is determined under section 1(h)(1)(B), plus
``(C) a tax of 20 percent of the taxpayer's adjusted net capital
gain (or, if less, taxable excess) in excess of the amount on which tax
is determined under subparagraph (B).''
(2) Conforming amendment.--Clause (ii) of section 55(b)(1)(A) is
amended by striking ``clause (i)'' and inserting ``this subsection''.
(c) Other Conforming Amendments.--
(1) Subsection (d) of section 291 is amended by inserting at the end
the following new sentence: ``Any capital gain dividend treated as
having been paid out of such difference to a shareholder which is not a
corporation retains its characters as section 1250 gain for purposes of
applying section 1(h) to such shareholder.''
(2) Paragraph (1) of section 1445(e) is amended by striking ``28
percent'' and inserting ``20 percent''.
(3) The second sentence of section 7518(g)(6)(A), and the second
sentence of section 607(h)(6)(A) of the Merchant Marine Act, 1936, are
each amended by striking ``28 percent'' and inserting ``20 percent''.
(d) Effective Dates.--
(1) In general.--Except as provided in paragraph (2), the amendments
made by this section shall apply to taxable years ending after May 6,
1997.
(2) Withholding.--The amendment made by subsection (c)(2) shall
apply only to amounts paid after the date of the enactment of this Act.
(3) Application of estimated tax rules.--Clause (i) of section
6654(d)(1)(C) of the Internal Revenue Code of 1986 shall be applied by
substituting ``109 percent'' for ``110 percent'' where the preceding
taxable year referred in such clause is a taxable year beginning in
calendar year 1996.
SEC. 312. INDEXING OF CERTAIN ASSETS ACQUIRED AFTER DECEMBER
31, 2000, FOR PURPOSES OF DETERMINING GAIN.
(a) In General.--Part II of subchapter O of chapter 1 (relating to
basis rules of general application) is amended by inserting after
section 1021 the following new section:
``SEC. 1022. INDEXING OF CERTAIN ASSETS ACQUIRED AFTER
DECEMBER 31, 2000, FOR PURPOSES OF DETERMINING GAIN.
``(a) General Rule.--
``(1) Indexed basis substituted for adjusted basis.--Solely for
purposes of determining gain on the sale or other disposition by a
taxpayer (other than a corporation) of an indexed asset which has been
held for more than 3 years, the indexed basis of the asset shall be
substituted for its adjusted basis.
``(2) Exception for depreciation, etc.--The deductions for
depreciation, depletion, and amortization shall be determined without
regard to the application of paragraph (1) to the taxpayer or any other
person.
``(3) Exception for principal residences.--Paragraph (1) shall not
apply to any disposition of the principal residence (within the meaning
of section 121) of the taxpayer .
``(b) Indexed Asset.--
``(1) In general.--For purposes of this section, the term `indexed
asset' means--
``(A) common stock in a C corporation (other than a foreign
corporation), and
``(B) tangible property,
which is a capital asset or property used in the trade or business
(as defined in section 1231(b)).
``(2) Stock in certain foreign corporations included.--For purposes
of this section--
``(A) In general.--The term `indexed asset' includes common stock in
a foreign corporation which is regularly traded on an established
securities market.
``(B) Exception.--Subparagraph (A) shall not apply to--
``(i) stock of a foreign investment company (within the meaning of
section 1246(b)),
``(ii) stock in a passive foreign investment company (as defined in
section 1296),
``(iii) stock in a foreign corporation held by a United States
person who meets the requirements of section 1248(a)(2), and
``(iv) stock in a foreign personal holding company (as defined in
section 552).
``(C) Treatment of american depository receipts.--An American
depository receipt for common stock in a foreign corporation shall be
treated as common stock in such corporation.
``(c) Indexed Basis.--For purposes of this section--
``(1) General rule.--The indexed basis for any asset is--
``(A) the adjusted basis of the asset, increased by
``(B) the applicable inflation adjustment.
``(2) Applicable inflation adjustment.--The applicable inflation
adjustment for any asset is an amount equal to--
``(A) the adjusted basis of the asset, multiplied by
``(B) the percentage (if any) by which--
``(i) the chain-type price index for GDP for the last calendar
quarter ending before the asset is disposed of, exceeds
``(ii) the chain-type price index for GDP for the last calendar
quarter ending before the asset was acquired by the taxpayer.
The percentage under subparagraph (B) shall be rounded to the nearest
\1/10\ of 1 percentage point.
``(3) Chain-type price index for GDP.--The chain-type price index
for GDP for any calendar quarter is such index for such quarter (as
shown in the last revision thereof released by the Secretary of Commerce
before the close of the following calendar quarter).
``(d) Suspension of Holding Period Where Diminished Risk of Loss;
Treatment of Short Sales.--
``(1) In general.--If the taxpayer (or a related person) enters into
any transaction which substantially reduces the risk of loss from
holding any asset, such asset shall not be treated as an indexed asset
for the period of such reduced risk.
``(2) Short sales.--
``(A) In general.--In the case of a short sale of an indexed asset
with a short sale period in excess of 3 years, for purposes of this
title, the amount realized shall be an amount equal to the amount
realized (determined without regard to this paragraph) increased by the
applicable inflation adjustment. In applying subsection (c)(2) for
purposes of the preceding sentence, the date on which the property is
sold short shall be treated as the date of acquisition and the closing
date for the sale shall be treated as the date of disposition.
``(B) Short sale period.--For purposes of subparagraph (A), the
short sale period begins on the day that the property is sold and ends
on the closing date for the sale.
``(e) Treatment of Regulated Investment Companies and Real Estate
Investment Trusts.--
``(1) Adjustments at entity level.--
``(A) In general.--Except as otherwise provided in this paragraph,
the adjustment under subsection (a) shall be allowed to any qualified
investment entity (including for purposes of determining the earnings
and profits of such entity).
``(B) Exception for corporate shareholders.--Under regulations--
``(i) in the case of a distribution by a qualified investment entity
(directly or indirectly) to a corporation--
``(I) the determination of whether such distribution is a dividend
shall be made without regard to this section, and
``(II) the amount treated as gain by reason of the receipt of any
capital gain dividend shall be increased by the percentage by which the
entity's net capital gain for the taxable year (determined without
regard to this section) exceeds the entity's net capital gain for such
year determined with regard to this section, and
``(ii) there shall be other appropriate adjustments (including
deemed distributions) so as to ensure that the benefits of this section
are not allowed (directly or indirectly) to corporate shareholders of
qualified investment entities.
For purposes of the preceding sentence, any amount includible in
gross income under section 852(b)(3)(D) shall be treated as a capital
gain dividend and an S corporation shall not be treated as a
corporation.
``(C) Exception for qualification purposes.--This section shall not
apply for purposes of sections 851(b) and 856(c).
``(D) Exception for certain taxes imposed at entity level.--
``(i) Tax on failure to distribute entire gain.--If any amount is
subject to tax under section 852(b)(3)(A) for any taxable year, the
amount on which tax is imposed under such section shall be increased by
the percentage determined under subparagraph (B)(i)(II). A similar rule
shall apply in the case of any amount subject to tax under paragraph (2)
or (3) of section 857(b) to the extent attributable to the excess of the
net capital gain over the deduction for dividends paid determined with
reference to capital gain dividends only. The first sentence of this
clause shall not apply to so much of the amount subject to tax under
section 852(b)(3)(A) as is designated by the company under section
852(b)(3)(D).
``(ii) Other taxes.--This section shall not apply for purposes of
determining the amount of any tax imposed by paragraph (4), (5), or (6)
of section 857(b).
``(2) Adjustments to interests held in entity.--
``(A) Regulated investment companies.--Stock in a regulated
investment company (within the meaning of section 851) shall be an
indexed asset for any calendar quarter in the same ratio as--
``(i) the average of the fair market values of the indexed assets
held by such company at the close of each month during such quarter,
bears to
``(ii) the average of the fair market values of all assets held by
such company at the close of each such month.
``(B) Real estate investment trusts.--Stock in a real estate
investment trust (within the meaning of section 856) shall be an indexed
asset for any calendar quarter in the same ratio as--
``(i) the fair market value of the indexed assets held by such trust
at the close of such quarter, bears to
``(ii) the fair market value of all assets held by such trust at the
close of such quarter.
``(C) Ratio of 80 percent or more.--If the ratio for any calendar
quarter determined under subparagraph (A) or (B) would (but for this
subparagraph) be 80 percent or more, such ratio for such quarter shall
be 100 percent.
``(D) Ratio of 20 percent or less.--If the ratio for any calendar
quarter determined under subparagraph (A) or (B) would (but for this
subparagraph) be 20 percent or less, such ratio for such quarter shall
be zero.
``(E) Look-thru of partnerships.--For purposes of this paragraph, a
qualified investment entity which holds a partnership interest shall be
treated (in lieu of holding a partnership interest) as holding its
proportionate share of the assets held by the partnership.
``(3) Treatment of return of capital distributions.--Except as
otherwise provided by the Secretary, a distribution with respect to
stock in a qualified investment entity which is not a dividend and which
results in a reduction in the adjusted basis of such stock shall be
treated as
allocable to stock acquired by the taxpayer in the order in
which such stock was acquired.
``(4) Qualified investment entity.--For purposes of this subsection,
the term `qualified investment entity' means--
``(A) a regulated investment company (within the meaning of section
851), and
``(B) a real estate investment trust (within the meaning of section
856).
``(f) Other Pass-Thru Entities.--
``(1) Partnerships.--
``(A) In general.--In the case of a partnership, the adjustment made
under subsection (a) at the partnership level shall be passed through to
the partners.
``(B) Special rule in the case of section 754 elections.--In the
case of a transfer of an interest in a partnership with respect to which
the election provided in section 754 is in effect--
``(i) the adjustment under section 743(b)(1) shall, with respect to
the transferor partner, be treated as a sale of the partnership assets
for purposes of applying this section, and
``(ii) with respect to the transferee partner, the partnership's
holding period for purposes of this section in such assets shall be
treated as beginning on the date of such adjustment.
``(2) S corporations.--In the case of an S corporation, the
adjustment made under subsection (a) at the corporate level shall be
passed through to the shareholders. This section shall not apply for
purposes of determining the amount of any tax imposed by section 1374 or
1375.
``(3) Common trust funds.--In the case of a common trust fund, the
adjustment made under subsection (a) at the trust level shall be passed
through to the participants.
``(4) Indexing adjustment disregarded in determining loss on sale of
interest in entity.--Notwithstanding the preceding provisions of this
subsection, for purposes of determining the amount of any loss on a sale
or exchange of an interest in a partnership, S corporation, or common
trust fund, the adjustment made under subsection (a) shall not be taken
into account in determining the adjusted basis of such interest.
``(g) Dispositions Between Related Persons.--
``(1) In general.--This section shall not apply to any sale or other
disposition of property between related persons except to the extent
that the basis of such property in the hands of the transferee is a
substituted basis.
``(2) Related persons defined.--For purposes of this section, the
term `related persons' means--
``(A) persons bearing a relationship set forth in section 267(b), and
``(B) persons treated as single employer under subsection (b) or (c)
of section 414.
``(h) Transfers To Increase Indexing Adjustment.--If any person
transfers cash, debt, or any other property to another person and the
principal purpose of such transfer is to secure or increase an
adjustment under subsection (a), the Secretary may disallow part or all
of such adjustment or increase.
``(i) Special Rules.--For purposes of this section--
``(1) Treatment of improvements, etc.--If there is an addition to
the adjusted basis of any tangible property or of any stock in a
corporation during the taxable year by reason of an improvement to such
property or a contribution to capital of such corporation--
``(A) such addition shall never be taken into account under
subsection (c)(1)(A) if the aggregate amount thereof during the taxable
year with respect to such property or stock is less than $1,000, and
``(B) such addition shall be treated as a separate asset acquired at
the close of such taxable year if the aggregate amount thereof during
the taxable year with respect to such property or stock is $1,000 or
more.
A rule similar to the rule of the preceding sentence shall apply to
any other portion of an asset to the extent that separate treatment of
such portion is appropriate to carry out the purposes of this section.
``(2) Assets which are not indexed assets throughout holding
period.--The applicable inflation adjustment shall be appropriately
reduced for periods during which the asset was not an indexed asset.
``(3) Treatment of certain distributions.--A distribution with
respect to stock in a corporation which is not a dividend shall be
treated as a disposition.
``(4) Acquisition date where there has been prior application of
subsection ( a )(1) with respect to the taxpayer.--If there has been a
prior application of subsection (a)(1) to an asset while such asset was
held by the taxpayer, the date of acquisition of such asset by the
taxpayer shall be treated as not earlier than the date of the most
recent such prior application.
``(5) Collapsible corporations.--The application of section 341(a)
(relating to collapsible corporations) shall be determined without
regard to this section.
``(j) Regulations.--The Secretary shall prescribe such regulations as
may be necessary or appropriate to carry out the purposes of this
section.''
(b) Clerical Amendment.--The table of sections for part II of
subchapter O of chapter 1 is amended by inserting after the item
relating to section 1021 the following new item:
``Sec. 1022. Indexing of certain assets acquired after December
31, 2000, for purposes of determining gain.''
(c) Effective Dates.--
(1) In general.--The amendments made by this section shall apply to
the disposition of any property the holding period of which begins after
December 31, 2000.
(2) Certain transactions between related persons.--The amendments
made by this section shall not apply to the disposition of any property
acquired after December 31, 2000, from a related person (as defined in
section 1022(g)(2) of the Internal Revenue Code of 1986, as added by
this section) if--
(A) such property was so acquired for a price less than the
property's fair market value, and
(B) the amendments made by this section did not apply to such
property in the hands of such related person.
(d) Election To Recognize Gain on Assets Held on January 1,
2001.--For purposes of the Internal Revenue Code of 1986--
(1) In general.--A taxpayer other than a corporation may elect to
treat--
(A) any readily tradable stock (which is an indexed asset) held by
such taxpayer on January 1, 2001, and not sold before the next business
day after such date, as having been sold on such next business day for
an amount equal to its closing market price on such next business day
(and as having been reacquired on such next business day for an amount
equal to such closing market price), and
(B) any other indexed asset held by the taxpayer on January 1, 2001,
as having been sold on such date for an amount equal to its fair market
value on such date (and as having been reacquired on such date for an
amount equal to such fair market value).
(2) Treatment of gain or loss.--
(A) 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.
(B) Any loss resulting from an election under paragraph (1) shall
not be allowed for any taxable year.
(3) Election.--An election under paragraph (1) shall be made in such
manner as the Secretary of the Treasury or his delegate may prescribe
and shall specify the assets for which such election is made. Such an
election, once made with respect to any asset, shall be irrevocable.
(4) Readily tradable stock.--For purposes of this subsection, the
term ``readily tradable stock'' means any stock which, as of January 1,
2001, is readily tradable on an established securities market or
otherwise.
SEC. 313. EXEMPTION FROM TAX FOR GAIN ON SALE OF PRINCIPAL RESIDENCE.
(a) In General.--Section 121 (relating to one-time exclusion of gain
from sale of principal residence by individual who has attained age 55)
is amended to read as follows:
``SEC. 121. EXCLUSION OF GAIN FROM SALE OF PRINCIPAL RESIDENCE.
``(a) Exclusion.--Gross income shall not include gain from the sale
or exchange of property if, during the 5-year period ending on the date
of the sale or exchange, such property has been owned and used by the
taxpayer as the taxpayer's principal residence for periods aggregating 2
years or more.
``(b) Limitations.--
``(1) Dollar limitation.--The amount of gain excluded from gross
income under subsection (a) with respect to any sale or exchange shall
not exceed $250,000 ($500,000 in the case of a joint return where both
spouses meet the use requirement of subsection (a)).
``(2) Application to only 1 sale or exchange every 2 years.--
``(A) In general.--Subsection (a) shall not apply to any sale or
exchange by the taxpayer if, during the 2-year period ending on the date
of such sale or exchange, there was any other sale or exchange by the
taxpayer or his spouse to which subsection (a) applied.
``(B) Premarriage sales by spouse not taken into account.--If, but
for this subparagraph, subsection (a) would not apply to a sale or
exchange by a married individual by reason of a sale or exchange by such
individual's spouse before their marriage--
``(i) subparagraph (A) shall be applied without regard to the sale
or exchange by such individual's spouse, but
``(ii) the amount of gain excluded from gross income under
subsection (a) with respect to the sale or exchange by such individual
shall not exceed $250,000.
``(C) Pre-may 7, 1997, sales not taken into account.--Subparagraph
(A) shall be applied without regard to any sale or exchange before May
7, 1997.
``(c) Exclusion for Taxpayers Failing To Meet Certain Requirements.--
``(1) In general.--In the case of a sale or exchange to which this
subsection applies, the ownership and use requirements of subsection (a)
shall not apply and subsection (b)(2) shall not apply; but the amount of
gain excluded from gross income under subsection (a) with respect to
such sale of exchange shall not exceed--
``(A) the amount which bears the same ratio to the amount which
would be so excluded if such requirements had been met, as
``(B) the shorter of--
``(i) the aggregate periods, during the 5-year period ending on the
date of such sale or exchange, such property has been owned and used by
the taxpayer as the taxpayer's principal residence, or
``(ii) the period after the date of the most recent prior sale or
exchange by the taxpayer or his spouse to which subsection (a) applied
and before the date of such sale or exchange,
bears to 2 years.
``(2) Sales and exchanges to which subsection applies.--This
subsection shall apply to any sale or exchange if--
``(A) subsection (a) would not (but for this subsection) apply to
such sale or exchange by reason of--
``(i) a failure to meet the ownership and use requirements of
subsection (a), or
``(ii) subsection (b)(2), and
``(B) such sale or exchange is by reason of a change in place of
employment, health, or, to the extent provided in regulations, other
unforeseen circumstances.
``(d) Special Rules.--
``(1) Joint returns.--For purposes of this section, if a husband and
wife make a joint return for the taxable year of the sale or exchange of
the property, subsection (a) shall, subject to the provisions of
subsection (b), apply if either spouse meets the ownership and use
requirements of subsection (a) with respect to such property.
``(2) Property of deceased spouse.--For purposes of this section, in
the case of an unmarried individual whose spouse is deceased on the date
of the sale or exchange of property, the period such unmarried
individual owned such property shall include the period such deceased
spouse held such property before death.
``(3) Property of divorced spouse.--For purposes of this section, in
the case of an individual holding property transferred to such
individual incident to divorce (within the meaning of section 1041(c))--
``(A) the period such individual owns such property shall include
the period the former spouse owned the property, and
``(B) the dollar limitation applicable under paragraph (1) shall not
be less than the amount such limitation would have been had the sale or
exchange occurred on the date the divorce became final.
``(4) Tenant-stockholder in cooperative housing corporation.--For
purposes of this section, if the taxpayer holds stock as a
tenant-stockholder (as defined in section 216) in a cooperative housing
corporation (as defined in such section), then--
``(A) the holding requirements of subsection (a) shall be applied to
the holding of such stock, and
``(B) the use requirements of subsection (a) shall be applied to the
house or apartment which the taxpayer was entitled to occupy as such
stockholder.
``(5) Involuntary conversions.--
``(A) In general.--For purposes of this section, the destruction,
theft, seizure, requisition, or condemnation of property shall be
treated as the sale of such property.
``(B) Application of section 1033.--In applying section 1033
(relating to involuntary conversions), the amount realized from the sale
or exchange of property shall be treated as being the amount determined
without regard to this section, reduced by the amount of gain not
included in gross income pursuant to this section.
``(C) Property acquired after involuntary conversion.--If the basis
of the property sold or exchanged is determined (in whole or in part)
under section 1033(b) (relating to basis of property acquired through
involuntary conversion), then the holding and use by the taxpayer of the
converted property shall be treated as holding and use by the taxpayer
of the property sold or exchanged.
``(6) Recognition of gain attributable to depreciation.--Subsection
(a) shall not apply to so much of
the gain from the sale of any property as does not exceed the
portion of the depreciation adjustments (as defined in section
1250(b)(3)) attributable to periods after May 6, 1997, in respect of
such property.
``(7) Determination of use during periods of out-of-residence
care.--In the case of a taxpayer who--
``(A) becomes physically or mentally incapable of self-care, and
``(B) owns property and uses such property as the taxpayer's
principal residence during the 5-year period described in subsection (a)
for periods aggregating at least 1 year,
then the taxpayer shall be treated as using such property as the
taxpayer's principal residence during any time during such 5-year period
in which the taxpayer owns the property and resides in any facility
(including a nursing home) licensed by a State or political subdivision
to care for an individual in the taxpayer's condition.
``(8) Determination of marital status.--In the case of any sale or
exchange, for purposes of this section--
``(A) the determination of whether an individual is married shall be
made as of the date of the sale or exchange, and
``(B) an individual legally separated from his spouse under a decree
of divorce or of separate maintenance shall not be considered as
married.
``(9) Sales of life estates and remainder interests.--For purposes
of this section--
``(A) In general.--This section shall not fail to apply to the sale
or exchange of an interest in a principal residence by reason of such
interest being a life estate or a remainder interest in such residence,
but this section shall apply only to one such interest in such residence
which is sold or exchanged separately.
``(B) Exception for sales to related parties.--Subparagraph (A)
shall not apply to any sale to, or exchange with, any person who bears a
relationship to the taxpayer which is described in section 267(b) or
707(b).
``(e) Denial of Exclusion for Expatriates.--This section shall not
apply to any sale or exchange by an individual if the treatment provided
by section 877(a)(1) applies to such individual.
``(f) Election To Have Section Not Apply.--This section shall not
apply to any sale or exchange with respect to which the taxpayer elects
not to have this section apply.
``(g) Residences Acquired in Rollovers Under Section 1034.--For
purposes of this section, in the case of property the acquisition of
which by the taxpayer resulted under section 1034 (as in effect on the
day before the date of the enactment of this sentence) in the
nonrecognition of any part of the gain realized on the sale or exchange
of another residence, in determining the period for which the taxpayer
has owned and used such property as the taxpayer's principal residence,
there shall be included the aggregate periods for which such other
residence (and each prior residence taken into account under section
1223(7) in determining the holding period of such property) had been so
owned and used.''
(b) Repeal of Nonrecognition of Gain on Rollover of Principal
Residence.--Section 1034 (relating to rollover of gain on sale of
principal residence) is hereby repealed.
(c) Conforming Amendments.--
(1) The following provisions of the Internal Revenue Code of 1986
are each amended by striking ``section 1034'' and inserting ``section
121'': sections 25(e)(7), 56(e)(1)(A), 56(e)(3)(B)(i),
143(i)(1)(C)(i)(I), 163(h)(4)(A)(i)(I), 280A(d)(4)(A), 464(f)(3)(B)(i),
1033(h)(4), 1274(c)(3)(B), 6334(a)(13), and 7872(f)(11)(A).
(2) Paragraph (4) of section 32(c) is amended by striking ``(as
defined in section 1034(h)(3))'' and by adding at the end the following
new sentence: ``For purposes of the preceding sentence, the term
`extended active duty' means any period of active duty pursuant to a
call or order to such duty for a period in excess of 90 days or for an
indefinite period.''
(3) Subparagraph (A) of 143(m)(6) is amended by inserting ``(as in
effect on the day before the date of the enactment of the Revenue
Reconciliation Act of 1997)'' after ``1034(e)''.
(4) Subsection (e) of section 216 is amended by striking ``such
exchange qualifies for nonrecognition of gain under section 1034(f)''
and inserting ``such dwelling unit is used as his principal residence
(within the meaning of section 121)''.
(5) Section 512(a)(3)(D) is amended by inserting ``(as in effect on
the day before the date of the enactment of the Revenue Reconciliation
Act of 1997)'' after ``1034''.
(6) Paragraph (7) of section 1016(a) is amended by inserting ``(as
in effect on the day before the date of the enactment of the Revenue
Reconciliation Act of 1997)'' after ``1034'' and by inserting ``(as so
in effect)'' after ``1034(e)''.
(7) Paragraph (3) of section 1033(k) is amended to read as follows:
``(3) For exclusion from gross income of gain from involuntary
conversion of principal residence, see section 121.''
(8) Subsection (e) of section 1038 is amended to read as follows:
``(e) Principal Residences.--If--
``(1) subsection (a) applies to a reacquisition of real property
with respect to the sale of which gain was not recognized under section
121 (relating to gain on sale of principal residence); and
``(2) within 1 year after the date of the reacquisition of such
property by the seller, such property is resold by him,
then, under regulations prescribed by the Secretary, subsections (b),
(c), and (d) of this section shall not apply to the reacquisition of
such property and, for purposes of applying section 121, the resale of
such property shall be treated as a part of the transaction constituting
the original sale of such property.''
(9) Paragraph (7) of section 1223 is amended by inserting ``(as in
effect on the day before the date of the enactment of the Revenue
Reconciliation Act of 1997)'' after ``1034''.
(10) Paragraph (7) of section 1250(d) is amended to read as follows:
``(7) Disposition of principal residence.--Subsection (a) shall not
apply to a disposition of property to the extent used by the taxpayer as
his principal residence (within the meaning of section 121, relating to
gain on sale of principal residence).''
(11) Subsection (c) of section 6012 is amended by striking
``(relating to one-time exclusion of gain from sale of principal
residence by individual who has attained age 55)'' and inserting
``(relating to gain from sale of principal residence)''.
(12) Paragraph (2) of section 6212(c) is amended by striking
subparagraph (C) and by redesignating the succeeding subparagraphs
accordingly.
(13) Section 6504 is amended by striking paragraph (4) and by
redesignating the succeeding paragraphs accordingly.
(14) The item relating to section 121 in the table of sections for
part III of subchapter B of chapter 1 is amended to read as follows:
``Sec. 121. Exclusion of gain from sale of principal residence.''
(15) The table of sections for part III of subchapter O of chapter 1
of such Code is amended by striking the item relating to section 1034.
(d) Effective Date.--
(1) In general.--The amendments made by this section shall apply to
sales and exchanges after May 6, 1997.
(2) Sales before date of enactment.--At the election of the
taxpayer, the amendments made by this section shall not apply to any
sale or exchange before the date of the enactment of this Act.
(3) Binding contracts.--At the election of the taxpayer, the
amendments made by this section shall not apply to a sale or exchange
after the date of the enactment of this Act, if--
(A) such sale or exchange is pursuant to a contract which was
binding on such date, or
(B) without regard to such amendments, gain would not be recognized
under section 1034 of the Internal Revenue Code of 1986 (as in effect on
the day before the date of the enactment of this Act) on such sale or
exchange by reason of a new residence acquired on or before such date or
with respect to the acquisition of which by the taxpayer a binding
contract was in effect on such date.
This paragraph shall not apply to any sale or exchange by an
individual if the treatment provided by section 877(a)(1) of the
Internal Revenue Code of 1986 applies to such individual.
PART II--CORPORATE CAPITAL GAINS
SEC. 321. REDUCTION OF ALTERNATIVE CAPITAL GAIN TAX FOR CORPORATIONS.
(a) In General.--Section 1201 is amended to read as follows:
``SEC. 1201. ALTERNATIVE TAX FOR CORPORATIONS.
``(a) General Rule.--If for any taxable year a corporation has 8-year
gain, then, in lieu of the tax imposed by sections 11, 511, and 831 (a)
and (b) (whichever is applicable), there is hereby imposed a tax (if
such tax is less than the tax imposed by such sections) which shall
consist of the sum of--
``(1) a tax computed on the taxable income reduced by the amount of
the 8-year gain, at the rates and in the manner as if this subsection
had not been enacted, plus
``(2) a tax of the applicable percentage of the amount of the 8-year
gain (or, if less, taxable income).
``(b) Applicable Percentage.--For purposes of subsection (a)--
``(1) In general.--The term `applicable percentage' means--
``(A) 32 percent for the portion of any taxable year within 1998,
``(B) 31 percent for the portion of any taxable year within 1999, and
``(C) 30 percent for the portion of any taxable year after 1999.
``(2) Fiscal year taxpayers.--
``(A) Taxable years beginning in 1997.--In applying this section to
taxable years beginning in 1997, 8-year gain shall not exceed the 8-year
gain determined by taking into account only gains and losses properly
taken into account for the portion of the taxable year after December
31, 1997.
``(B) Taxable years beginning in 1998 or 1999.--In the case of a
taxable year beginning in 1998 or 1999 which includes portions of 2
calendar years, the applicable percentage shall be applied separately to
such portions by taking into account--
``(i) in the case of the first such portion, the lesser of--
``(I) the 8-year gain determined by taking into account only gains
and losses properly taken into account for such portion, or
``(II) the 8-year gain determined for the entire taxable year, and
``(ii) in the case of the second such portion, the 8-year gain (and
the taxable income) determined for the entire taxable year reduced by
the amount on which tax is determined under subsection (a)(2) for the
first such portion determined under clause (i).
``(C) Special rule for pass-thru entities.--Section 1(h)(8)(C) shall
apply for purposes of this paragraph.
``(c) 8 -Year Gain.--For purposes of this section, the term `8-year
gain' means the lesser of--
``(1) the amount of long-term capital gain which would be computed
for the taxable year if only gain from the sale or exchange of property
held by the taxpayer for more than 8 years were taken into account, or
``(2) net capital gain.
The determination under the preceding sentence shall be made without
regard to collectibles gain (as defined in section 1(h)(5)) or section
1250 gain (as defined in section 1(h)(7)).
``(d) Cross References.--
``For computation of the alternative tax--
``(1) in the case of life insurance companies, see section 801(a)(2),
``(2) in the case of regulated investment companies and their
shareholders, see section 852(b)(3)(A) and (D), and
``(3) in the case of real estate investment trusts, see section
857(b)(3)(A).''
(b) Technical Amendments.--
(1) Subsection (d) of section 291 is amended by striking
``subsection (a)(1) to such shareholder'' and inserting ``subsection
(a)(1) and section 1201 to such shareholder''.
(2) Clause (iii) of section 852(b)(3)(D) is amended by striking ``65
percent'' and inserting ``the applicable percentage'' and by inserting
at the end the following new sentence: ``For purposes of the preceding
sentence, the term `applicable percentage' means the percentage equal to
the excess of 100 percent over the percentage applicable under section
1201(a).''
(3)(A) Subparagraph (B) of section 852(b)(3) is amended to read as
follows:
``(B) Treatment of capital gain dividends by shareholders.--
``(i) In general.--Except as provided in clause (ii), a capital gain
dividend shall be treated by the shareholders as gain from the sale or
exchange of a capital asset held for more than 1 year.
``(ii) Coordination with 8-year holding period for corporate net
capital gain.--The portion of any capital gain dividend designated by
the company as allocable to gain from the sale or exchange of property
held by the company for more than 8 years shall be treated as gain from
the sale or exchange of a capital asset held for more than 8 years.
Rules similar to the rules of subparagraph (C) shall apply to any
designation under the preceding sentence.''
(B) Clause (i) of section 851(b)(3)(D) is amended by adding at the
end thereof the following new sentence: ``Rules similar to the rules of
subparagraph (B) shall apply in determining character of the amount to
be so included by any such shareholder which is a corporation.''
(4) Subparagraph (B) of section 857(b)(3) is amended to read as
follows:
``(B) Treatment of capital gain dividends by shareholders.--
``(i) In general.--Except as provided in clause (ii), a capital gain
dividend shall be treated by the shareholders or holders of beneficial
interests as gain from the sale or exchange of a capital asset held for
more than 1 year.
``(ii) Coordination with 8-year holding period for corporate net
capital gain.--The portion of any capital gain dividend designated by
the company as allocable to gain from the sale or exchange of property
held by the company for more than 8 years shall be treated as gain from
the sale or exchange of a capital asset held for more than 8 years.
Rules similar to the rules of subparagraph (C) shall apply to any
designation under the preceding sentence.''
(5) Subsection (c) of section 584 is amended--
(A) by inserting ``but not more than 8 years'' after ``1 year'' each
place it appears in paragraph (2),
(B) by striking ``and'' at the end of paragraph (2), and
(C) by redesignating paragraph (3) as paragraph (4) and inserting
after paragraph (2) the following new paragraph:
``(3) as part of its gains and losses from sales or exchanges of
capital assets held for more than 8 years, its proportionate share of
the gains and losses of the common trust fund from sales or exchanges of
capital assets held for more than 8 years, and''.
(6) Subparagraph (E) of section 904(b)(3) is amended by adding at
the end the following new clause:
``(iv) Regulations.--The Secretary shall prescribe regulations that
adjust the limitation under subsection (a) to reflect the rate
differential for 8-year gain (as defined in section 1201(c)) between the
highest rate of tax specified in section 11(b) and the alternate rate of
tax under section 1201(a) and the limitation on the deduction for
capital losses under section 1211.''
(c) Effective Dates.--The amendments made by this section shall apply
to taxable years ending after December 31, 1997.
TITLE IV--ALTERNATIVE MINIMUM TAX REFORM
SEC. 401. ADJUSTMENT OF EXEMPTION AMOUNTS FOR TAXPAYERS OTHER
THAN CORPORATIONS.
(a) In General.--Subsection (d) of section 55 is amended by adding at
the end the following new paragraph:
``(4) Adjustment of exemption amounts for taxpayers other than
corporations.--
``(A) Taxable years beginning before january 1, 2008.--In the case
of any taxable year beginning in a calendar year after 1998 and before
2008--
``(i) In general.--The dollar amount applicable under paragraph
(1)(A) for any odd-numbered calendar year--
``(I) shall be $1,000 greater than the dollar amount applicable
under paragraph (1)(A) for the prior odd-numbered calendar year, and
``(II) shall apply to taxable years beginning in such odd-numbered
calendar year and the succeeding calendar year.
``(B) Taxable years beginning after december 31, 2007.--In the case
of any taxable year beginning in a calendar year after 2007, the dollar
amount applicable under paragraph (1)(A) for taxable years beginning in
2007 shall be increased by an amount equal to the product of--
``(i) such dollar amount, and
``(ii) the cost-of-living adjustment determined under section
1(f)(3) for the calendar year in which the taxable year begins,
determined by substituting `calendar year 2006' for `calendar year 1992'
in subparagraph (B) thereof.
If any increase determined under the preceding sentence is not a
multiple of $100, such increase shall be rounded to the next lowest
multiple of $100.
``(C) Other amounts.--
``(i) The dollar amount applicable under paragraph (1)(B) for any
taxable year shall be an amount equal to 75 percent of the dollar amount
applicable under paragraph (1)(A) for such year.
``(ii) The dollar amount applicable under paragraph (1)(C) for any
taxable year shall be an amount equal to 50 percent of the dollar amount
applicable under paragraph (1)(A) for such year.''
(b) Conforming Amendment.--The last sentence of section 55(d)(3) is
amended by striking ``$165,000 or (ii) $22,500'' and inserting ``the
minimum amount of such income (as so determined) for which the exemption
amount under paragraph (1)(C) is zero, or (ii) such exemption amount
(determined without regard to this paragraph)''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 1998.
SEC. 402. EXEMPTION FROM ALTERNATIVE MINIMUM TAX FOR SMALL CORPORATIONS.
(a) In General.--Section 55 (relating to alternative minimum tax
imposed) is amended by adding at the end the following new subsection:
``(e) Exemption for Small Corporations.--
``(1) In general.--The tentative minimum tax of a corporation shall
be zero for any taxable year if--
``(A) such corporation met the $5,000,000 gross receipts test of
section 448(c) for any prior taxable year beginning after December 31,
1996, and
``(B) such corporation would meet such test for the taxable year and
all prior taxable years beginning after December 31, 1997, if such test
were applied by substituting `$7,500,000' for `$5,000,000'.
``(2) Prospective application of minimum tax if small corporation
ceases to be small.--In the case of a corporation whose tentative
minimum tax is zero for any prior taxable year by reason of paragraph
(1), the application of this part for taxable years beginning with the
first taxable year such corporation ceases to be described in paragraph
(1) shall be determined without regard to transactions entered into or
other items arising in taxable years prior to such first taxable year.
``(3) Limitation on use of credit for prior year minimum tax
liability.--In the case of a taxpayer whose tentative minimum tax for
any taxable year is zero by reason of paragraph (1), the amount
described in paragraph (2) of section 53(b) shall not be less than the
greater of--
``(A) the tentative minimum tax for the taxable year, or
``(B) 25 percent of so much of the regular tax liability (reduced by
the credit allowed by section 27) as exceeds $25,000.
Rules similar to the rules of section 38(c)(3)(B) shall apply for
purposes of the preceding sentence.''
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 1997.
SEC. 403. REPEAL OF ADJUSTMENT FOR DEPRECIATION.
Clause (i) of section 56(a)(1)(A) is amended by inserting ``and
before January 1, 1999,'' after ``December 31, 1986,''.
SEC. 404. MINIMUM TAX NOT TO APPLY TO FARMERS' INSTALLMENT SALES.
(a) In General.--The last sentence of paragraph (6) of section 56(a)
(relating to treatment of installment sales in computing alternative
minimum taxable income) is amended to read as follows: ``This paragraph
shall not apply to any disposition--
``(A) in the case of a taxpayer using the cash receipts and
disbursements method of accounting, described in section 453(l)(2)(A)
(relating to farm property), or
``(B) with respect to which an election is in effect under section
453(l)(2)(B) (relating to timeshares and residential lots).''
(b) Effective Dates.--
(1) In general.--The amendment made by this section shall apply to
dispositions in taxable years beginning after December 31, 1987.
(2) Special rule for 1987.--In the case of taxable years beginning
in 1987, the last sentence of section 56(a)(6) of the Internal Revenue
Code of 1986 (as in effect for such taxable years) shall be applied by
inserting ``or in the case of a taxpayer using the cash receipts and
disbursements method of accounting, any disposition described in section
453C(e)(1)(B)(ii)'' after ``section 453C(e)(4)''.
TITLE V--ESTATE, GIFT, AND GENERATION-SKIPPING TAX PROVISIONS
Subtitle A--Estate and Gift Tax Provisions
SEC. 501. COST-OF-LIVING ADJUSTMENTS RELATING TO ESTATE AND
GIFT TAX PROVISIONS.
(a) Increase in Unified Estate and Gift Tax Credit.--
(1) Estate tax credit.--
(A) In general.--Subsection (a) of section 2010 (relating to unified
credit against estate tax) is amended by striking ``$192,800'' and
inserting ``the applicable credit amount''.
(B) Applicable credit amount.--Section 2010 is amended by
redesignating subsection (c) as subsection (d) and by inserting after
subsection (b) the following new subsection:
``(c) Applicable Credit Amount.--For purposes of this section--
``(1) In general.--For purposes of this section, the applicable
credit amount is the amount of the tentative tax which would be
determined under the rate schedule set forth in section 2001(c) if the
amount with respect to which such tentative tax is to be computed were
the applicable exclusion amount determined in accordance with the
following table:
``In the case of estates of decedents
The applicable
dying, and gifts made, during:
exclusion amount is:
1998 $ 650,00005
1999 $ 750,00005
2000 $ 765,00005
2001 through 2004 $ 775,00005
2005 $ 800,00005
2006 $ 825,00005
2007 or thereafter $1,000,000.
``(2) Cost-of-living adjustment.--In the case of any decedent dying,
and gift made, in a calendar year after 2007, the $1,000,000 amount set
forth in paragraph (1) shall be increased by an amount equal to--
``(A) $1,000,000, multiplied by
``(B) the cost-of-living adjustment determined under section 1(f)(3)
for such calendar year by substituting `calendar year 2006' for
`calendar year 1992' in subparagraph (B) thereof.
If any amount as adjusted under the preceding sentence is not a
multiple of $10,000, such amount shall be rounded to the next lowest
multiple of $10,000.''
(C) Estate tax returns.--Paragraph (1) of section 6018(a) is amended
by striking ``$600,000'' and inserting ``the applicable exclusion amount
in effect under section 2010(c) for the calendar year which includes the
date of death''.
(D) Phaseout of graduated rates and unified credit.--Paragraph (2)
of section 2001(c) is amended by striking ``$21,040,000'' and inserting
``the amount at which the average tax rate under this section is 55
percent''.
(E) Estates of nonresidents not citizens.--Subparagraph (A) of
section 2102(c)(3) is amended by striking ``$192,800'' and inserting
``the applicable credit amount in effect under section 2010(c) for the
calendar year which includes the date of death''.
(2) Unified gift tax credit.--Paragraph (1) of section 2505(a) is
amended by striking ``$192,800'' and inserting ``the applicable credit
amount in effect under section 2010(c) for such calendar year''.
(b) Alternate Valuation of Certain Farm, Etc., Real
Property.--Subsection (a) of section 2032A is amended by adding at the
end the following new paragraph:
``(3) Inflation adjustment.--In the case of estates of decedents
dying in a calendar year after 1998, the $750,000 amount contained in
paragraph (2) shall be increased by an amount equal to--
``(A) $750,000, multiplied by
``(B) the cost-of-living adjustment determined under section 1(f)(3)
for such calendar year by substituting `calendar year 1997' for
`calendar year 1992' in subparagraph (B) thereof.
If any amount as adjusted under the preceding sentence is not a
multiple of $10,000, such amount shall be rounded to the next lowest
multiple of $10,000.''
(c) Annual Gift Tax Exclusion.--Subsection (b) of section 2503 is
amended--
(1) by striking the subsection heading and inserting the following:
``(b) Exclusions From Gifts.--
``(1) In general.--'',
(2) by moving the text 2 ems to the right, and
(3) by adding at the end the following new paragraph:
``(2) Inflation adjustment.--In the case of gifts made in a calendar
year after 1998, the $10,000 amount contained in paragraph (1) shall be
increased by an amount equal to--
``(A) $10,000, multiplied by
``(B) the cost-of-living adjustment determined under section 1(f)(3)
for such calendar year by substituting `calendar year 1997' for
`calendar year 1992' in subparagraph (B) thereof.
If any amount as adjusted under the preceding sentence is not a
multiple of $1,000, such amount shall be rounded to the next lowest
multiple of $1,000.''
(d) Exemption From Generation-Skipping Tax.--Section 2631 (relating
to GST exemption) is amended by adding at the end the following new
subsection:
``(c) Inflation Adjustment.--In the case of an individual who dies in
any calendar year after 1998, the $1,000,000 amount contained in
subsection (a) shall be increased by an amount equal to--
``(1) $1,000,000, multiplied by
``(2) the cost-of-living adjustment determined under section 1(f)(3)
for such calendar year by substituting `calendar year 1997' for
`calendar year 1992' in subparagraph (B) thereof.
If any amount as adjusted under the preceding sentence is not a
multiple of $10,000, such amount shall be rounded to the next lowest
multiple of $10,000.''
(e) Amount Subject to Reduced Rate Where Extension of Time for
Payment of Estate Tax on Closely Held Business.--Subsection (j) of
section 6601 is amended by redesignating paragraph (3) as paragraph (4)
and by inserting after paragraph (2) the following new paragraph:
``(3) Inflation adjustment.--In the case of estates of decedents
dying in a calendar year after 1998, the $1,000,000 amount contained in
paragraph (2)(A) shall be increased by an amount equal to--
``(A) $1,000,000, multiplied by
``(B) the cost-of-living adjustment determined under section 1(f)(3)
for such calendar year by substituting `calendar year 1997' for
`calendar year 1992' in subparagraph (B) thereof.
If any amount as adjusted under the preceding sentence is not a
multiple of $10,000, such amount shall be rounded to the next lowest
multiple of $10,000.''
(f) Effective Date.--The amendments made by this section shall apply
to the estates of decedents dying, and gifts made, after December 31,
1997.
SEC. 502. 20-YEAR INSTALLMENT PAYMENT WHERE ESTATE CONSISTS
LARGELY OF INTEREST IN CLOSELY HELD BUSINESS.
(a) In General.--Section 6166(a) (relating to extension of time for
payment of estate tax where estate consists largely of interest in
closely held business) is amended by striking ``10'' in paragraph (1)
and the heading thereof and inserting ``20''.
(b) Effective Date.--The amendments made by this section shall apply
to estates of decedents dying after December 31, 1997.
SEC. 503. NO INTEREST ON CERTAIN PORTION OF ESTATE TAX
EXTENDED UNDER SECTION 6166, REDUCED INTEREST ON REMAINING PORTION, AND
NO DEDUCTION FOR SUCH REDUCED INTEREST.
(a) No Interest and Reduced Interest.--
(1) In general.--Paragraphs (1) and (2) of section 6601(j) (relating
to 4-percent rate on certain portion of estate tax extended under
section 6166), as amended by section 501(e), are amended to read as
follows:
``(1) In general.--If the time for payment of an amount of tax
imposed by chapter 11 is extended as provided in section 6166, then in
lieu of the annual rate provided by subsection (a)--
``(A) no interest shall be paid on the no-interest portion of such
amount, and
``(B) interest on so much of such amount as exceeds such no-interest
portion shall be paid at a rate equal to 45 percent of the annual rate
provided by subsection (a).
For purposes of this subsection, the amount of any deficiency which
is prorated to installments payable under section 6166 shall be treated
as an amount of tax payable in installments under such section.
``(2) No-interest portion.--For purposes of this section, the term
`no-interest portion' means the lesser of--
``(A)(i) the amount of the tentative tax which would be determined
under the rate schedule set forth in section 2001(c) if the amount with
respect to which such tentative tax is to be computed were the sum of
$1,000,000 and the applicable exclusion amount in effect under section
2010(c), reduced by
``(ii) the applicable credit amount in effect under section 2010(c), or
``(B) the amount of the tax imposed by chapter 11 which is extended
as provided in section 6166.''
(2) Conforming amendments.--
(A) Section 6601(j), as amended by section 501, is amended--
(i) by striking ``4-percent'' each place it appears in paragraph (3)
and inserting ``no-interest'', and
(ii) by striking ``4 -Percent Rate on Certain Portion of '' in the
heading and inserting `` Rate on ''.
(B) Section 6166(b)(7)(A)(iii) is amended to read as follows:
``(iii) for purposes of applying section 6601(j) (relating to rate
on estate tax extended under section 6166), the no-interest portion
shall be zero.''
(C) Section 6166(b)(8)(A)(iii) is amended to read as follows:
``(iii) No-interest portion not to apply.--For purposes of applying
section 6601(j) (relating to rate on estate tax extended under section
6166), the no-interest portion shall be zero.''
(b) Disallowance of Interest Deduction.--
(1) Estate tax.--Paragraph (1) of section 2053(c) is amended by
adding at the end the following new subparagraph:
``(D) Section 6166 interest.--No deduction shall be allowed under
this section for any interest payable under section 6601 on any unpaid
portion of the tax imposed by section 2001 for the period during which
an extension of time for payment of such tax is in effect under section
6166.''
(2) Income tax.--Subparagraph (E) of section 163(h)(2) is amended by
striking ``or 6166''.
(c) Effective Date.--The amendments made by this section shall apply
to estates of decedents dying after December 31, 1997.
SEC. 504. EXTENSION OF TREATMENT OF CERTAIN RENTS UNDER
SECTION 2032A TO LINEAL DESCENDANTS.
(a) General Rule.--Paragraph (7) of section 2032A(c) (relating to
special rules for tax treatment of dispositions and failures to use for
qualified use) is amended by adding at the end the following new
subparagraph:
``(E) Certain rents treated as qualified use.--For purposes of this
subsection, a surviving spouse or lineal descendant of the decedent
shall not be treated as failing to use qualified real property in a
qualified use solely because such spouse or descendant rents such
property to a member of the family of such spouse or descendant on a net
cash basis. For purposes of the preceding sentence, a legally adopted
child of an individual shall be treated as the child of such individual
by blood.''
(b) Conforming Amendment.--Section 2032A(b)(5)(A) is amended by
striking the last sentence.
(c) Effective Date.--The amendments made by this section shall apply
with respect to leases entered into after December 31, 1976.
SEC. 505. CLARIFICATION OF JUDICIAL REVIEW OF ELIGIBILITY FOR
EXTENSION OF TIME FOR PAYMENT OF ESTATE TAX.
(a) In General.--Part IV of subchapter C of chapter 76 of the
Internal Revenue Code of 1986 (relating to declaratory judgments) is
amended by adding at the end the following new section:
``SEC. 7479. DECLARATORY JUDGMENTS RELATING TO ELIGIBILITY OF
ESTATE WITH RESPECT TO INSTALLMENT PAYMENTS UNDER SECTION 6166.
(a) Creation of Remedy.--In a case of actual controversy involving a
determination by the Secretary of (or a failure by the Secretary to make
a determination with respect to)--
``(1) whether an election may be made under section 6166 (relating
to extension of time for payment of estate tax where estate consists
largely of interest in closely held business) with respect to an estate,
or
``(2) whether the extension of time for payment of tax provided in
section 6166(a) has ceased to apply with respect to an estate,
upon the filing of an appropriate pleading, the Tax Court may make a
declaration with respect to whether such election may be made, whether
such extension has ceased to apply, or the amount of such installment
payments. Any such declaration shall have the force and effect of a
decision of the Tax Court and shall be reviewable as such.
``(b) Limitations.--
``(1) Petitioner.--A pleading may be filed under this section, with
respect to any estate, only--
``(A) by the executor of such estate, or
``(B) by any person who has assumed an obligation to make payments
under section 6166 with respect
to such estate (but only if each other such person is joined
as a party).
``(2) Exhaustion of administrative remedies.--The court shall not
issue a declaratory judgment or decree under this section in any
proceeding unless it determines that the petitioner has exhausted all
available administrative remedies within the Internal Revenue Service. A
petitioner shall be deemed to have exhausted its administrative remedies
with respect to a failure of the Secretary to make a determination at
the expiration of 180 days after the date on which the request for such
determination was made if the petitioner has taken, in a timely manner,
all reasonable steps to secure such determination.
``(3) Time for bringing action.--If the Secretary sends by certified
or registered mail notice of his determination as described in
subsection (a) to the petitioner, no proceeding may be initiated under
this section unless the pleading is filed before the 91st day after the
date of such mailing.''
(b) Clerical Amendment.--The table of sections for part IV of
subchapter C of chapter 76 of such Code is amended by adding at the end
the following new item:
``Sec. 7479. Declaratory judgments relating to eligibility of
estate with respect to installment payments under section 6166.''
(c) Effective Date.--The amendments made by this section shall apply
to the estates of decedents dying after the date of the enactment of
this Act.
SEC. 506. GIFTS MAY NOT BE REVALUED FOR ESTATE TAX PURPOSES
AFTER EXPIRATION OF STATUTE OF LIMITATIONS.
(a) In General.--Section 2001 (relating to imposition and rate of
estate tax) is amended by adding at the end the following new
subsection:
``(f) Valuation of Gifts.--If--
``(1) the time has expired within which a tax may be assessed under
chapter 12 (or under corresponding provisions of prior laws) on the
transfer of property by gift made during a preceding calendar period (as
defined in section 2502(b)), and
``(2) the value of such gift is shown on the return for such
preceding calendar period or is disclosed in such return, or in a
statement attached to the return, in a manner adequate to apprise the
Secretary of the nature of such gift,
the value of such gift shall, for purposes of computing the tax under
this chapter, be the value of such gift as finally determined for
purposes of chapter 12.''
(b) Modification of Application of Statute of Limitations.--Paragraph
(9) of section 6501(c) is amended to read as follows:
``(9) Gift tax on certain gifts not shown on return.--If any gift of
property the value of which (or any increase in taxable gifts required
under section 2701(d) which) is required to be shown on a return of tax
imposed by chapter 12 (without regard to section 2503(b)), and is not
shown on such return, any tax imposed by chapter 12 on such gift may be
assessed, or a proceeding in court for the collection of such tax may be
begun without assessment, at any time. The preceding sentence shall not
apply to any item which is disclosed in such return, or in a statement
attached to the return, in a manner adequate to apprise the Secretary of
the nature of such item. The value of any item which is so disclosed may
not be redetermined by the Secretary after the expiration of the period
under subsection (a).''
(c) Declaratory Judgment Procedure for Determining Value of Gift.--
(1) In general.--Part IV of subchapter C of chapter 76 is amended by
inserting after section 7476 the following new section:
``SEC. 7477. DECLARATORY JUDGMENTS RELATING TO VALUE OF CERTAIN GIFTS.
``(a) Creation of Remedy.--In a case of an actual controversy
involving a determination by the Secretary of the value of any gift
shown on the return of tax imposed by chapter 12 or disclosed on such
return or in any statement attached to such return, upon the filing of
an appropriate pleading, the Tax Court may make a declaration of the
value of such gift. Any such declaration shall have the force and effect
of a decision of the Tax Court and shall be reviewable as such.
``(b) Limitations.--
``(1) Petitioner.--A pleading may be filed under this section only
by the donor.
``(2) Exhaustion of administrative remedies.--The court shall not
issue a declaratory judgment or decree under this section in any
proceeding unless it determines that the petitioner has exhausted all
available administrative remedies within the Internal Revenue Service.
``(3) Time for bringing action.--If the Secretary sends by certified
or registered mail notice of his determination as described in
subsection (a) to the petitioner, no proceeding may be initiated under
this section unless the pleading is filed before the 91st day after the
date of such mailing.''
(2) Clerical amendment.--The table of sections for such part IV is
amended by inserting after the item relating to section 7476 the
following new item:
``Sec. 7477. Declaratory judgments relating to value of certain gifts.''
(d) Conforming Amendment.--Subsection (c) of section 2504 is amended
by striking ``, and if a tax under this chapter or under corresponding
provisions of prior laws has been assessed or paid for such preceding
calendar period''.
(e) Effective Dates.--
(1) In general.--The amendments made by subsections (a) and (c)
shall apply to gifts made after the date of the enactment of this Act.
(2) Subsection (b)--The amendment made by subsection (b) shall apply
to gifts made in calendar years ending after the date of the enactment
of this Act.
SEC. 507. TERMINATION OF THROWBACK RULES FOR DOMESTIC TRUSTS.
(a) Accumulation Distributions.--
(1) In general.--Section 665 is amended by adding at the end the
following new subsection:
``(f) Special Rule for United States Trusts.--For purposes of this
subpart, in the case of a trust other than a foreign trust, any
distribution in any taxable year beginning after the date of the
enactment of this subsection shall be computed without regard to any
undistributed net income.''
(2) Conforming amendment.--Subsection (b) of section 665 is amended
by inserting ``except as provided in subsection (f),'' after
``subpart,''
(b) Property Transferred to Trusts.--Subsection (e) of section 644 is
amended by striking ``or'' at the end of paragraph (3), by striking the
period at the end of paragraph (4) and inserting ``, or '', and by
adding at the end the following new paragraph:
``(5) in the case of a trust other than a foreign trust, any sale or
exchange of property after the date of the enactment of this
paragraph.''
(c) Effective Dates.--
(1) In general.--Except as provided in paragraph (2), the amendments
made by this section shall apply to distributions in taxable years
beginning after the date of the enactment of this Act.
(2) Transferred property.--The amendments made by subsection (b)
shall apply to sales or exchanges after the date of the enactment of
this Act.
SEC. 508. UNIFIED CREDIT OF DECEDENT INCREASED BY UNIFIED
CREDIT OF SPOUSE USED ON SPLIT GIFT INCLUDED IN DECEDENT'S GROSS ESTATE.
(a) In General.--Section 2010 (relating to unified credit against
estate tax) is amended by adding at the end the following new
subsection:
``(d) Treatment of Unified Credit Used By Spouse on Split-Gift
Included in Decedent's Gross Estate.--If--
``(1) the decedent was the donor of any gift one-half of which was
considered under section 2513 as made by the decedent's spouse, and
``(2) the amount of such gift is includible in the gross estate of
the decedent by reason of section 2035, 2036, 2037, or 2038,
the amount of the credit allowable by subsection (a) to the estate of
the decedent shall be increased by the amount of the unified credit
allowed against the tax imposed by section 2501 on the amount of such
gift considered under section 2513 as made by such spouse.''
(b) Effective Date.--The amendment made by subsection (a) shall apply
to gifts made after the date of the enactment of this Act.
SEC. 509. REFORMATION OF DEFECTIVE BEQUESTS, ETC., TO SPOUSE
OF DECEDENT.
(a) In General.--Subsection (b) of section 2056 (relating to
bequests, etc., to surviving spouse) is amended by adding at the end the
following new paragraph:
``(11) Reformations permitted.--
``(A) In general.--In the case of any interest in property with
respect to which a deduction would be allowable under subsection (a) but
for a provision of this subsection, if--
``(i) the surviving spouse is entitled to all of the income from the
property for life,
``(ii) no person other than such spouse is entitled to any
distribution of such property during such spouse's life, and
``(iii) there is a change of a governing instrument (by reformation,
amendment, construction, or otherwise) as of the applicable date which
results in the satisfaction of the requirements of such provision as of
the date of the decedent's death,
the determination of whether such deduction is allowable shall be
made as of the applicable date.
``(B) Special rule where timely commencement of
reformation.--Clauses (i) and (ii) of subparagraph (A) shall not apply
to any interest if, not later than the date described in subparagraph
(C)(i), a judicial proceeding is commenced to change such interest into
an interest which satisfies the requirements of the provision by reason
of which (but for this paragraph) a deduction would not be allowable
under subsection (a) for such interest.
``(C) Applicable date.--For purposes of subparagraph (A), the term
`applicable date' means--
``(i) the last date (including extensions) for filing the return of
tax imposed by this chapter, or
``(ii) if a judicial proceeding is commenced to comply with such
provision, the time when the changes pursuant to such proceeding are
made.
``(D) Special rule.--If the change referred to in subparagraph
(A)(iii) is to qualify the passage of the interest under paragraph (7),
subparagraph (A) shall apply only if the election under paragraph (7)(B)
is made.
``(E) Statute of limitations.--If a judicial proceeding described in
subparagraph (C)(ii) is commenced with respect to any interest, the
period for assessing any deficiency of tax attributable to such interest
shall not expire before the date 1 year after the date on which the
Secretary is notified that such provision has been complied with or that
such proceeding has been terminated.''
(b) Comparable Rule for Gift Tax.--Section 2523 (relating to gift to
spouse) is amended by adding at the end the following new subsection:
``(j) Reformations permitted.--Rules similar to the rules of section
2056(b)(11) shall apply for purposes of this section.''
(c) Effective Date.--The amendments made by this section shall apply
to estates of decedents dying, and gifts made, after the date of the
enactment of this Act.
Subtitle B--Generation-Skipping Tax Provisions
SEC. 511. SEVERING OF TRUSTS HOLDING PROPERTY HAVING AN
INCLUSION RATIO OF GREATER THAN ZERO.
(a) In General.--Subsection (a) of section 2642 (relating to
inclusion ratio) is amended by adding at the end the following new
paragraph:
``(3) Severing of trusts holding property having an inclusion ratio
of greater than zero.--
``(A) In general.--If a trust holding property having an inclusion
ratio of greater than zero is severed in a qualified severance, at the
election of the trustee of such trust, the trusts resulting from such
severance shall be treated as separate trusts for purposes of this
chapter and 1 such trust shall have an inclusion ratio of 1 and the
other such trust shall have an inclusion ratio of zero.
``(B) Qualified severance.--For purposes of subparagraph (A), the
term `qualified severance' means the creation of 2 trusts from a single
trust if each property held by the single trust was divided between the
2 created trusts such that one trust received an interest in each such
property equal to the applicable fraction of the single trust. Such term
includes any other severance permitted under regulations prescribed by
the Secretary.
``(C) Election.--The election under this paragraph shall be made at
the time prescribed by the Secretary. Such an election, once made, shall
be irrevocable.''
(b) Effective Date.--The amendment made by subsection (a) shall apply
to severances after the date of the enactment of this Act.
SEC. 512. EXPANSION OF EXCEPTION FROM GENERATION-SKIPPING
TRANSFER TAX FOR TRANSFERS TO INDIVIDUALS WITH DECEASED PARENTS.
(a) In General.--Section 2651 (relating to generation assignment) is
amended by redesignating subsection (e) as subsection (f), and by
inserting after subsection (d) the following new subsection:
``(e) Special Rule for Persons With a Deceased Parent.--
``(1) In general.--For purposes of determining whether any transfer
is a generation-skipping transfer, if--
``(A) an individual is a descendant of a parent of the transferor
(or the transferor's spouse or former spouse), and
``(B) such individual's parent who is a lineal descendant of the
parent of the transferor (or the transferor's spouse or former spouse)
is dead at the time the transfer (from which an interest of such
individual is established or derived) is subject to a tax imposed by
chapter 11 or 12 upon the transferor (and if there shall be more than 1
such time, then at the earliest such time),
such individual shall be treated as if such individual were a member
of the generation which is 1 generation below the lower of the
transferor's generation or the generation assignment of the youngest
living ancestor of such individual who
is also a descendant of the parent of the transferor (or the
transferor's spouse or former spouse), and the generation assignment of
any descendant of such individual shall be adjusted accordingly.
``(2) Limited application of subsection to collateral heirs.--This
subsection shall not apply with respect to a transfer to any individual
who is not a lineal descendant of the transferor (or the transferor's
spouse or former spouse) if, at the time of the transfer, such
transferor has any living lineal descendant.''
(b) Conforming Amendments.--
(1) Section 2612(c) (defining direct skip) is amended by striking
paragraph (2) and by redesignating paragraph (3) as paragraph (2).
(2) Section 2612(c)(2) (as so redesignated) is amended by striking
``section 2651(e)(2)'' and inserting ``section 2651(f)(2)''.
(c) Effective Date.--The amendments made by this section shall apply
to terminations, distributions, and transfers occurring after December
31, 1997.
TITLE VI--EXTENSIONS
SEC. 601. RESEARCH TAX CREDIT.
(a) In General.--Paragraph (1) of section 41(h) (relating to
termination) is amended--
(1) by striking ``May 31, 1997'' and inserting ``December 31,
1998'', and
(2) by striking in the last sentence ``during the first 11 months of
such taxable year.'' and inserting ``during the 30-month period
beginning with the first month of such year. The 30 months referred to
in the preceding sentence shall be reduced by the number of full months
after June 1996 (and before the first month of such first taxable year)
during which the taxpayer paid or incurred any amount which is taken
into account in determining the credit under this section.''
(b) Technical Amendments.--
(1) Subparagraph (B) of section 41(c)(4) is amended to read as follows:
``(B) Election.--An election under this paragraph shall apply to the
taxable year for which made and all succeeding taxable years unless
revoked with the consent of the Secretary.''
(2) Paragraph (1) of section 45C(b) is amended by striking ``May 31,
1997'' and inserting ``December 31, 1998''.
(c) Effective Date.--The amendments made by this section shall apply
to amounts paid or incurred after May 31, 1997.
SEC. 602. CONTRIBUTIONS OF STOCK TO PRIVATE FOUNDATIONS.
(a) In General.--Clause (ii) of section 170(e)(5)(D) (relating to
termination) is amended by striking ``May 31, 1997'' and inserting
``December 31, 1998''.
(b) Effective Date.--The amendment made by subsection (a) shall apply
to contributions made after May 31, 1997.
SEC. 603. WORK OPPORTUNITY TAX CREDIT.
(a) Extension.--
(1) In general.--Subparagraph (B) of section 51(c)(4) (relating to
termination) is amended by striking ``September 30, 1997'' and inserting
``September 30, 1998''.
(2) Effective date.--The amendment made by paragraph (1) shall apply
to individuals who begin work for the employer after September 30, 1997.
(b) Work Opportunity Credit Allowed Against Minimum Tax.--
(1) In General.--Subsection (c) of section 38 (relating to
limitation based on amount of tax) is amended by redesignating paragraph
(3) as paragraph (4) and by inserting after paragraph (2) the following
new paragraph:
``(3) Special rules for work opportunity credit.--
``(A) In general.--In the case of the work opportunity credit--
``(i) this section and section 39 shall be applied separately with
respect to the credit, and
``(ii) in applying paragraph (1) to the credit--
``(I) subparagraph (A) shall not apply, and
``(II) the limitation under paragraph (1) (as modified by subclause
(I)) shall be reduced by the credit allowed under subsection (a) for the
taxable year (other than the work opportunity credit).
``(B) Work opportunity credit.--For purposes of this subsection, the
term `work opportunity credit' means the credit allowable under
subsection (a) by reason of section 51(a).''
(2) Conforming amendment.--Subclause (II) of section 38(c)(2)(A)(ii)
is amended by inserting ``or the work opportunity credit'' after
``employment credit''.
(3) Effective date.--The amendments made by this subsection shall
apply to taxable years beginning after December 31, 1997.
(c) Percentage of Wages Allowed as Credit.--
(1) In general.--Subsection (a) of section 51 (relating to
determination of amount) is amended by striking ``35 percent'' and
inserting ``40 percent''.
(2) Application of credit for individuals performing fewer than 400
hours of services.--Paragraph (3) of section 51(i) is amended to read as
follows:
``(3) Individuals not meeting minimum employment periods.--
``(A) Reduction of credit for individuals performing fewer than 400
hours of services.--In the case of an individual who has completed at
least 120 hours, but less than 400 hours, of services performed for the
employer, subsection (a) shall be applied by substituting `25 percent'
for `40 percent'.
``(B) Denial of credit for individuals performing fewer than 120
hours of services.--No wages shall be taken into account under
subsection (a) with respect to any individual unless such individual has
completed at least 120 hours of services performed for the employer.''
(3) Effective date.--The amendments made by this subsection shall
apply to individuals who begin work for the employer after September 30,
1997.
(d) Modification of Eligibility Requirement Based on Period on
Welfare.--
(1) In general.--Subparagraph (A) of section 51(d)(2) (defining
qualified IV A recipient) is amended by striking all that follows ``a IV
A program'' and inserting ``for any 9 months during the 18-month period
ending on the hiring date.''
(2) Conforming amendment.--Subparagraph (A) of section 51(d)(3) is
amended to read as follows:
``(A) In general.--The term `qualified veteran' means any veteran
who is certified by the designated local agency as being a member of a
family receiving assistance under a food stamp program under the Food
Stamp Act of 1977 for at least a 3-month period ending during the
12-month period ending on the hiring date.''
(3) Effective date.--The amendments made by this subsection shall
apply to individuals who begin work for the employer after September 30,
1997.
SEC. 604. ORPHAN DRUG TAX CREDIT.
(a) In General.--Section 45C (relating to clinical testing expenses
for certain drugs for rare diseases or conditions) is amended by
striking subsection (e).
(b) Effective Date.--The amendment made by subsection (a) shall apply
to amounts paid or incurred after May 31, 1997.
TITLE VII--INCENTIVES FOR REVITALIZATION OF THE DISTRICT OF COLUMBIA
SEC. 701. TAX INCENTIVES FOR REVITALIZATION OF THE DISTRICT OF COLUMBIA.
(a) In General.--Chapter 1 is amended by adding at the end the
following new subchapter:
``SUBCHAPTER W--DISTRICT OF COLUMBIA ENTERPRISE ZONE
``Sec. 1400. Establishment of DC Zone.
``Sec. 1400A. Tax-exempt economic development bonds.
``Sec. 1400B. Credit for equity investments in and loans to
District of Columbia businesses.
``Sec. 1400C. Zero percent capital gains rate.
``Sec. 1400D. Credit to provide equivalent of 10 percent rate
bracket in lieu of 15 percent bracket.
``SEC. 1400. ESTABLISHMENT OF DC ZONE.
``(a) In General.--The applicable DC area is hereby designated as the
District of Columbia Enterprise Zone. For purposes of this title (except
as otherwise provided in this subchapter), the District of Columbia
Enterprise Zone shall be treated as an empowerment zone designated under
subchapter U.
``(b) Applicable DC Area.--For purposes of subsection (a), the term
`applicable DC area' means the area consisting of--
``(1) the census tracts located in the District of Columbia which
are part of an enterprise community designated under subchapter U before
the date of the enactment of this subchapter, and
``(2) all other census tracts--
``(A) which are located in the District of Columbia, and
``(B) for which the poverty rate is not less than 35 percent.
``(c) District of Columbia Enterprise Zone.--For purposes of this
subchapter, the terms `District of Columbia Enterprise Zone' and `DC
Zone' mean the District of Columbia Enterprise Zone designated by
subsection (a).
(d) Special Rule for Application of Employment Credit.--In the case
of the DC Zone, section 1396 (relating to empowerment zone employment
credit) shall be applied by substituting ``20'' for ``15'' in the table
contained in section 1396(b). The preceding sentence shall apply only
with respect to qualified zone employees, as defined in section 1396(d),
determined by treating no area other than the DC Zone as an empowerment
zone or enterprise community.
``(e) Time For Which Designation Applicable.--
``(1) In general.--The designation made by subsection (a) shall
apply for the period beginning on January 1, 1998, and ending on
December 31, 2002.
``(2) Coordination with dc enterprise community designated under
subchapter u.--The designation as an enterprise community, under
subchapter U, of the census tracts referred to in subsection (b)(1)
shall terminate on December 31, 2002.
``SEC. 1400A. TAX-EXEMPT ECONOMIC DEVELOPMENT BONDS.
``(a) In General.--In the case of the District of Columbia Enterprise
Zone--
``(1) subsection (a) of section 1394 (relating to tax-exempt
facility bonds for empowerment zones and enterprise communities) applies
only with respect to bonds issued by the Economic Development
Corporation, and
``(2) subparagraph (A) of section 1394(c)(1) (relating to limitation
on amount of bonds) shall be applied by substituting `$15,000,000' for
`$3,000,000'.
``(b) Economic Development Corporation.--For purposes of this
section, the term `Economic Development Corporation' means an entity
which is created by Federal law in 1997 as part of the District of
Columbia government.
``(c) Period of Applicability.--This section shall apply to bonds
issued during the period beginning on January 1, 1998, and ending on
December 31, 2002.
``SEC. 1400B. CREDIT FOR EQUITY INVESTMENTS IN AND LOANS TO
DISTRICT OF COLUMBIA BUSINESSES.
``(a) General Rule.--For purposes of section 38, the DC Zone
investment credit determined under this section for any taxable year
is--
``(1) the qualified lender credit for such year, and
``(2) the qualified equity investment credit for such year.
``(b) Qualified Lender Credit.--For purposes of this section--
``(1) In general.--The qualified lender credit for any taxable year
is the amount of credit specified for such year by the Economic
Development Corporation with respect to qualified District loans made by
the taxpayer.
``(2) Limitation.--In no event may the qualified lender credit with
respect to any loan exceed 25 percent of the cost of the property
purchased with the proceeds of the loan.
``(3) Qualified district loan.--For purposes of paragraph (1), the
term `qualified district loan' means any loan for the purchase (as
defined in section 179(d)(2)) of property to which section 168 applies
(or would apply but for section 179) (or land which is functionally
related and subordinate to such property) and substantially all of the
use of which is in the District of Columbia and is in the active conduct
of a trade or business in the District of Columbia. A rule similar to
the rule of section 1397C(a)(2) shall apply for purposes of the
preceding sentence.
``(c) Qualified Equity Investment Credit.--
``(1) In general.--For purposes of this section, the qualified
equity investment credit determined under this section for any taxable
year is an amount equal to the percentage specified by the Economic
Development Corporation (but not greater than 25 percent) of the
aggregate amount paid in cash by the taxpayer during the taxable year
for the purchase of District business investments.
``(2) District business investment.--For purposes of this
subsection, the term `District business investment' means--
``(A) any District business stock, and
``(B) any District partnership interest.
``(3) District business stock.--For purposes of this subsection--
``(A) In general.--Except as provided in subparagraph (B), the term
`District business stock' means any stock in a domestic corporation if--
``(i) such stock is acquired by the taxpayer at its original issue
(directly or through an underwriter) solely in exchange for cash, and
``(ii) as of the time such stock was issued, such corporation was
engaged in a trade or business in the District of Columbia (or, in the
case of a new corporation, such corporation was being organized for
purposes of engaging in such a trade or business).
``(B) Redemptions.--A rule similar to the rule of section 1202(c)(3)
shall apply for purposes of this paragraph.
``(4) Qualified district partnership interest.--For purposes of this
subsection, the term `qualified District partnership interest' means any
interest in a partnership if--
``(A) such interest is acquired by the taxpayer from the partnership
solely in exchange for cash, and
``(B) as of the time such interest was acquired, such partnership
was engaging in a trade or business in the District of Columbia (or, in
the case of a new partnership, such partnership was being organized for
purposes of engaging in such a trade or business).
A rule similar to the rule of paragraph (3)(B) shall apply for
purposes of this paragraph.
``(5) Recapture of credit upon certain dispositions of district
business investments.--
``(A) In general.--If a taxpayer disposes of any District business
investment (or any other property the basis of which is determined in
whole or in part by reference to the adjusted basis of such investment)
before the end of the 5-year period beginning on the date such
investment was acquired by the taxpayer, the taxpayer's tax imposed by
this chapter for the taxable year in which such distribution occurs
shall be increased by the aggregate decrease in the credits allowed
under section 38 for all prior taxable years which would have resulted
solely from reducing to zero any credit determined under this section
with respect to such investment.
``(B) Exceptions.--Subparagraph (A) shall not apply to any gift,
transfer, or transaction described in paragraph (1), (2), or (3) of
section 1245(b).
``(C) Special rule.--Any increase in tax under subparagraph (A)
shall not be treated as a tax imposed by this chapter for purposes of--
``(i) determining the amount of any credit allowable under this
chapter, and
``(ii) determining the amount of the tax imposed by section 55.
``(6) Basis reduction.--For purposes of this title, the basis of any
District business investment shall be reduced by the amount of the
credit determined under this section with respect to such investment.
``(d) Limitation on Amount of Credit.--
``(1) In general.--The amount of the DC Zone investment credit
determined under this section with respect to any taxpayer for any
taxable year shall not exceed the credit amount allocated to such
taxpayer for such taxable year by the Economic Development Corporation.
``(2) Overall limitation.--The aggregate credit amount which may be
allocated by the Economic Development Corporation under this section
shall not exceed $75,000,000.
``(3) Criteria for allocating credit amounts.--The allocation of
credit amounts under this section shall be made in accordance with
criteria established by the Economic Development Corporation. In
establishing such criteria, such Corporation shall take into account--
``(A) the degree to which the business receiving the loan or
investment will provide job opportunities for low and moderate income
residents of the DC Zone, and
``(B) whether such business is within the DC Zone.
``(e) Economic Development Corporation.--For purposes of this
section, the term `Economic Development Corporation' has the meaning
given such term by section 1400A(b).
``(f) Regulations.--The Secretary shall prescribe such regulations as
may be appropriate to carry out this section.
``(g) Application of Section.--This section shall apply to any credit
amount allocated for taxable years beginning after December 31, 1997,
and before January 1, 2003.
``SEC. 1400C. ZERO PERCENT CAPITAL GAINS RATE.
``(a) Exclusion.--Gross income shall not include qualified capital
gain from the sale or exchange of any DC Zone asset held for more than 5
years.
``(b) DC Zone Asset.--For purposes of this section--
``(1) In general.--The term `DC Zone asset' means--
``(A) any DC Zone business stock,
``(B) any DC Zone partnership interest, and
``(C) any DC Zone business property.
``(2) DC zone business stock.--
``(A) In general.--The term `DC Zone business stock' means any stock
in a domestic corporation which is originally issued after December 31,
1997, if--
``(i) such stock is acquired by the taxpayer, before January 1,
2003, at its original issue (directly or through an underwriter) solely
in exchange for cash,
``(ii) as of the time such stock was issued, such corporation was a
DC Zone business (or, in the case of a new corporation, such corporation
was being organized for purposes of being a DC Zone business), and
``(iii) during substantially all of the taxpayer's holding period
for such stock, such corporation qualified as a DC Zone business.
``(B) Redemptions.--A rule similar to the rule of section 1202(c)(3)
shall apply for purposes of this paragraph.
``(3) DC zone partnership interest.--The term `DC Zone partnership
interest' means any capital or profits interest in a domestic
partnership which is originally issued after December 31, 1997, if--
``(A) such interest is acquired by the taxpayer, before January 1,
2003, from the partnership solely in exchange for cash,
``(B) as of the time such interest was acquired, such partnership
was a DC Zone business (or, in the case of a new partnership, such
partnership was being organized for purposes of being a DC Zone
business), and
``(C) during substantially all of the taxpayer's holding period for
such interest, such partnership qualified as a DC Zone business.
A rule similar to the rule of paragraph (2)(B) shall apply for
purposes of this paragraph.
``(4) DC zone business property.--
``(A) In general.--The term `DC Zone business property' means
tangible property if--
``(i) such property was acquired by the taxpayer by purchase (as
defined in section 179(d)(2)) after December 31, 1997, and before
January 1, 2003,
``(ii) the original use of such property in the DC Zone commences
with the taxpayer, and
``(iii) during substantially all of the taxpayer's holding period
for such property, substantially all of the use of such property was in
a DC Zone business of the taxpayer.
``(B) Special rule for buildings which are substantially improved.--
``(i) In general.--The requirements of clauses (i) and (ii) of
subparagraph (A) shall be treated as met with respect to--
``(I) property which is substantially improved by the taxpayer
before January 1, 2003, and
``(II) any land on which such property is located.
``(ii) Substantial improvement.--For purposes of clause (i),
property shall be treated as substantially improved by the taxpayer only
if, during any 24-month period beginning after December 31, 1997,
additions to basis with respect to such property in the hands of the
taxpayer exceed the greater of--
``(I) an amount equal to the adjusted basis of such property at the
beginning of such 24-month period in the hands of the taxpayer, or
``(II) $5,000.
``(6) Treatment of subsequent purchasers, etc.--The term `DC Zone
asset' includes any property which would be a DC Zone asset but for
paragraph (2)(A)(i), (3)(A), or (4)(A)(ii) in the hands of the taxpayer
if such property was a DC Zone asset in the hands of a prior holder.
``(7) 5- year safe harbor.--If any property ceases to be a DC Zone
asset by reason of paragraph (2)(A)(iii), (3)(C), or (4)(A)(iii) after
the 5-year period beginning on the date the taxpayer acquired such
property, such property shall continue to be treated as meeting the
requirements of such paragraph; except that the amount of gain to which
subsection (a) applies on any sale or exchange of such property shall
not exceed the amount which would be qualified capital gain had such
property been sold on the date of such cessation.
``(c) DC Zone Business.--For purposes of this section, the term `DC
Zone business' means any entity which is an enterprise zone business (as
defined in section 1397B), determined by treating no area other than the
DC Zone as an empowerment zone or enterprise community.
``(d) Other Definitions and Special Rules.--For purposes of this
section--
``(1) Qualified capital gain.--Except as otherwise provided in this
subsection, the term `qualified capital gain' means any gain recognized
on the sale or exchange of--
``(A) a capital asset, or
``(B) property used in the trade or business (as defined in section
1231(b)).
``(2) Gain before 1998 or after 2007 not qualified.--The term
`qualified capital gain' shall not include any gain attributable to
periods before January 1, 1998, or after December 31, 2007.
``(3) Certain gain on real property not qualified.--The term
`qualified capital gain' shall not include any gain which would be
treated as ordinary income under section 1250 if section 1250 applied to
all depreciation rather than the additional depreciation.
``(4) Intangibles and land not integral part of dc zone
business.--The term `qualified capital gain' shall not include any gain
which is attributable to real property, or an intangible asset, which is
not an integral part of a DC Zone business.
``(5) Related party transactions.--The term `qualified capital gain'
shall not include any gain attributable, directly or indirectly, in
whole or in part, to a transaction with a related person. For purposes
of this paragraph, persons are related to each other if such persons are
described in section 267(b) or 707(b)(1).
``(e) Certain Other Rules To Apply.--Rules similar to the rules of
subsections (g), (h), (i)(2), and (j) of section 1202 shall apply for
purposes of this section.
``(f) Sales and Exchanges of Interests in Partnerships and S
Corporations Which Are DC Zone Businesses.--In the case of the sale or
exchange of an interest in a partnership, or of stock in an S
corporation, which was a DC Zone business during substantially all of
the period the taxpayer held such interest or stock, the amount of
qualified capital gain shall be determined without regard to--
``(1) any gain which is attributable to real property, or an
intangible asset, which is not an integral part of a DC Zone business,
and
``(2) any gain attributable to periods before January 1, 1998, or
after December 31, 2007.
``SEC. 1400D. CREDIT TO PROVIDE EQUIVALENT OF 10 PERCENT RATE
BRACKET IN LIEU OF 15 PERCENT BRACKET.
``(a) In General.--In the case of a DC Zone individual, there shall
be allowed as a credit against the tax imposed by this chapter for the
taxable year an amount equal to 5 percent of so much of the taxpayer's
taxable income for the year as does not exceed the highest amount of
such income which is subject to the 15 percent rate under section 1.
``(b) DC Zone Individual.--For purposes of this section, the term `DC
Zone individual' means an individual who has a principal place of abode
in the District of Columbia Enterprise Zone for not less than 183 days
of the taxable year.
``(c) Credit Not To Apply to Estate or Trust.--This section shall not
apply to an estate or trust.
``(d) Coordination With Other Credits.--For purposes of this chapter,
the credit under this section shall be treated as a credit under subpart
A of part IV of subchapter A.
``(e) Termination.--This section shall not apply to any taxable year
beginning after December 31, 2007.''
(b) Credits Made Part of General Business Credit.--
(1) Subsection (b) of section 38 is amended by striking ``plus'' at
the end of paragraph (11), by striking the period at the end of
paragraph (12) and inserting ``, plus'', and by adding at the end the
following new paragraph:
``(13) the DC Zone investment credit determined under section
1400B(a).''
(2) Subsection (d) of section 39 is amended by adding at the end the
following new paragraph:
``(8) No carryback of dc zone credits before effective date.--No
portion of the unused business credit for any taxable year which is
attributable to the credit under section 1400B, or to the credits under
subchapter U by reason of section 1400, may be carried back to a taxable
year ending before the date of the enactment of sections 1400B and
1400.''
(3) Subsection (c) of section 196 is amended by striking ``and'' at
the end of paragraph (6), by striking the period at the end of paragraph
(7) and inserting ``, and'', and by adding at the end the following new
paragraph:
``(8) the DC Zone investment credit determined under section
1400B(a).''
(c) Clerical Amendment.--The table of subchapters for chapter 1 is
amended by adding at the end the following new item:
``Subchapter W. District of Columbia Enterprise Zone.''
(d) Effective Date.--This section shall take effect on the date of
the enactment of this Act.
SEC. 702. INCENTIVES CONDITIONED ON OTHER DC REFORM.
The amendments made by section 701 shall not take effect unless an
entity known as the Economic Development Corporation is created by
Federal law in 1997 as part of the District of Columbia government.
TITLE VIII--WELFARE-TO-WORK INCENTIVES
SEC. 801. INCENTIVES FOR EMPLOYING LONG-TERM FAMILY ASSISTANCE
RECIPIENTS.
(a) In General.--Subpart F of part IV of subchapter A of chapter 1 is
amended by inserting after section 51 the following new section:
``SEC. 51A. TEMPORARY INCENTIVES FOR EMPLOYING LONG-TERM
FAMILY ASSISTANCE RECIPIENTS.
``(a) Determination of Amount.--For purposes of section 38, the
amount of the welfare-to-work credit determined under this section for
the taxable year shall be equal to--
``(1) 35 percent of the qualified first-year wages for such year, and
``(2) 50 percent of the qualified second-year wages for such year.
``(b) Qualified Wages Defined.--For purposes of this section--
``(1) In general.--The term `qualified wages' means the wages paid
or incurred by the employer during the taxable year to individuals who
are long-term family assistance recipients.
``(2) Qualified first-year wages.--The term `qualified first-year
wages' means, with respect to any individual, qualified wages
attributable to service rendered during the 1-year period beginning with
the day the individual begins work for the employer.
``(3) Qualified second-year wages.--The term `qualified second-year
wages' means, with respect to any individual, qualified wages
attributable to service rendered during the 1-year period beginning on
the day after the last day of the 1-year period with respect to such
individual determined under paragraph (2).
``(4) Only first $10,000 of wages per year taken into account.--The
amount of the qualified first-year wages, and the amount of qualified
second-year wages, which may be taken into account with respect to any
individual shall not exceed $10,000 per year.
``(5) Wages.--
``(A) In general.--The term `wages' has the meaning given such term
by section 51(c), without regard to paragraph (4) thereof.
``(B) Certain amounts treated as wages.--The term `wages' includes
amounts paid or incurred by the employer which are excludable from such
recipient's gross income under--
``(i) section 105 (relating to amounts received under accident and
health plans),
``(ii) section 106 (relating to contributions by employer to
accident and health plans),
``(iii) section 127 (relating to educational assistance programs) or
would be so excludable but for section 127(d), but only to the extent
paid or incurred to a person not related to the employer, or
``(iv) section 129 (relating to dependent care assistance programs).
The amount treated as wages by clause (i) or (ii) for any period
shall be based on the reasonable cost of coverage for the period, but
shall not exceed the applicable premium for the period under section
4980B(f)(4).
``(C) Special rules for agricultural and railway labor.--If such
recipient is an employee to whom subparagraph (A) or (B) of section
51(h)(1) applies, rules similar to the rules of such subparagraphs shall
apply except that--
``(i) such subparagraph (A) shall be applied by substituting
`$10,000' for `$6,000', and
``(ii) such subparagraph (B) shall be applied by substituting
`$833.33' for `$500'.
``(c) Long-Term Family Assistance Recipients.--For purposes of this
section--
``(1) In general.--The term `long-term family assistance recipient'
means any individual who is certified by the designated local agency (as
defined in section 51(d)(10))--
``(A) as being a member of a family receiving assistance under a
IV-A program (as defined in section 51(d)(2)(B)) for at least the
18-month period ending on the hiring date.
``(B)(i) as being a member of a family receiving such assistance for
18 months beginning after the date of the enactment of this section, and
``(ii) as having a hiring date which is not more than 2 years after
the end of the earliest such 18-month period, or
``(C)(i) as being a member of a family which ceased to be eligible
after the date of the enactment of this section for such assistance by
reason of any limitation imposed by Federal or State law on the maximum
period such assistance is payable to a family, and
``(ii) as having a hiring date which is not more than 2 years after
the date of such cessation.
``(2) Hiring date.--The term `hiring date' has the meaning given
such term by section 51(d).
``(d) Certain Rules To Apply.--
``(1) In general.--Rules similar to the rules of section 52, and
subsections (d)(11), (f), (g), (i) (as in effect on the day before the
date of the enactment of the Revenue Reconciliation Act of 1997), (j),
and (k) of section 51, shall apply for purposes of this section.
``(2) Credit to be part of general business credit, etc.--References
to section 51 in section 38(b), 280C(a), and 1396(c)(3) shall be treated
as including references to this section.
``(e) Coordination With Work Opportunity Credit.--If a credit is
allowed under this section to an employer with respect to an individual
for any taxable year, then for purposes of applying section 51 to such
employer, such individual shall not be treated as a member of a targeted
group for such taxable year.
``(f) Termination.--This section shall not apply to individuals who
begin work for the employer after April 30, 1999.''
(b) Clerical Amendment.--The table of sections for subpart F of part
IV of subchapter A of chapter 1 is amended by inserting after the item
relating to section 51 the following new item:
``Sec. 51A. Temporary incentives for employing long-term family
assistance recipients.''
(c) Effective Date.--The amendments made by this section shall apply
to individuals who begin work for the employer after December 31, 1997.
TITLE IX--MISCELLANEOUS PROVISIONS
Subtitle A--Provisions Relating to Excise Taxes
SEC. 901. REPEAL OF TAX ON DIESEL FUEL USED IN RECREATIONAL BOATS.
(a) In General.--Subparagraph (B) of section 6421(e)(2) (defining
off-highway business use) is amended by striking clauses (iii) and (iv).
(b) Conforming Amendments.--
(1) Subparagraph (A) of section 4041(a)(1) is amended--
(A) by striking ``, a diesel-powered train, or a diesel-powered
boat'' each place it appears and inserting ``or a diesel-powered
train'', and
(B) by striking ``vehicle, train, or boat'' and inserting ``vehicle
or train''.
(2) Paragraph (1) of section 4041(a) is amended by striking
subparagraph (D).
(3) Paragraph (2) of section 9503(f) is amended by striking
subparagraph (C) and by redesignating subparagraphs (D) and (E) as
subparagraphs (C) and (D), respectively.
(c) Effective Date.--The amendments made by this section shall take
effect on January 1, 1998.
SEC. 902. CONTINUED APPLICATION OF TAX ON IMPORTED RECYCLED HALON 1211.
(a) In General.--Paragraph (1) of section 4682(d) is amended by
striking ``recycled halon'' and inserting ``recycled Halon 1301 or
recycled Halon 2402''.
(b) Effective Date.--The amendment made by subsection (a) shall take
effect on the date of the enactment of this Act.
SEC. 903. UNIFORM RATE OF TAX ON VACCINES.
(a) In General.--Subsection (b) of section 4131 is amended to read as
follows:
``(b) Amount of Tax.--
``(1) In general.--The amount of the tax imposed by subsection (a)
shall be 84 cents per dose of any taxable vaccine.
``(2) Combinations of vaccines.--If any taxable vaccine is described
in more than 1 subparagraph of section 4132(a)(1), the amount of the tax
imposed by subsection (a) on such vaccine shall be the sum of the
amounts for the vaccines which are so included.''
(b) Taxable Vaccines.--Paragraph (1) of section 4132(a) is amended to
read as follows:
``(1) Taxable vaccine.--The term `taxable vaccine' means any of the
following vaccines which are manufactured or produced in the United
States or entered into the United States for consumption, use, or
warehousing:
``(A) Any vaccine containing diphtheria toxoid.
``(B) Any vaccine containing tetanus toxoid.
``(C) Any vaccine containing pertussis bacteria, extracted or
partial cell bacteria, or specific pertussis antigens.
``(D) Any vaccine against measles.
``(E) Any vaccine against mumps.
``(F) Any vaccine against rubella.
``(G) Any vaccine containing polio virus.
``(H) Any HIB vaccine.
``(I) Any vaccine against hepatitis B.
``(J) Any vaccine against chicken pox.''
(c) Conforming Amendment.--Subsection (a) of section 4132 is amended
by striking paragraphs (2), (3), and (4) and by redesignating paragraphs
(5) through (8) as paragraphs (2) through (5), respectively.
(d) Effective Date.--The amendments made by this section shall take
effect on October 1, 1997.
SEC. 904. OPERATORS OF MULTIPLE GASOLINE RETAIL OUTLETS
TREATED AS WHOLESALE DISTRIBUTOR FOR REFUND PURPOSES.
(a) In General.--Subparagraph (B) of section 6416(a)(4) (defining
whole distributor) is amended by adding at the end the following new
sentence: ``Such term includes any person who makes retail sales of
gasoline at 10 or more retail motor fuel outlets.''
(b) Effective Date.--The amendment made by subsection (a) shall take
effect on the date of the enactment of this Act.
SEC. 905. EXEMPTION OF ELECTRIC AND OTHER CLEAN-FUEL MOTOR
VEHICLES FROM LUXURY AUTOMOBILE CLASSIFICATION.
(a) In General.--Subsection (a) of section 4001 (relating to
imposition of tax) is amended to read as follows:
``(a) Imposition of Tax.--
``(1) In general.--There is hereby imposed on the 1st retail sale of
any passenger vehicle a tax equal to 10 percent of the price for which
so sold to the extent such price exceeds the applicable amount.
``(2) Applicable amount.--
``(A) In general.--Except as provided in subparagraphs (B) and (C),
the applicable amount is $30,000.
``(B) Qualified clean-fuel vehicle property.--In the case of a
passenger vehicle which is propelled by a fuel which is not a
clean-burning fuel to which is installed qualified clean-fuel vehicle
property (as defined in section 179A(c)(1)(A)) for purposes of
permitting such vehicle to be propelled by a clean-burning fuel, the
applicable amount is equal to the sum of--
``(i) $30,000, plus
``(ii) the increase in the price for which the passenger vehicle was
sold (within the meaning of section 4002) due to the installation of
such property.
``(C) Purpose built passenger vehicle.--
``(i) In general.--In the case of a purpose built passenger vehicle,
the applicable amount is equal to 150 percent of $30,000.
``(ii) Purpose built passenger vehicle.--For purposes of clause (i),
the term `purpose built passenger vehicle' means a passenger vehicle
produced by an original equipment manufacturer and designed so that the
vehicle may be propelled primarily by electricity.''
(b) Conforming Amendments.--
(1) Subsection (e) of section 4001 (relating to inflation
adjustment) is amended to read as follows:
``(e) Inflation Adjustment.--
``(1) In general.--The $30,000 amount in subparagraphs (A), (B)(i),
and (C)(i) of subsection (a)(2) shall be increased by an amount equal
to--
``(A) $30,000, multiplied by
``(B) the cost-of-living adjustment under section 1(f)(3) for the
calendar year in which the vehicle is sold, determined by substituting
`calendar year 1990' for `calendar year 1992' in subparagraph (B)
thereof.
``(2) Rounding.--If any amount as adjusted under paragraph (1) is
not a multiple of $2,000, such amount shall be rounded to the next
lowest multiple of $2,000.''
(2) Subsection (f) of section 4001 (relating to phasedown) is
amended by striking ``subsection (a)'' and inserting ``subsection
(a)(1)''.
(3) Subparagraph (B) of section 4003(a)(2) is amended to read as
follows:
``(B) the appropriate applicable amount as determined under section
4001(a)(2).''
(c) Effective Date.--The amendments made by this section shall apply
to sales and installations occurring on or after the date of the
enactment of this Act.
Subtitle B--Provisions Relating to Pensions and Fringe Benefits
SEC. 911. SECTION 401(K) PLANS FOR CERTAIN IRRIGATION AND
DRAINAGE ENTITIES.
(a) In General.--Subparagraph (B) of section 401(k)(7) (relating to
rural cooperative plan) is amended--
(1) by striking ``and'' at the end of clause (iii), by redesignating
clause (iv) as clause (v), and by inserting after clause (iii) the
following new clause:
``(iv) any organization which--
``(I) is a mutual irrigation or ditch company described in section
501(c)(12) (without regard to the 85 percent requirement thereof), or
``(II) is a district organized under the laws of a State as a
municipal corporation for the purpose of irrigation, water conservation,
or drainage, and'', and
(2) in clause (v), as so redesignated, by striking ``or (iii)'' and
inserting ``, (iii), or (iv)''.
(b) Effective Date.--The amendments made by subsection (a) shall
apply to years beginning after December 31, 1997.
SEC. 912. EXTENSION OF MORATORIUM ON APPLICATION OF CERTAIN
NONDISCRIMINATION RULES TO STATE AND LOCAL GOVERNMENTS.
(a) General Nondiscrimination and Participation Rules.--
(1) Nondiscrimination requirements.--Section 401(a)(5) (relating to
qualified pension, profit-sharing, and stock bonus plans) is amended by
adding at the end the following:
``(G) Governmental plans.--Paragraphs (3) and (4) shall not apply to
a governmental plan (within the meaning of section 414(d)).''.
(2) Additional participation requirements.--Section 401(a)(26)(H)
(relating to additional participation requirements) is amended to read
as follows:
``(H) Exception for governmental plans.--This paragraph shall not
apply to a governmental plan (within the meaning of section 414(d)).''.
(3) Minimum participation standards.--Section 410(c)(2) (relating to
application of participation standards to certain plans) is amended to
read as follows:
``(2) A plan described in paragraph (1) shall be treated as meeting
the requirements of this section for purposes of section 401(a), except
that in the case of a plan described in subparagraph (B), (C), or (D) of
paragraph (1), this paragraph shall only apply if such plan meets the
requirements of section 401(a)(3) (as in effect on September 1,
1974).''.
(b) Participation Standards for Qualified Cash or Deferred
Arrangements.--Section 401(k)(3) (relating to application of
participation and discrimination standards) is amended by adding at the
end the following:
``(G)(i) The requirements of subparagraph (A)(i) and (C) shall not
apply to a governmental plan (within the meaning of section 414(d)).
``(ii) The requirements of subsection (m)(2) (without regard to
subsection (a)(4)) shall apply to any matching contribution of a
governmental plan (as so defined).''.
(c) Nondiscrimination Rules for Section 403(b) Plans.--Section
403(b)(12) (relating to nondiscrimination requirements) is amended by
adding at the end the following:
``(C) Governmental plans.--For purposes of paragraph (1)(D), the
requirements of subparagraph (A)(i) shall not apply to a governmental
plan (within the meaning of section 414(d)).''.
(d) Effective Date.--
(1) In general.--The amendments made by this section apply to
taxable years beginning on or after the date of enactment of this Act.
(2) Treatment for years beginning before date of enactment.--A
governmental plan (within the meaning of section 414(d) of the Internal
Revenue Code of 1986) shall be treated as satisfying the requirements of
sections 401(a)(3), 401(a)(4), 401(a)(26), 401(k), 401(m), 403 (b)(1)(D)
and (b)(12), and 410 of such Code for all taxable years beginning before
the date of enactment of this Act.
SEC. 913. TREATMENT OF CERTAIN DISABILITY BENEFITS RECEIVED BY
FORMER POLICE OFFICERS OR FIREFIGHTERS.
(a) General Rule.--For purposes of determining whether any amount to
which this section applies is excludable from gross income under section
104(a)(1) of the Internal Revenue Code of 1986, the following conditions
shall be treated as personal injuries or sickness in the course of
employment:
(1) Heart disease.
(2) Hypertension.
(b) Amounts To Which Section Applies.--This section shall apply to
any amount--
(1) which is payable--
(A) to an individual (or to the survivors of an individual) who was
a full-time employee of any police department or fire department which
is organized and operated by a State, by any political subdivision
thereof, or by any agency or instrumentality of a State or political
subdivision thereof, and
(B) under a State law (as amended on May 19, 1992) which
irrebuttably presumed that heart disease and hypertension are
work-related illnesses but only for employees separating from service
before July 1, 1992; and
(2) which was received in calendar year 1989, 1990, or 1991.
(c) Waiver of Statute of Limitations.--If, on the date of the
enactment of this Act (or at any time within the 1-year period beginning
on such date of enactment) credit or refund of any overpayment of tax
resulting from the provisions of this section is barred by any law or
rule of law, credit or refund of such overpayment shall, nevertheless,
be allowed or made if claim therefore is filed before the date 1 year
after such date of enactment.
SEC. 914. PORTABILITY OF PERMISSIVE SERVICE CREDIT UNDER
GOVERNMENTAL PENSION PLANS.
(a) In General.--Section 415(b)(2) (relating to the limitation for
defined benefit plans) is amended by adding at the end the following new
subparagraph:
``(J) Purchase of permissive service credit.--
``(i) Benefits treated as derived from employer contributions.--For
purposes of this section, the term `annual benefit' shall include the
accrued benefit derived from contributions to a governmental plan
(within the meaning of section 414(d)) to purchase permissive service
credit.
``(ii) Definition of permissive service credit.--For purposes of
this subparagraph, the term `permissive service credit' means credit--
``(I) for a period of service recognized by a governmental plan for
purposes of calculating an employee's accrued benefit under such plan,
``(II) which such employee has not received (or has forfeited), and
``(III) which such employee may receive only by making a
contribution, as determined under the governmental plan, which does not
exceed the amount (actuarially determined under the terms of such
governmental plan) necessary to fund the accrued benefit attributable to
such period of service.
``(iii) No effect on employer `pick-up' contributions.--Nothing in
this subparagraph shall be construed as preventing the application of
section 414(h) to contributions to purchase permissive service credit.''
(b) Conforming Amendment.--Section 415(c)(2) is amended by adding at
the end the following new sentence: ``The term `annual addition' shall
not include contributions to purchase permissive service credit (within
the meaning of subsection (b)(2)(J)).''
(c) Effective Date.--The amendments made by this section shall apply
to years beginning after December 31, 1997.
SEC. 915. GRATUITOUS TRANSFERS FOR THE BENEFIT OF EMPLOYEES.
(a) In General.--Subparagraph (C) of section 664(d)(1) and
subparagraph (C) of section 664(d)(2) are each amended by striking the
period at the end thereof and inserting ``or, to the extent the
remainder interest is in qualified employer securities (as defined in
paragraph (3)(C)), is to be transferred to an employee stock ownership
plan (as defined in section 4975(e)(7)) in a qualified gratuitous
transfer (as defined by subsection (g)).''
(b) Qualified Gratuitous Transfer Defined.--Section 664 is amended by
adding at the end the following new subsection:
``(g) Qualified Gratuitous Transfer of Qualified Employer Securities.--
``(1) In general.--For purposes of this section, the term `qualified
gratuitous transfer' means a transfer of qualified employer securities
to an employee stock ownership plan (as defined in section 4975(e)(7))
but only to the extent that--
``(A) the securities transferred previously passed from a decedent
dying before January 1, 1999, to a trust described in paragraph (1) or
(2) of subsection (d),
``(B) no deduction under section 404 is allowable with respect to
such transfer,
``(C) such plan contains the provisions required by paragraph (3),
``(D) such plan treats such securities as being attributable to
employer contributions but without regard to the limitations otherwise
applicable to such contributions under section 404, and
``(E) the employer whose employees are covered by the plan described
in this paragraph files with the Secretary a verified written statement
consenting to the application of sections 4978 and 4979A with respect to
such employer.
``(2) Exception.--The term `qualified gratuitous transfer' shall not
include a transfer of qualified employer securities to an employee stock
ownership plan unless--
``(A) such plan was in existence on August 1, 1996,
``(B) at the time of the transfer, the decedent and members of the
decedent's family (within the meaning of section 267(c)(4)) own
(directly or through the application of section 318(a)) no more than 10
percent of the value of the stock of the corporation referred to in
paragraph (4), and
``(C) immediately after the transfer, such plan owns (after the
application of section 318(a)(4)) at least 60 percent of the value of
the outstanding stock of the corporation.
``(3) Plan requirements.--A plan contains the provisions required by
this paragraph if such plan provides that--
``(A) the qualified employer securities so transferred are allocated
to plan participants in a manner consistent with section 401(a)(4),
``(B) plan participants are entitled to direct the plan as to the
manner in which such securities which are entitled to vote and are
allocated to the account of such participant are to be voted,
``(C) an independent trustee votes the securities so transferred
which are not allocated to plan participants,
``(D) each participant who is entitled to a distribution from the
plan has the rights described in subparagraphs (A) and (B) of section
409(h)(1),
``(E) such securities are held in a suspense account under the plan
to be allocated each year, up to the limitations under section 415(c),
after first allocating all other annual additions for the limitation
year, up to the limitations under sections 415 (c) and (e), and
``(F) on termination of the plan, all securities so transferred
which are not allocated to plan participants as of such termination are
to be transferred to, or for the use of, an organization described in
section 170(c).
For purposes of the preceding sentence, the term `independent
trustee' means any trustee who is not a member of the family (within the
meaning of section 267(c)(4)) of the decedent or a 5-percent
shareholder. A plan shall not fail to be treated as meeting the
requirements of section 401(a) by reason of meeting the requirements of
this subsection.
``(4) Qualified employer securities.--For purposes of this section,
the term `qualified employer securities' means employer securities (as
defined in section 409(l)) which are issued by a domestic corporation--
``(A) which has no outstanding stock which is readily tradable on an
established securities market, and
``(B) which has only 1 class of stock.
``(5) Treatment of securities allocated by employee stock ownership
plan to persons related to decedent or 5-percent shareholders.--
``(A) In general.--If any portion of the assets of the plan
attributable to securities acquired by the plan in a qualified
gratuitous transfer are allocated to the account of--
``(i) any person who is related to the decedent (within the meaning
of section 267(b)), or
``(ii) any person who, at the time of such allocation or at any time
during the 1-year period ending on the date of the acquisition of
qualified employer securities by the plan, is a 5-percent shareholder of
the employer maintaining the plan,
the plan shall be treated as having distributed (at the time of such
allocation) to such person or shareholder the amount so allocated.
``(B) 5- percent shareholder.--For purposes of subparagraph (A), the
term `5-percent shareholder' means any person who owns (directly or
through the application of section 318(a)) more than 5 percent of the
outstanding stock of the corporation which issued such qualified
employer securities or of any corporation which is a member of the same
controlled group of corporations (within the meaning of section
409(l)(4)) as such corporation. For purposes of the preceding sentence,
section 318(a) shall be applied without regard to the exception in
paragraph (2)(B)(i) thereof.
``(C) Cross reference.--
``For excise tax on allocations described in subparagraph (A), see
section 4979A.
``(6) Tax on failure to transfer unallocated securities to charity
on termination of plan.--If the requirements of paragraph (3)(F) are not
met with respect to any securities, there is hereby imposed a tax on the
employer maintaining the plan in an amount equal to the sum of--
``(A) the amount of the increase in the tax which would be imposed
by chapter 11 if such securities were not transferred as described in
paragraph (1), and
``(B) interest on such amount at the underpayment rate under section
6621 (and compounded daily) from the due date for filing the return of
the tax imposed by chapter 11.''
(c) Conforming Amendments.--
(1) Section 401(a)(1) is amended by inserting ``or by a charitable
remainder trust pursuant to a qualified gratuitous transfer (as defined
in section 664(g)(1)),'' after ``stock bonus plans),''.
(2) Section 404(a)(9) is amended by inserting after subparagraph (B)
the following new subparagraph:
``(C) A qualified gratuitous transfer (as defined in section
664(g)(1)) shall have no effect on the amount or amounts otherwise
deductible under paragraph (3) or (7) or under this paragraph.''
(3) Section 415(c)(6) is amended by adding at the end thereof the
following new sentence:
``The amount of any qualified gratuitous transfer (as defined in
section 664(g)(1)) allocated to a participant for any limitation year
shall not exceed the limitations imposed by this section, but such
amount shall not be taken into account in determining whether any other
amount exceeds the limitations imposed by this section.''
(4) Section 415(e) is amended--
(A) by redesignating paragraph (6) as paragraph (7), and
(B) by inserting after paragraph (5) the following new paragraph:
``(6) Special rule for qualified gratuitous transfers.--Any
qualified gratuitous transfer of qualified employer securities (as
defined by section 664(g)) shall not be taken into account in
calculating, and shall not be subject to, the limitations provided in
this subsection.''
(5) Subparagraph (B) of section 664(d)(1) and subparagraph (B) of
section 664(d)(2) are each amended by inserting ``and other than
qualified gratuitous transfers described in subparagraph (C)'' after
``subparagraph (A)''.
(6) Paragraph (4) of section 674(b) is amended by inserting before
the period ``or to an employee stock ownership plan (as defined in
section 4975(e)(7)) in a qualified gratuitous transfer (as defined in
section 664(g)(1))''.
(7) Section 2055(a) is amended--
(i) by striking ``or'' at the end of paragraph (3),
(ii) by striking the period at the end of paragraph (4) and
inserting ``; or'', and
(iii) by inserting after paragraph (4) the following new paragraph:
``(5) to an employee stock ownership plan if such transfer qualifies
as a qualified gratuitous transfer of qualified employer securities
within the meaning of section 664(g).''
(8) Paragraph (8) of section 2056(b) is amended to read as follows:
``(8) Special rule for charitable remainder trusts.--
``(A) In general.--If the surviving spouse of the decedent is the
only beneficiary of a qualified charitable remainder trust who is not a
charitable beneficiary nor an ESOP beneficiary, paragraph (1) shall not
apply to any interest in such trust which passes or has passed from the
decedent to such surviving spouse.
``(B) Definitions.--For purposes of subparagraph (A)--
``(i) Charitable beneficiary.--The term `charitable beneficiary'
means any beneficiary which is an organization described in section
170(c).
``(ii) ESOP beneficiary.--The term `ESOP beneficiary' means any
beneficiary which is an employee stock ownership plan (as defined in
section 4975(e)(7)) that holds a remainder interest in qualified
employer securities (as defined in section 664(g)(4)) to be transferred
to such plan in a qualified gratuitous transfer (as defined in section
664(g)(1)).
``(iii) Qualified charitable remainder trust.--The term `qualified
charitable remainder trust' means a charitable remainder annuity trust
or a charitable remainder unitrust (described in section 664).''
(9) Section 4947(b) is amended by inserting after paragraph (3) the
following new paragraph:
``(4) Section 507.--The provisions of section 507(a) shall not apply
to a trust which is described in subsection (a)(2) by reason of a
distribution of qualified employer securities (as defined in section
664(g)(4)) to an employee stock ownership plan (as defined in section
4975(e)(7)) in a qualified gratuitous transfer (as defined by section
664(g)).''
(10) The last sentence of section 4975(e)(7) is amended by inserting
``and section 664(g)'' after ``section 409(n)''
(11) Subsection (a) of section 4978 is amended--
(A) by inserting ``or acquired any qualified employer securities in
a qualified gratuitous transfer to which section 664(g) applied'' after
``section 1042 applied'', and
(B) by inserting before the period at the end of subparagraph (B)
``60 percent of the total value of all employer securities as of such
disposition in the case of any qualified employer securities in a
qualified gratuitous transfer to which section 664(g) applied)''.
(12) Paragraph (2) of section 4978(b) is amended--
(A) by inserting ``or acquired in the qualified gratuitous transfer
to which section 664(g) applied'' after ``section 1042 applied'', and
(B) by inserting ``or to which section 664(g) applied'' after
``section 1042 applied'' in subparagraph (C) thereof.
(13) Subsection (c) of section 4978 is amended by striking ``written
statement'' and all that follows and inserting ``written statement
described in section 664(g)(1)(E) or in section 1042(b)(3) (as the case
may be).''
(14) Paragraph (2) of section 4978(e) is amended by striking the
period and inserting ``; except that such section shall be applied
without regard to subparagraph (B) thereof for purposes of applying this
section and section 4979A with respect to securities acquired in a
qualified gratuitous transfer (as defined in section 664(g)(1)).''
(15) Subsection (a) of section 4979A is amended to read as follows:
``(a) Imposition of Tax.--If--
``(1) there is a prohibited allocation of qualified securities by
any employee stock ownership plan or eligible worker-owned cooperative,
or
``(2) there is an allocation described in section 664(g)(5)(A),
there is hereby imposed a tax on such allocation equal to 50 percent
of the amount involved.''
(16) Subsection (c) of section 4979A is amended to read as follows:
``(c) Liability for Tax.--The tax imposed by this section shall be
paid by--
``(1) the employer sponsoring such plan, or
``(2) the eligible worker-owned cooperative,
which made the written statement described in section 664(g)(1)(E) or
in section 1042(b)(3)(B) (as the case may be).''
(17) Section 4979A is amended by redesignating subsection (d) as
subsection (e) and by inserting after subsection (c) the following new
subsection:
``(d) Special Statute of Limitations for Tax Attributable to Certain
Allocations.--The statutory period for the assessment of any tax imposed
by this section on an allocation described in subsection (a)(2) of
qualified employer securities shall not expire before the date which is
3 years from the later of--
``(1) the 1st allocation of such securities in connection with a
qualified gratuitous transfer (as defined in section 664(g)(1)), or
``(2) the date on which the Secretary is notified of the allocation
described in subsection (a)(2).''
(d) Effective Date.--The amendments made by this section shall apply
to transfers made by trusts to, or for the use of, an employee stock
ownership plan after the date of the enactment of this Act.
SEC. 916. TREATMENT OF CERTAIN TRANSPORTATION ON
NON-COMMERCIALLY OPERATED AIRCRAFT AS A FRINGE BENEFIT EXCLUDABLE FROM
GROSS INCOME.
(a) In General.--Subsection (b) of section 132 (relating to
no-additional-cost service defined) is amended to read as follows:
``(b) No-Additional-Cost Service Defined.--For purposes of this
section, the term `no-additional-cost service'
means any service provided by an employer to an employee for
use by such employee if--
``(1) such service--
``(A) is offered for sale to customers in the ordinary course of the
line of business of the employer in which the employee is performing
services, or
``(B) consists of transportation on an aircraft, if--
``(i) transportation on such aircraft is not offered for sale to
customers,
``(ii) such transportation for use by such employee is provided on a
flight made in the ordinary course of the trade or business of an
employer which owns or leases such aircraft for use in such trade or
business, and
``(iii) the flight on which the transportation is provided would
have been made whether or not such employee was transported on the
flight, and
``(2) the employer incurs no substantial additional cost (including
forgone revenue) in providing such service to the employee (determined
without regard to any amount paid by the employee for such service).''
(b) Effective Date.--The amendment made by subsection (a) shall apply
to services provided after December 31, 1997.
SEC. 917. MINIMUM PENSION ACCRUED BENEFIT DISTRIBUTABLE
WITHOUT CONSENT INCREASED TO $5,000.
(a) In General.--Subparagraph (A) of section 411(a)(11) (relating to
restrictions on certain mandatory distributions) is amended by striking
``$3,500'' and inserting ``the applicable limit''.
(b) Applicable Limit.--Paragraph (11) of section 411(a) is amended by
adding at the end the following new subparagraph:
``(D) Applicable limit.--
``(i) In general.--For purposes of subparagraph (A), the applicable
limit is $5,000.
``(ii) Inflation adjustment.--In the case of plan years beginning in
a calendar year after 1998, the dollar amount contained in clause (i)
shall be increased by an amount equal to--
``(I) such dollar amount, multiplied by
``(II) the cost-of-living adjustment determined under section
1(f)(3) for such calendar year by substituting `calendar year 1997' for
`calendar year 1992' in subparagraph (B) thereof.
If any amount as adjusted under the preceding sentence is not a
multiple of $50, such amount shall be rounded to the next lowest
multiple of $50.''
(c) Conforming Amendments.--
(1) Section 411(a)(7)(B), paragraphs (1) and (2) of section 417(e),
and section 457(e)(9) are each amended by striking ``$3,500'' each place
in appears (other than the headings) and inserting ``the applicable
limit under section 411(a)(11)(D)''.
(2) The headings for paragraphs (1) and (2) of section 417(e) and
subparagraph (A) of section 457(e)(9) are each amended by striking
``$3,500'' and inserting `` applicable limit ''.
(d) Effective Date.--The amendments made by this section shall apply
to plan years beginning after the date of the enactment of this Act.
SEC. 918. CLARIFICATION OF CERTAIN RULES RELATING TO EMPLOYEE
STOCK OWNERSHIP PLANS OF S CORPORATIONS.
(a) Certain Cash Distributions Permitted.--
(1) Paragraph (2) of section 409(h) is amended by adding at the end
the following new subparagraph:
``(B) Plan maintained by s corporation.--In the case of a plan
established and maintained by an S corporation which otherwise meets the
requirements of this subsection or section 4975(e)(7), such plan shall
not be treated as failing to meet the requirements of this subsection or
section 401(a) merely because it does not permit a participant to
exercise the right described in paragraph (1)(A) if such plan provides
that the participant entitled to a distribution has a right to receive
the distribution in cash.''
(2) Paragraph (2) of section 409(h) is amended--
(A) by striking ``a plan which'' in the first sentence and inserting
the following:
``(A) In general.--A plan which'', and
(B) by moving the text before subparagraph (B) 2 ems to the right.
(b) Shareholder-Employees Not Treated as Owner-Employees Under Tax on
Prohibited Transactions.--The last sentence of section 4975(d) is
amended by striking all that follows ``preceding sentence,'' through
``Revision Act of 1982,''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 1997.
Subtitle C--Revisions Relating to Disasters
SEC. 921. AUTHORITY TO POSTPONE CERTAIN TAX-RELATED DEADLINES
BY REASON OF PRESIDENTIALLY DECLARED DISASTER.
(a) In General.--Chapter 77 is amended by inserting after section
7508 the following new section:
``SEC. 7508A. AUTHORITY TO POSTPONE CERTAIN TAX-RELATED
DEADLINES BY REASON OF PRESIDENTIALLY DECLARED DISASTER.
``(a) In General.--In the case of a taxpayer determined by the
Secretary to be affected by a Presidentially declared disaster (as
defined by section 1033(h)(3)), the Secretary may prescribe regulations
under which a period of up to 90 days may be disregarded in determining,
under the internal revenue laws, in respect of any tax liability
(including any penalty, additional amount, or addition to the tax) of
such taxpayer--
``(1) whether any of the acts by the taxpayer described in paragraph
(1) of section 7508(a) were performed within the time prescribed
therefor, and
``(2) the amount of any credit or refund.
``(b) Interest on Overpayments and Underpayments.--Subsection (a)
shall not apply for the purpose of determining interest on any
overpayment or underpayment.''
(b) Clerical Amendment.--The table of sections for chapter 77 is
amended by inserting after the item relating to section 7508 the
following new item:
``Sec. 7508A. Authority to postpone certain tax-related deadlines
by reason of presidentially declared disaster.''
(c) Effective Date.--The amendments made by this section shall apply
with respect to any period for performing an act that has not expired
before the date of the enactment of this Act.
SEC. 922. USE OF CERTAIN APPRAISALS TO ESTABLISH AMOUNT OF
DISASTER LOSS.
(a) In General.--Subsection (i) of section 165 is amended by adding
at the end the following new paragraph:
``(4) Use of disaster loan appraisals to establish amount of
loss.--Nothing in this title shall be construed to prohibit the
Secretary from prescribing regulations or other guidance under which an
appraisal for the purpose of obtaining a loan of Federal funds or a loan
guarantee from the Federal Government as a result of a Presidentially
declared disaster (as defined by section 1033(h)(3)) may be used to
establish the amount of any loss described in paragraph (1) or (2).''
(b) Effective Date.--The amendment made by subsection (a) shall take
effect on the date of the enactment of this Act.
SEC. 923. TREATMENT OF LIVESTOCK SOLD ON ACCOUNT OF
WEATHER-RELATED CONDITIONS.
(a) Deferral of Income Inclusion.--Subsection (e) of section 451
(relating to special rules for proceeds from livestock sold on account
of drought) is amended--
(1) by striking ``drought conditions, and that these drought
conditions'' in paragraph (1) and inserting ``drought, flood, or other
weather-related conditions, and that such conditions''; and
(2) by inserting `` , Flood, or Other Weather-Related Conditions ''
after `` Drought '' in the subsection heading.
(b) Involuntary Conversions.--Subsection (e) of section 1033
(relating to livestock sold on account of drought) is amended--
(1) by inserting ``, flood, or other weather-related conditions''
before the period at the end thereof; and
(2) by inserting `` , Flood, or Other Weather-Related Conditions ''
after `` Drought '' in the subsection heading.
(c) Effective Date.--The amendments made by this section shall apply
to sales and exchanges after December 31, 1996.
SEC. 924. MORTGAGE FINANCING FOR RESIDENCES LOCATED IN DISASTER AREAS.
Subsection (k) of section 143 (relating to mortgage revenue bonds;
qualified mortgage bond and qualified veteran's mortgage bond) is
amended by adding at the end the following new paragraph:
``(11) Special rules for residences located in disaster areas.--In
the case of a residence located in an area determined by the President
to warrant assistance from the Federal Government under the Disaster
Relief and Emergency Assistance Act (as in effect on the date of the
enactment of the Revenue Reconciliation Act of 1997), this section shall
be applied with the following modifications to financing provided with
respect to such residence within 1 year after the date of the disaster
declaration:
``(A) Subsection (d) (relating to 3-year requirement) shall not apply.
``(B) Subsections (e) and (f) (relating to purchase price
requirement and income requirement) shall be applied as if such
residence were a targeted area residence.
The preceding sentence shall apply only with respect to bonds issued
after December 31, 1996, and before January 1, 2000.''
Subtitle D--Provisions Relating to Employment Taxes
SEC. 931. CLARIFICATION OF EMPLOYMENT TAX STATUS OF
INDIVIDUALS DISTRIBUTING BAKERY PRODUCTS.
(a) Internal Revenue Code.--Subparagraph (A) of section 3121(d)(3) is
amended by striking ``bakery products,''.
(b) Social Security Act.--Subparagraph (A) of section 210(j)(3) of
the Social Security Act is amended by striking ``bakery products,''.
(c) Effective Date.--The amendments made by this section shall apply
to services performed after December 31, 1997.
SEC. 932. CLARIFICATION OF STANDARD TO BE USED IN DETERMINING
EMPLOYMENT TAX STATUS OF SECURITIES BROKERS.
(a) In General.--In determining for purposes of the Internal Revenue
Code of 1986 whether a registered representative of a securities
broker-dealer is an employee (as defined in section 3121(d) of the
Internal Revenue Code of 1986), no weight shall be given to instructions
from the service recipient which are imposed only in compliance with
investor protection standards imposed by the Federal Government, any
State government, or a governing body pursuant to a delegation by a
Federal or State agency.
(b) Effective Date.--Subsection (a) shall apply to services performed
after December 31, 1997.
SEC. 933. CLARIFICATION OF EXEMPTION FROM SELF-EMPLOYMENT TAX
FOR CERTAIN TERMINATION PAYMENTS RECEIVED BY FORMER INSURANCE SALESMEN.
(a) Internal Revenue Code.--Section 1402 (relating to definitions) is
amended by adding at the end the following new subsection:
``(k) Codification of Treatment of Certain Termination Payments
Received by Former Insurance Salesmen.--Nothing in subsection (a) shall
be construed as including in the net earnings from self-employment of an
individual any amount received during the taxable year from an insurance
company on account of services performed by such individual as an
insurance salesman for such company if--
``(1) such amount is received after termination of such individual's
agreement to perform such services for such company,
``(2) such individual performs no services for such company after
such termination and before the close of such taxable year,
``(3) such individual enters into a covenant not to compete against
such company which applies to at least the 1-year period beginning on
the date of such termination, and
``(4) the amount of such payment--
``(A) depends solely on policies sold by such individual during the
last year of such agreement and the extent to which such policies remain
in force for some period after such termination, and
``(B) does not depend to any extent on length of service or overall
earnings from services performed for such company.''
(b) Social Security Act.--Section 211 of the Social Security Act is
amended by adding at the end the following new subsection:
``CODIFICATION OF TREATMENT OF CERTAIN TERMINATION PAYMENTS RECEIVED BY
FORMER INSURANCE SALESMEN
``(j) Nothing in subsection (a) shall be construed as including in
the net earnings from self-employment of an individual any amount
received during the taxable year from an insurance company on account of
services performed by such individual as an insurance salesman for such
company if--
``(1) such amount is received after termination of such individual's
agreement to perform such services for such company,
``(2) such individual performs no services for such company after
such termination and before the close of such taxable year,
``(3) such individual enters into a covenant not to compete against
such company which applies to at least the 1-year period beginning on
the date of such termination, and
``(4) the amount of such payment--
``(A) depends solely on policies sold by such individual during the
last year of such agreement and the extent to which such policies remain
in force for some period after such termination, and
``(B) does not depend to any extent on length of service or overall
earnings from services performed for such company.''
(c) Effective Date.--The amendments made by this section shall apply
to payments after December 31, 1997.
SEC. 934. STANDARDS FOR DETERMINING WHETHER INDIVIDUALS ARE
NOT EMPLOYEES.
(a) In General.--Chapter 25 (general provisions relating to
employment taxes) is amended by adding after section 3510 the following
new section:
``SEC. 3511. STANDARDS FOR DETERMINING WHETHER INDIVIDUALS ARE
NOT EMPLOYEES.
``(a) General Rule.--For purposes of this title, and notwithstanding
any provision of this title to the contrary, if the requirements of
subsections (b), (c), and (d) are met with respect
to any service performed by any individual, then with respect
to such service--
``(1) the service provider shall not be treated as an employee,
``(2) the service recipient shall not be treated as an employer, and
``(3) the payor shall not be treated as an employer.
``(b) Service Provider Requirements With Regard to Service
Recipient.--For the purposes of subsection (a), the requirements of this
subsection are met if the service provider, in connection with
performing the service--
``(1) has a significant investment in assets and/or training,
``(2) incurs significant unreimbursed expenses,
``(3) agrees to perform the service for a particular amount of time
or to complete a specific result and is liable for damages for early
termination without cause,
``(4) is paid primarily on a commissioned basis, or
``(5) purchases products for resale.
``(c) Additional Service Provider Requirements With Regard to
Others.--For the purposes of subsection (a), the requirements of this
subsection are met if--
``(1) the service provider--
``(A) has a principal place of business,
``(B) does not primarily provide the service in the service
recipient's place of business, or
``(C) pays a fair market rent for use of the service recipient's
place of business; or
``(2) the service provider--
``(A) is not required to perform service exclusively for the service
recipient, and
``(B) in the year involved, or in the preceding or subsequent year--
``(i) has performed a significant amount of service for other persons,
``(ii) has offered to perform service for other persons through--
``(I) advertising,
``(II) individual written or oral solicitations,
``(III) listing with registries, agencies, brokers, and other
persons in the business of providing referrals to other service
recipients, or
``(IV) other similar activities, or
``(iii) provides service under a business name which is registered
with (or for which a license has been obtained from) a State, a
political subdivision of a State, or any agency or instrumentality of 1
or more States or political subdivisions.
``(d) Written Document Requirements.--For purposes of subsection (a),
the requirements of this subsection are met if the services performed by
the individual are performed pursuant to a written contract between such
individual and the person for whom the services are performed, or the
payor, and such contract provides that the individual will not be
treated as an employee with respect to such services for purposes of
this subtitle or subtitle A.
``(e) Special Rules.--For purposes of this section--
``(1) If for any taxable year any service recipient or payor fails
to meet the applicable reporting requirements of sections 6041(a),
6041A(a), or 6051 with respect to a service provider, then, unless such
failure is due to reasonable cause and not willful neglect, this section
shall not apply in determining whether such service provider shall not
be treated as an employee of such service recipient or payor for such
year.
``(2) If the service provider is performing services through an
entity owned in whole or in part by such service provider, then the
references to `service provider' in subsections (b) through (d) may
include such entity, provided that the written contract referred to in
paragraph (1) of subsection (d) may be with either the service provider
or such entity and need not be with both.
``(f) Definitions.--For the purposes of this section--
``(1) Service provider.--The term `service provider' means any
individual who performs service for another person.
``(2) Service recipient.--Except as provided in paragraph (5), the
term `service recipient' means the person for whom the service provider
performs such service.
``(3) Payor.--Except as provided in paragraph (5), the term `payor'
means the person who pays the service provider for the performance of
such service in the event that the service recipients do not pay the
service provider.
``(4) In connection with performing the service.--The term `in
connection with performing the service' means in connection or related
to--
``(A) the actual service performed by the service provider for the
service recipients or for other persons for whom the service provider
has performed similar service, or
``(B) the operation of the service provider's trade or business.
``(5) Exceptions.--The terms `service recipient' and `payor' do not
include any entity which is owned in whole or in part by the service
provider.''
(b) Clerical Amendment.--The table of sections for chapter 25 is
amended by adding at the end the following new item:
``Sec. 3511. Standards for determining whether individuals are not
employees.''
(c) Effective Date.--The amendments made by this section shall apply
to services performed after December 31, 1997.
Subtitle E--Provisions Relating to Small Businesses
SEC. 941. WAIVER OF PENALTY THROUGH 1998 ON SMALL BUSINESSES
FAILING TO MAKE ELECTRONIC FUND TRANSFERS OF TAXES.
No penalty shall be imposed under the Internal Revenue Code of 1986
solely by reason of a failure by a person to use the electronic fund
transfer system established under section 6302(h) of such Code if--
(1) such person is a member of a class of taxpayers first required
to use such system on or after July 1, 1997, and
(2) such failure occurs before January 1, 1999.
SEC. 942. CLARIFICATION OF TREATMENT OF HOME OFFICE USE FOR
ADMINISTRATIVE AND MANAGEMENT ACTIVITIES.
(a) In General.--Paragraph (1) of section 280A(c) is amended by
adding at the end the following new sentence: ``For purposes of
subparagraph (A), the term `principal place of business' includes a
place of business which is used by the taxpayer for the administrative
or management activities of any trade or business of the taxpayer if
there is no other fixed location of such trade or business where the
taxpayer conducts substantial administrative or management activities of
such trade or business.''
(b) Effective Date.--The amendment made by subsection (a) shall apply
to taxable years beginning after December 31, 1997.
Subtitle F--Other Provisions
SEC. 951. USE OF ESTIMATES OF SHRINKAGE FOR INVENTORY ACCOUNTING.
(a) In General.--Section 471 (relating to general rule for
inventories) is amended by redesignating subsection (b) as subsection
(c) and by inserting after subsection (a) the following new subsection:
``(b) Estimates of Inventory Shrinkage Permitted.--A method of
determining inventories shall not be deemed not to clearly reflect
income solely because it utilizes estimates of inventory shrinkage that
are confirmed by a physical count only after the last day of the taxable
year if--
``(1) the taxpayer normally does a physical count of inventories at
each location on a regular and consistent basis, and
``(2) the taxpayer makes proper adjustments to such inventories and
to its estimating methods to the extent such estimates are greater than
or less than the actual shrinkage.''
(b) Effective Date.--
(1) In general.--The amendment made by this section shall apply to
taxable years ending after the date of the enactment of this Act.
(2) Coordination with section 481.--In the case of any taxpayer
permitted by this section to change its method of accounting to a
permissible method for any taxable year--
(A) such changes shall be treated as initiated by the taxpayer,
(B) such changes shall be treated as made with the consent of the
Secretary, and
(C) the period for taking into account the adjustments under section
481 by reason of such change shall be 4 years.
SEC. 952. ASSIGNMENT OF WORKMEN'S COMPENSATION LIABILITY
ELIGIBLE FOR EXCLUSION RELATING TO PERSONAL INJURY LIABILITY
ASSIGNMENTS.
(a) In General.--Subsection (c) of section 130 (relating to certain
personal injury liability assignments) is amended--
(1) by inserting ``, or as compensation under any workmen's
compensation act,'' after ``(whether by suit or agreement)'' in the
material preceding paragraph (1),
(2) by inserting ``or the workmen's compensation claim,'' after
``agreement,'' in paragraph (1), and
(3) by striking ``section 104(a)(2)'' in paragraph (2)(D) and
inserting ``paragraph (1) or (2) of section 104(a)''.
(b) Effective Date.--The amendments made by subsection (a) shall
apply to claims under workmen's compensation acts filed after the date
of the enactment of this Act.
SEC. 953. TAX-EXEMPT STATUS FOR CERTAIN STATE WORKER'S
COMPENSATION ACT COMPANIES.
(a) In General.--Section 501(c)(27) (relating to membership
organizations under workmen's compensation acts) is amended by adding at
the end the following:
``(B) Any organization (including a mutual insurance company) if--
``(i) such organization is created by State law and is organized and
operated under State law exclusively to--
``(I) provide workmen's compensation insurance which is required by
State law or with respect to which State law provides significant
disincentives if such insurance is not purchased by an employer, and
``(II) provide related coverage which is incidental to workmen's
compensation insurance,
``(ii) such organization must provide workmen's compensation
insurance to any employer in the State (for employees in the State or
temporarily assigned out-of-State) which seeks such insurance and meets
other reasonable requirements relating thereto,
``(iii)(I) the State makes a financial commitment with respect to
such organization either by extending the full faith and credit of the
State to debt of such organization or by providing the initial operating
capital of such organization and (II) in the case of periods after the
date of enactment of this subparagraph, the assets of such organization
revert to the State upon dissolution, and
``(iv) the majority of the board of directors or oversight body of
such organization are appointed by the chief executive officer or other
executive branch official of the State, by the State legislature, or by
both.''
(b) Conforming Amendments.--Section 501(c)(27) of such Code is
amended by inserting ``(A)'' after ``(27)'', by redesignating
subparagraphs (A), (B), and (C) as clauses (i), (ii), and (iii),
respectively, and by redesignating clauses (i) and (ii) of subparagraphs
(B) and (C) (before redesignation) as subclauses (I) and (II),
respectively.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 1997.
SEC. 954. ELECTION TO CONTINUE EXCEPTION FROM TREATMENT OF
PUBLICLY TRADED PARTNERSHIPS AS CORPORATIONS.
(a) In General.--Section 7704 is amended by adding at the end thereof
the following new subsection:
``(g) Exception for Existing Publicly Traded Partnerships.--
``(1) In general.--Subsection (a) shall not apply to an existing
publicly traded partnership which elects the application of this
subsection and consents to the application of the tax imposed by
paragraph (3).
``(2) Existing publicly traded partnership.--For purposes of this
section, the term `existing publicly traded partnership' means any
publicly traded partnership to which subsection (a) does not apply as of
the date of the enactment of this paragraph (other than by reason of
subsection (c)(1)).
``(3) Additional tax on electing publicly traded partnerships.--
``(A) Imposition of tax.--There is hereby imposed for each taxable
year on the income of every electing publicly traded partnership a tax
equal to 15 percent of the gross income for such taxable year from the
active conduct of trades and businesses by the partnership.
``(B) Electing publicly traded partnership.--For purposes of this
paragraph, the term `electing publicly traded partnership' means any
partnership for which the consent under paragraph (1) is in effect.
``(C) Adjustments in the case of tiered partnerships.--For purposes
of this paragraph, if the income of the partnership includes its
distributive share of income from another partnership for any taxable
year, the gross income referred to in subparagraph (A) shall include the
gross income of such other partnership from the active conduct of trades
and businesses of such other partnership (in lieu of such distributive
share). A similar rule shall apply in the case of lower-tiered
partnerships.
``(D) Treatment of tax.--For purposes of this title, the tax imposed
by this paragraph shall be treated as imposed by chapter 1 other than
for purposes of determining the amount of any credit allowable under
chapter 1.
``(4) Election.--An election and consent under this subsection shall
apply to the taxable year for which made and all subsequent taxable
years unless revoked by the partnership. Such revocation may be made
without the consent of the Secretary, but, once so revoked, may not be
reinstated.''.
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 1997.
SEC. 955. EXCLUSION FROM UNRELATED BUSINESS TAXABLE INCOME FOR
CERTAIN SPONSORSHIP PAYMENTS.
(a) In General.--Section 513 (relating to unrelated trade or business
income) is amended by adding at the end the following new subsection:
``(i) Treatment of Certain Sponsorship Payments.--
``(1) In general.--The term `unrelated trade or business' does not
include the activity of soliciting and receiving qualified sponsorship
payments.
``(2) Qualified sponsorship payments.--For purposes of this
subsection--
``(A) In general.--The term `qualified sponsorship payment' means
any payment made by any person engaged in a trade or business with
respect to which there is no arrangement or expectation that such person
will receive any substantial return benefit other than the use or
acknowledgement of the name or logo (or product lines) of such person's
trade or business in connection with the activities of the organization
that receives such payment. Such a use or acknowledgement does not
include advertising such person's products or services (including
messages containing qualitative or comparative language, price
information or other indications of savings or value, an endorsement, or
an inducement to purchase, sell, or use such products or services).
``(B) Limitations.--
``(i) Contingent payments.--The term `qualified sponsorship payment'
does not include any payment if the amount of such payment is contingent
upon the level of attendance at one or more events, broadcast ratings,
or other factors indicating the degree of public exposure to one or more
events.
``(ii) Acknowledgements or advertising in periodicals.--The term
`qualified sponsorship payment' does not include any payment which
entitles the payor to an acknowledgement or advertising in regularly
scheduled and printed material published by or on behalf of the payee
organization that is not related to and primarily distributed in
connection with a specific event conducted by the payee organization.
``(3) Allocation of portions of single payment.--For purposes of
this subsection, to the extent that a portion of a payment would (if
made as a separate payment) be a qualified sponsorship payment, such
portion of such payment and the other portion of such payment shall be
treated as separate payments.''.
(b) Effective Date.--The amendment made by this section shall apply
to payments solicited or received after December 31, 1997.
SEC. 956. ASSOCIATIONS OF HOLDERS OF TIMESHARE INTERESTS TO BE
TAXED LIKE OTHER HOMEOWNERS ASSOCIATIONS.
(a) Timeshare Associations Included as Homeowner Associations.--
(1) In general.--Paragraph (1) of section 528(c) (defining
homeowners association) is amended--
(A) by striking ``or a residential real estate management
association'' and inserting ``, a residential real estate management
association, or a timeshare association'' in the material preceding
subparagraph (A),
(B) by striking ``or'' at the end of clause (i) of subparagraph (B),
by striking the period at the end of clause (ii) of subparagraph (B) and
inserting ``, or'', and by adding at the end of subparagraph (B) the
following new clause:
``(iii) owners of timeshare rights to use, or timeshare ownership
interests in, association property in the case of a timeshare
association,'', and
(C) by inserting ``and, in the case of a timeshare association, for
activities provided to or on behalf of members of the association''
before the comma at the end of subparagraph (C).
(2) Timeshare association defined.--Subsection (c) of section 528 is
amended by redesignating paragraph (4) as paragraph (5) and by inserting
after paragraph (3) the following new paragraph:
``(4) Timeshare association.--The term `timeshare association' means
any organization (other than a condominium management association)
meeting the requirement of subparagraph (A) of paragraph (1) if any
member thereof holds a timeshare right to use, or a timeshare ownership
interest in, real property constituting association property.''
(b) Exempt Function Income.--Paragraph (3) of section 528(d) is
amended by striking ``or'' at the end of subparagraph (A), by striking
the period at the end of subparagraph (B) and inserting ``, or'', and by
adding at the end the following new subparagraph:
``(C) owners of timeshare rights to use, or timeshare ownership
interests in, real property in the case of a timeshare association.''
(c) Rate of Tax.--Subsection (b) of section 528 (relating to certain
homeowners associations) is amended by inserting before the period ``(32
percent of such income in the case of a timeshare association)''.
(d) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 1996.
SEC. 957. ADDITIONAL ADVANCE REFUNDING OF CERTAIN VIRGIN ISLAND BONDS.
Subclause (I) of section 149(d)(3)(A)(i) of the Internal Revenue Code
of 1986 shall not apply to the second advance refunding of any issue of
the Virgin Islands which was first advance refunded before June 9, 1997,
if the debt provisions of the refunding bonds are changed to repeal the
priority first lien requirement of the refunded bonds.
SEC. 958. NONRECOGNITION OF GAIN ON SALE OF STOCK TO CERTAIN
FARMERS' COOPERATIVES.
(a) In General.--Section 1042 (relating to sales of stock to employee
stock ownership plans or certain cooperatives) is amended by adding at
the end the following new subsection:
``(g) Application of Section to Sales of Stock in Agricultural
Refiners and Processors to Eligible Farm Cooperatives.--
``(1) In general.--This section shall apply to the sale of stock of
a qualified refiner or processor to an eligible farmers' cooperative.
``(2) Qualified refiner or processor.--For purposes of this
subsection, the term `qualified refiner or processor' means a domestic
corporation--
``(A) substantially all of the activities of which consist of the
active conduct of the trade or business of refining or processing
agricultural or horticultural products, and
``(B) which purchases more than one-half of such products to be
refined or processed from--
``(i) farmers who make up the eligible farmers' cooperative which is
purchasing stock in the corporation in a transaction to which this
subsection is to apply, and
``(ii) such cooperative.
``(3) Eligible farmers' cooperative.--For purposes of this section,
the term `eligible farmers' cooperative' means an organization to which
part I of subchapter T applies which is engaged in the marketing of
agricultural or horticultural products.
``(4) Special rules.--In applying this section to a sale to which
paragraph (1) applies--
``(A) the eligible farmers' cooperative shall be treated in the same
manner as a cooperative described in subsection (b)(1)(B),
``(B) subsection (b)(2) shall be applied by substituting `100
percent' for `30 percent' each place it appears,
``(C) the determination as to whether any stock in the domestic
corporation is a qualified security shall be made without regard to
whether the stock is an employer security or to subsection (c)(1)(A),
and
``(D) paragraphs (2)(D) and (7) of subsection (c) shall not apply.''
(b) Effective Date.--The amendment made by this section shall apply
to sales after December 31, 1997.
SEC. 959. EXCEPTION FROM REPORTING OF REAL ESTATE TRANSACTIONS
FOR SALES AND EXCHANGES OF CERTAIN PRINCIPAL RESIDENCES.
(a) In General.--Subsection (e) of section 6045 (relating to return
required in the case of real estate transactions) is amended by adding
at the end the following new paragraph:
``(5) Exception for sales or exchanges of certain principal
residences.--
``(A) In general.--Paragraph (1) shall not apply to any sale or
exchange of a residence for $250,000 or less if the person referred to
in paragraph (2)(A) receives written assurance in a form acceptable to
the Secretary from the seller that--
``(i) such residence is the principal residence (within the meaning
of section 121) of the seller,
``(ii) there is no federally subsidized mortgage financing
assistance with respect to the mortgage on such residence, and
``(iii) the seller meets the requirements of section 121(a) with
respect to such sale or exchange.
If such assurance includes an assurance that the seller is married,
the preceding sentence shall be applied by substituting `$500,000' for
`$250,000'.
``(B) Seller.--For purposes of this paragraph, the term `seller'
includes the person relinquishing the residence in an exchange.''
(b) Effective Date.--The amendment made by subsection (a) shall apply
to sales and exchanges after the date of the enactment of this Act.
SEC. 960. INCREASED DEDUCTIBILITY OF BUSINESS MEAL EXPENSES
FOR INDIVIDUALS SUBJECT TO FEDERAL HOURS OF SERVICE.
(a) In General.--Section 274(n) (relating to only 50 percent of meal
and entertainment expenses allowed as deduction) is amended by adding at
the end the following new paragraph:
``(3) Special rule for individuals subject to federal hours of
service.--
``(A) In general.--In the case of any expenses for food or beverages
consumed while away from home (within the meaning of section 162(a)(2))
by an individual during, or incident to, the period of duty subject to
the hours of service limitations of the Department of Transportation,
paragraph (1) shall be applied by substituting `the applicable
percentage' for `50 percent'.
``(B) Applicable percentage.--For purposes of this paragraph, the
term `applicable percentage' means the percentage determined under the
following table:
``For taxable years beginning
The applicable
in calendar year--
percentage is--
1998 or 1999
5514
2000 or 2001
6014
2002 or 2003
6514
2004 or 2005
7014
2006 or 2007
7514
2008 or thereafter
80.''
(b) Effective Date.--The amendment made by subsection (a) shall apply
to taxable years beginning after December 31, 1997.
SEC. 961. QUALIFIED LESSEE CONSTRUCTION ALLOWANCES FOR
SHORT-TERM LEASES.
(a) In General.--Part III of subchapter B of chapter 1 is amended by
inserting after section 109 the following new section:
``SEC. 110. QUALIFIED LESSEE CONSTRUCTION ALLOWANCES FOR
SHORT-TERM LEASES.
``(a) In General.--Gross income of a lessee does not include any
amount received in cash (or treated as a rent reduction) by a lessee
from a lessor--
``(1) under a short-term lease of retail space, and
``(2) for the purpose of such lessee's constructing or improving
qualified long-term real property for use in such lessee's trade or
business at such retail space,
but only to the extent that such amount does not exceed the amount
expended by the lessee for such construction or improvement.
``(b) Consistent Treatment by Lessor.--Qualified long-term real
property constructed or improved in connection with any amount excluded
from a lessee's income by reason of subsection (a) shall be treated as
nonresidential real property by the lessor.
``(c) Definitions.--For purposes of this section--
``(1) Qualified long-term real property.--The term `qualified
long-term real property' means nonresidential real property which is
part of, or otherwise present at, the retail space referred to in
subsection (a) and which reverts to the lessor at the termination of the
lease.
``(2) Short-term lease.--The term `short-term lease' means a lease
(or other agreement for occupancy or use) of retail space for 15 years
or less (as determined under the rules of section 168(i)(3)).
``(3) Retail space.--The term `retail space' means real property
leased, occupied, or otherwise used by a lessee in its trade or business
of selling tangible personal property or services to the general public.
``(d) Information Required To Be Furnished to Secretary.--Under
regulations, the lessee and lessor described in subsection (a) shall, at
such times and in such manner as may be provided in such regulations,
furnish to the Secretary--
``(1) information concerning the amounts received (or treated as a
rent reduction) and expended as described in subsection (a), and
``(2) any other information which the Secretary deems necessary to
carry out the provisions of this section.''
(b) Treatment as Information Return.--Subparagraph (A) of section
6724(d)(1)(A) is amended by striking ``or'' at the end of clause (vii),
by adding ``or'' at the end of clause (viii), and by adding at the end
the following new clause:
``(ix) section 110(d) (relating to qualified lessee construction
allowances for short-term leases),''.
(c) Cross Reference.--Paragraph (8) of section 168(i) (relating to
treatment of leasehold improvements) is amended by adding at the end the
following new subparagraph:
``(C) Cross reference.--
``For treatment of qualified long-term real property constructed
or improved in connection with cash or rent reduction from lessor to
lessee, see section 110(b).''
(d) Clerical Amendment.--The table of sections for part III of
subchapter B of chapter 1 is amended by inserting after the item
relating to section 109 the following new item:
``Sec. 110. Qualified lessee construction allowances for
short-term leases.''
(e) Effective Date.--The amendments made by this section shall apply
to leases entered into after the date of the enactment of this Act.
SEC. 962. TAX TREATMENT OF CONSOLIDATIONS OF LIFE INSURANCE
DEPARTMENTS OF MUTUAL SAVINGS BANKS.
(a) General Rule.--Section 594 (relating to alternative tax for
mutual savings banks conducting life insurance business) is amended by
adding at the end thereof the following new subsection:
``(c) Treatment of Consolidations.--If 2 or more life insurance
departments to which subsection (a) applied are consolidated into a
single life insurance company pursuant to a requirement of State law--
``(1) such consolidation shall be treated as a reorganization
described in section 368(a)(1)(E), and
``(2) any payments required to be made to policyholders in
connection with such consolidation shall be treated as policyholder
dividends deductible under section 808 but only if--
``(A) such payments are only with respect to policies in effect
immediately before such consolidation,
``(B) such payments are only with respect to policies which are
participating before and after such consolidation,
``(C) such payments shall cease with respect to any policy if such
policy lapses after such consolidation,
``(D) the policyholders before such consolidation had no divisible
right to the surplus of any such department and had no right to vote,
and
``(E) the approval of such policyholders was not required for such
consolidation.''
(b) Effective Date.--The amendment made by subsection (a) shall take
effect on December 31, 1991.
SEC. 963. OFFSET OF PAST-DUE, LEGALLY ENFORCEABLE STATE TAX
OBLIGATIONS AGAINST OVERPAYMENTS.
(a) In General.--Section 6402 is amended by redesignating subsections
(e) through (i) as subsections (f) through (j), respectively, and by
inserting after subsection (d) the following new subsection:
``(e) Collection of Past-Due, Legally Enforceable State Tax
Obligations.--
``(1) In general.--Upon receiving notice from any State that a named
person owes a past-due, legally enforceable State tax obligation to such
State, the Secretary shall, under such conditions as may be prescribed
by the Secretary--
``(A) reduce the amount of any overpayment payable to such person by
the amount of such State tax obligation;
``(B) pay the amount by which such overpayment is reduced under
subparagraph (A) to such State and notify such State of such person's
name, taxpayer identification number, address, and the amount collected;
and
``(C) notify the person making such overpayment that the overpayment
has been reduced by an amount necessary to satisfy a past-due, legally
enforceable State tax obligation.
If an offset is made pursuant to a joint return, the notice under
subparagraph (B) shall include the names, taxpayer identification
numbers, and addresses of each person filing such return.
``(2) Offset permitted only against residents of state seeking
offset.--Paragraph (1) shall apply to an overpayment by any person for a
taxable year only if the address shown on the return for such taxable
year is an address within the State seeking the offset.
``(3) Priorities for offset.--Any overpayment by a person shall be
reduced pursuant to this subsection--
``(A) after such overpayment is reduced pursuant to--
``(i) subsection (a) with respect to any liability for any internal
revenue tax on the part of the person who made the overpayment,
``(ii) subsection (c) with respect to past-due support, and
``(iii) subsection (d) with respect to any past-due, legally
enforceable debt owed to a Federal agency, and
``(B) before such overpayment is credited to the future liability
for any Federal internal revenue tax of such person pursuant to
subsection (b).
If the Secretary receives notice from 1 or more agencies of the State
of more than 1 debt subject to paragraph (1) that is owed by such person
to such an agency, any overpayment by such person shall be applied
against such debts in the order in which such debts accrued.
``(4) Notice; consideration of evidence.--No State may take action
under this subsection until such State--
``(A) notifies the person owing the past-due State tax liability
that the State proposes to take action pursuant to this section,
``(B) gives such person at least 60 days to present evidence that
all or part of such liability is not past-due or not legally
enforceable,
``(C) considers any evidence presented by such person and determines
that an amount of such debt is past-due and legally enforceable, and
``(D) satisfies such other conditions as the Secretary may prescribe
to ensure that the determination made under subparagraph (C) is valid
and that the State has made reasonable efforts to obtain payment of such
State tax obligation.
``(5) Past-due, legally enforceable state tax obligation.--For
purposes of this subsection, the term `past-due, legally enforceable
State tax obligation' means a debt--
``(A)(i) which resulted from--
``(I) a judgment rendered by a court of competent jurisdiction which
has determined an amount of State tax to be due, or
``(II) a determination after an administrative hearing which has
determined an amount of State tax to be due, and
``(ii) which is no longer subject to judicial review, or
``(B) which resulted from a State tax which has been assessed but
not collected, the time for redetermination of which has expired, and
which has not been delinquent for more than 10 years.
For purposes of this paragraph, the term `State tax' includes any
local tax administered by the chief tax administration agency of the
State.
``(6) Regulations.--The Secretary shall issue regulations
prescribing the time and manner in which States must submit notices of
past-due, legally enforceable State tax obligations and the necessary
information that must be contained in or accompany such notices. The
regulations shall specify the types of State taxes and the minimum
amount of debt to which the reduction procedure established by paragraph
(1) may be applied. The regulations may require States to pay a fee to
reimburse the Secretary for the cost of applying such procedure. Any fee
paid to the Secretary pursuant to the preceding sentence shall be used
to reimburse appropriations which bore all or part of the cost of
applying such procedure.
``(7) Erroneous payment to state.--Any State receiving notice from
the Secretary that an erroneous payment has been made to such State
under paragraph (1) shall pay promptly to the Secretary, in accordance
with such regulations as the Secretary may prescribe, an amount equal to
the amount of such erroneous payment (without regard to whether any
other amounts payable to such State under such paragraph have been paid
to such State).''
(b) Disclosure of Certain Information to States Requesting Refund
Offsets for Past-Due, Legally Enforceable State Tax Obligations.--
(1) Paragraph (10) of section 6103(l) is amended by striking ``(c)
or (d)'' each place it appears and inserting ``(c), (d), or (e)''.
(2) The paragraph heading for such paragraph (10) is amended by
striking `` section 6402 (c) or 6402 (d)'' and inserting `` subsection
(c), (d), or (e) of section 6402 ''.
(c) Conforming Amendments.--
(1) Subsection (a) of section 6402 is amended by striking ``(c) and
(d)'' and inserting ``(c), (d), and (e)''.
(2) Paragraph (2) of section 6402(d) is amended by striking ``and
before such overpayment'' and inserting ``and before such overpayment is
reduced pursuant to subsection (e) and before such overpayment''.
(3) Subsection (f) of section 6402, as redesignated by subsection
(a), is amended--
(A) by striking ``(c) or (d)'' and inserting ``(c), (d), or (e)'', and
(B) by striking ``Federal agency'' and inserting ``Federal agency or
State''.
(4) Subsection (h) of section 6402, as redesignated by subsection
(a), is amended by striking ``subsection (c)'' and inserting
``subsection (c) or (e)''.
(d) Amendments Applied After Technical Corrections to Personal
Responsibility and Work Opportunity Reconciliation Act of 1996.--
(1) Section 110(l) of the Personal Responsibility and Work
Opportunity Reconciliation Act of 1996 is amended
by striking paragraphs (4), (5), and (7) (and the amendments
made by such paragraphs), and the Internal Revenue Code of 1986 shall be
applied as if such paragraphs (and amendments) had never been enacted.
(2) For purposes of applying the amendments made by this section
other than this subsection, the provisions of this subsection shall be
treated as having been enacted immediately before the other provisions
of this section.
(e) Effective Date.--The amendments made by this section (other than
subsection (d)) shall apply to refunds payable under section 6402 of the
Internal Revenue Code of 1986 after December 31, 1998.
SEC. 964. EXEMPTION OF THE INCREMENTAL COST OF A CLEAN FUEL
VEHICLE FROM THE LIMITS ON DEPRECIATION FOR VEHICLES.
(a) In General.--Section 280F(a)(1) (relating to limiting
depreciation on luxury automobiles) is amended by adding at the end the
following new subparagraph:
``(C) Special rule for certain clean-fuel passenger automobiles.--
``(i) Modified automobiles.--In the case of a passenger automobile
which is propelled by a fuel which is not a clean-burning fuel to which
is installed qualified clean-fuel vehicle property (as defined in
section 179A(c)(1)(A)) for purposes of permitting such vehicle to be
propelled by a clean burning fuel (as defined in section 179A(e)(1)),
subparagraph (A) shall not apply to the cost of the installed qualified
clean burning vehicle property as depreciated pursuant to section 168 by
applying the rules under subsections (b)(1), (d)(1), and (e)(3)(B)
thereof.
``(ii) Purpose built passenger vehicles.--In the case of a purpose
built passenger vehicle (as defined in section 4001(a)(2)(C)(ii)), each
of the annual limitations specified in subparagraph (A) shall be
tripled.''
(b) Effective Date.--The amendments made by this section shall apply
to property placed in service on or after the date of enactment of this
Act and before January 1, 2005.
SEC. 965. TAX BENEFITS FOR LAW ENFORCEMENT OFFICERS KILLED IN
THE LINE OF DUTY.
(a) In General.--Part III of subchapter B of chapter 1 (relating to
items specifically excluded from gross income) is amended by
redesignating section 138 as section 139 and by inserting after section
137 the following new section:
``SEC. 138. SURVIVOR BENEFITS ATTRIBUTABLE TO SERVICE BY A LAW
ENFORCEMENT OFFICER WHO IS KILLED IN THE LINE OF DUTY.
``(a) In General.--Gross income shall not include any amount paid as
a survivor annuity on account of the death of a law enforcement officer
killed in the line of duty--
``(1) if such annuity is provided under a governmental plan which
meets the requirements of section 401(a) to the spouse (or a former
spouse) of the law enforcement officer or to a child of such officer,
and
``(2) to the extent such annuity is attributable to such officer's
service as a law enforcement officer.
``(b) Exceptions.--
``(1) In general.--Subsection (a) shall not apply with respect to
the death of any law enforcement officer if--
``(A) the death was caused by the intentional misconduct of the
officer or by such officer's intention to bring about such officer's
death,
``(B) the officer was voluntarily intoxicated (as defined in section
1204 of the Omnibus Crime Control and Safe Streets Act of 1968) at the
time of death, or
``(C) the officer was performing such officer's duties in a grossly
negligent manner at the time of death.
``(2) Exception for benefits paid to certain
individuals.--Subsection (a) shall not apply to any payment to an
individual whose actions were a substantial contributing factor to the
death of the officer.
``(c) Law Enforcement Officer.--For purposes of this section, the
term `law enforcement officer' means an individual serving a public
agency (as defined in section 1204 of the Omnibus Crime Control and Safe
Streets Act of 1968) in an official capacity, with or without
compensation, as a law enforcement officer (as defined in such
section).''
(b) Clerical Amendment.--The table of sections for part III of
subchapter B of chapter 1 is amended by striking the last item and
inserting the following new items:
``Sec. 138. Survivor benefits attributable to service by a law
enforcement officer who is killed in the line of duty.
``Sec. 139. Cross references to other Acts.''
(c) Effective Date.--The amendments made by this subsection shall
apply to amounts received in taxable years beginning after December 31,
1996, with respect to individuals dying after such date.
SEC. 966. TEMPORARY SUSPENSION OF TAXABLE INCOME LIMIT ON
PERCENTAGE DEPLETION FOR MARGINAL PRODUCTION.
In the case of taxable years beginning after December 31, 1997, and
before January 1, 2000, paragraph (1) of section 613A(d) of the Internal
Revenue Code of 1986 shall not apply to so much of the allowance for
depletion computed under section 613A(c) of such Code as is attributable
to paragraph (6) thereof.
Subtitle G--Extension of Duty-Free Treatment Under
Generalized System of Preferences; Tariff Treatment of Certain Equipment
and Repair of Vessels
SEC. 971. GENERALIZED SYSTEM OF PREFERENCES.
(a) Extension of Duty-Free Treatment Under System.--Section 505 of
the Trade Act of 1974 (19 U.S.C. 2465) is amended by striking ``May 31,
1997'' and inserting ``May 31, 1999''.
(b) Retroactive Application for Certain Liquidations and
Reliquidations.--
(1) In general.--Notwithstanding section 514 of the Tariff Act of
1930 or any other provision of law and subject to paragraph (2), the
entry--
(A) of any article to which duty-free treatment under title V of the
Trade Act of 1974 would have applied if the entry had been made on May
31, 1997, and
(B) that was made after May 31, 1997, and before the date of the
enactment of this Act,
shall be liquidated or reliquidated as free of duty, and the
Secretary of the Treasury shall refund any duty paid with respect to
such entry. As used in this subsection, the term ``entry'' includes a
withdrawal from warehouse for consumption.
(2) Requests.--Liquidation or reliquidation may be made under
paragraph (1) with respect to an entry only if a request therefor is
filed with the Customs Service, within 180 days after the date of the
enactment of this Act, that contains sufficient information to enable
the Customs Service--
(A) to locate the entry; or
(B) to reconstruct the entry if it cannot be located.
SEC. 972. EQUIPMENT AND REPAIR OF VESSELS.
(a) Tariff Treatment.--Section 466 of the Tariff Act of 1930 (19
U.S.C. 1466), is amended by adding at the end the following new
subsection:
``(i)(1) The duty imposed by subsection (a) shall not apply with
respect to activities occurring in a Shipbuilding Agreement Party, with
respect to--
``(A) self-propelled seagoing vessels of 100 gross tons or more that
are used for transportation of goods or persons or for performance of a
specialized service (including, but not limited to, ice breakers and
dredges), and
``(B) tugs of 365 kilowatts or more.
A vessel shall be considered `self-propelled seagoing' if its
permanent propulsion and steering provide it all the characteristics of
self-navigability in the high seas.
``(2) As used in this subsection--
``(A) the term `Shipbuilding Agreement Party' means a state or
separate customs territory that is a signatory to the Shipbuilding
Agreement; and
``(B) the term `Shipbuilding Agreement' means The Agreement
Respecting Normal Competitive Conditions in the Commercial Shipbuilding
and Repair Industry, resulting from negotiations under the auspices of
the Organization for Economic Cooperation and Development, and entered
into on December 21, 1994.''.
(b) Applicability.--The amendment made by subsection (a) applies only
with respect to activities occurring in a Shipbuilding Agreement Party
(as defined in section 466(i) of the Tariff Act of 1930) during the
1-year period beginning on the date of the enactment of this Act.
Subtitle H--United States-Caribbean Basin Trade Partnership Act
SEC. 981. SHORT TITLE.
This subtitle may be cited as the ``United States-Caribbean Basin
Trade Partnership Act''.
SEC. 982. FINDINGS AND POLICY.
(a) Findings.--The Congress makes the following findings:
(1) The United States apparel industry is a major component of the
United States manufacturing sector of the United States, employing
nearly 825,000 people who are located in every State in the country. The
United States apparel industry consumes 42 percent of the fabric
produced by United States textile mills, which employ more than 650,000
people.
(2) In 1973 the United States apparel industry supplied 88 percent
of the garments consumed by Americans, and in 1995 that share fell to
less than 50 percent.
(3) Countries in the Western Hemisphere offer the greatest
opportunities for increased exports of United States textile and apparel
products.
(4) Given the greater propensity of countries located in the Western
Hemisphere to use United States components and to purchase United States
products compared to other countries, increased trade and economic
activity between the United States and countries in the Western
Hemisphere will create new jobs in the United States as a result of
expanding export opportunities.
(5) The Caribbean Basin Economic Recovery Act represents a permanent
commitment by the United States to encourage the development of strong
democratic governments and revitalized economies in neighboring
countries in the Caribbean Basin.
(6) The economic security of the countries in the Caribbean Basin is
potentially threatened by the diversion of investment to Mexico as a
result of the North American Free Trade Agreement.
(7) Offering NAFTA equivalent benefits to Caribbean Basin
beneficiary countries, pending their eventual accession to the NAFTA or
a free trade agreement comparable to the NAFTA, will promote the growth
of free enterprise and economic opportunity in the region, and thereby
enhance the national security interests of the United States.
(b) Policy.--It is the policy of the United States--
(1) to assure that the domestic textile and apparel industry remains
competitive in the global marketplace by encouraging the formation and
expansion of ``partnerships'' between the textile and apparel industry
of the United States and the textile and apparel industry of various
countries located in the Western Hemisphere; and
(2) to offer to the products of Caribbean Basin partnership
countries tariffs and quota treatment equivalent to that accorded to
products of NAFTA countries, and to seek the accession of these
partnership countries to the NAFTA or a free trade agreement comparable
to the NAFTA at the earliest possible date, with the goal of achieving
full participation in the NAFTA or in a free trade agreement comparable
to the NAFTA by all partnership countries by not later than January 1,
2005.
SEC. 983. DEFINITIONS.
As used in this Act:
(1) Partnership country.--The term ``partnership country'' means a
beneficiary country as defined in section 212(a)(1)(A) of the Caribbean
Basin Economic Recovery Act (19 U.S.C. 2702(a)(1)(A)).
(2) NAFTA.--The term ``NAFTA'' means the North American Free Trade
Agreement entered into between the United States, Mexico, and Canada on
December 17, 1992.
(3) Trade representative.--The term ``Trade Representative'' means
the United States Trade Representative.
(4) WTO and wto member.--The terms ``WTO'' and ``WTO member'' have
the meanings given those terms in section 2 of the Uruguay Round
Agreements Act (19 U.S.C. 3501).
SEC. 984. TEMPORARY PROVISIONS TO PROVIDE NAFTA PARITY TO
PARTNERSHIP COUNTRIES.
(a) Temporary Provisions.--Section 213(b) of the Caribbean Basin
Economic Recovery Act (19 U.S.C. 2703(b)) is amended to read as follows:
``(b) Import-Sensitive Articles.--
``(1) In general.--Subject to paragraphs (2) through (5), the
duty-free treatment provided under this title does not apply to--
``(A) textile and apparel articles which are subject to textile
agreements;
``(B) footwear not designated at the time of the effective date of
this title as eligible articles for the purpose of the generalized
system of preferences under title V of the Trade Act of 1974;
``(C) tuna, prepared or preserved in any manner, in airtight
containers;
``(D) petroleum, or any product derived from petroleum, provided for
in headings 2709 and 2710 of the HTS;
``(E) watches and watch parts (including cases, bracelets and
straps), of whatever type including, but not limited to, mechanical,
quartz digital, or quartz analog, if such watches or watch parts contain
any material which is the product of any country with respect to which
HTS column 2 rates of duty apply; or
``(F) articles to which reduced rates of duty apply under subsection
(h).
``(2) NAFTA transition period treatment of certain textile and
apparel articles.--
``(A) Equivalent tariff and quota treatment.--During the transition
period--
``(i) the tariff treatment accorded at any time to any textile or
apparel article that originates in the territory of a partnership
country shall be identical to the tariff treatment that is accorded at
such time under section 2 of the Annex to an article described in the
same 8-digit subheading of the HTS that is an originating good of Mexico
and is imported into the United States;
``(ii) duty-free treatment under this title shall apply to any
textile or apparel article that is imported into the United States from
a partnership country and that--
``(I) is assembled in a partnership country, from fabrics wholly
formed and cut in the United States from yarns formed in the United
States, and is entered--
``(aa) under subheading 9802.00.80 of the HTS; or
``(bb) under chapter 61 or 62 of the HTS if, after such assembly,
the article would have qualified for treatment under subheading
9802.00.80 of the HTS, but for the fact the article was subjected to
bleaching, dyeing, stone-washing, enzyme-washing, acid-washing,
perma-pressing, or similar processes or embroidery; or
``(II) is knit-to-shape in a partnership country from yarns wholly
formed in the United States;
``(III) is made from fabric knit in a partnership country from
yarns wholly formed in the United States;
``(IV) is cut and assembled in a partnership country from yarns
wholly formed in the United States; or
``(V) is identified under subparagraph (C) as a handloomed,
handmade, or folklore article of such country and is certified as such
by the competent authority of such country; and
``(iii) no quantitative restriction under any bilateral textile
agreement may be applied to the importation into the United States of
any textile or apparel article that--
``(I) originates in the territory of a partnership country, or
``(II) qualifies for duty-free treatment under subclause (I), (II),
(III), (IV), or (V) of clause (ii).
``(B) NAFTA transition period treatment of nonoriginating textile
and apparel articles.--
``(i) Preferential tariff treatment.--Subject to clause (ii), the
President may place in effect at any time during the transition period
with respect to any textile or apparel article that--
``(I) is a product of a partnership country, but
``(II) does not qualify as a good that originates in the territory
of a partnership country,
tariff treatment that is identical to the in-preference-level tariff
treatment accorded at such time under Appendix 6.B of the Annex to an
article described in the same 8-digit subheading of the HTS that is a
product of Mexico and is imported into the United States. For purposes
of this clause, the `in-preference-level tariff treatment' accorded to
an article that is a product of Mexico is the rate of duty applied to
that article when imported in quantities less than or equal to the
quantities specified in Schedule 6.B.1, 6.B.2., or 6.B.3. of the Annex
for imports of that article from Mexico into the United States.
``(ii) Limitations on certain articles.--(I) Tariff treatment under
clause (i) may be extended, during any calendar year, to not more than
45,000,000 square meter equivalents of cotton or man-made fiber apparel,
to not more than 1,500,000 square meter equivalents of wool apparel, and
to not more than 25,000,000 square meter equivalents of goods entered
under subheading 9802.00.80 of the HTS.
``(II) Except as provided in subclause (III), the amounts set forth
in subclause (I) shall be allocated among the 7 partnership countries
with the largest volume of exports to the United States of textile and
apparel goods in calendar year 1996, based upon a pro rata share of the
volume of textile and apparel goods of each of those 7 countries that
entered the United States under subheading 9802.00.80 of the HTS during
the first 12 months of the 14-month period ending on the date of the
enactment of the United States-Caribbean Basin Trade Partnership Act.
``(III) Five percent of the amounts set forth in subclause (I) shall
be allocated among the partnership countries, other than those to which
subclause (II) applies, based upon a pro rata share of the exports to
the United States of textile and apparel goods of each of those
countries during the first 12 months of the 14-month period ending on
the date of the enactment of the United States-Caribbean Basin Trade
Partnership Act.
``(iii) Prior consultation.--The President may implement the
preferential tariff treatment described in clause (i) only after
consultation with representatives of the United States textile and
apparel industry and other interested parties regarding--
``(I) the specific articles to which such treatment will be extended,
``(II) the annual quantities of such articles that may be imported
at the preferential duty rates described in clause (i), and
``(III) the allocation of such annual quantities among beneficiary
countries.
``(C) Handloomed, handmade, and folklore articles.--For purposes of
subparagraph (A), the Trade Representative shall consult with
representatives of the partnership country for the purpose of
identifying particular textile and apparel goods that are mutually
agreed upon as being handloomed, handmade, or folklore goods of a kind
described in section 2.3 (a), (b), or (c) or Appendix 3.1.B.11 of the
Annex.
``(D) Bilateral emergency actions.--(i) The President may take--
``(I) bilateral emergency tariff actions of a kind described in
section 4 of the Annex with respect to any textile or apparel article
imported from a partnership country if the application of tariff
treatment under subparagraph (A) to such article results in conditions
that would be cause for the taking of such actions under such section 4
with respect to an article described in the same 8-digit subheading of
the HTS that is imported from Mexico; or
``(II) bilateral emergency quantitative restriction actions of a
kind described in section 5 of the Annex with respect to imports of any
textile or apparel article described in subparagraph (B)(i) (I) and (II)
if the importation of such article into the United States results in
conditions that would be cause for the taking of such actions under such
section 5 with respect to a like article that is a product of Mexico.
``(ii) The requirement in paragraph (5) of section 4 of the Annex
(relating to providing compensation) shall not be deemed to apply to a
bilateral emergency action taken under this subparagraph.
``(iii) For purposes of applying bilateral emergency action under
this subparagraph--
``(I) the term `transition period' in sections 4 and 5 of the Annex
shall be deemed to be the period defined in paragraph (5)(D); and
``(II) any requirements to consult specified in section 4 or 5 of
the Annex are deemed to be satisfied if the President requests
consultations with the partnership country in question and the country
does not agree to consult within the time period specified in such
section.
``(3) NAFTA transition period treatment of certain other articles
originating in beneficiary countries.--
``(A) Equivalent tariff treatment.--
``(i) In general.--Subject to clause (ii), the tariff treatment
accorded at any time during the transition period to any article
referred to in any of subparagraphs (B) through (F) of paragraph (1)
that originates in the territory of a partnership country shall be
identical to the tariff treatment that is accorded at such time under
Annex 302.2 of the NAFTA to an article described in the same 8-digit
subheading of the HTS that is an originating good of Mexico and is
imported into the United States.
``(ii) Exception.--Clause (i) does not apply to any article accorded
duty-free treatment under U.S. Note 2(b) to subchapter II of chapter 98
of the HTS.
``(B) Relationship to subsection (h) duty reductions.--If at any
time during the transition period the rate of duty that would (but for
action taken under subparagraph (A)(i) in regard to such period) apply
with respect to any article under subsection (h) is a rate of duty that
is lower than the rate of duty resulting from such action, then such
lower rate of duty shall be applied for the purposes of implementing
such action.
``(4) Customs procedures.--
``(A) In general.--
``(i) The obligations under chapter 5 of the NAFTA regarding customs
procedures, as such obligations apply to the exporting country, shall
apply
to importations under paragraphs (2) and (3) of articles from
partnership countries.
``(ii) The Secretary of the Treasury shall prescribe regulations
that require, as a condition of entry, that any importer of record that
claims preferential treatment under paragraph (2) or (3) must comply
with requirements similar in all material respects to the requirements
of article 502.1 of the NAFTA. The certificate of origin that otherwise
would be required under this subparagraph shall not be required in the
case of an article imported under paragraph (2) or (3) if such
certificate of origin would not be required under article 503 of the
NAFTA for a similar importation from Mexico.
``(B) Penalties for engaging in transshipment or other customs
fraud.--If an exporter is determined under the laws of the United States
to have engaged in illegal transshipment of textile or apparel products
from a partnership country, then the President shall deny all benefits
under this title to such exporter, and any successors of such exporter,
for a period of 2 years.
``(C) Study by USTR on Cooperation of Other Countries Concerning
Circumvention.--The Trade Representative, in consultation with the
United States Commissioner of Customs, shall conduct a study analyzing
the extent to which each partnership country--
``(i) has cooperated fully with the United States, consistent with
its domestic laws and procedures, in instances of circumvention or
alleged circumvention of existing quotas on imports of textile and
apparel goods, to establish necessary relevant facts in the places of
import, export, and, where applicable, transshipment, including
investigation of circumvention practices, exchanges of documents,
correspondence, reports, and other relevant information, to the extent
such information is available;
``(ii) has taken appropriate measures, consistent with its domestic
laws and procedures, against exporters and importers involved in
instances of false declaration concerning fiber content, quantities,
description, classification, or origin of textile and apparel goods; and
``(iii) has penalized the individuals and entities involved in any
such circumvention, consistent with its domestic laws and procedures,
and has worked closely to seek the cooperation of any third country to
prevent such circumvention from taking place in that third country.
The Trade Representative shall submit to the Congress, not later than
October 1, 1998, a report on the study conducted under this
subparagraph.
``(5) Definitions.--For purposes of this subsection--
``(A) The term `the Annex' means Annex 300 B of the NAFTA.
``(B) The term `NAFTA' means the North American Free Trade Agreement
entered into between the United States, Mexico, and Canada on December
17, 1992.
``(C) The term `partnership country' means a beneficiary country.
``(D) The term `textile or apparel article' means any article
referred to in paragraph (1)(A) that is a good listed in Appendix 1.1 of
the Annex.
``(E) The term `transition period' means, with respect to a
partnership country, the period that begins on January 1, 1998, and ends
on the earlier of--
``(i) December 31, 1998; or
``(ii) the date on which--
``(I) the United States first applies the NAFTA to the partnership
country upon its accession to the NAFTA, or
``(II) there enters into force with respect to the United States
and the partnership country a free trade agreement comparable to the
NAFTA that makes substantial progress in achieving the negotiating
objectives set forth in section 108(b)(5) of the North American Free
Trade Agreement Implementation Act (19 U.S.C. 3317(b)(5)).
``(F) An article shall be deemed as originating in the territory of
a partnership country if the article meets the rules of origin for a
good set forth in chapter 4 of the NAFTA, and, in the case of an article
described in Appendix 6.A of the Annex, the requirements stated in such
Appendix 6.A for such article to be treated as if it were an originating
good. In applying such chapter 4 or Appendix 6.A with respect to a
partnership country for purposes of this subsection--
``(i) no countries other than the United States and partnership
countries may be treated as being Parties to the NAFTA,
``(ii) references to trade between the United States and Mexico
shall be deemed to refer to trade between the United States and
partnership countries, and
``(iii) references to a Party shall be deemed to refer to the United
States or a partnership country, and references to the Parties shall be
deemed to refer to any combination of partnership countries or the
United States.''.
(b) Determination Regarding Retention of Designation.--Section
212(e)(1) of the Caribbean Basin Economic Recovery Act (19 U.S.C.
2702(e)) is amended--
(1) by inserting ``(A)'' after ``(1)'';
(2) by redesignating subparagraphs (A) and (B) as clauses (i) and
(ii), respectively;
(3) by adding at the end the following:
``(B)(i) Based on the President's review and analysis described in
subsection (f), the President may determine if the preferential
treatment under section 213(b) (2) and (3) should be withdrawn,
suspended, or limited with respect to any article of a partnership
country. Such determination shall be included in the report required by
subsection (f).
``(ii) Withdrawal, suspension, or limitation of the preferential
treatment under section 213(b) (2) and (3) with respect to a partnership
country shall be taken only after the requirements of subsection (a)(2)
and paragraph (2) of this subsection have been met.''.
(c) Reporting Requirements.--Section 212(f) of the Caribbean Basin
Economic Recovery Act (19 U.S.C. 2702(f)) is amended to read as follows:
``(f) Reporting Requirements.--Not later than 1 year after the date
of the enactment of the United States-Caribbean Basin Trade Partnership
Act and at the close of each 3-year period thereafter, the President
shall submit to the Congress a complete report regarding the operation
of this title, including--
``(1) with respect to subsections (b) and (c) of this section, the
results of a general review of beneficiary countries based on the
considerations described in such subsections;
``(2) with respect to subsection (c)(4), the degree to which a
country follows accepted rules of international trade provided for under
the General Agreement on Tariffs and Trade and the World Trade
Organization;
``(3) with respect to subsection (c)(9), the extent to which
beneficiary countries are providing or taking steps to provide
protection of intellectual property rights comparable to the protection
provided to the United States in bilateral intellectual property rights
agreements;
``(4) with respect to subsection (b)(2) and subsection (c)(5), the
extent that beneficiary countries are providing or taking steps to
provide protection of investment and investors comparable to the
protection provided to the United States in bilateral investment
treaties;
``(5) with respect to subsection (c)(3), the extent that beneficiary
countries are providing the United States with equitable and reasonable
market access in the product sectors for which benefits are provided
under this title;
``(6) with respect to subsection (c)(11), the extent that
beneficiary countries are cooperating with the United States in
administering the provisions of section 213(b); and
``(7) with respect to subsection (c)(8), the extent that beneficiary
countries are meeting the internationally recognized worker rights
criteria under such subsection.
In the first report under this subsection, the President shall include
a review of the implementation of section 213(b), and his analysis of
whether the benefits under paragraphs (2) and (3) of such section
further the objectives of this title and whether such benefits should be
continued.''.
(d) Conforming Amendment.--Section 213(a)(1) of the Caribbean Basin
Economic Recovery Act is amended by inserting ``and except as provided
in section 213(b)(2) and (3),'' after ``Tax Reform Act of 1986,''.
SEC. 985. EFFECT OF NAFTA ON SUGAR IMPORTS FROM BENEFICIARY COUNTRIES.
The President shall monitor the effects, if any, that the
implementation of the NAFTA has on the access of beneficiary countries
under the Caribbean Basin Economic Recovery Act to the United States
market for sugars, syrups, and molasses. If the President considers that
the implementation of the NAFTA is affecting, or will likely affect, in
an adverse manner the access of such countries to the United States
market, the President shall promptly--
(1) take such actions, after consulting with interested parties and
with the appropriate committees of the House of Representatives and the
Senate, or
(2) propose to the Congress such legislative actions,
as may be necessary or appropriate to ameliorate such adverse effect.
SEC. 986. DUTY-FREE TREATMENT FOR CERTAIN BEVERAGES MADE WITH
CARIBBEAN RUM.
Section 213(a) of the Caribbean Basin Economic Recovery Act (19
U.S.C. 2703(a)) is amended--
(1) in paragraph (5), by striking ``chapter'' and inserting
``title''; and
(2) by adding at the end the following new paragraph:
``(6) Notwithstanding paragraph (1), the duty-free treatment provided
under this title shall apply to liqueurs and spirituous beverages
produced in the territory of Canada from rum if--
``(A) such rum is the growth, product, or manufacture of a
beneficiary country or of the Virgin Islands of the United States;
``(B) such rum is imported directly from a beneficiary country or
the Virgin Islands of the United States into the territory of Canada,
and such liqueurs and spirituous beverages are imported directly from
the territory of Canada into the customs territory of the United States;
``(C) when imported into the customs territory of the United States,
such liqueurs and spirituous beverages are classified in subheading
2208.90 or 2208.40 of the HTS; and
``(D) such rum accounts for at least 90 percent by volume of the
alcoholic content of such liqueurs and spiritous beverages.''.
SEC. 987. MEETINGS OF TRADE MINISTERS AND USTR.
(a) Schedule of Meetings.--The President shall take the necessary
steps to convene a meeting with the trade ministers of the partnership
countries in order to establish a schedule of regular meetings, to
commence as soon as is practicable, of the trade ministers and the Trade
Representative, for the purpose set forth in subsection (b).
(b) Purpose.--The purpose of the meetings scheduled under subsection
(a) is to reach agreement between the United States and partnership
countries on the likely timing and procedures for initiating
negotiations for partnership to accede to the NAFTA, or to enter into
mutually advantageous free trade agreements with the United States that
contain provisions comparable to those in the NAFTA and would make
substantial progress in achieving the negotiating objectives set forth
in section 108(b)(5) of the North American Free Trade Agreement
Implementation Act (19 U.S.C. 3317(b)(5)).
SEC. 988. REPORT ON ECONOMIC DEVELOPMENT AND MARKET ORIENTED
REFORMS IN THE CARIBBEAN.
(a) In General.--The Trade Representative shall make an assessment of
the economic development efforts and market oriented reforms in each
partnership country and the ability of each such country, on the basis
of such efforts and reforms, to undertake the obligations of the NAFTA.
The Trade Representative shall, not later than July 1, 1998, submit to
the President and to the Committee on Finance of the Senate and the
Committee on Ways and Means of the House of Representatives a report on
that assessment.
(b) Accession to NAFTA.--
(1) Ability of countries to implement nafta.--The Trade
Representative shall include in the report under subsection (a) a
discussion of possible timetables and procedures pursuant to which
partnership countries can complete the economic reforms necessary to
enable them to negotiate accession to the NAFTA. The Trade
Representative shall also include an assessment of the potential
phase-in periods that may be necessary for those partnership countries
with less developed economies to implement the obligations of the NAFTA.
(2) Factors in assessing ability to implement nafta.--In assessing
the ability of each partnership country to undertake the obligations of
the NAFTA, the Trade Representative should consider, among other
factors--
(A) whether the country has joined the WTO;
(B) the extent to which the country provides equitable access to the
markets of that country;
(C) the degree to which the country uses export subsidies or imposes
export performance requirements or local content requirements;
(D) macroeconomic reforms in the country such as the abolition of
price controls on traded goods and fiscal discipline;
(E) progress the country has made in the protection of intellectual
property rights;
(F) progress the country has made in the elimination of barriers to
trade in services;
(G) whether the country provides national treatment to foreign
direct investment;
(H) the level of tariffs bound by the country under the WTO (if the
country is a WTO member);
(I) the extent to which the country has taken other trade
liberalization measures; and
(J) the extent which the country works to accommodate market access
objectives of the United States.
(c) Parity Review in the Event a New Country Accedes to NAFTA.--If--
(1) a country or group of countries accedes to the NAFTA, or
(2) the United States negotiates a comparable free trade agreement
with another country or group of countries,
the Trade Representative shall provide to the committees referred to
in subsection (a) a separate report on the economic impact of the new
trade relationship on partnership countries. The report shall include
any measures the Trade Representative proposes to minimize the potential
for the diversion of investment from partnership countries to the new
NAFTA member or free trade agreement partner.
TITLE X--REVENUES
Subtitle A--Financial Products
SEC. 1001. CONSTRUCTIVE SALES TREATMENT FOR APPRECIATED
FINANCIAL POSITIONS.
(a) In General.--Part IV of subchapter P of chapter 1 is amended by
adding at the end the following new section:
``SEC. 1259. CONSTRUCTIVE SALES TREATMENT FOR APPRECIATED
FINANCIAL POSITIONS.
``(a) In General.--If there is a constructive sale of an appreciated
financial position--
``(1) the taxpayer shall recognize gain as if such position were
sold, assigned, or otherwise terminated at its fair market value on the
date of such constructive sale (and any gain shall be taken into account
for the taxable year which includes such date), and
``(2) for purposes of applying this title for periods after the
constructive sale--
``(A) proper adjustment shall be made in the amount of any gain or
loss subsequently realized with respect to such position for any gain
taken into account by reason of paragraph (1), and
``(B) the holding period of such position shall be determined as if
such position were originally acquired on the date of such constructive
sale.
``(b) Appreciated Financial Position.--For purposes of this section--
``(1) In general.--Except as provided in paragraph (2), the term
`appreciated financial position' means any position with respect to any
stock, debt instrument, or partnership interest if there would be gain
were such position sold, assigned, or otherwise terminated at its fair
market value.
``(2) Exceptions.--The term `appreciated financial position' shall
not include--
``(A) any position with respect to straight debt (as defined in
section 1361(c)(5)(B) without regard to clause (iii) thereof), and
``(B) any position which is marked to market under any provision of
this title or the regulations thereunder.
``(3) Position.--The term `position' means an interest, including a
futures or forward contract, short sale, or option.
``(c) Constructive Sale.--For purposes of this section--
``(1) In general.--A taxpayer shall be treated as having made a
constructive sale of an appreciated financial position if the taxpayer
(or a related person)--
``(A) enters into a short sale of the same or substantially
identical property,
``(B) enters into an offsetting notional principal contract with
respect to the same or substantially identical property,
``(C) enters into a futures or forward contract to deliver the same
or substantially identical property,
``(D) in the case of an appreciated financial position that is a
short sale or a contract described in subparagraph (B) or (C) with
respect to any property, acquires the same or substantially identical
property, or
``(E) to the extent prescribed by the Secretary in regulations,
enters into 1 or more other transactions (or acquires 1 or more
positions) that have substantially the same effect as a transaction
described in any of the preceding subparagraphs.
``(2) Exception for sales of nonpublicly traded property.--The term
`constructive sale' shall not include any contract for sale of any
stock, debt instrument, or partnership interest which is not a
marketable security (as defined in section 453(f)) if the contract
settles within 1 year after the date such contract is entered into.
``(3) Exception for certain closed transactions.--In applying this
section, there shall be disregarded any transaction (which would
otherwise be treated as a constructive sale) during the taxable year
if--
``(A) such transaction is closed before the end of the 30th day
after the close of such taxable year, and
``(B) in the case of a transaction which is closed during the 90-day
period ending on such 30th day--
``(i) the taxpayer holds the appreciated financial position
throughout the 60-day period beginning on the date such transaction is
closed, and
``(ii) at no time during such 60-day period is the taxpayer's risk
of loss with respect to such position reduced by reason of a
circumstance which would be described in section 246(c)(4) if references
to stock included references to such position.
``(4) Related person.--A person is related to another person with
respect to a transaction if--
``(A) the relationship is described in section 267 or 707(b), and
``(B) such transaction is entered into with a view toward avoiding
the purposes of this section.
``(d) Other Definitions.--For purposes of this section--
``(1) Forward contract.--The term `forward contract' means a
contract to deliver a substantially fixed amount of property for a
substantially fixed price.
``(2) Offsetting notional principal contract.--The term `offsetting
notional principal contract' means, with respect to any property, an
agreement which includes--
``(A) a requirement to pay (or provide credit for) all or
substantially all of the investment yield (including appreciation) on
such property for a specified period, and
``(B) a right to be reimbursed for (or receive credit for) all or
substantially all of any decline in the value of such property.
``(e) Special Rules.--
``(1) Treatment of subsequent sale of position which was deemed
sold.--If--
``(A) there is a constructive sale of any appreciated financial
position,
``(B) such position is subsequently disposed of, and
``(C) at the time of such disposition, the transaction resulting in
the constructive sale of such position is open with respect to the
taxpayer or any related person,
solely for purposes of determining whether the taxpayer has entered
into a constructive sale of any other appreciated financial position
held by the taxpayer, the taxpayer shall be treated as entering into
such transaction immediately after such disposition. For purposes of the
preceding sentence, an assignment or other termination shall be treated
as a disposition.
``(2) Certain trust instruments treated as stock.--For purposes of
this section, an interest in a trust which is actively traded (within
the meaning of section 1092(d)(1)) shall be treated as stock.
``(3) Multiple positions in property.--If a taxpayer holds multiple
positions in property, the determination of whether a specific
transaction is a constructive sale and, if so, which appreciated
financial position is deemed sold shall be made in the same manner as
actual sales.
``(f) Regulations.--The Secretary shall prescribe such regulations as
may be necessary or appropriate to carry out the purposes of this
section.''
(b) Election of Mark to Market for Securities Traders and for Traders
and Dealers in Commodities.--Subsection (d) of section 475 (relating to
mark to market accounting method for dealers in securities) is amended
by adding at the end the following new paragraph:
``(4) Election of mark to market for securities traders and for
traders and dealers in commodities.--
``(A) In general.--In the case of a person--
``(i) who is engaged in a trade or business to which this paragraph
applies, and
``(ii) who elects to be treated as a dealer in securities for
purposes of this section with respect to such trade or business,
subsections (a), (b)(3), (c)(3), and (e) and the preceding provisions
of this subsection (or, in the case of a dealer in commodities, this
section) shall apply to all commodities and securities held by such
person in any trade or business with respect to which such election is
in effect in the same manner as if such person were a dealer in
securities and all references to securities included references to
commodities.
``(B) Application of paragraph.--This paragraph shall apply to any
active trade or business--
``(i) as a trader in securities, or
``(ii) as a trader or dealer in commodities.
``(C) Exception for certain holdings of traders.--In the case of a
trader in securities or commodities, subsection (a) shall not apply to
any security or commodity (to which subsection (a) would otherwise apply
solely by reason of this paragraph) if such security or commodity is
clearly identified in the trader's records (before the close of the day
applicable under subsection (b)(2)) as being held other than in a trade
or business to which the election under subparagraph
(A) is in effect. A security or commodity so identified shall
be treated as described in subsection (b)(1).
``(D) Commodity.--For purposes of this paragraph, the term
`commodities' includes only commodities of a kind customarily dealt in
on an organized commodity exchange.
``(E) Election.--An election under this paragraph may be made
separately for each trade or business and without the consent of the
Secretary. Such an election, once made, shall apply to the taxable year
for which made and all subsequent taxable years unless revoked with the
consent of the Secretary.''
(c) Clerical Amendment.--The table of sections for part IV of
subchapter P of chapter 1 is amended by adding at the end the following
new item:
``Sec. 1259. Constructive sales treatment for appreciated
financial positions.''
(d) Effective Dates.--
(1) In general.--Except as otherwise provided in this subsection,
the amendments made by this section shall apply to any constructive sale
after June 8, 1997.
(2) Exception for sales of positions, etc. held before june 9,
1997.--A constructive sale before June 9, 1997, and the property to
which the position involved in the transaction relates, shall not be
taken into account in determining whether any other constructive sale
after June 8, 1997, has occurred if, within before the close of the
30-day period beginning on the date of the enactment of this Act, such
position and property are clearly identified in the taxpayer's records
as offsetting. The preceding sentence shall cease to apply as of the
date the taxpayer ceases to hold such position or property.
(3) Special rule.--In the case of a decedent dying after June 8,
1997, if--
(A) there was a constructive sale on or before such date of any
appreciated financial position,
(B) the transaction resulting in such constructive sale of such
position remains open (with respect to the decedent or any related
person) for not less than 2 years after the date of such transaction
(whether such period is before or after such date), and
(C) such transaction is not closed within the 30-day period
beginning on the date of the enactment of this Act,
then, for purposes of such Code, such position (and any property
related thereto, as determined under the principles of section
1259(d)(1) of such Code (as so added)) shall be treated as property
constituting rights to receive an item of income in respect of a
decedent under section 691 of such Code.
(4) Election of securities traders, and for traders and dealers in
commodities, to be treated as dealers in securities.--
(A) In general.--The amendment made by subsection (b) shall apply to
taxable years ending after the date of the enactment of this Act.
(B) 4 -year spread of adjustments.--In the case of a taxpayer who
elects under section 475(d)(4) of the Internal Revenue Code of 1986 (as
added by this section) to change its method of accounting for its first
taxable year ending after the date of the enactment of this Act, the net
amount of the adjustments required to be taken into account by the
taxpayer under section 481 of the Internal Revenue Code of 1986 shall be
taken into account ratably over the 4-taxable year period beginning with
such first taxable year.
SEC. 1002. LIMITATION ON EXCEPTION FOR INVESTMENT COMPANIES
UNDER SECTION 351.
(a) In General.--Paragraph (1) of section 351(e) (relating to
exceptions) is amended by adding at the end the following: ``For
purposes of the preceding sentence, the determination of whether a
company is an investment company shall be made--
``(A) by taking into account all stock and securities held by the
company, whether or not readily marketable, and
``(B) by treating all of the following as securities:
``(i) Money.
``(ii) Any financial instrument (as defined in section 731(c)(2)(C)).
``(iii) Any foreign currency.
``(iv) Any interest in a real estate investment trust, a common
trust fund, a regulated investment company, or a publicly traded
partnership (as defined in section 7704(b)).
``(v) Any interest described in clause (iv), (v), or (vi) of section
731(c)(2)(B) (or which would be so described without regard to any
reference to active trading or marketability).
``(vi) Any other asset specified in regulations prescribed by the
Secretary.''
(b) Effective Date.--
(1) In general.--The amendment made by subsection (a) shall apply to
transfers after June 8, 1997, in taxable years ending after such date.
(2) Binding contracts.--The amendment made by subsection (a) shall
not apply to any transfer pursuant to a written binding contract in
effect on June 8, 1997, that provides for the transfer of a fixed amount
of property, and at all times thereafter before such transfer.
SEC. 1003. MODIFICATION OF RULES FOR ALLOCATING INTEREST
EXPENSE TO TAX-EXEMPT INTEREST.
(a) Pro Rata Allocation Rules Applicable to Corporations.--
(1) In general.--Paragraph (1) of section 265(b) is amended by
striking ``In the case of a financial institution'' and inserting ``In
the case of a corporation''.
(2) Only obligations acquired after june 8, 1997, taken into
account.--Subparagraph (A) of section 265(b)(2) is amended by striking
``August 7, 1986'' and inserting ``June 8, 1997 (August 7, 1986, in the
case of a financial institution)''.
(3) Small issuer exception not to apply.--Subparagraph (A) of
section 265(b)(3) is amended by striking ``Any qualified'' and inserting
``In the case of a financial institution, any qualified''.
(4) Exception for certain bonds acquired on sale of goods or
services.--Subparagraph (B) of section 265(b)(4) is amended by adding at
the end the following new sentence: ``In the case of a taxpayer other
than a financial institution, such term shall not include a nonsalable
obligation acquired by such taxpayer in the ordinary course of business
as payment for goods or services provided by such taxpayer to any State
or local government.''
(5) Look-thru rules for partnerships.--Paragraph (6) of section
265(b) is amended by adding at the end the following new subparagraph:
``(C) Look-thru rules for partnerships.--In the case of a
corporation which is a partner in a partnership, such corporation shall
be treated for purposes of this subsection as holding directly its
allocable share of the assets of the partnership.''
(6) Application of pro rata disallowance on affiliated group
basis.--Subsection (b) of section 265 is amended by adding at the end
the following new paragraph:
``(7) Application of disallowance on affiliated group basis.--
``(A) In general.--For purposes of this subsection, all members of
an affiliated group filing a consolidated return under section 1501
shall be treated as 1 taxpayer.
``(B) Treatment of insurance companies.--This subsection shall not
apply to an insurance company, and subparagraph (A) shall be applied
without regard to any member of an affiliated group which is an
insurance company.''
(6) De minimis exception for nonfinancial institutions.--Subsection
(b) of section 265 is amended by adding at the end the following new
paragraph:
``(8) De minimis exception for nonfinancial institutions.--In the
case of a corporation, paragraph (1) shall not apply for any taxable
year if the amount described in paragraph (2)(A) with respect to such
corporation does not exceed the lesser of--
``(A) 2 percent of the amount described in paragraph (2)(B), or
``(B) $1,000,000.
The preceding sentence shall not apply to a financial institution or
to a dealer in tax-exempt obligations.''
(7) Clerical amendment.--The subsection heading for section 265(b)
is amended by striking `` Financial Institutions'' and inserting ``
Corporations''.
(b) Application of Section 265(a)(2) With Respect to Controlled
Groups.--Paragraph (2) of section 265(a) is amended after
``obligations'' by inserting ``held by the taxpayer (or any corporation
which is a member of a controlled group (as defined in section
267(f)(1)) which includes the taxpayer)''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after the date of the enactment of this Act.
SEC. 1004. GAINS AND LOSSES FROM CERTAIN TERMINATIONS WITH
RESPECT TO PROPERTY.
(a) Application of Capital Treatment to Property Other Than Personal
Property.--
(1) In general.--Paragraph (1) of section 1234A (relating to gains
and losses from certain terminations) is amended by striking ``personal
property (as defined in section 1092(d)(1))'' and inserting
``property''.
(2) Effective date.--The amendment made by paragraph (1) shall apply
to terminations more than 30 days after the date of the enactment of
this Act.
(b) Application of Capital Treatment, Etc. to Obligations Issued by
Natural Persons.--
(1) In general.--Section 1271(b) is amended to read as follows:
``(b) Exception for Certain Obligations.--
``(1) In general.--This section shall not apply to--
``(A) any obligation issued by a natural person before June 9, 1997,
and
``(B) any obligation issued before July 2, 1982, by an issuer which
is not a corporation and is not a government or political subdivision
thereof.
``(2) Termination.--Paragraph (1) shall not apply to any obligation
purchased (within the meaning of section 179(d)(2)) after June 8,
1997.''
(2) Effective date.--The amendment made by paragraph (1) shall take
effect on the date of enactment of this Act.
SEC. 1005. DETERMINATION OF ORIGINAL ISSUE DISCOUNT WHERE
POOLED DEBT OBLIGATIONS SUBJECT TO ACCELERATION.
(a) In General.--Subparagraph (C) of section 1272(a)(6) (relating to
debt instruments to which the paragraph applies) is amended by striking
``or'' at the end of clause (i), by striking the period at the end of
clause (ii) and inserting ``, or'', and by inserting after clause (i)
the following:
``(iii) any pool of debt instruments the yield on which may be
reduced by reason of prepayments (or to the extent provided in
regulations, by reason of other events).
To the extent provided in regulations prescribed by the Secretary, in
the case of a small business engaged in the trade or business of selling
tangible personal property at retail, clause (iii) shall not apply to
debt instruments incurred in the ordinary course of such trade or
business while held by such business.''
(b) Effective Dates.--
(1) In general.--The amendment made by this section shall apply to
taxable years beginning after the date of the enactment of this Act.
(2) Change in method of accounting.--In the case of any taxpayer
required by this section to change its method of accounting for its
first taxable year beginning after the date of the enactment of this
Act--
(A) such change shall be treated as initiated by the taxpayer,
(B) such change shall be treated as made with the consent of the
Secretary, and
(C) the net amount of the adjustments required to be taken into
account by the taxpayer under section 481 of the Internal Revenue Code
of 1986 shall be taken into account ratably over the 4-taxable year
period beginning with such first taxable year.
SEC. 1006. DENIAL OF INTEREST DEDUCTIONS ON CERTAIN DEBT INSTRUMENTS.
(a) In General.--Section 163 (relating to deduction for interest) is
amended by redesignating subsection (k) as subsection (l) and by
inserting after subsection (j) the following new subsection:
``(k) Disallowance of Deduction on Certain Debt Instruments of
Corporations.--
``(1) In general.--No deduction shall be allowed under this chapter
for any interest paid or accrued on a disqualified debt instrument.
``(2) Disqualified debt instrument.--For purposes of this
subsection, the term `disqualified debt instrument' means any
indebtedness of a corporation which is payable in equity of the issuer
or a related party.
``(3) Special rules for amounts payable in equity.--For purposes of
paragraph (2), indebtedness shall be treated as payable in equity of the
issuer or a related party only if--
``(A) a substantial amount of the principal or interest is required
to be paid or converted, or at the option of the issuer or a related
party is payable in, or convertible into, such equity,
``(B) a substantial amount of the principal or interest is required
to be determined, or at the option of the issuer or a related party is
determined, by reference to the value of such equity, or
``(C) the indebtedness is part of an arrangement which is reasonably
expected to result in a transaction described in subparagraph (A) or
(B).
For purposes of subparagraphs (A) and (B), principal or interest
shall be treated as required to be so paid, converted, or determined if
it may be required at the option of the holder or a related party and
there is a substantial certainty the option will be exercised.
``(4) Related party.--For purposes of this subsection, a person is a
related party with respect to another person if such person bears a
relationship to such other person described in section 267(b) or 707(b).
``(5) Regulations.--The Secretary shall prescribe such regulations
as may be necessary or appropriate to carry out the purposes of this
subsection, including regulations preventing avoidance of this
subsection through the use of an issuer other than a corporation.''
(b) Effective Date.--
(1) In general.--The amendment made by this section shall apply to
disqualified debt instruments issued after June 8, 1997.
(2) Transition rule.--The amendment made by this section shall not
apply to any instrument issued after June 8, 1997, if such instrument
is--
(A) issued pursuant to a written agreement which was binding on such
date and at all times thereafter,
(B) described in a ruling request submitted to the Internal Revenue
Service on or before such date, or
(C) described on or before such date in a public announcement or in
a filing with the Securities and Exchange Commission required solely by
reason of the distribution.
Subtitle B--Corporate Organizations and Reorganizations
SEC. 1011. TAX TREATMENT OF CERTAIN EXTRAORDINARY DIVIDENDS.
(a) Treatment of Extraordinary Dividends in Excess of
Basis.--Paragraph (2) of section 1059(a) (relating to corporate
shareholder's recognition of gain attributable to nontaxed portion of
extraordinary dividends) is amended to read as follows:
``(2) Amounts in excess of basis.--If the nontaxed portion of such
dividends exceeds such basis, such excess shall be treated as gain from
the sale or exchange of such stock for the taxable year in which the
extraordinary dividend is received.''
(b) Treatment of Redemptions Where Options Involved.--Paragraph (1)
of section 1059(e) (relating to treatment of partial liquidations and
non-pro rata redemptions) is amended to read as follows:
``(1) Treatment of partial liquidations and certain
redemptions.--Except as otherwise provided in regulations--
``(A) Redemptions.--In the case of any redemption of stock--
``(i) which is part of a partial liquidation (within the meaning of
section 302(e)) of the redeeming corporation,
``(ii) which is not pro rata as to all shareholders, or
``(iii) which would not have been treated (in whole or in part) as a
dividend if any options had not been taken into account under section
318(a)(4),
any amount treated as a dividend with respect to such redemption
shall be treated as an extraordinary dividend to which paragraphs (1)
and (2) of subsection (a) apply without regard to the period the
taxpayer held such stock. In the case of a redemption described in
clause (iii), only the basis in the stock redeemed shall be taken into
account under subsection (a).
``(B) Reorganizations, etc.--An exchange described in section 356
which is treated as a dividend shall be treated as a redemption of stock
for purposes of applying subparagraph (A).''
(c) Time for Reduction.--Paragraph (1) of section 1059(d) is amended
to read as follows:
``(1) Time for reduction.--Any reduction in basis under subsection
(a)(1) shall be treated as occurring at the beginning of the ex-dividend
date of the extraordinary dividend to which the reduction relates.''
(d) Effective Dates.--
(1) In general.--The amendments made by this section shall apply to
distributions after May 3, 1995.
(2) Transition rule.--The amendments made by this section shall not
apply to any distribution made pursuant to the terms of--
(A) a written binding contract in effect on May 3, 1995, and at all
times thereafter before such distribution, or
(B) a tender offer outstanding on May 3, 1995.
(3) Certain dividends not pursuant to certain redemptions.--In
determining whether the amendment made by subsection (a) applies to any
extraordinary dividend other than a dividend treated as an extraordinary
dividend under section 1059(e)(1) of the Internal Revenue Code of 1986
(as amended by this Act), paragraphs (1) and (2) shall be applied by
substituting ``September 13, 1995'' for ``May 3, 1995''.
SEC. 1012. APPLICATION OF SECTION 355 TO DISTRIBUTIONS
FOLLOWED BY ACQUISITIONS AND TO INTRAGROUP TRANSACTIONS.
(a) Distributions Followed by Acquisitions.--Section 355 (relating to
distribution of stock and securities of a controlled corporation) is
amended by adding at the end the following new subsection:
``(e) Recognition of Gain Where Certain Distributions of Stock or
Securities Are Followed by Acquisition.--
``(1) General rule.--If there is a distribution to which this
subsection applies, the following rules shall apply:
``(A) Acquisition of controlled corporation.--If there is an
acquisition described in paragraph (2)(A)(ii) with respect to any
controlled corporation, any stock or securities in the controlled
corporation shall not be treated as qualified property for purposes of
subsection (c)(2) of this section or section 361(c)(2).
``(B) Acquisition of distributing corporation.--If there is an
acquisition described in paragraph (2)(A)(ii) with respect to the
distributing corporation, the controlled corporation shall recognize
gain in an amount equal to the amount of net gain which would be
recognized if all the assets of the distributing corporation
(immediately after the distribution) were sold (at such time) for fair
market value. Any gain recognized under the preceding sentence shall be
treated as long-term capital gain and shall be taken into account for
the taxable year which includes the day after the date of such
distribution.
``(2) Distributions to which subsection applies.--
``(A) In general.--This subsection shall apply to any distribution--
``(i) to which this section (or so much of section 356 as relates to
this section) applies, and
``(ii) which is part of a plan (or series of related transactions)
pursuant to which 1 or more persons acquire directly or indirectly stock
representing a 50-percent or greater interest in the distributing
corporation or any controlled corporation.
``(B) Plan presumed to exist in certain cases.--If 1 or more persons
acquire directly or indirectly stock representing a 50-percent or
greater interest in the distributing corporation or any controlled
corporation during the 4-year period beginning on the date which is 2
years before the date of the distribution, such acquisition shall be
treated as pursuant to a plan described in subparagraph (A)(ii) unless
it is established that the distribution and the acquisition are not
pursuant to a plan or series of related transactions.
``(C) Coordination with subsection (d).--This subsection shall not
apply to any distribution to which subsection (d) applies.
``(3) Special rules relating to acquisitions.--
``(A) Certain acquisitions not taken into account.--Except as
provided in regulations, the following acquisitions shall not be treated
as described in paragraph (2)(A)(ii):
``(i) The acquisition of stock in any controlled corporation by the
distributing corporation.
``(ii) The acquisition by a person of stock in any controlled
corporation by reason of holding stock in the distributing corporation.
``(iii) The acquisition by a person of stock in any successor
corporation of the distributing corporation or any controlled
corporation by reason of holding stock in such distributing or
controlled corporation.
``(iv) The acquisition of stock in a corporation if shareholders
owning directly or indirectly a 50-percent or greater interest in the
distributing corporation or any controlled corporation before such
acquisition own indirectly a 50-percent or greater interest in such
distributing or controlled corporation after such acquisition.
This subparagraph shall not apply to any acquisition if the stock
held before the acquisition was acquired pursuant to a plan described in
subparagraph (A)(ii).
``(B) Asset acquisitions.--Except as provided in regulations, for
purposes of this subsection, if the assets of the distributing
corporation or any controlled corporation are acquired by a successor
corporation in a transaction described in subparagraph (A), (C), or (D)
of section 368(a)(1) or any other transaction specified in regulations
by the Secretary, the shareholders (immediately before the acquisition)
of the corporation acquiring such assets shall be treated as acquiring
stock in the corporation from which the assets were acquired.
``(4) Definition and special rules.--For purposes of this subsection--
``(A) 50- percent or greater interest.--The term `50-percent or
greater interest' has the meaning given such term by subsection (d)(4).
``(B) Distributions in title 11 or similar case.--Paragraph (1)
shall not apply to any distribution made in a title 11 or similar case
(as defined in section 368(a)(3)).
``(C) Aggregation and attribution rules.--
``(i) Aggregation.--The rules of paragraph (7)(A) of subsection (d)
shall apply.
``(ii) Attribution.--Section 355(d)(8)(A) shall apply in determining
whether a person holds stock or securities in any corporation.
``(D) Successors and predecessors.--For purposes of this subsection,
any reference to a controlled corporation or a distributing corporation
shall include a reference to any predecessor or successor of such
corporation.
``(E) Statute of limitations.--If there is an acquisition to which
paragraph (1) (A) or (B) applies--
``(i) the statutory period for the assessment of any deficiency
attributable to any part of the gain recognized under this subsection by
reason of such acquisition shall not expire before the expiration of 3
years from the date the Secretary is notified by the taxpayer (in such
manner as the Secretary may by regulations prescribe) that such
acquisition occurred, and
``(ii) such deficiency may be assessed before the expiration of such
3-year period notwithstanding the provisions of any other law or rule of
law which would otherwise prevent such assessment.
``(5) Regulations.--The Secretary shall prescribe such regulations
as may be necessary to carry out the purposes of this subsection,
including regulations--
``(A) providing for the application of this subsection where there
is more than 1 controlled corporation,
``(B) treating 2 or more distributions as 1 distribution where
necessary to prevent the avoidance of such purposes, and
``(C) providing for the application of rules similar to the rules of
subsection (d)(6) where appropriate for purposes of paragraph (2)(B).''
(b) Section 355 Not To Apply to Certain Intragroup
Transactions.--Section 355, as amended by subsection (a), is amended by
adding at the end the following new subsection:
``(f) Section Not To Apply to Certain Intragroup
Transactions.--Except as provided in regulations, this section shall not
apply to the distribution of stock from 1 member of an affiliated group
filing a consolidated return to another member of such group, and the
Secretary shall provide proper adjustments for the treatment of such
distribution, including (if necessary) adjustments to--
``(1) the adjusted basis of any stock which--
``(A) is in a corporation which is a member of such group, and
``(B) is held by another member of such group, and
``(2) the earnings and profits of any member of such group.''
(c) Determination of Control in Certain Divisive Transactions.--
(1) Section 351 transactions.--Section 351(c) (relating to special
rule) is amended to read as follows:
``(c) Special Rules Where Distribution to Shareholders.--
``(1) In general.--In determining control for purposes of this
section--
``(A) the fact that any corporate transferor distributes part or all
of the stock in the corporation which it receives in the exchange to its
shareholders shall not be taken into account, and
``(B) if the requirements of section 355 are met with respect to
such distribution, the shareholders shall be treated as in control of
such corporation immediately after the exchange if the shareholders hold
at least a 50-percent interest in such corporation immediately after the
distribution.
``(2) 50- percent interest.--For purposes of this subsection, the
term `50-percent interest' means stock possessing 50 percent of the
total combined voting power of all classes of stock entitled to vote and
50 percent of the total value of shares of all classes of stock.''
(2) D reorganizations.--Section 368(a)(2)(H) (relating to special
rule for determining whether certain transactions are qualified under
paragraph (1)(D)) is amended to read as follows:
``(H) Special rules for determining whether certain transactions are
qualified under paragraph (1)(d).--For purposes of determining whether a
transaction qualifies under paragraph (1)(D)--
``(i) in the case of a transaction with respect to which the
requirements of subparagraphs (A) and (B) of section 354(b)(1) are met,
the term `control' has the meaning given such term by section 304(c),
and
``(ii) in the case of a transaction with respect to which the
requirements of section 355 are met, the shareholders described in
paragraph (1)(D) shall be treated as having control of the corporation
to which the assets are transferred if such shareholders hold a
50-percent or greater interest (as defined in section 351(c)(2)) in such
corporation immediately after the transfer.''
(d) Effective Dates.--
(1) Section 355 rules.--The amendments made by subsections (a) and
(b) shall apply to distributions after April 16, 1997.
(2) Divisive transactions.--The amendments made by subsection (c)
shall apply to transfers after the date of the enactment of this Act.
(3) Transition rule.--The amendments made by this section shall not
apply to any distribution after April 16, 1997, if such distribution
is--
(A) made pursuant to a written agreement which was binding on such
date and at all times thereafter,
(B) described in a ruling request submitted to the Internal Revenue
Service on or before such date, or
(C) described on or before such date in a public announcement or in
a filing with the Securities and Exchange Commission required solely by
reason of the distribution.
This paragraph shall not apply to any written agreement, ruling
request, or public announcement or filing unless it identifies the
unrelated acquirer of the distributing corporation or of any controlled
corporation, whichever is applicable.
SEC. 1013. TAX TREATMENT OF REDEMPTIONS INVOLVING RELATED CORPORATIONS.
(a) Stock Purchases by Related Corporations.--The last sentence of
section 304(a)(1) (relating to acquisition by related corporation other
than subsidiary) is amended to read as follows: ``To the extent that
such distribution is treated as a distribution to which section 301
applies, the transferor and the acquiring corporation shall be treated
in the same manner as if the transferor had transferred the stock so
acquired to the acquiring corporation in exchange for stock of the
acquiring corporation in a transaction to which section 351(a) applies,
and then the acquiring corporation had redeemed the stock it was treated
as issuing in such transaction.''
(b) Coordination With Section 1059.--Clause (iii) of section
1059(e)(1)(A), as amended by this title, is amended to read as follows:
``(iii) which would not have been treated (in whole or in part) as a
dividend if--
``(I) any options had not been taken into account under section
318(a)(4), or
``(II) section 304(a) had not applied,''.
(c) Special Rule for Acquisitions by Foreign Corporations.--Section
304(b) (relating to special rules for application of subsection (a)) is
amended by adding at the end the following new paragraph:
``(5) Acquisitions by foreign corporations.--
``(A) In general.--In the case of any acquisition to which
subsection (a) applies in which the acquiring corporation is a foreign
corporation, the only earnings and profits taken into account under
paragraph (2)(A) shall be those earnings and profits--
``(i) which are attributable (under regulations prescribed by the
Secretary) to stock of the acquiring corporation owned (within the
meaning of section 958(a)) by a corporation or individual which is--
``(I) a United States shareholder (within the meaning of section
951(b)) of the acquiring corporation, and
``(II) the transferor or a person who bears a relationship to the
transferor described in section 267(b) or 707(b), and
``(ii) which were accumulated during the period or periods such
stock was owned by such person while the acquiring corporation was a
controlled foreign corporation.
``(B) Application of section 1248.--For purposes of subparagraph
(A), the rules of section 1248(d) shall apply except to the extent
otherwise provided by the Secretary.
``(C) Regulations.--The Secretary shall prescribe such regulations
as are appropriate to carry out the purposes of this paragraph.''
(d) Effective Date.--
(1) In general.--The amendments made by this section shall apply to
distributions and acquisitions after June 8, 1997.
(2) Transition rule.--The amendments made by this section shall not
apply to any distribution or acquisition after June 8, 1997, if such
distribution or acquisition is--
(A) made pursuant to a written agreement which was binding on such
date and at all times thereafter,
(B) described in a ruling request submitted to the Internal Revenue
Service on or before such date, or
(C) described in a public announcement or filing with the Securities
and Exchange Commission on or before such date.
SEC. 1014. MODIFICATION OF HOLDING PERIOD APPLICABLE TO
DIVIDENDS RECEIVED DEDUCTION.
(a) In General.--Subparagraph (A) of section 246(c)(1) is amended to
read as follows:
``(A) which is held by the taxpayer for 45 days or less during the
90-day period beginning on the date which is 45 days before the date on
which such share becomes ex-dividend with respect to such dividend,
or''.
(b) Conforming Amendments.--
(1) Paragraph (2) of section 246(c) is amended to read as follows:
``(2) 90- day rule in the case of certain preference dividends.--In
the case of stock having preference in dividends, if the taxpayer
receives dividends with respect to such stock which are attributable to
a period or periods aggregating in excess of 366 days, paragraph (1)(A)
shall be applied--
``(A) by substituting `90 days' for `45 days' each place it appears,
and
``(B) by substituting `180-day period' for `90-day period'.''
(2) Paragraph (3) of section 246(c) is amended by adding ``and'' at
the end of subparagraph (A), by striking subparagraph (B), and by
redesignating subparagraph (C) as subparagraph (B).
(c) Effective Date.--The amendments made by this section shall apply
to dividends received or accrued after the 30th day after the date of
the enactment of this Act.
Subtitle C--Other Corporate Provisions
SEC. 1021. REGISTRATION AND OTHER PROVISIONS RELATING TO
CONFIDENTIAL CORPORATE TAX SHELTERS.
(a) In General.--Section 6111 (relating to registration of tax
shelters) is amended by redesignating subsections (d) and (e) as
subsections (e) and (f), respectively, and by inserting after subsection
(c) the following new subsection:
``(d) Certain Confidential Arrangements Treated as Tax Shelters.--
``(1) In general.--For purposes of this section, the term `tax
shelter' includes any entity, plan, arrangement, or transaction--
``(A) a significant purpose of the structure of which is the
avoidance or evasion of Federal income tax for a direct or indirect
participant which is a corporation,
``(B) which is offered to any potential participant under conditions
of confidentiality, and
``(C) for which the tax shelter promoters may receive fees in excess
of $100,000 in the aggregate.
``(2) Conditions of confidentiality.--For purposes of paragraph
(1)(B), an offer is under conditions of confidentiality if--
``(A) the potential participant to whom the offer is made (or any
other person acting on behalf of such participant) has an understanding
or agreement with or for the benefit of any promoter of the tax shelter
that such participant (or such other person) will limit disclosure of
the tax shelter or any significant tax features of the tax shelter, or
``(B) any promoter of the tax shelter--
``(i) claims, knows, or has reason to know,
``(ii) knows or has reason to know that any other person (other than
the potential participant) claims, or
``(iii) causes another person to claim,
that the tax shelter (or any aspect thereof) is proprietary to any
person other than the potential participant or is otherwise protected
from disclosure to or use by others.
For purposes of this subsection, the term `promoter' means any person
or any related person (within the meaning of section 267 or 707) who
participates in the organization, management, or sale of the tax
shelter.
``(3) Persons other than promoter required to register in certain
cases.--
``(A) In general.--If--
``(i) the requirements of subsection (a) are not met with respect to
any tax shelter (as defined in paragraph (1)) by any tax shelter
promoter, and
``(ii) no tax shelter promoter is a United States person,
then each United States person who discussed participation in such
shelter shall register such shelter under subsection (a).
``(B) Exception.--Subparagraph (A) shall not apply to a United
States person who discussed participation in a tax shelter if--
``(i) such person notified the promoter in writing (not later than
the close of the 90th day after the day on which such discussions began)
that such person would not participate in such shelter, and
``(ii) such person does not participate in such shelter.
``(4) Offer to participate treated as offer for sale.--For purposes
of subsections (a) and (b), an offer to participate in a tax shelter (as
defined in paragraph (1)) shall be treated as an offer for sale.''
(b) Penalty.--Subsection (a) of section 6707 (relating to failure to
furnish information regarding tax shelters) is amended by adding at the
end the following new paragraph:
``(3) Confidential arrangements.--
``(A) In general.--In the case of a tax shelter (as defined in
section 6111(d)), the penalty imposed under paragraph (1) shall be an
amount equal to the greater of--
``(i) 50 percent of the fees paid to all promoters of the tax
shelter with respect to offerings made before the date such shelter is
registered under section 6111, or
``(ii) $10,000.
Clause (i) shall be applied by substituting `75 percent' for `50
percent' in the case of an intentional failure or act described in
paragraph (1).
``(B) Special rule for participants required to register
shelter.--In the case of a person required to register such a tax
shelter by reason of section 6111(d)(3)--
``(i) such person shall be required to pay the penalty under
paragraph (1) only if such person actually participated in such shelter,
``(ii) the amount of such penalty shall be determined by taking into
account under subparagraph (A)(i) only the fees paid by such person, and
``(iii) such penalty shall be in addition to the penalty imposed on
any other person for failing to register such shelter.''
(c) Modifications to Substantial Understatement Penalty.--
(1) Restriction on reasonable basis for corporate understatement of
income tax.--Subparagraph (B) of section 6662(d)(2) is amended by adding
at the end the following new flush sentence:
``For purposes of clause (ii)(II), in no event shall a corporation be
treated as having a reasonable basis for its tax treatment of an item
attributable to a multiple-party financing transaction if such treatment
does not clearly reflect the income of the corporation.''
(2) Modification to definition of tax shelter.--Clause (iii) of
section 6662(d)(2)(C) is amended by striking ``the principal purpose''
and inserting ``a significant purpose''.
(d) Conforming Amendments.--
(1) Paragraph (2) of section 6707(a) is amended by striking ``The
penalty'' and inserting ``Except as provided in paragraph (3), the
penalty''.
(2) Subparagraph (A) of section 6707(a)(1) is amended by striking
``paragraph (2)'' and inserting ``paragraph (2) or (3), as the case may
be''.
(e) Effective Date.--
(1) In general.--Except as provided in paragraph (2), the amendments
made by this section shall apply to any tax shelter (as defined in
section 6111(d) of the Internal Revenue Code of 1986, as amended by this
section) interests in which are offered to potential participants after
the Secretary of the Treasury prescribes guidance with respect to
meeting requirements added by such amendments.
(2) Modifications to substantial understatement penalty.--The
amendments made by subsection (c) shall apply to items with respect to
transactions entered into after the date of the enactment of this Act.
SEC. 1022. CERTAIN PREFERRED STOCK TREATED AS BOOT.
(a) Section 351.--Section 351 (relating to transfer to corporation
controlled by transferor) is amended by redesignating subsection (g) as
subsection (h) and by inserting after subsection (f) the following new
subsection:
``(g) Nonqualified Preferred Stock Not Treated as Stock.--
``(1) In general.--For purposes of subsections (a) and (b), the term
`stock' shall not include nonqualified preferred stock.
``(2) Nonqualified preferred stock.--For purposes of paragraph (1)--
``(A) In general.--The term `nonqualified preferred stock' means
preferred stock if--
``(i) the holder of such stock has the right to require the issuer
or a related person to redeem or purchase the stock,
``(ii) the issuer or a related person is required to redeem or
purchase such stock,
``(iii) the issuer or a related person has the right to redeem or
purchase the stock and, as of the issue date, it is more likely than not
that such right will be exercised, or
``(iv) the dividend rate on such stock varies in whole or in part
(directly or indirectly) with reference to interest rates, commodity
prices, or other similar indices.
``(B) Limitations.--Clauses (i), (ii), and (iii) of subparagraph (A)
shall apply only if the right or obligation referred to therein may be
exercised within the 20-year period beginning on the issue date of such
stock and such right or obligation is not subject to a contingency
which, as of the issue date, makes remote the likelihood of the
redemption or purchase.
``(C) Exceptions for certain rights or obligations.--
``(i) In general.--A right or obligation shall not be treated as
described in clause (i), (ii), or (iii) of subparagraph (A) if--
``(I) it may be exercised only upon the death, disability, or
mental incompetency of the holder, or
``(II) in the case of a right or obligation to redeem or purchase
stock transferred in connection with the performance of services for the
issuer or a related person (and which represents reasonable
compensation), it may be exercised only upon the holder's separation
from service from the issuer or a related person.
``(ii) Exception.--Clause (i)(I) shall not apply if the stock
relinquished in the exchange, or the stock acquired in the exchange is
in--
``(I) a corporation if any class of stock in such corporation or a
related party is readily tradable on an established securities market or
otherwise, or
``(II) any other corporation if such exchange is part of a
transaction or series of transactions in which such corporation is to
become a corporation described in subclause (I).
``(3) Definitions.--For purposes of this subsection--
``(A) Preferred stock.--The term `preferred stock' means stock which
is limited and preferred as to dividends and does not participate
(including through a conversion privilege) in corporate growth to any
significant extent.
``(B) Related person.--A person shall be treated as related to
another person if they bear a relationship to such other person
described in section 267(b) or 707(b).
``(4) Regulations.--The Secretary may prescribe such regulations as
may be necessary or appropriate to carry out the purposes of this
subsection and sections 354(a)(2)(C), 355(a)(3)(D), and 356(e). The
Secretary may also prescribe regulations, consistent with the treatment
under this subsection and such sections, for the treatment of
nonqualified preferred stock under other provisions of this title.''
(b) Section 354.--Paragraph (2) of section 354(a) (relating to
exchanges of stock and securities in certain reorganizations) is amended
by adding at the end the following new subparagraph:
``(C) Nonqualified preferred stock.--
``(i) In general.--Nonqualified preferred stock (as defined in
section 351(g)(2)) received in exchange for stock other than
nonqualified preferred stock (as so defined) shall not be treated as
stock or securities.
``(ii) Recapitalizations of family-owned corporations.--
``(I) In general.--Clause (i) shall not apply in the case of a
recapitalization under section 368(a)(1)(E) of a family-owned
corporation.
``(II) Family-owned corporation.--For purposes of this clause,
except as provided in regulations, the term `family-owned corporation'
means any corporation which is described in clause (i) of section
447(d)(2)(C) throughout the 8-year period beginning on the date which is
5 years before the date of the recapitalization. For purposes of the
preceding sentence,
stock shall not be treated as owned by a family member during
any period described in section 355(d)(6)(B).''
(c) Section 355.--Paragraph (3) of section 355(a) is amended by
adding at the end the following new subparagraph:
``(D) Nonqualified preferred stock.--Nonqualified preferred stock
(as defined in section 351(g)(2)) received in a distribution with
respect to stock other than nonqualified preferred stock (as so defined)
shall not be treated as stock or securities.''
(d) Section 356.--Section 356 is amended by redesignating subsections
(e) and (f) as subsections (f) and (g), respectively, and by inserting
after subsection (d) the following new subsection:
``(e) Nonqualified Preferred Stock Treated as Other Property.--For
purposes of this section--
``(1) In general.--Except as provided in paragraph (2), the term
`other property' includes nonqualified preferred stock (as defined in
section 351(g)(2)).
``(2) Exception.--The term `other property' does not include
nonqualified preferred stock (as so defined) to the extent that, under
section 354 or 355, such preferred stock would be permitted to be
received without the recognition of gain.''
(e) Conforming Amendments.--
(1) Subparagraph (B) of section 354(a)(2) and subparagraph (C) of
section 355(a)(3)(C) are each amended by inserting ``(including
nonqualified preferred stock, as defined in section 351(g)(2))'' after
``stock''.
(2) Subparagraph (A) of section 354(a)(3) and subparagraph (A) of
section 355(a)(4) are each amended by inserting ``nonqualified preferred
stock and'' after ``including''.
(3) Section 1036 is amended by redesignating subsection (b) as
subsection (c) and by inserting after subsection (a) the following new
subsection:
``(b) Nonqualified Preferred Stock Not Treated as Stock.--For
purposes of this section, nonqualified preferred stock (as defined in
section 351(g)(2)) shall be treated as property other than stock.''
(f) Effective Date.--
(1) In general.--The amendments made by this section shall apply to
transactions after June 8, 1997.
(2) Transition rule.--The amendments made by this section shall not
apply to any transaction after June 8, 1997, if such transaction is--
(A) made pursuant to a written agreement which was binding on such
date and at all times thereafter,
(B) described in a ruling request submitted to the Internal Revenue
Service on or before such date, or
(C) described on or before such date in a public announcement or in
a filing with the Securities and Exchange Commission required solely by
reason of the distribution.
Subtitle D--Administrative Provisions
SEC. 1031. REPORTING OF CERTAIN PAYMENTS MADE TO ATTORNEYS.
(a) In General.--Section 6045 (relating to returns of brokers) is
amended by adding at the end the following new subsection:
``(f) Return Required in the Case of Payments to Attorneys.--
``(1) In general.--Any person engaged in a trade or business and
making a payment (in the course of such trade or business) to which this
subsection applies shall file a return under subsection (a) and a
statement under subsection (b) with respect to such payment.
``(2) Application of subsection.--
``(A) In general.--This subsection shall apply to any payment to an
attorney in connection with legal services (whether or not such services
are performed for the payor).
``(B) Exception.--This subsection shall not apply to the portion of
any payment which is required to be reported under section 6041(a) (or
would be so required but for the dollar limitation contained therein) or
section 6051.''
(b) Reporting of Attorneys' Fees Payable to Corporations.--The
regulations providing an exception under section 6041 of the Internal
Revenue Code of 1986 for payments made to corporations shall not apply
to payments of attorneys' fees.
(c) Effective Date.--The amendment made by this section shall apply
to payments made after December 31, 1997.
SEC. 1032. DECREASE OF THRESHOLD FOR REPORTING PAYMENTS TO
CORPORATIONS PERFORMING SERVICES FOR FEDERAL AGENCIES.
(a) In General.--Subsection (d) of section 6041A (relating to returns
regarding payments of remuneration for services and direct sales) is
amended by adding at the end the following new paragraph:
``(3) Payments to corporations by federal executive agencies.--
``(A) In general.--Notwithstanding any regulation prescribed by the
Secretary before the date of the enactment of this paragraph, subsection
(a) shall apply to remuneration paid to a corporation by any Federal
executive agency (as defined in section 6050M(b)).
``(B) Exception.--Subparagraph (A) shall not apply to--
``(i) services under contracts described in section 6050M(e)(3) with
respect to which the requirements of section 6050M(e)(2) are met, and
``(ii) such other services as the Secretary may specify in
regulations prescribed after the date of the enactment of this
paragraph.''
(b) Effective Date.--The amendment made by this section shall apply
to returns the due date for which (determined without regard to any
extension) is more than 90 days after the date of the enactment of this
Act.
SEC. 1033. DISCLOSURE OF RETURN INFORMATION FOR ADMINISTRATION
OF CERTAIN VETERANS PROGRAMS.
(a) General Rule.--Subparagraph (D) of section 6103(l)(7) (relating
to disclosure of return information to Federal, State, and local
agencies administering certain programs) is amended by striking ``Clause
(viii) shall not apply after September 30, 1998.''
(b) Effective Date.--The amendment made by subsection (a) shall take
effect on the date of the enactment of this Act.
SEC. 1034. CONTINUOUS LEVY ON CERTAIN PAYMENTS.
(a) In General.--Section 6331 (relating to levy and distraint) is
amended--
(1) by redesignating subsection (h) as subsection (i), and
(2) by inserting after subsection (g) the following new subsection:
``(h) Continuing Levy on Certain Payments.--
``(1) In general.--The effect of a levy on specified payments to or
received by a taxpayer shall be continuous from the date such levy is
first made until such levy is released. Notwithstanding section 6334,
such continuous levy shall attach to up to 15 percent of any specified
payment due to the taxpayer.
``(2) Specified payment.--For the purposes of paragraph (1), the
term `specified payment' means--
``(A) any Federal payment other than a payment for which eligibility
is based on the income or assets (or both) of a payee,
``(B) any payment described in paragraph (4), (7), (9), or (11) of
section 6334(a), and
``(C) any annuity or pension payment under the Railroad Retirement
Act or benefit under the Railroad Unemployment Insurance Act described
in subsection (a)(6) of this section.''
(b) Effective Date.--The amendment made by subsection (a) shall apply
to levies issued after the date of the enactment of this Act.
SEC. 1035. MODIFICATION OF LEVY EXEMPTION.
(a) In General.--Section 6334 (relating to property exempt from levy)
is amended by redesignating subsection (f) as subsection (g) and by
inserting after subsection (e) the following new subsection:
``(f) Levy Allowed on Certain Specified Payments.--Any payment
described in subparagraph (B) or (C) of section 6331(h)(2) shall not be
exempt from levy if the Secretary approves the levy thereon under
section 6331(h).''
(b) Effective Date.--The amendment made by subsection (a) shall apply
to levies issued after the date of the enactment of this Act.
SEC. 1036. CONFIDENTIALITY AND DISCLOSURE OF RETURNS AND
RETURN INFORMATION.
(a) In General.--Subsection (k) of section 6103 is amended by adding
at the end the following new paragraph:
``(8) Levies on certain government payments.--
``(A) Disclosure of return information in levies on financial
management service.--In serving a notice of levy, or release of such
levy, with respect to any applicable government payment, the Secretary
may disclose to officers and employees of the Financial Management
Service--
``(i) return information, including taxpayer identity information,
``(ii) the amount of any unpaid liability under this title
(including penalties and interest), and
``(iii) the type of tax and tax period to which such unpaid
liability relates.
``(B) Restriction on use of disclosed information.--Return
information disclosed under subparagraph (A) may be used by officers and
employees of the Financial Management Service only for the purpose of,
and to the extent necessary in, transferring levied funds in
satisfaction of the levy, maintaining appropriate agency records in
regard to such levy or the release thereof, notifying the taxpayer and
the agency certifying such payment that the levy has been honored, or in
the defense of any litigation ensuing from the honor of such levy.
``(C) Applicable government payment.--For purposes of this
paragraph, the term `applicable government payment' means--
``(i) any Federal payment (other than a payment for which
eligibility is based on the income or assets (or both) of a payee)
certified to the Financial Management Service for disbursement, and
``(ii) any other payment which is certified to the Financial
Management Service for disbursement and which the Secretary designates
by published notice.''.
(b) Conforming Amendments.--
(1) Section 6301(p) is amended--
(A) in paragraph (3)(A), by striking ``(2), or (6)'' and inserting
``(2), (6), or (8), and
(B) in paragraph (4), by inserting ``(k)(8),'' after ``(j) (1) or
(2),'' each place it appears.
(2) Section 552a(a)(8)(B) of title 5, United States Code, is amended
by striking ``or'' at the end of clause (v), by adding ``or'' at the end
of clause (vi), and by adding at the end the following new clause:
``(vii) matches performed incident to a levy described in section
6103(k)(8) of the Internal Revenue Code of 1986;''.
(c) Effective Date.--The amendments made by this section shall apply
to levies issued after the date of the enactment of this Act.
SEC. 1037. RETURNS OF BENEFICIARIES OF ESTATES AND TRUSTS
REQUIRED TO FILE RETURNS CONSISTENT WITH ESTATE OR TRUST RETURN OR TO
NOTIFY SECRETARY OF INCONSISTENCY.
(a) Domestic Estates and Trusts.--Section 6034A (relating to
information to beneficiaries of estates and trusts) is amended by adding
at the end the following new subsection:
``(c) Beneficiary's Return Must be Consistent with Estate or Trust
Return or Secretary Notified of Inconsistency.--
``(1) In general.--A beneficiary of any estate or trust to which
subsection (a) applies shall, on such beneficiary's return, treat any
reported item in a manner which is consistent with the treatment of such
item on the applicable entity's return.
``(2) Notification of inconsistent treatment.--
``(A) In general.--In the case of any reported item, if--
``(i)(I) the applicable entity has filed a return but the
beneficiary's treatment on such beneficiary's return is (or may be)
inconsistent with the treatment of the item on the applicable entity's
return, or
``(II) the applicable entity has not filed a return, and
``(ii) the beneficiary files with the Secretary a statement
identifying the inconsistency,
paragraph (1) shall not apply to such item.
``(B) Beneficiary receiving incorrect information.--A beneficiary
shall be treated as having complied with clause (ii) of subparagraph (A)
with respect to a reported item if the beneficiary--
``(i) demonstrates to the satisfaction of the Secretary that the
treatment of the reported item on the beneficiary's return is consistent
with the treatment of the item on the statement furnished under
subsection (a) to the beneficiary by the applicable entity, and
``(ii) elects to have this paragraph apply with respect to that item.
``(3) Effect of failure to notify.--In any case--
``(A) described in subparagraph (A)(i)(I) of paragraph (2), and
``(B) in which the beneficiary does not comply with subparagraph
(A)(ii) of paragraph (2),
any adjustment required to make the treatment of the items by such
beneficiary consistent with the treatment of the items on the applicable
entity's return shall be treated as arising out of mathematical or
clerical errors and assessed according to section 6213(b)(1). Paragraph
(2) of section 6213(b) shall not apply to any assessment referred to in
the preceding sentence.
``(4) Definitions.--For purposes of this subsection--
``(A) Reported item.--The term `reported item' means any item for
which information is required to be furnished under subsection (a).
``(B) Applicable entity.--The term `applicable entity' means the
estate or trust of which the taxpayer is the beneficiary.
``(5) Addition to tax for failure to comply with section.--For
addition to tax in the case of a beneficiary's negligence in connection
with, or disregard of, the requirements of this section, see part II of
subchapter A of chapter 68.''
(b) Foreign Trusts.--Subsection (d) of section 6048 (relating to
information with respect to certain foreign trusts) is amended by adding
at the end the following new paragraph:
``(5) United states person's return must be consistent with trust
return or secretary notified of inconsistency.--Rules similar to the
rules of section 6034A(c) shall apply to items reported by a trust under
subsection (b)(1)(B) and to United States persons referred to in such
subsection.''
(c) Effective Date.--The amendments made by this section shall apply
to returns of beneficiaries and owners filed after the date of the
enactment of this Act.
Subtitle E--Excise Tax Provisions
SEC. 1041. EXTENSION AND MODIFICATION OF AIRPORT AND AIRWAY
TRUST FUND TAXES.
(a) Fuel Taxes.--
(1) Aviation fuel.--Clause (ii) of section 4091(b)(3)(A) is amended
by striking ``September 30, 1997'' and inserting ``September 30, 2007''.
(2) Aviation gasoline.--Subparagraph (B) of section 4081(d)(2) is
amended by striking ``September 30, 1997'' and inserting ``September 30,
2007''.
(3) Noncommercial aviation.--Subparagraph (B) of section 4041(c)(3)
is amended by striking ``September 30, 1997'' and inserting ``September
30, 2007''.
(b) Ticket Taxes.--
(1) Persons.--Clause (ii) of section 4261(g)(1)(A) is amended by
striking ``September 30, 1997'' and inserting ``September 30, 2007''.
(2) Property.--Clause (ii) of section 4271(d)(1)(A) is amended by
striking ``September 30, 1997'' and inserting ``September 30, 2007''.
(c) Modifications to Tax on Transportation of Persons by Air.--
(1) In general.--Section 4261 (relating to imposition of tax) is
amended by striking subsections (a), (b), and (c) and inserting the
following new subsections:
``(a) In General.--There is hereby imposed on the amount paid for
taxable transportation of any person a tax equal to 7.5 percent of the
amount so paid.
``(b) Domestic Segments of Taxable Transportation.--
``(1) In general.--There is hereby imposed on the amount paid for
each domestic segment of taxable transportation by air a tax in the
amount determined in accordance with the following table for the
calendar year in which the segment begins:
In the case of segments
beginning during:
The tax is:
1997 or 1998 $2.00
1999 $2.25
2000 $2.50
2001 $2.75
2002 or thereafter $3.00
``(2) Domestic segment.--For purposes of this section, the term
`domestic segment' means any segment which is taxable transportation
described in section 4262(a)(1).
``(3) Changes in segments by reason of rerouting.--If--
``(A) a ticket is purchased for transportation between 2 locations
on specified flights, and
``(B) at the initiation of the air carrier after such purchase,
there is a change in the route taken which changes the number of
domestic segments, but there is no change in the amount charged for such
transportation,
the tax imposed by paragraph (1) shall be determined without regard
to such change in route.
``(c) Use of International Travel Facilities.--
``(1) In general.--There is hereby imposed a tax of $15.50 on any
amount paid (whether within or without the United States) for any
transportation of any person by air, if such transportation begins or
ends in the United States.
``(2) Exception for transportation entirely taxable under subsection
( a ).--This subsection shall not apply to any transportation all of
which is taxable under subsection (a) (determined without regard to
sections 4281 and 4282).
``(3) Special rule for alaska and hawaii.--In any case in which the
tax imposed by paragraph (1) applies to a domestic segment, such tax
shall apply only on departure.''
(2) Special rules.--Section 4261 is amended by redesignating
subsections (e), (f), and (g), as subsections (f), (g), and (h),
respectively, and by inserting after subsection (d) the following new
subsection:
``(e) Special Rules.--
``(1) Amounts paid outside the united states.--In the case of
amounts paid outside the United States for taxable transportation, the
taxes imposed by subsections (a) and (b) shall apply only to segments of
such transportation which begin and end in the United States.
``(2) Amounts paid for right to award free or reduced rate air
transportation.--Any amount paid (and the value of any other benefit
provided) to an air carrier (or any related person) for the right to
provide mileage awards for (or other reductions in the cost of) any
transportation of persons by air shall be treated for purposes of
subsection (a) as an amount paid for taxable transportation, and such
amount shall be taxable under subsection (a) without regard to any other
provision of this subchapter. The Secretary shall prescribe rules which
reallocate items of income, deduction, credit, exclusion, or other
allowance to the extent necessary to prevent the avoidance of tax
imposed by reason of this paragraph.
``(3) Inflation adjustment of dollar rates of tax.--
``(A) In general.--In the case of taxable events in a calendar year
after the last nonindexed year, the dollar amount contained in
subsection (b) and the dollar amount contained in subsection (c) shall
each be increased by an amount equal to--
``(i) such dollar amount, multiplied by
``(ii) the cost-of-living adjustment determined under section
1(f)(3) for such calendar year by substituting the year before the last
nonindexed year for `calendar year 1992' in subparagraph (B) thereof.
If any increase determined under the preceding sentence is not a
multiple of 10 cents, such increase shall be rounded to the nearest
multiple of 10 cents.
``(B) Last nonindexed year.--For purposes of subparagraph (A), the
last nonindexed year is--
``(i) 2002 in the case of a dollar amount contained in subsection
(b), and
``(ii) 1998 in the case of a dollar amount contained in subsection (c).
``(C) Taxable event.--For purposes of subparagraph (A), in the case
of the tax imposed subsection (b), the beginning of the domestic segment
shall be treated as the taxable event.''
(3) Secondary liability of carrier for unpaid tax.--Subsection (c)
of section 4263 is amended by striking ``subchapter--'' and all that
follows and inserting ``, such tax shall be paid by the carrier
providing the initial segment of such transportation which begins or
ends in the United States.''
(d) Modification of Rules on Airline Fare Advertising.--Subsection
(b) of section 7275 (relating to advertising) is amended by striking
``shall--'' and all that follows and inserting ``shall--
``(1) separately state--
``(A) the amount to be paid for such transportation, and
``(B) the amount of the taxes imposed by subsections (a), (b), and
(c) of section 4261 at a location proximate to (and in a type size not
less than half the type size of) the statement of the amount described
in subparagraph (A), and
``(2) describe such taxes substantially as: `user taxes to pay for
airport construction and airway safety and operations'.''
(e) Increased Airport and Airway Trust Fund Deposits.--
(1) Paragraph (1) of section 9502(b) is amended--
(A) by striking ``(to the extent that the rate of the tax on such
gasoline exceeds 4.3 cents per gallon)'' in subparagraph (C), and
(B) by striking ``to the extent attributable to the Airport and
Airway Trust Fund financing rate'' in subparagraph (C).
(2) Section 9502 is amended by striking subsection (f).
(f) Effective Dates.--
(1) Fuel taxes.--The amendments made by subsection (a) shall apply
take effect on October 1, 1997.
(2) Ticket taxes.--
(A) In general.--Except as otherwise provided in this paragraph, the
amendments made by subsections (b) and (c) shall apply to transportation
beginning on or after October 1, 1997.
(B) Treatment of amounts paid for tickets purchased before date of
enactment.--The amendments made by subsection (c) shall not apply to
amounts paid for a ticket purchased before the date of the enactment of
this Act for a specified flight beginning on or after October 1, 1997.
(C) Amounts paid for right to award mileage awards.--
(i) In general.--Paragraph (2) of section 4261(e) of the Internal
Revenue Code of 1986 (as added by the amendment made by subsection (c))
shall apply to amounts paid after September 30, 1997.
(ii) Payments within controlled group.--For purposes of clause (i),
any amount paid after June 11, 1997, and before October 1, 1997, by 1
member of a controlled group for a right which is described in such
section 4261(e)(2) and is furnished by another member of such group
after September 30, 1997, shall be treated as paid after September 30,
1997. For purposes of the preceding sentence, all persons treated as a
single employer under subsection (a) or (b) of section 52 of such Code
shall be treated as members of a controlled group.
(3) Advertising.--The amendment made by subsection (d) shall take
effect on October 1, 1997.
(4) Increased deposits into airport and airway trust fund.--The
amendments made by subsection (e) shall apply with respect to taxes
received in the Treasury on and after October 1, 1997.
(g) Delayed Deposits of Airline Ticket Tax Revenues.--In the case of
deposits of taxes imposed by section 4261 of the Internal Revenue Code
of 1986, the due date for any such deposit which would (but for this
subsection) be required to be made after August 14, 1997, and before
October 1, 1997, shall be October 10, 1997.
SEC. 1042. KEROSENE TAXED AS DIESEL FUEL.
(a) In General.--Subsection (a) of section 4083 (defining taxable
fuel) is amended by striking ``and'' at the end of subparagraph (A), by
striking the period at the end of subparagraph (B) and inserting ``,
and'', and by adding at the end the following new subparagraph:
``(C) kerosene.''
(b) Rate of Tax.--Clause (iii) of section 4081(a)(2)(A) is amended by
inserting ``or kerosene'' after ``diesel fuel''.
(c) Exemptions From Tax; Refunds to Vendors.--
(1) In general.--Section 4082 (relating to exemptions for diesel
fuel) is amended by striking ``diesel fuel'' each place it appears in
subsections (a) and (c) and inserting ``diesel fuel and kerosene''.
(2) Certain kerosene exempt from dyeing requirement.--Section 4082
is amended by redesignating subsections (c) and (d) as subsections (d)
and (e), respectively, and by inserting after subsection (b) the
following new subsection:
``(c) Exceptions to Dyeing Requirements.--
``(1) Aviation-grade kerosene.--Subsection (a)(2) shall not apply to
a removal, entry, or sale of aviation-grade kerosene (as determined
under regulations prescribed by the Secretary) if the person receiving
the kerosene is registered under section 4101 with respect to the tax
imposed by section 4091.
``(2) Use for non-fuel feedstock purposes.--Subsection (a)(2) shall
not apply to kerosene--
``(A) received by pipeline or barge for use by the person receiving
the kerosene in the manufacture or production of any substance (other
than gasoline, diesel fuel, or special fuels referred to in section
4041), or
``(B) to the extent provided in regulations, removed or entered--
``(i) for such a use by the person removing or entering the
kerosene, or
``(ii) for resale by such person for such a use by the purchaser,
but only if the person receiving, removing, or entering the kerosene
and such purchaser (if any) are registered under section 4101 with
respect to the tax imposed by section 4081.''
(3) Refunds.--
(A) Subsection (l) of section 6427 is amended by inserting ``or
kerosene'' after ``diesel fuel'' each place it appears in paragraphs
(1), (2), and (5) (including the heading for paragraph (5)).
(B) Paragraph (5) of section 6427(l) is amended by redesignating
subparagraph (B) as subparagraph (C) and by inserting after subparagraph
(A) the following new subparagraph:
``(B) Sales of kerosene not for use in motor fuel.--Paragraph (1)(A)
shall not apply to kerosene sold by a vendor--
``(i) for any use if such sale is from a pump which (as determined
under regulations prescribed by the Secretary) is not suitable for use
in fueling any diesel-powered highway vehicle or train, or
``(ii) to the extent provided by the Secretary, for blending with
heating oil to be used during periods of extreme or unseasonable cold.''
(C) Subparagraph (C) of section 6427(l)(5), as redesignated by
subparagraph (B) of this paragraph, is amended by striking
``subparagraph (A)'' and inserting ``subparagraph (A) or (B)''.
(D) The heading for subsection (l) of section 6427 is amended by
inserting `` , Kerosene, '' after `` Diesel Fuel ''.
(d) Conforming Amendments.--
(1) Paragraph (2) of section 4041(a) is amended by striking
``kerosene, gas oil, or fuel oil'' and inserting ``gas oil, fuel oil''.
(2) Paragraph (1) of section 4041(c) is amended by striking ``any
liquid'' and inserting ``kerosene and any other liquid''.
(3)(A) The heading for section 4082 is amended by inserting `` AND
KEROSENE'' after `` DIESEL FUEL''.
(B) The table of sections for subpart A of part III of subchapter A
of chapter 32 is amended by inserting ``and kerosene'' after ``diesel
fuel'' in the item relating to section 4082.
(4) Subsection (b) of section 4083 is amended by striking
``gasoline, diesel fuel,'' and inserting ``taxable fuels''.
(5) Subsection (a) of section 4093 is amended by striking ``any
liquid'' and inserting ``kerosene and any other liquid''.
(6) The material following subparagraph (F) of section 6416(b)(2) is
amended by inserting ``or kerosene'' after ``diesel fuel''.
(7) Paragraphs (1) and (3) of section 6427(f), and the heading for
section 6427(f), are each amended by inserting ``kerosene,'' after
``diesel fuel,''.
(8) Paragraph (2) of section 6427(f) is amended by striking ``or
diesel fuel'' each place it appears and inserting ``, diesel fuel, or
kerosene''.
(9) Subparagraph (A) of section 6427(i)(3) is amended by striking
``or diesel fuel'' and inserting ``, diesel fuel, or kerosene''.
(10) The heading for paragraph (4) of section 6427(i) is amended to
read as follows:
``(4) Special rule for refunds under subsection (l).--''
(11) Paragraph (1) of section 6715(c) is amended by inserting ``or
kerosene'' after ``diesel fuel''.
(12)(A) The text of section 7232 is amended by striking ``gasoline,
lubricating oil, diesel fuel'' and inserting ``any taxable fuel (as
defined in section 4083)''.
(B) The section heading for section 7232 is amended to read as follows:
``SEC. 7232. FAILURE TO REGISTER UNDER SECTION 4101, FALSE
REPRESENTATIONS OF REGISTRATION STATUS, ETC.''
(C) The table of sections for part II of subchapter A of chapter 75
is amended by striking the item relating to section 7232 and inserting
the following:
``Sec. 7232. Failure to register under section 4101, false
representations of registration status, etc.''
(13) Sections 9503(b)(1)(E) and 9508(b)(2) are each amended by
striking ``and diesel fuel'' and inserting ``, diesel fuel, and
kerosene''.
(14) Subparagraph (B) of section 9503(b)(5) is amended by striking
``or diesel fuel'' and inserting ``, diesel fuel, or kerosene''.
(15) Paragraphs (1)(B) and (2) of section 9503(f) are each amended
by inserting ``or kerosene'' after ``diesel fuel'' each place it
appears.
(e) Effective Date.--The amendments made by this section shall take
effect on July 1, 1998.
(f) Floor Stock Taxes.--
(1) Imposition of tax.--In the case of kerosene which is held on
July 1, 1998, by any person, there is hereby imposed a floor stocks tax
of 24.3 cents per gallon.
(2) Liability for tax and method of payment.--
(A) Liability for tax.--A person holding kerosene on July 1, 1998,
to which the tax imposed by paragraph (1) applies shall be liable for
such tax.
(B) Method of payment.--The tax imposed by paragraph (1) shall be
paid in such manner as the Secretary shall prescribe.
(C) Time for payment.--The tax imposed by paragraph (1) shall be
paid on or before August 31, 1998.
(3) Definitions.--For purposes of this subsection--
(A) Held by a person.--Kerosene shall be considered as ``held by a
person'' if title thereto has passed to such person (whether or not
delivery to the person has been made).
(B) Secretary.--The term ``Secretary'' means the Secretary of the
Treasury or his delegate.
(4) Exception for exempt uses.--The tax imposed by paragraph (1)
shall not apply to kerosene held by any person exclusively for any use
to the extent a credit or refund of the tax imposed by section 4081 of
the Internal Revenue Code of 1986 is allowable for such use.
(5) Exception for fuel held in vehicle tank.--No tax shall be
imposed by paragraph (1) on kerosene held in the tank of a motor vehicle
or motorboat.
(6) Exception for certain amounts of fuel.--
(A) In general.--No tax shall be imposed by paragraph (1) on
kerosene held on July 1, 1998, by any person if the aggregate amount of
kerosene held by such person on such date does not exceed 2,000 gallons.
The preceding sentence shall apply only if such person submits to the
Secretary (at the time and in the manner required by the Secretary) such
information as the Secretary shall require for purposes of this
paragraph.
(B) Exempt fuel.--For purposes of subparagraph (A), there shall not
be taken into account fuel held by any person which is exempt from the
tax imposed by paragraph (1) by reason of paragraph (4) or (5).
(C) Controlled groups.--For purposes of this paragraph--
(i) Corporations.--
(I) In general.--All persons treated as a controlled group shall be
treated as 1 person.
(II) Controlled group.--The term ``controlled group'' has the
meaning given to such term by subsection (a) of section 1563 of such
Code; except that for such purposes the phrase ``more than 50 percent''
shall be substituted for the phrase ``at least 80 percent'' each place
it appears in such subsection.
(ii) Nonincorporated persons under common control.--Under
regulations prescribed by the Secretary, principles similar to the
principles of clause (i) shall apply to a group of persons under common
control where 1 or more of such persons is not a corporation.
(7) Coordination with section 4081.--No tax shall be imposed by
paragraph (1) on kerosene to the extent that tax has been (or will be)
imposed on such kerosene under section 4081 or 4091 of such Code.
(8) Other laws applicable.--All provisions of law, including
penalties, applicable with respect to the taxes imposed by section 4081
of such Code shall, insofar as applicable and not inconsistent with the
provisions of this subsection, apply with respect to the floor stock
taxes imposed by paragraph (1) to the same extent as if such taxes were
imposed by such section 4081.
SEC. 1043. REDUCTION OF INCENTIVES FOR ALCOHOL FUELS.
(a) Denial of Credit for Alcohol Used To Produce Ether.--Subsection
(b) of section 40 is amended by adding at the end the following new
paragraph:
``(6) Denial of credit for alcohol used to produce ether.--No credit
shall be allowed under this section for alcohol used to produce any
ether.''
(b) Limitation on Alcohol Eligible for Credit for Alcohol Used as
Fuel--
(1) In general.--Subparagraph (A) of section 40(d)(1) (defining
alcohol) is amended by striking ``or'' at the end of clause (i), by
striking the period at the end of clause (ii) and inserting ``, or'',
and by adding at the end the following new clause:
``(iii) alcohol produced by a still (or other distilling apparatus)
placed in service after June 8, 1997.''
(2) Future credit limited to average historical production.--Section
40 is amended by adding at the end the following new subsection:
``(i) Expanded Production Ineligible for Credit.--
``(1) In general.--Subsection (a) shall apply to alcohol produced
after December 31, 1997, only if the alcohol is designated under this
subsection by a producer who is registered under section 4101.
``(2) Designation based on historical production.--
``(A) In general.--The amount of alcohol produced by a producer
during any calendar year which may be designated under this subsection
by any producer other than an eligible small ethanol producer is the
amount equal to the average annual amount of alcohol (as defined in
subsection (d)(1)(A) without regard to clause (iii))--
``(i) which was produced by such producer (other than casual
off-farm production) during each of the base period years, and
``(ii) which was sold or used by such producer for any purpose
described in clause (i) of subsection (b)(4)(B).
For purposes of the preceding sentence, a rule similar to the rule of
subsection (b)(4)(D) shall apply.
``(B) Base period year.--For purposes of subparagraph (A), the term
`base period year' means each of 3 years which are among the 5-year
period ending on May 31, 1997, determined by disregarding--
``(i) one year for which the production described in subparagraph
(A)(i) was the largest, and
``(ii) one year for which the production described in subparagraph
(A)(i) was the smallest.
``(3) Production for less than entire base period.--If alcohol is
produced by a producer for less than 3 base period years, the average
referred to in paragraph (2) shall be treated as being not less than 50
percent of the annual productive capacity of such producer as of June 8,
1997.
``(4) Acquisitions and dispositions.--Rules similar to the rules of
subparagraphs (A) and (B) of section 41(f)(3) shall apply for purposes
of this subsection.''
(3) Conforming amendment.--Paragraph (1) of section 40(g) is amended
by striking ``clauses (i) and (ii)'' and inserting ``clauses (i), (ii),
and (iii)''.
(c) Reduction of Credit For Ethanol By Reason of Carbon Dioxide
Byproduct Benefit.--
(1) Subsection (h) of section 40 is amended--
(A) by striking ``54 cents'' each place it appears and inserting
``51 cents'', and
(B) by striking ``40 cents'' each place it appears and inserting
``38.25 cents''.
(2) Subparagraph (A) of section 4041(b)(2) is amended by striking
``5.4 cents'' and inserting ``5.1 cents''.
(3) Paragraphs (4)(A) and (5) of section 4081(c) are each amended by
striking ``5.4 cents'' each place it appears and inserting ``5.1
cents''.
(4) Paragraph (1) of section 4091(c) is amended by striking ``13.4
cents'' and inserting ``13.1 cents''.
(d) Excise Tax on Excess Production of Fuel Alcohol.--
(1) In general.--Chapter 36 (relating to certain other excise taxes)
is amended by inserting after subchapter B the following new subchapter:
``SUBCHAPTER C--EXCESS PRODUCTION OF FUEL ALCOHOL
``Sec. 4476. Imposition of tax.
``SEC. 4476. IMPOSITION OF TAX.
``(a) General Rule.--There is hereby imposed a tax of 51 cents for
each gallon of excess fuel alcohol produced, imported, or brought into
the United States.
``(b) Liability for Tax.--The tax imposed by subsection (a) shall be
paid by the person who would be liable for the tax imposed by section
5001 on the alcohol but for paragraph (1)(C) or (12) of section 5214(a).
``(c) Excess Fuel Alcohol.--For purposes of this section--
``(1) Domestic production.--In the case of alcohol produced in the
United States, the term `excess fuel alcohol' means any alcohol--
``(A) which is withdrawn free of tax under paragraph (1)(C) or (12)
of section 5214(a) during any calendar year, and
``(B) which is not designated under section 40(i).
``(2) Other production.--In the case of alcohol imported or brought
into the United States--
``(A) In general.--The term `excess fuel alcohol' means, with
respect to the person importing or bringing such alcohol into the United
States, the excess of--
``(i) the amount of alcohol so imported or brought into the United
States by such person during any year, over
``(ii) such person's historical average determined under rules
similar to the rules of section 40(i)(2).
``(B) Exception.--Such term shall not include any alcohol which the
person importing or bringing such alcohol into the United States
establishes to the satisfaction of the Secretary that such alcohol is
not to be used as a fuel or in a mixture to be used as a fuel.
``(3) Alcohol.--The term `alcohol' includes methanol and ethanol but
does not include alcohol produced from petroleum, natural gas, or coal
(including lignite).
``(d) Special Rules.--
``(1) Exception for casual off-farm production.--The tax imposed by
this section shall not apply to casual off-farm production (within the
meaning of section 40).
``(2) Alcohol must be withdrawn for fuel use.--Alcohol withdrawn
free of tax under section 5214(a)(1)(C) shall be taken into account
under this section only if withdrawn for fuel use.
``(3) Certain rules to apply.--The tax imposed by this section shall
attach, and be determined and paid, as if it were tax imposed by section
5001.
``(e) Application of Tax Dependent on Availability of Other Fuel
Alcohol Subsidies.--
``(1) Application if fuel alcohol subsidies continue.--Paragraphs
(1)(B) and (2)(A)(ii) of subsection (c) shall not apply after December
31, 2000, if this section is in effect after such date.
``(2) Application if fuel alcohol subsidies terminate.--This section
shall not apply after December 31, 2000, if none of the fuel alcohol
subsidies apply to any sale or use after such date. For purposes of the
preceding sentence, the fuel alcohol subsidies are sections 40,
4041(b)(2), 4081(c), 4091(c), 6427(f), and 6427(q).''
(2) Tax to be nondeductible.--Subsection (a) of section 275 is
amended by adding at the end the following new paragraph:
``(7) Taxes imposed by section 4476 (relating to excess production
of fuel alcohol).''
(3) Tax to be deposited into highway trust fund.--Paragraph (1) of
section 9503(b) is amended by striking ``and'' at the end of
subparagraph (E), by redesignating subparagraph (F) as subparagraph (G),
and by inserting after subparagraph (E) the following new subparagraph:
``(F) section 4476 (relating to excess production of fuel alcohol),
and''.
(4) Clerical amendment.--The table of subchapters for chapter 36 is
amended by inserting after the item relating to subchapter B the
following new item:
``Subchapter C. Excess production of fuel alcohol.''
(e) Increase in Small Ethanol Producer Credit.--Subparagraph (A) of
section 40(b)(4) is amended by striking ``10 cents'' and inserting ``13
cents''.
(f) Effective Date.--
(1) Amendments relating to credit.--The amendments made by
subsections (a), (b), (c)(1), and (e) shall apply to alcohol produced
after December 31, 1997, in taxable years ending after such date.
(2) Amendments relating to excise taxes.--The amendments made by
subsections (c)(2) and (d) shall take effect on January 1, 1998.
(3) Stills placed in service pursuant to binding contracts.--For
purposes of subsections (d)(1)(A)(iii) and (i)(3) of section 40 of the
Internal Revenue Code of 1986, as amended by this section, a still (or
other distilling apparatus) shall be treated as placed in service before
June 9, 1997, if such still (or other apparatus) is constructed or
acquired by the taxpayer pursuant to a written contract which was
binding on June 8, 1997, and at all times thereafter before such
construction or acquisition.
SEC. 1044. RESTORATION OF LEAKING UNDERGROUND STORAGE TANK
TRUST FUND TAXES.
Paragraph (3) of section 4081(d) is amended by striking ``shall not
apply after December 31, 1995'' and inserting ``shall apply after the
date of the enactment of the Revenue Reconciliation Act of 1997 and
before October 1, 2002''.
SEC. 1045. APPLICATION OF COMMUNICATIONS TAX TO LONG-DISTANCE
PREPAID TELEPHONE CARDS.
(a) In General.--Subsection (b) of section 4251 is amended--
(1) by adding at the end the following new paragraph:
``(3) Long-distance prepaid telephone cards and similar
arrangements.--Any amount paid (and the value of any other benefit
provided) to a provider of communications services (or any related
person) for the right to award, sell, or otherwise make available
telephone service (or reductions in the cost of such service) other than
local telephone service through prepaid telephone cards or any similar
arrangement shall be treated as an amount paid for communications
services. The Secretary shall prescribe rules which reallocate items of
income, deduction, credit, exclusion, or other allowance to the extent
necessary to prevent the avoidance of tax imposed by reason of this
paragraph.'', and
(2) by inserting `` And Special Rule'' after `` Definitions'' in the
heading.
(b) Effective Date.--
(1) In general.--The amendments made by this section shall apply to
amounts paid on or after the date of the enactment of this Act.
(2) Payments within controlled group.--For purposes of paragraph
(1), any amount paid after June 11, 1997, and before the date of the
enactment of this Act by 1 member of a controlled group for a right
which is described in section 4251(b)(3) of the Internal Revenue Code of
1986 (as added by this section) and is furnished by another member of
such group shall be treated as paid on the date of the enactment of this
Act. For purposes of the preceding sentence, all persons treated as a
single employer under subsection (a) or (b) of section 52 of such Code
shall be treated as members of a controlled group.
Subtitle F--Provisions Relating to Tax-Exempt Entities
SEC. 1051. EXPANSION OF LOOK-THRU RULE FOR INTEREST,
ANNUITIES, ROYALTIES, AND RENTS DERIVED BY SUBSIDIARIES OF TAX-EXEMPT
ORGANIZATIONS.
(a) In General.--Paragraph (13) of section 512(b) is amended to read
as follows:
``(13) Special rules for certain amounts received from controlled
entities.--
``(A) In general.--If an organization (in this paragraph referred to
as the `controlling organization') receives (directly or indirectly) a
specified payment from another entity which it controls (in this
paragraph referred to as the `controlled entity'), notwithstanding
paragraphs (1), (2), and (3), the controlling organization shall include
such payment as an item of gross income derived from an unrelated trade
or business to the extent such payment reduces the net unrelated income
of the controlled entity (or increases any net unrelated loss of the
controlled entity). There shall be allowed all deductions of the
controlling organization directly connected with amounts treated as
derived from an unrelated trade or business under the preceding
sentence.
``(B) Net unrelated income or loss.--For purposes of this paragraph--
``(i) Net unrelated income.--The term `net unrelated income' means--
``(I) in the case of a controlled entity which is not exempt from
tax under section 501(a), the portion of such entity's taxable income
which would be unrelated business taxable income if such entity were
exempt from tax under section 501(a) and had the same exempt purposes
(as defined in section 513A(a)(5)(A)) as the controlling organization,
or
``(II) in the case of a controlled entity which is exempt from tax
under section 501(a), the amount of the unrelated business taxable
income of the controlled entity.
``(ii) Net unrelated loss.--The term `net unrelated loss' means the
net operating loss adjusted under rules similar to the rules of clause
(i).
``(C) Specified payment.--For purposes of this paragraph, the term
`specified payment' means any interest, annuity, royalty, or rent.
``(D) Definition of control.--For purposes of this paragraph--
``(i) Control.--The term `control' means--
``(I) in the case of a corporation, ownership (by vote or value) of
more than 50 percent of the stock in such corporation,
``(II) in the case of a partnership, ownership of more than 50
percent of the profits interests or capital interests in such
partnership, or
``(III) in any other case, ownership of more than 50 percent of the
beneficial interests in the entity.
``(ii) Constructive ownership.--Section 318 (relating to
constructive ownership of stock) shall apply for purposes of determining
ownership of stock in a corporation. Similar principles shall apply for
purposes of determining ownership of interests in any other entity.
``(E) Related persons.--The Secretary shall prescribe such rules as
may be necessary or appropriate to prevent avoidance of the purposes of
this paragraph through the use of related persons.''
(b) Effective Date.--
(1) In general.--Except as provided in paragraph (2), the amendments
made by this section shall apply to taxable years beginning after the
date of the enactment of this Act.
(2) Control test.--In the case of taxable years beginning before
January 1, 1999, an organization shall be treated as controlling another
organization for purposes of section 512(b)(13) of the Internal Revenue
Code of 1986 (as amended by this section) only if it controls such
organization within the meaning of such section, determined by
substituting ``80 percent'' for ``50 percent'' each place it appears in
subparagraph (D) thereof.
SEC. 1052. LIMITATION ON INCREASE IN BASIS OF PROPERTY
RESULTING FROM SALE BY TAX-EXEMPT ENTITY TO A RELATED PERSON.
(a) In General.--Part IV of subchapter O of chapter 1 (relating to
special rules for gain or loss on disposition of property) is amended by
redesignating section 1061 as section 1062 and by inserting after
section 1060 the following new section:
``SEC. 1061. BASIS LIMITATION FOR SALE OR EXCHANGE OF PROPERTY
BY TAX-EXEMPT ENTITY TO RELATED PERSON.
``(a) General Rule.--In the case of a sale or exchange of property
directly or indirectly between a tax-exempt entity and a related person,
the basis of the related person in the property acquired shall not
exceed the adjusted basis of such property (immediately before the
exchange) in the hands of the tax-exempt entity, increased by the amount
of gain recognized to the tax-exempt entity on the transfer which is
subject to tax under section 511.
``(b) Definitions.--For purposes of this section--
``(1) Tax-exempt entity.--The term `tax-exempt entity' means any
entity which is exempt from the tax imposed by this chapter.
``(2) Related person.--The term `related person' means any person
bearing a relationship to the tax-exempt entity which is described in
section 267(b) or 707(b)(1).
For purposes of applying section 267(b)(2) under the preceding
sentence, such an entity shall be treated as if it were an individual.''
(b) Clerical Amendment.--The table of sections for part IV of
subchapter O of chapter 1 is amended by striking the last item and
inserting the following:
``Sec. 1061. Basis limitation for sale or exchange of property by
tax-exempt entity to related person.
``Sec. 1062. Cross references.''
(c) Effective Date.--
(1) In general.--The amendments made by this section shall apply to
sales and exchanges after June 8, 1997.
(2) Binding contracts.--The amendments made by this section shall
not apply to any sale or exchange pursuant to a written contract which
was binding on June 8, 1997, and at all times thereafter before the sale
or exchange.
SEC. 1053. MODIFICATIONS TO EXCEPTION FROM REPORTING, ETC. OF
LOBBYING ACTIVITIES.
(a) In General.--Paragraph (3) of section 6033(e) (relating to
exception where dues generally nondeductible) is amended to read as
follows:
``(3) Exception where dues generally nondeductible.--
``(A) In general.--Paragraph (1)(A) shall not apply to an
organization if more than 90 percent of the amount of the aggregate
annual dues (or similar payments) paid to such organization are paid--
``(i) by individuals or families whose annual dues (or similar
amounts) are less than $100, or
``(ii) by organizations which are exempt from tax.
For purposes of the preceding sentence, all organizations sharing a
name, charter, historic affiliation, or similar characteristics and
coordinating their lobbying activities shall be treated as 1
organization.
``(B) Inflation adjustment.--In the case of dues for annual periods
beginning in any calendar year after 1998, the dollar amount contained
in subparagraph (A)(i) shall be increased by an amount equal to--
``(i) such dollar amount, multiplied by
``(ii) the cost-of-living adjustment determined under section
1(f)(3) for such calendar year by substituting `calendar year 1997' for
`calendar year 1992' in subparagraph (B) thereof.
If any increase determined under the preceding sentence is not a
multiple of $5, such increase shall be rounded to the nearest multiple
of $5.''
(b) Effective Date.--The amendment made by subsection (a) shall apply
to taxable years beginning after December 31, 1997.
SEC. 1054. TERMINATION OF CERTAIN EXCEPTIONS FROM RULES
RELATING TO EXEMPT ORGANIZATIONS WHICH PROVIDE COMMERCIAL-TYPE
INSURANCE.
(a) In General.--Subparagraphs (A) and (B) of section 1012(c)(4) of
the Tax Reform Act of 1986 shall not apply to any taxable year beginning
after December 31, 1997.
(b) Special Rules.--In the case of an organization to which section
501(m) of the Internal Revenue Code of 1986 applies solely by reason of
the amendment made by subsection (a)--
(1) no adjustment shall be made under section 481 (or any other
provision) of such Code on account of a change in its method of
accounting for its first taxable year beginning after December 31, 1997,
and
(2) for purposes of determining gain or loss, the adjusted basis of
any asset held on the 1st day of such taxable year shall be treated as
equal to its fair market value as of such day.
(c) Reserve Weakening after June 8, 1997.--Any reserve weakening
after June 8, 1997, by an organization described in subsection (b) shall
be treated as occurring in such organizations 1st taxable year beginning
after December 31, 1997.
(d) Regulations.--The Secretary of the Treasury or his delegate may
prescribe rules for providing proper adjustments for organizations
described in subsection (b) with respect to short taxable years which
begin during 1998 by reason of section 843 of the Internal Revenue Code
of 1986.
Subtitle G--Other Revenue Provisions
SEC. 1061. TERMINATION OF SUSPENSE ACCOUNTS FOR FAMILY
CORPORATIONS REQUIRED TO USE ACCRUAL METHOD OF ACCOUNTING.
(a) In General.--Subsection (i) of section 447 (relating to method of
accounting for corporations engaged in farming) is amended by adding at
the end the following new paragraph:
``(7) Termination.--
``(A) In general.--No suspense account may be established under this
subsection by any corporation required by this section to change its
method of accounting for any taxable year ending after June 8, 1997.
``(B) Phaseout of existing suspense accounts.--
``(i) In general.--Each suspense account under this subsection shall
be reduced (but not below zero) for each taxable year beginning after
June 8, 1997, by an amount equal to the lesser of--
``(I) the applicable portion of such account, or
``(II) 50 percent of the taxable income of the corporation for the
taxable year, or, if the corporation has no taxable income for such
year, the amount of any net operating loss (as defined in section
172(c)) for such taxable year.
For purposes of the preceding sentence, the amount of taxable income
and net operating loss shall be determined without regard to this
paragraph.
``(ii) Coordination with other reductions.--The amount of the
applicable portion for any taxable year shall be reduced (but not below
zero) by the amount of any reduction required for such taxable year
under any other provision of this subsection.
``(iv) Inclusion in income.--Any reduction in a suspense account
under this paragraph shall be included in gross income for the taxable
year of the reduction.
``(C) Applicable portion.--For purposes of subparagraph (B), the
term `applicable portion' means, for any taxable year, the amount which
would ratably reduce the amount in the account (after taking into
account prior reductions) to zero over the period consisting of such
taxable year and the remaining taxable years in such first 20 taxable
years.
``(D) Amounts after 20th year.--Any amount in the account as of the
close of the 20th year referred to in subparagraph (C) shall be treated
as the applicable portion for each succeeding year thereafter to the
extent not reduced under this paragraph for any prior taxable year after
such 20th year.''
(b) Effective Date.--The amendments made by this section shall apply
to taxable years ending after June 8, 1997.
SEC. 1062. MODIFICATION OF TAXABLE YEARS TO WHICH NET
OPERATING LOSSES MAY BE CARRIED.
(a) In General.--Subparagraph (A) of section 172(b)(1) (relating to
years to which loss may be carried) is amended--
(1) by striking ``3'' in clause (i) and inserting ``2'', and
(2) by striking ``15'' in clause (ii) and inserting ``20''.
(b) Retention of 3 -Year Carryback for Casualty Losses of
Individuals.--Paragraph (1) of section 172(b) is amended by adding at
the end the following new subparagraph:
``(F) Casualty losses of individuals.--Subparagraph (A)(i) shall be
applied by substituting `3 years' for `2 years' with respect to the
portion of the net operating loss of an individual for the taxable year
which is attributable to losses of property arising from fire, storm,
shipwreck, or other casualty, or from theft.''
(c) Effective Date.--The amendments made by this section shall apply
to net operating losses for taxable years beginning after the date of
the enactment of this Act.
SEC. 1063. EXPANSION OF DENIAL OF DEDUCTION FOR CERTAIN
AMOUNTS PAID IN CONNECTION WITH INSURANCE.
(a) Denial of Deduction for Premiums.--Paragraph (1) of section
264(a) is amended to read as follows:
``(1) Premiums on any life insurance policy, or endowment or annuity
contract, if the taxpayer is directly or indirectly a beneficiary under
the policy or contract.''
(b) Interest on Policy Loans.--Paragraph (4) of section 264(a) is
amended by striking ``individual, who'' and all that follows and
inserting ``individual.''
(c) Pro Rata Allocation of Interest Expense to Policy Cash
Values.--Section 264 is amended by adding at the end the following new
subsection:
``(e) Pro Rata Allocation of Interest Expense to Policy Cash Values.--
``(1) In general.--No deduction shall be allowed for that portion of
the taxpayer's interest expense which is allocable to unborrowed policy
cash values.
``(2) Allocation.--For purposes of paragraph (1), the portion of the
taxpayer's interest expense which is allocable to unborrowed policy cash
values is an amount which bears the same ratio to such interest expense
as--
``(A) the taxpayer's average unborrowed policy cash values of life
insurance policies, and annuity and endowment contracts, issued after
June 8, 1997, bears to
``(B) the average adjusted bases (within the meaning of section
1016) for all assets of the taxpayer.
``(3) Unborrowed policy cash values.--The term `unborrowed policy
cash value' means, with respect to any life insurance policy or annuity
or endowment contract, the excess of--
``(A) the cash surrender value of such policy or contract determined
without regard to any surrender charge, over
``(B) the amount of any loan in respect of such policy or contract.
``(4) Exception for certain policies and contracts covering
officers, directors, and employees.--Paragraph (1) shall not apply to
any policy or contract owned by an entity engaged in a trade or business
which covers any individual who is an officer, director, or employee of
such trade or business at the time first covered by the policy or
contract, and such policies and contracts shall not be taken into
account under paragraph (2).
``(5) Exception for policies and contracts held by natural persons;
treatment of partnerships and s corporations.--
``(A) Policies and contracts held by natural persons.--
``(i) In general.--This subsection shall not apply to any policy or
contract held by a natural person.
``(ii) Exception where business is beneficiary.--If a trade or
business is directly or indirectly the beneficiary under any policy or
contract, to the extent of the unborrowed cash value of such policy or
contract, such policy or contract shall be treated as held by such trade
or business and not by a natural person.
``(iii) Special rules.--
``(I) Certain trades or businesses not taken into account.--Clause
(ii) shall not apply to any trade or business carried on as a sole
proprietorship and to any trade or business performing services as an
employee.
``(II) Limitation on unborrowed cash value.--The amount of the
unborrowed cash value of any policy or contract which is taken into
account by reason of clause (ii) shall not exceed the benefit to which
the trade or business is entitled under the policy or contract.
``(iv) Reporting.--The Secretary shall require such reporting from
policyholders and issuers as is necessary to carry out clause (ii). Any
report required under the preceding sentence shall be treated as a
statement referred to in section 6724(d)(1).
``(B) Treatment of partnerships and s corporations.--In the case of
a partnership or S corporation, this subsection shall be applied at the
partnership and corporate levels.
``(6) Special rules.--
``(A) Coordination with subsection ( a ) and section 265.--If
interest on any indebtedness is disallowed under subsection (a) or
section 265--
``(i) such disallowed interest shall not be taken into account for
purposes of applying this subsection, and
``(ii) for purposes of applying paragraph (2)(B), the adjusted bases
otherwise taken into account shall be reduced (but not below zero) by
the amount of such indebtedness.
``(B) Coordination with section 263a.--This subsection shall be
applied before the application of section 263A (relating to
capitalization of certain expenses where taxpayer produces property).''
``(7) Interest expense.--The term `interest expense' means the
aggregate amount allowable to the taxpayer as a deduction for interest
(within the meaning of section 265(b)(4)) for the taxable year
(determined without regard to this subsection, section 265(b), and
section 291).
``(8) Aggregation rules.--
``(A) In general.--All members of a controlled group (within the
meaning of subsection (d)(5)(B)) shall be treated as 1 taxpayer for
purposes of this subsection.
``(B) Treatment of insurance companies.--This subsection shall not
apply to an insurance company, and subparagraph (A) shall be applied
without regard to any insurance company.''
(b) Treatment of Insurance Companies.--
(1) Clause (ii) of section 805(a)(4)(C) is amended by inserting ``,
or out of the increase for the taxable year in policy cash values
(within the meaning of section 264(e)(3)(A)) of life insurance policies
and annuity and endowment contracts to which section 264(e) applies''
after ``tax-exempt interest''.
(2) Clause (iii) of section 805(a)(4)(D) is amended by striking
``and'' and inserting ``, the increase for the taxable year in policy
cash values (within the meaning of section 264(e)(3)(A)) of life
insurance policies and annuity and endowment contracts to which section
264(e) applies, and''.
(3) Subparagraph (B) of section 807(a)(2) is amended by striking
``interest,'' and inserting ``interest and the amount of the
policyholder's share of the increase for the taxable year in policy cash
values (within the meaning of
section 264(e)(3)(A)) of life insurance policies and annuity
and endowment contracts to which section 264(e) applies,''.
(4) Subparagraph (B) of section 807(b)(1) is amended by striking
``interest,'' and inserting ``interest and the amount of the
policyholder's share of the increase for the taxable year in policy cash
values (within the meaning of section 264(e)(3)(A)) of life insurance
policies and annuity and endowment contracts to which section 264(e)
applies,''.
(5) Paragraph (1) of section 812(d) is amended by striking ``and''
at the end of subparagraph (B), by striking the period at the end of
subparagraph (C) and inserting ``, and'', and by adding at the end the
following new subparagraph:
``(D) the increase for any taxable year in the policy cash values
(within the meaning of section 264(e)(3)(A)) of life insurance policies
and annuity and endowment contracts to which section 264(e) applies.''
(6) Subparagraph (B) of section 832(b)(5) is amended by striking
``and'' at the end of clause (i), by striking the period at the end of
clause (ii) and inserting ``, and'', and by adding at the end the
following new clause:
``(iii) the increase for the taxable year in policy cash values
(within the meaning of section 264(e)(3)(A)) of life insurance policies
and annuity and endowment contracts to which section 264(e) applies.''
(c) Conforming Amendment.--Subparagraph (A) of section 265(b)(4) is
amended by inserting ``, section 264,'' before ``and section 291''.
(d) Effective Date.--The amendments made by this section shall apply
to contracts issued after June 8, 1997, in taxable years ending after
such date. For purposes of the preceding sentence, any material increase
in the death benefit or other material change in the contract shall be
treated as a new contract but the addition of covered lives shall be
treated as a new contract only with respect to such additional covered
lives. For purposes of this subsection, an increase in the death benefit
under a policy or contract issued in connection with a lapse described
in section 501(d)(2) of the Health Insurance Portability and
Accountability Act of 1996 shall not be treated as a new contract.
SEC. 1064. ALLOCATION OF BASIS AMONG PROPERTIES DISTRIBUTED BY
PARTNERSHIP.
(a) In General.--Subsection (c) of section 732 is amended to read as
follows:
``(c) Allocation of Basis.--
``(1) In general.--The basis of distributed properties to which
subsection (a)(2) or (b) is applicable shall be allocated--
``(A)(i) first to any unrealized receivables (as defined in section
751(c)) and inventory items (as defined in section 751(d)(2)) in an
amount equal to the adjusted basis of each such property to the
partnership, and
``(ii) if the basis to be allocated is less than the sum of the
adjusted bases of such properties to the partnership, then, to the
extent any decrease is required in order to have the adjusted bases of
such properties equal the basis to be allocated, in the manner provided
in paragraph (3), and
``(B) to the extent of any basis not allocated under subparagraph
(A), to other distributed properties--
``(i) first by assigning to each such other property such other
property's adjusted basis to the partnership, and
``(ii) then, to the extent any increase or decrease in basis is
required in order to have the adjusted bases of such other distributed
properties equal such remaining basis, in the manner provided in
paragraph (2) or (3), whichever is appropriate.
``(2) Method of allocating increase.--Any increase required under
paragraph (1)(B) shall be allocated among the properties--
``(A) first to properties with unrealized appreciation in proportion
to their respective amounts of unrealized appreciation before such
increase (but only to the extent of each property's unrealized
appreciation), and
``(B) then, to the extent such increase is not allocated under
subparagraph (A), in proportion to their respective fair market values.
``(3) Method of allocating decrease.--Any decrease required under
paragraph (1)(A) or (1)(B) shall be allocated--
``(A) first to properties with unrealized depreciation in proportion
to their respective amounts of unrealized depreciation before such
decrease (but only to the extent of each property's unrealized
depreciation), and
``(B) then, to the extent such decrease is not allocated under
subparagraph (A), in proportion to their respective adjusted bases (as
adjusted under subparagraph (A)).''
(b) Effective Date.--The amendment made by subsection (a) shall apply
to distributions after the date of the enactment of this Act.
SEC. 1065. REPEAL OF REQUIREMENT THAT INVENTORY BE
SUBSTANTIALLY APPRECIATED.
(a) In General.--Paragraph (2) of section 751(a) is amended to read
as follows:
``(2) inventory items of the partnership,''.
(b) Conforming Amendments.--
(1) Subsection (d) of section 751 is amended to read as follows:
``(d) Inventory Items.--For purposes of this subchapter, the term
`inventory items' means--
``(1) property of the partnership of the kind described in section
1221(1),
``(2) any other property of the partnership which, on sale or
exchange by the partnership, would be considered property other than a
capital asset and other than property described in section 1231,
``(3) any other property of the partnership which, if sold or
exchanged by the partnership, would result in a gain taxable under
subsection (a) of section 1246 (relating to gain on foreign investment
company stock), and
``(4) any other property held by the partnership which, if held by
the selling or distributee partner, would be considered property of the
type described in paragraph (1), (2), or (3).''
(2) Sections 724(d)(2), 731(a)(2)(B), 731(c)(6), 732(c)(1)(A) (as
amended by the preceding section), 735(a)(2), and 735(c)(1) are each
amended by striking ``section 751(d)(2)'' and inserting ``section
751(d)''.
(c) Effective Date.--The amendments made by this section shall apply
to sales, exchanges, and distributions after the date of the enactment
of this Act.
SEC. 1066. EXTENSION OF TIME FOR TAXING PRECONTRIBUTION GAIN.
(a) In General.--Sections 704(c)(1)(B) and 737(b)(1) are each amended
by striking ``5 years'' and inserting ``10 years''.
(b) Effective Date.--The amendment made by subsection (a) shall apply
to property contributed to a partnership after June 8, 1997.
SEC. 1067. RESTRICTIONS ON AVAILABILITY OF EARNED INCOME
CREDIT FOR TAXPAYERS WHO IMPROPERLY CLAIMED CREDIT IN PRIOR YEAR.
(a) In General.--Section 32 is amended by redesignating subsections
(k) and (l) as subsections (l) and (m), respectively, and by inserting
after subsection (j) the following new subsection:
``(k) Restrictions on Taxpayers Who Improperly Claimed Credit in
Prior Year.--
``(1) Taxpayers making prior fraudulent or reckless claims.--
``(A) In general.--No credit shall be allowed under this section for
any taxable year in the disallowance period.
``(B) Disallowance period.--For purposes of paragraph (1), the
disallowance period is--
``(i) the period of 10 taxable years after the most recent taxable
year for which there was a final determination that the taxpayer's claim
of credit under this section was due to fraud, and
``(ii) the period of 2 taxable years after the most recent taxable
year for which there was a final determination that the taxpayer's claim
of credit under this section was due to reckless or intentional
disregard of rules and regulations (but not due to fraud).
``(2) Taxpayers making improper prior claims.--In the case of a
taxpayer who is denied credit under this section for any taxable year as
a result of the deficiency procedures under subchapter B of chapter 63,
no credit shall be allowed under this section for any subsequent taxable
year unless the taxpayer provides such information as the Secretary may
require to demonstrate eligibility for such credit.''
(b) Due Diligence Requirement on Income Tax Return
Preparers.--Section 6695 is amended by adding at the end the following
new subsection:
``(g) Failure To Be Diligent in Determining Eligibility for Earned
Income Credit.--Any person who is an income tax preparer with respect to
any return or claim for refund who fails to comply with due diligence
requirements imposed by the Secretary by regulations with respect to
determining eligibility for, or the amount of, the credit allowable by
section 32 shall pay a penalty of $100 for each such failure.''
(c) Extension Procedures Applicable to Mathematical or Clerical
Errors.--Paragraph (2) of section 6213(g) (relating to the definition of
mathematical or clerical errors) is amended by striking ``and'' at the
end of subparagraph (H), by striking the period at the end of
subparagraph (I) and inserting ``, and'', and by inserting after
subparagraph (I) the following new subparagraph:
``(J) an omission of information required by section 32(k)(2)
(relating to taxpayers making improper prior claims of earned income
credit).''
(d) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 1996.
SEC. 1068. LIMITATION ON PROPERTY FOR WHICH INCOME FORECAST
METHOD MAY BE USED.
(a) Limitation.--Subsection (g) of section 167 is amended by adding
at the end the following new paragraph:
``(6) Limitation on property for which income forecast method may be
used.--The depreciation deduction allowable under this section may be
determined under the income forecast method or any similar method only
with respect to--
``(A) property described in paragraph (3) or (4) of section 168(f),
``(B) copyrights,
``(C) books,
``(D) patents, and
``(E) other property specified in regulations.
Such methods may not be used with respect to any amortizable section
197 intangible (as defined in section 197(c)).''
(b) Depreciation Period for Rent-To-Own Property.--
(1) In general.--Subparagraph (A) of section 168(e)(3) (relating to
3-year property) is amended by striking ``and'' at the end of clause
(i), by striking the period at the end of clause (ii) and inserting ``,
and'', and by adding at the end the following new clause:
``(iii) any qualified rent-to-own property.''
(2) 4 -year class life.--The table contained in section 168(g)(3)(B)
is amended by inserting before the first item the following new item:
``(A)(iii) 4''
(3) Definition of qualified rent-to-own property.--Subsection (i) of
section 168 is amended by adding at the end the following new paragraph:
``(14) Qualified rent-to-own property.--
``(A) In general.--The term `qualified rent-to-own property' means
property held by a rent-to-own dealer for purposes of being subject to a
rent-to-own contract.
``(B) Rent-to-own dealer.--The term `rent-to-own dealer' means a
person that, in the ordinary course of business, regularly enters into
rent-to-own contracts with customers for the use of consumer property,
if a substantial portion of those contracts terminate and the property
is returned to such person before the receipt of all payments required
to transfer ownership of the property from such person to the customer.
``(C) Consumer property.--The term `consumer property' means
tangible personal property of a type generally used within the home.
Such term shall not include cellular telephones and any computer or
peripheral equipment (as defined in section 168(i)).
``(D) Rent-to-own contract.--The term `rent-to-own contract' means
any lease for the use of consumer property between a rent-to-own dealer
and a customer who is an individual which--
``(i) is titled `Rent-to-Own Agreement' or `Lease Agreement with
Ownership Option,' or uses other similar language,
``(ii) provides for level, regular periodic payments (for a payment
period which is a week or month),
``(iii) provides that legal title to such property remains with the
rent-to-own dealer until the customer makes all the payments described
in clause (ii) or early purchase payments required under the contract to
acquire legal title to the item of property,
``(iv) provides a beginning date and a maximum period of time for
which the contract may be in effect that does not exceed 156 weeks or 36
months from such beginning date (including renewals or options to
extend),
``(v) provides for level payments within the 156-week or 36-month
period that, in the aggregate, generally exceed the normal retail price
of the consumer property plus interest,
``(vi) provides for payments under the contract that, in the
aggregate, do not exceed $10,000 per item of consumer property,
``(vii) provides that the customer does not have any legal
obligation to make all the payments referred to in clause (ii) set forth
under the contract, and that at the end of each payment period the
customer may either continue to use the consumer property by making the
payment for the next payment period or return such property to the
rent-to-own dealer in good working order, in which case the customer
does not incur any further obligations under the contract and is not
entitled to a return of any payments previously made under the contract,
and
``(viii) provides that the customer has no right to sell, sublease,
mortgage, pawn, pledge, encumber, or otherwise dispose of the consumer
property until all the payments stated in the contract have been made.''
(c) Effective Date.--The amendment made by this section shall apply
to property placed in service after the date of the enactment of this
Act.
SEC. 1069. REPEAL OF SPECIAL RULE FOR RENTAL USE OF VACATION
HOMES, ETC., FOR LESS THAN 15 DAYS.
(a) In General.--Section 280A (relating to disallowance of certain
expenses in connection with business use of home, rental of vacation
homes, etc.) is amended by striking subsection (g).
(b) No Basis Reduction Unless Depreciation Claimed.--Section 1016 is
amended by redesignating subsection (e) as subsection (f) and by
inserting after subsection (d) the following new subsection:
``(e) Special Rule Where Rental Use of Vacation Home, Etc., for Less
Than 15 Days.--If a dwelling unit is used during the taxable year by the
taxpayer as a residence and such dwelling unit is actually rented for
less than 15 days during the taxable year, the reduction under
subsection (a)(2) by reason of such rental use in any taxable year
beginning after December 31, 1997, shall not exceed the depreciation
deduction allowed for such rental use.''
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 1997.
SEC. 1070. EXPANSION OF REQUIREMENT THAT INVOLUNTARILY
CONVERTED PROPERTY BE REPLACED WITH PROPERTY ACQUIRED FROM AN UNRELATED
PERSON.
(a) In General.--Subsection (i) of section 1033 is amended to read as
follows:
``(i) Replacement Property Must Be Acquired From Unrelated Person in
Certain Cases.--
``(1) In general.--If the property which is involuntarily converted
is held by a taxpayer to which this subsection applies, subsection (a)
shall not apply if the replacement property or stock is acquired from a
related person. The preceding sentence shall not apply to the extent
that the related person acquired the replacement property or stock from
an unrelated person during the period applicable under subsection
(a)(2)(B).
``(2) Taxpayers to which subsection applies.--This subsection shall
apply to--
``(A) a C corporation,
``(B) a partnership in which 1 or more C corporations own, directly
or indirectly (determined in accordance with section 707(b)(3)), more
than 50 percent of the capital interest, or profits interest, in such
partnership at the time of the involuntary conversion, and
``(C) any other taxpayer if, with respect to property which is
involuntarily converted during the taxable year, the aggregate of the
amount of realized gain on such property on which there is realized gain
exceeds $100,000.
In the case of a partnership, subparagraph (C) shall apply with
respect to the partnership and with respect to each partner. A similar
rule shall apply in the case of an S corporation and its shareholders.
``(3) Related person.--For purposes of this subsection, a person is
related to another person if the person bears a relationship to the
other person described in section 267(b) or 707(b)(1).''
(b) Effective Date.--The amendment made by this section shall apply
to involuntary conversions occurring after June 8, 1997.
SEC. 1071. TREATMENT OF EXCEPTION FROM INSTALLMENT SALES RULES
FOR SALES OF PROPERTY BY A MANUFACTURER TO A DEALER.
(a) In General.--Paragraph (2) of section 811(c) of the Tax Reform
Act of 1986 is hereby repealed.
(b) Effective Date.--
(1) In general.--The amendment made by this section shall apply to
taxable years beginning after the date of the enactment of this Act.
(2) Coordination with section 481.--In the case of any taxpayer
required by this section to change its method of accounting for any
taxable year--
(A) such changes shall be treated as initiated by the taxpayer,
(B) such changes shall be treated as made with the consent of the
Secretary, and
(C) the net amount of the adjustments required to be taken into
account under section 481(a) of the Internal Revenue Code of 1986 shall
be taken into account ratably over the 4 taxable year period beginning
with the first taxable year beginning after the date of the enactment of
this Act.
TITLE XI--SIMPLIFICATION AND OTHER FOREIGN-RELATED PROVISIONS
Subtitle A--General Provisions
SEC. 1101. TREATMENT OF COMPUTER SOFTWARE AS FSC EXPORT PROPERTY.
(a) In General.--Subparagraph (B) of section 927(a)(2) (relating to
property excluded from eligibility as FSC export property) is amended by
inserting ``, and other than computer software (whether or not
patented)'' before ``, for commercial or home use''.
(b) Effective Date.--The amendment made by subsection (a) shall apply
to gross receipts attributable to periods after December 31, 1997, in
taxable years ending after such date.
(c) Phasein of Treatment.--For purposes of the Internal Revenue Code
of 1986--
(1) 1998.--In the case of gross receipts attributable to calendar
year 1998, the amendment made by subsection (a) shall apply to only
\1/3\ of such gross receipts.
(2) 1999.--In the case of gross receipts attributable to calendar
year 1999, the amendment made by subsection (a) shall apply to only
\2/3\ of such gross receipts.
SEC. 1102. ADJUSTMENT OF DOLLAR LIMITATION ON SECTION 911 EXCLUSION.
(a) General Rule.--Paragraph (2) of section 911(b) is amended by--
(1) by striking ``of $70,000'' in subparagraph (A) and inserting
``equal to the exclusion amount for the calendar year in which such
taxable year begins'', and
(2) by adding at the end the following new subparagraph:
``(D) Exclusion amount.--
``(i) In general.--The exclusion amount for any calendar year is the
exclusion amount determined in accordance with the following table (as
adjusted by clause (ii)):
``For calendar year--
The exclusion amount is--
1998
$72,00005
1999
74,00005
2000
76,00005
2001
78,00005
2002 and thereafter
80,000.
``(ii) Inflation adjustment.--In the case of any taxable year
beginning in a calendar year after 2007, the $80,000 amount in clause
(i) shall be increased by an amount equal to the product of--
``(I) such dollar amount, and
``(II) the cost-of-living adjustment determined under section
1(f)(3) for the calendar year in which the taxable year begins,
determined by substituting `2006' for `1992' in subparagraph (B)
thereof.
If any increase determined under the preceding sentence is not a
multiple of $100, such increase shall be rounded to the next lowest
multiple of $100.''
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 1997.
SEC. 1103. CERTAIN INDIVIDUALS EXEMPT FROM FOREIGN TAX CREDIT
LIMITATION.
(a) General Rule.--Section 904 (relating to limitations on foreign
tax credit) is amended by redesignating subsection (j) as subsection (k)
and by inserting after subsection (i) the following new subsection:
``(j) Certain Individuals Exempt.--
``(1) In general.--In the case of an individual to whom this
subsection applies for any taxable year--
``(A) the limitation of subsection (a) shall not apply,
``(B) no taxes paid or accrued by the individual during such taxable
year may be deemed paid or accrued under subsection (c) in any other
taxable year, and
``(C) no taxes paid or accrued by the individual during any other
taxable year may be deemed paid or accrued under subsection (c) in such
taxable year.
``(2) Individuals to whom subsection applies.--This subsection shall
apply to an individual for any taxable year if--
``(A) the entire amount of such individual's gross income for the
taxable year from sources without the United States consists of
qualified passive income,
``(B) the amount of the creditable foreign taxes paid or accrued by
the individual during the taxable
year does not exceed $300 ($600 in the case of a joint return), and
``(C) such individual elects to have this subsection apply for the
taxable year.
``(3) Definitions.--For purposes of this subsection--
``(A) Qualified passive income.--The term `qualified passive income'
means any item of gross income if--
``(i) such item of income is passive income (as defined in
subsection (d)(2)(A) without regard to clause (iii) thereof), and
``(ii) such item of income is shown on a payee statement furnished
to the individual.
``(B) Creditable foreign taxes.--The term `creditable foreign taxes'
means any taxes for which a credit is allowable under section 901;
except that such term shall not include any tax unless such tax is shown
on a payee statement furnished to such individual.
``(C) Payee statement.--The term `payee statement' has the meaning
given to such term by section 6724(d)(2).
``(D) Estates and trusts not eligible.--This subsection shall not
apply to any estate or trust.''
(b) Effective Date.--The amendment made by subsection (a) shall apply
to taxable years beginning after December 31, 1997.
SEC. 1104. EXCHANGE RATE USED IN TRANSLATING FOREIGN TAXES.
(a) Accrued Taxes Translated by Using Average Rate for Year to Which
Taxes Relate.--
(1) In general.--Subsection (a) of section 986 (relating to
translation of foreign taxes) is amended to read as follows:
``(a) Foreign Income Taxes.--
``(1) Translation of accrued taxes.--
``(A) In general.--For purposes of determining the amount of the
foreign tax credit, in the case of a taxpayer who takes foreign income
taxes into account when accrued, the amount of any foreign income taxes
(and any adjustment thereto) shall be translated into dollars by using
the average exchange rate for the taxable year to which such taxes
relate.
``(B) Exception for certain taxes.--Subparagraph (A) shall not apply
to any foreign income taxes--
``(i) paid after the date 2 years after the close of the taxable
year to which such taxes relate, or
``(ii) paid before the beginning of the taxable year to which such
taxes relate.
``(C) Exception for inflationary currencies.--Subparagraph (A) shall
not apply to any foreign income taxes the liability for which is
denominated in any inflationary currency (as determined under
regulations).
``(D) Cross reference.--
``For adjustments where tax is not paid within 2 years, see
section 905(c).
``(2) Translation of taxes to which paragraph (1) does not
apply.--For purposes of determining the amount of the foreign tax
credit, in the case of any foreign income taxes to which subparagraph
(A) of paragraph (1) does not apply--
``(A) such taxes shall be translated into dollars using the exchange
rates as of the time such taxes were paid to the foreign country or
possession of the United States, and
``(B) any adjustment to the amount of such taxes shall be translated
into dollars using--
``(i) except as provided in clause (ii), the exchange rate as of the
time when such adjustment is paid to the foreign country or possession,
or
``(ii) in the case of any refund or credit of foreign income taxes,
using the exchange rate as of the time of the original payment of such
foreign income taxes.
``(3) Foreign income taxes.--For purposes of this subsection, the
term `foreign income taxes' means any income, war profits, or excess
profits taxes paid or accrued to any foreign country or to any
possession of the United States.''
(2) Adjustment when not paid within 2 years after year to which
taxes relate.--Subsection (c) of section 905 is amended to read as
follows:
``(c) Adjustments to Accrued Taxes.--
``(1) In general.--If--
``(A) accrued taxes when paid differ from the amounts claimed as
credits by the taxpayer,
``(B) accrued taxes are not paid before the date 2 years after the
close of the taxable year to which such taxes relate, or
``(C) any tax paid is refunded in whole or in part,
the taxpayer shall notify the Secretary, who shall redetermine the
amount of the tax for the year or years affected. The Secretary may
prescribe adjustments to tax pools under sections 902 and 960 in lieu of
the redetermination under the preceding sentence.
``(2) Special rule for taxes not paid within 2 years.--
``(A) In general.--Except as provided in subparagraph (B), in making
the redetermination under paragraph (1), no credit shall be allowed for
accrued taxes not paid before the date referred to in subparagraph (B)
of paragraph (1).
``(B) Taxes subsequently paid.--Any such taxes if subsequently paid
shall be taken into account for the taxable year to which such taxes
relate (and translated as provided in section 986(a)(2)(A)).
``(3) Adjustments.--The amount of tax (if any) due on any
redetermination under paragraph (1) shall be paid by the taxpayer on
notice and demand by the Secretary, and the amount of tax overpaid (if
any) shall be credited or refunded to the taxpayer in accordance with
subchapter B of chapter 66 (section 6511 et seq.).
``(4) Bond requirements.--In the case of any tax accrued but not
paid, the Secretary, as a condition precedent to the allowance of the
credit provided in this subpart, may require the taxpayer to give a
bond, with sureties satisfactory to and approved by the Secretary, in
such sum as the Secretary may require, conditioned on the payment by the
taxpayer of any amount of tax found due on any such redetermination. Any
such bond shall contain such further conditions as the Secretary may
require.
``(5) Other special rules.--In any redetermination under paragraph
(1) by the Secretary of the amount of tax due from the taxpayer for the
year or years affected by a refund, the amount of the taxes refunded for
which credit has been allowed under this section shall be reduced by the
amount of any tax described in section 901 imposed by the foreign
country or possession of the United States with respect to such refund;
but no credit under this subpart, or deduction under section 164, shall
be allowed for any taxable year with respect to any such tax imposed on
the refund. No interest shall be assessed or collected on any amount of
tax due on any redetermination by the Secretary, resulting from a refund
to the taxpayer, for any period before the receipt of such refund,
except to the extent interest was paid by the foreign country or
possession of the United States on such refund for such period.''
(b) Authority To Use Average Rates.--
(1) In general.--Subsection (a) of section 986 (as amended by
subsection (a)) is amended by redesignating paragraph (3) as paragraph
(4) and inserting after paragraph (2) the following new paragraph:
``(3) Authority to permit use of average rates.--To the extent
prescribed in regulations, the average exchange rate for the period
(specified in such regulations) during which the taxes or adjustment is
paid may be used instead of the exchange rate as of the time of such
payment.''
(2) Determination of average rates.--Subsection (c) of section 989
is amended by striking ``and'' at the end of paragraph (4), by striking
the period at the end of paragraph (5) and inserting ``, and'', and by
adding at the end thereof the following new paragraph:
``(6) setting forth procedures for determining the average exchange
rate for any period.''
(3) Conforming amendments.--Subsection (b) of section 989 is amended
by striking ``weighted'' each place it appears.
(c) Effective Dates.--
(1) In general.--The amendments made by subsections (a)(1) and (b)
shall apply to taxes paid or accrued in taxable years beginning after
December 31, 1997.
(2) Subsection ( a )(2).--The amendment made by subsection (a)(2)
shall apply to taxes which relate to taxable years beginning after
December 31, 1997.
SEC. 1105. ELECTION TO USE SIMPLIFIED SECTION 904 LIMITATION
FOR ALTERNATIVE MINIMUM TAX.
(a) General Rule.--Subsection (a) of section 59 (relating to
alternative minimum tax foreign tax credit) is amended by adding at the
end thereof the following new paragraph:
``(3) Election to use simplified section 904 limitation.--
``(A) In general.--In determining the alternative minimum tax
foreign tax credit for any taxable year to which an election under this
paragraph applies--
``(i) subparagraph (B) of paragraph (1) shall not apply, and
``(ii) the limitation of section 904 shall be based on the
proportion which--
``(I) the taxpayer's taxable income (as determined for purposes of
the regular tax) from sources without the United States (but not in
excess of the taxpayer's entire alternative minimum taxable income),
bears to
``(II) the taxpayer's entire alternative minimum taxable income for
the taxable year.
``(B) Election.--
``(i) In general.--An election under this paragraph may be made only
for the taxpayer's first taxable year which begins after December 31,
1997, and for which the taxpayer claims an alternative minimum tax
foreign tax credit.
``(ii) Election revocable only with consent.--An election under this
paragraph, once made, shall apply to the taxable year for which made and
all subsequent taxable years unless revoked with the consent of the
Secretary.''
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 1997.
SEC. 1106. TREATMENT OF PERSONAL TRANSACTIONS BY INDIVIDUALS
UNDER FOREIGN CURRENCY RULES.
(a) General Rule.--Subsection (e) of section 988 (relating to
application to individuals) is amended to read as follows:
``(e) Application to Individuals.--
``(1) In general.--The preceding provisions of this section shall
not apply to any section 988 transaction entered into by an individual
which is a personal transaction.
``(2) Exclusion for certain personal transactions.--If--
``(A) nonfunctional currency is disposed of by an individual in any
transaction, and
``(B) such transaction is a personal transaction,
no gain shall be recognized for purposes of this subtitle by reason
of changes in exchange rates after such currency was acquired by such
individual and before such disposition. The preceding sentence shall not
apply if the gain which would otherwise be recognized on the transaction
exceeds $200.
``(3) Personal transactions.--For purposes of this subsection, the
term `personal transaction' means any transaction entered into by an
individual, except that such term shall not include any transaction to
the extent that expenses properly allocable to such transaction meet the
requirements of section 162 or 212 (other than that part of section 212
dealing with expenses incurred in connection with taxes).''
(b) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 1997.
SEC. 1107. ALL NONCONTROLLED SECTION 902 CORPORATIONS WHICH
ARE NOT PASSIVE FOREIGN INVESTMENT COMPANIES IN ONE FOREIGN TAX
LIMITATION BASKET.
(a) In General.--Subparagraph (E) of section 904(d)(2) (relating to
noncontrolled section 902 corporations) is amended by adding at the end
the following new clause:
``(iv) All non-pfic's treated as one.--All noncontrolled section 902
corporations which are not passive foreign investment companies (as
defined in section 1297) shall be treated as one noncontrolled section
902 corporation for purposes of paragraph (1). The Secretary may
prescribe regulations regarding the treatment of distributions out of
earnings and profits for periods prior to the taxpayer's acquisition of
such stock.''
(b) Effective Date.--The amendment made by subsection (a) shall apply
to taxable years beginning after December 31, 2001.
Subtitle B--Treatment of Controlled Foreign Corporations
SEC. 1111. GAIN ON CERTAIN STOCK SALES BY CONTROLLED FOREIGN
CORPORATIONS TREATED AS DIVIDENDS.
(a) General Rule.--Section 964 (relating to miscellaneous provisions)
is amended by adding at the end thereof the following new subsection:
``(e) Gain on Certain Stock Sales by Controlled Foreign Corporations
Treated as Dividends.--
``(1) In general.--If a controlled foreign corporation sells or
exchanges stock in any other foreign corporation, gain recognized on
such sale or exchange shall be included in the gross income of such
controlled foreign corporation as a dividend to the same extent that it
would have been so included under section 1248(a) if such controlled
foreign corporation were a United States person. For purposes of
determining the amount which would have been so includible, the
determination of whether such other foreign corporation was a controlled
foreign corporation shall be made without regard to the preceding
sentence.
``(2) Same country exception not applicable.--Clause (i) of section
954(c)(3)(A) shall not apply to any amount treated as a dividend by
reason of paragraph (1).
``(3) Clarification of deemed sales.--For purposes of this
subsection, a controlled foreign corporation shall be treated as having
sold or exchanged any stock if, under any provision of this subtitle,
such controlled foreign corporation is treated as having gain from the
sale or exchange of such stock.''
(b) Amendment of Section 904(d).--Clause (i) of section 904(d)(2)(E)
is amended by striking ``and except as provided in regulations, the
taxpayer was a United States shareholder in such corporation''.
(c) Effective Dates.--
(1) The amendment made by subsection (a) shall apply to gain
recognized on transactions occurring after the date of the enactment of
this Act.
(2) The amendment made by subsection (b) shall apply to
distributions after the date of the enactment of this Act.
SEC. 1112. MISCELLANEOUS MODIFICATIONS TO SUBPART F.
(a) Section 1248 Gain Taken Into Account in Determining Pro Rata
Share.--
(1) In general.--Paragraph (2) of section 951(a) (defining pro rata
share of subpart F income) is amended by adding at the end thereof the
following new sentence: ``For purposes of subparagraph (B), any gain
included in the gross income of any person as a dividend under section
1248 shall be treated as a distribution received by such person with
respect to the stock involved.''
(2) Effective date.--The amendment made by paragraph (1) shall apply
to dispositions after the date of the enactment of this Act.
(b) Basis Adjustments in Stock Held by Foreign Corporation.--
(1) In general.--Section 961 (relating to adjustments to basis of
stock in controlled foreign corporations and of other property) is
amended by adding at the end thereof the following new subsection:
``(c) Basis Adjustments in Stock Held by Foreign Corporation.--Under
regulations prescribed by the Secretary, if a United States shareholder
is treated under section 958(a)(2) as owning any stock in a controlled
foreign corporation which is actually owned by another controlled
foreign corporation, adjustments similar to the adjustments provided by
subsections (a) and (b) shall be made to the basis of such stock in the
hands of such other controlled foreign corporation, but only for the
purposes of determining the amount included under section 951 in the
gross income of such United States shareholder (or any other United
States shareholder who acquires from any person any portion of the
interest of such United States shareholder by reason of which such
shareholder was treated as owning such stock, but only to the extent of
such portion, and subject to such proof of identity of such interest as
the Secretary may prescribe by regulations).''
(2) Effective date.--The amendment made by paragraph (1) shall apply
for purposes of determining inclusions for taxable years of United
States shareholders beginning after December 31, 1997.
(c) Clarification of Treatment of Branch Tax Exemptions or
Reductions.--
(1) In general.--Subsection (b) of section 952 is amended by adding
at the end thereof the following new sentence: ``For purposes of this
subsection, any exemption (or reduction) with respect to the tax imposed
by section 884 shall not be taken into account.''.
(2) Effective date.--The amendment made by paragraph (1) shall apply
to taxable years beginning after December 31, 1986.
SEC. 1113. INDIRECT FOREIGN TAX CREDIT ALLOWED FOR CERTAIN
LOWER TIER COMPANIES.
(a) Section 902 Credit.--
(1) In general.--Subsection (b) of section 902 (relating to deemed
taxes increased in case of certain 2nd and 3rd tier foreign
corporations) is amended to read as follows:
``(b) Deemed Taxes Increased in Case of Certain Lower Tier
Corporations.--
``(1) In general.--If--
``(A) any foreign corporation is a member of a qualified group, and
``(B) such foreign corporation owns 10 percent or more of the voting
stock of another member of such group from which it receives dividends
in any taxable year,
such foreign corporation shall be deemed to have paid the same
proportion of such other member's post-1986 foreign income taxes as
would be determined under subsection (a) if such foreign corporation
were a domestic corporation.
``(2) Qualified group.--For purposes of paragraph (1), the term
`qualified group' means--
``(A) the foreign corporation described in subsection (a), and
``(B) any other foreign corporation if--
``(i) the domestic corporation owns at least 5 percent of the voting
stock of such other foreign corporation indirectly through a chain of
foreign corporations connected through stock ownership of at least 10
percent of their voting stock,
``(ii) the foreign corporation described in subsection (a) is the
first tier corporation in such chain, and
``(iii) such other corporation is not below the sixth tier in such
chain.
The term `qualified group' shall not include any foreign corporation
below the third tier in the chain referred to in clause (i) unless such
foreign corporation is a controlled foreign corporation (as defined in
section 957) and the domestic corporation is a United States shareholder
(as defined in section 951(b)) in such foreign corporation. Paragraph
(1) shall apply to those taxes paid by a member of the qualified group
below the third tier only with respect to periods during which it was a
controlled foreign corporation.''
(2) Conforming amendments.--
(A) Subparagraph (B) of section 902(c)(3) is amended by adding
``or'' at the end of clause (i) and by striking clauses (ii) and (iii)
and inserting the following new clause:
``(ii) the requirements of subsection (b)(2) are met with respect to
such foreign corporation.''
(B) Subparagraph (B) of section 902(c)(4) is amended by striking
``3rd foreign corporation'' and inserting ``sixth tier foreign
corporation''.
(C) The heading for paragraph (3) of section 902(c) is amended by
striking `` where domestic corporation acquires 10 percent of foreign
corporation '' and inserting `` where foreign corporation first
qualifies ''.
(D) Paragraph (3) of section 902(c) is amended by striking
``ownership'' each place it appears.
(b) Section 960 Credit.--Paragraph (1) of section 960(a) (relating to
special rules for foreign tax credits) is amended to read as follows:
``(1) Deemed paid credit.--For purposes of subpart A of this part,
if there is included under section 951(a) in the gross income of a
domestic corporation any amount attributable to earnings and profits of
a foreign corporation which is a member of a qualified group (as defined
in section 902(b)) with respect to the domestic corporation, then,
except to the extent provided in regulations, section 902 shall be
applied as if the amount so included were a dividend paid by such
foreign corporation (determined by applying section 902(c) in accordance
with section 904(d)(3)(B)).''
(c) Effective Date.--
(1) In general.--The amendments made by this section shall apply to
taxes of foreign corporations for taxable years of such corporations
beginning after the date of enactment of this Act.
(2) Special rule.--In the case of any chain of foreign corporations
described in clauses (i) and (ii) of section 902(b)(2)(B) of the
Internal Revenue Code of 1986 (as amended by this section), no
liquidation, reorganization, or similar transaction in a taxable year
beginning after the date of the enactment of this Act shall have the
effect of permitting taxes to be taken into account under section
902 of the Internal Revenue Code of 1986 which could not have
been taken into account under such section but for such transaction.
Subtitle C--Treatment of Passive Foreign Investment Companies
SEC. 1121. UNITED STATES SHAREHOLDERS OF CONTROLLED FOREIGN
CORPORATIONS NOT SUBJECT TO PFIC INCLUSION.
Section 1296 is amended by adding at the end the following new
subsection:
``(e) Exception for United States Shareholders of Controlled Foreign
Corporations.--
``(1) In general.--For purposes of this part, a corporation shall
not be treated with respect to a shareholder as a passive foreign
investment company during the qualified portion of such shareholder's
holding period with respect to stock in such corporation.
``(2) Qualified portion.--For purposes of this subsection, the term
`qualified portion' means the portion of the shareholder's holding
period--
``(A) which is after December 31, 1997, and
``(B) during which the shareholder is a United States shareholder
(as defined in section 951(b)) of the corporation and the corporation is
a controlled foreign corporation.
``(3) New holding period if qualified portion ends.--
``(A) In general.--Except as provided in subparagraph (B), if the
qualified portion of a shareholder's holding period with respect to any
stock ends after December 31, 1997, solely for purposes of this part,
the shareholder's holding period with respect to such stock shall be
treated as beginning as of the first day following such period.
``(B) Exception.--Subparagraph (A) shall not apply if such stock
was, with respect to such shareholder, stock in a passive foreign
investment company at any time before the qualified portion of the
shareholder's holding period with respect to such stock and no election
under section 1298(b)(1) is made.''
SEC. 1122. ELECTION OF MARK TO MARKET FOR MARKETABLE STOCK IN
PASSIVE FOREIGN INVESTMENT COMPANY.
(a) In General.--Part VI of subchapter P of chapter 1 is amended by
redesignating subpart C as subpart D, by redesignating sections 1296 and
1297 as sections 1297 and 1298, respectively, and by inserting after
subpart B the following new subpart:
``Subpart C--Election of Mark to Market For Marketable Stock
``Sec. 1296. Election of mark to market for marketable stock.
``SEC. 1296. ELECTION OF MARK TO MARKET FOR MARKETABLE STOCK.
``(a) General Rule.--In the case of marketable stock in a passive
foreign investment company which is owned (or treated under subsection
(g) as owned) by a United States person at the close of any taxable year
of such person, at the election of such person--
``(1) If the fair market value of such stock as of the close of such
taxable year exceeds its adjusted basis, such United States person shall
include in gross income for such taxable year an amount equal to the
amount of such excess.
``(2) If the adjusted basis of such stock exceeds the fair market
value of such stock as of the close of such taxable year, such United
States person shall be allowed a deduction for such taxable year equal
to the lesser of--
``(A) the amount of such excess, or
``(B) the unreversed inclusions with respect to such stock.
``(b) Basis Adjustments.--
``(1) In general.--The adjusted basis of stock in a passive foreign
investment company--
``(A) shall be increased by the amount included in the gross income
of the United States person under subsection (a)(1) with respect to such
stock, and
``(B) shall be decreased by the amount allowed as a deduction to the
United States person under subsection (a)(2) with respect to such stock.
``(2) Special rule for stock constructively owned.--In the case of
stock in a passive foreign investment company which the United States
person is treated as owning under subsection (g)--
``(A) the adjustments under paragraph (1) shall apply to such stock
in the hands of the person actually holding such stock but only for
purposes of determining the subsequent treatment under this chapter of
the United States person with respect to such stock, and
``(B) similar adjustments shall be made to the adjusted basis of the
property by reason of which the United States person is treated as
owning such stock.
``(c) Character and Source Rules.--
``(1) Ordinary treatment.--
``(A) Gain.--Any amount included in gross income under subsection
(a)(1), and any gain on the sale or other disposition of marketable
stock in a passive foreign investment company (with respect to which an
election under this section is in effect), shall be treated as ordinary
income.
``(B) Loss.--Any--
``(i) amount allowed as a deduction under subsection (a)(2), and
``(ii) loss on the sale or other disposition of marketable stock in
a passive foreign investment company (with respect to which an election
under this section is in effect) to the extent that the amount of such
loss does not exceed the unreversed inclusions with respect to such
stock,
shall be treated as an ordinary loss. The amount so treated shall be
treated as a deduction allowable in computing adjusted gross income.
``(2) Source.--The source of any amount included in gross income
under subsection (a)(1) (or allowed as a deduction under subsection
(a)(2)) shall be determined in the same manner as if such amount were
gain or loss (as the case may be) from the sale of stock in the passive
foreign investment company.
``(d) Unreversed Inclusions.--For purposes of this section, the term
`unreversed inclusions' means, with respect to any stock in a passive
foreign investment company, the excess (if any) of--
``(1) the amount included in gross income of the taxpayer under
subsection (a)(1) with respect to such stock for prior taxable years,
over
``(2) the amount allowed as a deduction under subsection (a)(2) with
respect to such stock for prior taxable years.
The amount referred to in paragraph (1) shall include any amount which
would have been included in gross income under subsection (a)(1) with
respect to such stock for any prior taxable year but for section 1291.
``(e) Marketable Stock.--For purposes of this section--
``(1) In general.--The term `marketable stock' means--
``(A) any stock which is regularly traded on--
``(i) a national securities exchange which is registered with the
Securities and Exchange Commission or the national market system
established pursuant to section 11A of the Securities and Exchange Act
of 1934, or
``(ii) any exchange or other market which the Secretary determines
has rules adequate to carry out the purposes of this part,
``(B) to the extent provided in regulations, stock in any foreign
corporation which is comparable to a regulated investment company and
which offers for sale or has outstanding any stock of which it is the
issuer and which is redeemable at its net asset value, and
``(C) to the extent provided in regulations, any option on stock
described in subparagraph (A) or (B).
``(2) Special rule for regulated investment companies.--In the case
of any regulated investment company which is offering for sale or has
outstanding any stock of which it is the issuer and which is redeemable
at its net asset value, all stock in a passive foreign investment
company which it owns directly or indirectly shall be treated as
marketable stock for purposes of this section. Except as provided in
regulations, similar treatment as marketable stock shall apply in the
case of any other regulated investment company which publishes net asset
valuations at least annually.
``(f) Treatment of Controlled Foreign Corporations Which are
Shareholders in Passive Foreign Investment Companies.--In the case of a
foreign corporation which is a controlled foreign corporation and which
owns (or is treated under subsection (g) as owning) stock in a passive
foreign investment company--
``(1) this section (other than subsection (c)(2)) shall apply to
such foreign corporation in the same manner as if such corporation were
a United States person, and
``(2) for purposes of subpart F of part III of subchapter N--
``(A) any amount included in gross income under subsection (a)(1)
shall be treated as foreign personal holding company income described in
section 954(c)(1)(A), and
``(B) any amount allowed as a deduction under subsection (a)(2)
shall be treated as a deduction allocable to foreign personal holding
company income so described.
``(g) Stock Owned Through Certain Foreign Entities.--Except as
provided in regulations--
``(1) In general.--For purposes of this section, stock owned,
directly or indirectly, by or for a foreign partnership or foreign trust
or foreign estate shall be considered as being owned proportionately by
its partners or beneficiaries. Stock considered to be owned by a person
by reason of the application of the preceding sentence shall, for
purposes of applying such sentence, be treated as actually owned by such
person.
``(2) Treatment of certain dispositions.--In any case in which a
United States person is treated as owning stock in a passive foreign
investment company by reason of paragraph (1)--
``(A) any disposition by the United States person or by any other
person which results in the United States person being treated as no
longer owning such stock, and
``(B) any disposition by the person owning such stock,
shall be treated as a disposition by the United States person of the
stock in the passive foreign investment company.
``(h) Coordination With Section 851(b).--For purposes of paragraphs
(2) and (3) of section 851(b), any amount included in gross income under
subsection (a) shall be treated as a dividend.
``(i) Stock Acquired From a Decedent.--In the case of stock of a
passive foreign investment company which is acquired by bequest, devise,
or inheritance (or by the decedent's estate) and with respect to which
an election under this section was in effect as of the date of the
decedent's death, notwithstanding section 1014, the basis of such stock
in the hands of the person so acquiring it shall be the adjusted basis
of such stock in the hands of the decedent immediately before his death
(or, if lesser, the basis which would have been determined under section
1014 without regard to this subsection).
``(j) Coordination With Section 1291 for First Year of Election.--
``(1) Taxpayers other than regulated investment companies.--
``(A) In general.--If the taxpayer elects the application of this
section with respect to any marketable stock in a corporation after the
beginning of the taxpayer's holding period in such stock, and if the
requirements of subparagraph (B) are not satisfied, section 1291 shall
apply to--
``(i) any distributions with respect to, or disposition of, such
stock in the first taxable year of the taxpayer for which such election
is made, and
``(ii) any amount which, but for section 1291, would have been
included in gross income under subsection (a) with respect to such stock
for such taxable year in the same manner as if such amount were gain on
the disposition of such stock.
``(B) Requirements.--The requirements of this subparagraph are met
if, with respect to each of such corporation's taxable years for which
such corporation was a passive foreign investment company and which
begin after December 31, 1986, and included any portion of the
taxpayer's holding period in such stock, such corporation was treated as
a qualified electing fund under this part with respect to the taxpayer.
``(2) Special rules for regulated investment companies.--
``(A) In general.--If a regulated investment company elects the
application of this section with respect to any marketable stock in a
corporation after the beginning of the taxpayer's holding period in such
stock, then, with respect to such company's first taxable year for which
such company elects the application of this section with respect to such
stock--
``(i) section 1291 shall not apply to such stock with respect to any
distribution or disposition during, or amount included in gross income
under this section for, such first taxable year, but
``(ii) such regulated investment company's tax under this chapter
for such first taxable year shall be increased by the aggregate amount
of interest which would have been determined under section 1291(c)(3) if
section 1291 were applied without regard to this subparagraph.
Clause (ii) shall not apply if for the preceding taxable year the
company elected to mark to market the stock held by such company as of
the last day of such preceding taxable year.
``(B) Disallowance of deduction.--No deduction shall be allowed to
any regulated investment company for the increase in tax under
subparagraph (A)(ii).
``(k) Election.--This section shall apply to marketable stock in a
passive foreign investment company which is held by a United States
person only if such person elects to apply this section with respect to
such stock. Such an election shall apply to the taxable year for which
made and all subsequent taxable years unless--
``(1) such stock ceases to be marketable stock, or
``(2) the Secretary consents to the revocation of such election.
``(l) Transition Rule for Individuals Becoming Subject to United
States Tax.--If any individual becomes a United States person in a
taxable year beginning after December 31, 1997, solely for purposes of
this section, the adjusted basis (before adjustments under subsection
(b)) of any marketable stock in a passive foreign investment company
owned by such individual on the first day of such taxable year
shall be treated as being the greater of its fair market value
on such first day or its adjusted basis on such first day.''
(b) Coordination With Interest Charge, Etc.--
(1) Paragraph (1) of section 1291(d) is amended by adding at the end
the following new flush sentence:
``Except as provided in section 1296(j), this section also shall not
apply if an election under section 1296(k) is in effect for the
taxpayer's taxable year.''
(2) The subsection heading for subsection (d) of section 1291 is
amended by striking `` Subpart B'' and inserting `` Subparts B and C ''.
(3) Subparagraph (A) of section 1291(a)(3) is amended to read as
follows:
``(A) Holding period.--The taxpayer's holding period shall be
determined under section 1223; except that--
``(i) for purposes of applying this section to an excess
distribution, such holding period shall be treated as ending on the date
of such distribution, and
``(ii) if section 1296 applied to such stock with respect to the
taxpayer for any prior taxable year, such holding period shall be
treated as beginning on the first day of the first taxable year
beginning after the last taxable year for which section 1296 so
applied.''
(c) Treatment of Mark-to-Market Gain Under Section 4982.--
(1) Subsection (e) of section 4982 is amended by adding at the end
thereof the following new paragraph:
``(6) Treatment of gain recognized under section 1296.--For purposes
of determining a regulated investment company's ordinary income--
``(A) notwithstanding paragraph (1)(C), section 1296 shall be
applied as if such company's taxable year ended on October 31, and
``(B) any ordinary gain or loss from an actual disposition of stock
in a passive foreign investment company during the portion of the
calendar year after October 31 shall be taken into account in
determining such regulated investment company's ordinary income for the
following calendar year.
In the case of a company making an election under paragraph (4), the
preceding sentence shall be applied by substituting the last day of the
company's taxable year for October 31.''
(2) Subsection (b) of section 852 is amended by adding at the end
thereof the following new paragraph:
``(10) Special rule for certain losses on stock in passive foreign
investment company.--To the extent provided in regulations, the taxable
income of a regulated investment company (other than a company to which
an election under section 4982(e)(4) applies) shall be computed without
regard to any net reduction in the value of any stock of a passive
foreign investment company with respect to which an election under
section 1296(k) is in effect occurring after October 31 of the taxable
year, and any such reduction shall be treated as occurring on the first
day of the following taxable year.''
(3) Subsection (c) of section 852 is amended by inserting after
``October 31 of such year'' the following: ``, without regard to any net
reduction in the value of any stock of a passive foreign investment
company with respect to which an election under section 1296(k) is in
effect occurring after October 31 of such year,''.
(d) Conforming Amendments.--
(1) Sections 532(b)(4) and 542(c)(10) are each amended by striking
``section 1296'' and inserting ``section 1297''.
(2) Subsection (f) of section 551 is amended by striking ``section
1297(b)(5)'' and inserting ``section 1298(b)(5)''
(3) Subsections (a)(1) and (d) of section 1293 are each amended by
striking ``section 1297(a)'' and inserting ``section 1298(a)''.
(4) Paragraph (3) of section 1297(b), as redesignated by subsection
(a), is hereby repealed.
(5) The table of sections for subpart D of part VI of subchapter P
of chapter 1, as redesignated by subsection (a), is amended to read as
follows:
``Sec. 1297. Passive foreign investment company.
``Sec. 1298. Special rules.''
(6) The table of subparts for part VI of subchapter P of chapter 1
is amended by striking the last item and inserting the following new
items:
``Subpart C. Election of mark to market for marketable stock.
``Subpart D. General provisions.''
(e) Clarification of Gain Recognition Election.--The last sentence of
section 1298(b)(1), as so redesignated, is amended by inserting
``(determined without regard to the preceding sentence)'' after
``investment company''.
SEC. 1123. EFFECTIVE DATE.
The amendments made by this subtitle shall apply to--
(1) taxable years of United States persons beginning after December
31, 1997, and
(2) taxable years of foreign corporations ending with or within such
taxable years of United States persons.
Subtitle D--Repeal of Excise Tax on Transfers to Foreign Entities
SEC. 1131. REPEAL OF EXCISE TAX ON TRANSFERS TO FOREIGN
ENTITIES; RECOGNITION OF GAIN ON CERTAIN TRANSFERS TO FOREIGN TRUSTS AND
ESTATES.
(a) Repeal of Excise Tax.--Chapter 5 (relating to transfers to avoid
income tax) is hereby repealed.
(b) Recognition of Gain on Certain Transfers to Foreign Trusts and
Estates.--Subpart F of part I of subchapter J of chapter 1 is amended by
adding at the end the following new section:
``SEC. 684. RECOGNITION OF GAIN ON CERTAIN TRANSFERS TO
CERTAIN FOREIGN TRUSTS AND ESTATES.
``(a) In general.--In the case of any transfer of property by a
United States person to a foreign estate or trust, for purposes of this
subtitle, such transfer shall be treated as a sale or exchange for an
amount equal to the fair market value of the property transferred, and
the transferor shall recognize as gain the excess of--
``(1) the fair market value of the property so transferred, over
``(2) the adjusted basis (for purposes of determining gain) of such
property in the hands of the transferor.
``(b) Exception.--Subsection (a) shall not apply to a transfer to a
trust by a United States person if such person is treated as the owner
of such trust under section 671.''
(c) Other Anti-Avoidance Provisions Replacing Repealed Excise Tax.--
(1) Gain recognition on exchanges involving foreign
persons.--Section 1035 is amended by redesignating subsection (c) as
subsection (d) and by inserting after subsection (b) the following new
subsection:
``(c) Exchanges Involving Foreign Persons.--To the extent provided in
regulations, subsection (a) shall not apply to any exchange having the
effect of transferring property to any person other than a United States
person.''
(2) Transfers to foreign corporations.--Section 367 is amended by
adding at the end the following new subsection:
``(f) Other Transfers.--To the extent provided in regulations, if a
United States person transfers property to a foreign corporation as
paid-in surplus or as a contribution to capital (in a transaction not
otherwise described in this section), such foreign corporation shall
not, for purposes of determining
the extent to which gain shall be recognized on such transfer,
be considered to be a corporation.''
(3) Certain transfers to partnerships.--Section 721 is amended by
adding at the end the following new subsection:
``(c) Regulations Relating to Transfers to Foreign Persons.--The
Secretary may provide by regulations that subsection (a) shall not apply
to gain realized on the transfer of property to a partnership if such
gain, when recognized, will be includible in the gross income of a
person other than a United States person.''
(4) Repeal of u.s. source treatment of deemed
royalties.--Subparagraph (C) of section 367(d)(2) is amended to read as
follows:
``(C) Amounts received treated as ordinary income.--For purposes of
this chapter, any amount included in gross income by reason of this
subsection shall be treated as ordinary income.''
(5) Transfers of intangibles to partnerships.--
(A) Subsection (d) of section 367 is amended by adding at the end
the following new paragraph:
``(3) Regulations relating to transfers of intangibles to
partnerships.--The Secretary may provide by regulations that the rules
of paragraph (2) also apply to the transfer of intangible property by a
United States person to a partnership in circumstances consistent with
the purposes of this subsection.''
(B) Section 721 is amended by adding at the end the following new
subsection:
``(d) Transfers of Intangibles.--
``For regulatory authority to treat intangibles transferred to a
partnership as sold, see section 367(d)(3).''
(d) Technical and Conforming Amendments.--
(1) Subsection (h) of section 814 is amended by striking ``or 1491''.
(2) Section 1057 (relating to election to treat transfer to foreign
trust, etc., as taxable exchange) is hereby repealed.
(3) Section 6422 is amended by striking paragraph (5) and by
redesignating paragraphs (6) through (13) as paragraphs (5) through
(12), respectively.
(4) The table of chapters for subtitle A is amended by striking the
item relating to chapter 5.
(5) The table of sections for part IV of subchapter O of chapter 1
is amended by striking the item relating to section 1057.
(6) The table of sections for subpart F of part I of subchapter J of
chapter 1 is amended by adding at the end the following new item:
``Sec. 684. Recognition of gain on certain transfers to certain
foreign trusts and estates.''
(e) Effective Date.--The amendments made by this section shall take
effect on the date of the enactment of this Act.
Subtitle E--Information Reporting
SEC. 1141. CLARIFICATION OF APPLICATION OF RETURN REQUIREMENT
TO FOREIGN PARTNERSHIPS.
(a) In General.--Section 6031 (relating to return of partnership
income) is amended by adding at the end the following new subsection:
``(e) Foreign Partnerships.--
``(1) Exception for foreign partnership.--Except as provided in
paragraph (2), the preceding provisions of this section shall not apply
to a foreign partnership.
``(2) Certain foreign partnerships required to file return.--Except
as provided in regulations prescribed by the Secretary, this section
shall apply to a foreign partnership for any taxable year if for such
year, such partnership has--
``(A) gross income derived from sources within the United States, or
``(B) gross income which is effectively connected with the conduct
of a trade or business within the United States.
The Secretary may provide simplified filing procedures for foreign
partnerships to which this section applies.''
(b) Sanction for Failure by Foreign Partnership To Comply With
Section 6031 To Include Denial of Deductions.--Subsection (f) of section
6231 is amended--
(1) by striking `` Losses and'' in the heading and inserting ``
Deductions, Losses, and'', and
(2) by striking ``loss or'' each place it appears and inserting
``deduction, loss, or''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after the date of the enactment of this Act.
SEC. 1142. CONTROLLED FOREIGN PARTNERSHIPS SUBJECT TO
INFORMATION REPORTING COMPARABLE TO INFORMATION REPORTING FOR CONTROLLED
FOREIGN CORPORATIONS.
(a) In General.--So much of section 6038 (relating to information
with respect to certain foreign corporations) as precedes paragraph (2)
of subsection (a) is amended to read as follows:
``SEC. 6038. INFORMATION REPORTING WITH RESPECT TO CERTAIN
FOREIGN CORPORATIONS AND PARTNERSHIPS.
``(a) Requirement.--
``(1) In general.--Every United States person shall furnish, with
respect to any foreign business entity which such person controls, such
information as the Secretary may prescribe relating to--
``(A) the name, the principal place of business, and the nature of
business of such entity, and the country under whose laws such entity is
incorporated (or organized in the case of a partnership);
``(B) in the case of a foreign corporation, its post-1986
undistributed earnings (as defined in section 902(c));
``(C) a balance sheet for such entity listing assets, liabilities,
and capital;
``(D) transactions between such entity and--
``(i) such person,
``(ii) any corporation or partnership which such person controls, and
``(iii) any United States person owning, at the time the transaction
takes place--
``(I) in the case of a foreign corporation, 10 percent or more of
the value of any class of stock outstanding of such corporation, and
``(II) in the case of a foreign partnership, at least a 10-percent
interest in such partnership; and
``(E)(i) in the case of a foreign corporation, a description of the
various classes of stock outstanding, and a list showing the name and
address of, and number of shares held by, each United States person who
is a shareholder of record owning at any time during the annual
accounting period 5 percent or more in value of any class of stock
outstanding of such foreign corporation, and
``(ii) information comparable to the information described in clause
(i) in the case of a foreign partnership.
The Secretary may also require the furnishing of any other
information which is similar or related in nature to that specified in
the preceding sentence or which the Secretary determines to be
appropriate to carry out the provisions of this title.''
(b) Definitions.--
(1) In general.--Subsection (e) of section 6038 (relating to
definitions) is amended--
(A) by redesignating paragraphs (1) and (2) as paragraphs (2) and
(4), respectively,
(B) by inserting before paragraph (2) (as so redesignated) the
following new paragraph:
``(1) Foreign business entity.--The term `foreign business entity'
means a foreign corporation and a foreign partnership.'', and
(C) by inserting after paragraph (2) (as so redesignated) the
following new paragraph:
``(3) Partnership-related definitions.--
``(A) Control.--A person is in control of a partnership if such
person owns directly or indirectly more than a 50 percent interest in
such partnership.
``(B) 50- percent interest.--For purposes of subparagraph (A), a
50-percent interest in a partnership is--
``(i) an interest equal to 50 percent of the capital interest, or 50
percent of the profits interest, in such partnership, or
``(ii) to the extent provided in regulations, an interest to which
50 percent of the deductions or losses of such partnership are
allocated.
For purposes of the preceding sentence, rules similar to the rules of
section 267(c) (other than paragraph (3)) shall apply, except so as to
consider a United States person as owning such an interest which is
owned by a person which is not a United States person.
``(C) 10- percent interest.--A 10-percent interest in a partnership
is an interest which would be described in subparagraph (B) if `10
percent' were substituted for `50 percent' each place it appears.''
(2) Clerical amendment.--The paragraph heading for paragraph (2) of
section 6038(e) (as so redesignated) is amended by inserting `` of
corporation'' after `` Control''.
(c) Modification of Sanctions on Partnerships and Corporations for
Failure To Furnish Information.--
(1) In general.--Subsection (b) of section 6038 is amended--
(A) by striking ``$1,000'' each place it appears and inserting
``$10,000'', and
(B) by striking ``$24,000'' in paragraph (2) and inserting ``$50,000''.
(d) Reporting by 10 -Percent Partners.--Subsection (a) of section
6038 is amended by adding at the end the following new paragraph:
``(5) Information required from 10-percent partner of controlled
foreign partnership.--In the case of a foreign partnership which is
controlled by United States persons holding at least 10-percent
interests (but not by any one United States person), the Secretary may
require each United States person who holds a 10-percent interest in
such partnership to furnish information relating to such partnership,
including information relating to such partner's ownership interests in
the partnership and allocations to such partner of partnership items.''
(e) Technical Amendments.--
(1) The following provisions of section 6038 are each amended by
striking ``foreign corporation'' each place it appears and inserting
``foreign business entity'':
(A) Paragraphs (2) and (3) of subsection (a).
(B) Subsection (b).
(C) Subsection (c) other than paragraph (1)(B) thereof.
(D) Subsection (d).
(E) Subsection (e)(4) (as redesignated by subsection (b)).
(2) Subparagraph (B) of section 6038(c)(1) is amended by inserting
``in the case of a foreign business entity which is a foreign
corporation,'' after ``(B)''.
(3) Paragraph (8) of section 318(b) is amended by striking
``6038(d)(1)'' and inserting ``6038(d)(2)''.
(4) Paragraph (4) of section 901(k) is amended by striking ``foreign
corporation'' and inserting ``foreign corporation or partnership''.
(5) The table of sections for subpart A of part III of subchapter A
of chapter 61 is amended by striking the item relating to section 6038
and inserting the following new item:
``Sec. 6038. Information reporting with respect to certain foreign
corporations and partnerships.''
(f) Effective Date.--The amendments made by this section shall apply
to annual accounting periods of foreign partnerships beginning after the
date of the enactment of this Act.
SEC. 1143. MODIFICATIONS RELATING TO RETURNS REQUIRED TO BE
FILED BY REASON OF CHANGES IN OWNERSHIP INTERESTS IN FOREIGN
PARTNERSHIP.
(a) No Return Required Unless Changes Involve 10 -Percent Interest in
Partnership.--
(1) In general.--Subsection (a) of section 6046A (relating to
returns as to interests in foreign partnerships) is amended by adding at
the end the following new sentence: ``Paragraphs (1) and (2) shall apply
to any acquisition or disposition only if the United States person
directly or indirectly holds at least a 10-percent interest in such
partnership either before or after such acquisition or disposition, and
paragraph (3) shall apply to any change only if the change is equivalent
to at least a 10-interest in such partnership.''
(2) 10 -percent interest.--Section 6046A is amended by redesignating
subsection (d) as subsection (e) and by inserting after subsection (c)
the following new subsection:
``(d) 10 -Percent Interest.--For purposes of subsection (a), a
10-percent interest in a partnership is an interest described in section
6038(e)(3)(C).''
(b) Modification of Penalty on Failure to Report Changes in Ownership
Interests in Foreign Corporations and Partnerships.--Subsection (a) of
section 6679 (relating to failure to file returns, etc., with respect to
foreign corporations or foreign partnerships) is amended to read as
follows:
``(a) Civil Penalty.--
``(1) In general.--In addition to any criminal penalty provided by
law, any person required to file a return under section 6035, 6046, or
6046A who fails to file such return at the time provided in such
section, or who files a return which does not show the information
required pursuant to such section, shall pay a penalty of $10,000,
unless it is shown that such failure is due to reasonable cause.
``(2) Increase in penalty where failure continues after
notification.--If any failure described in paragraph (1) continues for
more than 90 days after the day on which the Secretary mails notice of
such failure to the United States person, such person shall pay a
penalty (in addition to the amount required under paragraph (1)) of
$10,000 for each 30-day period (or fraction thereof) during which such
failure continues after the expiration of such 90-day period. The
increase in any penalty under this paragraph shall not exceed $50,000.
``(3) Reduced penalty for returns relating to foreign personal
holding companies.--In the case of a return required under section 6035,
paragraph (1) shall be applied by substituting `$1,000' for `$10,000',
and paragraph (2) shall not apply.''
(c) Effective Date.--The amendments made by this section shall apply
to transfers and changes after the date of the enactment of this Act.
SEC. 1144. TRANSFERS OF PROPERTY TO FOREIGN PARTNERSHIPS
SUBJECT TO INFORMATION REPORTING COMPARABLE TO INFORMATION REPORTING FOR
SUCH TRANSFERS TO FOREIGN CORPORATIONS.
(a) In General.--Paragraph (1) of section 6038B(a) (relating to
notice of certain transfers to foreign corporations) is amended to read
as follows:
``(1) transfers property to--
``(A) a foreign corporation in an exchange described in section 332,
351, 354, 355, 356, or 361, or
``(B) a foreign partnership in a contribution described in section
721 or in any other contribution described in regulations prescribed by
the Secretary,''.
(b) Exceptions.--Section 6038B is amended by redesignating subsection
(b) as subsection (c) and by inserting after subsection (a) the
following new subsection:
``(b) Exceptions for Certain Transfers to Foreign Partnerships;
Special Rule.--
``(1) Exceptions.--Subsection (a)(1)(B) shall apply to a transfer by
a United States person to a foreign partnership only if--
``(A) the United States person holds (immediately after the
transfer) directly or indirectly at least a 10-percent interest (as
defined in section 6046A(d)) in the partnership, or
``(B) the value of the property transferred (when added to the value
of the property transferred by such person or any related person to such
partnership or a related partnership during the 12-month period ending
on the date of the transfer) exceeds $100,000.
For purposes of the preceding sentence, the value of any transferred
property is its fair market value at the time of its transfer.
``(2) Special rule.--If by reason of an adjustment under section 482
or otherwise, a contribution described in subsection (a)(1) is deemed to
have been made, such contribution shall be treated for purposes of this
section as having been made not earlier than the date specified by the
Secretary.''
(c) Modification of Penalty Applicable to Foreign Corporations and
Partnerships.--Paragraph (1) of section 6038B(b) is amended by striking
``equal to'' and all that follows and inserting ``equal to 10 percent of
the fair market value of the property at the time of the exchange (and,
in the case of a contribution described in subsection (a)(1)(B), such
person shall recognize gain as if the contributed property had been sold
for such value at the time of such contribution).''
(d) Effective Date.--
(1) In general.--The amendments made by this section shall apply to
transfers made after the date of the enactment of this Act.
(2) Election of retroactive effect.--Section 1494(c) of the Internal
Revenue Code of 1986 shall not apply to any transfer after August 20,
1996, if the person otherwise required to file a return with respect to
such transfer elects to apply the amendments made by this section to
transfers after August 20, 1996. The Secretary of the Treasury or his
delegate may prescribe simplified reporting under the preceding
sentence.
SEC. 1145. EXTENSION OF STATUTE OF LIMITATION FOR FOREIGN TRANSFERS.
(a) In General.--Paragraph (8) of section 6501(c) (relating to
failure to notify Secretary under section 6038B) is amended to read as
follows:
``(8) Failure to notify secretary of certain foreign transfers.--In
the case of any information which is required to be reported to the
Secretary under section 6038, 6038A, 6038B, 6046, 6046A, or 6048, the
time for assessment of any tax imposed by this title with respect to any
event or period to which such information relates shall not expire
before the date which is 3 years after the date on which the Secretary
is furnished the information required to be reported under such
section.''
(b) Effective Date.--The amendment made by subsection (a) shall apply
to information the due date for the reporting of which is after the date
of the enactment of this Act.
SEC. 1146. INCREASE IN FILING THRESHOLDS FOR RETURNS AS TO
ORGANIZATION OF FOREIGN CORPORATIONS AND ACQUISITIONS OF STOCK IN SUCH
CORPORATIONS.
(a) In General.--Subsection (a) of section 6046 (relating to returns
as to organization or reorganization of foreign corporations and as to
acquisitions of their stock) is amended to read as follows:
``(a) Requirement of Return.--
``(1) In general.--A return complying with the requirements of
subsection (b) shall be made by--
``(A) each United States citizen or resident who becomes an officer
or director of a foreign corporation if a United States person (as
defined in section 7701(a)(30)) meets the stock ownership requirements
of paragraph (2) with respect to such corporation,
``(B) each United States person--
``(i) who acquires stock which, when added to any stock owned on the
date of such acquisition, meets the stock ownership requirements of
paragraph (2) with respect to a foreign corporation, or
``(ii) who acquires stock which, without regard to stock owned on
the date of such acquisition, meets the stock ownership requirements of
paragraph (2) with respect to a foreign corporation,
``(C) each person (not described in subparagraph (B)) who is treated
as a United States shareholder under section 953(c) with respect to a
foreign corporation, and
``(D) each person who becomes a United States person while meeting
the stock ownership requirements of paragraph (2) with respect to stock
of a foreign corporation.
In the case of a foreign corporation with respect to which any person
is treated as a United States shareholder under section 953(c),
subparagraph (A) shall be treated as including a reference to each
United States person who is an officer or director of such corporation.
``(2) Stock ownership requirements.--A person meets the stock
ownership requirements of this paragraph with respect to any corporation
if such person owns 10 percent or more of--
``(A) the total combined voting power of all classes of stock of
such corporation entitled to vote, or
``(B) the total value of the stock of such corporation.''
(b) Effective Date.--The amendment made by this section shall take
effect on January 1, 1998.
Subtitle F--Determination of Foreign or Domestic Status of Partnerships
SEC. 1151. DETERMINATION OF FOREIGN OR DOMESTIC STATUS OF PARTNERSHIPS.
(a) In General.--Paragraph (4) of section 7701(a) is amended by
inserting before the period ``unless, in the case of a partnership, the
partnership is more properly treated as a foreign partnership under
regulations prescribed by the Secretary''.
(b) Effective Date.--The amendment made by subsection (a) shall apply
to taxable years beginning after the date of the enactment of this Act.
Subtitle G--Other Simplification Provisions
SEC. 1161. TRANSITION RULE FOR CERTAIN TRUSTS.
(a) In General.--Paragraph (3) of section 1907(a) of the Small
Business Job Protection Act of 1996 is amended by adding at the end the
following flush sentence:
``To the extent prescribed in regulations by the Secretary of the
Treasury or his delegate, a trust which was in existence on August 20,
1996 (other than a trust treated as owned by the grantor under subpart E
of part I of subchapter J of chapter 1 of the Internal Revenue Code of
1986), and which was treated as a United States person on the day before
the date of the enactment of this Act may elect to continue to be
treated as a United States person notwithstanding section 7701(a)(30)(E)
of such Code.''
(b) Effective Date.--The amendment made by subsection (a) shall take
effect as if included in the amendments made by section 1907(a) of the
Small Business Job Protection Act of 1996.
SEC. 1162. REPEAL OF STOCK AND SECURITIES SAFE HARBOR
REQUIREMENT THAT PRINCIPAL OFFICE BE OUTSIDE THE UNITED STATES.
(a) In General.--The last sentence of clause (ii) of section
864(b)(2)(A) (relating to stock or securities) is amended by striking
``, or in the case of a corporation'' and all that follows and inserting
a period.
(b) Effective Date.--The amendment made by subsection (a) shall apply
to taxable years beginning after December 31, 1997.
Subtitle H--Other Provisions
SEC. 1171. DEFINITION OF FOREIGN PERSONAL HOLDING COMPANY INCOME.
(a) Income From Notional Principal Contracts and Payments in Lieu of
Dividends.--
(1) In general.--Paragraph (1) of section 954(c) (defining foreign
personal holding company income) is amended by adding at the end the
following new subparagraphs:
``(F) Income from notional principal contracts.--Net income from
notional principal contracts. Any item of income, gain, deduction, or
loss from a notional principal contract entered into for purposes of
hedging any item described in any preceding subparagraph shall not be
taken into account for purposes of this subparagraph but shall be taken
into account under such other subparagraph.
``(G) Payments in lieu of dividends.--Payments in lieu of dividends
which are made pursuant to an agreement to which section 1058 applies.''
(2) Conforming amendment.--Subparagraph (B) of section 954(c)(1) is
amended--
(A) by striking the second sentence, and
(B) by striking ``also'' in the last sentence.
(b) Exception for Dealers.--Paragraph (2) of section 954(c) is
amended by adding at the end the following new subparagraph:
``(C) Exception for dealers.--Except as provided in subparagraph
(A), (E), or (G) of paragraph (1) or by regulations, in the case of a
regular dealer in property (within the meaning of paragraph (1)(B)),
forward contracts, option contracts, or similar financial instruments
(including notional principal contracts and all instruments referenced
to commodities), there shall not be taken into account in computing
foreign personal holding income any item of income, gain, deduction, or
loss from any transaction (including hedging transactions) entered into
in the ordinary course of such dealer's trade or business as such a
dealer.''
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after the date of the enactment of this Act.
SEC. 1172. PERSONAL PROPERTY USED PREDOMINANTLY IN THE UNITED
STATES TREATED AS NOT PROPERTY OF A LIKE KIND WITH RESPECT TO PROPERTY
USED PREDOMINANTLY OUTSIDE THE UNITED STATES.
(a) In General.--Subsection (h) of section 1031 (relating to exchange
of property held for productive use or investment) is amended to read as
follows:
``(h) Special Rules for Foreign Real and Personal Property.--For
purposes of this section--
``(1) Real property.--Real property located in the United States and
real property located outside the United States are not property of a
like kind.
``(2) Personal property.--
``(A) In general.--Personal property used predominantly within the
United States and personal property used predominantly outside the
United States are not property of a like kind.
``(B) Predominant use.--Except as provided in subparagraph (C) and
(D), the predominant use of any property shall be determined based on--
``(i) in the case of the property relinquished in the exchange, the
2-year period ending on the date of such relinquishment, and
``(ii) in the case of the property acquired in the exchange, the
2-year period beginning on the date of such acquisition.
``(C) Property held for less than 2 years.--Except in the case of an
exchange which is part of a transaction (or series of transactions)
structured to avoid the purposes of this subsection--
``(i) only the periods the property was held by the person
relinquishing the property (or any related person) shall be taken into
account under subparagraph (B)(i), and
``(ii) only the periods the property was held by the person
acquiring the property (or any related person) shall be taken into
account under subparagraph (B)(ii).
``(D) Special rule for certain property.--Property described in any
subparagraph of section 168(g)(4) shall be treated as used predominantly
in the United States.''
(b) Effective Date.--
(1) In general.--The amendment made by this section shall apply to
transfers after June 8, 1997, in taxable years ending after such date.
(2) Binding contracts.--The amendment made by this section shall not
apply to any transfer pursuant to a written binding contract in effect
on June 8, 1997, and at all times thereafter before the disposition of
property. A contract shall not fail to meet the requirements of the
preceding sentence solely because--
(A) it provides for a sale in lieu of an exchange, or
(B) the property to be acquired as replacement property was not
identified under such contract before June 9, 1997.
SEC. 1173. HOLDING PERIOD REQUIREMENT FOR CERTAIN FOREIGN TAXES.
(a) In General.--Section 901 is amended by redesignating subsection
(k) as subsection (l) and by inserting after subsection (j) the
following new subsection:
``(k) Minimum Holding Period for Certain Taxes.--
``(1) Withholding taxes.--
``(A) In general.--In no event shall a credit be allowed under
subsection (a) for any withholding tax on a dividend with respect to
stock in a corporation if--
``(i) such stock is held by the recipient of the dividend for 15
days or less during the 30-day period beginning on the date which is 15
days before the date on which such share becomes ex-dividend with
respect to such dividend, or
``(ii) to the extent that the recipient of the dividend is under an
obligation (whether pursuant to a short sale or otherwise) to make
related payments with respect to positions in substantially similar or
related property.
``(B) Withholding tax.--For purposes of this paragraph, the term
`withholding tax' includes any tax
determined on a gross basis; but does not include any tax
which is in the nature of a prepayment of a tax imposed on a net basis.
``(2) Deemed paid taxes.--In the case of income, war profits, or
excess profits taxes deemed paid under section 853, 902, or 960 through
a chain of ownership of stock in 1 or more corporations, no credit shall
be allowed under subsection (a) for such taxes if--
``(A) any stock of any corporation in such chain (the ownership of
which is required to obtain credit under subsection (a) for such taxes)
is held for less than the period described in paragraph (1)(A)(i), or
``(B) the corporation holding the stock is under an obligation
referred to in paragraph (1)(A)(ii).
``(3) 45 -day rule in the case of certain preference dividends.--In
the case of stock having preference in dividends and dividends with
respect to such stock which are attributable to a period or periods
aggregating in excess of 366 days, paragraph (1)(A)(i) shall be
applied--
``(A) by substituting `45 days' for `15 days' each place it appears,
and
``(B) by substituting `90-day period' for `30-day period'.
``(4) Exception for certain taxes paid by securities dealers.--
``(A) In general.--Paragraphs (1) and (2) shall not apply to any
qualified tax with respect to any security held in the active conduct in
a foreign country of a securities business of any person--
``(i) who is registered as a securities broker or dealer under
section 15(a) of the Securities Exchange Act of 1934,
``(ii) who is registered as a Government securities broker or dealer
under section 15C(a) of such Act, or
``(iii) who is licensed or authorized in such foreign country to
conduct securities activities in such country and is subject to bona
fide regulation by a securities regulating authority of such country.
``(B) Qualified tax.--For purposes of subparagraph (A), the term
`qualified tax' means a tax paid to a foreign country (other than the
foreign country referred to in subparagraph (A)) if--
``(i) the dividend to which such tax is attributable is subject to
taxation on a net basis by the country referred to in subparagraph (A),
and
``(ii) such country allows a credit against its net basis tax for
the full amount of the tax paid to such other foreign country.
``(C) Regulations.--The Secretary may prescribe such regulations as
may be appropriate to prevent the abuse of the exception provided by
this paragraph.
``(5) Certain rules to apply.--For purposes of this subsection, the
rules of paragraphs (3) and (4) of section 246(c) shall apply.
``(6) Treatment of bona fide sales.--If a person's holding period is
reduced by reason of the application of the rules of section 246(c)(4)
to any contract for the bona fide sale of stock, the determination of
whether such person's holding period meets the requirements of paragraph
(2) shall be made as of the date such contract is entered into.
``(7) Taxes allowed as deduction, etc.--Sections 275 and 78 shall
not apply to any tax which is not allowable as a credit under subsection
(a) by reason of this subsection.''
(b) Notice of Withholding Taxes Paid by Regulated Investment
Company.--Subsection (c) of section 853 (relating to foreign tax credit
allowed to shareholders) is amended by adding at the end the following
new sentence: ``Such notice shall also include the amount of such taxes
which (without regard to the election under this section) would not be
allowable as a credit under section 901(a) to the regulated investment
company by reason of section 901(k).''
(c) Effective Date.--The amendments made by this section shall apply
to dividends paid or accrued more than 30 days after the date of the
enactment of this Act.
SEC. 1174. PENALTIES FOR FAILURE TO DISCLOSE POSITION THAT
CERTAIN INTERNATIONAL TRANSPORTATION INCOME IS NOT INCLUDIBLE IN GROSS
INCOME.
(a) In General.--Section 883 is amended by adding at the end the
following new subsection:
``(d) Penalties for Failure to Disclose Position That Certain
International Transportation Income Is Not Includible in Gross Income.--
``(1) In general.--A taxpayer who, with respect to any tax imposed
by this title, takes the position that any of its gross income derived
from the international operation of 1 or more ships or aircraft is not
includible in gross income by reason of paragraph (1) or (2) of
subsection (a) or paragraph (1) or (2) of section 872(b) (or by reason
of any applicable treaty) shall be entitled to such treatment only if
such position is disclosed (in such manner as the Secretary may
prescribe) on the return of tax for such tax (or any statement attached
to such return).
``(2) Additional penalties for failing to disclose position.--If a
taxpayer fails to meet the requirement of paragraph (1) for any taxable
year with respect to the international operation of 1 or more ships or 1
or more aircraft--
``(A) the amount of the income from the international operation to
which such failure relates--
``(i) which is from sources without the United States, and
``(ii) which is attributable to a fixed place of business in the
United States,
shall be treated for purposes of this title as effectively connected
with the conduct of a trade or business within the United States, and
``(B) no deductions or credits shall be allowed which are
attributable to income from the international operation to which the
failure relates.
``(3) Reasonable cause exception.--This subsection shall not apply
to a failure to disclose a position if it is shown that such failure is
due to reasonable cause and not due to willful neglect.''
(b) Conforming Amendments.--Paragraphs (1) and (2) of section 872(b),
and paragraphs (1) and (2) of section 883(a), are each amended by
striking ``Gross income'' each place it appears and inserting ``Except
as provided in section 883(d), gross income''.
(c) Effective Date.--
(1) In general.--The amendments made by this section shall apply to
taxable years beginning after December 31, 1997.
(2) Coordination with treaties.--The amendments made by this section
shall not apply in any case where their application would be contrary to
any treaty obligation of the United States.
(d) Information To Be Provided by Customs Service.--The United States
Custom Service shall provide the Secretary of the Treasury or his
delegate with such information as may be specified by such Secretary in
order to enable such Secretary to determine whether ships which are not
registered in the United States are engaged in transportation to or from
the United States.
SEC. 1175. DENIAL OF TREATY BENEFITS FOR CERTAIN PAYMENTS
THROUGH HYBRID ENTITIES.
A foreign person shall be entitled under any income tax treaty of the
United States with a foreign country to any reduced rate of any
withholding tax imposed by the Internal Revenue Code of 1986 on an item
of income derived through any
partnership or other pass-thru entity only to the extent that
such item is treated for purposes of the taxation laws of such foreign
country as an item of income of such person. The preceding sentence
shall not apply if--
(1) the treaty contains a provision addressing the applicability of
the treaty in the case of an item of income derived through a
partnership, or
(2) the foreign country imposes tax on a distribution of such item
of income from such partnership to such person.
SEC. 1176. INTEREST ON UNDERPAYMENTS NOT REDUCED BY FOREIGN
TAX CREDIT CARRYBACKS.
(a) In General.--Subsection (d) of section 6601 is amended by
redesignating paragraphs (2) and (3) as paragraphs (3) and (4),
respectively, and by inserting after paragraph (1) the following new
paragraph:
``(2) Foreign tax credit carrybacks.--If any credit allowed for any
taxable year is increased by reason of a carryback of tax paid or
accrued to foreign countries or possessions of the United States, such
increase shall not affect the computation of interest under this section
for the period ending with the filing date for the taxable year in which
such taxes were in fact paid or accrued, or, with respect to any portion
of such credit carryback from a taxable year attributable to a net
operating loss carryback or a capital loss carryback from a subsequent
taxable year, such increase shall not affect the computation of interest
under this section for the period ending with the filing date for such
subsequent taxable year.''
(b) Conforming Amendment to Refunds Attributable to Foreign Tax
Credit Carrybacks.--
(1) In general.--Subsection (f) of section 6611 is amended by
redesignating paragraphs (2) and (3) as paragraphs (3) and (4),
respectively, and by inserting after paragraph (1) the following new
paragraph:
``(2) Foreign tax credit carrybacks.--For purposes of subsection
(a), if any overpayment of tax imposed by subtitle A results from a
carryback of tax paid or accrued to foreign countries or possessions of
the United States, such overpayment shall be deemed not to have been
made before the filing date for the taxable year in which such taxes
were in fact paid or accrued, or, with respect to any portion of such
credit carryback from a taxable year attributable to a net operating
loss carryback or a capital loss carryback from a subsequent taxable
year, such overpayment shall be deemed not to have been made before the
filing date for such subsequent taxable year.''
(2) Conforming amendments.--
(A) Paragraph (4) of section 6611(f) (as so redesignated) is amended--
(i) by striking `` paragraphs (1) and (2)'' and inserting ``
paragraphs (1), (2), and (3)'', and
(ii) by striking ``paragraph (1) or (2)'' each place it appears and
inserting ``paragraph (1), (2), or (3)''.
(B) Clause (ii) of section 6611(f)(4)(B) (as so redesignated) is
amended by striking ``and'' at the end of subclause (I), by
redesignating subclause (II) as subclause (III), and by inserting after
subclause (I) the following new subclause:
``(II) in the case of a carryback of taxes paid or accrued to
foreign countries or possessions of the United States, the taxable year
in which such taxes were in fact paid or accrued (or, with respect to
any portion of such carryback from a taxable year attributable to a net
operating loss carryback or a capital loss carryback from a subsequent
taxable year, such subsequent taxable year), and''.
(C) Subclause (III) of section 6611(f)(4)(B)(ii) (as so
redesignated) is amended by inserting ``(as defined in paragraph
(3)(B))'' after ``credit carryback'' the first place it appears.
(D) Section 6611 is amended by striking subsection (g) and by
redesignating subsections (h) and (i) as subsections (g) and (h),
respectively.
(c) Effective Date.--The amendments made by this section shall apply
to carrybacks arising in taxable years beginning after the date of the
enactment of this Act.
SEC. 1177. CLARIFICATION OF PERIOD OF LIMITATIONS ON CLAIM FOR
CREDIT OR REFUND ATTRIBUTABLE TO FOREIGN TAX CREDIT CARRYFORWARD.
(a) In General.--Subparagraph (A) of section 6511(d)(3) is amended by
striking ``for the year with respect to which the claim is made'' and
inserting ``for the year in which such taxes were actually paid or
accrued''.
(b) Effective Date.--The amendment made by subsection (a) shall apply
to taxes paid or accrued in taxable years beginning after the date of
the enactment of this Act.
SEC. 1178. MISCELLANEOUS CLARIFICATIONS.
(a) Attribution of Deemed Paid Foreign Taxes to Prior
Distributions.--Subparagraph (B) of section 902(c)(2) is amended by
striking ``deemed paid with respect to'' and inserting ``attributable
to''.
(b) Financial Services Income Determined Without Regard to High-Taxed
Income.--Subclause (II) of section 904(d)(2)(C)(i) is amended by
striking ``subclause (I)'' and inserting ``subclauses (I) and (III)''.
(c) Effective Date.--The amendments made by this section shall take
effect on the date of the enactment of this Act.
TITLE XII--SIMPLIFICATION PROVISIONS RELATING TO INDIVIDUALS
AND BUSINESSES
Subtitle A--Provisions Relating to Individuals
SEC. 1201. BASIC STANDARD DEDUCTION AND MINIMUM TAX EXEMPTION
AMOUNT FOR CERTAIN DEPENDENTS.
(a) Basic Standard Deduction.--
(1) In general.--Paragraph (5) of section 63(c) (relating to
limitation on basic standard deduction in the case of certain
dependents) is amended by striking ``shall not exceed'' and all that
follows and inserting ``shall not exceed the greater of--
``(A) $500, or
``(B) the sum of $250 and such individual's earned income.''
(2) Conforming amendment.--Paragraph (4) of section 63(c) is amended--
(A) by striking ``(5)(A)'' in the material preceding subparagraph
(A) and inserting ``(5)'', and
(B) by striking ``by substituting'' and all that follows in
subparagraph (B) and inserting ``by substituting for `calendar year
1992' in subparagraph (B) thereof--
``(i) `calendar year 1987' in the case of the dollar amounts
contained in paragraph (2) or (5)(A) or subsection (f), and
``(ii) `calendar year 1997' in the case of the dollar amount
contained in paragraph (5)(B).''
(b) Minimum Tax Exemption Amount.--Subsection (j) of section 59 is
amended to read as follows:
``(j) Treatment of Unearned Income of Minor Children.--
``(1) In general.--In the case of a child to whom section 1(g)
applies, the exemption amount for purposes of section 55 shall not
exceed the sum of--
``(A) such child's earned income (as defined in section 911(d)(2))
for the taxable year, plus
``(B) $5,000.
``(2) Inflation adjustment.--In the case of any taxable year
beginning in a calendar year after 1998, the dollar amount in paragraph
(1)(B) shall be increased by an amount equal to the product of--
``(A) such dollar amount, and
``(B) the cost-of-living adjustment determined under section 1(f)(3)
for the calendar year in which the taxable year begins, determined by
substituting `1997' for `1992' in subparagraph (B) thereof.
If any increase determined under the preceding sentence is not a
multiple of $50, such increase shall be rounded to the nearest multiple
of $50.''
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 1997.
SEC. 1202. INCREASE IN AMOUNT OF TAX EXEMPT FROM ESTIMATED TAX
REQUIREMENTS.
(a) In General.--Paragraph (1) of section 6654(e) (relating to
exception where tax is small amount) is amended by striking ``$500'' and
inserting ``$1,000''.
(b) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 1997.
SEC. 1203. OPTIONAL METHODS FOR COMPUTING SECA TAX COMBINED.
(a) Internal Revenue Code.--
(1) In general.--Subsection (h) of section 1402 is amended to read
as follows:
``(h) Optional Method for Computing Self-Employment Income.--
``(1) Individuals.--In the case of any trade or business which is
carried on by an individual--
``(A) if the gross income derived by him from such trade or business
is not more than the upper limit for the taxable year, the net earnings
from self-employment derived by him from such trade or business may, at
his option, be deemed to be 66\2/3\ percent of such gross income, or
``(B) if the gross income derived by him from such trade or business
is more than the upper limit for the taxable year and the net earnings
from self-employment derived by him from such trade or business
(computed under subsection (a) without regard to this sentence) are less
than the lower limit for the taxable year, the net earnings from
self-employment derived by him from such trade or business may, at his
option, be deemed to be the lower limit for the taxable year.
``(2) Member of a partnership.--In the case of a member of a
partnership carrying on any trade or business--
``(A) if his distributive share of the gross income of the
partnership derived from such trade or business (after such gross income
has been reduced by the sum of all payments to which section 707(c)
applies) is not more than the upper limit for the taxable year, his
distributive share of income described in section 702(a)(8) derived from
such trade or business may, at his option, be deemed to be an amount
equal to 66\2/3\ percent of his distributive share of such gross income
(after such gross income has been so reduced), or
``(B) if his distributive share of the gross income of the
partnership derived from such trade or business (after such gross income
has been reduced by the sum of all payments to which section 707(c)
applies) is more than the upper limit for the taxable year and his
distributive share (whether or not distributed) of income described in
section 702(a)(8) derived from such trade or business (computed under
this subsection without regard to this sentence) is less than the lower
limit for the taxable year, his distributive share of income described
in section 702(a)(8) derived from such trade or business may, at his
option, be deemed to be the lower limit for the taxable year.
``(3) Upper and lower limits.--For purposes of this subsection--
``(A) Lower limit.--The lower limit for any taxable year is the sum
of the amounts applicable under section 213(d) of the Social Security
Act for calendar quarters ending with or within such taxable year.
``(B) Upper limit.--The upper limit for any taxable year is the
amount equal to 150 percent of the lower limit for such taxable year.
``(4) Determination of gross income.--For purposes of this
subsection, the term `gross income' means--
``(A) in the case of any such trade or business in which the income
is computed under a cash receipts and disbursements method, the gross
receipts from such trade or business reduced by the cost or other basis
of property which was purchased and sold in carrying on such trade or
business, adjusted (after such reduction) in accordance with the
provisions of paragraphs (1) through (7) and paragraph (9) of subsection
(a), and
``(B) in the case of any such trade or business in which the income
is computed under an accrual method, the gross income from such trade or
business, adjusted in accordance with the provisions of paragraphs (1)
through (7) and paragraph (9) of subsection (a).
``(5) Income derived from more than 1 trade or business.--For
purposes of this subsection, if an individual (including a member of a
partnership) derives gross income from more than 1 such trade or
business, such gross income (including his distributive share of the
gross income of any partnership derived from any such trade or business)
shall be deemed to have been derived from one trade or business.
``(6) Election.--The option under this subsection shall be allowed
for any taxable year only if elected on the first return filed for such
taxable year.''
(2) Conforming amendment.--Subsection (a) of section 1402 is amended
by striking all that follows the first sentence following paragraph (15)
and inserting ``For optional method of determining net earnings from
self-employment, see subsection (h).''
(b) Social Security Act.--Subsection (g) of section 211 of the Social
Security Act is amended to read as follows:
``(g) Optional Method for Computing Self-Employment Income.--
``(1) Individuals.--In the case of any trade or business which is
carried on by an individual--
``(A) if the gross income derived by him from such trade or business
is not more than the upper limit for the taxable year, the net earnings
from self-employment derived by him from such trade or business may, at
his option, be deemed to be 66\2/3\ percent of such gross income, or
``(B) if the gross income derived by him from such trade or business
is more than the upper limit for the taxable year and the net earnings
from self-employment derived by him from such trade or business
(computed under subsection (a) without regard to this sentence) are less
than the lower limit for the taxable year, the net earnings from
self-employment derived by him from such trade or business may, at his
option, be deemed to be the lower limit for the taxable year.
``(2) Member of a partnership.--In the case of a member of a
partnership carrying on any trade or business--
``(A) if his distributive share of the gross income of the
partnership derived from such trade or business (after such gross income
has been reduced by the sum of all payments to which section 707(c) of
the Internal Revenue Code of 1986 applies) is not more than the upper
limit for the taxable year, his distributive share of income described
in section 702(a)(8) of such Code derived from such trade or business
may, at his option, be deemed to be an amount equal to 66\2/3\ percent
of his distributive share of such gross income (after such gross income
has been so reduced), or
``(B) if his distributive share of the gross income of the
partnership derived from such trade or business (after such gross income
has been reduced by the sum of all payments to which section 707(c) of
such Code applies) is more than the upper limit for the taxable year and
his distributive share (whether or not distributed) of income described
in section 702(a)(8) of such Code derived from such trade or business
(computed under this subsection without regard to this sentence) is less
than the lower limit for the taxable year, his distributive share of
income described in section 702(a)(8) of such Code derived from such
trade or business may, at his option, be deemed to be the lower limit
for the taxable year.
``(3) Upper and lower limits.--For purposes of this subsection--
``(A) Lower limit.--The lower limit for any taxable year is the sum
of the amounts applicable under section 213(d) for calendar quarters
ending with or within such taxable year.
``(B) Upper limit.--The upper limit for any taxable year is the
amount equal to 150 percent of the lower limit for such taxable year.
``(4) Determination of gross income.--For purposes of this
subsection, the term `gross income' means--
``(A) in the case of any such trade or business in which the income
is computed under a cash receipts and disbursements method, the gross
receipts from such trade or business reduced by the cost or other basis
of property which was purchased and sold in carrying on such trade or
business, adjusted (after such reduction) in accordance with the
provisions of paragraphs (1) through (6) and paragraph (8) of subsection
(a), and
``(B) in the case of any such trade or business in which the income
is computed under an accrual method, the gross income from such trade or
business, adjusted in accordance with the provisions of paragraphs (1)
through (6) and paragraph (8) of subsection (a).
``(5) Income derived from more than 1 trade or business.--For
purposes of this subsection, if an individual (including a member of a
partnership) derives gross income from more than 1 such trade or
business, such gross income (including his distributive share of the
gross income of any partnership derived from any such trade or business)
shall be deemed to have been derived from one trade or business.
``(6) Election.--The option under this subsection shall be allowed
for any taxable year only if elected on the first return filed for such
taxable year.''
(2) Conforming amendment.--Subsection (a) of section 211 of the
Social Security Act is amended by striking all that follows the first
sentence following paragraph (15) and inserting ``For optional method of
determining net earnings from self-employment, see subsection (g).''
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 1997.
SEC. 1204. TREATMENT OF CERTAIN REIMBURSED EXPENSES OF RURAL
MAIL CARRIERS.
(a) In General.--Section 162 (relating to trade or business expenses)
is amended by redesignating subsection (o) as subsection (p) and by
inserting after subsection (n) the following new subsection:
``(o) Treatment of Certain Reimbursed Expenses of Rural Mail
Carriers.--
``(1) General rule.--In the case of any employee of the United
States Postal Service who performs services involving the collection and
delivery of mail on a rural route and who receives qualified
reimbursements for the expenses incurred by such employee for the use of
a vehicle in performing such services--
``(A) the amount allowable as a deduction under this chapter for the
use of a vehicle in performing such services shall be equal to the
amount of such qualified reimbursements; and
``(B) such qualified reimbursements shall be treated as paid under a
reimbursement or other expense allowance arrangement for purposes of
section 62(a)(2)(A) (and section 62(c) shall not apply to such qualified
reimbursements).
``(2) Definition of qualified reimbursements.--For purposes of this
subsection, the term `qualified reimbursements' means the amounts paid
by the United States Postal Service to employees as an equipment
maintenance allowance under the 1991 collective bargaining agreement
between the United States Postal Service and the National Rural Letter
Carriers' Association. Amounts paid as an equipment maintenance
allowance by such Postal Service under later collective bargaining
agreements that supersede the 1991 agreement shall be considered
qualified reimbursements if such amounts do not exceed the amounts that
would have been paid under the 1991 agreement, adjusted for changes in
the Consumer Price Index (as defined in section 1(f)(5)) since 1991.''
(b) Technical Amendment.--Section 6008 of the Technical and
Miscellaneous Revenue Act of 1988 is hereby repealed.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 1997.
SEC. 1205. TREATMENT OF TRAVELING EXPENSES OF CERTAIN FEDERAL
EMPLOYEES ENGAGED IN CRIMINAL INVESTIGATIONS.
(a) In General.--Subsection (a) of section 162 is amended by adding
at the end the following new sentence: ``The preceding sentence shall
not apply to any Federal employee during any period for which such
employee is certified by the Attorney General (or the designee thereof)
as traveling on behalf of the United States in temporary duty status to
investigate, or provide support services for the investigation of, a
Federal crime.''
(b) Effective Date.--The amendment made by subsection (a) shall apply
to amounts paid or incurred with respect to taxable years ending after
the date of the enactment of this Act.
SEC. 1206. PAYMENT OF TAX BY COMMERCIALLY ACCEPTABLE MEANS.
(a) General Rule.--Section 6311 is amended to read as follows:
``SEC. 6311. PAYMENT OF TAX BY COMMERCIALLY ACCEPTABLE MEANS.
``(a) Authority To Receive.--It shall be lawful for the Secretary to
receive for internal revenue taxes (or in payment for internal revenue
stamps) any commercially acceptable means that the Secretary deems
appropriate to the extent and under the conditions provided in
regulations prescribed by the Secretary.
``(b) Ultimate Liability.--If a check, money order, or other method
of payment, including payment by credit card, debit card, or charge card
so received is not duly paid, or is paid and subsequently charged back
to the Secretary, the person by whom such check, or money order, or
other method of payment has been tendered shall remain liable for the
payment of the tax or for the stamps, and for all legal penalties and
additions, to the same extent as if such check, money order, or other
method of payment had not been tendered.
``(c) Liability of Banks and Others.--If any certified, treasurer's,
or cashier's check (or other guaranteed draft), or any money order, or
any other means of payment that has been guaranteed by a financial
institution (such as a credit card, debit card, or charge card
transaction which has been guaranteed expressly by a financial
institution) so received is not duly paid, the United States shall, in
addition to its right to exact payment from the party originally
indebted therefor, have a lien for--
``(1) the amount of such check (or draft) upon all assets of the
financial institution on which drawn,
``(2) the amount of such money order upon all the assets of the
issuer thereof, or
``(3) the guaranteed amount of any other transaction upon all the
assets of the institution making such guarantee,
and such amount shall be paid out of such assets in preference to any
other claims whatsoever against such financial institution, issuer, or
guaranteeing institution, except the necessary costs and expenses of
administration and the reimbursement of the United States for the amount
expended in the redemption of the circulating notes of such financial
institution.
``(d) Payment by Other Means.--
``(1) Authority to prescribe regulations.--The Secretary shall
prescribe such regulations as the Secretary deems necessary to receive
payment by commercially acceptable means, including regulations that--
``(A) specify which methods of payment by commercially acceptable
means will be acceptable,
``(B) specify when payment by such means will be considered received,
``(C) identify types of nontax matters related to payment by such
means that are to be resolved by persons ultimately liable for payment
and financial intermediaries, without the involvement of the Secretary,
and
``(D) ensure that tax matters will be resolved by the Secretary,
without the involvement of financial intermediaries.
``(2) Authority to enter into contracts.--Notwithstanding section
3718(f) of title 31, United States Code, the Secretary is authorized to
enter into contracts to obtain services related to receiving payment by
other means where cost beneficial to the Government.
``(3) Special provisions for use of credit cards.--If use of credit
cards is accepted as a method of payment of taxes pursuant to subsection
(a)--
``(A) a payment of internal revenue taxes (or a payment for internal
revenue stamps) by a person by use of a credit card shall not be subject
to section 161 of the Truth-in-Lending Act (15 U.S.C. 1666), or to any
similar provisions of State law, if the error alleged by the person is
an error relating to the underlying tax liability, rather than an error
relating to the credit card account such as a computational error or
numerical transposition in the credit card transaction or an issue as to
whether the person authorized payment by use of the credit card,
``(B) a payment of internal revenue taxes (or a payment for internal
revenue stamps) shall not be subject to section 170 of the
Truth-in-Lending Act (15 U.S.C. 1666i), or to any similar provisions of
State law,
``(C) a payment of internal revenue taxes (or a payment for internal
revenue stamps) by a person by use of a debit card shall not be subject
to section 908 of the Electronic Fund Transfer Act (15 U.S.C. 1693f), or
to any similar provisions of State law, if the error alleged by the
person is an error relating to the underlying tax liability, rather than
an error relating to the debit card account such as a computational
error or numerical transposition in the debit card transaction or an
issue as to whether the person authorized payment by use of the debit
card,
``(D) the term `creditor' under section 103(f) of the
Truth-in-Lending Act (15 U.S.C. 1602(f)) shall not include the Secretary
with respect to credit card transactions in payment of internal revenue
taxes (or payment for internal revenue stamps), and
``(E) notwithstanding any other provision of law to the contrary, in
the case of payment made by credit card or debit card transaction of an
amount owed to a person as the result of the correction of an error
under section 161 of the Truth-in-Lending Act (15 U.S.C. 1666) or
section 908 of the Electronic Fund Transfer Act (15 U.S.C. 1693f), the
Secretary is authorized to provide such amount to such person as a
credit to that person's credit card or debit card
account through the applicable credit card or debit card system.
``(e) Confidentiality of Information.--
``(1) In general.--Except as otherwise authorized by this
subsection, no person may use or disclose any information relating to
credit or debit card transactions obtained pursuant to section
6103(k)(8) other than for purposes directly related to the processing of
such transactions, or the billing or collection of amounts charged or
debited pursuant thereto.
``(2) Exceptions.--
``(A) Debit or credit card issuers or others acting on behalf of
such issuers may also use and disclose such information for purposes
directly related to servicing an issuer's accounts.
``(B) Debit or credit card issuers or others directly involved in
the processing of credit or debit card transactions or the billing or
collection of amounts charged or debited thereto may also use and
disclose such information for purposes directly related to--
``(i) statistical risk and profitability assessment;
``(ii) transferring receivables, accounts, or interest therein;
``(iii) auditing the account information;
``(iv) complying with Federal, State, or local law; and
``(v) properly authorized civil, criminal, or regulatory
investigation by Federal, State, or local authorities.
``(3) Procedures.--Use and disclosure of information under this
paragraph shall be made only to the extent authorized by written
procedures promulgated by the Secretary.
``(4) Cross reference.--
``For provision providing for civil damages for violation of
paragraph (1), see section 7431.''
(b) Separate Appropriation Required for Payment of Credit Card
Fees.--No amount may be paid by the United States to a credit card
issuer for the right to receive payments of internal revenue taxes by
credit card without a separate appropriation therefor.
(c) Clerical Amendment.--The table of sections for subchapter B of
chapter 64 is amended by striking the item relating to section 6311 and
inserting the following:
``Sec. 6311. Payment of tax by commercially acceptable means.''
(d) Amendments to Sections 6103 and 7431 With Respect to Disclosure
Authorization.--
(1) Subsection (k) of section 6103 (relating to confidentiality and
disclosure of returns and return information) is amended by adding at
the end the following new paragraph:
``(8) Disclosure of information to administer section 6311.--The
Secretary may disclose returns or return information to financial
institutions and others to the extent the Secretary deems necessary for
the administration of section 6311. Disclosures of information for
purposes other than to accept payments by checks or money orders shall
be made only to the extent authorized by written procedures promulgated
by the Secretary.''
(2) Section 7431 (relating to civil damages for unauthorized
disclosure of returns and return information) is amended by adding at
the end the following new subsection:
``(g) Special Rule for Information Obtained Under Section
6103(k)(8).--For purposes of this section, any reference to section 6103
shall be treated as including a reference to section 6311(e).''
(3) Section 6103(p)(3)(A) is amended by striking ``or (6)'' and
inserting ``(6), or (8)''.
(e) Effective Date.--The amendments made by this section shall take
effect on the day 9 months after the date of the enactment of this Act.
Subtitle B--Provisions Relating to Businesses Generally
SEC. 1211. MODIFICATIONS TO LOOK-BACK METHOD FOR LONG-TERM CONTRACTS.
(a) Look-Back Method Not To Apply in Certain Cases.--Subsection (b)
of section 460 (relating to percentage of completion method) is amended
by adding at the end the following new paragraph:
``(6) Election to have look-back method not apply in de minimis
cases.--
``(A) Amounts taken into account after completion of
contract.--Paragraph (1)(B) shall not apply with respect to any taxable
year (beginning after the taxable year in which the contract is
completed) if--
``(i) the cumulative taxable income (or loss) under the contract as
of the close of such taxable year, is within
``(ii) 10 percent of the cumulative look-back taxable income (or
loss) under the contract as of the close of the most recent taxable year
to which paragraph (1)(B) applied (or would have applied but for
subparagraph (B)).
``(B) De minimis discrepancies.--Paragraph (1)(B) shall not apply in
any case to which it would otherwise apply if--
``(i) the cumulative taxable income (or loss) under the contract as
of the close of each prior contract year, is within
``(ii) 10 percent of the cumulative look-back income (or loss) under
the contract as of the close of such prior contract year.
``(C) Definitions.--For purposes of this paragraph--
``(i) Contract year.--The term `contract year' means any taxable
year for which income is taken into account under the contract.
``(ii) Look-back income or loss.--The look-back income (or loss) is
the amount which would be the taxable income (or loss) under the
contract if the allocation method set forth in paragraph (2)(A) were
used in determining taxable income.
``(iii) Discounting not applicable.--The amounts taken into account
after the completion of the contract shall be determined without regard
to any discounting under the 2nd sentence of paragraph (2).
``(D) Contracts to which paragraph applies.--This paragraph shall
only apply if the taxpayer makes an election under this subparagraph.
Unless revoked with the consent of the Secretary, such an election shall
apply to all long-term contracts completed during the taxable year for
which election is made or during any subsequent taxable year.''
(b) Modification of Interest Rate.--
(1) In general.--Subparagraph (C) of section 460(b)(2) is amended by
striking ``the overpayment rate established by section 6621'' and
inserting ``the adjusted overpayment rate (as defined in paragraph
(7))''.
(2) Adjusted overpayment rate.--Subsection (b) of section 460 is
amended by adding at the end the following new paragraph:
``(7) Adjusted overpayment rate.--
``(A) In general.--The adjusted overpayment rate for any interest
accrual period is the overpayment rate in effect under section 6621 for
the calendar quarter in which such interest accrual period begins.
``(B) Interest accrual period.--For purposes of subparagraph (A),
the term `interest accrual period' means the period--
``(i) beginning on the day after the return due date for any taxable
year of the taxpayer, and
``(ii) ending on the return due date for the following taxable year.
For purposes of the preceding sentence, the term `return due date'
means the date prescribed for filing the return of the tax imposed by
this chapter (determined without regard to extensions).''
(c) Effective Date.--
(1) In general.--Except as provided in paragraph (2), the amendments
made by this section shall apply to contracts completed in taxable years
ending after the date of the enactment of this Act.
(2) Subsection (b).--The amendments made by subsection (b) shall
apply for purposes of section 167(g) of the Internal Revenue Code of
1986 to property placed in service after September 13, 1995.
SEC. 1212. MINIMUM TAX TREATMENT OF CERTAIN PROPERTY AND
CASUALTY INSURANCE COMPANIES.
(a) In General.--Clause (i) of section 56(g)(4)(B) (relating to
inclusion of items included for purposes of computing earnings and
profits) is amended by adding at the end the following new sentence:
``In the case of any insurance company taxable under section 831(b),
this clause shall not apply to any amount not described in section
834(b).''
(b) Effective Date.--The amendment made by subsection (a) shall apply
to taxable years beginning after December 31, 1997.
Subtitle C--Simplification Relating to Electing Large Partnerships
PART I--GENERAL PROVISIONS
SEC. 1221. SIMPLIFIED FLOW-THROUGH FOR ELECTING LARGE PARTNERSHIPS.
(a) General Rule.--Subchapter K (relating to partners and
partnerships) is amended by adding at the end the following new part:
``PART IV--SPECIAL RULES FOR ELECTING LARGE PARTNERSHIPS
``Sec. 771. Application of subchapter to electing large partnerships.
``Sec. 772. Simplified flow-through.
``Sec. 773. Computations at partnership level.
``Sec. 774. Other modifications.
``Sec. 775. Electing large partnership defined.
``Sec. 776. Special rules for partnerships holding oil and gas
properties.
``Sec. 777. Regulations.
``SEC. 771. APPLICATION OF SUBCHAPTER TO ELECTING LARGE PARTNERSHIPS.
``The preceding provisions of this subchapter to the extent
inconsistent with the provisions of this part shall not apply to an
electing large partnership and its partners.
``SEC. 772. SIMPLIFIED FLOW-THROUGH.
``(a) General Rule.--In determining the income tax of a partner of an
electing large partnership, such partner shall take into account
separately such partner's distributive share of the partnership's--
``(1) taxable income or loss from passive loss limitation activities,
``(2) taxable income or loss from other activities,
``(3) net capital gain (or net capital loss)--
``(A) to the extent allocable to passive loss limitation activities,
and
``(B) to the extent allocable to other activities,
``(4) tax-exempt interest,
``(5) applicable net AMT adjustment separately computed for--
``(A) passive loss limitation activities, and
``(B) other activities,
``(6) general credits,
``(7) low-income housing credit determined under section 42,
``(8) rehabilitation credit determined under section 47,
``(9) foreign income taxes,
``(10) the credit allowable under section 29, and
``(11) other items to the extent that the Secretary determines that
the separate treatment of such items is appropriate.
``(b) Separate Computations.--In determining the amounts required
under subsection (a) to be separately taken
into account by any partner, this section and section 773
shall be applied separately with respect to such partner by taking into
account such partner's distributive share of the items of income, gain,
loss, deduction, or credit of the partnership.
``(c) Treatment at Partner Level.--
``(1) In general.--Except as provided in this subsection, rules
similar to the rules of section 702(b) shall apply to any partner's
distributive share of the amounts referred to in subsection (a).
``(2) Income or loss from passive loss limitation activities.--For
purposes of this chapter, any partner's distributive share of any income
or loss described in subsection (a)(1) shall be treated as an item of
income or loss (as the case may be) from the conduct of a trade or
business which is a single passive activity (as defined in section 469).
A similar rule shall apply to a partner's distributive share of amounts
referred to in paragraphs (3)(A) and (5)(A) of subsection (a).
``(3) Income or loss from other activities.--
``(A) In general.--For purposes of this chapter, any partner's
distributive share of any income or loss described in subsection (a)(2)
shall be treated as an item of income or expense (as the case may be)
with respect to property held for investment.
``(B) Deductions for loss not subject to section 67.--The deduction
under section 212 for any loss described in subparagraph (A) shall not
be treated as a miscellaneous itemized deduction for purposes of section
67.
``(4) Treatment of net capital gain or loss.--For purposes of this
chapter, any partner's distributive share of any gain or loss described
in subsection (a)(3) shall be treated as a long-term capital gain or
loss, as the case may be.
``(5) Minimum tax treatment.--In determining the alternative minimum
taxable income of any partner, such partner's distributive share of any
applicable net AMT adjustment shall be taken into account in lieu of
making the separate adjustments provided in sections 56, 57, and 58 with
respect to the items of the partnership. Except as provided in
regulations, the applicable net AMT adjustment shall be treated, for
purposes of section 53, as an adjustment or item of tax preference not
specified in section 53(d)(1)(B)(ii).
``(6) General credits.--A partner's distributive share of the amount
referred to in paragraph (6) of subsection (a) shall be taken into
account as a current year business credit.
``(d) Operating Rules.--For purposes of this section--
``(1) Passive loss limitation activity.--The term `passive loss
limitation activity' means--
``(A) any activity which involves the conduct of a trade or
business, and
``(B) any rental activity.
For purposes of the preceding sentence, the term `trade or business'
includes any activity treated as a trade or business under paragraph (5)
or (6) of section 469(c).
``(2) Tax-exempt interest.--The term `tax-exempt interest' means
interest excludable from gross income under section 103.
``(3) Applicable net amt adjustment.--
``(A) In general.--The applicable net AMT adjustment is--
``(i) with respect to taxpayers other than corporations, the net
adjustment determined by using the adjustments applicable to
individuals, and
``(ii) with respect to corporations, the net adjustment determined
by using the adjustments applicable to corporations.
``(B) Net adjustment.--The term `net adjustment' means the net
adjustment in the items attributable to passive loss activities or other
activities (as the case may be) which would result if such items were
determined with the adjustments of sections 56, 57, and 58.
``(4) Treatment of certain separately stated items.--
``(A) Exclusion for certain purposes.--In determining the amounts
referred to in paragraphs (1) and (2) of subsection (a), any net capital
gain or net capital loss (as the case may be), and any item referred to
in subsection (a)(11), shall be excluded.
``(B) Allocation rules.--The net capital gain shall be treated--
``(i) as allocable to passive loss limitation activities to the
extent the net capital gain does not exceed the net capital gain
determined by only taking into account gains and losses from sales and
exchanges of property used in connection with such activities, and
``(ii) as allocable to other activities to the extent such gain
exceeds the amount allocated under clause (i).
A similar rule shall apply for purposes of allocating any net capital
loss.
``(C) Net capital loss.--The term `net capital loss' means the
excess of the losses from sales or exchanges of capital assets over the
gains from sales or exchange of capital assets.
``(5) General credits.--The term `general credits' means any credit
other than the low-income housing credit, the rehabilitation credit, the
foreign tax credit, and the credit allowable under section 29.
``(6) Foreign income taxes.--The term `foreign income taxes' means
taxes described in section 901 which are paid or accrued to foreign
countries and to possessions of the United States.
``(e) Special Rule for Unrelated Business Tax.--In the case of a
partner which is an organization subject to tax under section 511, such
partner's distributive share of any items shall be taken into account
separately to the extent necessary to comply with the provisions of
section 512(c)(1).
``(f) Special Rules for Applying Passive Loss Limitations.--If any
person holds an interest in an electing large partnership other than as
a limited partner--
``(1) paragraph (2) of subsection (c) shall not apply to such
partner, and
``(2) such partner's distributive share of the partnership items
allocable to passive loss limitation activities shall be taken into
account separately to the extent necessary to comply with the provisions
of section 469.
The preceding sentence shall not apply to any items allocable to an
interest held as a limited partner.
``SEC. 773. COMPUTATIONS AT PARTNERSHIP LEVEL.
``(a) General Rule.--
``(1) Taxable income.--The taxable income of an electing large
partnership shall be computed in the same manner as in the case of an
individual except that--
``(A) the items described in section 772(a) shall be separately
stated, and
``(B) the modifications of subsection (b) shall apply.
``(2) Elections.--All elections affecting the computation of the
taxable income of an electing large partnership or the computation of
any credit of an electing large partnership shall be made by the
partnership; except that the election under section 901, and any
election under section 108, shall be made by each partner separately.
``(3) Limitations, etc.--
``(A) In general.--Except as provided in subparagraph (B), all
limitations and other provisions affecting the computation of the
taxable income of an electing large partnership or the computation of
any
credit of an electing large partnership shall be applied at
the partnership level (and not at the partner level).
``(B) Certain limitations applied at partner level.--The following
provisions shall be applied at the partner level (and not at the
partnership level):
``(i) Section 68 (relating to overall limitation on itemized
deductions).
``(ii) Sections 49 and 465 (relating to at risk limitations).
``(iii) Section 469 (relating to limitation on passive activity
losses and credits).
``(iv) Any other provision specified in regulations.
``(4) Coordination with other provisions.--Paragraphs (2) and (3)
shall apply notwithstanding any other provision of this chapter other
than this part.
``(b) Modifications to Determination of Taxable Income.--In
determining the taxable income of an electing large partnership--
``(1) Certain deductions not allowed.--The following deductions
shall not be allowed:
``(A) The deduction for personal exemptions provided in section 151.
``(B) The net operating loss deduction provided in section 172.
``(C) The additional itemized deductions for individuals provided in
part VII of subchapter B (other than section 212 thereof).
``(2) Charitable deductions.--In determining the amount allowable
under section 170, the limitation of section 170(b)(2) shall apply.
``(3) Coordination with section 67.--In lieu of applying section 67,
70 percent of the amount of the miscellaneous itemized deductions shall
be disallowed.
``(c) Special Rules for Income From Discharge of Indebtedness.--If an
electing large partnership has income from the discharge of any
indebtedness--
``(1) such income shall be excluded in determining the amounts
referred to in section 772(a), and
``(2) in determining the income tax of any partner of such
partnership--
``(A) such income shall be treated as an item required to be
separately taken into account under section 772(a), and
``(B) the provisions of section 108 shall be applied without regard
to this part.
``SEC. 774. OTHER MODIFICATIONS.
``(a) Treatment of Certain Optional Adjustments, Etc.--In the case of
an electing large partnership--
``(1) computations under section 773 shall be made without regard to
any adjustment under section 743(b) or 108(b), but
``(2) a partner's distributive share of any amount referred to in
section 772(a) shall be appropriately adjusted to take into account any
adjustment under section 743(b) or 108(b) with respect to such partner.
``(b) Credit Recapture Determined at Partnership Level.--
``(1) In general.--In the case of an electing large partnership--
``(A) any credit recapture shall be taken into account by the
partnership, and
``(B) the amount of such recapture shall be determined as if the
credit with respect to which the recapture is made had been fully
utilized to reduce tax.
``(2) Method of taking recapture into account.--An electing large
partnership shall take into account a credit recapture by reducing the
amount of the appropriate current year credit to the extent thereof, and
if such recapture exceeds the amount of such current year credit, the
partnership shall be liable to pay such excess.
``(3) Dispositions not to trigger recapture.--No credit recapture
shall be required by reason of any transfer of an interest in an
electing large partnership.
``(4) Credit recapture.--For purposes of this subsection, the term
`credit recapture' means any increase in tax under section 42(j) or
50(a).
``(c) Partnership Not Terminated by Reason of Change in
Ownership.--Subparagraph (B) of section 708(b)(1) shall not apply to an
electing large partnership.
``(d) Partnership Entitled to Certain Credits.--The following shall
be allowed to an electing large partnership and shall not be taken into
account by the partners of such partnership:
``(1) The credit provided by section 34.
``(2) Any credit or refund under section 852(b)(3)(D).
``(e) Treatment of REMIC Residuals.--For purposes of applying section
860E(e)(6) to any electing large partnership--
``(1) all interests in such partnership shall be treated as held by
disqualified organizations,
``(2) in lieu of applying subparagraph (C) of section 860E(e)(6),
the amount subject to tax under section 860E(e)(6) shall be excluded
from the gross income of such partnership, and
``(3) subparagraph (D) of section 860E(e)(6) shall not apply.
``(f) Special Rules for Applying Certain Installment Sale Rules.--In
the case of an electing large partnership--
``(1) the provisions of sections 453(l)(3) and 453A shall be applied
at the partnership level, and
``(2) in determining the amount of interest payable under such
sections, such partnership shall be treated as subject to tax under this
chapter at the highest rate of tax in effect under section 1 or 11.
``SEC. 775. ELECTING LARGE PARTNERSHIP DEFINED.
``(a) General Rule.--For purposes of this part--
``(1) In general.--The term `electing large partnership' means, with
respect to any partnership taxable year, any partnership if--
``(A) the number of persons who were partners in such partnership in
the preceding partnership taxable year equaled or exceeded 100, and
``(B) such partnership elects the application of this part.
To the extent provided in regulations, a partnership shall cease to
be treated as an electing large partnership for any partnership taxable
year if in such taxable year fewer than 100 persons were partners in
such partnership.
``(2) Election.--The election under this subsection shall apply to
the taxable year for which made and all subsequent taxable years unless
revoked with the consent of the Secretary.
``(b) Special Rules for Certain Service Partnerships.--
``(1) Certain partners not counted.--For purposes of this section,
the term `partner' does not include any individual performing
substantial services in connection with the activities of the
partnership and holding an interest in such partnership, or an
individual who formerly performed substantial services in connection
with such activities and who held an interest in such partnership at the
time the individual performed such services.
``(2) Exclusion.--For purposes of this part, an election under
subsection (a) shall not be effective with respect to any partnership if
substantially all the partners of such partnership--
``(A) are individuals performing substantial services in connection
with the activities of such partnership or are personal service
corporations (as defined in section 269A(b)) the owner-employees (as
defined in section 269A(b)) of which perform such substantial services,
``(B) are retired partners who had performed such substantial
services, or
``(C) are spouses of partners who are performing (or had previously
performed) such substantial services.
``(3) Special rule for lower tier partnerships.--For purposes of
this subsection, the activities of a partnership shall include the
activities of any other partnership in which the partnership owns
directly an interest in the capital and profits of at least 80 percent.
``(c) Exclusion of Commodity Pools.--For purposes of this part, an
election under subsection (a) shall not be effective with respect to any
partnership the principal activity of which is the buying and selling of
commodities (not described in section 1221(1)), or options, futures, or
forwards with respect to such commodities.
``(d) Secretary May Rely on Treatment on Return.--If, on the
partnership return of any partnership, such partnership is treated as an
electing large partnership, such treatment shall be binding on such
partnership and all partners of such partnership but not on the
Secretary.
``SEC. 776. SPECIAL RULES FOR PARTNERSHIPS HOLDING OIL AND GAS
PROPERTIES.
``(a) Computation of Percentage Depletion.--In the case of an
electing large partnership, except as provided in subsection (b)--
``(1) the allowance for depletion under section 611 with respect to
any partnership oil or gas property shall be computed at the partnership
level without regard to any provision of section 613A requiring such
allowance to be computed separately by each partner,
``(2) such allowance shall be determined without regard to the
provisions of section 613A(c) limiting the
amount of production for which percentage depletion is
allowable and without regard to paragraph (1) of section 613A(d), and
``(3) paragraph (3) of section 705(a) shall not apply.
``(b) Treatment of Certain Partners.--
``(1) In general.--In the case of a disqualified person, the
treatment under this chapter of such person's distributive share of any
item of income, gain, loss, deduction, or credit attributable to any
partnership oil or gas property shall be determined without regard to
this part. Such person's distributive share of any such items shall be
excluded for purposes of making determinations under sections 772 and
773.
``(2) Disqualified person.--For purposes of paragraph (1), the term
`disqualified person' means, with respect to any partnership taxable
year--
``(A) any person referred to in paragraph (2) or (4) of section
613A(d) for such person's taxable year in which such partnership taxable
year ends, and
``(B) any other person if such person's average daily production of
domestic crude oil and natural gas for such person's taxable year in
which such partnership taxable year ends exceeds 500 barrels.
``(3) Average daily production.--For purposes of paragraph (2), a
person's average daily production of domestic crude oil and natural gas
for any taxable year shall be computed as provided in section
613A(c)(2)--
``(A) by taking into account all production of domestic crude oil
and natural gas (including such person's proportionate share of any
production of a partnership),
``(B) by treating 6,000 cubic feet of natural gas as a barrel of
crude oil, and
``(C) by treating as 1 person all persons treated as 1 taxpayer
under section 613A(c)(8) or among whom allocations are required under
such section.
``SEC. 777. REGULATIONS.
``The Secretary shall prescribe such regulations as may be
appropriate to carry out the purposes of this part.''
(b) Clerical Amendment.--The table of parts for subchapter K of
chapter 1 is amended by adding at the end the following new item:
``Part IV. Special rules for electing large partnerships.''
(c) Effective Date.--The amendments made by this section shall apply
to partnership taxable years beginning after December 31, 1997.
SEC. 1222. SIMPLIFIED AUDIT PROCEDURES FOR ELECTING LARGE PARTNERSHIPS.
(a) General Rule.--Chapter 63 is amended by adding at the end thereof
the following new subchapter:
``SUBCHAPTER D--TREATMENT OF ELECTING LARGE PARTNERSHIPS
``Part I. Treatment of partnership items and adjustments.
``Part II. Partnership level adjustments.
``Part III. Definitions and special rules.
``PART I--TREATMENT OF PARTNERSHIP ITEMS AND ADJUSTMENTS
``Sec. 6240. Application of subchapter.
``Sec. 6241. Partner's return must be consistent with partnership
return.
``Sec. 6242. Procedures for taking partnership adjustments into account.
``SEC. 6240. APPLICATION OF SUBCHAPTER.
``(a) General Rule.--This subchapter shall only apply to electing
large partnerships and partners in such partnerships.
``(b) Coordination With Other Partnership Audit Procedures.--
``(1) In general.--Subchapter C of this chapter shall not apply to
any electing large partnership other than in its capacity as a partner
in another partnership which is not an electing large partnership.
``(2) Treatment where partner in other partnership.--If an electing
large partnership is a partner in another partnership which is not an
electing large partnership--
``(A) subchapter C of this chapter shall apply to items of such
electing large partnership which are partnership items with respect to
such other partnership, but
``(B) any adjustment under such subchapter C shall be taken into
account in the manner provided by section 6242.
``SEC. 6241. PARTNER'S RETURN MUST BE CONSISTENT WITH
PARTNERSHIP RETURN.
``(a) General Rule.--A partner of any electing large partnership
shall, on the partner's return, treat each partnership item attributable
to such partnership in a manner which is consistent with the treatment
of such partnership item on the partnership return.
``(b) Underpayment Due to Inconsistent Treatment Assessed as Math
Error.--Any underpayment of tax by a partner by reason of failing to
comply with the requirements of subsection (a) shall be assessed and
collected in the same manner as if such underpayment were on account of
a mathematical or clerical error appearing on the partner's return.
Paragraph (2) of section 6213(b) shall not apply to any assessment of an
underpayment referred to in the preceding sentence.
``(c) Adjustments Not To Affect Prior Year of Partners.--
``(1) In general.--Except as provided in paragraph (2), subsections
(a) and (b) shall apply without regard to any adjustment to the
partnership item under part II.
``(2) Certain changes in distributive share taken into account by
partner.--
``(A) In general.--To the extent that any adjustment under part II
involves a change under section 704 in a partner's distributive share of
the amount of any partnership item shown on the partnership return, such
adjustment shall be taken into account in applying this title to such
partner for the partner's taxable year for which such item was required
to be taken into account.
``(B) Coordination with deficiency procedures.--
``(i) In general.--Subchapter B shall not apply to the assessment or
collection of any underpayment of tax attributable to an adjustment
referred to in subparagraph (A).
``(ii) Adjustment not precluded.--Notwithstanding any other law or
rule of law, nothing in subchapter B (or in any proceeding under
subchapter B) shall preclude the assessment or collection of any
underpayment of tax (or the allowance of any credit or refund of any
overpayment of tax) attributable to an adjustment referred to in
subparagraph (A) and such assessment or collection or allowance (or any
notice thereof) shall not preclude any notice, proceeding, or
determination under subchapter B.
``(C) Period of limitations.--The period for--
``(i) assessing any underpayment of tax, or
``(ii) filing a claim for credit or refund of any overpayment of tax,
attributable to an adjustment referred to in subparagraph (A) shall
not expire before the close of the period prescribed by section 6248 for
making adjustments with respect to the partnership taxable year
involved.
``(D) Tiered structures.--If the partner referred to in subparagraph
(A) is another partnership or an S corporation, the rules of this
paragraph shall also apply to persons holding interests in such
partnership or S corporation (as the case may be); except that, if such
partner is an electing large partnership, the adjustment referred to in
subparagraph (A) shall be
taken into account in the manner provided by section 6242.
``(d) Addition to Tax for Failure to Comply With Section.--
``For addition to tax in case of partner's disregard of
requirements of this section, see part II of subchapter A of chapter 68.
``SEC. 6242. PROCEDURES FOR TAKING PARTNERSHIP ADJUSTMENTS INTO ACCOUNT.
``(a) Adjustments Flow Through To Partners for Year in Which
Adjustment Takes Effect.--
``(1) In general.--If any partnership adjustment with respect to any
partnership item takes effect (within the meaning of subsection (d)(2))
during any partnership taxable year and if an election under paragraph
(2) does not apply to such adjustment, such adjustment shall be taken
into account in determining the amount of such item for the partnership
taxable year in which such adjustment takes effect. In applying this
title to any person who is (directly or indirectly) a partner in such
partnership during such partnership taxable year, such adjustment shall
be treated as an item actually arising during such taxable year.
``(2) Partnership liable in certain cases.--If--
``(A) a partnership elects under this paragraph to not take an
adjustment into account under paragraph (1),
``(B) a partnership does not make such an election but in filing its
return for any partnership taxable year fails to take fully into account
any partnership adjustment as required under paragraph (1), or
``(C) any partnership adjustment involves a reduction in a credit
which exceeds the amount of such credit determined for the partnership
taxable year in which the adjustment takes effect,
the partnership shall pay to the Secretary an amount determined by
applying the rules of subsection (b)(4) to the adjustments not so taken
into account and any excess referred to in subparagraph (C).
``(3) Offsetting adjustments taken into account.--If a partnership
adjustment requires another adjustment in a taxable year after the
adjusted year and before the partnership taxable year in which such
partnership adjustment takes effect, such other adjustment shall be
taken into account under this subsection for the partnership taxable
year in which such partnership adjustment takes effect.
``(4) Coordination with part ii.--Amounts taken into account under
this subsection for any partnership taxable year shall continue to be
treated as adjustments for the adjusted year for purposes of determining
whether such amounts may be readjusted under part II.
``(b) Partnership Liable for Interest and Penalties.--
``(1) In general.--If a partnership adjustment takes effect during
any partnership taxable year and such adjustment results in an imputed
underpayment for the adjusted year, the partnership--
``(A) shall pay to the Secretary interest computed under paragraph
(2), and
``(B) shall be liable for any penalty, addition to tax, or
additional amount as provided in paragraph (3).
``(2) Determination of amount of interest.--The interest computed
under this paragraph with respect to any partnership adjustment is the
interest which would be determined under chapter 67--
``(A) on the imputed underpayment determined under paragraph (4)
with respect to such adjustment,
``(B) for the period beginning on the day after the return due date
for the adjusted year and ending on the return due date for the
partnership taxable year in which such adjustment takes effect (or, if
earlier, in the case of any adjustment to which subsection (a)(2)
applies, the date on which the payment under subsection (a)(2) is made).
Proper adjustments in the amount determined under the preceding
sentence shall be made for adjustments required for partnership taxable
years after the adjusted year and before the year in which the
partnership adjustment takes effect by reason of such partnership
adjustment.
``(3) Penalties.--A partnership shall be liable for any penalty,
addition to tax, or additional amount for which it would have been
liable if such partnership had been an individual subject to tax under
chapter 1 for the adjusted year and the imputed underpayment determined
under paragraph (4) were an actual underpayment (or understatement) for
such year.
``(4) Imputed underpayment.--For purposes of this subsection, the
imputed underpayment determined under this paragraph with respect to any
partnership adjustment is the underpayment (if any) which would result--
``(A) by netting all adjustments to items of income, gain, loss, or
deduction and by treating any net increase in income as an underpayment
equal to the amount of such net increase multiplied by the highest rate
of tax in effect under section 1 or 11 for the adjusted year, and
``(B) by taking adjustments to credits into account as increases or
decreases (whichever is appropriate) in the amount of tax.
For purposes of the preceding sentence, any net decrease in a loss
shall be treated as an increase in income and a similar rule shall apply
to a net increase in a loss.
``(c) Administrative Provisions.--
``(1) In general.--Any payment required by subsection (a)(2) or
(b)(1)(A)--
``(A) shall be assessed and collected in the same manner as if it
were a tax imposed by subtitle C, and
``(B) shall be paid on or before the return due date for the
partnership taxable year in which the partnership adjustment takes
effect.
``(2) Interest.--For purposes of determining interest, any payment
required by subsection (a)(2) or (b)(1)(A) shall be treated as an
underpayment of tax.
``(3) Penalties.--
``(A) In general.--In the case of any failure by any partnership to
pay on the date prescribed therefor any amount required by subsection
(a)(2) or (b)(1)(A), there is hereby imposed on such partnership a
penalty of 10 percent of the underpayment. For purposes of the preceding
sentence, the term `underpayment' means the excess of any payment
required under this section over the amount (if any) paid on or before
the date prescribed therefor.
``(B) Accuracy-related and fraud penalties made applicable.--For
purposes of part II of subchapter A of chapter 68, any payment required
by subsection (a)(2) shall be treated as an underpayment of tax.
``(d) Definitions and Special Rules.--For purposes of this section--
``(1) Partnership adjustment.--The term `partnership adjustment'
means any adjustment in the amount of any partnership item of an
electing large partnership.
``(2) When adjustment takes effect.--A partnership adjustment takes
effect--
``(A) in the case of an adjustment pursuant to the decision of a
court in a proceeding brought under part II, when such decision becomes
final,
``(B) in the case of an adjustment pursuant to any administrative
adjustment request under section 6251, when such adjustment is allowed
by the Secretary, or
``(C) in any other case, when such adjustment is made.
``(3) Adjusted year.--The term `adjusted year' means the partnership
taxable year to which the item being adjusted relates.
``(4) Return due date.--The term `return due date' means, with
respect to any taxable year, the date prescribed for filing the
partnership return for such taxable year (determined without regard to
extensions).
``(5) Adjustments involving changes in character.--Under
regulations, appropriate adjustments in the application of this section
shall be made for purposes of taking into account partnership
adjustments which involve a change in the character of any item of
income, gain, loss, or deduction.
``(e) Payments Nondeductible.--No deduction shall be allowed under
subtitle A for any payment required to be made by an electing large
partnership under this section.
``PART II--PARTNERSHIP LEVEL ADJUSTMENTS
``Subpart A. Adjustments by Secretary.
``Subpart B. Claims for adjustments by partnership.
``Subpart A--Adjustments by Secretary
``Sec. 6245. Secretarial authority.
``Sec. 6246. Restrictions on partnership adjustments.
``Sec. 6247. Judicial review of partnership adjustment.
``Sec. 6248. Period of limitations for making adjustments.
``SEC. 6245. SECRETARIAL AUTHORITY.
``(a) General Rule.--The Secretary is authorized and directed to make
adjustments at the partnership level in any partnership item to the
extent necessary to have such item be treated in the manner required.
``(b) Notice of Partnership Adjustment.--
``(1) In general.--If the Secretary determines that a partnership
adjustment is required, the Secretary is authorized to send notice of
such adjustment to the partnership by certified mail or registered mail.
Such notice shall be sufficient if mailed to the partnership at its last
known address even if the partnership has terminated its existence.
``(2) Further notices restricted.--If the Secretary mails a notice
of a partnership adjustment to any partnership for any partnership
taxable year and the partnership files a petition under section 6247
with respect to such notice, in the absence of a showing of fraud,
malfeasance, or misrepresentation of a material fact, the Secretary
shall not mail another such notice to such partnership with respect to
such taxable year.
``(3) Authority to rescind notice with partnership consent.--The
Secretary may, with the consent of the partnership, rescind any notice
of a partnership adjustment mailed to such partnership. Any notice so
rescinded shall not be treated as a notice of a partnership adjustment,
for purposes of this section, section 6246, and section 6247, and the
taxpayer shall have no right to bring a proceeding under section 6247
with respect to such notice. Nothing in this subsection shall affect any
suspension of the running of any period of limitations during any period
during which the rescinded notice was outstanding.
``SEC. 6246. RESTRICTIONS ON PARTNERSHIP ADJUSTMENTS.
``(a) General Rule.--Except as otherwise provided in this chapter, no
adjustment to any partnership item may be made (and no levy or
proceeding in any court for the collection of any amount resulting from
such adjustment may be made, begun or prosecuted) before--
``(1) the close of the 90th day after the day on which a notice of a
partnership adjustment was mailed to the partnership, and
``(2) if a petition is filed under section 6247 with respect to such
notice, the decision of the court has become final.
``(b) Premature Action May Be Enjoined.--Notwithstanding section
7421(a), any action which violates subsection (a) may be enjoined in the
proper court, including the Tax Court. The Tax Court shall have no
jurisdiction to enjoin any action under this subsection unless a timely
petition has been filed under section 6247 and then only in respect of
the adjustments that are the subject of such petition.
``(c) Exceptions to Restrictions on Adjustments.--
``(1) Adjustments arising out of math or clerical errors.--
``(A) In general.--If the partnership is notified that, on account
of a mathematical or clerical error appearing on the partnership return,
an adjustment to a partnership item is required, rules similar to the
rules of paragraphs (1) and (2) of section 6213(b) shall apply to such
adjustment.
``(B) Special rule.--If an electing large partnership is a partner
in another electing large partnership, any adjustment on account of such
partnership's failure to comply with the requirements of section 6241(a)
with respect to its interest in such other partnership shall be treated
as an adjustment referred to in subparagraph (A), except that paragraph
(2) of section 6213(b) shall not apply to such adjustment.
``(2) Partnership may waive restrictions.--The partnership shall at
any time (whether or not a notice of partnership adjustment has been
issued) have the right, by a signed notice in writing filed with the
Secretary, to waive the restrictions provided in subsection (a) on the
making of any partnership adjustment.
``(d) Limit Where No Proceeding Begun.--If no proceeding under
section 6247 is begun with respect to any notice of a partnership
adjustment during the 90-day period described in subsection (a), the
amount for which the partnership is liable under section 6242 (and any
increase in any partner's liability for tax under chapter 1 by reason of
any adjustment under section 6242(a)) shall not exceed the amount
determined in accordance with such notice.
``SEC. 6247. JUDICIAL REVIEW OF PARTNERSHIP ADJUSTMENT.
``(a) General Rule.--Within 90 days after the date on which a notice
of a partnership adjustment is mailed to the partnership with respect to
any partnership taxable year, the partnership may file a petition for a
readjustment of the partnership items for such taxable year with--
``(1) the Tax Court,
``(2) the district court of the United States for the district in
which the partnership's principal place of business is located, or
``(3) the Claims Court.
``(b) Jurisdictional Requirement for Bringing Action in District
Court or Claims Court.--
``(1) In general.--A readjustment petition under this section may be
filed in a district court of the United States or the Claims Court only
if the partnership filing the petition deposits with the Secretary, on
or before the date the petition is filed, the amount for which the
partnership would be liable under section 6242(b) (as of the date of the
filing of the petition) if the partnership items were adjusted as
provided by the notice of partnership adjustment. The court may by order
provide that the jurisdictional requirements of this paragraph are
satisfied where there has been a good faith attempt to satisfy such
requirement and any shortfall of the amount required to be deposited is
timely corrected.
``(2) Interest payable.--Any amount deposited under paragraph (1),
while deposited, shall not be treated as a payment of tax for purposes
of this title (other than chapter 67).
``(c) Scope of Judicial Review.--A court with which a petition is
filed in accordance with this section shall have jurisdiction to
determine all partnership items of the partnership for the partnership
taxable year to which the notice of partnership adjustment relates and
the proper allocation of such
items among the partners (and the applicability of any
penalty, addition to tax, or additional amount for which the partnership
may be liable under section 6242(b)).
``(d) Determination of Court Reviewable.--Any determination by a
court under this section shall have the force and effect of a decision
of the Tax Court or a final judgment or decree of the district court or
the Claims Court, as the case may be, and shall be reviewable as such.
The date of any such determination shall be treated as being the date of
the court's order entering the decision.
``(e) Effect of Decision Dismissing Action.--If an action brought
under this section is dismissed other than by reason of a rescission
under section 6245(b)(3), the decision of the court dismissing the
action shall be considered as its decision that the notice of
partnership adjustment is correct, and an appropriate order shall be
entered in the records of the court.
``SEC. 6248. PERIOD OF LIMITATIONS FOR MAKING ADJUSTMENTS.
``(a) General Rule.--Except as otherwise provided in this section, no
adjustment under this subpart to any partnership item for any
partnership taxable year may be made after the date which is 3 years
after the later of--
``(1) the date on which the partnership return for such taxable year
was filed, or
``(2) the last day for filing such return for such year (determined
without regard to extensions).
``(b) Extension by Agreement.--The period described in subsection (a)
(including an extension period under this subsection) may be extended by
an agreement entered into by the Secretary and the partnership before
the expiration of such period.
``(c) Special Rule in Case of Fraud, Etc.--
``(1) False return.--In the case of a false or fraudulent
partnership return with intent to evade tax, the adjustment may be made
at any time.
``(2) Substantial omission of income.--If any partnership omits from
gross income an amount properly includible therein which is in excess of
25 percent of the amount of gross income stated in its return,
subsection (a) shall be applied by substituting `6 years' for `3 years'.
``(3) No return.--In the case of a failure by a partnership to file
a return for any taxable year, the adjustment may be made at any time.
``(4) Return filed by secretary.--For purposes of this section, a
return executed by the Secretary under subsection (b) of section 6020 on
behalf of the partnership shall not be treated as a return of the
partnership.
``(d) Suspension When Secretary Mails Notice of Adjustment.--If
notice of a partnership adjustment with respect to any taxable year is
mailed to the partnership, the running of the period specified in
subsection (a) (as modified by the other provisions of this section)
shall be suspended--
``(1) for the period during which an action may be brought under
section 6247 (and, if a petition is filed under section 6247 with
respect to such notice, until the decision of the court becomes final),
and
``(2) for 1 year thereafter.
``Subpart B--Claims for Adjustments by Partnership
``Sec. 6251. Administrative adjustment requests.
``Sec. 6252. Judicial review where administrative adjustment
request is not allowed in full.
``SEC. 6251. ADMINISTRATIVE ADJUSTMENT REQUESTS.
``(a) General Rule.--A partnership may file a request for an
administrative adjustment of partnership items for any partnership
taxable year at any time which is--
``(1) within 3 years after the later of--
``(A) the date on which the partnership return for such year is
filed, or
``(B) the last day for filing the partnership return for such year
(determined without regard to extensions), and
``(2) before the mailing to the partnership of a notice of a
partnership adjustment with respect to such taxable year.
``(b) Secretarial Action.--If a partnership files an administrative
adjustment request under subsection (a), the Secretary may allow any
part of the requested adjustments.
``(c) Special Rule in Case of Extension Under Section 6248.--If the
period described in section 6248(a) is extended pursuant to an agreement
under section 6248(b), the period prescribed by subsection (a)(1) shall
not expire before the date 6 months after the expiration of the
extension under section 6248(b).
``SEC. 6252. JUDICIAL REVIEW WHERE ADMINISTRATIVE ADJUSTMENT
REQUEST IS NOT ALLOWED IN FULL.
``(a) In General.--If any part of an administrative adjustment
request filed under section 6251 is not allowed by the Secretary, the
partnership may file a petition for an adjustment with respect to the
partnership items to which such part of the request relates with--
``(1) the Tax Court,
``(2) the district court of the United States for the district in
which the principal place of business of the partnership is located, or
``(3) the Claims Court.
``(b) Period for Filing Petition.--A petition may be filed under
subsection (a) with respect to partnership items for a partnership
taxable year only--
``(1) after the expiration of 6 months from the date of filing of
the request under section 6251, and
``(2) before the date which is 2 years after the date of such request.
The 2-year period set forth in paragraph (2) shall be extended for
such period as may be agreed upon in writing by the partnership and the
Secretary.
``(c) Coordination With Subpart A.--
``(1) Notice of partnership adjustment before filing of
petition.--No petition may be filed under this section after the
Secretary mails to the partnership a notice of a partnership adjustment
for the partnership taxable year to which the request under section 6251
relates.
``(2) Notice of partnership adjustment after filing but before
hearing of petition.--If the Secretary mails to the partnership a notice
of a partnership adjustment for the partnership taxable year to which
the request under section 6251 relates after the filing of a petition
under this subsection but before the hearing of such petition, such
petition shall be treated as an action brought under section 6247 with
respect to such notice, except that subsection (b) of section 6247 shall
not apply.
``(3) Notice must be before expiration of statute of limitations.--A
notice of a partnership adjustment for the partnership taxable year
shall be taken into account under paragraphs (1) and (2) only if such
notice is mailed before the expiration of the period prescribed by
section 6248 for making adjustments to partnership items for such
taxable year.
``(d) Scope of Judicial Review.--Except in the case described in
paragraph (2) of subsection (c), a court with which a petition is filed
in accordance with this section shall have jurisdiction to determine
only those partnership items to which the part of the request under
section 6251 not allowed by the Secretary relates and those items with
respect to which the Secretary asserts adjustments as offsets to the
adjustments requested by the partnership.
``(e) Determination of Court Reviewable.--Any determination by a
court under this subsection shall have the force and effect of a
decision of the Tax Court or a final judgment or decree of the district
court or the Claims Court, as the case may be, and shall be reviewable
as such. The date of any such determination shall be treated as being
the date of the court's order entering the decision.
``PART III--DEFINITIONS AND SPECIAL RULES
``Sec. 6255. Definitions and special rules.
``SEC. 6255. DEFINITIONS AND SPECIAL RULES.
``(a) Definitions.--For purposes of this subchapter--
``(1) Electing large partnership.--The term `electing large
partnership' has the meaning given to such term by section 775.
``(2) Partnership item.--The term `partnership item' has the meaning
given to such term by section 6231(a)(3).
``(b) Partners Bound by Actions of Partnership, Etc.--
``(1) Designation of partner.--Each electing large partnership shall
designate (in the manner prescribed by the Secretary) a partner (or
other person) who shall have the sole authority to act on behalf of such
partnership under this subchapter. In any case in which such a
designation is not in effect, the Secretary may select any partner as
the partner with such authority.
``(2) Binding effect.--An electing large partnership and all
partners of such partnership shall be bound--
``(A) by actions taken under this subchapter by the partnership, and
``(B) by any decision in a proceeding brought under this subchapter.
``(c) Partnerships Having Principal Place of Business Outside the
United States.--For purposes of sections 6247 and 6252, a principal
place of business located outside the United States shall be treated as
located in the District of Columbia.
``(d) Treatment Where Partnership Ceases To Exist.--If a partnership
ceases to exist before a partnership adjustment under this subchapter
takes effect, such adjustment shall be taken into account by the former
partners of such partnership under regulations prescribed by the
Secretary.
``(e) Date Decision Becomes Final.--For purposes of this subchapter,
the principles of section 7481(a) shall be applied in determining the
date on which a decision of a district court or the Claims Court becomes
final.
``(f) Partnerships in Cases Under Title 11 of the United States
Code.--The running of any period of limitations provided in this
subchapter on making a partnership adjustment (or provided by section
6501 or 6502 on the assessment or collection of any amount required to
be paid under section 6242) shall, in a case under title 11 of the
United States Code, be suspended during the period during which the
Secretary is prohibited by reason of such case from making the
adjustment (or assessment or collection) and--
``(1) for adjustment or assessment, 60 days thereafter, and
``(2) for collection, 6 months thereafter.
``(g) Regulations.--The Secretary shall prescribe such regulations as
may be necessary to carry out the provisions of this subchapter,
including regulations--
``(1) to prevent abuse through manipulation of the provisions of
this subchapter, and
``(2) providing that this subchapter shall not apply to any case
described in section 6231(c)(1) (or the regulations prescribed
thereunder) where the application of this subchapter to such a case
would interfere with the effective and efficient enforcement of this
title.
In any case to which this subchapter does not apply by reason of
paragraph (2), rules similar to the rules of sections 6229(f) and
6255(f) shall apply.''
(b) Clerical Amendment.--The table of subchapters for chapter 63 is
amended by adding at the end thereof the following new item:
``SUBCHAPTER D. TREATMENT OF ELECTING LARGE PARTNERSHIPS.''
SEC. 1223. DUE DATE FOR FURNISHING INFORMATION TO PARTNERS OF
ELECTING LARGE PARTNERSHIPS.
(a) General Rule.--Subsection (b) of section 6031 (relating to copies
to partners) is amended by adding at the end the following new sentence:
``In the case of an electing large partnership (as defined in section
775), such information shall be furnished on or before the first March
15 following the close of such taxable year.''
(b) Treatment as Information Return.--Section 6724 is amended by
adding at the end the following new subsection:
``(e) Special Rule for Certain Partnership Returns.--If any
partnership return under section 6031(a) is required under section
6011(e) to be filed on magnetic media or in other machine-readable form,
for purposes of this part, each schedule required to be included with
such return with respect to each partner shall be treated as a separate
information return.''
SEC. 1224. RETURNS MAY BE REQUIRED ON MAGNETIC MEDIA.
Paragraph (2) of section 6011(e) (relating to returns on magnetic
media) is amended by adding at the end thereof the following new
sentence:
``Notwithstanding the preceding sentence, the Secretary shall require
partnerships having more than 100 partners to file returns on magnetic
media.''
SEC. 1225. TREATMENT OF PARTNERSHIP ITEMS OF INDIVIDUAL
RETIREMENT ACCOUNTS.
Subsection (b) of section 6012 is amended by adding at the end
thereof the following new paragraph:
``(6) IRA share of partnership income.--In the case of a trust which
is exempt from taxation under section 408(e), for purposes of this
section, the trust's distributive share of items of gross income and
gain of any partnership to which subchapter C or D of chapter 63 applies
shall be treated as equal to the trust's distributive share of the
taxable income of such partnership.''
SEC. 1226. EFFECTIVE DATE.
The amendments made by this part shall apply to partnership taxable
years ending on or after December 31, 1997.
PART II--PROVISIONS RELATED TO TEFRA PARTNERSHIP PROCEEDINGS
SEC. 1231. TREATMENT OF PARTNERSHIP ITEMS IN DEFICIENCY PROCEEDINGS.
(a) In General.--Subchapter C of chapter 63 is amended by adding at
the end the following new section:
``SEC. 6234. DECLARATORY JUDGMENT RELATING TO TREATMENT OF
ITEMS OTHER THAN PARTNERSHIP ITEMS WITH RESPECT TO AN OVERSHELTERED
RETURN.
``(a) General Rule.--If--
``(1) a taxpayer files an oversheltered return for a taxable year,
``(2) the Secretary makes a determination with respect to the
treatment of items (other than partnership items) of such taxpayer for
such taxable year, and
``(3) the adjustments resulting from such determination do not give
rise to a deficiency (as defined in section 6211) but would give rise to
a deficiency if there were no net loss from partnership items,
the Secretary is authorized to send a notice of adjustment reflecting
such determination to the taxpayer by certified or registered mail.
``(b) Oversheltered Return.--For purposes of this section, the term
`oversheltered return' means an income tax return which--
``(1) shows no taxable income for the taxable year, and
``(2) shows a net loss from partnership items.
``(c) Judicial Review in the Tax Court.--Within 90 days, or 150 days
if the notice is addressed to a person outside the United States, after
the day on which the notice of adjustment authorized in subsection (a)
is mailed to the taxpayer, the
taxpayer may file a petition with the Tax Court for
redetermination of the adjustments. Upon the filing of such a petition,
the Tax Court shall have jurisdiction to make a declaration with respect
to all items (other than partnership items and affected items which
require partner level determinations as described in section
6230(a)(2)(A)(i)) for the taxable year to which the notice of adjustment
relates, in accordance with the principles of section 6214(a). Any such
declaration shall have the force and effect of a decision of the Tax
Court and shall be reviewable as such.
``(d) Failure To File Petition.--
``(1) In general.--Except as provided in paragraph (2), if the
taxpayer does not file a petition with the Tax Court within the time
prescribed in subsection (c), the determination of the Secretary set
forth in the notice of adjustment that was mailed to the taxpayer shall
be deemed to be correct.
``(2) Exception.--Paragraph (1) shall not apply after the date that
the taxpayer--
``(A) files a petition with the Tax Court within the time prescribed
in subsection (c) with respect to a subsequent notice of adjustment
relating to the same taxable year, or
``(B) files a claim for refund of an overpayment of tax under
section 6511 for the taxable year involved.
If a claim for refund is filed by the taxpayer, then solely for
purposes of determining (for the taxable year involved) the amount of
any computational adjustment in connection with a partnership proceeding
under this subchapter (other than under this section) or the amount of
any deficiency attributable to affected items in a proceeding under
section 6230(a)(2), the items that are the subject of the notice of
adjustment shall be presumed to have been correctly reported on the
taxpayer's return during the pendency of the refund claim (and, if
within the time prescribed by section 6532 the taxpayer commences a
civil action for refund under section 7422, until the decision in the
refund action becomes final).
``(e) Limitations Period.--
``(1) In general.--Any notice to a taxpayer under subsection (a)
shall be mailed before the expiration of the period prescribed by
section 6501 (relating to the period of limitations on assessment).
``(2) Suspension when secretary mails notice of adjustment.--If the
Secretary mails a notice of adjustment to the taxpayer for a taxable
year, the period of limitations on the making of assessments shall be
suspended for the period during which the Secretary is prohibited from
making the assessment (and, in any event, if a proceeding in respect of
the notice of adjustment is placed on the docket of the Tax Court, until
the decision of the Tax Court becomes final), and for 60 days
thereafter.
``(3) Restrictions on assessment.--Except as otherwise provided in
section 6851, 6852, or 6861, no assessment of a deficiency with respect
to any tax imposed by subtitle A attributable to any item (other than a
partnership item or any item affected by a partnership item) shall be
made--
``(A) until the expiration of the applicable 90-day or 150-day
period set forth in subsection (c) for filing a petition with the Tax
Court, or
``(B) if a petition has been filed with the Tax Court, until the
decision of the Tax Court has become final.
``(f) Further Notices of Adjustment Restricted.--If the Secretary
mails a notice of adjustment to the taxpayer for a taxable year and the
taxpayer files a petition with the Tax Court within the time prescribed
in subsection (c), the Secretary may not mail another such notice to the
taxpayer with respect to the same taxable year in the absence of a
showing of fraud, malfeasance, or misrepresentation of a material fact.
``(g) Coordination With Other Proceedings Under This Subchapter.--
``(1) In general.--The treatment of any item that has been
determined pursuant to subsection (c) or (d) shall be taken into account
in determining the amount of any computational adjustment that is made
in connection with a partnership proceeding under this subchapter (other
than under this section), or the amount of any deficiency attributable
to affected items in a proceeding under section 6230(a)(2), for the
taxable year involved. Notwithstanding any other law or rule of law
pertaining to the period of limitations on the making of assessments,
for purposes of the preceding sentence, any adjustment made in
accordance with this section shall be taken into account regardless of
whether any assessment has been made with respect to such adjustment.
``(2) Special rule in case of computational adjustment.--In the case
of a computational adjustment that is made in connection with a
partnership proceeding under this subchapter (other than under this
section), the provisions of paragraph (1) shall apply only if the
computational adjustment is made within the period prescribed by section
6229 for assessing any tax under subtitle A which is attributable to any
partnership item or affected item for the taxable year involved.
``(3) Conversion to deficiency proceeding.--If--
``(A) after the notice referred to in subsection (a) is mailed to a
taxpayer for a taxable year but before the expiration of the period for
filing a petition with the Tax Court under subsection (c) (or, if a
petition is filed with the Tax Court, before the Tax Court makes a
declaration for that taxable year), the treatment of any partnership
item for the taxable year is finally determined, or any such item ceases
to be a partnership item pursuant to section 6231(b), and
``(B) as a result of that final determination or cessation, a
deficiency can be determined with respect to the items that are the
subject of the notice of adjustment,
the notice of adjustment shall be treated as a notice of deficiency
under section 6212 and any petition filed in respect of the notice shall
be treated as an action brought under section 6213.
``(4) Finally determined.--For purposes of this subsection, the
treatment of partnership items shall be treated as finally determined
if--
``(A) the Secretary enters into a settlement agreement (within the
meaning of section 6224) with the taxpayer regarding such items,
``(B) a notice of final partnership administrative adjustment has
been issued and--
``(i) no petition has been filed under section 6226 and the time for
doing so has expired, or
``(ii) a petition has been filed under section 6226 and the decision
of the court has become final, or
``(C) the period within which any tax attributable to such items may
be assessed against the taxpayer has expired.
``(h) Special Rules if Secretary Incorrectly Determines Applicable
Procedure.--
``(1) Special rule if secretary erroneously mails notice of
adjustment.--If the Secretary erroneously determines that subchapter B
does not apply to a taxable year of a taxpayer and consistent with that
determination timely mails a notice of adjustment to the taxpayer
pursuant to subsection (a) of this section, the notice of adjustment
shall be treated as a notice of deficiency under section 6212 and any
petition that is filed in respect of the notice shall be treated as an
action brought under section 6213.
``(2) Special rule if secretary erroneously mails notice of
deficiency.--If the Secretary erroneously determines that subchapter B
applies to a taxable year of a taxpayer and consistent with that
determination timely mails a notice of deficiency to the taxpayer
pursuant to section 6212, the notice of deficiency shall be treated as a
notice of adjustment under subsection (a) and any petition that is filed
in respect of the notice shall be treated as an action brought under
subsection (c).''
(b) Treatment of Partnership Items in Deficiency
Proceedings.--Section 6211 (defining deficiency) is amended by adding at
the end the following new subsection:
``(c) Coordination With Subchapter C.--In determining the amount of
any deficiency for purposes of this subchapter, adjustments to
partnership items shall be made only as provided in subchapter C.''
(c) Clerical Amendment.--The table of sections for subchapter C of
chapter 63 is amended by adding at the end the following new item:
``Sec. 6234. Declaratory judgment relating to treatment of items
other than partnership items with respect to an oversheltered return.''
(d) Effective Date.--The amendments made by this section shall apply
to partnership taxable years ending after the date of the enactment of
this Act.
SEC. 1232. PARTNERSHIP RETURN TO BE DETERMINATIVE OF AUDIT
PROCEDURES TO BE FOLLOWED.
(a) In General.--Section 6231 (relating to definitions and special
rules) is amended by adding at the end the following new subsection:
``(g) Partnership Return To Be Determinative of Whether Subchapter
Applies.--
``(1) Determination that subchapter applies.--If, on the basis of a
partnership return for a taxable year, the Secretary reasonably
determines that this subchapter applies to such partnership for such
year but such determination is erroneous, then the provisions of this
subchapter are hereby extended to such partnership (and its items) for
such taxable year and to partners of such partnership.
``(2) Determination that subchapter does not apply.--If, on the
basis of a partnership return for a taxable year, the Secretary
reasonably determines that this subchapter does not apply to such
partnership for such year but such determination is erroneous, then the
provisions of this subchapter shall not apply to such partnership (and
its items) for such taxable year or to partners of such partnership.''
(b) Effective Date.--The amendment made by this section shall apply
to partnership taxable years ending after the date of the enactment of
this Act.
SEC. 1233. PROVISIONS RELATING TO STATUTE OF LIMITATIONS.
(a) Suspension of Statute Where Untimely Petition Filed.--Paragraph
(1) of section 6229(d) (relating to suspension where Secretary makes
administrative adjustment) is amended by striking all that follows
``section 6226'' and inserting the following: ``(and, if a petition is
filed under section 6226 with respect to such administrative adjustment,
until the decision of the court becomes final), and''.
(b) Suspension of Statute During Bankruptcy Proceeding.--Section 6229
is amended by adding at the end the following new subsection:
``(h) Suspension During Pendency of Bankruptcy Proceeding.--If a
petition is filed naming a partner as a debtor in a bankruptcy
proceeding under title 11 of the United States Code, the running of the
period of limitations provided in this section with respect to such
partner shall be suspended--
``(1) for the period during which the Secretary is prohibited by
reason of such bankruptcy proceeding from making an assessment, and
``(2) for 60 days thereafter.''
(c) Tax Matters Partner in Bankruptcy.--Section 6229(b) is amended by
redesignating paragraph (2) as paragraph (3) and by inserting after
paragraph (1) the following new paragraph:
``(2) Special rule with respect to debtors in title 11
cases.--Notwithstanding any other law or rule of law, if an agreement is
entered into under paragraph (1)(B) and the agreement is signed by a
person who would be the tax matters partner but for the fact that, at
the time that the agreement is executed, the person is a debtor in a
bankruptcy proceeding under title 11 of the United States Code, such
agreement shall be binding on all partners in the partnership unless the
Secretary has been notified of the bankruptcy proceeding in accordance
with regulations prescribed by the Secretary.''
(d) Effective Dates.--
(1) Subsections (a) and (b).--The amendments made by subsections (a)
and (b) shall apply to partnership taxable years with respect to which
the period under section 6229 of the Internal Revenue Code of 1986 for
assessing tax has not expired on or before the date of the enactment of
this Act.
(2) Subsection (c).--The amendment made by subsection (c) shall
apply to agreements entered into after the date of the enactment of this
Act.
SEC. 1234. EXPANSION OF SMALL PARTNERSHIP EXCEPTION.
(a) In General.--Clause (i) of section 6231(a)(1)(B) (relating to
exception for small partnerships) is amended to read as follows:
``(i) In general.--The term `partnership' shall not include any
partnership having 10 or fewer partners each of whom is an individual
(other than a nonresident alien), a C corporation, or an estate of a
deceased partner. For purposes of the preceding sentence, a husband and
wife (and their estates) shall be treated as 1 partner.''
(b) Effective Date.--The amendment made by this section shall apply
to partnership taxable years ending after the date of the enactment of
this Act.
SEC. 1235. EXCLUSION OF PARTIAL SETTLEMENTS FROM 1-YEAR
LIMITATION ON ASSESSMENT.
(a) In General.--Subsection (f) of section 6229 (relating to items
becoming nonpartnership items) is amended--
(1) by striking ``(f) Items Becoming Nonpartnership Items.--If'' and
inserting the following:
``(f) Special Rules.--
``(1) Items becoming nonpartnership items.--If'',
(2) by moving the text of such subsection 2 ems to the right, and
(3) by adding at the end the following new paragraph:
``(2) Special rule for partial settlement agreements.--If a partner
enters into a settlement agreement with the Secretary with respect to
the treatment of some of the partnership items in dispute for a
partnership taxable year but other partnership items for such year
remain in dispute, the period of limitations for assessing any tax
attributable to the settled items shall be determined as if such
agreement had not been entered into.''
(b) Effective Date.--The amendment made by this section shall apply
to settlements entered into after the date of the enactment of this Act.
SEC. 1236. EXTENSION OF TIME FOR FILING A REQUEST FOR
ADMINISTRATIVE ADJUSTMENT.
(a) In General.--Section 6227 (relating to administrative adjustment
requests) is amended by redesignating subsections (b) and (c) as
subsections (c) and (d), respectively, and by inserting after subsection
(a) the following new subsection:
``(b) Special Rule in Case of Extension of Period of Limitations
Under Section 6229.--The period prescribed by subsection (a)(1) for
filing of a request for an administrative adjustment shall be extended--
``(1) for the period within which an assessment may be made pursuant
to an agreement (or any extension thereof) under section 6229(b), and
``(2) for 6 months thereafter.''
(b) Effective Date.--The amendment made by this section shall take
effect as if included in the amendments made by section 402 of the Tax
Equity and Fiscal Responsibility Act of 1982.
SEC. 1237. AVAILABILITY OF INNOCENT SPOUSE RELIEF IN CONTEXT
OF PARTNERSHIP PROCEEDINGS.
(a) In General.--Subsection (a) of section 6230 is amended by adding
at the end the following new paragraph:
``(3) Special rule in case of assertion by partner's spouse of
innocent spouse relief.--
``(A) Notwithstanding section 6404(b), if the spouse of a partner
asserts that section 6013(e) applies with respect to a liability that is
attributable to any adjustment to a partnership item, then such spouse
may file with the Secretary within 60 days after the notice of
computational adjustment is mailed to the spouse a request for abatement
of the assessment specified in such notice. Upon receipt of such
request, the Secretary shall abate the assessment. Any reassessment of
the tax with respect to which an abatement is made under this
subparagraph shall be subject to the deficiency procedures prescribed by
subchapter B. The period for making any such reassessment shall not
expire before the expiration of 60 days after the date of such
abatement.
``(B) If the spouse files a petition with the Tax Court pursuant to
section 6213 with respect to the request for abatement described in
subparagraph (A), the Tax Court shall only have jurisdiction pursuant to
this
section to determine whether the requirements of section
6013(e) have been satisfied. For purposes of such determination, the
treatment of partnership items under the settlement, the final
partnership administrative adjustment, or the decision of the court
(whichever is appropriate) that gave rise to the liability in question
shall be conclusive.
``(C) Rules similar to the rules contained in subparagraphs (B) and
(C) of paragraph (2) shall apply for purposes of this paragraph.''
(b) Claims for Refund.--Subsection (c) of section 6230 is amended by
adding at the end the following new paragraph:
``(5) Rules for seeking innocent spouse relief.--
``(A) In general.--The spouse of a partner may file a claim for
refund on the ground that the Secretary failed to relieve the spouse
under section 6013(e) from a liability that is attributable to an
adjustment to a partnership item.
``(B) Time for filing claim.--Any claim under subparagraph (A) shall
be filed within 6 months after the day on which the Secretary mails to
the spouse the notice of computational adjustment referred to in
subsection (a)(3)(A).
``(C) Suit if claim not allowed.--If the claim under subparagraph
(B) is not allowed, the spouse may bring suit with respect to the claim
within the period specified in paragraph (3).
``(D) Prior determinations are binding.--For purposes of any claim
or suit under this paragraph, the treatment of partnership items under
the settlement, the final partnership administrative adjustment, or the
decision of the court (whichever is appropriate) that gave rise to the
liability in question shall be conclusive.''
(c) Technical Amendments.--
(1) Paragraph (1) of section 6230(a) is amended by striking
``paragraph (2)'' and inserting ``paragraph (2) or (3)''.
(2) Subsection (a) of section 6503 is amended by striking ``section
6230(a)(2)(A)'' and inserting ``paragraph (2)(A) or (3) of section
6230(a)''.
(d) Effective Date.--The amendments made by this section shall take
effect as if included in the amendments made by section 402 of the Tax
Equity and Fiscal Responsibility Act of 1982.
SEC. 1238. DETERMINATION OF PENALTIES AT PARTNERSHIP LEVEL.
(a) In General.--Section 6221 (relating to tax treatment determined
at partnership level) is amended by striking ``item'' and inserting
``item (and the applicability of any penalty, addition to tax, or
additional amount which relates to an adjustment to a partnership
item)''.
(b) Conforming Amendments.--
(1) Subsection (f) of section 6226 is amended--
(A) by striking ``relates and'' and inserting ``relates,'', and
(B) by inserting before the period ``, and the applicability of any
penalty, addition to tax, or additional amount which relates to an
adjustment to a partnership item''.
(2) Clause (i) of section 6230(a)(2)(A) is amended to read as follows:
``(i) affected items which require partner level determinations
(other than penalties, additions to tax, and additional amounts that
relate to adjustments to partnership items), or''.
(3)(A) Subparagraph (A) of section 6230(a)(3), as added by section
14317, is amended by inserting ``(including any liability for any
penalty, addition to tax, or additional amount relating to such
adjustment)'' after ``partnership item''.
(B) Subparagraph (B) of such section is amended by inserting ``(and
the applicability of any penalties, additions to tax, or additional
amounts)'' after ``partnership items''.
(C) Subparagraph (A) of section 6230(c)(5), as added by section
14317, is amended by inserting before the period ``(including any
liability for any penalties, additions to tax, or additional amounts
relating to such adjustment)''.
(D) Subparagraph (D) of section 6230(c)(5), as added by section
14317, is amended by inserting ``(and the applicability of any
penalties, additions to tax, or additional amounts)'' after
``partnership items''.
(4) Paragraph (1) of section 6230(c) is amended by striking ``or''
at the end of subparagraph (A), by striking the period at the end of
subparagraph (B) and inserting ``, or'', and by adding at the end the
following new subparagraph:
``(C) the Secretary erroneously imposed any penalty, addition to
tax, or additional amount which relates to an adjustment to a
partnership item.''
(5) So much of subparagraph (A) of section 6230(c)(2) as precedes
``shall be filed'' is amended to read as follows:
``(A) Under paragraph (1) (a) or (c).--Any claim under subparagraph
(A) or (C) of paragraph (1)''.
(6) Paragraph (4) of section 6230(c) is amended by adding at the end
the following: ``In addition, the determination under the final
partnership administrative adjustment or under the decision of the court
(whichever is appropriate) concerning the applicability of any penalty,
addition to tax, or additional amount which relates to an adjustment to
a partnership item shall also be conclusive. Notwithstanding the
preceding sentence, the partner shall be allowed to assert any partner
level defenses that may apply or to challenge the amount of the
computational adjustment.''
(c) Effective Date.--The amendments made by this section shall apply
to partnership taxable years ending after the date of the enactment of
this Act.
SEC. 1239. PROVISIONS RELATING TO COURT JURISDICTION, ETC.
(a) Tax Court Jurisdiction To Enjoin Premature Assessments of
Deficiencies Attributable to Partnership Items.--Subsection (b) of
section 6225 is amended by striking ``the proper court.'' and inserting
``the proper court, including the Tax Court. The Tax Court shall have no
jurisdiction to enjoin any action or proceeding under this subsection
unless a timely petition for a readjustment of the partnership items for
the taxable year has been filed and then only in respect of the
adjustments that are the subject of such petition.''
(b) Jurisdiction To Consider Statute of Limitations With Respect to
Partners.--Paragraph (1) of section 6226(d) is amended by adding at the
end the following new sentence:
``Notwithstanding subparagraph (B), any person treated under
subsection (c) as a party to an action shall be permitted to participate
in such action (or file a readjustment petition under subsection (b) or
paragraph (2) of this subsection) solely for the purpose of asserting
that the period of limitations for assessing any tax attributable to
partnership items has expired with respect to such person, and the court
having jurisdiction of such action shall have jurisdiction to consider
such assertion.''
(c) Tax Court Jurisdiction To Determine Overpayments Attributable to
Affected Items.--
(1) Paragraph (6) of section 6230(d) is amended by striking ``(or an
affected item)''.
(2) Paragraph (3) of section 6512(b) is amended by adding at the end
the following new sentence:
``In the case of a credit or refund relating to an affected item
(within the meaning of section 6231(a)(5)), the preceding sentence shall
be applied by substituting the periods
under sections 6229 and 6230(d) for the periods under section
6511(b)(2), (c), and (d).''
(d) Venue on Appeal.--
(1) Paragraph (1) of section 7482(b) is amended by striking ``or''
at the end of subparagraph (D), by striking the period at the end of
subparagraph (E) and inserting ``, or'', and by inserting after
subparagraph (E) the following new subparagraph:
``(F) in the case of a petition under section 6234(c)--
``(i) the legal residence of the petitioner if the petitioner is not
a corporation, and
``(ii) the place or office applicable under subparagraph (B) if the
petitioner is a corporation.''
(2) The last sentence of section 7482(b)(1) is amended by striking
``or 6228(a)'' and inserting ``, 6228(a), or 6234(c)''.
(e) Other Provisions.--
(1) Subsection (c) of section 7459 is amended by striking ``or
section 6228(a)'' and inserting ``, 6228(a), or 6234(c)''.
(2) Subsection (o) of section 6501 is amended by adding at the end
the following new paragraph:
``(3) For declaratory judgment relating to treatment of items other
than partnership items with respect to an oversheltered return, see
section 6234.''
(f) Effective Date.--The amendments made by this section shall apply
to partnership taxable years ending after the date of the enactment of
this Act.
SEC. 1240. TREATMENT OF PREMATURE PETITIONS FILED BY NOTICE
PARTNERS OR 5-PERCENT GROUPS.
(a) In General.--Subsection (b) of section 6226 (relating to judicial
review of final partnership administrative adjustments) is amended by
redesignating paragraph (5) as paragraph (6) and by inserting after
paragraph (4) the following new paragraph:
``(5) Treatment of premature petitions.--If--
``(A) a petition for a readjustment of partnership items for the
taxable year involved is filed by a notice partner (or a 5-percent
group) during the 90-day period described in subsection (a), and
``(B) no action is brought under paragraph (1) during the 60-day
period described therein with respect to such taxable year which is not
dismissed,
such petition shall be treated for purposes of paragraph (1) as filed
on the last day of such 60-day period.''
(b) Effective Date.--The amendment made by this section shall apply
to petitions filed after the date of the enactment of this Act.
SEC. 1241. BONDS IN CASE OF APPEALS FROM CERTAIN PROCEEDING.
(a) In General.--Subsection (b) of section 7485 (relating to bonds to
stay assessment of collection) is amended--
(1) by inserting ``penalties,'' after ``any interest,'', and
(2) by striking ``aggregate of such deficiencies'' and inserting
``aggregate liability of the parties to the action''.
(b) Effective Date.--The amendment made by this section shall take
effect as if included in the amendments made by section 402 of the Tax
Equity and Fiscal Responsibility Act of 1982.
SEC. 1242. SUSPENSION OF INTEREST WHERE DELAY IN COMPUTATIONAL
ADJUSTMENT RESULTING FROM CERTAIN SETTLEMENTS.
(a) In General.--Subsection (c) of section 6601 (relating to interest
on underpayment, nonpayment, or extension of time for payment, of tax)
is amended by adding at the end the following new sentence: ``In the
case of a settlement under section 6224(c) which results in the
conversion of partnership items to nonpartnership items pursuant to
section 6231(b)(1)(C), the preceding sentence shall apply to a
computational adjustment resulting from such settlement in the same
manner as if such adjustment were a deficiency and such settlement were
a waiver referred to in the preceding sentence.''
(b) Effective Date.--The amendment made by this section shall apply
to adjustments with respect to partnership taxable years beginning after
the date of the enactment of this Act.
SEC. 1243. SPECIAL RULES FOR ADMINISTRATIVE ADJUSTMENT
REQUESTS WITH RESPECT TO BAD DEBTS OR WORTHLESS SECURITIES.
(a) General Rule.--Section 6227 (relating to administrative
adjustment requests) is amended by adding at the end the following new
subsection:
``(e) Requests With Respect to Bad Debts or Worthless Securities.--In
the case of that portion of any request for an administrative adjustment
which relates to the deductibility by the partnership under section 166
of a debt as a debt which became worthless, or under section 165(g) of a
loss from worthlessness of a security, the period prescribed in
subsection (a)(1) shall be 7 years from the last day for filing the
partnership return for the year with respect to which such request is
made (determined without regard to extensions).''
(b) Effective Date.--
(1) In general.--The amendment made by subsection (a) shall take
effect as if included in the amendments made by section 402 of the Tax
Equity and Fiscal Responsibility Act of 1982.
(2) Treatment of requests filed before date of enactment.--In the
case of that portion of any request (filed before the date of the
enactment of this Act) for an administrative adjustment which relates to
the deductibility of a debt as a debt which became worthless or the
deductibility of a loss from the worthlessness of a security--
(A) paragraph (2) of section 6227(a) of the Internal Revenue Code of
1986 shall not apply,
(B) the period for filing a petition under section 6228 of the
Internal Revenue Code of 1986 with respect to such request shall not
expire before the date 6 months after the date of the enactment of this
Act, and
(C) such a petition may be filed without regard to whether there was
a notice of the beginning of an administrative proceeding or a final
partnership administrative adjustment.
PART III--PROVISION RELATING TO CLOSING OF PARTNERSHIP
TAXABLE YEAR WITH RESPECT TO DECEASED PARTNER, ETC.
SEC. 1246. CLOSING OF PARTNERSHIP TAXABLE YEAR WITH RESPECT TO
DECEASED PARTNER, ETC.
(a) General Rule.--Subparagraph (A) of section 706(c)(2) (relating to
disposition of entire interest) is amended to read as follows:
``(A) Disposition of entire interest.--The taxable year of a
partnership shall close with respect to a partner whose entire interest
in the partnership terminates (whether by reason of death, liquidation,
or otherwise).''
(b) Clerical Amendment.--The paragraph heading for paragraph (2) of
section 706(c) is amended to read as follows:
``(2) Treatment of dispositions.--''.
(c) Effective Date.--The amendments made by this section shall apply
to partnership taxable years beginning after December 31, 1997.
Subtitle D--Provisions Relating to Real Estate Investment Trusts
SEC. 1251. CLARIFICATION OF LIMITATION ON MAXIMUM NUMBER OF
SHAREHOLDERS.
(a) Rules Relating to Determination of Ownership.--
(1) Failure to issue shareholder demand letter not to disqualify
reit.--Section 857(a) (relating to requirements applicable to real
estate investment trusts) is amended by striking paragraph (2) and by
redesignating paragraph (3) as paragraph (2).
(2) Shareholder demand letter requirement; penalty.--Section 857
(relating to taxation of real estate investment trusts and their
beneficiaries) is amended by redesignating subsection (f) as subsection
(g) and by inserting after subsection (e) the following new subsection:
``(f) Real Estate Investment Trusts To Ascertain Ownership.--
``(1) In general.--Each real estate investment trust shall each
taxable year comply with regulations prescribed by the Secretary for the
purposes of ascertaining the actual ownership of the outstanding shares,
or certificates of beneficial interest, of such trust.
``(2) Failure to comply.--
``(A) In general.--If a real estate investment trust fails to comply
with the requirements of paragraph (1) for a taxable year, such trust
shall pay (on notice and demand by the Secretary and in the same manner
as tax) a penalty of $25,000.
``(B) Intentional disregard.--If any failure under paragraph (1) is
due to intentional disregard of the requirement under paragraph (1), the
penalty under subparagraph (A) shall be $50,000.
``(C) Failure to comply after notice.--The Secretary may require a
real estate investment trust to take such actions as the Secretary
determines appropriate to ascertain actual ownership if the trust fails
to meet the requirements of paragraph (1). If the trust fails to take
such actions, the trust shall pay (on notice and demand by the Secretary
and in the same manner as tax) an additional penalty equal to the
penalty determined under subparagraph (A) or (B), whichever is
applicable.
``(D) Reasonable cause.--No penalty shall be imposed under this
paragraph with respect to any failure if it is shown that such failure
is due to reasonable cause and not to willful neglect.''
(b) Compliance With Closely Held Prohibition.--
(1) In general.--Section 856 (defining real estate investment trust)
is amended by adding at the end the following new subsection:
``(k) Requirement That Entity Not Be Closely Held Treated as Met in
Certain Cases.--A corporation, trust, or association--
``(1) which for a taxable year meets the requirements of section
857(f)(1), and
``(2) which does not know, or exercising reasonable diligence would
not have known, whether the entity failed to meet the requirement of
subsection (a)(6),
shall be treated as having met the requirement of subsection (a)(6)
for the taxable year.''
(2) Conforming amendment.--Paragraph (6) of section 856(a) is
amended by inserting ``subject to the provisions of subsection (k),''
before ``which is not''.
SEC. 1252. DE MINIMIS RULE FOR TENANT SERVICES INCOME.
(a) In General.--Paragraph (2) of section 856(d) (defining rents from
real property) is amended by striking subparagraph (C) and the last
sentence and inserting:
``(C) any impermissible tenant service income (as defined in
paragraph (7)).''
(b) Impermissible Tenant Service Income.--Section 856(d) is amended
by adding at the end the following new paragraph:
``(7) Impermissible tenant service income.--For purposes of
paragraph (2)(C)--
``(A) In general.--The term `impermissible tenant service income'
means, with respect to any real or personal property, any amount
received or accrued directly or indirectly by the real estate investment
trust for--
``(i) services furnished or rendered by the trust to the tenants of
such property, or
``(ii) managing or operating such property.
``(B) Disqualification of all amounts where more than de minimis
amount.--If the amount described in subparagraph (A) with respect to a
property for any taxable year exceeds 1 percent of all amounts received
or accrued during such taxable year directly or indirectly by the real
estate investment trust with respect to such property, the impermissible
tenant service income of the trust with respect to the property shall
include all such amounts.
``(C) Exceptions.--For purposes of subparagraph (A)--
``(i) services furnished or rendered, or management or operation
provided, through an independent contractor from whom the trust itself
does not derive or receive any income shall not be treated as furnished,
rendered, or provided by the trust, and
``(ii) there shall not be taken into account any amount which would
be excluded from unrelated business taxable income under section
512(b)(3) if received by an organization described in section 511(a)(2).
``(D) Amount attributable to impermissible services.--For purposes
of subparagraph (A), the amount treated as received for any service (or
management or operation) shall not be less than 150 percent of the
direct cost of the trust in furnishing or rendering the service (or
providing the management or operation).
``(E) Coordination with limitations.--For purposes of paragraphs (2)
and (3) of subsection (c), amounts described in subparagraph (A) shall
be included in the gross income of the corporation, trust, or
association.''
SEC. 1253. ATTRIBUTION RULES APPLICABLE TO TENANT OWNERSHIP.
Section 856(d)(5) (relating to constructive ownership of stock) is
amended by adding at the end the following: ``For purposes of paragraph
(2)(B), section 318(a)(3)(A) shall be applied under the preceding
sentence in the case of a partnership by taking into account only
partners who own (directly or indirectly) 25 percent or more of the
capital interest, or the profits interest, in the partnership.''
SEC. 1254. CREDIT FOR TAX PAID BY REIT ON RETAINED CAPITAL GAINS.
(a) General Rule.--Paragraph (3) of section 857(b) (relating to
capital gains) is amended by redesignating subparagraph (D) as
subparagraph (E) and by inserting after subparagraph (C) the following
new subparagraph:
``(D) Treatment by shareholders of undistributed capital gains.--
``(i) Every shareholder of a real estate investment trust at the
close of the trust's taxable year shall include, in computing his
long-term capital gains in his return for his taxable year in which the
last day of the trust's taxable year falls, such amount as the trust
shall designate in respect of such shares in a written notice mailed to
its shareholders at any time prior to the expiration of 60 days after
the close of its taxable year (or mailed to its shareholders or holders
of beneficial interests with its annual report for the taxable year),
but the amount so includible by any shareholder shall not exceed that
part of the amount subjected to tax in subparagraph (A)(ii) which he
would have received
if all of such amount had been distributed as capital gain
dividends by the trust to the holders of such shares at the close of its
taxable year.
``(ii) For purposes of this title, every such shareholder shall be
deemed to have paid, for his taxable year under clause (i), the tax
imposed by subparagraph (A)(ii) on the amounts required by this
subparagraph to be included in respect of such shares in computing his
long-term capital gains for that year; and such shareholders shall be
allowed credit or refund as the case may be, for the tax so deemed to
have been paid by him.
``(iii) The adjusted basis of such shares in the hands of the holder
shall be increased with respect to the amounts required by this
subparagraph to be included in computing his long-term capital gains, by
the difference between the amount of such includible gains and the tax
deemed paid by such shareholder in respect of such shares under clause
(ii).
``(iv) In the event of such designation, the tax imposed by
subparagraph (A)(ii) shall be paid by the real estate investment trust
within 30 days after the close of its taxable year.
``(v) The earnings and profits of such real estate investment trust,
and the earnings and profits of any such shareholder which is a
corporation, shall be appropriately adjusted in accordance with
regulations prescribed by the Secretary.
``(vi) As used in this subparagraph, the terms `shares' and
`shareholders' shall include beneficial interests and holders of
beneficial interests, respectively.''
(b) Conforming Amendments.--
(1) Clause (i) of section 857(b)(7)(A) is amended by striking
``subparagraph (B)'' and inserting ``subparagraph (B) or (D)''.
(2) Clause (iii) of section 852(b)(3)(D) is amended by striking ``by
65 percent'' and all that follows and inserting ``by the difference
between the amount of such includible gains and the tax deemed paid by
such shareholder in respect of such shares under clause (ii).''
SEC. 1255. REPEAL OF 30-PERCENT GROSS INCOME REQUIREMENT.
(a) General Rule.--Subsection (c) of section 856 (relating to
limitations) is amended--
(1) by adding ``and'' at the end of paragraph (3),
(2) by striking paragraphs (4) and (8), and
(3) by redesignating paragraphs (5), (6), and (7) as paragraphs (4),
(5), and (6), respectively.
(b) Conforming Amendments.--
(1) Subparagraph (G) of section 856(c)(5), as redesignated by
subsection (a), is amended by striking ``and such agreement shall be
treated as a security for purposes of paragraph (4)(A)''.
(2) Paragraph (5) of section 857(b) is amended by striking ``section
856(c)(7)'' and inserting ``section 856(c)(6)''.
(3) Subparagraph (C) of section 857(b)(6) is amended by striking
``section 856(c)(6)(B)'' and inserting ``section 856(c)(5)(B)''.
SEC. 1256. MODIFICATION OF EARNINGS AND PROFITS RULES FOR
DETERMINING WHETHER REIT HAS EARNINGS AND PROFITS FROM NON-REIT YEAR.
Subsection (d) of section 857 is amended by adding at the end the
following new paragraph:
``(3) Distributions to meet requirements of subsection ( a )(2)(B)
.--Any distribution which is made in order to comply with the
requirements of subsection (a)(2)(B)--
``(A) shall be treated for purposes of this subsection and
subsection (a)(2)(B) as made from the earliest accumulated earnings and
profits (other than earnings and profits to which subsection (a)(2)(A)
applies) rather than the most recently accumulated earnings and profits,
and
``(B) to the extent treated under subparagraph (A) as made from
accumulated earnings and profits, shall not be treated as a distribution
for purposes of subsection (b)(2)(B).''
SEC. 1257. TREATMENT OF FORECLOSURE PROPERTY.
(a) Grace Periods.--
(1) Initial period.--Paragraph (2) of section 856(e) (relating to
special rules for foreclosure property) is amended by striking ``on the
date which is 2 years after the date the trust acquired such property''
and inserting ``as of the close of the 3d taxable year following the
taxable year in which the trust acquired such property''.
(2) Extension.--Paragraph (3) of section 856(e) is amended--
(A) by striking ``or more extensions'' and inserting ``extension'', and
(B) by striking the last sentence and inserting: ``Any such
extension shall not extend the grace period beyond the close of the 3d
taxable year following the last taxable year in the period under
paragraph (2).''
(b) Revocation of Election.--Paragraph (5) of section 856(e) is
amended by striking the last sentence and inserting: ``A real estate
investment trust may revoke any such election for a taxable year by
filing the revocation (in the manner provided by the Secretary) on or
before the due date (including any extension of time) for filing its
return of tax under this chapter for the taxable year. If a trust
revokes an election for any property, no election may be made by the
trust under this paragraph with respect to the property for any
subsequent taxable year.''
(c) Certain Activities Not To Disqualify Property.--Paragraph (4) of
section 856(e) is amended by adding at the end the following new flush
sentence:
``For purposes of subparagraph (C), property shall not be treated as
used in a trade or business by reason of any activities of the real
estate investment trust with respect to such property to the extent that
such activities would not result in amounts received or accrued,
directly or indirectly, with respect to such property being treated as
other than rents from real property.''
SEC. 1258. PAYMENTS UNDER HEDGING INSTRUMENTS.
Section 856(c)(5)(G) (relating to treatment of certain interest rate
agreements), as redesignated by section 1255, is amended to read as
follows:
``(G) Treatment of certain hedging instruments.--Except to the
extent provided by regulations, any--
``(i) payment to a real estate investment trust under an interest
rate swap or cap agreement, option, futures contract, forward rate
agreement, or any similar financial instrument, entered into by the
trust in a transaction to reduce the interest rate risks with respect to
any indebtedness incurred or to be incurred by the trust to acquire or
carry real estate assets, and
``(ii) gain from the sale or other disposition of any such investment,
shall be treated as income qualifying under paragraph (2).''
SEC. 1259. EXCESS NONCASH INCOME.
Section 857(e)(2) (relating to determination of amount of excess
noncash income) is amended--
(1) by striking subparagraph (B),
(2) by striking the period at the end of subparagraph (C) and
inserting a comma,
(3) by redesignating subparagraph (C) (as amended by paragraph (2))
as subparagraph (B), and
(4) by adding at the end the following new subparagraphs:
``(C) the amount (if any) by which--
``(i) the amounts includible in gross income with respect to
instruments to which section 860E(a) or 1272 applies, exceed
``(ii) the amount of money and the fair market value of other
property received during the taxable year under such instruments, and
``(D) amounts includible in income by reason of cancellation of
indebtedness.''
SEC. 1260. PROHIBITED TRANSACTION SAFE HARBOR.
Clause (iii) of section 857(b)(6)(C) (relating to certain sales not
to constitute prohibited transactions) is amended by striking ``(other
than foreclosure property)'' in subclauses (I) and (II) and inserting
``(other than sales of foreclosure property or sales to which section
1033 applies)''.
SEC. 1261. SHARED APPRECIATION MORTGAGES.
(a) Bankruptcy Safe Harbor.--Section 856(j) (relating to treatment of
shared appreciation mortgages) is amended by redesignating paragraph (4)
as paragraph (5) and by inserting after paragraph (3) the following new
paragraph:
``(4) Coordination with 4-year holding period.--
``(A) In general.--For purposes of section 857(b)(6)(C), if a real
estate investment trust is treated as having sold secured property under
paragraph (3)(A), the trust shall be treated as having held such
property for at least 4 years if--
``(i) the secured property is sold or otherwise disposed of pursuant
to a case under title 11 of the United States Code,
``(ii) the seller is under the jurisdiction of the court in such
case, and
``(iii) the disposition is required by the court or is pursuant to a
plan approved by the court.
``(B) Exception.--Subparagraph (A) shall not apply if--
``(i) the secured property was acquired by the trust with the intent
to evict or foreclose, or
``(ii) the trust knew or had reason to know that default on the
obligation described in paragraph (5)(A) would occur.''
(b) Clarification of Definition of Shared Appreciation
Provision.--Clause (ii) of section 856(j)(5)(A) is amended by inserting
before the period ``or appreciation in value as of any specified date''.
SEC. 1262. WHOLLY OWNED SUBSIDIARIES.
Section 856(i)(2) (defining qualified REIT subsidiary) is amended by
striking ``at all times during the period such corporation was in
existence''.
SEC. 1263. EFFECTIVE DATE.
The amendments made by this part shall apply to taxable years
beginning after the date of the enactment of this Act.
Subtitle E--Provisions Relating to Regulated Investment Companies
SEC. 1271. REPEAL OF 30-PERCENT GROSS INCOME LIMITATION.
(a) General Rule.--Subsection (b) of section 851 (relating to
limitations) is amended by striking paragraph (3), by adding ``and'' at
the end of paragraph (2), and by redesignating paragraph (4) as
paragraph (3).
(b) Technical Amendments.--
(1) The material following paragraph (3) of section 851(b) (as
redesignated by subsection (a)) is amended--
(A) by striking out ``paragraphs (2) and (3)'' and inserting
``paragraph (2)'', and
(B) by striking out the last sentence thereof.
(2) Subsection (c) of section 851 is amended by striking
``subsection (b)(4)'' each place it appears (including the heading) and
inserting ``subsection (b)(3)''.
(3) Subsection (d) of section 851 is amended by striking
``subsections (b)(4)'' and inserting ``subsections (b)(3)''.
(4) Paragraph (1) of section 851(e) is amended by striking
``subsection (b)(4)'' and inserting ``subsection (b)(3)''.
(5) Paragraph (4) of section 851(e) is amended by striking
``subsections (b)(4)'' and inserting ``subsections (b)(3)''.
(6) Section 851 is amended by striking subsection (g) and
redesignating subsection (h) as subsection (g).
(7) Subsection (g) of section 851 (as redesignated by paragraph (6))
is amended by striking paragraph (3).
(8) Section 817(h)(2) is amended--
(A) by striking ``851(b)(4)'' in subparagraph (A) and inserting
``851(b)(3)'', and
(B) by striking ``851(b)(4)(A)(i)'' in subparagraph (B) and
inserting ``851(b)(3)(A)(i)''.
(9) Section 1092(f)(2) is amended by striking ``Except for purposes
of section 851(b)(3), the'' and inserting ``The''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years ending after the date of the enactment of this Act.
Subtitle F--Taxpayer Protections
SEC. 1281. REASONABLE CAUSE EXCEPTION FOR CERTAIN PENALTIES.
(a) Information on Deductible Employee Contributions.--Subsection (g)
of section 6652 (relating to information required in connection with
deductible employee contributions) is amended by adding at the end the
following new sentence: ``No penalty shall be imposed under this
subsection on any failure which is shown to be due to reasonable cause
and not willful neglect.''
(b) Reports on Status as Qualified Small Business.--Subsection (k) of
section 6652 (relating to failure to make reports required under section
1202) is amended by adding at the end the following new sentence: ``No
penalty shall be imposed under this subsection on any failure which is
shown to be due to reasonable cause and not willful neglect.''
(c) Returns of Personal Holding Company Tax by Foreign
Corporations.--Section 6683 (relating to failure of foreign corporation
to file return of personal holding company tax) is amended by adding at
the end the following new sentence: ``No penalty shall be imposed under
this section on any failure which is shown to be due to reasonable cause
and not willful neglect.''
(d) Failure To Make Required Payments.--Subparagraph (A) of section
7519(f)(4) is amended by adding at the end the following new sentence:
``No penalty shall be imposed under this subparagraph on any failure
which is shown to be due to reasonable cause and not willful neglect.''
(e) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after the date of the enactment of this Act.
SEC. 1282. CLARIFICATION OF PERIOD FOR FILING CLAIMS FOR REFUNDS.
(a) In General.--Paragraph (3) of section 6512(b) (relating to
overpayment determined by Tax Court) is amended by adding at the end the
following flush sentence:
``In a case described in subparagraph (B) where the date of the
mailing of the notice of deficiency is during the third year after the
due date (with extensions) for filing the return of tax and no return
was filed before such date, the applicable period under subsections (a)
and (b)(2) of section 6511 shall be 3 years.''
(b) Effective Date.--The amendment made by subsection (a) shall apply
to claims for credit or refund for taxable years ending after the date
of the enactment of this Act.
SEC. 1283. REPEAL OF AUTHORITY TO DISCLOSE WHETHER PROSPECTIVE
JUROR HAS BEEN AUDITED.
(a) In General.--Subsection (h) of section 6103 (relating to
disclosure to certain Federal officers and employees for purposes of tax
administration, etc.) is amended by striking paragraph (5) and by
redesignating paragraph (6) as paragraph (5).
(b) Conforming Amendment.--Paragraph (4) of section 6103(p) is
amended by striking ``(h)(6)'' each place it appears and inserting
``(h)(5)''.
(c) Effective Date.--The amendments made by this section shall apply
to judicial proceedings commenced after the date of the enactment of
this Act.
SEC. 1284. CLARIFICATION OF STATUTE OF LIMITATIONS.
(a) In General.--Subsection (a) of section 6501 (relating to
limitations on assessment and collection) is amended by adding at the
end thereof the following new sentence: ``For purposes of this chapter,
the term `return' means the return required to be filed by the taxpayer
(and does not include a return of any person from whom the taxpayer has
received an item of income, gain, loss, deduction, or credit).''
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after the date of the enactment of this Act.
SEC. 1285. AWARDING OF ADMINISTRATIVE COSTS.
(a) Right to Appeal Tax Court Decision.--Subsection (f) of section
7430 (relating to right of appeal) is amended by adding at the end the
following new paragraph:
``(3) Appeal of tax court decision.--An order of the Tax Court
disposing of a petition under paragraph (2) shall be reviewable in the
same manner as a decision of the Tax Court, but only with respect to the
matters determined in such order.''
(b) Period for Applying to IRS for Costs.--Subsection (b) of section
7430 (relating to limitations) is amended by adding at the end the
following new paragraph:
``(5) Period for applying to irs for administrative costs.--An award
may be made under subsection (a) by the Internal Revenue Service for
reasonable administrative costs only if the prevailing party files an
application with the Internal Revenue Service for such costs before the
91st day after the date on which the final decision of the Internal
Revenue Service as to the determination of the tax, interest, or penalty
is mailed to such party.''
(c) Period for Petitioning of Tax Court for Review of Denial of
Costs.--Paragraph (2) of section 7430(f) (relating to right of appeal)
is amended--
(1) by striking ``appeal to'' and inserting ``the filing of a
petition for review with'', and
(2) by adding at the end the following new sentence: ``If the
Secretary sends by certified or registered mail a notice of such
decision to the petitioner, no proceeding in the Tax Court may be
initiated under this paragraph unless such petition is filed before the
91st day after the date of such mailing.''
(d) Effective Date.--The amendments made by this section shall apply
to civil actions or proceedings commenced after the date of the
enactment of this Act.
SEC. 1286. PENALTY FOR UNAUTHORIZED INSPECTION OF TAX RETURNS
OR TAX RETURN INFORMATION.
(a) In General.--Part I of subchapter A of chapter 75 (relating to
crimes, other offenses, and forfeitures) is amended by adding after
section 7213 the following new section:
``SEC. 7213A. UNAUTHORIZED INSPECTION OF RETURNS OR RETURN INFORMATION.
``(a) Prohibitions.--
``(1) Federal employees and other persons.--It shall be unlawful for--
``(A) any officer or employee of the United States, or
``(B) any person described in section 6103(n) or an officer or
employee of any such person,
willfully to inspect, except as authorized in this title, any return
or return information.
``(2) State and other employees.--It shall be unlawful for any
person (not described in paragraph (1)) willfully to inspect, except as
authorized in this title, any return or return information acquired by
such person or another person under a provision of section 6103 referred
to in section 7213(a)(2).
``(b) Penalty.--
``(1) In general.--Any violation of subsection (a) shall be
punishable upon conviction by a fine in any amount not exceeding $1,000,
or imprisonment of not more than 1 year, or both, together with the
costs of prosecution.
``(2) Federal officers or employees.--An officer or employee of the
United States who is convicted of any violation of subsection (a) shall,
in addition to any other punishment, be dismissed from office or
discharged from employment.
``(c) Definitions.--For purposes of this section, the terms
`inspect', `return', and `return information' have the respective
meanings given such terms by section 6103(b).''
(b) Technical Amendments.--
(1) Paragraph (2) of section 7213(a) is amended by inserting
``(5),'' after ``(m)(2), (4),''.
(2) The table of sections for part I of subchapter A of chapter 75
is amended by inserting after the item relating to section 7213 the
following new item:
``Sec. 7213A. Unauthorized inspection of returns or return
information.''
(c) Effective Date.--The amendments made by this section shall apply
to violations occurring on and after the date of the enactment of this
Act.
SEC. 1287. CIVIL DAMAGES FOR UNAUTHORIZED INSPECTION OF
RETURNS AND RETURN INFORMATION; NOTIFICATION OF UNLAWFUL INSPECTION OR
DISCLOSURE.
(a) Civil Damages for Unauthorized Inspection.--Subsection (a) of
section 7431 is amended--
(1) by striking `` Disclosure '' in the headings for paragraphs (1)
and (2) and inserting `` Inspection or disclosure '', and
(2) by striking ``discloses'' in paragraphs (1) and (2) and
inserting ``inspects or discloses''.
(b) Notification of Unlawful Inspection or Disclosure.--Section 7431
is amended by redesignating subsections (e) and (f) as subsections (f)
and (g), respectively, and by inserting after subsection (d) the
following new subsection:
``(e) Notification of Unlawful Inspection and Disclosure.--If any
person is criminally charged by indictment or information with
inspection or disclosure of a taxpayer's return or return information in
violation of--
``(1) paragraph (1) or (2) of section 7213(a),
``(2) section 7213A(a), or
``(3) subparagraph (B) of section 1030(a)(2) of title 18, United
States Code,
the Secretary shall notify such taxpayer as soon as practicable of
such inspection or disclosure.''
(c) No Damages for Inspection Requested by Taxpayer.--Subsection (b)
of section 7431 is amended to read as follows:
``(b) Exceptions.--No liability shall arise under this section with
respect to any inspection or disclosure--
``(1) which results from a good faith, but erroneous, interpretation
of section 6103, or
``(2) which is requested by the taxpayer.''
(d) Conforming Amendments.--
(1) Subsections (c)(1)(A), (c)(1)(B)(i), and (d) of section 7431 are
each amended by inserting ``inspection or'' before ``disclosure''.
(2) Clause (ii) of section 7431(c)(1)(B) is amended by striking
``willful disclosure or a disclosure'' and inserting ``willful
inspection or disclosure or an inspection or disclosure''.
(3) Subsection (f) of section 7431, as redesignated by subsection
(b), is amended to read as follows:
``(f) Definitions.--For purposes of this section, the terms
`inspect', `inspection', `return', and `return information' have the
respective meanings given such terms by section 6103(b).''
(4) The section heading for section 7431 is amended by inserting ``
inspection or'' before `` disclosure''.
(5) The table of sections for subchapter B of chapter 76 is amended
by inserting ``inspection or'' before ``disclosure'' in the item
relating to section 7431.
(6) Paragraph (2) of section 7431(g), as redesignated by subsection
(b), is amended by striking ``any use'' and inserting ``any inspection
or use''.
(e) Effective Date.--The amendments made by this section shall apply
to inspections and disclosures occurring on and after the date of the
enactment of this Act.
TITLE XIII--SIMPLIFICATION PROVISIONS RELATING TO ESTATE AND GIFT TAXES
SEC. 1301. GIFTS TO CHARITIES EXEMPT FROM GIFT TAX FILING REQUIREMENTS.
(a) In General.--Section 6019 is amended by striking ``or'' at the
end of paragraph (1), by adding ``or'' at the end of paragraph (2), and
by inserting after paragraph (2) the following new paragraph:
``(3) a transfer with respect to which a deduction is allowed under
section 2522, except that this paragraph shall apply with respect to a
transfer of property (other than a transfer described in section
2522(d)) only if the entire value of such property is allowed as a
deduction under section 2522,''.
(b) Effective Date.--The amendment made by this section shall apply
to gifts made after the date of the enactment of this Act.
SEC. 1302. CLARIFICATION OF WAIVER OF CERTAIN RIGHTS OF RECOVERY.
(a) Amendment to Section 2207A.--Paragraph (2) of section 2207A(a)
(relating to right of recovery in the case of certain marital deduction
property) is amended to read as follows:
``(2) Decedent may otherwise direct.--Paragraph (1) shall not apply
with respect to any property to the extent that the decedent in his will
(or a revocable trust) specifically indicates an intent to waive any
right of recovery under this subchapter with respect to such property.''
(b) Amendment to Section 2207B.--Paragraph (2) of section 2207B(a)
(relating to right of recovery where decedent retained interest) is
amended to read as follows:
``(2) Decedent may otherwise direct.--Paragraph (1) shall not apply
with respect to any property to the extent that the decedent in his will
(or a revocable trust) specifically indicates an intent to waive any
right of recovery under this subchapter with respect to such property.''
(c) Effective Date.--The amendments made by this section shall apply
with respect to the estates of decedents dying after the date of the
enactment of this Act.
SEC. 1303. TRANSITIONAL RULE UNDER SECTION 2056A.
(a) General Rule.--In the case of any trust created under an
instrument executed before the date of the enactment of the Revenue
Reconciliation Act of 1990, such trust shall be treated as meeting the
requirements of paragraph (1) of section 2056A(a) of the Internal
Revenue Code of 1986 if the trust instrument requires that all trustees
of the trust be individual citizens of the United States or domestic
corporations.
(b) Effective Date.--The provisions of subsection (a) shall take
effect as if included in the provisions of section 11702(g) of the
Revenue Reconciliation Act of 1990.
SEC. 1304. CLARIFICATIONS RELATING TO DISCLAIMERS.
(a) Partial Transfer-Type Disclaimers Permitted.--Paragraph (3) of
section 2518(c) (relating to certain transfers treated as disclaimers)
is amended by inserting ``(or an undivided portion of such interest)''
after ``entire interest in the property''.
(b) Retention of Interest by Decedent's Spouse Permitted in
Transfer-Type Disclaimers.--Paragraph (3) of section 2518(c) is amended
by adding at the end the following new flush sentence:
``For purposes of the preceding sentence, a written transfer by the
spouse of the decedent of property to a trust shall not fail to be
treated as a transfer of such spouse's interest in such property by
reason of such spouse having an interest in such trust.''
(c) Disclaimers Are Effective For Income Tax Purposes.--Subsection
(a) of section 2518 is amended by inserting ``and subtitle A'' after
``this subtitle'' each place it appears.
(d) Effective Date.--The amendments made by this section shall apply
to transfers creating an interest in the person disclaiming, and
disclaimers, made after the date of the enactment of this Act.
SEC. 1305. INCREASE OF AMOUNT OF LAPSE OF GENERAL POWER OF
APPOINTMENT NOT TREATED AS RELEASE FOR PURPOSES OF ESTATE AND GIFT TAX
(5 OR 5 POWER).
(a) Estate Tax.--Subparagraph (A) of section 2041(b)(2) (relating to
lapse of power) is amended by striking ``$5,000'' and inserting
``$10,000''.
(b) Gift Tax.--Paragraph (1) of section 2514(e) (relating to lapse of
power) is amended by striking ``$5,000'' and inserting ``$10,000''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after the date of the enactment of this Act.
SEC. 1306. TREATMENT FOR ESTATE TAX PURPOSES OF SHORT-TERM
OBLIGATIONS HELD BY NONRESIDENT ALIENS.
(a) In General.--Subsection (b) of section 2105 is amended by
striking ``and'' at the end of paragraph (2), by striking the period at
the end of paragraph (3) and inserting ``, and'', and by inserting after
paragraph (3) the following new paragraph:
``(4) obligations which would be original issue discount obligations
as defined in section 871(g)(1) but for subparagraph (B)(i) thereof, if
any interest thereon (were such interest received by the decedent at the
time of his death) would not be effectively connected with the conduct
of a trade or business within the United States.''
(b) Effective Date.--The amendment made by this section shall apply
to estates of decedents dying after the date of the enactment of this
Act.
SEC. 1307. CERTAIN REVOCABLE TRUSTS TREATED AS PART OF ESTATE.
(a) In General.--Subpart A of part I of subchapter J (relating to
estates, trusts, beneficiaries, and decedents) is amended by adding at
the end the following new section:
``SEC. 646. CERTAIN REVOCABLE TRUSTS TREATED AS PART OF ESTATE.
``(a) General Rule.--For purposes of this subtitle, if both the
executor (if any) of an estate and the trustee of a qualified revocable
trust elect the treatment provided in this section, such trust shall be
treated and taxed as part of such estate (and not as a separate trust)
for all taxable years of the estate ending after the date of the
decedent's death and before the applicable date.
``(b) Definitions.--For purposes of subsection (a)--
``(1) Qualified revocable trust.--The term `qualified revocable
trust' means any trust (or portion thereof) which was treated under
section 676 as owned by the decedent of the estate referred to in
subsection (a) by reason of a power in the grantor (determined without
regard to section 672(e)).
``(2) Applicable date.--The term `applicable date' means--
``(A) if no return of tax imposed by chapter 11 is required to be
filed, the date which is 2 years after the date of the decedent's death,
and
``(B) if such a return is required to be filed, the date which is 6
months after the date of the final determination of the liability for
tax imposed by chapter 11.
``(c) Election.--The election under subsection (a) shall be made not
later than the time prescribed for filing the return of tax imposed by
this chapter for the first taxable year of the estate (determined with
regard to extensions) and, once made, shall be irrevocable.''
(b) Comparable Treatment Under Generation-Skipping Tax.--Paragraph
(1) of section 2652(b) is amended by adding at the end the following new
sentence: ``Such term shall not include any trust during any period the
trust is treated as part of an estate under section 646.''
(c) Clerical Amendment.--The table of sections for such subpart A is
amended by adding at the end the following new item:
``Sec. 646. Certain revocable trusts treated as part of estate.''
(d) Effective Date.--The amendments made by this section shall apply
with respect to estates of decedents dying after the date of the
enactment of this Act.
SEC. 1308. DISTRIBUTIONS DURING FIRST 65 DAYS OF TAXABLE YEAR OF ESTATE.
(a) In General.--Subsection (b) of section 663 (relating to
distributions in first 65 days of taxable year) is amended by inserting
``an estate or'' before ``a trust'' each place it appears.
(b) Conforming Amendment.--Paragraph (2) of section 663(b) is amended
by striking ``the fiduciary of such trust'' and inserting ``the executor
of such estate or the fiduciary of such trust (as the case may be)''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after the date of the enactment of this Act.
SEC. 1309. SEPARATE SHARE RULES AVAILABLE TO ESTATES.
(a) In General.--Subsection (c) of section 663 (relating to separate
shares treated as separate trusts) is amended--
(1) by inserting before the last sentence the following new
sentence: ``Rules similar to the rules of the preceding provisions of
this subsection shall apply to treat substantially separate and
independent shares of different beneficiaries in an estate having more
than 1 beneficiary as separate estates.'', and
(2) by inserting ``or estates'' after ``trusts'' in the last sentence.
(b) Conforming Amendment.--The subsection heading of section 663(c)
is amended by inserting `` Estates or'' before `` Trusts''.
(c) Effective Date.--The amendments made by this section shall apply
to estates of decedents dying after the date of the enactment of this
Act.
SEC. 1310. EXECUTOR OF ESTATE AND BENEFICIARIES TREATED AS
RELATED PERSONS FOR DISALLOWANCE OF LOSSES, ETC.
(a) Disallowance of Losses.--Subsection (b) of section 267 (relating
to losses, expenses, and interest with respect to transactions between
related taxpayers) is amended by striking ``or'' at the end of paragraph
(11), by striking the period at the end of paragraph (12) and inserting
``; or'', and by adding at the end the following new paragraph:
``(13) Except in the case of a sale or exchange in satisfaction of a
pecuniary bequest, an executor of an estate and a beneficiary of such
estate.''
(b) Ordinary Income From Gain From Sale of Depreciable
Property.--Subsection (b) of section 1239 is amended by striking the
period at the end of paragraph (2) and inserting ``, and'' and by adding
at the end the following new paragraph:
``(3) except in the case of a sale or exchange in satisfaction of a
pecuniary bequest, an executor of an estate and a beneficiary of such
estate.''
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after the date of the enactment of this Act.
SEC. 1311. LIMITATION ON TAXABLE YEAR OF ESTATES.
(a) In General.--Section 645 (relating to taxable year of trusts) is
amended to read as follows:
``SEC. 645. TAXABLE YEAR OF ESTATES AND TRUSTS.
``(a) Estates.--For purposes of this subtitle, the taxable year of an
estate shall be a year ending on October 31, November 30, or December
31.
``(b) Trusts.--
``(1) In general.--For purposes of this subtitle, the taxable year
of any trust shall be the calendar year.
``(2) Exception for trusts exempt from tax and charitable
trusts.--Paragraph (1) shall not apply to a trust exempt from taxation
under section 501(a) or to a trust described in section 4947(a)(1).''
(b) Clerical Amendment.--The table of sections for subpart A of part
I of subchapter J of chapter 1 is amended by striking the item relating
to section 645 and inserting the following new item:
``Sec. 645. Taxable year of estates and trusts.''
(c) Effective Date.--The amendments made by this section shall apply
to estates of decedents dying after the date of the enactment of this
Act.
SEC. 1312. TREATMENT OF FUNERAL TRUSTS.
(a) In General.--Subpart F of part I of subchapter J of chapter 1 is
amended by adding at the end the following new section:
``SEC. 684. TREATMENT OF FUNERAL TRUSTS.
``(a) In General.--In the case of a qualified funeral trust--
``(1) subparts B, C, D, and E shall not apply, and
``(2) no deduction shall be allowed by section 642(b).
``(b) Qualified Funeral Trust.--For purposes of this subsection, the
term `qualified funeral trust' means any trust (other than a foreign
trust) if--
``(1) the trust arises as a result of a contract with a person
engaged in the trade or business of providing funeral or burial services
or property necessary to provide such services,
``(2) the sole purpose of the trust is to hold, invest, and reinvest
funds in the trust and to use such funds solely to make payments for
such services or property for the benefit of the beneficiaries of the
trust,
``(3) the only beneficiaries of such trust are individuals who have
entered into contracts described in paragraph (1) to have such services
or property provided at their death,
``(4) the only contributions to the trust are contributions by or
for the benefit of such beneficiaries,
``(5) the trustee elects the application of this subsection, and
``(6) the trust would (but for the election described in paragraph
(5)) be treated as owned by the beneficiaries under subpart E.
``(c) Dollar Limitation on Contributions.--
``(1) In general.--The term `qualified funeral trust' shall not
include any trust which accepts aggregate contributions by or for the
benefit of an individual in excess of $7,000.
``(2) Related trusts.--For purposes of paragraph (1), all trusts
having trustees which are related persons shall betreated as 1 trust.
For purposes of the preceding sentence, persons are related if--
``(A) the relationship between such persons is described in section
267 or 707(b),
``(B) such persons are treated as a single employer under subsection
(a) or (b) of section 52, or
``(C) the Secretary determines that treating such persons as related
is necessary to prevent avoidance of the purposes of this section.
``(3) Inflation adjustment.--In the case of any contract referred to
in subsection (b)(1) which is entered into during any calendar year
after 1998, the dollar amount referred to paragraph (1) shall be
increased by an amount equal to--
``(A) such dollar amount, multiplied by
``(B) the cost-of-living adjustment determined under section 1(f)(3)
for such calendar year, by substituting `calendar year 1997' for
`calendar year 1992' in subparagraph (B) thereof.
If any dollar amount after being increased under the preceding
sentence is not a multiple of $100, such dollar amount shall be rounded
to the nearest multiple of $100.
``(d) Application of Rate Schedule.--Section 1(e) shall be applied to
each qualified funeral trust by treating each beneficiary's interest in
each such trust as a separate trust.
``(e) Treatment of Amounts Refunded to Beneficiary on
Cancellation.--No gain or loss shall be recognized to a beneficiary
described in subsection (b)(3) of any qualified funeral trust by reason
of any payment from such trust to such beneficiary by reason of
cancellation of a contract referred to in subsection (b)(1). If any
payment referred to in
the preceding sentence consists of property other than money,
the basis of such property in the hands of such beneficiary shall be the
same as the trust's basis in such property immediately before the
payment.
``(f) Simplified Reporting.--The Secretary may prescribe rules for
simplified reporting of all trusts having a single trustee.''
(b) Clerical Amendment.--The table of sections for subpart F of part
I of subchapter J of chapter 1 is amended by adding at the end the
following new item:
``Sec. 684. Treatment of funeral trusts.''
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after the date of the enactment of this Act.
SEC. 1313. ADJUSTMENTS FOR GIFTS WITHIN 3 YEARS OF DECEDENT'S DEATH.
(a) General Rule.--Section 2035 is amended to read as follows:
``SEC. 2035. ADJUSTMENTS FOR CERTAIN GIFTS MADE WITHIN 3 YEARS
OF DECEDENT'S DEATH.
``(a) Inclusion of Certain Property in Gross Estate.--If--
``(1) the decedent made a transfer (by trust or otherwise) of an
interest in any property, or relinquished a power with respect to any
property, during the 3-year period ending on the date of the decedent's
death, and
``(2) the value of such property (or an interest therein) would have
been included in the decedent's gross estate under section 2036, 2037,
2038, or 2042 if such transferred interest or relinquished power had
been retained by the decedent on the date of his death,
the value of the gross estate shall include the value of any property
(or interest therein) which would have been so included.
``(b) Inclusion of Gift Tax on Gifts Made During 3 Years Before
Decedent's Death.--The amount of the gross estate (determined without
regard to this subsection) shall be increased by the amount of any tax
paid under chapter 12 by the decedent or his estate on any gift made by
the decedent or his spouse during the 3-year period ending on the date
of the decedent's death.
``(c) Other Rules Relating to Transfers Within 3 Years of Death.--
``(1) In general.--For purposes of--
``(A) section 303(b) (relating to distributions in redemption of
stock to pay death taxes),
``(B) section 2032A (relating to special valuation of certain farms,
etc., real property), and
``(C) subchapter C of chapter 64 (relating to lien for taxes),
the value of the gross estate shall include the value of all property
to the extent of any interest therein of which the decedent has at any
time made a transfer, by trust or otherwise, during the 3-year period
ending on the date of the decedent's death.
``(2) Coordination with section 6166.--An estate shall be treated as
meeting the 35 percent of adjusted gross estate requirement of section
6166(a)(1) only if the estate meets such requirement both with and
without the application of paragraph (1).
``(3) Marital and small transfers.--Paragraph (1) shall not apply to
any transfer (other than a transfer with respect to a life insurance
policy) made during a calendar year to any donee if the decedent was not
required by section 6019 (other than by reason of section 6019(2)) to
file any gift tax return for such year with respect to transfers to such
donee.
``(d) Exception.--Subsection (a) shall not apply to any bona fide
sale for an adequate and full consideration in money or money's worth.
``(e) Treatment of Certain Transfers From Revocable Trusts.--For
purposes of this section and section 2038, any transfer from any portion
of a trust during any period that such portion was treated under section
676 as owned by the decedent by reason of a power in the grantor
(determined without regard to section 672(e)) shall be treated as a
transfer made directly by the decedent.''
(b) Clerical Amendment.--The table of sections for part III of
subchapter A of chapter 11 is amended by striking ``gifts'' in the item
relating to section 2035 and inserting ``certain gifts''.
(c) Effective Date.--The amendments made by this section shall apply
to the estates of decedents dying after the date of the enactment of
this Act.
SEC. 1314. CLARIFICATION OF TREATMENT OF SURVIVOR ANNUITIES
UNDER QUALIFIED TERMINABLE INTEREST RULES.
(a) In General.--Subparagraph (C) of section 2056(b)(7) is amended by
inserting ``(or, in the case of an interest in an annuity arising under
the community property laws of a State, included in the gross estate of
the decedent under section 2033)'' after ``section 2039''.
(b) Effective Date.--The amendment made by this section shall apply
to estates of decedents dying after the date of the enactment of this
Act.
SEC. 1315. TREATMENT UNDER QUALIFIED DOMESTIC TRUST RULES OF
FORMS OF OWNERSHIP WHICH ARE NOT TRUSTS.
(a) In General.--Subsection (c) of section 2056A (defining qualified
domestic trust) is amended by adding at the end the following new
paragraph:
``(3) Trust.--To the extent provided in regulations prescribed by
the Secretary, the term `trust' includes other arrangements which have
substantially the same effect as a trust.''
(b) Effective Date.--The amendment made by this section shall apply
to estates of decedents dying after the date of the enactment of this
Act.
SEC. 1316. OPPORTUNITY TO CORRECT CERTAIN FAILURES UNDER SECTION 2032A.
(a) General Rule.--Paragraph (3) of section 2032A(d) (relating to
modification of election and agreement to be permitted) is amended to
read as follows:
``(3) Modification of election and agreement to be permitted.--The
Secretary shall prescribe procedures which provide that in any case in
which the executor makes an election under paragraph (1) (and submits
the agreement referred to in paragraph (2)) within the time prescribed
therefor, but--
``(A) the notice of election, as filed, does not contain all
required information, or
``(B) signatures of 1 or more persons required to enter into the
agreement described in paragraph (2) are not included on the agreement
as filed, or the agreement does not contain all required information,
the executor will have a reasonable period of time (not exceeding 90
days) after notification of such failures to provide such information or
signatures.''
(b) Effective Date.--The amendment made by subsection (a) shall apply
to the estates of decedents dying after the date of the enactment of
this Act.
SEC. 1317. AUTHORITY TO WAIVE REQUIREMENT OF UNITED STATES
TRUSTEE FOR QUALIFIED DOMESTIC TRUSTS.
(a) In General.--Subparagraph (A) of section 2056A(a)(1) is amended
by inserting ``except as provided in regulations prescribed by the
Secretary,'' before ``requires''.
(b) Effective Date.--The amendment made by this section shall apply
to estates of decedents dying after the date of the enactment of this
Act.
TITLE XIV--SIMPLIFICATION PROVISIONS RELATING TO EXCISE
TAXES, TAX-EXEMPT BONDS, AND OTHER MATTERS
Subtitle A--Excise Tax Simplification
PART I--EXCISE TAXES ON HEAVY TRUCKS AND LUXURY CARS
SEC. 1401. INCREASE IN DE MINIMIS LIMIT FOR AFTER-MARKET
ALTERATIONS FOR HEAVY TRUCKS AND LUXURY CARS.
(a) In General.--Sections 4003(a)(3)(C) and 4051(b)(2)(B) (relating
to exceptions) are each amended by striking ``$200'' and inserting
``$1,000''.
(b) Effective Date.--The amendments made by subsection (a) shall
apply to installations on vehicles sold after the date of the enactment
of this Act.
SEC. 1402. CREDIT FOR TIRE TAX IN LIEU OF EXCLUSION OF VALUE
OF TIRES IN COMPUTING PRICE.
(a) In General.--Subsection (e) of section 4051 is amended to read as
follows:
``(e) Credit Against Tax for Tire Tax.--If--
``(1) tires are sold on or in connection with the sale of any
article, and
``(2) tax is imposed by this subchapter on the sale of such tires,
there shall be allowed as a credit against the tax imposed by this
subchapter an amount equal to the tax (if any) imposed by section 4071
on such tires.''
(b) Conforming Amendment.--Subparagraph (B) of section 4052(b)(1) is
amended by striking clause (iii), by adding ``and'' at the end of clause
(ii), and by redesignating clause (iv) as clause (iii).
(c) Effective Date.--The amendments made by this section shall take
effect on January 1, 1998.
PART II--PROVISIONS RELATED TO DISTILLED SPIRITS, WINES, AND BEER
SEC. 1411. CREDIT OR REFUND FOR IMPORTED BOTTLED DISTILLED
SPIRITS RETURNED TO DISTILLED SPIRITS PLANT.
(a) In General.--Section 5008(c)(1) (relating to distilled spirits
returned to bonded premises) is amended by striking ``withdrawn from
bonded premises on payment or determination of tax'' and inserting ``on
which tax has been determined or paid''.
(b) Effective Date.--The amendment made by subsection (a) shall take
effect on the 1st day of the 1st calendar quarter that begins at least
90 days after the date of the enactment of this Act.
SEC. 1412. AUTHORITY TO CANCEL OR CREDIT EXPORT BONDS WITHOUT
SUBMISSION OF RECORDS.
(a) In General.--Section 5175(c) (relating to cancellation of credit
of export bonds) is amended by striking ``on the submission of'' and all
that follows and inserting ``if there is such proof of exportation as
the Secretary may by regulations require.''
(b) Effective Date.--The amendment made by subsection (a) shall take
effect on the 1st day of the 1st calendar quarter that begins at least
90 days after the date of the enactment of this Act.
SEC. 1413. REPEAL OF REQUIRED MAINTENANCE OF RECORDS ON
PREMISES OF DISTILLED SPIRITS PLANT.
(a) In General.--Section 5207(c) (relating to preservation and
inspection) is amended by striking ``shall be kept on the premises where
the operations covered by the record are carried on and''.
(b) Effective Date.--The amendment made by subsection (a) shall take
effect on the 1st day of the 1st calendar quarter that begins at least
90 days after the date of the enactment of this Act.
SEC. 1414. FERMENTED MATERIAL FROM ANY BREWERY MAY BE RECEIVED
AT A DISTILLED SPIRITS PLANT.
(a) In General.--Section 5222(b)(2) (relating to receipt) is amended
to read as follows:
``(2) beer conveyed without payment of tax from brewery premises,
beer which has been lawfully removed from brewery premises upon
determination of tax, or''.
(b) Clarification of Authority To Permit Removal of Beer Without
Payment of Tax for Use as Distilling Material.--Section 5053 (relating
to exemptions) is amended by redesignating subsection (f) as subsection
(i) and by inserting after subsection (e) the following new subsection:
``(f) Removal for Use as Distilling Material.--Subject to such
regulations as the Secretary may prescribe, beer may be removed from a
brewery without payment of tax to any distilled spirits plant for use as
distilling material.''
(c) Clarification of Refund and Credit of Tax.--Section 5056
(relating to refund and credit of tax, or relief from liability) is
amended--
(1) by redesignating subsection (c) as subsection (d) and by
inserting after subsection (b) the following new subsection:
``(c) Beer Received at a Distilled Spirits Plant.--Any tax paid by
any brewer on beer produced in the United States may be refunded or
credited to the brewer, without interest, or if the tax has not been
paid, the brewer may be relieved of liability therefor, under
regulations as the Secretary may prescribe, if such beer is received on
the bonded premises of a distilled spirits plant pursuant to the
provisions of section 5222(b)(2), for use in the production of distilled
spirits.'', and
(2) by striking ``or rendering unmerchantable'' in subsection (d)
(as so redesignated) and inserting ``rendering unmerchantable, or
receipt on the bonded premises of a distilled spirits plant''.
(d) Effective Date.--The amendments made by this section shall take
effect on the 1st day of the 1st calendar quarter that begins at least
90 days after the date of the enactment of this Act.
SEC. 1415. REPEAL OF REQUIREMENT FOR WHOLESALE DEALERS IN
LIQUORS TO POST SIGN.
(a) In General.--Section 5115 (relating to sign required on premises)
is hereby repealed.
(b) Conforming Amendments.--
(1) Section 5681(a) is amended by striking ``, and every wholesale
dealer in liquors,'' and by striking ``section 5115(a) or''.
(2) Section 5681(c) is amended--
(A) by striking ``or wholesale liquor establishment, on which no
sign required by section 5115(a) or'' and inserting ``on which no sign
required by'', and
(B) by striking ``or wholesale liquor establishment, or who'' and
inserting ``or who''.
(3) The table of sections for subpart D of part II of subchapter A
of chapter 51 is amended by striking the item relating to section 5115.
(c) Effective Date.--The amendments made by this section shall take
effect on the date of the enactment of this Act.
SEC. 1416. REFUND OF TAX TO WINE RETURNED TO BOND NOT LIMITED
TO UNMERCHANTABLE WINE.
(a) In General.--Section 5044(a) (relating to refund of tax on
unmerchantable wine) is amended by striking ``as unmerchantable''.
(b) Conforming Amendments.--
(1) Section 5361 is amended by striking ``unmerchantable''.
(2) The section heading for section 5044 is amended by striking ``
unmerchantable ''.
(3) The item relating to section 5044 in the table of sections for
subpart C of part I of subchapter A of chapter 51 is amended by striking
``unmerchantable''.
(c) Effective Date.--The amendments made by this section shall take
effect on the 1st day of the 1st calendar quarter that begins at least
90 days after the date of the enactment of this Act.
SEC. 1417. USE OF ADDITIONAL AMELIORATING MATERIAL IN CERTAIN WINES.
(a) In General.--Section 5384(b)(2)(D) (relating to ameliorated fruit
and berry wines) is amended by striking ``loganberries, currants, or
gooseberries,'' and inserting ``any fruit or berry with a natural fixed
acid of 20 parts per thousand or more (before any correction of such
fruit or berry)''.
(b) Effective Date.--The amendment made by this section shall take
effect on the 1st day of the 1st calendar quarter that begins at least
90 days after the date of the enactment of this Act.
SEC. 1418. DOMESTICALLY PRODUCED BEER MAY BE WITHDRAWN FREE OF
TAX FOR USE OF FOREIGN EMBASSIES, LEGATIONS, ETC.
(a) In General.--Section 5053 (relating to exemptions), as amended by
section 1414(b), is amended by inserting after subsection (f) the
following new subsection:
``(g) Removals for Use of Foreign Embassies, Legations, Etc.--
``(1) In general.--Subject to such regulations as the Secretary may
prescribe--
``(A) beer may be withdrawn from the brewery without payment of tax
for transfer to any customs bonded warehouse for entry pending
withdrawal therefrom as provided in subparagraph (B), and
``(B) beer entered into any customs bonded warehouse under
subparagraph (A) may be withdrawn for consumption in the United States
by, and for the official and family use of, such foreign governments,
organizations, and individuals as are entitled to withdraw imported beer
from such warehouses free of tax.
Beer transferred to any customs bonded warehouse under subparagraph
(A) shall be entered, stored, and accounted for in such warehouse under
such regulations and bonds as the Secretary may prescribe, and may be
withdrawn therefrom by such governments, organizations, and individuals
free of tax under the same conditions and procedures as imported beer.
``(2) Other rules to apply.--Rules similar to the rules of
paragraphs (2) and (3) of section 5362(e) shall apply for purposes of
this subsection.''
(b) Effective Date.--The amendment made by subsection (a) shall take
effect on the 1st day of the 1st calendar quarter that begins at least
90 days after the date of the enactment of this Act.
SEC. 1419. BEER MAY BE WITHDRAWN FREE OF TAX FOR DESTRUCTION.
(a) In General.--Section 5053 (relating to exemptions), as amended by
section 1418(a), is amended by inserting after subsection (g) the
following new subsection:
``(h) Removals for Destruction.--Subject to such regulations as the
Secretary may prescribe, beer may be removed from the brewery without
payment of tax for destruction.''
(b) Effective Date.--The amendment made by subsection (a) shall take
effect on the 1st day of the 1st calendar quarter that begins at least
90 days after the date of the enactment of this Act.
SEC. 1420. AUTHORITY TO ALLOW DRAWBACK ON EXPORTED BEER
WITHOUT SUBMISSION OF RECORDS.
(a) In General.--The first sentence of section 5055 (relating to
drawback of tax on beer) is amended by striking ``found to have been
paid'' and all that follows and inserting ``paid on such beer if there
is such proof of exportation as the Secretary may by regulations
require.''
(b) Effective Date.--The amendment made by subsection (a) shall take
effect on the 1st day of the 1st calendar quarter that begins at least
90 days after the date of the enactment of this Act.
SEC. 1421. TRANSFER TO BREWERY OF BEER IMPORTED IN BULK
WITHOUT PAYMENT OF TAX.
(a) In General.--Part II of subchapter G of chapter 51 is amended by
adding at the end the following new section:
``SEC. 5418. BEER IMPORTED IN BULK.
``Beer imported or brought into the United States in bulk containers
may, under such regulations as the Secretary may prescribe, be withdrawn
from customs custody and transferred in such bulk containers to the
premises of a brewery without payment of the internal revenue tax
imposed on such beer. The proprietor of a brewery to which such beer is
transferred shall become liable for the tax on the beer withdrawn from
customs custody under this section upon release of the beer from customs
custody, and the importer, or the person bringing such beer into the
United States, shall thereupon be relieved of the liability for such
tax.''
(b) Clerical Amendment.--The table of sections for such part II is
amended by adding at the end the following new item:
``Sec. 5418. Beer imported in bulk.''
(c) Effective Date.--The amendments made by this section shall take
effect on the 1st day of the 1st calendar quarter that begins at least
90 days after the date of the enactment of this Act.
SEC. 1422. TRANSFER TO BONDED WINE CELLARS OF WINE IMPORTED IN
BULK WITHOUT PAYMENT OF TAX.
(a) In General.--Part II of subchapter F of chapter 51 is amended by
inserting after section 5363 the following new section:
``SEC. 5364. WINE IMPORTED IN BULK.
``Wine imported or brought into the United States in bulk containers
may, under such regulations as the Secretary may prescribe, be withdrawn
from customs custody and transferred in such bulk containers to the
premises of a bonded wine cellar without payment of the internal revenue
tax imposed on such wine. The proprietor of a bonded wine cellar to
which such wine is transferred shall become liable for the tax on the
wine withdrawn from customs custody under this section upon release of
the wine from customs custody, and the importer, or the person bringing
such wine into the United States, shall thereupon be relieved of the
liability for such tax.''
(b) Clerical Amendment.--The table of sections for such part II is
amended by inserting after the item relating to section 5363 the
following new item:
``Sec. 5364. Wine imported in bulk.''
(c) Effective Date.--The amendments made by this section shall take
effect on the 1st day of the 1st calendar quarter that begins at least
90 days after the date of the enactment of this Act.
PART III--OTHER EXCISE TAX PROVISIONS
SEC. 1431. AUTHORITY TO GRANT EXEMPTIONS FROM REGISTRATION REQUIREMENTS.
(a) In General.--Section 4222(b)(2) (relating to export) is amended--
(1) by striking ``in the case of any sale or resale for export,'', and
(2) by striking `` Export '' and inserting `` Under regulations ''.
(b) Effective Date.--The amendments made by subsection (a) shall take
effect on the date of the enactment of this Act.
SEC. 1432. REPEAL OF EXPIRED PROVISIONS.
(a) Piggy-Back Trailers.--Section 4051 (relating to imposition of tax
on heavy trucks and trailers sold at retail) is amended by striking
subsection (d) and by redesignating subsection (e) as subsection (d).
(b) Deep Seabed Mining.--
(1) In general.--Subchapter F of chapter 36 (relating to tax on
removal of hard mineral resources from deep seabed) is hereby repealed.
(2) Conforming amendment.--The table of subchapters for chapter 36
is amended by striking the item relating to subchapter F.
(c) Ozone-Depleting Chemicals.--
(1) Paragraph (1) of section 4681(b) is amended by striking
subparagraphs (B) and (C) and inserting the following new subparagraph:
``(B) Base tax amount.--The base tax amount for purposes of
subparagraph (A) with respect to any sale or use during any calendar
year after 1995 shall be $5.35 increased by 45 cents for each year after
1995.''
(2) Subsection (g) of section 4682 is amended to read as follows:
``(g) Chemicals Used as Propellants in Metered-Dose Inhalers.--
``(1) Exemption from tax.--
``(A) In general.--No tax shall be imposed by section 4681 on--
``(i) any use of any substance as a propellant in metered-dose
inhalers, or
``(ii) any qualified sale by the manufacturer, producer, or importer
of any substance.
``(B) Qualified sale.--For purposes of subparagraph (A), the term
`qualified sale' means any sale by the manufacturer, producer, or
importer of any substance--
``(i) for use by the purchaser as a propellant in metered dose
inhalers, or
``(ii) for resale by the purchaser to a 2d purchaser for such use by
the 2d purchaser.
The preceding sentence shall apply only if the manufacturer,
producer, and importer, and the 1st and 2d purchasers (if any) meet such
registration requirements as may be prescribed by the Secretary.
``(2) Overpayments.--If any substance on which tax was paid under
this subchapter is used by any person as a propellant in metered-dose
inhalers, credit or refund without interest shall be allowed to such
person in an amount equal to the tax so paid. Amounts payable under the
preceding sentence with respect to uses during the taxable year shall be
treated as described in section 34(a) for such year unless claim thereof
has been timely filed under this paragraph.''
Subtitle B--Tax-Exempt Bond Provisions
SEC. 1441. REPEAL OF $100,000 LIMITATION ON UNSPENT PROCEEDS
UNDER 1-YEAR EXCEPTION FROM REBATE.
Subclause (I) of section 148(f)(4)(B)(ii) (relating to additional
period for certain bonds) is amended by striking ``the lesser of 5
percent of the proceeds of the issue or $100,000'' and inserting ``5
percent of the proceeds of the issue''.
SEC. 1442. EXCEPTION FROM REBATE FOR EARNINGS ON BONA FIDE
DEBT SERVICE FUND UNDER CONSTRUCTION BOND RULES.
Subparagraph (C) of section 148(f)(4) is amended by adding at the end
the following new clause:
``(xvii) Treatment of bona fide debt service funds.--If the spending
requirements of clause (ii) are met with respect to the available
construction proceeds of a construction issue, then paragraph (2) shall
not apply to earnings on a bona fide debt service fund for such issue.''
SEC. 1443. REPEAL OF DEBT SERVICE-BASED LIMITATION ON
INVESTMENT IN CERTAIN NONPURPOSE INVESTMENTS.
Subsection (d) of section 148 (relating to special rules for
reasonably required reserve or replacement fund) is amended by striking
paragraph (3).
SEC. 1444. REPEAL OF EXPIRED PROVISIONS.
(a) Paragraph (2) of section 148(c) is amended by striking
subparagraph (B) and by redesignating subparagraphs (C), (D), and (E) as
subparagraphs (B), (C), and (D), respectively.
(b) Paragraph (4) of section 148(f) is amended by striking
subparagraph (E).
SEC. 1445. EFFECTIVE DATE.
The amendments made by this subtitle shall apply to bonds issued
after the date of the enactment of this Act.
Subtitle C--Tax Court Procedures
SEC. 1451. OVERPAYMENT DETERMINATIONS OF TAX COURT.
(a) Appeal of Order.--Paragraph (2) of section 6512(b) (relating to
jurisdiction to enforce) is amended by adding at the end the following
new sentence: ``An order of the Tax Court disposing of a motion under
this paragraph shall be reviewable in the same manner as a decision of
the Tax Court, but only with respect to the matters determined in such
order.''
(b) Denial of Jurisdiction Regarding Certain Credits and
Reductions.--Subsection (b) of section 6512 (relating to overpayment
determined by Tax Court) is amended by adding at the end the following
new paragraph:
``(4) Denial of jurisdiction regarding certain credits and
reductions.--The Tax Court shall have no jurisdiction under this
subsection to restrain or review any credit or reduction made by the
Secretary under section 6402.''
(c) Effective Date.--The amendments made by this section shall take
effect on the date of the enactment of this Act.
SEC. 1452. REDETERMINATION OF INTEREST PURSUANT TO MOTION.
(a) In General.--Subsection (c) of section 7481 (relating to
jurisdiction over interest determinations) is amended to read as
follows:
``(c) Jurisdiction Over Interest Determinations.--
``(1) In general.--Notwithstanding subsection (a), if, within 1 year
after the date the decision of the Tax Court becomes final under
subsection (a) in a case to which this subsection applies, the taxpayer
files a motion in the Tax Court for a redetermination of the amount of
interest involved, then the Tax Court may reopen the case solely to
determine whether the taxpayer has made an overpayment of such interest
or the Secretary has made an underpayment of such interest and the
amount thereof.
``(2) Cases to which this subsection applies.--This subsection shall
apply where--
``(A)(i) an assessment has been made by the Secretary under section
6215 which includes interest as imposed by this title, and
``(ii) the taxpayer has paid the entire amount of the deficiency
plus interest claimed by the Secretary, and
``(B) the Tax Court finds under section 6512(b) that the taxpayer
has made an overpayment.
``(3) Special rules.--If the Tax Court determines under this
subsection that the taxpayer has made an overpayment of interest or that
the Secretary has made an underpayment of interest, then that
determination shall be treated under section 6512(b)(1) as a
determination of an overpayment of tax. An order of the Tax Court
redetermining interest, when entered upon the records of the court,
shall be reviewable in the same manner as a decision of the Tax Court.''
(b) Effective Date.--The amendment made by this section shall take
effect on the date of the enactment of this Act.
SEC. 1453. APPLICATION OF NET WORTH REQUIREMENT FOR AWARDS OF
LITIGATION COSTS.
(a) In General.--Paragraph (4) of section 7430(c) (defining
prevailing party) is amended by adding at the end thereof the following
new subparagraph:
``(D) Special rules for applying net worth requirement.--In applying
the requirements of section 2412(d)(2)(B) of title 28, United States
Code, for purposes of subparagraph (A)(iii) of this paragraph--
``(i) the net worth limitation in clause (i) of such section shall
apply to--
``(I) an estate but shall be determined as of the date of the
decedent's death, and
``(II) a trust but shall be determined as of the last day of the
taxable year involved in the proceeding, and
``(ii) individuals filing a joint return shall be treated as 1
individual for purposes of clause (i) of such section, except in the
case of a spouse relieved of liability under section 6013(e).''
(b) Effective Date.--The amendment made by this section shall apply
to proceedings commenced after the date of the enactment of this Act.
SEC. 1454. PROCEEDINGS FOR DETERMINATION OF EMPLOYMENT STATUS.
(a) In General.--Subchapter B of chapter 76 (relating to proceedings
by taxpayers and third parties) is amended by redesignating section 7435
as section 7436 and by inserting after section 7434 the following new
section:
``SEC. 7435. PROCEEDINGS FOR DETERMINATION OF EMPLOYMENT STATUS.
``(a) Creation of Remedy.--If, in connection with an audit of any
person, there is an actual controversy involving a determination by the
Secretary as part of an examination that--
``(1) one or more individuals performing services for such person
are employees of such person for purposes of subtitle C, or
``(2) such person is not entitled to the treatment under subsection
(a) of section 530 of the Revenue Act of 1978 with respect to such an
individual,
upon the filing of an appropriate pleading, the Tax Court may
determine whether such a determination by the Secretary is correct. Any
such determination by the Tax Court shall have the force and effect of a
decision of the Tax Court and shall be reviewable as such.
``(b) Limitations.--
``(1) Petitioner.--A pleading may be filed under this section only
by the person for whom the services are performed.
``(2) Time for filing action.--If the Secretary sends by certified
or registered mail notice to the petitioner of a determination by the
Secretary described in subsection (a), no proceeding may be initiated
under this section with respect to such determination unless the
pleading is filed before the 91st day after the date of such mailing.
``(3) No adverse inference from treatment while action is
pending.--If, during the pendency of any proceeding brought under this
section, the petitioner changes his treatment for employment tax
purposes of any individual whose employment status as an employee is
involved in such proceeding (or of any individual holding a
substantially similar position) to treatment as an employee, such change
shall not be taken into account in the Tax Court's determination under
this section.
``(c) Small Case Procedures.--
``(1) In general.--At the option of the petitioner, concurred in by
the Tax Court or a division thereof before the hearing of the case,
proceedings under this section may (notwithstanding the provisions of
section 7453) be conducted subject to the rules of evidence, practice,
and procedure applicable under section 7463 if the amount of employment
taxes placed in dispute is $10,000 or less for each calendar quarter
involved.
``(2) Finality of decisions.--A decision entered in any proceeding
conducted under this subsection shall not be reviewed in any other court
and shall not be treated as a precedent for any other case not involving
the same petitioner and the same determinations.
``(3) Certain rules to apply.--Rules similar to the rules of the
last sentence of subsection (a), and subsections (c), (d), and (e), of
section 7463 shall apply to proceedings conducted under this subsection.
``(d) Special Rules.--
``(1) Restrictions on assessment and collection pending action,
etc.--The principles of subsections (a), (b), and (d) of section 6213,
section 6214(a), section 6503(a), and section 6512 shall apply to
proceedings brought under this section in the same manner as if the
Secretary's determination described in subsection (a) were a notice of
deficiency.
``(2) Awarding of costs and certain fees.--Section 7430 shall apply
to proceedings brought under this section.
``(e) Employment Tax.--The term `employment tax' means any tax
imposed by subtitle C.''
(b) Conforming Amendments.--
(1) Subsection (d) of section 6511 is amended by adding at the end
the following new paragraph:
``(7) Special period of limitation with respect to self-employment
tax in certain cases.--If--
``(A) the claim for credit or refund relates to an overpayment of
the tax imposed by chapter 2 (relating to the tax on self-employment
income) attributable to Tax Court determination in a proceeding under
section 7435, and
``(B) the allowance of a credit or refund of such overpayment is
otherwise prevented by the operation of any law or rule of law other
than section 7122 (relating to compromises),
such credit or refund may be allowed or made if claim therefor is
filed on or before the last day of the second year after the calendar
year in which such determination becomes final.''
(2) Sections 7453 and 7481(b) are each amended by striking ``section
7463'' and inserting ``section 7435(c) or 7463''.
(3) The table of sections for subchapter B of chapter 76 is amended
by striking the last item and inserting the following:
``Sec. 7435. Proceedings for determination of employment status.
``Sec. 7436. Cross references.''
(c) Effective Date.--The amendments made by this section shall take
effect on the date of the enactment of this Act.
Subtitle D--Other Provisions
SEC. 1461. EXTENSION OF DUE DATE OF FIRST QUARTER ESTIMATED
TAX PAYMENT BY PRIVATE FOUNDATIONS.
(a) In General.--Paragraph (3) of section 6655(g) is amended by
adding at the end the following new sentence: ``In the case of a private
foundation, subsection (c)(2) shall be applied by substituting `May 15'
for `April 15'.''
(b) Effective Date.--The amendment made by subsection (a) shall apply
for purposes of determining underpayments of estimated tax for taxable
years beginning after the date of the enactment of this Act.
SEC. 1462. CLARIFICATION OF AUTHORITY TO WITHHOLD PUERTO RICO
INCOME TAXES FROM SALARIES OF FEDERAL EMPLOYEES.
(a) In General.--Subsection (c) of section 5517 of title 5, United
States Code, is amended by striking ``or territory or possession'' and
inserting ``, territory, possession, or commonwealth''.
(b) Effective Date.--The amendment made by subsection (a) shall take
effect on January 1, 1998.
SEC. 1463. CERTAIN NOTICES DISREGARDED UNDER PROVISION
INCREASING INTEREST RATE ON LARGE CORPORATE UNDERPAYMENTS.
(a) General Rule.--Subparagraph (B) of section 6621(c)(2) (defining
applicable date) is amended by adding at the end the following new
clause:
``(iii) Exception for letters or notices involving small
amounts.--For purposes of this paragraph, any letter or notice shall be
disregarded if the amount of the deficiency or proposed deficiency (or
the assessment or proposed assessment) set forth in such letter or
notice is not greater than $100,000 (determined by not taking into
account any interest, penalties, or additions to tax).''
(b) Effective Date.--The amendment made by subsection (a) shall apply
for purposes of determining interest for periods after December 31,
1997.
TITLE XV--TECHNICAL AMENDMENTS RELATED TO SMALL BUSINESS JOB
PROTECTION ACT OF 1996 AND OTHER LEGISLATION
SEC. 1501. AMENDMENTS RELATED TO SMALL BUSINESS JOB PROTECTION
ACT OF 1996.
(a) Amendments Related to Subtitle A.--
(1) Amendment related to section 1116.--Paragraph (1) of section
6050R(c) is amended by striking ``name and address'' and inserting
``name, address, and phone number of the information contact''.
(2) Amendment to section 1116.--Paragraphs (1) and (2)(C) of section
1116(b) of the Small Business Job Protection Act of 1996 shall each be
applied as if the reference to chapter 68 were a reference to chapter
61.
(b) Amendment Related to Subtitle B.--Subsection (c) of section 52 is
amended by striking ``targeted jobs credit'' and inserting ``work
opportunity credit''.
(c) Amendments Related to Subtitle C.--
(1) Amendment related to section 1302.--Subparagraph (B) of section
1361(e)(1) is amended by striking ``and'' at the end of clause (i),
striking the period at the end of clause (ii) and inserting ``, and'',
and adding at the end the following new clause:
``(iii) any charitable remainder annuity trust or charitable
remainder unitrust (as defined in section 664(d)).''
(2) Effective date for section 1307.--
(A) Notwithstanding section 1317 of the Small Business Job
Protection Act of 1996, the amendments made by subsections (a) and (b)
of section 1307 of such Act shall apply to determinations made after
December 31, 1996.
(B) In no event shall the 120-day period referred to in section
1377(b)(1)(B) of the Internal Revenue Code of 1986 (as added by such
section 1307) expire before the end of the 120-day period beginning on
the date of the enactment of this Act.
(3) Amendment related to section 1308.--Subparagraph (A) of section
1361(b)(3) is amended by striking ``For purposes of this title'' and
inserting ``Except as provided in regulations prescribed by the
Secretary, for purposes of this title''.
(4) Amendments related to section 1316.--
(A) Paragraph (2) of section 512(e) is amended by striking ``within
the meaning of section 1012'' and inserting ``as defined in section
1361(e)(1)(C)''.
(B) Paragraph (7) of section 1361(c) is redesignated as paragraph (6).
(C) Subparagraph (B) of section 1361(b)(1) is amended by striking
``subsection (c)(7)'' and inserting ``subsection (c)(6)''.
(D) Paragraph (1) of section 512(e) is amended by striking ``section
1361(c)(7)'' and inserting ``section 1361(e)(6)''.
(d) Amendments Related to Subtitle D.--
(1) Amendments related to section 1421.--
(A) Subsection (i) of section 408 is amended in the last sentence by
striking ``30 days'' and inserting ``31 days''.
(B) Subparagraph (H) of section 408(k)(6) is amended by striking
``if the terms of such pension'' and inserting ``of an employer if the
terms of simplified employee pensions of such employer''.
(C)(i) Subparagraph (B) of section 408(l)(2) is amended--
(I) by inserting ``and the issuer of an annuity established under
such an arrangement'' after ``under subsection (p)'', and
(II) in clause (i), by inserting ``or issuer'' after ``trustee''.
(ii) Paragraph (2) of section 6693(c) is amended--
(I) by inserting ``or issuer'' after ``trustee'', and
(II) in the heading, by inserting `` and issuer'' after ``trustee''.
(D) Subsection (p) of section 408 is amended by adding at the end
the following new paragraph:
``(8) Coordination with maximum limitation under subsection (a).--In
the case of any simple retirement account, subsections (a)(1) and (b)(2)
shall be applied by substituting `the sum of the dollar amount in effect
under paragraph (2)(A)(ii) of this subsection and the employer
contribution required under subparagraph (A)(iii) or (B)(i) of paragraph
(2) of this subsection, whichever is applicable' for `$2,000'.''
(E) Clause (i) of section 408(p)(2)(D) is amended by adding at the
end the following new sentence: ``If only individuals other than
employees described in subparagraph (A) or (B) of section 410(b)(3) are
eligible to participate in such arrangement, then the preceding sentence
shall be applied without regard to any qualified plan in which only
employees so described are eligible to participate.''
(F) Subparagraph (D) of section 408(p)(2) is amended by adding at
the end the following new clause:
``(iii) Grace period.--In the case of an employer who establishes
and maintains a plan under this subsection for 1 or more years and who
fails to meet the requirements of this subparagraph for any subsequent
year due to any acquisition, disposition, or similar transaction
involving another such employer, rules similar to the rules of section
410(b)(6)(C) shall apply for purposes of this subparagraph.''
(G) Paragraph (5) of section 408(p) is amended in the text preceding
subparagraph (A) by striking ``simplified'' and inserting ``simple''.
(2) Amendments related to section 1422.--
(A) Clause (ii) of section 401(k)(11)(D) is amended by striking the
period and inserting ``if such plan allows only contributions required
under this paragraph.''
(B) Paragraph (11) of section 401(k) is amended by adding at the end
the following new subparagraph:
``(E) Cost-of-living adjustment.--The Secretary shall adjust the
$6,000 amount under subparagraph (B)(i)(I) at the same time and in the
same manner as under section 408(p)(2)(E).''
(C) Subparagraph (A) of section 404(a)(3) is amended--
(i) in clause (i), by striking ``not in excess of'' and all that
follows and inserting the following: ``not in excess of the greater of--
``(I) 15 percent of the compensation otherwise paid or accrued
during the taxable year to the beneficiaries under the stock bonus or
profit-sharing plan, or
``(II) the amount such employer is required to contribute to such
trust under section 401(k)(11) for such year.'', and
(ii) in clause (ii), by striking ``15 percent'' and all that follows
and inserting the following ``the amount described in subclause (I) or
(II) of clause (i), whichever is greater, with respect to such taxable
year.''
(D) Subparagraph (B) of section 401(k)(11) is amended by adding at
the end the following new clause:
``(iii) Administrative requirements.--
``(I) In general.--Rules similar to the rules of subparagraphs (B)
and (C) of section 408(p)(5) shall apply for purposes of this
subparagraph.
``(II) Notice of election period.--The requirements of this
subparagraph shall not be treated as met with respect to any year unless
the employer notifies each employee eligible to participate, within a
reasonable period of time before the 60th day before the beginning of
such year (and, for the first year the employee is so eligible, the 60th
day before the first day such employee is so eligible), of the rules
similar to the rules of section 408(p)(5)(C) which apply by reason of
subclause (I).''
(3) Amendment related to section 1433.--The heading of paragraph
(11) of section 401(m) is amended by striking `` Alternative'' and
inserting `` Additional alternative''.
(4) Amendment related to section 1462.--The paragraph (7) of section
414(q) added by section 1462 of the Small Business Job Protection Act of
1996 is redesignated as paragraph (9).
(5) Clarification of section 1450.--
(A) Section 403(b)(11) of the Internal Revenue Code of 1986 shall
not apply with respect to a distribution from a contract described in
section 1450(b)(1) of such Act to the extent that such distribution is
not includible in income by reason of section 403(b)(8) of such Code
(determined after the application of section 1450(b)(2) of such Act).
(B) This paragraph shall apply as if included in section 1450 of the
Small Business Job Protection Act of 1996.
(e) Amendment Related to Subtitle E.--Subparagraph (A) of section
956(b)(1) is amended by inserting ``to the extent such amount was
accumulated in prior taxable years'' after ``section 316(a)(1)''.
(f) Amendments Related to Subtitle F.--
(1) Amendments related to section 1601.--
(A) The heading of section 30A is amended to read as follows:
``SEC. 30A. PUERTO RICO ECONOMIC ACTIVITY CREDIT.''
(B) The table of sections for subpart B of part IV of subchapter A
of chapter 1 is amended in the item relating to section 30A by striking
``Puerto Rican'' and inserting ``Puerto Rico''.
(C) Paragraph (1) of section 55(c) is amended by striking ``Puerto
Rican'' and inserting ``Puerto Rico''.
(2) Amendments related to section 1606.--
(A) Clause (ii) of section 9503(c)(2)(A) is amended by striking
``(or with respect to qualified diesel-powered highway vehicles
purchased before January 1, 1999)''.
(B) Subparagraph (A) of section 9503(e)(5) is amended by striking
``; except that'' and all that follows and inserting a period.
(3) Amendments related to section 1607.--
(A) Subsection (f) of section 4001 (relating to phasedown of tax on
luxury passenger automobiles) is amended--
(i) by inserting ``and section 4003(a)'' after ``subsection (a)'', and
(ii) by inserting ``, each place it appears,'' before ``the
percentage''.
(B) Subsection (g) of section 4001 (relating to termination) is
amended by striking ``tax imposed by this section'' and inserting
``taxes imposed by this section and section 4003'' and by striking ``or
use'' and inserting ``, use, or installation''.
(4) Amendments related to section 1609.--
(A) Subsection (l) of section 4041 is amended--
(i) by inserting ``or a fixed-wing aircraft'' after ``helicopter'', and
(ii) in the heading, by striking `` Helicopter''.
(B) The last sentence of section 4041(a)(2) is amended by striking
``section 4081(a)(2)(A)'' and inserting ``section 4081(a)(2)(A)(i)''.
(C) Subsection (b) of section 4092 is amended by striking ``section
4041(c)(4)'' and inserting ``section 4041(c)(2)''.
(D) Subsection (g) of section 4261 (as redesignated by title X) is
amended by inserting ``on that flight'' after ``dedicated''.
(E) Paragraph (1) of section 1609(h) of such Act is amended by
striking ``paragraph (3)(A)(i)'' and inserting ``paragraph (3)(A)''.
(F) Paragraph (4) of section 1609(h) of such Act is amended by
inserting before the period ``or exclusively for the use described in
section 4092(b) of such Code''.
(5) Amendments related to section 1616.--
(A) Subparagraph (A) of section 593(e)(1) is amended by inserting
``(and, in the case of an S corporation, the accumulated adjustments
account, as defined in section 1368(e)(1))'' after ``1951,''.
(B) Paragraph (7) of section 1374(d) is amended by adding at the end
the following new sentence: ``For purposes of applying this section to
any amount includible in income by reason of section 593(e), the
preceding sentence shall be applied without regard to the phrase
`10-year'.''
(6) Amendments related to section 1621.--
(A) Subparagraph (A) of section 860L(b)(1) is amended in the text
preceding clause (i) by striking ``after the startup date'' and
inserting ``on or after the startup date''.
(B) Paragraph (2) of section 860L(d) is amended by striking
``section 860I(c)(2)'' and inserting ``section 860I(b)(2)''.
(C) Subparagraph (B) of section 860L(e)(2) is amended by inserting
``other than foreclosure property'' after ``any permitted asset''.
(D) Subparagraph (A) of section 860L(e)(3) is amended by striking
``if the FASIT'' and all that follows and inserting the following new
flush text after clause (ii):
``if the FASIT were treated as a REMIC and permitted assets (other
than cash or cash equivalents) were treated as qualified mortgages.''
(E)(i) Paragraph (3) of section 860L(e) is amended by adding at the
end the following new subparagraph:
``(D) Income from dispositions of former hedge assets.--Paragraph
(2)(A) shall not apply to income derived from the disposition of--
``(i) an asset which was described in subsection (c)(1)(D) when
first acquired by the FASIT but on the date of such disposition was no
longer described in subsection (c)(1)(D)(ii), or
``(ii) a contract right to acquire an asset described in clause (i).''
(ii) Subparagraph (A) of section 860L(e)(2) is amended by inserting
``except as provided in paragraph (3),'' before ``the receipt''.
(g) Amendments Related to Subtitle G.--
(1) Extension of period for claiming refunds for alcohol
fuels.--Notwithstanding section 6427(i)(3)(C) of the Internal Revenue
Code of 1986, a claim filed under section 6427(f) of such Code for any
period after September 30, 1995, and before October 1, 1996, shall be
treated as timely filed if filed before the 60th day after the date of
the enactment of this Act.
(2) Amendments to sections 1703 and 1704.--Sections 1703(n)(8) and
1704(j)(4)(B) of the Small Business Job Protection Act of 1996 shall
each be applied as if such sections referred to section 1702 instead of
section 1602.
(h) Amendments Related to Subtitle H.--
(1) Amendments related to section 1806.--
(A) Subparagraph (B) of section 529(e)(1) is amended by striking
``subsection (c)(2)(C)'' and inserting ``subsection (c)(3)(C)''.
(B) Subparagraph (C) of section 529(e)(1) is amended by inserting
``(or agency or instrumentality thereof)'' after ``local government''.
(C) Paragraph (2) of section 1806(c) of the Small Business Job
Protection Act of 1996 is amended by striking so much of the first
sentence as follows subparagraph (B)(ii) and inserting the following:
``then such program (as in effect on August 20, 1996) shall be
treated as a qualified State tuition program with respect to
contributions (and earnings allocable thereto) pursuant to contracts
entered into under such program before the first date on which such
program meets such requirements (determined without regard to this
paragraph) and the provisions of such program (as so in effect) shall
apply in lieu of section 529(b) of the Internal Revenue Code of 1986
with respect to such contributions and earnings.''
(2) Amendments related to section 1807.--
(A) Paragraph (2) of section 23(a) is amended to read as follows:
``(2) Year credit allowed.--The credit under paragraph (1) with
respect to any expense shall be allowed--
``(A) in the case of any expense paid or incurred before the taxable
year in which such adoption becomes final, for the taxable year
following the taxable year during which such expense is paid or
incurred, and
``(B) in the case of an expense paid or incurred during or after the
taxable year in which such adoption becomes final, for the taxable year
in which such expense is paid or incurred.''
(B) Subparagraph (B) of section 23(b)(2) is amended by striking
``determined--'' and all that follows and inserting the following:
``determined without regard to sections 911, 931, and 933.''
(C) Paragraph (1) of section 137(b) (relating to adoption assistance
programs) is amended by striking ``amount excludable from gross income''
and inserting ``of the amounts paid or expenses incurred which may be
taken into account''.
(D)(i) Subparagraph (C) of section 414(n)(3) is amended by inserting
``137,'' after ``132,''.
(ii) Paragraph (2) of section 414(t) is amended by inserting
``137,'' after ``132,''.
(iii) Paragraph (1) of section 6039D(d) is amended by striking ``or
129'' and inserting ``129, or 137''.
(i) Amendments Related to Subtitle I.--
(1) Amendment related to section 1901.--Subsection (b) of section
6048 is amended in the heading by striking `` Grantor'' and inserting ``
Owner''.
(2) Amendments related to section 1903.--
Clauses (ii) and (iii) of section 679(a)(3)(C) are each amended by
inserting ``, owner,'' after ``grantor''.
(3) Amendments related to section 1907.--
(A) Clause (ii) of section 7701(a)(30)(E) is amended by striking
``fiduciaries'' and inserting ``persons''.
(B) Subsection (b) of section 641 is amended by adding at the end
the following new sentence: ``For purposes of this subsection, a foreign
trust or foreign estate shall be treated as a nonresident alien
individual who is not present in the United States at any time.''
(4) Effective Date Related to Subtitle I.--The Secretary of the
Treasury may by regulations or other administrative guidance provide
that the amendments made by section 1907(a) of the Small Business Job
Protection Act of 1996 shall not apply to a trust with respect to a
reasonable period beginning on the date of the enactment of such Act,
if--
(A) such trust is in existence on August 20, 1996, and is a United
States person for purposes of the Internal Revenue Code of 1986 on such
date (determined without regard to such amendments),
(B) no election is in effect under section 1907(a)(3)(B) of such Act
with respect to such trust,
(C) before the expiration of such reasonable period, such trust
makes the modifications necessary to be treated as a United States
person for purposes of such Code (determined with regard to such
amendments), and
(D) such trust meets such other conditions as the Secretary may
require.
(j) Effective Date.--
(1) In general.--Except as provided in paragraph (2), the amendments
made by this section shall take effect as if included in the provisions
of the Small Business Job Protection Act of 1996 to which they relate.
(2) Certain administrative requirements with respect to certain
pension plans.--The amendment made by subsection (d)(2)(D) shall apply
to calendar years beginning after the date of the enactment of this Act.
SEC. 1502. AMENDMENTS RELATED TO HEALTH INSURANCE PORTABILITY
AND ACCOUNTABILITY ACT OF 1996.
(a) Amendments Related to Section 301.--
(1) Paragraph (2) of section 26(b) is amended by striking ``and'' at
the end of subparagraph (N), by striking the period at the end of
subparagraph (O) and inserting ``, and'', and by adding at the end the
following new subparagraph:
``(P) section 220(f)(4) (relating to additional tax on medical
savings account distributions not used for qualified medical
expenses).''
(2) Paragraph (3) of section 220(c) is amended by striking
subparagraph (A) and redesignating subparagraphs (B) through (D) as
subparagraphs (A) through (C), respectively.
(3) Subparagraph (C) of section 220(d)(2) is amended by striking
``an eligible individual'' and inserting ``described in clauses (i) and
(ii) of subsection (c)(1)(A)''.
(4) Subsection (a) of section 6693 is amended by adding at the end
the following new sentence:
``This subsection shall not apply to any report which is an
information return described in section 6724(d)(1)(C)(i) or a payee
statement described in section 6724(d)(2)(X).''
(5) Paragraph (4) of section 4975(d) is amended by striking ``if,
with respect to such transaction'' and all that follows and inserting
the following: ``if section 220(e)(2) applies to such transaction.''
(b) Amendment Related to Section 321.--Subparagraph (B) of section
7702B(c)(2) is amended in the last sentence by inserting ``described in
subparagraph (A)(i)'' after ``chronically ill individual''.
(c) Amendment Related to Section 322.--Subparagraph (B) of section
162(l)(2) is amended by adding at the end the following new sentence:
``The preceding sentence shall be applied separately with respect to--
``(i) plans which include coverage for qualified long-term care
services (as defined in section 7702B(c)) or are qualified long-term
care insurance contracts (as defined in section 7702B(b)), and
``(ii) plans which do not include such coverage and are not such
contracts.''
(d) Amendments Related to Section 323.--
(1) Paragraph (1) of section 6050Q(b) is amended by inserting ``,
address, and phone number of the information contact'' after ``name''.
(2)(A) Paragraph (2) of section 6724(d) is amended by striking so
much as follows subparagraph (Q) and precedes the last sentence, and
inserting the following new subparagraphs:
``(R) section 6050R(c) (relating to returns relating to certain
purchases of fish),
``(S) section 6051 (relating to receipts for employees),
``(T) section 6052(b) (relating to returns regarding payment of
wages in the form of group-term life insurance),
``(U) section 6053(b) or (c) (relating to reports of tips),
``(V) section 6048(b)(1)(B) (relating to foreign trust reporting
requirements),
``(W) section 4093(c)(4)(B) (relating to certain purchasers of
diesel and aviation fuels),
``(X) section 408(i) (relating to reports with respect to individual
retirement plans) to any person other than the Secretary with respect to
the amount of payments made to such person, or
``(Y) section 6047(d) (relating to reports by plan administrators)
to any person other than the Secretary with respect to the amount of
payments made to such person.''
(B) Subsection (e) of section 6652 is amended in the last sentence
by striking ``section 6724(d)(2)(X)'' and inserting ``section
6724(d)(2)(Y)''.
(e) Amendment Related to Section 325.--Clauses (ii) and (iii) of
section 7702B(g)(4)(B) are each amended by striking ``Secretary'' and
inserting ``appropriate State regulatory agency''.
(f) Amendments Related to Section 501.--
(1) Paragraph (4) of section 264(a) is amended by striking
subparagraph (A) and all that follows through ``by the taxpayer.'' and
inserting the following:
``(A) is or was an officer or employee, or
``(B) is or was financially interested in,
any trade or business carried on (currently or formerly) by the
taxpayer.''
(2) The last 2 sentences of section 264(d)(2)(B)(ii) are amended to
read as follows:
``For purposes of subclause (II), the term `applicable period' means
the 12-month period beginning on the date the policy is issued (and each
successive 12-month period thereafter) unless the taxpayer elects a
number of months (not greater than 12) other than such 12-month period
to be its applicable period. Such an election shall be made not later
than the 90th day after the date of the enactment of this sentence and,
if made, shall apply to the taxpayer's first taxable year ending on or
after October 13, 1995, and all subsequent taxable years unless revoked
with the consent of the Secretary.''
(3) Subparagraph (B) of section 264(d)(4) is amended by striking
``the employer'' and inserting ``the taxpayer''.
(4) Subsection (c) of section 501 of the Health Insurance
Portability and Accountability Act of 1996 is amended by striking
paragraph (3).
(5) Paragraph (2) of section 501(d) of such Act is amended by
striking ``no additional premiums'' and all that follows and inserting
the following: ``a lapse occurring by reason of no additional premiums
being received under the contract after October 13, 1995.''
(g) Amendments Related to Section 511.--
(1) Subparagraph (B) of section 877(d)(2) is amended by striking
``the 10-year period described in subsection (a)'' and inserting ``the
10-year period beginning on the date the individual loses United States
citizenship''.
(2) Subparagraph (D) of section 877(d)(2) is amended by adding at
the end the following new sentence: ``In the case of any exchange
occurring during such 5 years, any gain recognized under this
subparagraph shall be recognized immediately after such loss of
citizenship.''
(3) Paragraph (3) of section 877(d) is amended by inserting ``and
the period applicable under paragraph (2)'' after ``subsection (a)''.
(4) Subparagraph (A) of section 877(d)(4) is amended--
(A) by inserting ``during the 10-year period beginning on the date
the individual loses United States citizenship'' after ``contributes
property'' in clause (i),
(B) by inserting ``immediately before such contribution'' after
``from such property'', and
(C) by striking ``during the 10-year period referred to in
subsection (a),''.
(5) Subparagraph (C) of section 2501(a)(3) is amended by striking
``decedent'' and inserting ``donor''.
(6)(A) Clause (i) of section 2107(c)(2)(A) is amended by striking
``such foreign country in respect of property included in the gross
estate'' and inserting ``such foreign country''.
(B) Subparagraph (C) of section 2107(c)(2) is amended to read as
follows:
``(C) Proportionate share.--In the case of property which is
included in the gross estate solely by reason of subsection (b), such
property's proportionate share is the percentage which the value of such
property bears to the total value of all property included in the gross
estate solely by reason of subsection (b).''.
(h) Amendments Related to Section 512.--
(1) Subpart A of part III of subchapter A of chapter 61 is amended
by redesignating the section 6039F added by section 512 of the Health
Insurance Portability and Accountability Act of 1996 as section 6039G
and by moving such section 6039G to immediately after the section 6039F
added by section 1905 of the Small Business Job Protection Act of 1996.
(2) The table of sections for subpart A of part III of subchapter A
of chapter 61 is amended by striking the item relating to the section
6039F related to information on individuals losing United States
citizenship and inserting after the item relating to the section 6039F
related to notice of large gifts received from foreign persons the
following new item:
``Sec. 6039G. Information on individuals losing United States
citizenship.''
(3) Paragraph (1) of section 877(e) is amended by striking ``6039F''
and inserting ``6039G''.
(i) Effective Date.--The amendments made by this section shall take
effect as if included in the provisions of the Health Insurance
Portability and Accountability Act of 1996 to which such amendments
relate.
SEC. 1503. AMENDMENTS RELATED TO TAXPAYER BILL OF RIGHTS 2.
(a) Amendment Related to Section 1311.--Subsection (b) of section
4962 is amended by striking ``subchapter A or C'' and inserting
``subchapter A, C, or D''.
(b) Amendments Related to Section 1312.--
(1)(A) Paragraph (10) of section 6033(b) is amended by striking all
that precedes subparagraph (A) and inserting the following:
``(10) the respective amounts (if any) of the taxes imposed on the
organization, or any organization manager of the organization, during
the taxable year under any of the following provisions (and the
respective amounts (if any) of reimbursements paid by the organization
during the taxable year with respect to taxes imposed on any such
organization manager under any of such provisions):''.
(B) Subparagraph (C) of section 6033(b)(10) is amended by adding at
the end the following: ``except to the extent that, by reason of section
4962, the taxes imposed under such section are not required to be paid
or are credited or refunded,''.
(2) Paragraph (11) of section 6033(b) is amended to read as follows:
``(11) the respective amounts (if any) of--
``(A) the taxes imposed with respect to the organization on any
organization manager, or any disqualified person, during the taxable
year under section 4958 (relating to taxes on private excess benefit
from certain charitable organizations), and
``(B) reimbursements paid by the organization during the taxable
year with respect to taxes imposed under such section,
except to the extent that, by reason of section 4962, the taxes
imposed under such section are not required to be paid or are credited
or refunded,''.
(c) Effective Date.--The amendments made by this section shall take
effect as if included in the provisions of the Taxpayer Bill of Rights 2
to which such amendments relate.
SEC. 1504. MISCELLANEOUS PROVISIONS.
(a) Amendments Related to Energy Policy Act of 1992.--
(1) Paragraph (1) of section 263(a) is amended by striking ``or'' at
the end of subparagraph (F), by striking the period at the end of
subparagraph (G) and inserting ``; or'', and by adding at the end the
following new subparagraph:
``(H) expenditures for which a deduction is allowed under section
179A.''
(2) Subparagraph (B) of section 312(k)(3) is amended--
(A) by striking ``179'' in the heading and the first place it
appears in the text and inserting ``179 or 179A'', and
(B) by striking ``179'' the last place it appears and inserting
``179 or 179A, as the case may be''.
(3) Paragraphs (2)(C) and (3)(C) of section 1245(a) are each amended
by inserting ``179A,'' after ``179,''.
(4) The amendments made by this subsection shall take effect as if
included in the amendments made by section 1913 of the Energy Policy Act
of 1992.
(b) Amendments Related to Uruguay Round Agreements Act.--
(1) Paragraph (1) of section 6621(a) is amended in the last sentence
by striking ``subsection (c)(3))'' and inserting ``subsection (c)(3),
applied by substituting `overpayment' for `underpayment')''.
(2) Subclause (II) of section 412(m)(5)(E)(ii) is amended by
striking ``clause (i)'' and inserting ``subclause (I)''.
(3) Subparagraph (A) of section 767(d)(3) of the Uruguay Round
Agreements Act is amended in the last sentence by striking ``(except
that'' and all that follows through ``into account)''.
(4) The amendments made by this subsection shall take effect as if
included in the sections of the Uruguay Round Agreements Act to which
they relate.
(c) Amendment Related to Omnibus Budget Reconciliation Act of 1993.--
(1) Paragraph (6) of section 168(j) (defining Indian reservation) is
amended by adding at the end the following new flush sentence:
``For purposes of the preceding sentence, such section 3(d) shall be
applied by treating the term `former Indian reservations in Oklahoma' as
including only lands which are within the jurisdictional area of an
Oklahoma Indian tribe (as determined by the Secretary of the Interior)
and are recognized by such Secretary as eligible for trust land status
under 25 CFR Part 151 (as in effect on the date of the enactment of this
sentence).''
(2) The amendment made by paragraph (1) shall apply as if included
in the amendments made by section 13321 of the Omnibus Budget
Reconciliation Act of 1993, except that such amendment shall not apply--
(A) with respect to property (with an applicable recovery period
under section 168(j) of the Internal Revenue Code of 1986 of 6 years or
less) held by the taxpayer if the taxpayer claimed the benefits of
section 168(j) of such Code with respect to such property on a return
filed before March 18, 1997, but only if such return is the first return
of tax filed for the taxable year in which such property was placed in
service, or
(B) with respect to wages for which the taxpayer claimed the
benefits of section 45A of such Code for a taxable year on a return
filed before March 18, 1997, but only if such return was the first
return of tax filed for such taxable year.
(d) Amendment Related to Tax Reform Act of 1986.--Paragraph (3) of
section 1059(d) is amended by striking ``subsection (a)(2)'' and
inserting ``subsection (a)''.
(e) Amendment Related to Tax Reform Act of 1984.--
(1) Section 267(f) is amended by adding at the end the following new
paragraph:
``(4) Determination of relationship resulting in disallowance of
loss, for purposes of other provisions.--For purposes of any other
section of this title which refers to a relationship which would result
in a disallowance of losses under this section, deferral under paragraph
(2) shall be treated as disallowance.''
(2) Effective Date.--The amendment made by paragraph (1) shall take
effect as if included in section 174(b) of the Tax Reform Act of 1984.
(f) Clerical Amendments.--
(1) Clause (iii) of section 163(j)(2)(B) is amended by striking
``clause (i)'' and inserting ``clause (ii)''.
(2) Paragraph (1) of section 665(d) is amended in the last sentence
by striking ``or 669(d) and (e)''.
(3) Subsection (g) of section 1441 (relating to cross reference) is
amended by striking ``one-half'' and inserting ``85 percent''.
(4) Paragraph (1) of section 2523(g) is amended by striking
``qualified remainder trust'' and inserting ``qualified charitable
remainder trust''.
(5) Subsection (d) of section 9502 is amended by redesignating the
paragraph added by section 806 of the Federal Aviation Reauthorization
Act of 1996 as paragraph (6).
STATEMENT OF THE HOUSE COMMITTEE ON THE BUDGET
ON THE REVENUE RECONCILIATION ACT OF 1997
To serve the American people, balancing the Federal budget is only
half the job. Congress and the administration must, at the same time,
let Americans keep more of their own money--to save, to invest, and to
make their own choices about how best to use the resources they have
earned.
That is the principle behind this legislation, the Revenue
Reconciliation Act of 1997. This bill and its twin measure, the Balanced
Budget Act of 1997, seek jointly to fulfill the reconciliation
directives of the Concurrent Resolution on the Budget for Fiscal Year
1997. That resolution embraced the Bipartisan Budget Agreement, between
the Congressional leadership and the administration, to balance the
Federal budget by 2002 and provide much-needed tax relief for America's
middle-income working families.
Key components of this tax package include the following:
-12A total of $85 billion in net tax relief over the next 5 years and
$250 billion over the next 10 years.
-12A tax credit, reaching $500 per child, that will benefit 41
million children of America's families.
-12Roughly $35 billion over 5 years in post-secondary education tax
incentives.
-12Broad-based relief from capital gains taxes to promote capital
formation and, most important, job creation.
-12Expansion of individual retirement accounts [IRA's] to encourage
personal saving.
-12Significant reductions in death taxes.
-12Reform of corporate taxes through the repeal of roughly $14
billion over 5 years in inappropriate corporate tax benefits.
This tax package represents a good faith effort to meet the terms of
the Bipartisan Budget Agreement. Most important, though, it meets the
needs of American taxpayers. It also proceeds from an unalterable truth:
the people who know best how to spend their money are the people
themselves.
Committee on Ways and Means,
House of Representatives,
Washington, DC, June 14, 1997.
Hon. John R. Kasich, Chairman, Committee on the Budget, Washington, DC.
Dear Mr. Chairman: On June 13, 1997, the Committee on Ways and
Means, pursuant to H. Con. Res. 84, the Concurrent Resolution on the
Budget for Fiscal Year 1998, ordered favorably reported, as amended, its
budget reconciliation revenue recommendations, to the Committee on
Budget by a recorded vote of 22 16. Accordingly, I am now transmitting
these recommendations to you.
Enclosed are the legislative language, explanatory report language,
estimates of the Congressional Budget Office and the Joint Committee on
Taxation.
Please feel free to contact me or Pete Singleton if you have any
questions. With best personal regards,
Sincerely,
Bill Archer,
Chairman.
Enclosures.
I. INTRODUCTION
A. Purpose and Summary
PURPOSE
The revenue reconciliation provisions included in the Committee's
budget reconciliation recommendations provide income and estate and gift
tax relief to America's families, educational tax benefits, savings and
investment incentives, estate and gift tax relief to closely-held
businesses, extension of certain expiring tax provisions, District of
Columbia tax incentives, welfare-to-work tax credit, various
miscellaneous tax provisions, revenue-offset provisions (including a
10-year extension of financing of the Airport and Airway Trust Fund and
corporate and other tax reforms), numerous tax simplification provisions
(most of which have been previously approved by the Committee and the
Congress in the Balanced Budget Act of 1995 in the 104th Congress, but
not enacted), needed technical corrections to recently-passed tax
legislation, and an increase in the public debt limit as projected under
the Balanced Budget Agreement and the Fiscal Year 1998 Budget
Resolution.
SUMMARY
The following is a brief summary of the revenue reconciliation
provisions of the bill.
Title I--Child and Dependent Care Tax Credits; Health Care for Children
Child tax credit for children under the age of 17--The bill allows
taxpayers a maximum nonrefundable tax credit of $500 ($400 for taxable
year 1998) for each qualifying child under the age of 17. For taxpayers
with modified AGI in excess of certain thresholds, the sum of the
otherwise allowable child credit and the otherwise allowable dependent
care credit is phased out. Beginning after 2001, the otherwise allowable
child credit is reduced by one-half of the amount of the taxpayer's
dependent care credit. Generally, the child tax credit is effective for
taxable years beginning after December 31, 1997.
Dependent care credit--The present-law credit is indexed for
inflation. The credit is also phased out in conjunction with the child
tax credit for high-income taxpayers. The provision is effective for
taxable years beginning after December 31, 1997.
Expand definition of high-risk individuals with respect to tax-exempt
State-sponsored organizations providing health coverage--The bill
expands the definition of high-risk individuals to include a child of an
individual who meets the present-law definition of a high-risk
individual, subject to certain requirements. The provision is effective
for taxable years beginning after December 31, 1997.
Title II--Education Tax Incentives
HOPE credit for higher education tuition expenses--Individual
taxpayers are allowed to claim a nonrefundable HOPE credit against
Federal income taxes up to $1,500 per student for 50 percent of
qualified tuition and related expenses (i.e., tuition, fees, and books
but not room and board) paid for the first two years of post-secondary
education for the taxpayer, the taxpayer's spouse, or a dependent. The
credit is phased out for taxpayers with modified AGI between $40,000 and
$50,000 ($80,000 and $100,000 for joint returns). Eligible students must
be enrolled on at least a half-time basis at a college, university, or
certain vocational schools, but need not maintain any specific grade
point average. The credit is not available with respect to a student if
a taxpayer elects to claim the proposed deduction for qualified higher
education expenses (described below) with respect to that student for
the taxable year. The provision is effective for expenses paid after
December 31, 1997, for education furnished in academic periods beginning
after such date.
Deduction for qualified higher education expenses and tax treatment
of qualified tuition programs and education investment
accounts--Individual taxpayers are allowed a deduction of up to $10,000
per student per year for qualified higher education expenses (i.e.,
tuition, fees, books, supplies, and room and board) paid by the taxpayer
during the taxable year for education furnished to the taxpayer, the
taxpayer's spouse, or a dependent. The deduction is allowed only to the
extent that the taxpayer is required to include in gross income for the
taxable year earnings distributed from a qualified tuition program
(which is a tax-exempt prepaid tuition program maintained by a State or
one or more private colleges) or an education investment account (which
is a tax-exempt trust established exclusively for the purpose of paying
qualified higher education expenses of the account holder). The
deduction is allowed regardless of whether or not the taxpayer otherwise
itemizes deductions or claims the standard deduction. The deduction is
not available, however, with respect to a student if the proposed HOPE
credit (described above) is claimed with respect to that student for the
taxable year. Aggregate deductions allowed for a student for all taxable
years are limited to $40,000. The deduction is not available for
graduate-level courses. Contributions to education investment accounts
and qualified tuition programs not operated by a State may not exceed
$5,000 per beneficiary per year (with an aggregate contribution limit of
$50,000 per beneficiary for all years). The deduction is available for
qualified higher education expenses paid after December 31, 1997, for
education furnished in academic periods beginning after such date.
Phase out qualified tuition reduction exclusion--The bill phases out
the special rule in section 117(d) that excludes a qualified tuition
reduction provided to an employee of an educational organization from
gross income. The excludable percentage is 80 percent in 1998 and is
reduced by 20 percent each year thereafter; no exclusion is permitted
after 2001.
Penalty free IRA withdrawals for education expenses--The bill
provides that individuals may make penalty-free withdrawals from their
IRAs to pay for the undergraduate and graduate higher education expenses
of themselves, their spouses, their
children and grandchildren or the children or grandchildren of
their spouses.
Tax credit for certain tutoring expenses--The bill provides a
nonrefundable tax credit equal to the lesser of (1) $150 or (2) 50
percent of the costs of supplementary educational assistance provided to
elementary or secondary school students. The credit is phased out for
taxpayers with adjusted gross income in excess of certain limits The
credit is available for taxable years beginning after December 31, 1997.
Exclusion for employer-provided educational assistance--The bill
extends the exclusion for employer-provided educational assistance to
courses beginning before January 1, 1998.
Modification of $150 million limit on qualified 510(c)(3)
non-hospital bonds--The $150 million limit is increased annually in $10
million increments until it reaches $200 million.
Enhanced deduction for corporate contributions of computer technology
and equipment--The bill provides that corporate contributions of
computer technology and equipment to be used for educational purposes in
any of grades K 12 qualifies for the augmented contribution deduction
currently available under Code sections 170(e)(3) and 170(e)(4). The
provision is effective for contributions made in taxable years beginning
after 1997.
Treatment of cancellation of certain student loans--The bill expands
present-law section 108(f) so that an individual's gross income does not
include forgiveness of loans made by tax-exempt charitable organizations
provided the loan recipient's work satisfies a community benefit
requirement. Section 108(f) also is expanded to cover forgiveness of
certain Federal direct student loans for which an income-contingent
repayment option has been selected.
Title III--Savings and Investment Tax Incentives
American Dream IRAs--The bill replaces present-law nondeductible IRAs
with new American Dream IRAs (``AD IRAs'') to which all individuals may
make nondeductible contributions of up to $2,000 annually. Contributions
to an AD IRA are in addition to any contributions that can be made to a
deductible IRA under the present-law rules. No income limitations apply
to AD IRAs. Withdrawals from an AD IRA are not includible in income if
the withdrawal (1) is made after the 5-taxable year period beginning
with the first taxable year in which the individual made a contribution
to an AD IRA, and (2) is (a) made on or after the date on which the
individual attains age 59\1/2\, (b) made to a beneficiary (or to the
individual's estate) on or after the death of the individual, (c)
attributable to the individual's being disabled, or (d) for first-time
homebuyer expenses.
Capital gains provisions--The bill reduces the maximum rate of
capital gains of individuals from 28 percent to 20 percent (10 percent
for gains otherwise taxed at the 15-percent rate), effective May 7,
1997. This maximum rate applies both for the regular tax and the
alternative minimum tax. A 26-percent maximum rate is provided for gain
attributable to real estate depreciation. The maximum rate for gain
attributable to collectibles remains at 28 percent. For certain assets
acquired after December 31, 2000, and held 3 years or more, the cost
basis may be indexed for inflation. The bill generally provides that
$250,000 ($500,000 in the case of a married couple) of gain from the
sale of a principal residence is exempt from tax, for sales after May 6,
1997. The bill reduces the corporate capital gains tax on assets held
more than 8 years to 30 percent (32 percent in 1998 and 31 percent in
1999). The bill modifies the ``110 percent of last year's liability''
safe harbor of the individual estimated tax to a ``109 percent of last
year's liability'' safe harbor for 1997 estimated tax payments.
Title IV--Alternative Minimum Tax Provisions
Modifications to the alternative minimum tax (``AMT'')--The bill (1)
increases and indexes (after 2007) the AMT exemption amounts applicable
to individuals, (2) repeals the depreciation adjustment for property
placed in service after 1998, and (3) repeals the corporate AMT for
small business for taxable years beginning after 1997.
Minimum tax installment sales of farmers--The bill repeals the
minimum tax on installment sales of farmers, effective for dispositions
after 1987.
Title V--Estate and Gift Tax Provisions
Increase in estate and gift tax unified credit--The bill increases
the present-law unified credit as follows: the effective exemption is
$650,000 for decedents dying and gifts made in 1998; $750,000 in 1999;
$765,000 in 2000; $775,000 in 2001 through 2004; $800,000 in 2005;
$825,000 in 2006; $1 million in 2007. After 2007, the effective
exemption is indexed annually for inflation.
Indexing of certain other estate and gift tax provisions--The bill
provides that, after 1998, the $10,000 annual exclusion for gifts, the
$750,000 ceiling on special use valuation, the $1,000,000
generation-skipping transfer tax exemption, and the $1,000,000 ceiling
on the value of a closely-held business eligible for the special low
interest rate (as modified below), are indexed annually for inflation.
Installment payments of estate tax attributable to closely held
businesses--The bill extends the period for which Federal estate tax
installments can be made under section 6166 to a maximum period of 24
years. In addition, the bill provides that no interest is imposed on the
amount of deferred estate tax attributable to the first $1,000,000 in
taxable value of the closely held business (i.e., the first $1,000,000
in value in excess of the effective exemption provided by the unified
credit). For businesses with a taxable
value in excess of $1,000,000, the bill also eliminates the
deductibility of interest paid on estate taxes deferred under section
6166, and reduces the interest rate accordingly.
Estate tax recapture from cash leases of specially-valued
property--The bill provides that the cash lease of specially-valued real
property by a lineal descendant of the decedent to a member of the
lineal descendant's family, who continues to operate the farm or closely
held business, does not cause the qualified use of such property to
cease for purposes of imposing the additional estate tax under section
2032A(c).
Clarify eligibility for extension of time for payment of estate
tax--The bill gives taxpayers access to the courts to resolve disputes
over an estate's eligibility for the section 6166 election by
authorizing the U.S. Tax Court to provide declaratory judgments
regarding initial or continuing eligibility for deferral under section
6166.
Gifts may not be revalued for estate tax purposes after expiration of
statute of limitations--The bill provides that a gift for which the
limitations period has passed cannot be revalued for purposes of
determining the applicable estate tax bracket and available unified
credit.
Repeal of throwback rules applicable to domestic trusts--The bill
exempts from the throwback rules amounts distributed by a domestic trust
after December 31, 1995. The provision also provides that
precontribution gain on property sold by a domestic trust no longer is
subject to section 644.
Unified credit of decedent increased by unified credit of spouse used
on split gift included in decedent's gross estate--With respect to any
split-gift property that is subsequently includible in both spouses'
estates, the bill increases the unified credit allowable to the
decedent's estate by the amount of the unified credit previously allowed
to the decedent's spouse with respect to the split gift.
Reformation of defective bequests to spouse of decedent--The bill
allows the marital deduction with respect to a defective power of
appointment or QTIP trust if a reformation (meeting certain criteria) is
made to correct the defect.
Generation-skipping tax provisions--The bill provides that if a trust
with an inclusion ratio of greater than zero is severed into two
separate trusts, the bill allows the trustee to elect to treat one of
the separate trusts as having an inclusion ratio of zero and the other
separate trust as having an inclusion ratio of one. In addition, the
bill extends the predeceased parent exception to transfers to collateral
heirs, provided that the decedent has no living lineal descendants at
the time of the transfer. The predeceased parent exception (as modified)
also is extended to taxable terminations and taxable distributions.
Title VI--Extension of Certain Expiring Tax Provisions
Research tax credit--The research tax credit is extended for the
period June 1, 1997, through December 31, 1998 (with a special rule
providing a similar, 19-month extension for taxpayers which elect the
alternative incremental research credit regime).
Contributions of stock to private foundations--The bill extends the
special rule contained in section 170(e)(5) that allows a deduction
equal to fair market value for contributions of qualified appreciated
stock made to private foundations during the period June 1, 1997,
through December 31, 1998.
Work opportunity tax credit--The bill extends the work opportunity
tax credit for one year and makes other modifications. The provisions
generally are effective for wages paid or incurred to qualified
individuals who begin work for the employer after September 30, 1997,
and before October 1, 1998.
Orphan drug tax credit--The bill permanently extends the orphan drug
tax credit, effective for qualified clinical testing expenses paid or
incurred after May 31, 1997.
Title VII--District of Columbia Tax Incentives
D.C. Enterprise Zone--The bill designates certain economically
depressed census tracts within the District of Columbia as the ``D.C.
Enterprise Zone,'' within which business and individual residents are
eligible for special tax incentives. All of the tax incentives take
effect only if, prior to January 1, 1998, a Federal law is enacted
creating a District of Columbia economic development corporation. In
general, tax incentives that are available under present law for certain
businesses located in empowerment zones are available in the D.C.
Enterprise Zone. These are: (1) a 20-percent wage credit for the first
$15,000 of wages paid to D.C. Enterprise Zone residents who work in the
D.C. Enterprise Zone; (2) an additional $20,000 of expensing under Code
section 179 for qualified Zone property; and (3) special tax-exempt
financing for certain Zone facilities. In addition, the bill provides
$75 million in tax credits to be allocated by the newly created economic
development corporation to taxpayers that make equity investments in, or
loans to, businesses engaged in an active trade or business anywhere in
the District of Columbia. The bill also provides a zero percent capital
gains rate for capital gains from the sale of certain qualified D.C.
Enterprise Zone business assets held for more than 5 years. Finally, the
bill provides that residents of the D.C. Enterprise Zone are entitled to
a 10-percent tax rate on all taxable income that currently is subject to
a 15-percent Federal income tax rate.
Title VIII--Welfare-to-Work Tax Credit
The bill provides employers a credit on the first $20,000 of eligible
wages paid to qualified long-term family assistance recipients.
Qualified long-term family assistance recipients include members of a
family receiving family assistance for specified periods of time and
members of family no longer on family assistance because of either
Federal
or State time limits. The maximum credit is $8,500 per
employee. The provision is effective for wages paid or incurred to
qualified individuals who begin work for an employer on or after January
1, 1998 and before May 1, 1999.
Title IX--Miscellaneous Provisions
Repeal excise tax on diesel fuel used in recreational boats--The bill
repeals the tax on diesel fuel used in recreational boats.
Modify excise tax on ozone-depleting chemicals--The bill repeals the
present-law exemption for imported recycled halon-1211.
Modify rate structure of vaccine excise tax--The bill modifies the
excise tax on vaccines to provide a uniform rate of tax of $0.84 per
dose for all vaccines. In addition, the bill adds the HIB (hemophilus
influenza type B) vaccine, the Hepatitis B vaccine, and the varicella
(chickenpox) vaccine to the list of taxable vaccines.
Treat certain ``chain retailers'' as wholesale distributors under the
gasoline tax refund rules--Chain retailers, defined as owner-operators
having 10 or more retail outlets, are permitted to claim gasoline tax
refunds for fuel sold to States and local governments and certain others
under the provisions that currently apply to wholesale distributors.
Application of luxury excise tax to clean fuel vehicles--The bill
increases the threshold at which the luxury excise tax on automobiles
applies in the case of clean-burning fuel vehicles and electric cars.
Provisions relating to pensions and other benefits--The bill (1)
provides that certain irrigation or ditch companies or districts may
maintain cash or deferred arrangements (``section 401(k) plans''); (2)
provides that the current moratorium on the application of certain
discrimination rules to State and local government plans is permanent;
(3) provides that certain disability payments made on behalf of
full-time employees of a police or fire department are excludable from
income; (4) provides that contributions made by government employees to
purchase certain permissive service credit under a governmental pension
plan are not to be taken into account in determining annual additions;
(5) provides a deduction from the taxable estate for the value of
certain stock transferred to an employee stock ownership plan; (6)
increases the maximum benefit that can be distributed from a qualified
pension plan without the participant's consent from $3,500 to $5,000
(indexed); (7) clarifies certain rules relating to employee stock
ownership plans of S corporations; and (8) provides that the value of
certain air transportation on employer-provided noncommercial flights is
excludable from income.
Disaster relief provisions--The bill provides the Secretary of the
Treasury with the authority to extend additional taxpayer deadlines for
up to 90 days for certain taxpayers affected by Presidentially declared
disasters. The bill also contains a provision relating to the use of
certain appraisals to establish the amount of a disaster loss. In
addition, the bill extends the deferral provisions of present law
applicable to livestock sold on account of drought to livestock sold on
account of floods and other weather-related conditions. Finally, the
bill modifies the mortgage revenue bond rules to extend them to
Presidentially declared disaster areas. Specifically, the bill waives
the first-time homebuyer requirement, the income limits and the purchase
price limits during the one-year period following the date of the
disaster declaration. The provision is effective for loans financed with
bonds issued after December 31, 1996, and before January 1, 2000.
Provisions relating to employment taxes--The bill (1) provides a safe
harbor under which, if certain requirements are satisfied, a worker is
classified as an independent contractor for Federal tax purposes; (2)
removes the statutory rule treating bakery drivers as employees, so that
the generally applicable rules for determining worker status apply to
bakery drivers; (3) provides that certain instructions of a service
recipient provided pursuant to Federal or State law are not taken into
account in determining whether a retail securities broker is an employee
or independent contractor; and (4) provides that certain termination
payments received by former insurance salesmen are not subject to
self-employment taxes.
Provisions relating to small businesses--The bill provides for an
18-month delay in the imposition of penalties for specified failures to
make payments electronically through EFPTS. In addition, the bill
provides that a home office qualifies as the ``principal place of
business''--such that certain expenses with respect to such office may
be deductible as a trade or business expense--if (1) the office is used
by the taxpayer to conduct administrative or management activities of a
trade or business and (2) there is no other fixed location of the trade
or business where the taxpayer conducts substantial administrative or
management activities of the trade or business. As under present law,
deductions are allowed for a home office meeting this two-part test only
if the office is exclusively used on a regular basis as a place of
business by the taxpayer and, in the case of an employee, only if such
exclusive use is for the convenience of the employer. The provision
applies to taxable years beginning after December 31, 1997.
Other provisions--
Inventory shrinkage--The bill provides that a method of keeping
inventories will not be considered unsound, or to fail to clearly
reflect income, solely because it includes an adjustment for the
shrinkage estimated to occur through year-end, based on inventories
taken other than at year-end.
Treatment of workmen's compensation liability under rules for certain
personal injury liability assignments--The provision extends the
exclusion for qualified assignments under section 130 to amounts
assigned for assuming a liability to pay compensation under any
workmen's compensation act, effective for workmen's compensation claims
filed after the date of enactment.
Treatment of State workmen's compensation funds--The provision
clarifies the tax-exempt status of any organization that is created by
State law, and organized and operated exclusively to provide workmen's
compensation insurance and related coverage that is incidental to
workmen's compensation insurance, and that meets certain additional
requirements. The provision is effective for taxable years beginning
after December 31, 1997. No inference is intended as to the status of
such organizations under present law.
Treatment of certain publicly traded partnerships--In the case of an
existing publicly traded partnership that elects under the provision to
be subject to a tax on gross income from the active conduct of a trade
or business, the rule of present law treating a publicly traded
partnership as a corporation does not apply. The provision is effective
for taxable years beginning after December 31, 1997.
Exclusion from UBIT for certain corporate sponsorship payments--The
bill provides that ``qualified sponsorship payments'' received by
tax-exempt organizations are exempt from taxation under the unrelated
business income tax (``UBIT''). ``Qualified sponsorship payments'' are
defined as any payment made by a person engaged in a trade or business
with respect to which that person receives from the tax-exempt
organization no substantial return benefit other than the use or
acknowledgment of the name or logo (or product lines) of the person's
trade or business in connection with the organization's activities. The
provision applies to qualified sponsorship payments solicited or
received after December 31, 1997.
Timeshare associations--The bill generally extends the rules for
taxation of homeowners associations to timeshare associations. However,
the rate of tax applicable to timeshare associations is 32 percent,
rather than 30 percent. The provision is effective for taxable years
beginning after December 31, 1996.
Modification of advance refunding rules for certain tax-exempt bonds
issued by the Virgin Islands--One additional advance refunding is
allowed for governmental bonds issued by the Virgin Islands that were
advance refunded before June 9, 1997, if the Virgin Islands debt
provisions are changed to modify their lien requirement.
Farm co-ops--The bill provides that gain may be deferred on the sale
of refiners and processors to a farm cooperative.
Information reporting on sales of principal residences--Reports to
the IRS are not be required for most sales of primary residences with a
sales price of $500,000 or less ($250,000 or less if the seller is not
married), provided the person settling the sale obtains representations
that any gain on the sale is eligible to be excluded.
Increased deduction for certain business meals--The deductible
percentage of the cost of food and beverages consumed while away from
home by an individual during, or incident to, a period of duty subject
to the hours of service limitations of the Department of Transportation
is increased from 50 percent to 80 percent in stages, over an eleven
year period beginning in 1998.
Treatment of construction allowances provided to lessees with respect
to short-term leases--The bill provides an exclusion from income for a
retail tenant that receives construction allowances from a landlord to
the extent the tenant uses the allowances to construct or improve
nonresidential real property that reverts to the landlord at the end of
a short-term lease.
Mutual savings banks--The provision provides that the consolidation
of two or more life insurance departments of mutual savings banks into a
single life insurance company by requirement of State law is treated as
a recapitalization. Any payments required to be made to policyholders in
connection with the consolidation are treated as policyholder dividends
deductible by the company under section 808, provided that certain
requirements are met. The provision takes effect on December 31, 1991.
Allow refunds to be offset for State tax obligations-- Subject to
certain limitations, an overpayment of Federal tax could be offset by
the amount of any past-due, legally enforceable State tax obligation of
a resident of the State seeking the offset.,
Clean fuel vehicles--The bill increases the limitation on
depreciation permitted to be claimed by the taxpayer on automobiles in
the case of clean-burning fuel vehicles and electric cars.
Tax benefits for law enforcement officers killed in the line of
duty--The bill provides that certain death benefits received with
respect to a police officer killed in the line of duty are excludable
from income.
Two-year suspension of oil and gas income net income limit for
production from marginal wells--The bill suspends the
65-percent-of-net-income limitation on percentage depletion deductions
for domestic oil and gas production from marginal properties for taxable
years beginning in 1998 and 1999.
Extension of duty-free treatment under Generalized System of
Preferences; Tariff treatment of certain equipment and repair of
vehicles
Generalized System of Preferences--The bill reauthorizes Title V of
the Trade Act of 1974, (the Generalized System of Preferences), as
amended, for two years through May 31, 1999. Refunds would be
authorized, upon request of the importer, for any duty paid between May
31, 1997 and the date of enactment.
Temporary suspension of vessel repair duty (shipbuilding)--The bill
suspends, for a one-year period beginning on date of enactment, the
current 50-percent duty, established under section 466 of the Tariff Act
of 1930, on repairs to U.S. flag vessels made in countries that are
signatories to the OECD Shipbuilding Agreement.
United States-Caribbean Basin Trade Partnership Program
The bill amends section 213(b) of the Caribbean Basin Economic
Recovery Act to provide tariff and quota treatment on imports from CBI
beneficiary countries of currently excluded articles (such as textiles,
apparel, tuna, petroleum and petroleum products, and footwear) that is
similar to tariff and quota treatment accorded to like articles imported
from Mexico under the NAFTA, during a temporary period of one year.
Title X--Revenue-Increase Provisions
Financial Products
Require recognition of gain on certain appreciated positions in
financial property--The bill requires a taxpayer with an appreciated
position in stock, a partnership interest or certain trust interests or
debt instruments to recognize gain as if the taxpayer had sold the
position if the taxpayer enters into one of several transactions. The
transactions covered are a ``short sale against the box'', a forward or
futures contract to deliver the same property, an offsetting notional
principal contract, and, as provided in Treasury regulations, other
transactions with substantially the same effect. An exception is
provided for certain transactions that are closed prior to the end of
the taxable year in which they are entered into, or within 30 days
thereafter. The bill also extends the present law ``mark-to-market''
regime for securities dealers to securities traders and commodities
traders and dealers on an elective basis.
Limitation on exception for investment companies under section
351--The bill expands the definition of an investment company for
purposes of the present-law rule that property contributed to a
partnership or corporation meeting this definition does not qualify for
non-recognition treatment. Under the bill, an investment company
generally includes any corporation or partnership if more than 80
percent of its assets (by value) consist of money, financial
instruments, foreign currency and certain interests in precious metals
and entities that hold passive-type assets.
Disallowance of interest on indebtedness allocable to tax-exempt
obligations--The bill extends to all corporations (other than insurance
companies) the rule that applies to financial institutions that
disallows interest deductions of a taxpayer (that are not otherwise
disallowed as allocable under present law to tax-exempt obligations) in
the same proportion as the average basis of its tax-exempt obligations
(other than nonsalable tax-exempt debt acquired by a corporation in the
ordinary course of business in payment for goods or services sold to a
State or local government) bears to the average basis of all of the
taxpayer's assets. The bill does not extend the small-issuer exception
to taxpayers which are not financial institutions, but does provide a de
minimis exception if the average adjusted basis of tax exempt obligation
is less than the lesser of $1 million or 2 percent of the basis of all
of the corporation's assets.
Gains and losses from certain terminations with respect to
property--The bill extends the rule which treats gain or loss from the
cancellation, lapse, expiration, or other termination of a right or
obligation which is (or on acquisition would be) a capital asset in the
hands of the taxpayer to all types of property. The bill also repeals
the provision that exempts debt obligations issued by natural persons
from the rule which treats gain realized on retirement of the debt as
exchanges.
Determination of original issue discount where pooled debt
obligations subject to acceleration--The bill requires credit card
issuers and other holders of pools of debt instruments to accrue
interest income on such pools using reasonable prepayment assumptions.
Deny interest deduction on certain debt instruments--The bill denies
interest deductions on corporate instruments where a substantial amount
of interest or principal is mandatorily payable in stock of the issuer
or a related party, or is so payable at the option of the issuer or a
related party. The provision also applies to instruments that are part
of an arrangement designed to result in such payment. The provision is
effective for instruments issued after June 8, 1997, unless issued
pursuant to a binding written agreement in effect on that date or
described in an IRS ruling request or a public announcement or SEC
filing on or before such date.
Corporate Organizations and Reorganizations
Require gain recognition for certain extraordinary dividends--Under
the bill, except as provided in regulations, a corporate shareholder
recognizes gain immediately with respect to any redemption treated as a
dividend (in whole or in part) where the nontaxed portion of the
dividend (under the dividends received deduction) exceeds the basis of
the shares surrendered, if the redemption is treated as a dividend due
to options being counted as stock ownership. In addition, the bill
requires immediate gain recognition whenever the basis of stock with
respect to which any extraordinary dividend was received is reduced
below zero. The bill is effective for distributions after May 3, 1995,
unless made pursuant to the terms of a written binding contract in
effect on May 3, 1995 or a tender offer outstanding on that date. In
applying the new gain rules to any distribution that is not a partial
liquidation, a non pro rata redemption, or a redemption that is treated
as a dividend by reason of options, September 13, 1995, is substituted
for May 3, 1995.
Require gain recognition on certain distributions of controlled
corporation stock--If, pursuant to a plan or arrangement in existence on
the date of distribution, either the controlled or distributing
corporation in a section 355 distribution is acquired, gain is
recognized by the other corporation as of the date of the distribution.
An acquisition occurs if a person or persons acquire 50 percent or more
of the vote or value of the stock of the controlled or distributing
corporation pursuant to a plan. Except as provided in regulations, in
the case of distributions within an affiliated group of corporations
filing a
consolidated return, section 355 would not apply to any
distribution from one member of the group to another. The bill also
modifies certain rules for determining control immediately after a
distribution in the case of certain divisive transactions, reducing the
present-law test from 80 percent of vote and of all other classes of
stock to a 50 percent of vote and value test. This part of the provision
is generally effective for distributions after the date of enactment.
The rest of the provision generally is effective for distributions after
April 16, 1997. No part of the bill applies to a distribution that is
pursuant to a written binding contract, IRS ruling request, or an SEC
filing or a public announcement on or before April 16, 1997, in which
the unrelated acquiror is identified.
Reform tax treatment of certain corporate stock transfers--Purchases
of stock between related corporations that are treated as dividends
under section 304 is treated as if the transferor had acquired the stock
in exchange for stock of the acquiror and that stock deemed issued had
then been redeemed. Basis reduction rules apply. The bill also limits
the earnings and profits of an acquiring foreign corporation that would
be taken into account in applying section 304. The provision is
effective for distributions or acquisitions after June 8, 1997 except
that it will not apply to any such distribution made pursuant to a
written agreement that was binding on that date, or that was described
in an IRS ruling request or SEC filing or public announcement on of
before that date.
Modify holding period for dividends-received deduction--A corporation
will not be eligible for the dividends received deduction unless it
satisfies a holding period requirement with respect to each dividend.
The provision is effective for dividends paid or accrued after the 30th
day after the date of enactment.
Registration of confidential tax shelters and substantial
understatement penalty--The bill requires the registration with the
Treasury Department of certain confidential tax shelters and modifies
the substantial understatement penalty.
Treat certain preferred stock as ``boot''--Certain preferred stock is
treated as taxable consideration if received in an otherwise tax-free
reorganization or contribution to a corporation. This is preferred stock
that does not participate in corporate growth and that includes certain
rights to put or redeem the stock within 20 years. Also, stock the
dividend rate on which varies with reference to interest rates or
certain other indices is within the provision. The provision applies to
transactions after June 8, 1997, unless pursuant to a binding written
contract in effect on that date or described in an IRS ruling request,
SEC filing, or public announcement on or before that date.
Administrative Provisions
Administrative Provisions--The bill provides for information
reporting of certain payments made to attorneys, a decrease in the
threshold for reporting payments to corporations performing services for
Federal agencies, permanently extends the rules relating to disclosure
of return information for administration of certain veterans programs,
provides for modifications of the lien and levy rules (including the
extension of the continuous levy rules to additional types of payments).
Consistency rule for beneficiaries of trusts and estates--The bill
requires a beneficiary of an estate or trust to file its return in a
manner that is consistent with the information received from the estate
or trust, unless the beneficiary identifies the inconsistency.
Excise Tax Provisions
Extension and modification of aviation excise taxes--The bill extends
the Airport and Airway Trust Fund excise taxes in passenger and freight
transportation for ten years, through September 30, 2007. The bill also
modifies the structure of the commercial air passenger tax from 10
percent of the amount paid to a tax equal to the aggregate of 7.5
percent plus $2 per flight segment (phasing up until the pre flight
segment reaches $3.00 in 2002). The international departure tax is
increased to $15.50 per passenger, and the tax is extended to
internationally arriving passengers. The 7.5 percent tax is extended to
amounts paid by credit card companies and other companies under
marketing arrangements whereby they offer frequent flyer or other
reduced airfare provisions to customers and others. The
4.3-cents-per-gallon deficit reduction tax imposed on aviation fuel is
transferred to the Airport and Airway Trust Fund, and modifications are
made in certain tax deposits. The modifications generally apply to
transportation beginning after September 30, 1997.
Extend diesel fuel excise tax rules to kerosene--The bill extends the
current diesel fuel excise tax rules to kerosene, subject to limited
modifications allowing non-tax-paid sales to registered aviation dealers
and certain industrial feedstock users.
Modify tax benefits for ethanol and renewable source methanol--The
bill provides for the phase-out of the current tax benefits for ethanol
and renewable source methanol through the currently scheduled expiration
dates. The phase-out is accomplished through a restriction on production
from new facilities, production caps (enforced by an excess production
penalty equal to the tax benefits), a reduction in the general
54-cents-per-gallon tax benefit level, and reversal of the Treasury
Department regulation providing that ETBE and similar ethers qualify for
the tax benefits.
Reinstate Leaking Underground Storage Tank Trust Fund excise tax--The
bill extends the pre-1996 excise tax of 0.1 cent per gallon on gasoline,
diesel fuel, special motor fuels, aviation fuels, and inland waterway
fuels for five years from the date of enactment. Revenues from the
reinstated tax will go to the Leaking Underground Storage Tank Trust
Fund as under prior law.
Application of communications tax to long-distance prepaid telephone
cards--The bill clarifies that payments from persons to communications
companies for prepaid telephone cards which are subsequently distributed
or resold to the ultimate user of the
prepaid telephone card constitute payments for communication
services that are subject to the 3-percent communications excise tax.
Tax-Exempt Organizations
Extend UBIT rules to second-tier subsidiaries and amend control
test--The bill modifies the test for determining control for purposes of
the unrelated business income tax rules contained in section 512(b)(13).
Generally, ``control'' means ownership by vote or value of more than 50
percent of the ownership interests. In addition, the bill applies the
constructive ownership rules of section 318 for purposes of section
512(b)(13). The provision generally applies to taxable years beginning
after the date of enactment.
Limit increase in basis of property on sale by tax-exempt entity to
related person--The bill requires a carryover basis in property
transferred by a tax exempt entity to a related party in a sale or
exchange, except to the extent of any gain recognized to the seller as
unrelated business taxable income. The provision is effective for sales
or exchanges after June 8, 1997, unless pursuant to a binding written
contract in effect on that date.
Reporting and proxy tax requirements for political and lobbying
expenditures--The bill provides that an exemption from the general
disclosure requirements and proxy tax of section 6033(e) is available to
a tax-exempt organization if more than 90 percent of the amount of
aggregate annual dues (or similar payments) received by the organization
are paid by (1) individuals or families whose annual dues (or similar
amounts) are less than $100, or (2) tax-exempt entities. The provision
is effective for taxable years beginning after December 31, 1997.
Repeal grandfather rule with respect to pension business of certain
insurers--The provision repeals the grandfather rules applicable to that
portion of the business of the Teachers Insurance Annuity
Association--College Retirement Equities Fund which is attributable to
pension business and to that portion of the business of Mutual of
America which is attributable to pension business. The provision is
effective for taxable years beginning after December 31, 1997.
Other Provisions
Phase-out suspense accounts for certain large farm corporations--The
bill (1) repeals the ability of family farm corporations with average
gross receipts over $25 million to defer income from the required switch
from the cash method to an accrual method of accounting by establishing
suspense accounts and (2) requires previously-created suspense accounts
generally to be restored to income over a period of 20 years.
Modify net operating loss carryback and carryforward rules--The bill
reduces the carryback period for net operating losses from three to two
years and extends the carryforward period from 15 to 20 years.
Expand the limitations on deductibility of interest and premiums with
respect to life insurance, endowment, and annuity contracts--The
present-law premium deduction limitation is modified to provide that no
deduction is permitted for premiums paid on any life insurance, annuity
or endowment contract covering the life of any individual, when the
taxpayer is directly or indirectly a beneficiary under the contract.
Also, no deduction is allowed for any amount paid or accrued on debt
incurred or continued to purchase or carry a life insurance, endowment,
or annuity contract covering the life of any individual. In addition, in
the case of a taxpayer other than a natural person, no deduction is
allowed for the portion of the taxpayer's interest expense that is
allocable to unborrowed policy cash surrender values with respect to any
life insurance policy or annuity or endowment contract issued after June
8, 1997. The provisions apply generally with respect to contracts issued
after June 8, 1997.
Allocation of basis of properties distributed to a partner by a
partnership--The provision modifies the basis allocation rules for
distributee partners, generally requiring allocation of basis increases
in accordance with the fair market value of the distributed properties
rather than in accordance with their basis to the partnership, effective
for partnership distributions after the date of enactment.
Treatment of inventory items of a partnership--The provision
eliminates the requirement that inventory be substantially appreciated
in order to give rise to ordinary income under the rules relating to
sales and exchanges of partnership interests and certain partnership
distributions. The provision is effective for sales, exchanges, and
distributions after the date of enactment.
Treatment of appreciated property contributed to a partnership--The
provision extends the 5-year limit on taxation of partners'
pre-contribution gain to 10 years, effective for property contributed to
a partnership after June 8, 1997.
Earned income credit (``EIC'') compliance provisions--In addition to
the establishment of IRS continuous levy and the modifications of levy
exemptions (described elsewhere) which also apply to the EIC, the bill
provides three compliance measures to address the EIC compliance
problem. First, taxpayers who fraudulently claim the EIC are made EIC
ineligible for 10 years thereafter. Taxpayers who erroneously claim the
EIC due to reckless or intentional disregard of rules or regulations are
ineligible to claim the EIC for two years thereafter. Second, taxpayers
who are denied the EIC as a result of deficiency procedures are
ineligible in subsequent years to claim the EIC unless they provide
evidence of eligibility as required by the Secretary of the Treasury.
Finally, return preparers are subject to a $100 penalty for each return
claiming an EIC with respect to which certain due diligence requirements
are not
satisfied. These provisions are effective for taxable years
beginning after December 31, 1996.
Restrict eligibility for income forecast method--The bill limits the
availability of the income forecast method of depreciation to movies,
sound recordings, videotapes, books, patents, copyrights, and other
similar items. The bill also provides a 3-year recovery period for
consumer durable goods leased by rent-to-own businesses.
Require taxpayers to include the rental value of residence in income
without regard to period of rental--Gross income for income tax purposes
generally includes all income including rents. However, gross income
does not include rental income where a dwelling unit is used by the
taxpayer as a residence and is actually rented for less than 15 days
during the taxable year. Also, no deductions relating to such rental are
allowed. The bill repeals the 15-day rules.
Modify the exception to the related party rule of section 1033 for
individuals to only provide an exception for de minimis amounts-- The
bill provides that in order for the nonrecognition rules of section 1033
(relating to involuntary conversions) to apply, an individual must
acquire replacement property from a unrelated party, subject to a
$100,000 de minimis rule.
Repeal of exception for certain sales by manufacturers to
dealer--The bill repeals the exception that permits the use of the
installment method of accounting for certain sales by manufacturers to
dealers.
Title XI--Foreign Tax Provisions
General Provisions
Eligibility of licenses of computer software for foreign sales
corporation benefits--The bill provides that computer software licensed
for reproduction abroad is not excluded from the definition of export
property for purposes of the foreign sales corporation provisions.
Accordingly, computer software that is exported with a right to
reproduce is eligible for the benefits of the foreign sales corporation
provisions.
Increase dollar limitation on section 911 exclusion--Under the bill,
the $70,000 limitation on the exclusion for foreign earned income is
increased to $80,000, in increments of $2,000 each year beginning in
1998, and is indexed for inflation beginning in 2008.
Simplify foreign tax credit limitation for individuals--The bill
exempts individuals with no more than $300 ($600 in the case of married
persons filing jointly) of creditable foreign taxes, and no foreign
source income other than passive income, from the foreign tax credit
limitation rules.
Simplify translation of foreign taxes--The bill generally provides
for accrual-basis taxpayers to translate foreign taxes at the average
exchange rate for the taxable year to which such taxes relate. The bill
also generally provides that, in cases where the foreign taxes actually
are paid more than two years after such accrual, such taxes are to be
taken into account for the year to which they relate, but are to be
translated at the exchange rate for the time of payment.
Election to use simplified foreign tax credit limitation for
alternative minimum tax purposes--The bill permits taxpayers to elect to
use as their AMT foreign tax credit limitation fraction the ratio of
foreign source regular taxable income to entire alternative minimum
taxable income, rather than the ratio of foreign source alternative
minimum taxable income to entire alternative minimum taxable income.
Simplify treatment of personal transactions in foreign currency--The
bill applies nonrecognition treatment to any exchange gain that results
from an individual's acquisition of foreign currency and disposition of
it in a personal transaction, provided that such gain does not exceed
$200.
Simplify foreign tax credit limitation for dividends from 10/50
companies--Under the bill, a single foreign tax credit limitation
generally applies to dividends received by the taxpayer from all
so-called 10/50 companies (other than any 10/50 company that qualifies
as a passive foreign investment company).
General Provisions Affecting Treatment of Controlled Foreign
Corporations
The bill makes several modifications to the treatment of controlled
foreign corporations and lower-tier controlled foreign corporations. In
addition, the bill extends the application of the indirect foreign tax
credit to taxes paid or accrued by fourth- through sixth-tier controlled
foreign corporations.
Modification of Passive Foreign Investment Company
Provisions to Eliminate Overlap with Subpart F and to Allow
Mark-to-Market Election
Under the bill, a shareholder that is subject to the subpart F rules
with respect to stock of a passive foreign investment company that is
also a controlled foreign corporation is not subject also to the passive
foreign investment company provisions with respect to the same stock.
The bill also allows a shareholder of a passive foreign investment
company to make a mark-to-market election with respect to the stock of
the passive foreign investment company, provided that such stock is
marketable.
Simplify Formation and Operation of International Joint Ventures
The bill repeals the excise tax that applies to transfers of
appreciated property by U.S. persons to certain foreign entities. The
bill requires enhanced information reporting by U.S. persons with
respect to their interests in foreign partnerships.
Modification of Reporting Threshold for Stock Ownership of a
Foreign Corporation
The bill increases the stock ownership threshold that results in an
information reporting obligation with respect to a foreign corporation
from 5 percent to 10 percent.
Other Foreign Simplification Provisions
Transition rule for certain trusts--The bill grants regulatory
authority to allow nongrantor trusts that had been treated as U.S.
trusts prior to the enactment of the Small Business Job Protection Act
of 1996 to elect to continue to be treated as U.S. trusts.
Repeal of stock and securities safe harbor requirement that
principal office be outside the United States--The bill modifies the
present-law safe harbor that treats foreign persons that trade stock or
securities for their own accounts as not engaged in a U.S. trade or
business. For purposes of the safe harbor, the bill eliminates the
present-law requirement that the principal office not be within the
United States.
Other Foreign Provisions
Inclusion of income from notional principal contracts and stock
lending transactions under subpart F--The bill adds to the definition of
foreign personal holding company income for subpart F purposes net
income from all types of notional principal contracts and payments in
lieu of dividends derived from equity securities lending transactions.
The bill provides an expanded dealer exception from the definition of
foreign personal holding company income.
Restrict like-kind exchange rules for certain property--The bill
provides that for the nonrecognition rules of section 1031 (relating to
like-kind exchanges) to apply, the property surrendered in the exchange
and the party received in the exchange must be both predominantly used
either in (or outside) the United States.
Holding period requirement for certain foreign taxes--The bill
denies a shareholder the foreign tax credits normally available with
respect to a dividend on stock of a foreign corporation or regulated
investment company if the shareholder has not held the stock for 16
days, in the case of common stock, or 46 days in the case of preferred
stock. An exception is provided for dividends on certain stock held by a
foreign securities dealer.
Penalties for failure to file disclosure of exemption for income
from the international operation of ships or aircraft by foreign
persons--The bill imposes penalties on foreign persons that do not
satisfy the filing requirements for claiming exemption from U.S. tax for
income from the international operation of ships or aircraft.
Limitation on treaty benefits for payments to hybrid entities--The
bill limits the availability of a reduced rate of withholding tax under
an income tax treaty in the case of income derived through a hybrid
entity, in order to prevent tax avoidance.
Clarification of determination of foreign taxes deemed paid--The
bill clarifies that, for purposes of the indirect foreign tax credit, a
foreign corporation's foreign tax pool does not include any taxes that
are attributable to dividends distributed by the foreign corporation in
prior taxable years.
Clarification of foreign tax credit limitation for financial
services income--The bill clarifies that the exclusion from passive
income for income that is treated as high-taxed income does not apply
for purposes of the separate foreign tax credit limitation applicable to
financial services income.
Interest on underpayment reduced by foreign tax credit
carryback--The bill provides that, if an underpayment for a taxable year
is reduced or eliminated by a foreign tax credit carryback from a
subsequent taxable year, such carryback does not affect the computation
of interest on the underpayment for the period ending with the filing
date for such subsequent taxable year in which the foreign taxes were
paid or accrued.
Determination of period of limitations relating to foreign tax
credits--The bill provides that, in the case of a claim relating to an
overpayment attributable to foreign tax credits, the limitations period
is determined by reference to the year in which the foreign taxes were
paid or accrued.
Title XII--Simplification Provisions Relating to Individuals
and Businesses
Individual Simplification Provisions
Modifications to standard deduction of dependents; AMT treatment of
certain minor children--The bill increases the standard deduction for a
taxpayer with respect to whom a dependency exemption is allowed on
another taxpayer's return to the lesser of (1) the standard deduction
for individual taxpayers or (2) the greater of: (a) $500 (indexed for
inflation as under present law), or (b) the individual's earned income
plus $250. The bill increases the AMT exemption amount for a child under
age 14 to the lesser of (1) $33,750 or (2) the sum of the child's earned
income plus $5,000.
Increase estimated tax de minimis threshold--The bill increases the
individual estimated tax de minimis threshold from $500 to $1,000.
Optional methods for computing SECA tax combined--The bill
simplifies the reporting of self-employment income by combining the
optional methods for reporting farm and non farm self-employment income.
The provision also ensures that persons reporting self-employment income
by the optional method have enough self-employment income to provide
four quarters of coverage under the Social Security Act.
Treatment of certain reimbursed expenses of rural mail carriers--The
bill simplifies the treatment of certain reimbursed expenses of rural
mail carriers.
Travel expenses of Federal criminal investigators--The bill provides
for special rules relating to the travel expenses of certain Federal
criminal investigators.
Payment of taxes by commercially acceptable means--The bill
generally provides for the payment of taxes by any commercially
acceptable means.
Provisions Relating to Businesses Generally
Simplification to the look-back method applicable to long-term
contracts--The bill simplifies the look-back method applicable to
long-term contracts by providing that the method need not be applied to
de minimis changes to estimated income and by stream lining the
calculation of applicable interest rates used in the look-back
calculation.
Minimum tax treatment of certain property and casualty insurance
companies--The bill provides that a property and casualty insurance
company that elects for regular tax purposes to be taxed only on taxable
investment income determines its adjusted current earnings under the
alternative minimum tax without regard to any amount not taken into
account in determining its gross investment income.
Partnership Simplification Provisions
The bill makes simplifying changes to reporting and audit rules in
the case of electing large partnerships, which are generally those that
elect to come within the provisions and that have 100 or more partners
for the partnership's preceding taxable year. The bill also provides
that electing large partnerships must report to partners by March 15
following the close of the partnership's taxable year. The bill also
provides for reporting on magnetic media to the IRS for all
partnerships, and modifies the filing threshold for an IRA with an
interest in an electing large partnership. In addition, the bill
provides modifications and clarifications to the present-law rules
governing partnership proceedings that were enacted in 1982 as part of
TEFRA.
Modifications of Rules for Real Estate Investment Trusts
Clarification of limitation on maximum number of shareholders-- The
bill replaces the rule that disqualifies a REIT for any year in which
the REIT failed to comply with Treasury regulations to ascertain its
ownership, with an intermediate penalty of $25,000 ($50,000 for
intentional violations) for failing to do so. In addition, a REIT that
complied with the Treasury regulations for ascertaining its ownership,
and which did not know, or have reason to know, that it was so closely
held as to be classified as a personal holding company, is treated as
meeting the requirement that it not be a personal holding company.
De minimis rule for tenant service income--The bill permits a REIT
to render a de minimis amount (one percent of rents) of impermissible
services to tenants, or in connection with the management of property,
and still treat amounts received with respect to that property as rent.
Attribution rules applicable to tenant ownership--The bill modifies
the application of section 318(a)(3)(A) (attribution to partnerships)
for purposes of defining rent in section 856(d)(2), so that attribution
occurs only when a partner owns a 25 percent or greater interest in the
partnership.
Credit for tax paid by REIT on retained capital gains--The bill
permits a REIT to elect to retain and pay income tax on net long-term
capital gains it received during the tax year, just as a RIC is
permitted under present law.
Repeal of 30-percent gross income requirement--The bill repeals the
rule that requires less than 30 percent of a REIT's gross income be
derived from gain from the sale or other disposition of stock or
securities held for less than one year, certain real property held less
than four years, and property that is sold or disposed of in a
prohibited transaction.
Modification of earnings and profits for determining whether REIT
has earnings and profits from non-REIT year--The bill changes the
ordering rule for purposes of the requirement that newly-electing REITs
distribute earnings and profits that were accumulated in non-REIT years
such that distributions of accumulated earnings and profits generally
are treated as made from the entity's earliest accumulated earnings and
profits, rather than the most recently accumulated earnings and profits.
Treatment of foreclosure property--The bill lengthens the original
grace period for foreclosure property until the last day of the third
full taxable year following the election. Under the bill, the grace
period could be extended for an additional three years by filing a
request to the IRS and a REIT could revoke an election to treat property
as foreclosure property for any taxable year.
Payments under hedging instruments--The bill treats income from all
hedges (such as an interest rate swap, cap agreement, option, futures
contract, forward rate agreement or any similar financial instrument)
that reduce the interest rate risk of REIT liabilities, not just from
interest rate swaps and caps, as qualifying income under the 95-percent
test.
Excess noncash income--The bill (1) expands the class of excess
noncash items that are not subject to the distribution requirement to
include income from the cancellation of indebtedness and (2) extends the
treatment of original issue discount and coupon interest as excess
noncash items to REITs that use an accrual method of taxation.
Prohibited transaction safe harbor--The bill excludes from the
prohibited sales rules property that was involuntarily converted.
Shared appreciation mortgages--The bill provides that interest
received on a shared appreciation mortgage is not subject to the tax on
prohibited transactions where the property subject to the mortgage is
sold within 4 years of the REIT's acquisition of the mortgage pursuant
to a bankruptcy plan of the mortgagor unless the REIT acquired the
mortgage knew or had reason to know that the property subject to the
mortgage would be sold in a bankruptcy proceeding.
Wholly-owned REIT subsidiaries--The bill permits any corporation
wholly-owned by a REIT to be treated as a qualified subsidiary,
regardless of whether the corporation had always been owned by the REIT.
Repeal of the 30-Percent (Or ``Short-Short'') Test for
Regulated Investment Companies
The bill repeals the requirement of a regulated investment company
(RIC) that it derive less than 30 percent of its gross income from the
sale or other disposition of stock or securities held for less than 3
months (the ``30-percent test'' or ``short-short rule'').
Taxpayer Protections
The bill provides a reasonable cause exception for certain additional
penalties where one does not now exist, clarifies the period for filing
claims for refunds, repeals the authority to disclose otherwise
confidential information regarding whether a prospective juror has been
audited, clarifies the statute of limitations, clarifies the rules
regarding the awarding of administrative costs, and provides a criminal
penalty and civil damages for unauthorized inspection of tax returns and
return information (``browsing'').
Title XIII--Estate, Gift, and Trust Tax Simplification
The bill contains a number of simplification provisions relating to
Federal estate, gift and trust taxes that are intended to simplify
administration of the Internal Revenue Code.
Title XIV--Excise Tax and Other Simplification Provisions
Excise tax simplification--The bill simplifies taxpayer compliance
with numerous excise tax provisions: accessories installed after
purchasing heavy trucks and certain automobiles, the treatment of tires
under the heavy vehicle retail tax, and expanded exemptions from IRS
registration requirements in certain cases. Additionally, the bill
includes a number of provisions related to the taxes on distilled
spirits, wine, and beer designed to conform the administration of those
taxes (1) across beverage types, and (2) to current industry and Bureau
of Alcohol, Tobacco, and Firearms preferred practices.
Tax-exempt bond provisions--The bill (1) repeals the $100,000
limitation on unspent proceeds under the 1-year exception from rebate,
(2) exempts earnings on bond proceeds invested in a bona fide debt
service fund from the arbitrage rebate requirement and the penalty
requirement (under the construction bond exception from rebate) if the
spending requirements are otherwise satisfied, (3) repeals the
150-percent of debt service yield restriction, and (4) repeals certain
student loan bond provisions as deadwood.
Tax Court procedures--The bill provides rules relating to overpayment
determinations, to the redetermination of interest pursuant to a motion,
and to the application of net worth limitations for awards of litigation
costs. The bill also generally provides for Tax Court jurisdiction for
the determination of employment status.
Other provisions--The bill provides that the due date of a private
foundation's first-quarter estimated tax payment is the same date for
filing the foundation's annual return for the preceding year. The bill
clarifies the authority to withhold Puerto Rico (and other Commonwealth)
income taxes from the salaries of Federal employees. The bill also
provides that notices of less than $100,000 are disregarded for purposes
of triggering the increased interest rate on certain large corporate
underpayments.
Title XV--Technical Corrections
The bill includes a number of technical corrections to previously
enacted legislation, including the Small Business Job Protection Act of
1996, Health Insurance Portability and Accountability Act of 1996,
Taxpayer Bill of Rights 2, and other recent tax acts.
B. Background and Need for Legislation
Under the Fiscal Year 1998 Budget Resolution (House Con. Res. 84),
the Committee on Ways and Means was instructed to report the revenue
reconciliation provisions for a net of $85 billion of tax cuts for the
first 5 fiscal years (fiscal years 1998 2002) and no more than $250
billion for the 10-year period (fiscal years 1998 2007). The budget
resolution was the result of the Balanced Budget Agreement between the
Congressional leadership and the President. The revenue reconciliation
provisions approved by the Committee reflect the need for tax reduction
for families, capital gains relief, savings and investment incentives,
estate and gift tax relief to families and closely-held businesses,
extensions of certain expiring tax provisions, District of Columbia tax
incentives, welfare-to-work tax credit, miscellaneous tax provisions,
revenue-offset provisions, tax simplification provisions, tax technical
corrections, and an increase in the public debt limit.
C. Legislative History
Committee consideration budget conciliation revenue recommendation
The Committee on Ways and Means (the ``Committee'') conducted
consideration of budget reconciliation revenue recommendations
(including tax simplification and technical corrections) on June 11 13,
1997. The Committee's statutory language (referred to in this report as
``the bill'') for its budget reconciliation revenue recommendations was
approved, as amended, on June 13, 1997, by a roll call vote of 22 yeas
and 16 nays. The statutory provisions and this explanatory material are
to be submitted to the House Committee on the Budget for inclusion in
the Budget Committee's report on the Fiscal 1998 Budget Reconciliation
Bill.
Committee hearings
Committee and Subcommittee hearings related to various budget
reconciliation revenue recommendations have been held during the 105th
Congress.
Full Committee hearings
Full Committee hearings were held as follows:
Solvency of the Airport and Airway Trust Fund (February 5, 1997);
President's Fiscal Year 1998 Budget (February 11 12, 1997);
Education and Training Tax Provisions of the Administration Fiscal
Year 1998 Budget Proposal (March 5, 1997);
Revenue Raising Provisions in the Administration's Fiscal Year 1998
Budget Proposal (March 12, 1997);
Savings and Investment Provisions in the Administration's Fiscal
Year 1998 Budget Proposal (March 19, 1997);
Internal Revenue Service's 1995 Earned Income Tax Credit Compliance
Study (May 8, 1997).
Subcommittee hearings
The Oversight Subcommittee held the following hearings related to
Internal Revenue Service oversight:
Annual Report of the Internal Revenue Service Taxpayer Advocate
(February 25, 1997);
``High-Risk'' Programs Within the Jurisdiction of the Committee on
Ways and Means (March 4, 1997);
IRS Budget for Fiscal 1998 and the 1997 Tax Return Filing Season
(March 18, 1997);
Electronic Federal Tax Payment System (April 16, 1997).
II. EXPLANATION OF THE BILL
TITLE I. CHILD AND DEPENDENT CARE TAX CREDITS; HEALTH CARE FOR CHILDREN
A. Child Tax Credit For Children Under Age 17 (sec. 101 of the bill and
new sec. 24 of the Code)
PRESENT LAW
In general
Present law does not provide tax credits based solely on the
taxpayer's number of dependent children. Taxpayers with dependent
children, however, generally are able to claim a personal exemption for
each of these dependents. The total amount of personal exemptions is
subtracted (along with certain other items) from adjusted gross income
(``AGI'') in arriving at taxable income. The amount of each personal
exemption is $2,650 for 1997, and is adjusted annually for inflation. In
1997, the amount of the personal exemption is phased out for taxpayers
with AGI in excess of $121,200 for single taxpayers, $151,500 for heads
of household, and $181,800 for married couples filing joint returns.
These phaseout thresholds are adjusted annually for inflation.
Dependent care credit
A nonrefundable credit against income tax liability is available for
up to 30 percent (phased down to 20 percent for individuals with AGI
above $28,000) of a limited dollar amount of employment-related child
and dependent care expenses. Eligible employment-related expenses are
limited to $2,400 if there is one qualifying individual and $4,800 if
there are two or more qualifying individuals. Employment-related
expenses are expenses for household services and the care of a
qualifying individual, if incurred to enable the taxpayer to be
gainfully employed. Employment-related expenses are reduced to the
extent the taxpayer has employer-provided dependent care assistance that
is excludable from gross income.
REASONS FOR CHANGE
The Committee believes that the individual income tax structure does
not reduce tax liability by enough to reflect a family's reduced ability
to pay taxes as family size increases. In part, this is because over the
last 50 years the value of the dependent personal exemption has declined
in real terms by over one-third. The Committee believes that a tax
credit for families with dependent children will reduce the individual
income tax burden of those families, will better recognize the financial
responsibilities of raising dependent children, and will promote family
values.
EXPLANATION OF PROVISION
The bill allows taxpayers a maximum nonrefundable tax credit of $500
($400 for taxable year 1998) for each qualifying child under the age of
17. A qualifying child is defined as an individual for whom the taxpayer
can claim a dependency exemption and who is a son or daughter of the
taxpayer (or a descendent of either), a stepson or stepdaughter of the
taxpayer or an eligible foster child of the taxpayer. The credit amount
is not indexed for inflation.
For taxpayers with modified AGI in excess of certain thresholds, the
sum of the otherwise allowable child credit and the otherwise allowable
dependent care credit is phased out. Specifically, the sum of the
otherwise allowable child credit and then the otherwise allowable
dependent care credit is reduced by $25 for each $1,000 of modified AGI
(or fraction thereof) in excess of the threshold (``the modified AGI
phase-out''). For these purposes modified AGI is computed by increasing
the taxpayer's AGI by the amount otherwise excluded from gross income
under Code sections 911, 931, or 933 (relating to the exclusion of
income of U.S. citizens or residents living abroad; residents of Guam,
American Samoa, and the Northern Mariana Islands; and residents of
Puerto Rico, respectively). The reduction is applied first to the child
credit and then to the dependent care credit. For married taxpayers
filing joint returns, the threshold is $110,000. For taxpayers filing
single or head of household returns, the threshold is $75,000. For
married taxpayers filing separate returns, the threshold is $55,000.
These thresholds are not indexed for inflation.
Beginning after 2001, the otherwise allowable child credit would be
reduced by one-half of the amount of the taxpayer's otherwise allowable
dependent care credit. This reduction to the otherwise allowable child
credit would be applied after the application of the modified AGI
phase-out to the child and dependent care credits (if applicable). The
maximum amount of the child credit for each taxable year (after the
reduction, if any, for the dependent care credit after 2001) could not
exceed an amount equal to the excess of: (1) the taxpayer's regular
income tax liability (net of applicable credits) over (2) the sum of the
taxpayer's tentative minimum tax liability (determined without regard to
the alternative minimum foreign tax credit) and the earned income credit
allowed.
EFFECTIVE DATE
Generally, the child tax credit is effective for taxable years
beginning after December 31, 1997. The provision to reduce the otherwise
allowable child credit by one-half of the amount of the taxpayer's
dependent care credit is effective for taxable years beginning after
December 31, 2001.
B. Expand Definition of High-Risk Individuals with Respect to Tax-Exempt
State-Sponsored Organizations Providing Health Coverage (sec. 101( b ) of
the bill and sec. 501( c )(26) of the Code)
PRESENT LAW
Present law provides tax-exempt status to any membership organization
that is established by a State exclusively to provide coverage for
medical care on a nonprofit basis to certain high-risk individuals,
provided certain criteria are satisfied.\1\
The organization may provide coverage for medical care either by
issuing insurance itself or by entering into an arrangement with a
health maintenance organization (``HMO'').
\1\No inference is intended as to the tax treatment of other types of
State-sponsored organizations.
High-risk individuals eligible to receive medical care coverage from
the organization must be residents of the State who, due to a
pre-existing medical condition, are unable to obtain health coverage for
such condition through insurance or an HMO, or are able to acquire such
coverage only at a rate that is substantially higher than the rate
charged for such coverage by the organization. The State must determine
the composition of membership in the organization. For example, a State
could mandate that all organizations that are subject to insurance
regulation by the State must be members of the organization.
Present law further requires the State or members of the organization
to fund the liabilities of the organization to the extent that premiums
charged to eligible individuals are insufficient to cover such
liabilities. Finally, no part of the net earnings of the organization
can inure to the benefit of any private shareholder or individual.
REASONS FOR CHANGE
The Committee believes that including certain children of high-risk
individuals in the group of individuals to whom such an organization may
provide medical care coverage will assist States in providing medical
care coverage for uninsured children.
EXPLANATION OF PROVISION
The provision expands the definition of high-risk individuals to
include a child of an individual who meets the present-law definition of
a high-risk individual, subject to certain requirements. The
requirements are: (1) the taxpayer is allowed a deduction for a personal
exemption for the child for the taxable year; (2) the child has not
attained the age of 17 as of the close of the calendar year in which the
taxable year of the taxpayer begins; and (3) the child is a son or
daughter or the taxpayer (or a dependent of either), a stepson or
stepdaughter of the taxpayer, or an eligible foster child of the
taxpayer.
EFFECTIVE DATE
The provision is effective for taxable years beginning after December
31, 1997.
C. Indexing of the Dependent Care Credit; Phase Out for High-Income
Taxpayers (sec. 102 of the bill and secs. 21 and 26 of the Code)
PRESENT LAW
A nonrefundable credit against income tax liability is available for
up to 30 percent of a limited dollar amount of employment-related child
and dependent care expenses. The credit may be claimed by an individual
who maintains a household that includes one or more qualifying
individuals. A qualifying individual is a dependent of the taxpayer who
is under the age of 13, a physically or mentally incapacitated
dependent, or a physically or mentally incapacitated spouse. A married
couple must file a joint return in order to claim the credit.
Employment-related expenses are expenses for household services and
the care of a qualifying individual, if incurred to enable the taxpayer
to be gainfully employed. The amount of employment-related expenses that
may be taken into account in computing the credit generally may not
exceed an individual's earned income or, in the case of married
taxpayers, the earned income of the spouse with the lesser earnings.
Thus, if one spouse is not employed, no credit is generally allowed.
Eligible employment-related expenses are limited to $2,400 if there is
one qualifying individual, and $4,800 if there are two or more
qualifying individuals. The amount of employment-related expenses is
reduced by the aggregate amount of employer-provided dependent care
assistance excluded from the taxpayer's income.\2\
\2\Up to $5,000 annually of employer-provided dependent care assistance
is excludable from gross income if the assistance is provided under a
separate written plan of the employer that does not discriminate in
favor of highly compensated employees and certain other requirements are
satisfied.
The 30-percent credit rate is reduced by one percentage point for
each $2,000 (or fraction thereof) of adjusted gross income (``AGI'')
above $10,000. A married couple's combined AGI is used for purposes of
this computation. Individuals with more than $28,000 of AGI are entitled
to a credit equal to 20 percent of allowable employment-related
expenses.
REASONS FOR CHANGE
The Committee believes that, as the costs of dependent care increase
as a result of inflation, the size of the credit should also be
increased. Also, the Committee believes that the credit should be
targeted to lower- and middle-income taxpayers.
EXPLANATION OF PROVISION
The dollar limits on eligible employment-related expenses ($2,400 if
there is one qualifying individual and $4,800 if there are two or more
qualifying individuals) are indexed for inflation.
The sum of the otherwise allowable dependent care credit and the
otherwise allowable child credit is phased out for taxpayers with
modified AGI in excess of certain thresholds. Specifically, the sum of
the otherwise allowable child credit and then the otherwise allowable
dependent care credit is reduced by $25 for each $1,000 of modified AGI
(or fraction thereof) in excess of the threshold. For these purposes
modified AGI is computed by increasing the taxpayer's AGI by the amount
otherwise excluded from gross income under Code sections 911, 931, or
933 (relating to the exclusion of income of U.S. citizens or residents
living abroad; residents of Guam, American Samoa, and the Northern
Mariana Islands; and residents of Puerto Rico, respectively). The
reduction is applied first to the child credit and then to the dependent
care credit. For married taxpayers filing joint returns, the threshold
is $110,000. For taxpayers filing single or head of household returns,
the threshold is $75,000. These thresholds are not indexed for
inflation.
EFFECTIVE DATE
The provision is effective for taxable years beginning after December
31, 1997.
TITLE II. EDUCATION TAX INCENTIVES
A. Tax Benefits Relating to Education Expenses
1. HOPE CREDIT FOR HIGHER EDUCATION TUITION EXPENSES (SEC. 201 OF THE
BILL AND NEW SEC. 25A OF THE CODE)
Present Law
Deductibility of education expenses
Taxpayers generally may not deduct education and training expenses.
However, a deduction for education expenses generally is allowed under
section 162 if the education or training (1) maintains or improves a
skill required in a trade or business currently engaged in by the
taxpayer, or (2) meets the express requirements of the taxpayer's
employer, or requirements of applicable law or regulations, imposed as a
condition of continued employment (Treas. Reg. sec. 1.162 5). However,
education expenses are not deductible if they relate to certain minimum
educational requirements or to education or training that enables a
taxpayer to begin working in a new trade or business. In the case of an
employee, education expenses (if not reimbursed by the employer) may be
claimed as an itemized deduction only if such expenses meet the
above-described criteria for deductibility under section 162 and only to
the extent that the expenses, along with other miscellaneous deductions,
exceed 2 percent of the taxpayer's adjusted gross income (AGI).
Exclusion for employer-provided educational assistance
A special rule allows an employee to exclude from gross income for
income tax purposes and from wages for employment tax purposes up to
$5,250 annually paid by his or her employer for educational assistance
(sec. 127). In order for the exclusion to apply certain requirements
must be satisfied, including a requirement that not more than 5 percent
of the amounts paid or incurred by the employer during the year for
educational assistance under a qualified educational assistance program
can be provided for the class of individuals consisting of more than
5-percent owners of the employer and the spouses or dependents of such
more than 5-percent owners. This special rule for employer-provided
educational assistance expires with respect to courses beginning after
June 30, 1997 (and does not apply to graduate level courses beginning
after June 30, 1996).
For purposes of the special exclusion, educational assistance means
the payment by an employer of expenses incurred by or on behalf of the
employee for education of the employee including, but not limited to,
tuition, fees, and similar payments, books, supplies, and equipment.
Educational assistance also includes the provision by the employer of
courses of instruction for the employee (including books, supplies, and
equipment). Educational assistance does not include tools or supplies
which may be retained by the employee after completion of a course or
meals, lodging, or transportation. The exclusion does not apply to any
education involving sports, games, or hobbies.
In the absence of the special exclusion, employer-provided
educational assistance is excludable from gross income and wages as a
working condition fringe benefit (sec. 132(d)) only to the extent the
education expenses would be deductible under section 162.
Exclusion for interest earned on savings bonds
Another special rule (sec. 135) provides that interest earned on a
qualified U.S. Series EE savings bond issued after 1989 is excludable
from gross income if the proceeds of the bond upon redemption do not
exceed qualified higher education expenses paid by the taxpayer during
the taxable year.\3\
``Qualified higher education expenses'' include tuition and fees (but
not room and board expenses) required for the enrollment or attendance
of the taxpayer, the taxpayer's spouse, or a dependent of the taxpayer
at certain colleges, universities, or vocational schools. The exclusion
provided by section 135 is phased out for certain higher-income
taxpayers, determined by the taxpayer's modified AGI during the year the
bond is redeemed. For 1996, the exclusion was phased out for taxpayers
with modified AGI between $49,450 and $64,450 ($74,200 and $104,200 for
joint returns). To prevent taxpayers from effectively avoiding the
income phaseout limitation through issuance of bonds directly in the
child's name, section 135(c)(1)(B) provides that the interest exclusion
is available only with respect to U.S. Series EE savings bonds issued to
taxpayers who are at least 24 years old.
\3\If the aggregate redemption amount (i.e., principal plus interest) of
all Series EE bonds redeemed by the taxpayer during the taxable year
exceeds the qualified education expenses incurred, then the excludable
portion of interest income is based on the ratio that the education
expenses bears to the aggregate redemption amount (sec. 135(b)).
Qualified scholarships
Section 117 excludes from gross income amounts received as a
qualified scholarship by an individual who is a candidate for a degree
and used for tuition and fees required for the enrollment or attendance
(or for fees, books, supplies, and equipment required for courses of
instruction) at a primary, secondary, or post-secondary educational
institution. The tax-free treatment provided by section 117 does not
extend to scholarship amounts covering regular living expenses, such as
room and board. There is, however, no dollar limitation for the section
117 exclusion, provided that the scholarship funds are used to pay for
tuition and required fees. In addition to the exclusion for qualified
scholarships, section 117 provides an exclusion from gross income for
qualified tuition reductions for education below the graduate level
provided to employees of certain educational organizations. Section
117(c) specifically provides that the exclusion for qualified
scholarships does not apply to any amount received by a student that
represents payment for teaching, research, or other services by the
student required as a condition for receiving the scholarship.
Student loan forgiveness
In the case of an individual, section 108(f) provides that gross
income subject to Federal income tax does not include any amount from
the forgiveness (in whole or in part) of certain student loans, provided
that the forgiveness is contingent on the student's working for a
certain period of time in certain professions for any of a broad class
of employers (e.g., providing health care services to a nonprofit
organization). Student loans eligible for this special rule must be made
to an individual to assist the individual in attending an education
institution that normally maintains a regular faculty and curriculum and
normally has a regularly enrolled body of students in attendance at the
place where its education activities are regularly carried on. Loan
proceeds may be used not only for tuition and required fees, but also to
cover room and board expenses (in contrast to tax-free scholarships
under section 117, which are limited to tuition and required fees). In
addition, the loan must be made by (1) the United States (or an
instrumentality or agency thereof), (2) a State (or any political
subdivision thereof), (3) certain tax-exempt public benefit corporations
that control a State, county, or municipal hospital and whose employees
have been deemed to be public employees under State law, or (4) an
educational organization that originally received the funds from which
the loan was made from the United States, a State, or a tax-exempt
public benefit corporation. Thus, loans made with private,
nongovernmental funds are not qualifying student loans for purposes of
the section 108(f) exclusion. As with section 117, there is no dollar
limitation for the section 108(f) exclusion.
Qualified State prepaid tuition programs
Section 529 (enacted as part of the Small Business Job Protection Act
of 1996) provides tax-exempt status to ``qualified State tuition
programs,'' meaning certain programs established and maintained by a
State (or agency or instrumentality thereof) under which persons may (1)
purchase tuition credits or certificates on behalf of a designated
beneficiary that entitle the beneficiary to a waiver or payment of
qualified higher education expenses of the beneficiary, or (2) make
contributions to an account that is established for the purpose of
meeting qualified higher education expenses of the designated
beneficiary of the account. ``Qualified higher education expenses'' are
defined as tuition, fees, books, supplies, and equipment required for
the enrollment or attendance at a college or university (or certain
vocational schools). Qualified higher education expenses do not include
room and board expenses. Section 529 also provides that no amount shall
be included in the gross income of a contributor to, or beneficiary of,
a qualified State tuition program with respect to any distribution from,
or earnings under, such program, except that (1) amounts distributed or
educational benefits provided to a beneficiary (e.g., when the
beneficiary attends college) will be included in the beneficiary's gross
income (unless excludable under another Code section) to the extent such
amounts or the value of the educational benefits exceed contributions
made on behalf of the beneficiary, and (2) amounts distributed to a
contributor (e.g., when a parent receives a refund) will be included in
the contributor's gross income to the extent such amounts exceed
contributions made by that person.\4\
\4\Specifically, section 529(c)(3)(A) provides that any distribution
under a qualified State tuition program shall be includible in the gross
income of the distributee in the same manner as provided under
present-law section 72 to the extent not excluded from gross income
under any other provision of the Code.
REASONS FOR CHANGE
To assist low- and middle-income families and students in paying for
the costs of post-secondary education, the Committee believes that
taxpayers should be allowed to claim a credit against Federal income
taxes for certain tuition and related expenses incurred during a
student's first two years of attendance (on at least a half-time basis)
at a college, university, or certain vocational schools.
EXPLANATION OF PROVISION
In general
Individual taxpayers are allowed to claim a non-refundable HOPE
credit against Federal income taxes up to $1,500 per student per year
for 50 percent of qualified tuition and related expenses (but not room
and board expenses) paid for the first two years of the student's
post-secondary education in a degree or certificate program. The
qualified tuition and related expenses must be incurred on behalf of the
taxpayer, the taxpayer's spouse, or a dependent. The HOPE credit is
available with respect to an individual student for two taxable years,
provided that the student has not completed the first two years of
post-secondary education. Beginning in 1998, the maximum credit amount
of $1,500 will be indexed for inflation, rounded down to the closest
multiple of $50.\5\
\5\The HOPE credit may not be used to reduce any alternative minimum tax
(AMT) liability owed by the taxpayer.
The HOPE credit amount that a taxpayer may otherwise claim is phased
out ratably for taxpayers with modified AGI between $40,000 and $50,000
($80,000 and $100,000 for joint returns). Modified AGI includes amounts
otherwise excluded with respect to income earned abroad (or income from
Puerto Rico or U.S. possessions). Beginning in 2001, the income
phase-out ranges will be indexed for inflation, rounded down to the
closest multiple of $5,000.
The HOPE credit is available in the taxable year the expenses are
paid, subject to the requirement that the education commence or continue
during that year or during the first three
months of the next year. Qualified tuition expenses paid with
the proceeds of a loan generally are eligible for the HOPE credit
(rather than repayment of the loan itself).\6\
\6\The Treasury Department is granted authority to issue regulations
providing that the HOPE credit will be recaptured in cases where the
student or taxpayer receives a refund of tuition and related expenses
with respect to which a credit was claimed in a prior year.
Dependent students
A taxpayer may claim the HOPE credit with respect to an eligible
student who is not the taxpayer or the taxpayer's spouse (e.g., in cases
where the student is the taxpayer's child) only if the taxpayer claims
the student as a dependent for the taxable year for which the credit is
claimed. If a student is claimed as a dependent by the parent or other
taxpayer, the eligible student him- or herself is not entitled to claim
a HOPE credit for that taxable year on the student's own tax return. If
a parent (or other taxpayer) claims a student as a dependent, any
qualified tuition and related expenses paid by the student are treated
as paid by the parent (or other taxpayer) for purposes of the provision.
Election of HOPE credit or proposed deduction for qualified
higher education expenses
For each taxable year, a taxpayer may elect with respect to an
eligible student either the HOPE credit or the proposed deduction for
qualified higher education expenses (described below). Thus, for
example, if a parent claims a child as a dependent for a taxable year,
then all qualified tuition expenses paid by both the parent and child
are deemed paid by the parent, and the parent may claim the HOPE credit
(assuming that the AGI phaseout does not apply) on the parent's return.
As an alternative, the parent may elect for that taxable year the
deduction for qualified higher education expenses with respect to the
dependent child (as described below).\7\
On the other hand, if a child is not claimed as a dependent by the
parent (or by any other taxpayer) for the taxable year, then the child
him- or herself has the option of electing either the HOPE credit or
deduction for qualified higher education expenses paid during that year.
\7\For any taxable year, a taxpayer may claim the HOPE credit for
qualified tuition and related expenses paid with respect to one student
and also claim the proposed deduction (described below) for higher
education expenses paid with respect to one or more other students. If
the HOPE credit is claimed with respect to one student for one or two
taxable years, then the proposed deduction for higher education expenses
may be available with respect to that student for subsequent taxable
years.
Qualified tuition and related expenses
The HOPE credit is available for ``qualified tuition and related
expenses,'' meaning tuition, fees, and books required for the enrollment
or attendance of an eligible student at an eligible educational
institution. Charges and fees associated with meals, lodging, student
activities, athletics, insurance, transportation, and similar personal,
living or family expenses are not included. The expenses of education
involving sports, games, or hobbies are not qualified tuition expenses
unless this education is part of the student's degree program.
Qualified tuition and related expenses generally include only
out-of-pocket expenses. Qualified tuition and related expenses do not
include expenses covered by educational assistance that is not required
to be included in the gross income of either the student or the taxpayer
claiming the credit. Thus, total qualified tuition and related expenses
are reduced by any scholarship or fellowship grants excludable from
gross income under present-law section 117 and any other tax-free
educational benefits received by the student during the taxable year. No
reduction of qualified tuition and related expenses is required for a
gift, bequest, devise, or inheritance within the meaning of section
102(a). Under the provision, a HOPE credit is not allowed with respect
to any education expense for which a deduction is claimed under section
162 or any other section of the Code.\8\
\8\In addition, the bill amends present-law section 135 to provide that
the amount of qualified higher education expenses taken into account for
purposes of that section is reduced by the amount of such expenses taken
into account in determining the HOPE credit allowed to any taxpayer with
respect to the student for the taxable year.
Eligible student
An eligible student for purposes of the HOPE credit is an individual
who is enrolled in a degree, certificate, or other program (including a
program of study abroad approved for credit by the institution at which
such student is enrolled) leading to a recognized educational credential
at an eligible educational institution. The student must pursue a course
of study on at least a half-time basis. (In other words, for at least
one academic period which begins during the taxable year, the student
must carry at least one-half the normal full-time work load for the
course of study the student is pursuing.) An eligible student may not
have been convicted of a Federal or State felony consisting of the
possession or distribution of a controlled substance.
Eligible educational institution
Eligible educational institutions are defined by reference to section
481 of the Higher Education Act of 1965. Such institutions generally are
accredited post-secondary educational institutions offering credit
toward a bachelor's degree, an associate's degree, or another recognized
post-secondary credential. Certain proprietary institutions and
post-secondary vocational institutions also are eligible educational
institutions. The institution must be eligible to participate in
Department of Education student aid programs.
Regulations
The Secretary of the Treasury (in consultation with the Secretary of
Education) is granted authority to issue regulations to implement the
proposal, including regulations providing appropriate rules for
recordkeeping and information reporting. These regulations may address
the information reports that eligible educational institutions will be
required to file to assist students and the IRS in calculating the
amount of the HOPE credit potentially available. Where certain terms are
defined by reference to the Higher Education Act of 1965, the Secretary
of Education has authority to issue regulations, as well as authority to
define other education terms as necessary.
EFFECTIVE DATE
The provision is effective for expenses paid after December 31, 1997,
for education furnished in academic periods beginning after such date.
2. DEDUCTION FOR QUALIFIED HIGHER EDUCATION EXPENSES AND TAX TREATMENT
OF QUALIFIED TUITION PROGRAMS AND EDUCATION INVESTMENT ACCOUNTS (SECS. 202, 211,
AND 212 OF THE BILL AND SEC. 529 AND NEW SECS. 222 AND 530 OF THE CODE)
PRESENT LAW
Deductibility of education expenses
Taxpayers generally may not deduct education and training expenses.
However, a deduction for education expenses generally is allowed under
section 162 if the education or training (1) maintains or improves a
skill required in a trade or business currently engaged in by the
taxpayer, or (2) meets the express requirements of the taxpayer's
employer, or requirements of applicable law or regulations, imposed as a
condition of continued employment (Treas. Reg. sec. 1.162-5). However,
education expenses are not deductible if they relate to certain minimum
educational requirements or to education or training that enables a
taxpayer to begin working in a new trade or business. In the case of an
employee, education expenses (if not reimbursed by the employer) may be
claimed as an itemized deduction only if such expenses meet the
above-described criteria for deductibility under section 162 and only to
the extent that the expenses, along with other miscellaneous deductions,
exceed 2 percent of the taxpayer's adjusted gross income (AGI).
Exclusion for employer-provided educational assistance
A special rule allows an employee to exclude from gross income for
income tax purposes and from wages for employment tax purposes up to
$5,250 annually paid by his or her employer for educational assistance
(sec. 127). In order for the exclusion to apply certain requirements
must be satisfied, including a requirement that not more than 5 percent
of the amounts paid or incurred by the employer during the year for
educational assistance under a qualified educational assistance program
can be provided for the class of individuals consisting of more than
5-percent owners of the employer and the spouses or dependents of such
more than 5-percent owners. This special rule for employer-provided
educational assistance expires with respect to courses beginning after
June 30, 1997 (and does not apply to graduate level courses beginning
after June 30, 1996).
For purposes of the special exclusion, educational assistance means
the payment by an employer of expenses incurred by or on behalf of the
employee for education of the employee including, but not limited to,
tuition, fees, and similar payments, books, supplies, and equipment.
Educational assistance also includes the provision by the employer of
courses of instruction for the employee (including books, supplies, and
equipment). Educational assistance does not include tools or supplies
which may be retained by the employee after completion of a course or
meals, lodging, or transportation. The exclusion does not apply to any
education involving sports, games, or hobbies.
In the absence of the special exclusion, employer-provided
educational assistance is excludable from gross income and wages as a
working condition fringe benefit (sec. 132(d)) only to the extent the
education expenses would be deductible under section 162.
Exclusion for interest earned on savings bonds
Another special rule (sec. 135) provides that interest earned on a
qualified U.S. Series EE savings bond issued after 1989 is excludable
from gross income if the proceeds of the bond upon redemption do not
exceed qualified higher education expenses paid by the taxpayer during
the taxable year.\9\
``Qualified higher education expenses'' include tuition and fees (but
not room and board expenses) required for the enrollment or attendance
of the taxpayer, the taxpayer's spouse, or a dependent of the taxpayer
at certain colleges, universities, or vocational schools. The exclusion
provided by section 135 is phased out for certain higher-income
taxpayers, determined by the taxpayer's modified AGI during the year the
bond is redeemed. For 1996, the exclusion was phased out for taxpayers
with modified AGI between $49,450 and $64,450 ($74,200 and $104,200 for
joint returns). To prevent taxpayers from effectively avoiding the
income phaseout limitation through issuance of bonds directly in the
child's name, section 135(c)(1)(B) provides that the interest exclusion
is available only with respect to U.S. Series EE savings bonds issued to
taxpayers who are at least 24 years old.
\9\If the aggregate redemption amount (i.e., principal plus interest) of
all Series EE bonds redeemed by the taxpayer during the taxable year
exceeds the qualified education expenses incurred, then the excludable
portion of interest income is based on the ratio that the education
expenses bears to the aggregate redemption amount (sec. 135(b)).
Qualified scholarships
Section 117 excludes from gross income amounts received as a
qualified scholarship by an individual who is a candidate for a degree
and used for tuition and fees required for the enrollment or attendance
(or for fees, books, supplies, and equipment required for courses of
instruction) at a primary, secondary, or post-secondary
educational institution. The tax-free treatment provided by section 117
does not extend to scholarship amounts covering regular living expenses,
such as room and board. There is, however, no dollar limitation for the
section 117 exclusion, provided that the scholarship funds are used to
pay for tuition and required fees. In addition to the exclusion for
qualified scholarships, section 117 provides an exclusion from gross
income for qualified tuition reductions for education below the graduate
level provided to employees of certain educational organizations.
Section 117(c) specifically provides that the exclusion for qualified
scholarships does not apply to any amount received by a student that
represents payment for teaching, research, or other services by the
student required as a condition for receiving the scholarship.
Student loan forgiveness
In the case of an individual, section 108(f) provides that gross
income subject to Federal income tax does not include any amount from
the forgiveness (in whole or in part) of certain student loans, provided
that the forgiveness is contingent on the student's working for a
certain period of time in certain professions for any of a broad class
of employers (e.g., providing health care services to a nonprofit
organization). Student loans eligible for this special rule must be made
to an individual to assist the individual in attending an education
institution that normally maintains a regular faculty and curriculum and
normally has a regularly enrolled body of students in attendance at the
place where its education activities are regularly carried on. Loan
proceeds may be used not only for tuition and required fees, but also to
cover room and board expenses (in contrast to tax-free scholarships
under section 117, which are limited to tuition and required fees). In
addition, the loan must be made by (1) the United States (or an
instrumentality or agency thereof), (2) a State (or any political
subdivision thereof), (3) certain tax-exempt public benefit corporations
that control a State, county, or municipal hospital and whose employees
have been deemed to be public employees under State law, or (4) an
educational organization that originally received the funds from which
the loan was made from the United States, a State, or a tax-exempt
public benefit corporation. Thus, loans made with private,
nongovernmental funds are not qualifying student loans for purposes of
the section 108(f) exclusion. As with section 117, there is no dollar
limitation for the section 108(f) exclusion.
Qualified State prepaid tuition programs
Section 529 (enacted as part of the Small Business Job Protection Act
of 1996) provides tax-exempt status to ``qualified State tuition
programs,'' meaning certain programs established and maintained by a
State (or agency or instrumentality thereof) under which persons may (1)
purchase tuition credits or certificates on behalf of a designated
beneficiary that entitle the beneficiary to a waiver or payment of
qualified higher education expenses of the beneficiary, or (2) make
contributions to an account that is established for the purpose of
meeting qualified higher education expenses of the designated
beneficiary of the account. ``Qualified higher education expenses'' are
defined as tuition, fees, books, supplies, and equipment required for
the enrollment or attendance at a college or university (or certain
vocational schools). Qualified higher education expenses do not include
room and board expenses. Section 529 also provides that no amount shall
be included in the gross income of a contributor to, or beneficiary of,
a qualified State tuition program with respect to any distribution from,
or earnings under, such program, except that (1) amounts distributed or
educational benefits provided to a beneficiary (e.g., when the
beneficiary attends college) will be included in the beneficiary's gross
income (unless excludable under another Code section) to the extent such
amounts or the value of the educational benefits exceed contributions
made on behalf of the beneficiary, and (2) amounts distributed to a
contributor (e.g., when a parent receives a refund) will be included in
the contributor's gross income to the extent such amounts exceed
contributions made by that person.\10\
\10\Specifically, section 529(c)(3)(A) provides that any distribution
under a qualified State tuition program shall be includible in the gross
income of the distributee in the same manner as provided under
present-law section 72 to the extent not excluded from gross income
under any other provision of the Code.
Contributions made to a qualified State tuition program are treated
as incomplete gifts for Federal gift tax purposes (sec. 529(c)(2)).
Thus, any Federal gift tax consequences are determined at the time that
a distribution is made from an account under the program. The waiver (or
payment) of qualified higher education expenses of a designated
beneficiary by (or to) an educational institution under a qualified
State tuition program is treated as a qualified transfer for purposes of
present-law section 2503(e). Amounts contributed to a qualified State
tuition program (and earnings thereon) are includible in the
contributor's estate for Federal estate tax purposes in the event that
the contributor dies before such amounts are distributed under the
program (sec. 529(c)(4)).
Individual retirement arrangements (``IRAs'')
An individual may make deductible contributions to an individual
retirement arrangement (``IRA'') for each taxable year up to the lesser
of $2,000 or the amount of the individual's compensation for the year if
the individual is not an active participant in an employer-sponsored
qualified retirement plan (and, if married, the individual's spouse also
is not an active participant). Contributions may be made to an IRA for a
taxable year up to April 15th of the following year. An individual who
makes excess contributions to an IRA, i.e., contributions in excess of
$2,000, is subject to an excise tax on such excess contributions unless
they are distributed from the IRA before the due date for filing the
individual's tax return for the year (including extensions). If the
individual (or his or her spouse, if married) is an active participant,
the $2,000 limit is phased out between $40,000 and $50,000 of adjusted
gross income (``AGI'') for married couples and between $25,000 and
$35,000 of AGI for single individuals.
Present law permits individuals to make nondeductible contributions
(up to $2,000 per year) to an IRA to the extent an individual is not
permitted to (or does not) make deductible contributions. Earnings on
such contributions are includible in gross income when withdrawn.
An individual generally is not subject to income tax on amounts held
in an IRA, including earnings on contributions, until the amounts are
withdrawn from the IRA. Amounts withdrawn from an IRA are includible in
gross income (except to the extent of nondeductible contributions). In
addition, a 10-percent additional tax generally applies to distributions
from IRAs made before age 59\1/2\, unless the distribution is made (1)
on account of death or disability, (2) in the form of annuity payments,
(3) for medical expenses of the individual and his or her spouse and
dependents that exceed 7.5 percent of AGI, or (4) for medical insurance
of the individual and his or her spouse and dependents (without regard
to the 7.5 percent of AGI floor) if the individual has received
unemployment compensation for at least 12 weeks, and the withdrawal is
made in the year such unemployment compensation is received or the
following year.
REASONS FOR CHANGE
To encourage families and students to save for future education
expenses, the Committee believes that tax-exempt status should be
granted to certain prepaid tuition programs operated by States or
private educational institutions and to education investment accounts
established by taxpayers on behalf of future students. The Committee
further believes that a deduction should be allowed for Federal income
tax purposes for earnings withdrawn from such prepaid tuition programs
and education investment accounts if the earnings are used pay for
qualified higher education expenses of an undergraduate student who is
attending a college, university, or certain vocational schools on at
least a half-time basis.
EXPLANATION OF PROVISION
In general
Individual taxpayers are allowed a deduction of up to $10,000 per
student per year for qualified higher education expenses paid by the
taxpayer during the taxable year for education furnished to the
taxpayer, the taxpayer's spouse, or a dependent. The deduction is
allowed regardless of whether the taxpayer otherwise itemizes deductions
or claims the standard deduction.\11\
A deduction is not allowed under the bill with respect to an otherwise
eligible student if the HOPE credit (as described previously) is claimed
with respect to that student for the same taxable year.\12\
\11\The deduction will be claimed after a taxpayer computes adjusted
gross income (AGI). The deduction is not a preference item for
alternative minimum tax (AMT) purposes.
\12\If a HOPE credit was claimed with respect to a student for an
earlier taxable year (i.e., the student's first or second year of
post-secondary education), the deduction provided for by the bill may be
claimed with respect to that student for a subsequent taxable year.
The deduction is allowed only to the extent that the taxpayer is
required to include in gross income for the taxable year amounts
distributed from a ``qualified tuition program'' or ``education
investment account.'' In other words, amounts distributed from a
qualified tuition program or education investment account that are
includible in the taxpayer's gross income (i.e., earnings) and that are
used to pay for qualified higher education expenses during the taxable
year will be deductible under the bill (subject to a $10,000 annual
limit per student). Amounts distributed from qualified tuition programs
or education investment accounts generally will be includible in the
gross income of the distributee in the same manner as provided under
present-law section 72 (to the extent not excluded under any other
section, such as section 117).
Under the bill, the deduction is limited to $10,000 per student for
each taxable year. Aggregate deductions under the bill with respect to
any one student may not exceed $40,000 for all taxable years. A
deduction is not permitted with respect to a student after he or she
completes the equivalent of the first four years of post-secondary
education at an eligible educational institution.
Dependent students
If a parent (or other taxpayer) claims a student as a dependent for a
taxable year, then only the parent (or other taxpayer)--and not the
student--may claim the deduction for qualified higher education expenses
for that taxable year. In such a case where the parent claims the
proposed deduction for qualified higher education expenses, amounts
includible in gross income by reason of a distribution from a qualified
tuition program or education investment account will be includible in
the parent's (or other taxpayer's) gross income for that taxable
year.\13\
If a parent (or other taxpayer) claims a student as a dependent for a
taxable year, then all qualified higher education expenses paid that
year by both the parent (or other taxpayer) and the student are deemed
to be paid by the parent (or other taxpayer). If the student is not
claimed as a dependent by another taxpayer, then only the student him-
or herself may claim the deduction provided for by the bill (or, as an
alternative, the HOPE credit described above) on the student's own tax
return for the taxable year.\14\
\13\Such an income inclusion is required on the parent's return only if
the parent both claims the student as a dependent and elects the
deduction provided for by the bill. In contrast, if the parent claims
the student as a dependent but elects the HOPE credit, then, if there is
any distribution from a qualified tuition program or education
investment account during that year, the earnings portion of such
distributions will be includible in the student's (or other
distributee's) gross income, as provided for by present-law section
529(c)(3).
\14\For example, assume an education investment account (or qualified
tuition program account) has a balance of $20,000, of which $12,000
represents contributions of principal and $8,000 represents accumulated
earnings. If the student has expenses of $10,000 consisting of $7,000
tuition and related expenses and $3,000 in room and board, a
distribution of $10,000 from such account to pay these expenses will,
under present-law section 72, be deemed to consist of the pro-rata share
of principal and accumulated earnings in the account--in this case,
$6,000 in principal and $4,000 in accumulated earnings. If the parent
claims the student as a dependent and elects the proposed deduction for
qualified higher education expenses, the parent will include the $4,000
of accumulated earnings in the parent's gross income and then is allowed
to claim an offsetting deduction for the same $4,000, thus resulting in
no tax liability for the $4,000 in earnings. Under no circumstances will
the principal portion of any distribution from the account be includible
in gross income, nor will a deduction be allowed under the bill for
education expenses paid with such principal. Alternatively, the parent
may elect to claim the HOPE credit (assuming that the AGI phaseout does
not apply and the student is claimed as a dependent and has not yet
completed the first two years of post-secondary education), and the
$4,000 in accumulated earnings will be includible in the distributee's
(i.e., the student's) gross income and an offsetting deduction will not
be available. Additionally, the qualified expenses for purposes of the
HOPE credit will not include room and board expenses, so only $7,000 in
expenses will qualify for the HOPE credit. The 50-percent HOPE credit
rate will then be applied to this amount, which indicates a credit
amount of $3,500, but the credit that could be claimed will be limited
to the statutory maximum of $1,500 per student. As a final alternative,
if the parent does not claim the student as a dependent, then the
student may elect to claim either the HOPE credit or the deduction as
described above.
Qualified higher education expenses
Under the bill, the term ``qualified higher education expenses''
means tuition, fees, books, supplies, and equipment required for the
enrollment or attendance of a student at an eligible education
institution, as well as room and board expenses (meaning the minimum
room and board allowance applicable to the student as determined by the
institution in calculating costs of attendance for Federal financial aid
programs under sec. 472 of the Higher Education Act of 1965). Qualified
higher education expenses do not include expenses for any graduate level
course of a kind normally taken by an individual pursuing a program
leading to a law, business, medical, or other advanced academic or
professional degree.
Qualified higher education expenses generally include only
out-of-pocket expenses. Qualified higher education expenses do not
include expenses covered by educational assistance that is not required
to be included in the gross income of either the student or the taxpayer
claiming the credit. Thus, total qualified higher education expenses are
reduced by any scholarship or fellowship grants excludable from gross
income under present-law section 117 and any other tax-free educational
benefits received by the student during the taxable year. In addition,
no deduction is allowed under the bill for expenses paid with amounts
that are excludible under section 135. No reduction of qualified tuition
expenses is required for a gift, bequest, devise, or inheritance within
the meaning of section 102(a). If a student's education expenses for a
taxable year are deducted under section 162 or any other section of the
Code, then no deduction is available for such expenses under the bill.
Eligible students
To be eligible for the deduction provided for by the bill, a student
must be at least a half-time student in a degree or certificate program
at an eligible educational institution. For this purpose, a student is
at least a half-time student if, during at least one academic period
which begins during the taxable year, he or she is carrying at least
one-half the normal full-time work load for the course of study the
student is pursuing. A student will no longer be an eligible student
once he or she has completed the equivalent of the first four years of
post-secondary education at an eligible educational institution. An
eligible student may not have been convicted of a Federal or State
felony consisting of the possession or distribution of a controlled
substance.
Eligible educational institution
Eligible educational institutions are defined by reference to section
481 of the Higher Education Act of 1965. Such institutions generally are
accredited post-secondary educational institutions offering credit
toward a bachelor's degree, an associate's degree, or another recognized
post-secondary credential. Certain proprietary institutions and
post-secondary vocational institutions also are eligible educational
institutions. The institution must be eligible to participate in
Department of Education student aid programs.
Qualified tuition programs and education investments accounts
Under the bill, a ``qualified tuition program'' means any qualified
State tuition program, generally as defined under present-law section
529, as well as any program established and maintained by one or more
eligible educational institutions (which may be private institutions
that are not State-owned) that satisfy the requirements under section
529 (other than present-law, State ownership rule). An ``education
investment account'' means a trust which is created or organized in the
United States exclusively for the purpose of paying the qualified higher
education expenses of the account holder and which satisfies certain
other requirements.
Contributions to qualified tuition programs or education investment
accounts may be made only in cash.\15\
Such contributions may not be made after the designated beneficiary or
account holder reaches age 18. Any balance remaining in a qualified
tuition program or education investment account must be distributed
within 30 days after the earlier of the date that the beneficiary or
account holder becomes 30 years old (or dies) or the date that the
beneficiary or account holder completes the equivalent of the first four
years of post-secondary education at one or more eligible institutions.
Transfers or rollovers of credits or account balances from one account
benefiting one beneficiary to another account benefiting another
beneficiary will not be considered a distribution from a qualified
tuition program or education investment account (nor will a change in
the designated beneficiary or account holder) if the new beneficiary is
a member of the family of the old beneficiary.\16\
In the case of an education investment account or qualified tuition
program maintained by one or more private educational institutions,
contributions to an account established on behalf of a particular
beneficiary (or to a program on behalf of a named beneficiary) may not
exceed $5,000 per year, with an aggregate limit of $50,000 for
contributions on behalf of that beneficiary for all years. The $50,000
aggregate contribution limit per beneficiary is applied by taking into
account all amounts contributed to all education investment accounts for
the beneficiary for the current taxable year and all prior taxable
years, as well as all amounts contributed to all qualified tuition
programs on behalf of such beneficiary for the current taxable year and
all prior taxable years.\17\
\15\The bill allows taxpayers to redeem U.S. Savings Bonds and be
eligible for the exclusion under section 135 (as if the proceeds were
used to pay qualified higher education expenses) if the proceeds from
the redemption are contributed to a qualified tuition program or
education investment account on behalf of the taxpayer, the taxpayer's
spouse, or a dependent, In such a case, the beneficiary's or account
holder's basis in the bond proceeds contributed on his or her behalf to
the qualified tuition program or education investment will be the
contributor's basis in the bonds (i.e., the original purchase price paid
by the contributor for such bonds).
\16\For this purpose, a ``member of the family'' means persons described
in paragraphs (1) through (8) of section 152(a), and any spouse of such
persons.
\17\To the extent contributions exceed the $50,000 aggregate limit, an
excise tax penalty may be imposed on the contributor under present-law
section 4973, unless the excess contributions (and any earnings thereon)
are returned to the contributor before the due date for the return for
the taxable year in which the excess contribution is made.
Qualified tuition programs and education investment accounts (as
separate legal entities) will be exempt from Federal income tax, other
than taxes imposed under the present-law unrelated business income tax
(UBIT) rules.\18\
\18\An interest in a qualified tuition program is not treated as debt
for purposes of the debt-financed property UBIT rules of section 514.
Under the bill, an additional tax of 10 percent will be imposed on
distributions from qualified tuition programs or education investment
account to the extent the distribution exceeds qualified higher
education expenses paid by the taxpayer (and is not made on account of
the death, disability, or scholarship received by the designated
beneficiary or account holder).
Estate and gift tax treatment
For Federal estate and gift tax purposes, any contribution to a
qualified tuition program or education investment account will be
treated as a completed gift of a present interest from the contributor
to the beneficiary at the time of the contribution. Thus, annual
contributions--which cannot exceed $5,000 per year in the case of an
education investment account or qualified tuition program maintained by
one or more private education institutions--will be eligible for the
present-law gift tax exclusion provided by Code section 2503(b) and also
will be excludable for purposes of the generation-skipping transfer tax
(provided that the contribution, when combined with any other
contributions made by the donor to that same beneficiary, does not
exceed the annual $10,000 gift-tax exclusion limit). Similar gift tax
and generation-skipping tax treatment will apply to contributions of up
to $10,000 per donor per beneficiary made to a State-sponsored qualified
tuition program. Contributions to a qualified tuition program (either a
State-sponsored program or one maintained by a private education
institution) or to an education investment account will not, however, be
eligible for the educational expense exclusion provided by Code section
2503(e). In no event will a distribution from a qualified tuition
program or education investment account be treated as a taxable gift.
Transfers or rollovers of credits or account balances from an account
benefiting one beneficiary to an account benefiting another beneficiary
(or a change in the designated beneficiary) will not be treated as a
taxable gift to the extent that the new beneficiary is: (1) a member of
the family of the old beneficiary (as defined above), and (2) assigned
to the same generation as the old beneficiary (within the meaning of
Code section 2651). In all other cases, a transfer from one beneficiary
to another beneficiary (or a change in the designated beneficiary) will
be treated as a taxable gift from the old beneficiary to the new
beneficiary to the extent it exceeds the $10,000 present-law gift tax
exclusion. Thus, a transfer of an account from a brother to his sister
will not be treated as a taxable gift, whereas a transfer from a father
to his son will be treated as a taxable gift (to the extent it exceeds
the $10,000 present-law gift tax exclusion).
For estate tax purposes, the value of any interest in a qualified
tuition program or education investment account will be includible in
the estate of the designated beneficiary. In no event will such
interests be includible in the estate of the contributor.
EFFECTIVE DATE
The deduction for qualified higher education expenses, and the
expansion of the definition of qualified higher education expenses under
sec. 529 to cover room and board expenses, are effective for expenses
paid after December 31, 1997, for education furnished in academic
periods beginning after such date. The provisions governing the
tax-exempt status of qualified tuition plans and education investment
accounts generally are effective after December 31, 1997. The gift tax
provisions are effective for contributions (or transfers) made after the
date of enactment, and the estate tax provisions are effective for
decedents dying after June 8, 1997.
3. PHASE OUT QUALIFIED TUITION REDUCTION EXCLUSION (SEC. 202(C) OF THE
BILL AND SEC. 117(D) OF THE CODE)
PRESENT LAW
Under present law, a ``qualified tuition reduction'' is excluded from
gross income (sec. 117(d)). A ``qualified tuition reduction'' means any
reduction in tuition provided to an employee of an educational
organization for the education of the employee,\19\
the employee's spouse, and dependent children at that organization or
another such organization. For this purpose, qualifying educational
organizations are those that normally maintain a regular faculty and
curriculum and normally have a regularly enrolled body of pupils or
students in attendance at the place where the educational activities are
regularly carried out. In general, the qualified tuition reduction is
limited to education below the graduate level; however, this limitation
does not apply to graduate students engaged in teaching or research
activities. The exclusion does not apply to any amount that represents
payment for teaching, research, or other services rendered by the
student in exchange for receiving the tuition reduction.
\19\Eligible beneficiaries also include retired and disabled employees,
surviving spouses of retired or disabled employees,and children of
deceased employees if the children are under the age of 25.
REASONS FOR CHANGE
The Committee believes that because employees of educational
organizations, like other taxpayers, will enjoy the special education
tax benefits relating to education expenses, as well as the expanded
education savings opportunities contained in the bill, the exclusion
under 117(d) is no longer necessary.
EXPLANATION OF PROVISION
The bill phases out the special rule contained in section 117(d) that
excludes qualified tuition reductions from gross income. For 1998, 80
percent of a qualified tuition reduction is excludable from gross
income. For 1999, the excludable percentage is 60 percent; for 2000, the
excludable percentage is 40 percent; and for 2001, the excludable
percentage is 20 percent. No exclusion for a qualified tuition reduction
is permitted after 2001.
Educational benefits provided that are not excludable under the bill
may be eligible for the proposed HOPE credit, or may be eligible for the
deduction for qualified higher education expenses (described above) to
the extent that earnings are distributed from an education investment
account on behalf of the student during the year that the education
benefits are provided.
EFFECTIVE DATE
The provision is effective for qualified tuition reductions with
respect to courses of instruction beginning after December 31, 1997
(subject to the phaseout described above).
4. PENALTY-FREE WITHDRAWALS FROM IRAS FOR HIGHER EDUCATION EXPENSES
(SEC. 203 OF THE BILL AND SEC. 72(T) OF THE CODE)
PRESENT LAW
An individual may make deductible contributions to an individual
retirement arrangement (``IRA'') for each taxable year up to the lesser
of $2,000 or the amount of the individual's compensation for the year if
the individual is not an active participant in an employer-sponsored
qualified retirement plan (and, if married, the individual's spouse also
is not an active participant). In the case of a married couple,
deductible IRA contributions of up to $2,000 can be made for each spouse
(including, for example, a homemaker who does not work outside the home)
if the combined compensation of both spouses is at least equal to the
contributed amount.
If the individual (or the individual's spouse) is an active
participant in an employer-sponsored retirement plan, the $2,000
deduction limit is phased out over certain adjusted gross income
(``AGI'') levels. The limit is phased out between $40,000 and $50,000 of
AGI for married taxpayers, and between $25,000 and $35,000 of AGI for
single taxpayers. An individual may make nondeductible IRA contributions
to the extent the individual is not permitted to make deductible IRA
contributions. Contributions cannot be made to an IRA after age 70\1/2\.
Amounts held in an IRA are includible in income when withdrawn
(except to the extent the withdrawal is a return of nondeductible
contributions). Amounts withdrawn prior to attainment of age 59\1/2\ are
subject to an additional 10-percent early withdrawal tax, unless the
withdrawal is due to death or disability, is made in the form of certain
periodic payments, is used to pay medical expenses in excess of 7.5
percent of AGI, or is used to purchase health insurance of an unemployed
individual.
REASONS FOR CHANGE
The Committee believes that it is appropriate and important to allow
individuals to withdraw amounts from their IRAs for purposes of paying
higher education expenses without incurring an additional 10-percent
early withdrawal tax.
EXPLANATION OF PROVISION
The bill provides that the 10-percent early withdrawal tax does not
apply to distributions from IRAs (including American Dream IRAs added by
the bill) if the taxpayer uses the amounts to pay qualified higher
education expenses (including those related to graduate level courses)
of the taxpayer, the taxpayer's spouse, or any child, or grandchild of
the individual or the individual's spouse.
The penalty-free withdrawal is available for ``qualified higher
education expenses,'' meaning tuition, fees, books, supplies, equipment
required for enrollment or attendance, and room and board at a
post-secondary educational institution (defined by reference to sec 481
of the Higher Education Act of 1965). Qualified higher education
expenses are reduced by any amount excludable from gross income under
section 135 relating to the redemption of a qualified U.S. savings bond
and certain scholarships and veterans benefits.
EFFECTIVE DATE
The provision is effective for distributions after December 31, 1997,
with respect to expenses paid after such date for education furnished in
academic periods beginning after such date.
5. TAX CREDIT FOR EXPENSES FOR EDUCATION WHICH SUPPLEMENTS ELEMENTARY
AND SECONDARY EDUCATION (SEC. 204 OF THE BILL AND NEW SEC. 25B OF THE CODE)
PRESENT LAW
In general, taxpayers may not deduct education and training expenses
that relate to basic elementary or secondary education. (Treas. reg.
sec. 1.162 5). Students who are employed may be eligible for the special
exclusion for employer-provided educational assistance under section
127. In addition, qualified scholarships received by such students are
excluded from gross income under section 117, and such students may be
eligible for the special rules for student loan forgiveness under
section 108(f). No tax credit is available under present law for
expenses incurred with respect to elementary or secondary education.
REASONS FOR CHANGE
The Committee believes that, in addition to making higher education
accessible and affordable through various tax incentives, it is
important to ensure that students have the necessary academic background
to pursue successfully such higher education objectives. To this end,
the Committee has provided assistance to students who may require
supplementary education with respect to basic elementary and secondary
school courses of study to assist such students in obtaining a solid
educational foundation.
EXPLANATION OF PROVISION
The bill provides a nonrefundable tax credit equal to the lesser of
(1) $150 or (2) 50 percent of qualified educational assistance expenses
paid with respect to an eligible student.
Eligible students are children under age 18 enrolled full-time in
elementary or secondary school. Qualified educational assistance
expenses are costs of supplementary education (e.g., tutoring). Such
supplementary education must be provided with respect to a student's
current classes by a supplementary education service provider that is
accredited by an accreditation organization recognized by the Secretary
of Education. Qualified expenses do not include the cost of courses that
prepare students for college entrance exams.
The credit is phased out for taxpayers with adjusted gross income
between $80,000 $92,000 for joint filers and between $50,000 $62,000 for
individual filers.
EFFECTIVE DATE
The credit is available for taxable years beginning after December
31, 1997.
B. Other Education-Related Tax Provisions
1. EXTENSION OF EXCLUSION FOR EMPLOYER-PROVIDED EDUCATIONAL ASSISTANCE
(SEC. 221 OF THE BILL AND SEC. 127 OF THE CODE)
PRESENT LAW
Under present law, an employee's gross income and wages do not
include amounts paid or incurred by the employer for educational
assistance provided to the employee if such amounts are paid or incurred
pursuant to an educational assistance program that meets certain
requirements. This exclusion is limited to $5,250 of educational
assistance with respect to an individual during a calendar year. The
exclusion does not apply to graduate level courses beginning after June
30, 1996. The exclusion expires with respect to courses beginning after
June 30, 1997. In the absence of the exclusion, educational assistance
is excludable from income only if it is related to the employee's
current job.
DESCRIPTION OF PROPOSAL
The proposal would extend the exclusion for employer-provided
educational assistance to courses of instruction beginning before
December 31, 1997. As under present law, the exclusion will not apply to
graduate-level courses.
EFFECTIVE DATE
The provision would be effective with respect to taxable years
beginning after December 31, 1996.
2. MODIFICATION OF $150 MILLION LIMIT ON QUALIFIED 501(C)(3) BONDS
OTHER THAN HOSPITAL BONDS (SEC. 222 OF THE BILL AND SEC. 145 OF THE CODE)
PRESENT LAW
Interest on State and local government bonds generally is excluded
from income if the bonds are issued to finance activities carried out
and paid for with revenues of these governments. Interest on bonds
issued by these governments to finance activities of other persons,
e.g., private activity bonds, is taxable unless a specific exception is
included in the Code. One such exception is for private activity bonds
issued to finance activities of private, charitable organizations
described in Code section 501(c)(3) (``section 501(c)(3)
organizations'') when the activities do not constitute an unrelated
trade or business.
Present law treats section 501(c)(3) organizations as private
persons; thus, bonds for their use may only be issued as private
activity ``qualified 501(1)(3) bonds,'' subject to the restrictions of
Code section 145. The most significant of these restrictions limits the
amount of outstanding bonds from which a section 501(c)(3) organization
may benefit to $150 million. In applying this ``$150 million limit,''
all section 501(c)(3) organizations under common management or control
are treated as a single organization. The limit does not apply to bonds
for hospital facilities, defined to include only acute care, primarily
inpatient, organizations.
REASONS FOR CHANGE
The committee believes that the present law $150 million limitation
is inappropriately low.
DESCRIPTION OF PROPOSAL
The $150 million limit is increased annually in $10 million
increments until it is $200 million. Specifically, the limitation is
$160 million in 1998, $170 million in 1999, $180 million in 2000, $190
million in 2001, and $200 million in 2002 and thereafter.
EFFECTIVE DATE
The provision is effective on January 1, 1998.
3. ENHANCED DEDUCTION FOR CORPORATE CONTRIBUTIONS OF COMPUTER
TECHNOLOGY AND EQUIPMENT (SEC. 223 OF THE BILL AND NEW SECTION 170(E)(6) OF THE
CODE)
PRESENT LAW
In computing taxable income, a taxpayer who itemizes deductions
generally is allowed to deduct the fair market value of property
contributed to a charitable organization.\20\
However, in the case of a charitable contribution of inventory or other
ordinary-income property, short-term capital gain property, or certain
gifts to private foundations, the amount of the deduction is limited to
the taxpayer's basis in the property. In the case of a charitable
contribution of tangible personal property, a taxpayer's deduction is
limited to the adjusted basis in such property if the use by the
recipient charitable organization is unrelated to the organization's
tax-exempt purpose (sec. 170(e)(1)(B)(i)).
\20\The amount of the deduction allowable for a taxable year with
respect to a charitable contribution may be reduced depending on the
type of property contributed, the type of charitable organization to
which the property is contributed, and the income of the taxpayer (secs.
170(b) and 170(e)). Corporations are entitled to claim a deduction for
charitable contributions, generally limited to 10 percent of their
taxable income (computed without regard to the contributions) for the
taxable year.
Special rules in the Code provide augmented deductions for certain
corporate\21\
contributions of inventory property for the care of the ill, the needy,
or infants (sec. 170(e)(3)) and certain corporate contributions of
scientific equipment constructed by the taxpayer, provided the original
use of such donated equipment is by the donee for research or research
training in the United States in physical or biological sciences (sec.
170(e)(4)).\22\
Under these special rules, the amount of the augmented deduction
available to a corporation making a qualified contribution is equal to
its basis in the donated property plus one-half of the amount of
ordinary income that would have been realized if the property had been
sold. However, the augmented deduction cannot exceed twice the basis of
the donated property.
\21\S corporations are not eligible donors for purposes of section
170(e)(3) or section 170(e)(4).
\22\Eligible donees under section 170(e)(4) are limited to
post-secondary educational institutions, scientific research
organizations, and certain other organizations that support scientific
research.
REASONS FOR CHANGE
The Committee believes that providing an incentive for businesses to
invest their computer equipment and software for the benefit of primary
and secondary school students will help to provide America's schools
with the technological resources necessary to prepare both teachers and
students for a technologically advanced present and future.
EXPLANATION OF PROVISION
The bill expands the list of qualified contributions that would
qualify for the augmented deduction currently available under Code
section 170(e)(3) and 170(e)(4). Under the bill, qualified contributions
mean gifts of computer technology and equipment (i.e., computer
software, computer or peripheral equipment, and fiber optic cable
related to computer use) to be used within the United States for
educational purposes in any of grades K 12.
Eligible donees are (1) any educational organization that normally
maintains a regular faculty and curriculum and has a regularly enrolled
body of pupils in attendance at the place where its educational
activities are regularly carried on; and (2) Code section 501(c)(3)
entities that are organized primarily for purposes of supporting
elementary and secondary education. A private foundation also is an
eligible donee, provided that, within 30 days after receipt of the
contribution, the private foundation contributes the property to an
eligible donee described above.
Qualified contributions are limited to gifts made no later than two
years after the date the taxpayer acquired or substantially completed
the construction of the donated property. Such donated property could be
computer technology or equipment that is inventory or depreciable trade
or business property in the hands of the donor. The bill permits payment
by the donee organization of shipping, transfer, and installation
costs.\23\
The special treatment applies only to donations made by C corporations;
as under present law section 170(e)(4), S corporations, personal holding
companies, and service organizations are not eligible donors.
\23\In the case of contributions made through private foundations, the
bill permits the payment by the private foundation of shipping,
transfer, and installation costs.
EFFECTIVE DATE
The provision is effective for contributions made in taxable years
beginning after 1997.
4. TREATMENT OF CANCELLATION OF CERTAIN STUDENT LOANS (SEC. 224 OF THE
BILL AND SECTION 108(F) OF THE CODE)
PRESENT LAW
In the case of an individual, gross income subject to Federal income
tax does not include any amount from the forgiveness (in whole or in
part) of certain student loans, provided that the forgiveness is
contingent on the student's working for a certain period of time in
certain professions for any of a broad class of employers (sec. 108(f)).
Student loans eligible for this special rule must be made to an
individual to assist the individual in attending an educational
institution that normally maintains a regular faculty and curriculum and
normally has a regularly enrolled body of students in attendance at the
place where its education activities are regularly carried on. Loan
proceeds may be used not only for tuition and required fees, but also to
cover room and board expenses (in contrast to tax free scholarships
under section 117, which are limited to tuition and required fees). In
addition, the loan must be made by (1) the United States (or an
instrumentality or agency thereof), (2) a State (or any political
subdivision thereof), (3) certain tax-exempt public benefit corporations
that control a State, county, or municipal hospital and whose employees
have been deemed to be public employees under State law, or (4) an
educational organization that originally received the funds from which
the loan was made from the United States, a State, or a tax-exempt
public benefit corporation. Thus, loans made with private,
nongovernmental funds are not qualifying student loans for purposes of
the section 108(f) exclusion.
REASONS FOR CHANGE
The Committee believes that it is appropriate to expand present-law
section 108(f), so that certain loan cancellation programs of tax-exempt
charitable organizations (e.g., private educational institutions)
receive Federal income tax treatment comparable to that provided for
similar government-sponsored programs. This provision will promote the
establishment of programs that encourage students to use their education
and training in valuable community service. In addition, the Committee
believes it is appropriate to expand section 108(f) to cover forgiveness
of certain Federal direct student loans.
EXPLANATION OF PROVISION
The bill expands section 108(f) so that an individual's gross income
does not include forgiveness of loans made by tax-exempt charitable
organizations (e.g., educational organizations or private foundations)
if the proceeds of such loans are used to pay costs of attendance at an
educational institution or to refinance outstanding student loans and
the student is not employed by the lender organization. As under present
law, the section 108(f) exclusion applies only if the forgiveness is
contingent on the student's working for a certain period of time in
certain professions for any of a broad class of employers. In addition,
in the case of loans made by tax-exempt charitable organizations, the
student's work must fulfill a public service requirement. The student
must work in an occupation or area with unmet needs and such work must
be performed for or under the direction of a tax-exempt charitable
organization or a governmental entity.
The exclusion also is expanded to cover forgiveness of direct student
loans made through the William D. Ford Federal Direct Loan Program where
loan repayment and forgiveness are contingent on the borrower's income
level and any unpaid amounts are forgiven in full by the Secretary of
Education at the end of a 25-year period. Thus, Federal Direct Loan
borrowers who have elected the income-contingent repayment option and
who have not repaid their loans in full at the end of a 25-year period
would not be required to include the outstanding loan balance in income
as a result of the forgiveness of the loan.
EFFECTIVE DATE
The provision applies to discharges of indebtedness after the date of
enactment.
TITLE III. SAVINGS AND INVESTMENT TAX INCENTIVES
a. american dream iras (sec. 301 of the bill and new sec. 408A of the
code)
PRESENT LAW
Under present law, an individual may make deductible contributions to
an individual retirement arrangement (``IRA'') up to the lesser of
$2,000 or the individual's compensation if the individual is not an
active participant in an employer-sponsored retirement plan (and, if
married, the individual's spouse also is not an active participant in
such a plan). In the case of a married couple, deductible IRA
contributions of up to $2,000 can be made for each spouse (including,
for example, a home maker who does not work outside the home) if the
combined compensation of both spouses is at least equal to the
contributed amount.
If the individual (or the individual's spouse) is an active
participant in an employer-sponsored retirement plan, the $2,000
deduction limit is phased out over certain adjusted gross income
(``AGI'') levels. The limit is phased out between $40,000 and $50,000 of
AGI for married taxpayers, and between $25,000 and $35,000 of AGI for
single taxpayers. An individual may make nondeductible IRA contributions
to the extent the individual is not permitted to make deductible IRA
contributions. Contributions cannot be made to an IRA after age 70\1/2\.
Amounts held in an IRA are includible in income when withdrawn
(except to the extent the withdrawal is a return of nondeductible
contributions). Amounts withdrawn prior to attainment of age 59\1/2\ are
subject to an additional 10-percent early withdrawal tax, unless the
withdrawal is due to death or disability, is made in the form of certain
periodic payments, is used to pay medical expenses in excess of 7.5
percent of AGI, or is used to purchase health insurance of an unemployed
individual.
In general, distributions from an IRA are required to begin at age
70\1/2\. An excise tax is imposed if the minimum required distributions
are not made. Distributions to the beneficiary of an IRA are generally
required to begin within 5 years of the death of the IRA owner, unless
the beneficiary is the surviving spouse.
A 15-percent excise tax is imposed on excess distributions with
respect to an individual during any calendar year from qualified
retirement plans, tax-sheltered annuities, and IRAs. In general, excess
distributions are defined as the aggregate amount of retirement
distributions (i.e., payments from applicable retirement plans) made
with respect to an individual during any calendar year to the extent
such amounts exceed $160,000 (for 1997) or 5 times that amount in the
case of a lump-sum distribution. The dollar limit is indexed for
inflation. A similar 15-percent additional estate tax applies to excess
retirement accumulations upon the death of the individual. The
15-percent tax on excess distributions (but not the 15-percent
additional estate tax) does not apply to distributions in 1997, 1998, or
1999.
REASONS FOR CHANGE
The Committee is concerned about the national savings rate, and
believes that individuals should be encouraged to save. The Committee
believes that the ability to make deductible contributions to an IRA is
a significant savings incentive. However, this incentive is not
available to all taxpayers under present law. Further, the present-law
income thresholds for IRA deductions are not indexed for inflation so
that fewer Americans will be eligible to make a deductible IRA
contribution each year, and the amount of the maximum contribution is
declining in real terms over time. The Committee believes it is
appropriate to encourage individual saving and that tax-favored savings
vehicles should be available to more individuals.
In addition, the Committee believes that some individuals would be
more likely to save if funds set aside in a tax-favored account could be
withdrawn without tax after a reasonable holding period for retirement
or certain special purposes. Some taxpayers may find such a vehicle more
suitable for their savings needs.
The Committee believes that providing an incentive to save for
certain special purposes is appropriate. The Committee believes that
many Americans may have difficulty saving enough to purchase a home.
Home ownership is a fundamental part of the American dream.
EXPLANATION OF PROVISION
In general
The bill replaces present-law nondeductible IRAs with new American
Dream IRAs (``AD IRAs'') to which all individuals may make nondeductible
contributions of up to $2,000 annually. Contributions to an AD IRA are
in addition to any contributions that can be made to a deductible IRA
under the present-law rules. No income limitations apply to AD IRAs. An
AD IRA is an IRA which is designated at the time of establishment as an
AD IRA in the manner prescribed by the Secretary. Qualified
distributions from an AD IRA are not includible in income.
Contributions to AD IRAs
The maximum annual contribution that may be made to an AD IRA is the
lesser of $2,000 or the individual's compensation for the year. As under
the present-law rules relating to deductible IRAs, a contribution of up
to $2,000 for each spouse may be made to an AD IRA provided the combined
compensation of the spouses is at least equal to the contributed amount.
The $2,000 contribution limit is adjusted annually for inflation
beginning after 1998 (in $50 increments).
Contributions to an AD IRA may be made even after the individual for
whom the account is maintained has attained age 70\1/2\.
Taxation of distributions
Qualified distributions from an AD IRA are not includible in gross
income, nor subject to the additional 10-percent tax on early
withdrawals. A qualified distribution is a distribution that (1) is made
after the 5-taxable year period beginning with the first taxable year in
which the individual made a contribution to an AD IRA\24\
, and (2) which is (a) made on or after the date on which the individual
attains age 59\1/2\, (b) made to a beneficiary (or to the individual's
estate) on or after the death of the individual, (c) attributable to the
individual's being disabled, or (d) for first-time homebuyer expenses.
\24\As is the case with IRAs generally, contributions to an AD IRA may
made for a year by the due date for the individual's tax return for the
year (determined without regard to extensions). In the case of a
contribution to an AD IRA made after the end of the taxable year, the
5-year holding period begins with the taxable year to which the
contribution relates, rather than the year in which the contribution is
actually made.
Distributions from an AD IRA that are not qualified distributions are
includible in income to the extent attributable to earnings, and subject
to the 10-percent early withdrawal tax (unless an exception applies).
The same exceptions to the early withdrawal tax that apply to IRAs apply
to AD IRAs. Thus, the following distributions from an AD IRA are not
subject to the 10-percent early withdrawal tax: (1) distributions after
age 59\1/2\; (2) distributions after death or disability of the AD IRA
owner; (3) certain periodic distributions; (4) distributions for medical
expenses in excess of 7.5 percent of adjusted gross income; (5)
distributions for medical insurance of unemployed individuals; and (6)
distributions for higher education expenses.\25\
In addition, the 10-percent early withdrawal tax does not apply to
amounts withdrawn from an AD IRA used to pay first-time homebuyer
expenses.\26\
\25\This exception to the early withdrawal tax is added by the bill.
\26\This exception to the early withdrawal tax does not apply to IRAs
other than AD IRAs.
Under the bill, qualified first-time homebuyer distributions are
withdrawals of up to $10,000 during the individual's lifetime that are
used within 60 days to pay costs (including reasonable settlement,
financing, or other closing costs) of acquiring, constructing, or
reconstructing the principal residence of a first-time homebuyer who is
the individual, the individual's spouse, or a child, grandchild, or
ancestor of the individual or individual's spouse. A first-time
homebuyer is an individual who has not had an ownership interest in a
principal residence during the 2-year period ending on the date of
acquisition of the principal residence to which the withdrawal relates.
The bill requires that the spouse of the individual also meet this
requirement as of the date the contract is entered into or construction
commences. The date of acquisition is the date the individual enters
into a binding contract to purchase a principal residence or begins
construction or reconstruction of such a residence. Principal residence
is defined as under the provisions relating to the rollover of gain on
the sale of a principal residence.
Under the bill, any amount withdrawn for the purchase of a principal
residence is required to be used within 60 days of the date of
withdrawal. The 10-percent additional income tax on early withdrawals is
imposed with respect to any amount not so used. If the 60-day rule
cannot be satisfied due to a delay in the acquisition of the residence,
the taxpayer may recontribute all or part of the amount withdrawn to the
AD IRA prior to the end of the 60-day period without adverse tax
consequences.
An ordering will applies for purposes of determining what portion of
a distribution that is not a qualified distribution is includible in
income. Under the ordering rule, distributions from an AD IRA are
treated as made from contributions first, and all an individual's AD
IRAs are treated as a single AD IRA. Thus, no portion of a distribution
from an AD IRA is treated as attributable to earnings (and therefore
includible in gross income) until the total of all distributions from
all the individual's AD IRAs exceeds the amount of contributions.
The pre-death minimum distribution rules that apply to IRAs do not
apply to AD IRAs, and amounts in AD IRAs are not taken into account for
purposes of the excise tax on excess distributions or the additional
estate tax on excess accumulations.
Distributions from an AD IRA may be rolled over tax free to another
AD IRA.
Conversions of IRAs to AD IRAs
All or any part of amounts in a present-law deductible or
nondeductible IRA may be converted into an AD IRA after December 31,
1997, and before January 1, 1999. The amount that would have been
includible in gross income if the individual had withdrawn the converted
amounts are included in gross income ratably over the 4-taxable year
period beginning with the taxable year in which the conversion is made.
The early withdrawal tax does not apply to such conversions.\27\
\27\In the case of conversions from an IRA to an AD IRA, the 5-taxable
year holding period begins with the taxable year in which the conversion
was made.
A conversion of an IRA into an AD IRA may be made in a variety of
different ways and with or without taking a distribution. For example, a
conversion could be made by taking a distribution from an IRA and
rolling it over within 60 days to an AD IRA. Or, an individual may make
a conversion simply by notifying the IRA trustee. An individual also may
make the conversion in connection with a change in IRA trustees through
a rollover or a trustee-to-trustee transfer. If a part of an IRA balance
is converted into an AD IRA, the AD IRA amounts have to be held
separately.
EFFECTIVE DATE
The provision is effective for taxable years beginning after December
31, 1997.
b. capital gains provisions
1. MAXIMUM RATE OF TAX ON NET CAPITAL GAIN OF INDIVIDUALS (SEC. 311 OF
THE BILL AND SEC. 1(H) OF THE CODE)
PRESENT LAW
In general, gain or loss reflected in the value of an asset is not
recognized for income tax purposes until a taxpayer disposes of the
asset. On the sale or exchange of capital assets, the net capital gain
is taxed at the same rate as ordinary income, except that individuals
are subject to a maximum marginal rate of 28 percent of the net capital
gain. Net capital gain is the excess of the net long-term capital gain
for the taxable year over the net short-term capital loss for the year.
Gain or loss is treated as long-term if the asset is held for more than
one year.
A capital asset generally means any property except (1) inventory,
stock in trade, or property held primarily for sale to customers in the
ordinary course of the taxpayer's trade or business, (2) depreciable or
real property used in the taxpayer's trade or business, (3) specified
literary or artistic property, (4) business accounts or notes
receivable, or (5) certain U.S. publications. In addition, the net gain
from the disposition of certain property used in the taxpayer's trade or
business is treated as long-term capital gain. Gain from the disposition
of depreciable personal property is not treated as capital gain to the
extent of all previous depreciation allowances. Gain from the
disposition of depreciable real property is generally not treated as
capital gain to the extent of the depreciation allowances in excess of
the allowances that would have been available under the straight-line
method of depreciation.
REASONS FOR CHANGE
The Committee believes it is important that tax policy be conducive
to economic growth. Economic growth cannot occur without saving,
investment, and the willingness of individuals to take risks and exploit
new market opportunities. The greater the pool of savings, the greater
the monies available for business investment in equipment and research.
It is through such investment in equipment and new products and services
that the United States economy can increase output and productivity. It
is through increases in productivity that workers earn higher real
wages. Hence, greater saving is necessary for all Americans to benefit
through a higher standard of living.
The net personal saving rate in the United States has averaged less
than 5 percent of gross domestic product (GDP) for the past 15 years.
The Committee believes such saving is inadequate to finance the
investment that is needed to equip the country's businesses with the
equipment and research dollars necessary to create the higher
productivity that results in higher real wages for working Americans. A
reduction in the taxation of capital gains increases the rate of return
on household saving. Testimony by many economists before the Committee
generally concluded that increasing the after-tax return to saving
should increase the saving rate of American households.
American technological leadership has been enhanced by the
willingness of individuals to take the risk of pursuing new businesses
exploiting new technologies. Risk taking is stifled if the taxation of
any resulting gain is high and the ability to claim losses is limited.
The Committee believes it is important to encourage risk taking and
believes a reduction in the taxation of capital gains will have that
effect.
Reduction in the taxation of capital gains also should improve the
efficiency of the capital markets. The taxation of capital gains upon
realization encourages investors who have accrued past gains to keep
their monies ``locked in'' to such investments even when better
investment opportunities present themselves. All economists that
testified before the Committee agreed that reducing the rate of taxation
of capital gains would encourage investors to unlock many of these
gains. This unlocking will permit more monies to flow to new, highly
valued uses in the economy. When monies flow freely, the efficiency of
the capital market is improved.
The unlocking effect also has the short-term and long-term effect of
increasing revenues to the Federal Government. The current revenue
estimating methods employed by the Congress account for this long-term
behavioral response. Nevertheless, current Congressional estimates
project that revenue losses to the Federal Government will arise from
the reduction in the tax rate on capital gains. The Committee observes,
however, that the conservative approach embodied in such estimates does
not attempt to account for the potential for increased growth in GDP
that can result from increased saving and risk taking. Many
macroeconomists have concluded that reductions in the taxation of
capital gains may increase GDP and wage growth sufficiently that future
tax revenues from the taxation of wages and business profits will offset
the losses forecast from the sale of capital assets. The potential for
future growth and its benefits both for all United States citizens and
for future Federal revenues were important considerations for the
Committee.
The Committee rejects the narrow view that reductions in the taxation
of capital gains benefit primarily higher-income Americans. Taking a
longer view, the Committee sees a reduction in the taxation of capital
gains as providing potential benefits to all individuals. Most
importantly, the Committee stresses that economic growth benefits all
Americans. Increased investment leads to greater productivity and leads
to higher wages. Traditional attempts to measure the benefit or burden
of a tax change do not account for this critical outcome.
EXPLANATION OF PROVISION
Under the bill, the maximum rate of tax on the net capital gain of an
individual is reduced from 28 percent to 20 percent. In addition, any
net capital gain which otherwise would be taxed at a 15 percent rate is
taxed at a rate of 10 percent. These rates apply for purposes of both
the regular tax and the minimum tax.
The tax on the net capital gain attributable to any long-term capital
gain from the sale or exchange of collectibles will remain at a maximum
rate of 28 percent; any long-term capital gain from the sale or exchange
of section 1250 property (i.e., depreciable real estate) to the extent
the
gain would have been treated as ordinary income if the
property had been section 1245 property will be taxed at a maximum rate
of 26 percent; and the tax treatment of small business stock (as defined
in section 1202(c)) will remain unchanged. Gain from the disposition of
a collectible which is an indexed asset (described below) will not be
eligible for the 28-percent rate unless the taxpayer elects to forego
indexing.
EFFECTIVE DATE
The provision applies to taxable years ending after May 6, 1997.
For a taxpayer's year that includes May 7, 1997, the lower rates will
not apply to an amount equal the net capital gain determined by
including only gain or loss properly taken into account for the portion
of the taxable year before May 7, 1997. Any net capital gain not
eligible for the lower rates will be subject to the present-law maximum
rate of 28 percent. This generally has the effect of applying the lower
rates to capital assets sold or exchanged (or installment payments
received) on or after May 7, 1997, and subjecting the remaining portion
of the net capital gain to a maximum rate of 28 percent.
In the case of gain taken into account by a pass-through entity
(i.e., a RIC, a REIT, a partnership, an estate or trust, or a common
trust fund), the date taken into account by the entity is the
appropriate date for applying the rule in the preceding paragraph. Thus,
gain taken into account by a pass-through entity before May 7, 1997 is
not eligible for the lower rates.
The provision also changes the 110-percent-of-last-year-liability
estimated tax safe harbor to a 109-percent-of-last-year-liability safe
harbor for 1997.
2. INDEXING OF BASIS OF CERTAIN ASSETS FOR PURPOSES OF DETERMINING GAIN
(SEC. 312 OF THE BILL AND NEW SEC. 1022 OF THE CODE)
PRESENT LAW
Under present law, gain or loss from the disposition of any asset
generally is the sales price of the asset is reduced by the taxpayer's
adjusted basis in that asset. The taxpayer's adjusted basis generally is
the taxpayer's cost in the asset adjusted for depreciation, depletion,
and certain other amounts. No adjustment is allowed for inflation.
REASONS FOR CHANGE
Because a taxpayer's adjusted basis for tax purposes is determined by
historical cost, a taxpayer can have gains for tax purposes even though
the real value of the assets (i.e., adjusted for inflation) has not
increased. Even at modest inflation rates of three percent per year for
five years, an investor's adjusted basis will under-represent his real
purchasing power by 16 percent over five years. The taxation of these
inflationary gains discourages new saving and investors from selling old
investments even when better investment opportunities present
themselves. This retards economic growth and leads to an inefficient
allocation of capital by the capital markets. For this reason, the
Committee believes it is appropriate to provide for inflation
adjustments to a taxpayer's adjusted basis in certain assets (held for
more than three years) for purposes of determining gain on their
disposition.
EXPLANATION OF PROVISION
In general
The bill generally provides for an inflation adjustment to (i.e.,
indexing of) the adjusted basis of certain assets (called ``indexed
assets'') held more than 3 years for purposes of determining gain (but
not loss) upon a sale or other disposition of such assets by a taxpayer
other than a C corporation. Assets held by trusts, estates, S
corporations, regulated investment companies (``RICs''), real estate
investment trusts (``REITs''), and partnerships are eligible for
indexing, to the extent gain on such assets is taken into account by
taxpayers other than C corporations.
The bill applies to assets acquired on or after January 1, 2001.
Indexed assets
Assets eligible for the inflation adjustment generally include common
(but not preferred) stock of C corporations and tangible property that
are capital assets or property used in a trade or business. A personal
residence is not eligible for indexing. To be eligible for indexing, an
asset must be held by the taxpayer for more than three years.
The adjusted basis of debt is not indexed. The proposal also excludes
from indexing intangible assets, such as options, futures, and other
derivatives.
Computation of inflation adjustment
The inflation adjustment under the provision is computed by
multiplying the taxpayer's adjusted basis in the indexed asset by an
inflation adjustment percentage. The inflation adjustment percentage is
the percentage by which the chain-type price index for GDP (as reported
by the Commerce Department's Bureau of Economic Analysis) for the last
calendar quarter ending before the disposition exceeds the chain-type
price index for GDP for the last calendar quarter ending before the
asset was acquired by the taxpayer. The inflation adjustment percentage
is rounded to the nearest one-tenth of a percent. No adjustment is made
if the inflation adjustment is one or less.
Indexing with respect to any asset ends at the time the asset is
treated as disposed of for tax purposes. Thus, with respect to
installment sales, the inflation adjustment to the seller does not take
into account any periods after the sale is made. The purchaser generally
is entitled to
inflation adjustments beginning with the date of purchase,
even though the purchase price is not paid until a later date.
In computing the inflation ratio, periods of time for which an asset
is not an indexed asset are not taken into account. For example, if
convertible debt is converted into common stock, the period prior to
conversion is disregarded in determining the inflation ratio applicable
to the disposition of the common stock.
Special entities
RICs and REITs
In the case of a RIC or a REIT, the indexing adjustments generally
apply in computing the taxable income and the earnings and profits of
the RIC or REIT. The indexing adjustments, however, are not applicable
in determining whether a corporation qualifies as a RIC or REIT.
In order to deny the benefit of indexing to corporate shareholders of
the RIC or REIT, the bill provides that, under regulations, (1) the
determination of whether a distribution to a corporate shareholder is a
dividend is made without regard to this provision, (2) the amount
treated as a capital gain dividend is increased to take into account
that the amount distributed was reduced by reason of the indexing
adjustment, and (3) such other adjustments as are necessary shall be
made to ensure that the benefits of indexing are not allowed to
corporate shareholders.
In the case of shares held in a RIC or REIT, partial indexing
generally is provided by the provision based on the ratio of the value
of indexed assets held by the entity to the value of all its assets. The
ratio of indexed assets to total assets is determined quarterly (for
RICs, the quarterly ratio is based on a three-month average). If the
ratio of indexed assets to total assets exceeds 80 percent in any
quarter, full indexing of the shares is allowed for that quarter. If
less than 20 percent of the assets are indexed assets in any quarter, no
indexing is allowed for that quarter for the shares. Partnership
interests held by a RIC or REIT are subject to a look-through test for
purposes of determining whether, and to what degree, the shares in the
RIC or REIT are indexed.
A return of capital distribution by a RIC or REIT generally is
treated by a shareholder as allocable to stock acquired by the
shareholder in the order in which the stock was acquired.
Partnership and S corporations, etc.
Under the provision, stock in an S corporation or an interest in a
partnership or common trust fund is not an indexed asset.\28\
This rule avoids the complexity that would result in determining the
proper measure of the basis adjustment if indexing were to take into
account the fluctuating basis of the S corporation stock or partnership
interest attributable to earnings and distributions or to the frequently
changing mix of assets (i.e., indexed assets and other assets) of the
entity. Under the provision, the individual owner receives the benefit
of the indexing adjustment when the S corporation, partnership, or
common trust fund disposes of indexed assets. Under the provision, any
inflation adjustments at the entity level flows through to the holders
and result in a corresponding increase in the basis of the holder's
interest in the entity. Where a partnership has a section 754 election
in effect, a partner transferring his interest in the partnership is
entitled to any indexing adjustment that has accrued at the partnership
level with respect to the partner and the transferee partner is entitled
to the benefits of indexing for inflation occurring after the transfer.
\28\An interest in a real mortgage investment conduit (``REMIC'') or a
financial asset securitization investment trust (``FASIT'') also are not
indexed assets, since REMICs and FASITs are not treated as corporations
for income tax purposes.
The indexing adjustment is disregarded in determining any loss on the
sale of an interest in a partnership, S corporation or common trust
fund.
Example 1. --A, B, and C form an equal partnership, and each
contributes $50 cash. The partnership purchases common stock in
corporation X for $150. At a time when the indexed basis to the
partnership for the stock is $240, the partnership sells the stock for
$300. Under the bill, the partners collectively recognizes $60 gain.
Each partner takes into account $20 gain and increases his basis in his
partnership interest by the $20 gain (under present law sec. 705). In
addition, under the bill each partner increases his basis for purposes
of determining gain on his partnership interest by $30 (his share of the
$90 indexing adjustment made by the partnership). Thus, if any partner
sells his partnership interest for $100, no gain or loss is recognized
to the partner.
Example 2. --Same facts as in Example 1, except that the partnership
does not sell the stock. Rather, partner A sells his partnership
interest to D for $100. The partnership does not have an election under
section 754 in effect. Partner A recognizes $50 of gain. Partner D's
basis in the partnership is the $100 purchase price. Assume that after
the sale by A, the partnership sells the stock for $300 (at a time when
the indexed basis is $240). The partnership recognizes $60 of gain and
each partner takes into account $20 gain and makes the same adjustments
as in the above example. If partner D then sold his partnership interest
for $100, he will recognize a loss of $20 ($100 amount realized less
adjusted basis for purposes of determining loss of $120; the $30
inflation adjustment would be disregarded in computing D's adjusted
basis in his partnership interest.)
Example 3. --Same facts as in Example 2, except that the partnership
has an election under section 754 in effect. When A sells his
partnership interest to D, A recognizes $20 of gain, because under the
bill, A's share of the partnership indexing adjustment is available to A
at that time. Upon the sale of the stock by the partnership, D
recognizes no gain or loss since the adjustment under section 743(b) had
been made with respect to his share of the partnership
properties. No adjustment is made by D to the basis in his
partnership interest as a result of the sale by the partnership.
Foreign corporations
Common stock of a foreign corporation generally is an indexed asset
if the stock is regularly traded on an established securities market.
The Committee intends that the terms ``regularly traded'' and
``established securities market'' have the same meaning under the bill
as they have in Treas. Reg. 1.884 5(d). Indexed assets, however, do not
include stock in a foreign investment company, a passive foreign
investment company (including a qualified electing fund), a foreign
personal holding company, or, in the hands of a shareholder who meets
the requirements of section 1248(a)(2) (generally pertaining to
10-percent shareholders of controlled foreign corporations), any other
foreign corporation. An American Depository Receipt (ADR) for common
stock in a foreign corporation is treated as common stock in the foreign
corporation and, therefore, the basis in an ADR for common stock
generally is indexed.
Other rules
Improvements and contributions to capital
No indexing is provided for improvements or contributions to capital
if the aggregate amount of the improvements or contributions to capital
during the taxable year with respect to the property or stock is less
than $1,000. If the aggregate amount of such improvements or
contributions to capital is $1,000 or more, each addition is treated as
a separate asset acquired at the close of the taxable year.
Suspension of holding period
No indexing adjustment is allowed during any period during which
there is a substantial diminution of the taxpayer's risk of loss from
holding the indexed asset by reason of any transaction entered into by
the taxpayer, or a related party.
Short sales
In the case of a short sale of an indexed asset with a short sale
period in excess of three years, the provision requires that the amount
realized be indexed for inflation for the short sale period.
Related parties
The bill does not index the basis of property for sales or
dispositions between related persons, except to the extent the adjusted
basis of property in the hands of the transferee is a substituted basis
(e.g., gifts).
Collapsible corporations
Under the bill, indexing does not reduce the amount of ordinary gain
that would be recognized in cases where a corporation is treated as a
collapsible corporation (under sec. 341) with respect to a distribution
or sale of stock.
EFFECTIVE DATE
The provision applies to property the holding period of which begins
after December 31, 2000.
A taxpayer holding any indexed asset on January 1, 2001, may elect to
treat the indexed asset as having been sold on such date for an amount
equal to its fair market value, and as having been reacquired for an
amount equal to such value. If the election is made, the asset would be
eligible for indexing under the provision. Any gain resulting from the
election would be treated as received on the date of the deemed sale,
and would not be treated as gain from the sale or exchange of property
between related persons under Code section 1239. Any loss would not be
allowed (and the disallowed loss would not be added to the basis of the
indexed asset). For readily traded securities, fair market value is the
closing market price on the business day following January 1, 2001. For
this purpose, ``readily traded'' means readily tradable on an
established securities market or otherwise.
A taxpayer may make the above election with respect to some indexed
assets and not with respect to others.
3. EXCLUSION OF GAIN ON SALE OF PRINCIPAL RESIDENCE (SEC. 313 OF THE
BILL AND SECS. 121 AND 1034 OF THE CODE)
PRESENT LAW
Rollover of gain
No gain is recognized on the sale of a principal residence if a new
residence at least equal in cost to the sales price of the old residence
is purchased and used by the taxpayer as his or her principal residence
within a specified period of time (sec. 1034). This replacement period
generally begins two years before and ends two years after the date of
sale of the old residence. The basis of the replacement residence is
reduced by the amount of any gain not recognized on the sale of the old
residence by reason of this gain rollover rule.
One-time exclusion
In general, an individual, on a one-time basis, may exclude from
gross income up to $125,000 of gain from the sale or exchange of a
principal residence if the taxpayer (1) has attained age 55 before the
sale, and (2) has owned the property and used it as a principal
residence for three or more of the five years preceding the sale (sec.
121).
REASONS FOR CHANGE
Calculating capital gain from the sale of a principal residence is
among the most complex tasks faced by a typical taxpayer. Many taxpayers
buy and sell a number of homes over the course of a lifetime, and are
generally not certain of how much housing appreciation they can expect.
Thus, even though most homeowners never pay any income tax on the
capital gain on their principal residences, as a result of the rollover
provisions and the $125,000 one-time exclusion, detailed records of
transactions and expenditures on home improvements must be kept, in most
cases, for many decades. To claim the exclusion, many taxpayers must
determine the basis of each home they have owned, and appropriately
adjust the basis of their current home to reflect any untaxed gains from
previous housing transactions. This determination may involve augmenting
the original cost basis of each home by expenditures on improvements. In
addition to the record-keeping burden this creates, taxpayers face the
difficult task of drawing a distinction between improvements that add to
basis, and repairs that do not. The failure to account accurately for
all improvements leads to errors in the calculation of capital gains,
and hence to an under- or over-payment of the capital gains on principal
residences. By excluding from taxation capital gains on principal
residences below a relatively high threshold, few taxpayers would have
to refer to records in determining income tax consequences of
transactions related to their house.
To postpone the entire capital gain from the sale of a principal
residence, the purchase price of a new home must be greater than the
sales price of the old home. This provision of present law encourages
some taxpayers to purchase larger and more expensive houses than they
otherwise would in order to avoid a tax liability, particularly those
who move from areas where housing costs are high to lower-cost areas.
This promotes an inefficient use of taxpayer's financial resources.
Present law also may discourage some older taxpayers from selling
their homes. Taxpayers who would realize a capital gain in excess of
$125,000 if they sold their home and taxpayers who have already used the
exclusion may choose to stay in their homes even though the home no
longer suits their needs. By raising the $125,000 limit and by allowing
multiple exclusions, this constraint to the mobility of the elderly
would be removed.
While most homeowners do not pay capital gains tax when selling their
homes, current law creates certain tax traps for the unwary that can
result in significant capital gains taxes or loss of the benefits of the
current exclusion. For example, an individual is not eligible for the
one- time capital gains exclusion if the exclusion was previously
utilized by the individual's spouse. This restriction has the unintended
effect of penalizing individuals who marry someone who has already taken
the exclusion. Households that move from a high housing-cost area to a
low housing- cost area may incur an unexpected capital gains tax
liability. Divorcing couples may incur substantial capital gains taxes
if they do not carefully plan their house ownership and sale decisions.
EXPLANATION OF PROVISION
Under the bill a taxpayer generally is able to exclude up to $250,000
($500,000 if married filing a joint return) of gain realized on the sale
or exchange of a principal residence. The exclusion is allowed each time
a taxpayer selling or exchanging a principal residence meets the
eligibility requirements, but generally no more frequently than once
every two years. The bill provides that gain would be recognized to the
extent of any depreciation allowable with respect to the rental or
business use of such principal residence for periods after May 6, 1997.
To be eligible for the exclusion, a taxpayer must have owned the
residence and occupied it as a principal residence for at least two of
the five years prior to the sale or exchange. A taxpayer who fails to
meet these requirements by reason of a change of place of employment,
health, or other unforseen circumstances is able to exclude the fraction
of the $250,000 ($500,000 if married filing a joint return) equal to the
fraction of two years that these requirements are met.
In the case of joint filers not sharing a principal residence, an
exclusion of $250,000 is available on a qualifying sale or exchange of
the principal residence of one of the spouses. Similarly, if a single
taxpayer who is otherwise eligible for an exclusion marries someone who
has used the exclusion within the two years prior to the marriage, the
bill would allow the newly married taxpayer a maximum exclusion of
$250,000. Once both spouses satisfy the eligibility rules and two years
have passed since the last exclusion was allowed to either of them, the
taxpayers may exclude $500,000 of gain on their joint return.
Under the proposal, the gain from the sale or exchange of the
remainder interest in the taxpayer's principal residence may qualify for
the otherwise allowable exclusion.
EFFECTIVE DATE
The provision is available for all sales or exchanges of a principal
residence occurring on or after May 7, 1997, and replaces the
present-law rollover and one-time exclusion provisions applicable to
principal residences.
A taxpayer could elect to apply present law (rather than the new
exclusion) to a sale or exchange (1) made before the date of enactment
of the Act, (2) made after the date of enactment pursuant to a binding
contract in effect on the date or (3) where the replacement residence
was acquired on or before the date of enactment (or pursuant to a
binding contract in effect of the date of enactment) and the rollover
provision would apply. If a taxpayer acquired his or her current
residence in a rollover transaction, periods of ownership and use of the
prior residence would be taken into account in determining ownership and
use of the current residence.
4. 30-PERCENT CORPORATE ALTERNATIVE TAX FOR CERTAIN CAPITAL GAINS (SEC.
321 OF THE BILL AND SEC. 1201 OF THE CODE)
PRESENT LAW
Under present law, the net capital gain of a corporation is taxed at
the same rate as ordinary income, and subject to tax at graduated rates
up to 35 percent.
REASONS FOR CHANGE
The Committee believes it is important that tax policy be conducive
to economic growth. Economic growth cannot occur without saving,
investment, and the willingness of businesses to take risks and exploit
new market opportunities. The greater the pool of savings, the greater
the monies available for business investment in equipment and research.
It is through such investment in equipment and new products and services
that the United States economy can increase output and productivity. It
is through increases in productivity that workers earn higher real
wages. Hence, greater saving is necessary for all Americans to benefit
through a higher standard of living.
The Committee observes that net business saving has not increased
significantly from its levels of a decade ago. The Committee believes
that a lower rate of tax on capital gains will encourage investment,
saving, and risk-taking, create new jobs, and promote economic growth.
EXPLANATION OF PROVISION
The bill provides a maximum rate of tax on the net capital gain of a
corporation to the extent the gain is attributable to the sale or
exchange of property held more than 8 years. The alternative tax is 32
percent on gain attributable to calendar year 1998; 31 percent on gain
attributable to calendar year 1999; and 30 percent on gain attributable
to calendar years after 1999. The bill also modifies the application of
the corporate alternative capital gains tax so that the alternative
capital gains tax applies to the lesser of 8-year gain or taxable
income. Gain from the disposition of a collectible or attributable to
the depreciation of section 1250 property is not eligible for the lower
rate.
EFFECTIVE DATE
The provision applies to taxable years ending after December 31,
1997. However, the lower rate does not apply to amounts properly taken
into account before January 1, 1998. For fiscal years beginning in 1998
and 1999, the tax is computed by applying the applicable percentage to
the 8-year gain for the first portion of the year (or, if less, the
8-year gain for the entire year), but in an amount not to exceed the
taxable income for the entire year and then by applying the applicable
percentage to an amount equal to the 8-year gain for the entire year
(or, if less, taxable income) reduced by the amount taxed at the
applicable percentage for the first portion of the year.
In the case of gain taken into account by a corporation from a
pass-through entity (i.e., a RIC, a REIT, an S corporation, a
partnership, an estate or trust, or a common trust fund), the date taken
into account by the entity is the appropriate date for applying the rule
in the preceding paragraph.
IV. ALTERNATIVE MINIMUM TAX PROVISIONS
A. Increase Exemption Amount Applicable to Individual Alternative
Minimum Tax (sec. 401 of the bill and sec. 55 of the Code)
PRESENT LAW
Present law imposes a minimum tax on an individual to the extent the
taxpayer's minimum tax liability exceeds his or her regular tax
liability. This alternative minimum tax is imposed upon individuals at
rates of (1) 26 percent on the first $175,000 of alternative minimum
taxable income in excess of a phased-out exemption amount and (2) 28
percent on the amount in excess of $175,000. The exemption amounts are
$45,000 in the case of married individuals filing a joint return and
surviving spouses; $33,750 in the case of other unmarried individuals;
and $22,500 in the case of married individuals filing a separate return.
These exemption amounts are phased-out by an amount equal to 25 percent
of the amount that the individual's alternative minimum taxable income
exceeds a threshold amount. These threshold amounts are $150,000 in the
case of married individuals filing a joint return and surviving spouses;
$112,500 in the case of other unmarried individuals; and $75,000 in the
case of married individuals filing a separate return, estates, and
trusts. The exemption amounts, the threshold phase-out amounts, and the
$175,000 break-point amount are not indexed for inflation.
REASONS FOR CHANGE
The Committee is concerned about the projected trend that
significantly more individuals with few or no tax preferences and
adjustments will become subject to the alternative minimum tax in the
near future. This trend is projected, in part, because the exemption
amounts applicable to the individual alternative minimum tax are not
indexed for inflation, while the standard deduction, personal
exemptions, rate brackets and other features of the regular tax are
indexed for inflation.
EXPLANATION OF PROVISION
For taxable years beginning in 1999, 2001, 2003, 2005 and 2007, the
exemption amounts of the individual alternative minimum tax are
increased as follows for each such year: (1) by $1,000 in the case of
married individuals filing a joint return and surviving spouses; (2) by
$750 in the case of other unmarried individuals; and (3) by $500 in the
case of married individuals filing a separate return. For taxable years
beginning after 2007, the exemption amounts are indexed for inflation.
EFFECTIVE DATE
The provision is effective for taxable years beginning after December
31, 1998.
B. Repeal Alternative Minimum Tax for Small Businesses and Repeal the
Depreciation Adjustment (secs. 402 and 403 of the bill and secs. 55 and
56 of the Code)
PRESENT LAW
In general
Present law imposes a minimum tax on an individual or a corporation
to the extent the taxpayer's minimum tax liability exceeds its regular
tax liability. The individual minimum tax is imposed at rates of 26 and
28 percent on alternative minimum taxable income in excess of a
phased-out exemption amount; the corporate minimum tax is imposed at a
rate of 20 percent on alternative minimum taxable income in excess of a
phased-out $40,000 exemption amount. Alternative minimum taxable income
(``AMTI'') is the taxpayer's taxable income increased by certain
preference items and adjusted by determining the tax treatment of
certain items in a manner that negates the deferral of income resulting
from the regular tax treatment of those items. In the case of a
corporation, in addition to the regular set of adjustments and
preferences, there is a second set of adjustments known as the
``adjusted current earnings'' adjustment.
The most significant alternative minimum tax adjustment relates to
depreciation. In computing AMTI, depreciation on property placed in
service after 1986 must be computed by using the class lives prescribed
by the alternative depreciation system of section 168(g) and either (1)
the straight-line method in the case of property subject to the
straight-line method under the regular tax or (2) the 150-percent
declining balance method in the case of other property. For regular tax
purposes, depreciation on tangible personal property generally is
computed using shorter recovery periods and more accelerated methods
than are allowed for alternative minimum tax purposes.
If a taxpayer is subject to alternative minimum tax in one year, such
amount of tax is allowed as a credit in a subsequent taxable year to the
extent the taxpayer's regular tax liability exceeds its tentative
minimum tax in such subsequent year. If the taxpayer is an individual,
this credit is allowed to the extent the taxpayer's alternative minimum
tax liability is a result of adjustments that are timing in nature.
REASONS FOR CHANGE
The Committee believes that the alternative minimum tax inhibits
capital formation and business enterprise and is administratively
complex. Therefore, the bill deletes the depreciation adjustment for new
investment in depreciable property by all businesses and completely
repeals the corporate alternative minimum tax for small businesses.
EXPLANATION OF PROVISION
Repeal of the corporate alternative minimum tax for small businesses
The corporate alternative minimum tax is repealed for small business
corporations for taxable years beginning after December 31, 1997. A
corporation that had average gross receipts of less than $5 million for
the three-year period beginning after December 31, 1994, is a small
business corporation for any taxable year beginning after December 31,
1997. A corporation that meets the $5 million gross receipts test will
continue to be treated as a small business corporation exempt from the
alternative minimum tax so long as its average gross receipts do not
exceed $7.5 million. A corporation that fails to meet the $7.5 million
gross receipts test will become subject to corporate alternative minimum
tax only with respect to preferences and adjustments that relate to
transactions and investments entered into after the corporation loses
its status as a small business corporation.
In addition, the alternative minimum tax credit allowable to a small
business corporation may not exceed the corporation's regular tax
liability (reduced by other credits) over 25 percent of the
corporation's regular tax (reduced by foreign tax credits) in excess of
$25,000.
Repeal of the depreciation adjustment
The alternative minimum tax adjustment relating to depreciation is
repealed for all taxpayers for property placed in service after December
31, 1998.
EFFECTIVE DATE
Except as provided above, the provision is effective for taxable
years beginning after December 31, 1997.
C. Repeal Installment Method Adjustment for Farmers (sec. 404 and sec.
56 of the Code)
PRESENT LAW
The installment method allows gain on the sale of property to be
recognized as payments are received. Under the regular tax, dealers in
personal property are not allowed to defer the recognition of income by
use of the installment method on the installment sale of such property.
For this purpose, dealer dispositions do not include sales of any
property used or produced in the trade or business of farming. For
alternative minimum tax purposes, the installment method is not
available with respect to the disposition of any property that is the
stock in trade of the taxpayer or any other property of a kind which
would be properly included in the inventory of the taxpayer if held at
year end, or property held by the taxpayer primarily for sale to
customers. No explicit exception is provided for installment sales of
farm property under the alternative minimum tax.
REASONS FOR CHANGE
The Committee understands that the Internal Revenue Service (``IRS'')
takes the position that the installment method may not be used for sales
of property produced on a farm for alternative minimum tax purposes. The
Committee further understands that the IRS has announced that it
generally will not enforce this position for taxable years beginning
before January 1, 1997, so long as the farmer changes its method of
accounting for installment sales for taxable years beginning after
December 31, 1996.\29\
The Committee believes that this issue should be clarified in favor of
the farmer.
\29\Notice 97 13, January 28, 1997.
EXPLANATION OF PROVISION
The bill generally provides that for purposes of the alternative
minimum tax, farmers may use the installment method of accounting.
EFFECTIVE DATE
The provision generally is effective for dispositions in taxable
years beginning after December 31, 1987.
TITLE V. ESTATE, GIFT, AND GENERATION-SKIPPING TAX PROVISIONS
A. Estate and Gift Tax Provisions
1. INCREASE IN ESTATE AND GIFT TAX UNIFIED CREDIT (SEC. 501(A) OF THE
BILL AND SEC. 2010 OF THE CODE)
PRESENT LAW
A gift tax is imposed on lifetime transfers by gift and an estate tax
is imposed on transfers at death. Since 1976, the gift tax and the
estate tax have been unified so that a single graduated rate schedule
applies to cumulative taxable transfers made by a taxpayer during his or
her lifetime and at death.\30\
A unified credit of $192,800 is provided against the estate and gift
tax, which effectively exempts the first $600,000 in cumulative taxable
transfers from tax (sec. 2010). For transfers in excess of $600,000,
estate and gift tax rates begin at 37 percent and reach 55 percent on
cumulative taxable transfers over $3 million (sec. 2001(c)). In
addition, a 5-percent surtax is imposed upon cumulative taxable
transfers between $10 million and $21,040,000, to phase out the benefits
of the graduated rates and the unified credit (sec. 2001(c)(2)).\31\
\30\Prior to 1976, separate tax rate schedules applied to the gift tax
and the estate tax.
\31\Thus, if a taxpayer has made cumulative taxable transfers equaling
$21,040,000 or more, his or her average transfer tax rate is 55 percent.
The phaseout has the effect of creating a 60-percent marginal transfer
tax rate on transfers in the phaseout range.
REASONS FOR CHANGE
The Committee believes that increasing the amount of the estate and
gift tax unified credit will encourage saving, promote capital formation
and entrepreneurial activity, and help to preserve existing family-owned
farms and businesses. The Committee further believes that indexing the
unified credit exemption equivalent amount for inflation is appropriate
to reduce the transfer tax consequences that result from increases in
asset value attributable solely to inflation.
EXPLANATION OF PROVISION
The bill increases the present-law unified credit beginning in 1998,
from an effective exemption of $600,000 to an effective exemption of
$1,000,000 in 2007. The increase in the effective exemption is phased in
according to the following schedule: the effective exemption is $650,000
for decedents dying and gifts made in 1998; $750,000 in 1999; $765,000
in 2000; $775,000 in 2001 through 2004; $800,000 in 2005; $825,000 in
2006; $1 million in 2007. After 2007, the effective exemption is indexed
annually for inflation. The indexed exemption amount is rounded to the
next lowest multiple of $10,000.
Conforming amendments to reflect the increased unified credit are
made (1) to the 5-percent surtax to conform the phase out of the
increased unified credit and graduated rates, (2) to the general filing
requirements for an estate tax return under section 6018(a), and (3) to
the amount of the unified credit allowed under section 2102(c)(3) with
respect to nonresident aliens with U.S. situs property who are residents
of certain treaty countries.
EFFECTIVE DATE
The provision is effective for decedents dying, and gifts made, after
December 31, 1997.
2. INDEXING OF CERTAIN OTHER ESTATE AND GIFT TAX PROVISIONS (SEC.
501(B) (E) OF THE BILL AND SEC. 2032A, 2503, 2631, AND 6601(J) OF THE CODE)
PRESENT LAW
Annual exclusion for gifts.-- A taxpayer may exclude $10,000 of
gifts of present interests in property made by an individual ($20,000
per married couple) to each donee during a calendar year (sec. 2503).
Special use valuation.-- An executor may elect for estate tax
purposes to value certain qualified real property used in farming or a
closely-held trade or business at its current use value, rather than its
``highest and best use'' value (sec. 2032A). The maximum reduction in
value under such an election is $750,000.
Generation-skipping transfer (``GST'') tax.-- An individual is
allowed an exemption from the GST tax of up to $1,000,000 for
generation-skipping transfers made during life or at death (sec. 2631).
Installment payment of estate tax.-- An executor may elect to pay
the Federal estate tax attributable to an interest in a closely held
business in installments over, at most, a 14-year period (sec. 6166).
The tax on the first $1,000,000 in value of a closely-held business is
eligible for a special 4-percent interest rate (sec. 6601(j)).
REASONS FOR CHANGE
The Committee believes that it is appropriate to index for inflation
the annual exclusion for gifts, the ceiling on special use valuation,
the generation-skipping transfer tax exemption, and the ceiling on the
value of a closely-held business eligible for the special low interest
rate, to reduce the transfer tax consequences that result from increases
in asset value attributable solely to inflation.
EXPLANATION OF PROVISION
The bill provides that, after 1998, the $10,000 annual exclusion for
gifts, the $750,000 ceiling on special use valuation, the $1,000,000
generation-skipping transfer tax exemption, and the $1,000,000 ceiling
on the value of a closely-held business eligible for the special low
interest rate (as modified below), are indexed annually for inflation.
Indexing of the annual exclusion is rounded to the next lowest multiple
of $1,000 and indexing of the other amounts is rounded to the next
lowest multiple of $10,000.
EFFECTIVE DATE
The proposal is effective for decedents dying, and gifts made, after
December 31, 1998.
3. INSTALLMENT PAYMENTS OF ESTATE TAX ATTRIBUTABLE TO CLOSELY HELD
BUSINESSES (SECS. 502 AND 503 OF THE BILL AND SECS. 6601(J) AND 6166 OF THE CODE)
PRESENT LAW
In general, the Federal estate tax is due within nine months of a
decedent's death. Under Code section 6166, an executor generally may
elect to pay the estate tax attributable to an interest in a closely
held business in installments over, at most, a 14-year period. If the
election is made, the estate may pay only interest for the first four
years, followed by up to 10 annual installments of principal and
interest. Interest generally is imposed at the rate applicable to
underpayments of tax under section 6621 (i.e., the Federal short-term
rate plus 3 percentage points). Under section 6601(j), however, a
special 4-percent interest rate applies to the amount of deferred estate
tax attributable to the first $1,000,000 in value of the closely-held
business.
To qualify for the installment payment election, the business must be
an active trade or business and the value of the decedent's interest in
the closely held business must exceed 35 percent of the decedent's
adjusted gross estate. An interest in a closely held business includes:
(1) any interest as a proprietor in a business carried on as a
proprietorship; (2) any interest in a partnership carrying on a trade or
business if the partnership has 15 or fewer partners, or if at least 20
percent of the partnership's assets are included in determining the
decedent's gross estate; or (3) stock in a corporation if the
corporation has 15 or fewer shareholders, or if at least 20 percent of
the value of the voting stock is included in determining the decedent's
gross estate.
REASONS FOR CHANGE
The Committee believes that the installment payment provisions need
to be expanded in order to better address the liquidity problems of
estates holding farms and closely held businesses, to prevent the
liquidation of such businesses in order to pay estate taxes. The
Committee further believes that the protection of closely held
businesses will preserve jobs and strengthen the communities in which
such businesses are located.
In addition, by eliminating the deductibility of interest paid on
estate taxes deferred under section 6166 (and reducing the interest rate
accordingly), the bill eliminates the need to file annual supplemental
estate tax returns and make complex iterative computations to claim an
estate tax deduction for interest paid.
EXPLANATION OF PROVISION
The bill extends the period for which Federal estate tax installments
can be made under section 6166 to a maximum period of 24 years. If the
election is made, the estate pays only interest for the first four
years, followed by up to 20 annual installments of principal and
interest.
In addition, the bill provides that no interest is imposed on the
amount of deferred estate tax attributable to the first $1,000,000 in
taxable value of the closely held business (i.e., the first $1,000,000
in value in excess of the effective exemption provided by the unified
credit). Thus, for example, in 1998, when the unified credit is
increased to provide an effective exemption of $650,000 (as described
above), the amount of estate tax attributable to the value of the
closely held business between $650,000 and $1,650,000 is eligible for
the zero-percent interest rate.
The interest rate imposed on the amount of deferred estate tax
attributable to the taxable value of the closely held business in excess
of $1,000,000 is reduced to an amount equal to 45 percent of the rate
applicable to underpayments of tax. The interest paid on estate taxes
deferred under section 6166 is not deductible for estate or income tax
purposes.
EFFECTIVE DATE
The provision is effective for decedents dying after December 31, 1997.
4. ESTATE TAX RECAPTURE FROM CASH LEASES OF SPECIALLY-VALUED PROPERTY
(SEC. 504 OF THE BILL AND SEC. 2032A OF THE CODE)
PRESENT LAW
A Federal estate tax is imposed on the value of property passing at
death. Generally, such property is included in the decedent's estate at
its fair market value. Under section 2032A, the executor may elect to
value certain ``qualified real property'' used in farming or other
qualifying trade or business at its current use value rather than its
highest and best use. If, after the special-use valuation election is
made, the heir who acquired the real property ceases to use it in its
qualified use within 10 years (15 years for individuals dying before
1982) of the decedent's death, an additional estate tax is imposed in
order to ``recapture'' the benefit of the special-use valuation (sec.
2032A(c)).
Some courts have held that cash rental of specially-valued property
after the death of the decedent is not a qualified use under section
2032A because the heirs no longer bear the financial risk of working the
property, and, therefore, results in the imposition of the additional
estate tax under section 2032A(c). See Martin v. Commissioner,
783 F.2d 81 (7th Cir. 1986) (cash lease to unrelated party not qualified
use); Williamson v. Commissioner, 93 T.C. 242 (1989), aff'd, 974 F.2d
1525 (9th Cir. 1992) (cash lease to family member not a qualified use);
Fisher v. Commissioner, 65 T.C.M. 2284 (1993) (cash lease to family
member not a qualified use); cf. Minter v. U.S., 19 F.3d 426 (8th Cir.
1994) (cash lease to family's farming corporation is qualified use);
Estate of Gavin v. U.S., 1997 U.S. App. Lexis 10383 (8th Cir. 1997)
(heir's option to pay cash rent or 50 percent crop share is qualified
use).
With respect to a decedent's surviving spouse, a special rule
provides that the surviving spouse will not be treated as failing to use
the property in a qualified use solely because the spouse rents the
property to a member of the spouse's family on a net cash basis. (sec.
2032A(b)(5)). Under section 2032A, members of an individual's family
include (1) the individual's spouse, (2) the individual's ancestors, (3)
lineal descendants of the individual, of the individual's spouse, or of
the individual's parents, and (4) the spouses of any such lineal
descendants.
REASONS FOR CHANGE
The Committee believes that cash leasing of farmland among family
members is consistent with the purposes of the special-use valuation
rules, which are intended to prevent family farms (and other qualifying
businesses) from being liquidated to pay estate taxes in cases where
members of the decedent's family continue to participate in the
business.
EXPLANATION OF PROVISION
The bill provides that the cash lease of specially-valued real
property by a lineal descendant of the decedent to a member of the
lineal descendant's family, who continues to operate the farm or closely
held business, does not cause the qualified use of such property to
cease for purposes of imposing the additional estate tax under section
2032A(c).
EFFECTIVE DATE
The provision is effective for cash rentals occurring after December
31, 1976.
5. CLARIFY ELIGIBILITY FOR EXTENSION OF TIME FOR PAYMENT OF ESTATE TAX
(SEC. 505 OF THE BILL AND NEW SEC. 7479 OF THE CODE)
PRESENT LAW
In general, the Federal estate tax is due within nine months of a
decedent's death. Under Code section 6166, an executor generally may
elect to pay the estate tax attributable to an interest in a closely
held business in installments over, at most, a 14-year period. If the
election is made, the estate may pay only interest for the first four
years, followed by up to 10 annual installments of principal and
interest. To qualify for the installment payment election, the business
must meet certain requirements. If certain events occur during the
repayment period (e.g., the closely held business is sold), full payment
of all deferred estate taxes is required at that time.
Under present law, there is limited access to judicial review of
disputes regarding initial or continuing eligibility for the deferral
and installment election under section 6166. If the Commissioner
determines that an estate was not initially eligible for deferral under
section 6166, or has lost its eligibility for such deferral, the estate
is required to pay the full amount of estate taxes asserted by the
Commissioner as being owed in order to obtain judicial review of the
Commissioner's determination.
REASONS FOR CHANGE
The bill gives taxpayers access to the courts to resolve disputes
over an estate's eligibility for the section 6166 election, without
requiring potential liquidation of the assets that the installment
provisions of section 6166 are designed to protect.
EXPLANATION OF PROVISION
The provision authorizes the U.S. Tax Court to provide declaratory
judgments regarding initial or continuing eligibility for deferral under
section 6166.
EFFECTIVE DATE
The provision applies to decedents dying after date of enactment.
6. Gifts may not be revalued for estate tax purposes after
expiration of statute of limitations (sec. 506 of the bill and secs.
2001, 6501(c)(9) and 7477 of the Code)
PRESENT LAW
The Federal estate and gift taxes are unified so that a single
progressive rate schedule is applied to an individual's cumulative gifts
and bequests. The tax on gifts made in a particular year is computed by
determining the tax on the sum of the taxable gifts made that year and
all prior years and then subtracting the tax on the prior years taxable
gifts and the unified credit. Similarly, the estate tax is computed by
determining the tax on the sum of the taxable estate and prior taxable
gifts and then subtracting the tax on taxable gifts and the unified
credit. Under a special rule applicable to the computation of the gift
tax (sec. 2504(c)), the value of gifts made in prior years is the value
that was used to determine the prior year's gift tax. There is no
comparable rule in the case of the computation of the estate tax.
Generally, any estate or gift tax must be assessed within three years
after the filing of the return. No proceeding in a court for the
collection of an estate or gift tax can be begun without an assessment
within the three-year period. If no return is filed, the tax may be
assessed, or a
suit commenced to collect the tax without assessment, at any
time. If an estate or gift tax return is filed, and the amount of
unreported items exceeds 25 percent of the amount of the reported items,
the tax may be assessed or a suit commenced to collect the tax without
assessment, within six years after the return was filed (sec. 6501).
Commencement of the statute of limitations generally does not require
that a particular gift be disclosed. A special rule, however, applies to
certain gifts that are valued under the special valuation rules of
Chapter 14. The gift tax statute of limitations runs for such a gift
only if it is disclosed on a gift tax return in a manner adequate to
apprise the Secretary of the Treasury of the nature of the item.
Most courts have permitted the Commissioner to redetermine the value
of a gift for which the statute of limitations period for the gift tax
has expired in order to determine the appropriate tax rate bracket and
unified credit for the estate tax. See, e.g., Evanson v. United States,
30 F.3d 960 (9th Cir. 1994); Stalcup v. United States, 946 F. 2d 1125
(5th Cir. 1991); Estate of Levin, 1991 T.C. Memo 1991 208, aff'd 986 F.
2d 91 (4th Cir. 1993); Estate of Smith v. Commissioner, 94 T.C. 872
(1990). But see Boatman's First National Bank v. United States, 705 F.
Supp. 1407 (W.D. Mo. 1988) (Commissioner not permitted to revalue
gifts).
REASONS FOR CHANGE
Revaluation of lifetime gifts at the time of death requires the
taxpayer to retain records for a potentially lengthy period. Rules that
encourage a determination within the gift tax statute of limitations
ease transfer tax administration by eliminating reliance on stale
evidence and reducing the period for which retention of records is
required.
EXPLANATION OF PROVISION
The bill provides that a gift for which the limitations period has
passed cannot be revalued for purposes of determining the applicable
estate tax bracket and available unified credit. For gifts made in
calendar years after the date of enactment, the bill also extends the
special rule governing gifts valued under Chapter 14 to all gifts. Thus,
the statute of limitations will not run on an inadequately disclosed
transfer in calendar years after the date of enactment, regardless of
whether a gift tax return was filed for other transfers in that same
year.
It is intended that, in order to revalue a gift that has been
adequately disclosed on a gift tax return, the IRS must issue a final
notice of redetermination of value (a ``final notice'') within the
statute of limitations applicable to the gift for gift tax purposes
(generally, three years). This rule is applicable even where the value
of the gift as shown on the return does not result in any gift tax being
owed (e.g., through use of the unified credit). It is also anticipated
that the IRS will develop an administrative appeals process whereby a
taxpayer can challenge a redetermination of value by the IRS prior to
issuance of a final notice.
A taxpayer who is mailed a final notice may challenge the
redetermined value of the gift (as contained in the final notice) by
filing a motion for a declaratory judgment with the Tax Court. The
motion must be filed on or before 90 days from the date that the final
notice was mailed. The statute of limitations is tolled during the
pendency of the Tax Court proceeding.
EFFECTIVE DATE
The provision generally applies to gifts made after the date of
enactment. The extension of the special rule under chapter 14 to all
gifts applies to gifts made in calendar years after the date of
enactment.
7. REPEAL OF THROWBACK RULES APPLICABLE TO DOMESTIC TRUSTS (SEC. 507 OF
THE BILL AND SECS. 644(E) AND 665 OF THE CODE)
PRESENT LAW
A nongrantor trust is treated as a separate taxpayer for Federal
income tax purposes. Such a trust generally is treated as a conduit with
respect to amounts distributed currently\32\
and taxed with respect to any income which is accumulated in the trust
rather than distributed. A separate graduated tax rate structure applies
to trusts which historically has permitted accumulated trust income to
be taxed at lower rates than the rates applicable to trust
beneficiaries. This benefit often was compounded through the creation of
multiple trusts.
\32\The conduit treatment is achieved by allowing the trust a deduction
for amounts distributed to beneficiaries during the taxable year to the
extent of distributable net income and by including such distributions
in the beneficiaries' income.
The Internal Revenue Code has several rules intended to limit the
benefit that would otherwise occur from using the lower rates applicable
to one or more trusts. Under the so-called ``throwback'' rules, the
distribution of previously accumulated trust income to a beneficiary
will be subject to tax (in addition to any tax paid by the trust on that
income) where the beneficiary's average top marginal rate in the
previous five years is higher than those of the trust.
Under section 643(f), two or more trusts are treated as one trust if
(1) the trusts have substantially the same grantor or grantors and
substantially the same primary beneficiary or beneficiaries, and (2) a
principal purpose for the existence of the trusts is to avoid Federal
income tax. For trusts that were irrevocable as of March 1, 1984,
section 643(f) applies only to contributions to corpus after that date.
Under section 644, if property is sold within two years of its
contribution to a trust, the gain that would have been recognized had
the contributor sold the property is taxed at the contributor's marginal
tax rates. In effect, section 644 treats such gains as if the
contributor had
realized the gain and then transferred the net after-tax
proceeds from the sale to the trust as corpus.
Sections 665 through 668 apply different rules to accumulation
distributions from a foreign trust than to accumulation distributions
from domestic trusts. If a foreign trust accumulates income, changes its
situs so as to become a domestic trust, and then makes a distribution
that is deemed to have been made in a year in which the trust was a
foreign trust, the distribution is treated as a distribution from a
foreign trust for purposes of the accumulation distribution rules. Rev.
Rul. 91 6, 1991 1 C.B. 89.
REASONS FOR CHANGE
The throwback rules and section 644 are intended to eliminate the
potential tax reduction arising from taxation at the trust level, rather
than the beneficiary or contributor level. When those provisions were
enacted, a taxpayer could reduce his or her overall tax liability
substantially by transferring property to one or more trusts, so that
any income from the property would be taxed at lower income tax rates.
In the Tax Reform Act of 1984, Congress curtailed the tax avoidance use
of multiple trusts. Moreover, in the Tax Reform Act of 1986, Congress
provided a new rate schedule for estates and trusts under which the
maximum tax benefit of the graduated rate structure applicable to
estates or trusts was reduced substantially to slightly more than $600
per year for a trust or estate. (Because of indexing of the rate
brackets, that benefit has increased to $845 per year per trust or
estate.) The Committee has determined that the insignificant potential
tax reduction available through the transfer of property to trust no
longer warrants the complexity of the throwback rules and section 644.
EXPLANATION OF PROVISION
The bill exempts from the throwback rules amounts distributed by a
domestic trust after the date of enactment. The provision also provides
that precontribution gain on property sold by a domestic trust no longer
is subject to section 644 (i.e., taxed at the contributor's marginal tax
rates).
The treatment of foreign trusts, including the treatment of foreign
trusts that become domestic trusts,\33\
remains unchanged.
\33\Rev. Rul. 91 6, 1991 1 C.B. 89.
EFFECTIVE DATE
The provision with respect to the throwback rules is effective for
distributions made in taxable years beginning after the date of
enactment. The modification to section 644 applies to sales or exchanges
after the date of enactment.
8. UNIFIED CREDIT OF DECEDENT INCREASED BY UNIFIED CREDIT OF SPOUSE
USED ON SPLIT GIFT INCLUDED IN DECEDENT'S GROSS ESTATE (SEC. 508 OF THE BILL AND
SEC. 2010 OF THE CODE)
PRESENT LAW
A gift tax is imposed on transfers by gift during life and an estate
tax is imposed on transfers at death. The gift and estate taxes are a
unified transfer tax system in that one progressive tax is imposed on
the cumulative transfers during lifetime and at death. The first $10,000
of gifts of present interests to each donee during any one calendar year
are excluded from Federal gift tax. Under section 2513, one spouse can
elect to treat a gift made by the other spouse to a third person as made
one-half by each spouse (i.e., ``gift-splitting'').
The amount of estate tax payable generally is determined by
multiplying the applicable tax rate (from the unified rate schedule) by
the cumulative post-1976 taxable transfers made by the taxpayer and then
subtracting any transfer taxes payable for prior taxable periods. This
amount is reduced by any remaining available unified credit (and other
applicable credits) to determine the estate tax liability. The estate
tax is imposed on all of the assets held by the decedent at his death,
including the value of certain property previously transferred by the
decedent in which the decedent had certain retained powers or interests.
In such circumstances, property that has been treated as a gift made
one-half by each spouse may be includible in both spouses' estates.
REASONS FOR CHANGE
The ability to gift-split is intended to equalize the treatment of
spouses in community property States and non-community property States.
Gift-splitting effectively permits the transferor taxpayer to benefit
from, among other things, any unified credit allowable to the
non-transferor spouse. The benefit of the non-transferor spouse's
unified credit is lost, however, in circumstances where the split-gift
property is subsequently included in both spouses' estates. The
Committee believes that it is inappropriate that the benefit of the
non-transferor spouse's unified credit be lost in such circumstances.
EXPLANATION OF PROVISION
With respect to any split-gift property that is subsequently
includible in both spouses' estates, the bill increases the unified
credit allowable to the decedent's estate by the amount of the unified
credit previously allowed to the decedent's spouse with respect to the
split gift.
EFFECTIVE DATE
The provision applies to gifts made after the date of enactment.
9. REFORMATION OF DEFECTIVE BEQUESTS TO SPOUSE OF DECEDENT (SEC. 509 OF
THE BILL AND SECS. 2056(B) AND 2523 OF THE CODE)
PRESENT LAW
A ``marital deduction'' generally is allowed for estate and gift tax
purposes for the value of property passing to a spouse. However,
``terminable interest'' property (i.e., an interest in property that
will terminate or fail) transferred to a spouse generally will only
qualify for the marital deduction under certain special rules designed
to ensure that there will be an estate or gift tax to the transferee
spouse on unspent transferred proceeds. Thus, the effect of a marital
deduction with the terminable interest rule is to provide only a method
of deferral of the estate or gift tax, not exemption. One of the special
terminable interest rules (Code sec. 2056(b)(5)) provides that the
marital deduction is allowed where the decedent transfers property to a
trust that is required to pay income to the surviving spouse and the
surviving spouse has a general power of appointment at that spouse's
death (under this so-called ``power of appointment trust,'' the power of
appointment both provides the surviving spouse with power to control the
ultimate disposition of the trust assets and assures that the trust
assets will be subject to estate or gift tax). Another special
terminable interest rule called the ``qualified terminable interest
property'' rule (``QTIP'') generally permits a marital deduction for
transfers by the decedent to a trust that is required to distribute all
of the income to the surviving spouse at least annually and an election
is made to subject the transferee spouse to transfer tax on the trust
property. To qualify for the marital deduction, a power of appointment
trust or QTIP trust must meet certain specific requirements. If there is
a technical defect in meeting those requirements, the marital deduction
may be lost.
REASONS FOR CHANGE
The IRS generally has required strict compliance with the
requirements for a qualified power of appointment trust under section
2056(b)(5) or for QTIP under section 2056(b)(7). As a result, taxpayers
have been unable to qualify for the marital deduction due to inadvertent
or unavoidable failure to meet those requirements. Accordingly, the
Committee believes it is appropriate to provide a reformation procedure
to allow such failures to be cured in order that the marital deduction
not be lost.
EXPLANATION OF PROVISION
The bill allows the marital deduction with respect to a defective
power of appointment or QTIP trust if there is a ``qualified
reformation'' of the trust that corrects the defect. In order to
qualify, the reformation must change the governing instrument in a
manner that cures the defects to qualification of the trust for the
marital deduction. In addition, where a reformation proceeding is
commenced after the due date for the estate tax return (including
extensions), the reformation would qualify only if, prior to
reformation, the governing instrument provides (1) that the surviving
spouse is entitled to all of the income from the property for life, and
(2) no person other than the surviving spouse is entitled to any
distributions during the surviving spouse's life. With respect to QTIP,
an election to qualify must be made by the executor on the estate tax
return as required by section 2056(b)(7)(B)(v).
The determination of whether a marital deduction should be allowed
(i.e., the reformation has cured the defects to qualification and
otherwise qualifies under this provision) is made either as of the due
date for filing the estate or gift tax return (including any extensions)
or the time that changes are completed pursuant to a reformation
proceeding. The statute of limitations is extended with respect to the
estate or gift tax attributable to the trust property until one year
after the date the Treasury Department is notified that a qualified
reformation has been completed or that the reformation proceeding has
otherwise terminated.
EFFECTIVE DATE
The provision applies to decedents dying after the date of enactment.
B. Generation-Skipping Tax Provisions
1. SEVERING OF TRUSTS HOLDING PROPERTY HAVING AN INCLUSION RATIO OF
GREATER THAN ZERO (SEC. 511 OF THE BILL AND SEC. 2642(A) OF THE CODE)
PRESENT LAW
A generation-skipping transfer tax (``GST'' tax) generally is imposed
on transfers, either directly or through a trust or similar arrangement,
to a skip person (i.e., a beneficiary in more than one generation below
that of the transferor). Transfers subject to the GST tax include direct
skips, taxable terminations and taxable distributions. An exemption of
$1 million is provided for each person making generation-skipping
transfers. The exemption may be allocated by a transferor (or his or her
executor) to transferred property.
If the value of the transferred property exceeds the amount of the
GST exemption allocated to that property, the GST tax generally is
determined by multiplying a flat tax rate equal to the highest estate
tax rate (i.e., currently 55 percent) by the ``inclusion percentage''
and the value of the taxable property at the time of the taxable event.
The ``inclusion percentage'' is the number one minus the ``exclusion
percentage''. The exclusion percentage generally is calculated by
dividing the amount of the GST exemption allocated to the property by
the value of the property.
Under Treasury regulations, trusts that are included in the
transferor's gross estate or created under the transferor's will may be
validly severed only if (1) the trust is severed according to a
direction in the governing instrument; or (2) the trust is severed
pursuant to the trustee's discretionary powers, but only if certain
other conditions are satisfied (e.g., the severance occurs or a
reformation proceeding begins before the estate tax return is due).
Treas. Reg. 26.2654-1(b).
REASONS FOR CHANGE
The Committee believes it is appropriate to provide flexibility for
the severance of trusts to minimize the need for complicated governing
documents and to remove a potential trap for poorly advised taxpayers.
The Committee understands that a similar result can already be obtained
by creating separate trusts in the governing document. The flexibility
of a severance should only be afforded, however, in situations where the
Treasury Department believes there is no significant opportunity for tax
avoidance as a result of the severance.
EXPLANATION OF PROVISION
If a trust with an inclusion ratio of greater than zero is severed
into two separate trusts, the bill allows the trustee to elect to treat
one of the separate trusts as having an inclusion ratio of zero and the
other separate trust as having an inclusion ratio of one. To qualify for
this treatment, the separate trust with the inclusion ratio of one must
receive an interest in each property held by the single trust (prior to
severance) equal to the single trust's inclusion ratio, except to the
extent otherwise provided by regulation. The remaining interests in each
property will be transferred to the separate trust with the inclusion
ratio of zero. The election must be irrevocable, and must be made at a
time and in a manner prescribed by the Treasury Department.
EFFECTIVE DATE
The provision is effective for severances of trusts occurring after
the date of enactment.
2. MODIFICATION OF GENERATION-SKIPPING TRANSFER TAX FOR TRANSFERS TO
INDIVIDUALS WITH DECEASED PARENTS (SEC. 512 OF THE BILL AND SEC. 2651 OF THE CODE)
PRESENT LAW
Under the ``predeceased parent exception'', a direct skip transfer to
a transferor's grandchild is not subject to the generation skipping
transfer (``GST'') tax if the child of the transferor who was the
grandchild's parent is deceased at the time of the transfer (sec.
2612(c)(2)). This ``predeceased parent exception'' to the GST tax is not
applicable to (1) transfers to collateral heirs, e.g., grandnieces or
grandnephews, or (2) taxable terminations or taxable distributions.
REASONS FOR CHANGE
The Committee believes that a transfer to a collateral relative whose
parent is dead should qualify for the predeceased parent exception in
situations where the transferor decedent has no lineal heirs, because no
motive or opportunity to avoid transfer tax exists. For similar reasons,
the Committee believes that transfers to trusts should be permitted to
qualify for the predeceased parent exclusion where the parent of the
beneficiary is dead at the time that the transfer is first subject to
estate or gift tax. The Committee also understands that this treatment
will remove a present law impediment to the establishment of charitable
lead trusts.
EXPLANATION OF PROVISION
The bill extends the predeceased parent exception to transfers to
collateral heirs, provided that the decedent has no living lineal
descendants at the time of the transfer. For example, the exception
would apply to a transfer made by an individual (with no living lineal
heirs) to a grandniece where the transferor's nephew or niece who is the
parent of the grandniece is deceased at the time of the transfer.
In addition, the bill extends the predeceased parent exception (as
modified by the change in the preceding paragraph) to taxable
terminations and taxable distributions, provided that the parent of the
relevant beneficiary was dead at the earliest time that the transfer
(from which the beneficiary's interest in the property was established)
was subject to estate or gift tax. For example, where a trust was
established to pay an annuity to a charity for a term for years with a
remainder interest granted to a grandson, the termination of the term
for years would not be a taxable termination subject to the GST tax if
the grandson's parent (who is the son or daughter of the transferor) is
deceased at the time the trust was created and the transfer creating the
trust was subject to estate or gift tax.
EFFECTIVE DATE
The provision is effective for generation skipping transfers
occurring after December 31, 1997.
TITLE VI. EXTENSION OF CERTAIN EXPIRING TAX PROVISIONS
A. Research Tax Credit (sec. 601 of the bill and sec. 41 of the Code)
PRESENT LAW
General rule
Section 41 provides for a research tax credit equal to 20 percent of
the amount by which a taxpayer's qualified research expenditures for a
taxable year exceeded its base amount for that year. The research tax
credit expired and generally will not apply to amounts paid or incurred
after May 31, 1997.\34\
\34\When originally enacted, the research tax credit applied to
qualified expenses incurred after June 30, 1981. The credit was modified
several times and was extended through June 30, 1995. The credit later
was extended for the period July 1, 1996, through May 31, 1997 (with a
special 11-month extension for taxpayers that elect to be subject to the
alternative incremental research credit regime).
A 20-percent research tax credit also applied to the excess of (1)
100 percent of corporate cash expenditures (including grants or
contributions) paid for basic research conducted by universities (and
certain nonprofit scientific research organizations) over (2) the sum of
(a) the greater of two minimum basic research floors plus (b) an amount
reflecting any decrease in nonresearch giving to universities by the
corporation as compared to such giving during a fixed-base period, as
adjusted for inflation. This separate credit computation is commonly
referred to as the ``university basic research credit'' (see sec.
41(e)).
Computation of allowable credit
Except for certain university basic research payments made by
corporations, the research tax credit applies only to the extent that
the taxpayer's qualified research expenditures for the current taxable
year exceed its base amount. The base amount for the current year
generally is computed by multiplying the taxpayer's ``fixed-base
percentage'' by the average amount of the taxpayer's gross receipts for
the four preceding years. If a taxpayer both incurred qualified research
expenditures and had gross receipts during each of at least three years
from 1984 through 1988, then its ``fixed-base percentage'' is the ratio
that its total qualified research expenditures for the 1984 1988 period
bears to its total gross receipts for that period (subject to a maximum
ratio of .16). All other taxpayers (so-called ``start-up firms'') are
assigned a fixed-base percentage of 3 percent.\35\
\35\The Small Business Job Protection Act of 1996 expanded the
definition of ``start-up firms'' under section 41(c)(3)(B)(I) to include
any firm if the first taxable year in which such firm had both gross
receipts and qualified research expenses began after 1983.
In computing the credit, a taxpayer's base amount may not be less
than 50 percent of its current-year qualified research expenditures.
To prevent artificial increases in research expenditures by shifting
expenditures among commonly controlled or otherwise related entities,
research expenditures and gross receipts of the taxpayer are aggregated
with research expenditures and gross receipts of certain related persons
for purposes of computing any allowable credit (sec. 41(f)(1)). Special
rules apply for computing the credit when a major portion of a business
changes hands, under which qualified research expenditures and gross
receipts for periods prior to the change of ownership of a trade or
business are treated as transferred with the trade or business that gave
rise to those expenditures and receipts for purposes of recomputing a
taxpayer's fixed-base percentage (sec. 41(f)(3)).
Alternative incremental research credit regime
As part of the Small Business Job Protection Act of 1996, taxpayers
are allowed to elect an alternative incremental research credit regime.
If a taxpayer elects to be subject to this alternative regime, the
taxpayer is assigned a three-tiered fixed-base percentage (that is lower
than the fixed-base percentage otherwise applicable under present law)
and the credit rate likewise is reduced. Under the alternative credit
regime, a credit rate of 1.65 percent applies to the extent that a
taxpayer's current-year research expenses exceed a base amount computed
by using a fixed-base percentage of 1 percent (i.e., the base amount
equals 1 percent of the taxpayer's average gross receipts for the four
preceding years) but do not exceed a base amount computed by using a
fixed-base percentage of 1.5 percent. A credit rate of 2.2 percent
applies to the extent that a taxpayer's current-year research expenses
exceed a base amount computed by using a fixed-base percentage of 1.5
percent but do not exceed a base amount computed by using a fixed-base
percentage of 2 percent. A credit rate of 2.75 percent applies to the
extent that a taxpayer's current-year research expenses exceed a base
amount computed by using a fixed-base percentage of 2 percent. An
election to be subject to this alternative incremental credit regime may
be made only for a taxpayer's first taxable year beginning after June
30, 1996, and before July 1, 1997, and such an election applies to that
taxable year and all subsequent years (in the event that the credit
subsequently is extended by Congress) unless revoked with the consent of
the Secretary of the Treasury. If a taxpayer elects the
alternative incremental research credit regime for its first taxable
year beginning after June 30, 1996, and before July 1, 1997, then all
qualified research expenses paid or incurred during the first 11 months
of such taxable year are treated as qualified research expenses for
purposes of computing the taxpayer's credit.
Eligible expenditures
Qualified research expenditures eligible for the research tax credit
consist of: (1) ``in-house'' expenses of the taxpayer for wages and
supplies attributable to qualified research; (2) certain time-sharing
costs for computer use in qualified research; and (3) 65 percent of
amounts paid by the taxpayer for qualified research conducted on the
taxpayer's behalf (so-called ``contract research expenses'').\36\
\68\Under a special rule enacted as part of the Small Business Job
Protection Act of 1996, 75 percent of amounts paid to a research
consortium for qualified research is treated as qualified research
expenses eligible for the research credit (rather than 65 percent under
the general rule under section 41(b)(3) governing contract research
expenses) if (1) Such research consortium is a tax-exempt organization
that is described in section 501(c)(3) (other than a private foundation)
or section 501(c)(6) and is organized and operated primarily to conduct
scientific research, and (2) such qualified research is conducted by the
consortium on behalf of the taxpayer and one or more persons not related
to the taxpayer.
To be eligible for the credit, the research must not only satisfy the
requirements of present-law section 174 (described below) but must be
undertaken for the purpose of discovering information that is
technological in nature, the application of which is intended to be
useful in the development of a new or improved business component of the
taxpayer, and must pertain to functional aspects, performance,
reliability, or quality of a business component. Research does not
qualify for the credit if substantially all of the activities relate to
style, taste, cosmetic, or seasonal design factors (sec. 41(d)(3)). In
addition, research does not qualify for the credit if conducted after
the beginning of commercial production of the business component, if
related to the adaptation of an existing business component to a
particular customer's requirements, if related to the duplication of an
existing business component from a physical examination of the component
itself or certain other information, or if related to certain efficiency
surveys, market research or development, or routine quality control
(sec. 41(d)(4)).
Expenditures attributable to research that is conducted outside the
United States do not enter into the credit computation. In addition, the
credit is not available for research in the social sciences, arts, or
humanities, nor is it available for research to the extent funded by any
grant, contract, or otherwise by another person (or governmental
entity).
Relation to deduction
Under section 174, taxpayers may elect to deduct currently the amount
of certain research or experimental expenditures incurred in connection
with a trade or business, notwithstanding the general rule that business
expenses to develop or create an asset that has a useful life extending
beyond the current year must be capitalized. However, deductions allowed
to a taxpayer under section 174 (or any other section) are reduced by an
amount equal to 100 percent of the taxpayer's research tax credit
determined for the taxable year. Taxpayers may alternatively elect to
claim a reduced research tax credit amount under section 41 in lieu of
reducing deductions otherwise allowed (sec. 280C(c)(3)).
REASONS FOR CHANGE
Businesses may not find it profitable to invest in some research
activities because of the difficulty in capturing the full benefits from
the research. Costly technological advances made by one firm are often
cheaply copied by its competitors. A research tax credit can help
promote investment in research, so that research activities undertaken
approach the optimal level for the overall economy. Therefore, the
Committee believes that, in order to encourage research activities, it
is appropriate to reinstate the research tax credit.
EXPLANATION OF PROVISION
The research tax credit is extended for 19 months--i.e., generally
for the period June 1, 1997, through December 31, 1998.
Under the provision, taxpayers are permitted to elect the alternative
incremental research credit regime under section 41(c)(4) for any
taxable year beginning after June 30, 1996, and such election will apply
to that taxable year and all subsequent taxable years unless revoked
with the consent of the Secretary of the Treasury.
EFFECTIVE DATE
The provision generally is effective for qualified research
expenditures paid or incurred during the period June 1, 1997, through
December 31, 1998.
A special rule provides that, notwithstanding the general termination
date for the research credit of December 31, 1998, if a taxpayer elects
to be subject to the alternative incremental research credit regime for
its first taxable year beginning after June 30, 1996, and before July 1,
1997, the alternative incremental research credit will be available
during the entire 30-month period beginning with the first month of such
taxable year--i.e., the equivalent of the 11-month extension provided
for by the Small Business Job Protection Act of 1996 plus an additional
19-month extension provided for by this bill. However, to prevent
taxpayers from effectively obtaining more than 30-months of research
credits from the Small Business Job Protection Act of 1996 and this
bill, the 30-month period for taxpayers electing the alternative
incremental research credit regime is reduced by the number of months
(if any) after June 1996 with respect to which the taxpayer claimed
research credit amounts under the regular, 20-percent research credit
rules.
B. Contributions of Stock to Private Foundations (sec. 602 of the bill
and sec. 170( e )(5) of the Code)
PRESENT LAW
In computing taxable income, a taxpayer who itemizes deductions
generally is allowed to deduct the fair market value of property
contributed to a charitable organization.\37\
However, in the case of a charitable contribution of short-term gain,
inventory, or other ordinary income property, the amount of the
deduction generally is limited to the taxpayer's basis in the property.
In the case of a charitable contribution of tangible personal property,
the deduction is limited to the taxpayer's basis in such property if the
use by the recipient charitable organization is unrelated to the
organization's tax-exempt purpose.\38\
\37\The amount of the deduction allowable for a taxable year with
respect to a charitable contribution may be reduced depending on the
type of property contributed, the type of charitable organization to
which the property is contributed, and the income of the taxpayer (secs.
170(b) and 170(e)).
\38\As part of the Omnibus Budget Reconciliation Act of 1993, Congress
eliminated the treatment of contributions of appreciated property (real,
personal, and intangible) as a tax preference for alternative minimum
tax (AMT) purposes. Thus, if a taxpayer makes a gift to charity of
property (other than short-term gain, inventory, or other ordinary
income property, or gifts to private foundations) that is real property,
intangible property, or tangible personal property the use of which is
related to the donee's tax-exempt purpose, the taxpayer is allowed to
claim the same fair-market-value deduction for both regular tax and AMT
purposes (subject to present-law percentage limitations).
In cases involving contributions to a private foundation (other than
certain private operating foundations), the amount of the deduction is
limited to the taxpayer's basis in the property. However, under a
special rule contained in section 170(e)(5), taxpayers are allowed a
deduction equal to the fair market value of ``qualified appreciated
stock'' contributed to a private foundation prior to May 31, 1997.\39\
Qualified appreciated stock is defined as publicly traded stock which
is capital gain property. The fair-market-value deduction for qualified
appreciated stock donations applies only to the extent that total
donations made by the donor to private foundations of stock in a
particular corporation did not exceed 10 percent of the outstanding
stock of that corporation. For this purpose, an individual is treated as
making all contributions that were made by any member of the
individual's family.
\39\The special rule contained in section 170(e)(5), which was
originally enacted in 1984, expired January 1, 1995. The Small Business
Job Protection Act of 1996 reinstated the rule for 11 months--for
contributions of qualified appreciated stock made to private foundations
during the period July 1, 1996, through May 31, 1997.
REASONS FOR CHANGE
The Committee believes that, to encourage donations to charitable
private foundations, it is appropriate to extend the rule that allows a
fair market value deduction for certain gifts of appreciated stock to
private foundations.
EXPLANATION OF PROVISION
The bill extends the special rule contained in section 170(e)(5) for
contributions of qualified appreciated stock made to private foundations
during the period June 1, 1997, through December 31, 1998.
EFFECTIVE DATE
The provision is effective for contributions of qualified appreciated
stock to private foundations made during the period June 1, 1997,
through December 31, 1998.
C. Work Opportunity Tax Credit (sec. 603 of the bill and sec. 51 of the
Code)
PRESENT LAW
In general
The work opportunity tax credit is available on an elective basis for
employers hiring individuals from one or more of seven targeted groups.
The credit generally is equal to 35 percent of qualified wages.
Qualified wages consist of wages attributable to service rendered by a
member of a targeted group during the one-year period beginning with the
day the individual begins work for the employer. For a vocational
rehabilitation referral, however, the period will begin on the day the
individual begins work for the employer on or after the beginning of the
individual's vocational rehabilitation plan as under prior law.
Generally, no more than $6,000 of wages during the first year of
employment is permitted to be taken into account with respect to any
individual. Thus, the maximum credit per individual is $2,100. With
respect to qualified summer youth employees, the maximum credit is 35
percent of up to $3,000 of qualified first-year wages, for a maximum
credit of $1,050.
The deduction for wages is reduced by the amount of the credit. Also,
the credit does not reduce alternative minimum tax (AMT) liability.
Targeted groups eligible for the credit
(1) Families receiving AFDC
An eligible recipient is an individual certified by the designated
local employment agency as being a member of a family eligible to
receive benefits under AFDC or its successor program for a period of at
least nine months part of which is during the 9-month period ending on
the hiring date. For these purposes, members of the family are defined
to include only those individuals taken into account for purposes of
determining eligibility for the AFDC or its successor program.
(2) Qualified ex-felon
A qualified ex-felon is an individual certified as: (1) having been
convicted of a felony under any State or Federal law, (2) being a member
of a family that had an income during the six months before the earlier
of the date of determination or the hiring date which on an annual basis
is 70 percent or less of the Bureau of Labor Statistics lower living
standard, and (3) having a hiring date within one year of release from
prison or date of conviction.
(3) High-risk-youth
A high-risk youth is an individual certified as being at least 18 but
not 25 on the hiring date and as having a principal place of abode
within an empowerment zone or enterprise community (as defined under
Subchapter U of the Internal Revenue Code). Qualified wages will not
include wages paid or incurred for services performed after the
individual moves outside an empowerment zone or enterprise community.
(4) Vocational rehabilitation referral
Vocational rehabilitation referrals are those individuals who have a
physical or mental disability that constitutes a substantial handicap to
employment and who have been referred to the employer while receiving,
or after completing, vocational rehabilitation services under an
individualized, written rehabilitation plan under a State plan approved
under the Rehabilitation Act of 1973 or under a rehabilitation plan for
veterans carried out under Chapter 31 of Title 38, U.S. Code.
Certification will be provided by the designated local employment agency
upon assurances from the vocational rehabilitation agency that the
employee has met the above conditions.
(5) Qualified summer youth employee
Qualified summer youth employees are individuals: (1) who perform
services during any 90-day period between May 1 and September 15, (2)
who are certified by the designated local agency as being 16 or 17 years
of age on the hiring date, (3) who have not been an employee of that
employer before, and (4) who are certified by the designated local
agency as having a principal place of abode within an empowerment zone
or enterprise community (as defined under Subchapter U of the Internal
Revenue Code). As with high-risk youths, no credit is available on wages
paid or incurred for service performed after the qualified summer youth
moves outside of an empowerment zone or enterprise community. If, after
the end of the 90-day period, the employer continues to employ a youth
who was certified during the 90-day period as a member of another
targeted group, the limit on qualified first-year wages will take into
account wages paid to the youth while a qualified summer youth employee.
(6) Qualified Veteran
A qualified veteran is a veteran who is a member of a family
certified as receiving assistance under: (1) AFDC for a period of at
least nine months part of which is during the 12-month period ending on
the hiring date, or (2) a food stamp program under the Food Stamp Act of
1977 for a period of at least three months part of which is during the
12-month period ending on the hiring date. For these purposes, members
of a family are defined to include only those individuals taken into
account for purposes of determining eligibility for: (i) the AFDC or its
successor program, and (ii) a food stamp program under the Food Stamp
Act of 1977, respectively.
Further, a qualified veteran is an individual who has served on
active duty (other than for training) in the Armed Forces for more than
180 days or who has been discharged or released
from active duty in the Armed Forces for a service-connected
disability. However, any individual who has served for a period of more
than 90 days during which the individual was on active duty (other than
for training) is not an eligible employee if any of this active duty
occurred during the 60-day period ending on the date the individual was
hired by the employer. This latter rule is intended to prevent employers
who hire current members of the armed services (or those departed from
service within the last 60 days) from receiving the credit.
(7) Families receiving Food Stamps
An eligible recipient is an individual aged 18 but not 25 certified
by a designated local employment agency as being a member of a family
receiving assistance under a food stamp program under the Food Stamp Act
of 1977 for a period of at least six months ending on the hiring date.
In the case of families that cease to be eligible for food stamps under
section 6(o) of the Food Stamp Act of 1977, the six-month requirement is
replaced with a requirement that the family has been receiving food
stamps for at least three of the five months ending on the date of hire.
For these purposes, members of the family are defined to include only
those individuals taken into account for purposes of determining
eligibility for a food stamp program under the Food Stamp Act of 1977.
Minimum employment period
No credit is allowed for wages paid unless the eligible individual is
employed by the employer for at least 180 days (20 days in the case of a
qualified summer youth employee) or 400 hours (120 hours in the case of
a qualified summer youth employee).
Expiration date
The credit is effective for wages paid or incurred to a qualified
individual who begins work for an employer after September 30, 1996, and
before October 1, 1997.
REASONS FOR CHANGE
The Committee believes that this short-term program with
modifications will provide the Congress and the Treasury and Labor
Departments an opportunity to assess fully the operation and
effectiveness of the credit as a hiring incentive.
EXPLANATION OF PROVISION
The bill extends for one year the work opportunity tax credit and
makes four modifications: (1) the minimum employment period is reduced
to 120 hours, (2) the credit percentage is modified so that the
percentage is 25% for the first 400 hours and 40% thereafter (assuming
the minimum employment period is satisfied with respect to that
employee), (3) an otherwise eligible member of a family receiving AFDC
benefits satisfies the credit requirements if the family has received
AFDC benefits for any 9-month period during the 18-month period ending
on the hiring date (this expansion applies whether or not the individual
is a qualified veteran), and (4) the credit is allowed against the AMT.
EFFECTIVE DATE
Generally the provisions that extend the work opportunity tax credit
and make other modifications to the credit are effective for wages paid
or incurred to qualified individuals who begin work for the employer
after September 30, 1997, and before October 1, 1998. The provision
allowing the credit against the AMT is effective for taxable years
beginning after December 31, 1997.
d. orphan drug tax credit (sec. 604 of the bill and sec. 45c of the
code)
PRESENT LAW
A 50-percent nonrefundable tax credit is allowed for qualified
clinical testing expenses incurred in testing of certain drugs for rare
diseases or conditions, generally referred to as ``orphan drugs.''
Qualified testing expenses are costs incurred to test an orphan drug
after the drug has been approved for human testing by the Food and Drug
Administration (``FDA'') but before the drug has been approved for sale
by the FDA. A rare disease or condition is defined as one that (1)
affects less than 200,000 persons in the United States, or (2) affects
more than 200,000 persons, but for which there is no reasonable
expectation that businesses could recoup the costs of developing a drug
for such disease or condition from U.S. sales of the drug. These rare
diseases and conditions include Huntington's disease, myoclonus, ALS
(Lou Gehrig's disease), Tourette's syndrome, and Duchenne's dystrophy (a
form of muscular dystrophy).
As with other general business credits (sec. 38), taxpayers are
allowed to carry back unused credits to three years preceding the year
the credit is earned (but not to a taxable year ending before July 1,
1996) and to carry forward unused credits to 15 years following the year
the credit is earned. The credit cannot be used to offset a taxpayer's
alternative minimum tax liability.
The orphan drug tax credit expired and does not apply to expenses
paid or incurred after May 31, 1997.\40\
\40\The orphan drug tax credit originally was enacted in 1983 and was
extended on several occasions. The credit expired on December 31, 1994,
and later was reinstated for the period July 1, 1996, through May 31,
1997.
REASONS FOR CHANGE
In order to encourage the socially optimal level of research to
develop drugs to treat rare diseases and conditions--and because the
research and clinical testing of such drugs often must be conducted over
several years--the Committee believes that the orphan drug tax credit
should be permanently extended.
EXPLANATION OF PROVISION
The orphan drug tax credit provided for by section 45C is permanently
extended.
EFFECTIVE DATE
The provision is effective for qualified clinical testing expenses
paid or incurred after May 31, 1997.
TITLE VII. DISTRICT OF COLUMBIA TAX INCENTIVES
(secs. 701 702 of the bill and new secs. 1400 1400D of the code)
PRESENT LAW
Empowerment zones and enterprise communities
In general
Pursuant to the Omnibus Budget Reconciliation Act of 1993 (OBRA
1993), the Secretaries of the Department of Housing and Urban
Development (HUD) and the Department of Agriculture designated a total
of nine empowerment zones and 95 enterprise communities on December 21,
1994. As required by law, six empowerment zones are located in urban
areas (with aggregate population for the six designated urban
empowerment zones limited to 750,000) and three empowerment zones are
located in rural areas.\41\
Of the enterprise communities, 65 are located in urban areas and 30 are
located in rural areas (sec. 1391). Designated empowerment zones and
enterprise communities were required to satisfy certain eligibility
criteria, including specified poverty rates and population and
geographic size limitations (sec. 1392). Portions of the District of
Columbia were designated as an enterprise community.
\41\The six designated urban empowerment zones are located in New York
City, Chicago, Atlanta, Detroit, Baltimore, and Philadelphia-Camden (New
Jersey). The three designated rural empowerment zones are located in
Kentucky Highlands (Clinton, Jackson, and Wayne counties, Kentucky),
Mid-Delta Mississippi (Bolivar, Holmes, Humphreys, Leflore counties,
Mississippi), an Rio Grande Valley Texas (Cameron, Hidalgo, Starr, and
Willacy counties, Texas).
The following tax incentives are available for certain businesses
located in empowerment zones: (1) an annual 20-percent wage credit for
the first $15,000 of wages paid to a zone resident who works in the
zone; (2) an additional $20,000 of expensing under Code section 179 for
``qualified zone property'' placed in service by an ``enterprise zone
business'' (accordingly, certain businesses operating in empowerment
zones are allowed up to $38,000 of expensing for 1997; the allowable
amount will increase to $38,500 for 1998); and (3) special tax-exempt
financing for certain zone facilities (described in more detail below).
The 95 enterprise communities are eligible for the special tax-exempt
financing benefits but not the other tax incentives available in the
nine empowerment zones. In addition to these tax incentives, OBRA 1993
provided that Federal grants would be made to designated empowerment
zones and enterprise communities.
The tax incentives for empowerment zones and enterprise communities
generally will be available during the period that the designation
remains in effect, i.e., a 10-year period.
Definition of ``qualified zone property''
Present-law section 1397C defines ``qualified zone property'' as
depreciable tangible property (including buildings), provided that: (1)
the property is acquired by the taxpayer (from an unrelated party) after
the zone or community designation took effect; (2) the original use of
the property in the zone or community commences with the taxpayer; and
(3) substantially all of the use of the property is in the zone or
community in the active conduct of a trade or business by the taxpayer
in the zone or community. In the case of property which is substantially
renovated by the taxpayer, however, the property need not be acquired by
the taxpayer after zone or community designation or originally used by
the taxpayer within the zone or community if, during any 24-month period
after zone or community designation, the additions to the taxpayer's
basis in the property exceed the greater of 100 percent of the
taxpayer's basis in the property at the beginning of the period, or
$5,000.
Definition of ``enterprise zone business''
Present-law section 1397B defines the term ``enterprise zone
business'' as a corporation or partnership (or proprietorship) if for
the taxable year: (1) the sole trade or business of the corporation or
partnership is the active conduct of a qualified business within an
empowerment zone or enterprise community; (2) at least 80 percent of the
total gross income is derived from the active conduct of a ``qualified
business'' within a zone or community; (3) substantially all of the
business' tangible property is used within a zone or community; (4)
substantially all of the business' intangible property is used in, and
exclusively related to, the active conduct of such business; (5)
substantially all of the services performed by employees are performed
within a zone or community; (6) at least 35 percent of the employees are
residents of the zone or community; and (7) no more than five percent of
the average of the aggregate unadjusted bases of the property owned by
the business is attributable to (a) certain financial property, or (b)
collectibles not held primarily for sale to customers in the ordinary
course of an active trade or business.
A ``qualified business'' is defined as any trade or business other
than a trade or business that consists predominantly of the development
or holding of intangibles for sale or license.\42\
In addition, the leasing of real property that is located within the
empowerment zone or community to others is treated as a qualified
business only if (1) the leased property is not residential property,
and (2) at least 50 percent of the gross rental income from the real
property is from enterprise zone businesses. The rental of tangible
personal property to others is not a qualified business unless
substantially all of the rental of such property is by enterprise zone
businesses or by residents of an empowerment zone or enterprise
community.
\42\Also, a qualified business does not include certain facilities
described in section 144(c)(6)(B) (e.g., massage parlor, hot tub
facility, or liquor store) or certain large farms.
Tax-exempt financing rules
Tax-exempt private activity bonds may be issued to finance certain
facilities in empowerment zones and enterprise communities. These bonds,
along with most private activity bonds, are subject to an annual private
activity bond State volume cap equal to $50 per resident of each State,
or (if greater) $150 million per State.
Qualified enterprise zone facility bonds are bonds 95 percent or more
of the net proceeds of which are used to finance (1) ``qualified zone
property'' (as defined above) the principal user of which is an
``enterprise zone business'' (also defined above\43\
), or (2) functionally related and subordinate land located in the
empowerment zone or enterprise community. These bonds may only be issued
while an empowerment zone or enterprise community designation is in
effect.
\43\For purpose of the tax-exempt financing rules, and ``enterprise
zones Business'' also includes a business located in a zone or community
which would qualify as an enterprise zone business if it were separately
incorporated.
The aggregate face amount of all qualified enterprise zone bonds for
each qualified enterprise zone business may not exceed $3 million per
zone or community. In addition, total qualified enterprise zone bond
financing for each principal user of these bonds may not exceed $20
million for all zones and communities.
Taxation of capital gains
In general, gain or loss reflected in the value of an asset is not
recognized for income tax purposes until a taxpayer disposes of the
asset. On the sale or exchange of capital assets, the net capital gain
generally is taxed at the same rate as ordinary income, except that the
maximum rate of tax is limited to 28 percent of the net capital
gain.\44\
Net capital gain is the excess of the net long-term capital gain for
the taxable year over the net short-term capital loss for the year. Gain
or loss is treated as long-term if the asset is held for more than one
year.
\44\The Revenue Reconciliation Act of 1993 added Code section 12002,
which provides a 50-percent exclusion for gain from the sale of certain
small business stock acquired at original issue and held for at least
five years.
Capital losses generally are deductible in full against capital
gains. In addition, individual taxpayers may deduct capital losses
against up to $3,000 of ordinary income in each year. Any remaining
unused capital losses may be carried forward indefinitely to another
taxable year.
A capital asset generally means any property except (1) inventory,
stock in trade, or property held primarily for sale to customers in the
ordinary course of the taxpayer's trade or business, (2) depreciable or
real property used in the taxpayer's trade or business, (3) specified
literary or artistic property, (4) business accounts or notes
receivable, and (5) certain publications of the Federal Government.
In addition, the net gain from the disposition of certain property
used in the taxpayer's trade or business is treated as long-term capital
gain. Gain from the disposition of depreciable personal property is not
treated as capital gain to the extent of all previous depreciation
allowances. Gain from the disposition of depreciable real property
generally is not treated as capital gain to the extent of the
depreciation allowances in excess of the allowances that would have been
available under the straight-line method.
Individual tax rates
To determine tax liability, an individual taxpayer generally must
apply the tax rate schedules (or the tax tables) to his or her taxable
income. The rate schedules are broken into several ranges of income,
known as income brackets, and the marginal tax rate increases as a
taxpayer's income increases. Separate rate schedules apply based on an
individual's filing status. For 1997, the individual income tax rate
schedules are as follows:
If taxable income is Then income tax equals
Single individuals
$0 $24,650 15 percent of taxable income.
$24,651 $59,750 $3,698, plus 28% of the amount over $24,650.
$59,751 $124,650 $13,526, plus 31% of the amount over $59,750.
$124,651 $271,050 $33,645, plus 36% of the amount over $124,650.
Over $271,050 $86,349, plus 39.6% of the amount over $271,050.
Heads of households
$0 $33,050 15 percent of taxable income.
$33,051 $85,350 $4,958, plus 28% of the amount over $33,050.
$85,351 $138,200 $19,602 plus 31% of the amount over $85,350.
$138,201 $271,050 $35,985, plus 36% of the amount over $138,200.
Over $271,050 $83,811, plus 39.6% of the amount over $271,050.
Married individuals filing joint returns
$0 $41,200 15 percent of taxable income.
$41,201 $99,600 $6,180, plus 28% of the amount over $41,200.
$99,601 $151,750 $22,532, plus 31% of the amount over $99,600.
$151,751 $271,050 $38,698, plus 36% of the amount over $151,750.
Over $271,050 $81,646, plus 39.6% of the amount over $271,050.
Married individuals filing separate returns
$0 $20,600 15 percent of taxable income.
$20,601 $49,800 $3,090, plus 28% of the amount over $20,600.
$49,801 $75,875 $11,266, plus 31% of the amount over $49,800.
$75,876 $135,525 $19,349, plus 36% of the amount over $75,875.
Over $135,525 $40,823 plus 39.6% of the amount over $135,525.
REASONS FOR CHANGE
The Committee believes that the District of Columbia faces two key
problems--residents migrating from the District and insufficient
economic activity. To this end, the Committee has provided certain tax
incentives to reduce the Federal tax burden on certain District
residents, and to encourage economic development in those areas of the
District where development has been inadequate. However, the Committee
is aware that the efficacy of tax incentives to address one or both
problems is severely limited absent fundamental structural reform of the
District's government and economy. Thus, the availability of the tax
incentives is contingent on the passage of other Federal legislation
that will implement such critical structural reforms.
EXPLANATION OF PROVISION
Designation of D.C. Enterprise Zone
Certain economically depressed census tracts within the District of
Columbia are designated as the ``D.C. Enterprise Zone,'' within which
businesses and individual residents are eligible for special tax
incentives. The census tracts that compose the D.C. Enterprise Zone are
(1) all census tracts that presently are part of the D.C. enterprise
community designated under section 1391 (i.e., portions of Anacostia,
Mt. Pleasant, Chinatown, and the easternmost part of the District) and
(2) all additional census tracts within the District of Columbia where
the poverty rate is at least 35 percent. The D.C. Enterprise Zone
designation generally will remain in effect for five years for the
period from January 1, 1998, through December 31, 2002.\45\
\45\The status of certain census tracts within the District as an
enterprise community designated under section 1391 also terminates on
December 31, 2002.
The following tax incentives will take effect only if, prior to
January 1, 1998, a Federal law is enacted creating a District of
Columbia economic development corporation that is an instrumentality of
the District of Columbia government.\46\
\46\In addition, the bill assumes the enactment of certain modifications
to Federal law (other than Federal tax laws contained in the Internal
Revenue Code) similar to those proposed by the Administration that would
clarify and expand the District's authority to issue revenue bonds.
Business development incentives
Empowerment zone wage credit, expensing, and tax-exempt financing
The following tax incentives that are available under present law in
empowerment zones would be available in the D.C. Enterprise Zone
(modified as described below): (1) a 20-percent wage credit for the
first $15,000 of wages paid to D.C. Enterprise Zone residents who work
in the D.C. Enterprise Zone; (2) an additional $20,000 of expensing
under Code section 179 for qualified zone property; and (3) special
tax-exempt financing for certain zone facilities.
In general, the wage credit for certain D.C. Enterprise Zone
residents who work in the D.C. Enterprise Zone is the same as is
available in empowerment zones under present law. However, the wage
credit rate remains at 20 percent for the D.C. Enterprise Zone for the
period 1998 through 2002 (and does not phase down to 15 percent in the
year 2002 as under present-law section 1396). The wage credit is
effective for wages paid (or incurred) to a qualified individual after
December 31, 1997, and before January 1, 2003.
The increased expensing under Code section 179 is effective for
property placed in service in taxable years beginning after December 31,
1997, and before January 1, 2003. Thus, qualified D.C. Zone property
placed in service in taxable years beginning in 1998 is eligible for up
to $38,500 of expensing.
A qualified D.C. Zone business (defined as under present law section
1394(b)(3)) is permitted to borrow proceeds from the issuance of
qualified enterprise zone facility bonds. Such bonds can be issued only
by a newly created economic development corporation and are subject to
the requirements applicable under present law to enterprise zone
facility bonds, except that the amount of outstanding bond proceeds that
can be borrowed by any qualified District business cannot exceed $15
million (rather than $3 million). The special tax-exempt bond provisions
apply to bonds issued after December 31, 1997, and prior to January 1,
2003.
Tax credits for equity investments in and loans to
businesses located in the District of Columbia
A newly created economic development corporation is authorized to
allocate $75 million in tax credits to taxpayers that make certain
equity investments in, or loans to, businesses (either corporations or
partnerships) engaged in an active trade or business in the District of
Columbia. The business need not be located in the D.C. Enterprise Zone,
although factors to be considered in the allocation of credits include
whether the project would provide job opportunities for low and moderate
income residents of the D.C. Enterprise Zone and whether the business is
located in the D.C. Enterprise Zone. Eligible businesses are not be
required to satisfy the criteria of a qualified D.C. Zone business,
described above. Such credits are nonrefundable and can be used to
offset a taxpayer's alternative minimum tax (AMT) liability.
Under the bill, the amount of credit cannot exceed 25 percent of the
amount invested (or loaned) by the taxpayer. Thus, the economic
development corporation may allocate the full $75
million in tax credits to no less than $300 million in equity
investments in, or loans, to eligible businesses.
Under the bill, credits may be allocated to loans made to an eligible
business only if the business uses the loan proceeds to purchase
depreciable tangible property and any functionally related and
subordinate land. Credits may be allocated to equity investments only if
the equity interest was acquired for cash. Any credits allocated to a
taxpayer making an equity investment are subject to recapture if the
equity interest is disposed of by the taxpayer within five years. A
taxpayer's basis in an equity investment is reduced by the amount of the
credit.
The bill applies to credit amounts allocated for taxable years
beginning after December 31, 1997, and before January 1, 2003.\47\
\47\As a general business credit, the credit can be carried back three
years (but not before January 1, 1998) and forward for fifteen years.
Zero percent capital gains rate
The bill provides a zero percent capital gains rate for capital gains
from the sale of certain qualified D.C Zone assets held for more than
five years. In general, D.C. Zone assets mean stock or partnership
interests held in or tangible property held by a D.C. Zone business. For
this purpose, a D.C. Zone business is defined as an enterprise zone
business under present-law section 1397B.
``D.C. Zone business stock'' is stock in a domestic corporation
originally issued after December 31, 1997, that, at the time of
issuance\48\
and during substantially all of the taxpayer's holding period, was a
D.C. Zone business, provided that such stock was acquired by the
taxpayer on original issue from the corporation solely in exchange for
cash\49\
. A ``D.C. Zone partnership interest'' is a domestic partnership
interest originally issued after December 31, 1997, that is acquired by
the taxpayer from the partnership solely in exchange for cash before
January 1, 2003, provided that, at the time such interest was
acquired\50\
and during substantially all of the taxpayer's holding period, the
partnership was a D.C. Zone business. Finally, ``D.C. Zone business
property'' is tangible property acquired by the taxpayer by purchase
(within the meaning of present law section 179(d)(2)) after December 31,
1997, and before January 1, 2003, provided that the original use of such
property in the D.C. Enterprise Zone commences with the taxpayer and
substantially all of the use of such property during substantially all
of the taxpayer's holding period was in a D.C. Zone business of the
taxpayer.
\48\In the case of a new corporation, it is sufficient if the
corporation is being organized for purposes of being a D.C. Zone
business.
\49\Qualified D.C. Zone business stock does not include any stock
acquired from a corporation which made a substantial stock redemption or
distribution (without a bona fide business purpose therefore) in an
attempt to avoid the purposes of the provision. A similar rule applies
with respect to qualified D.C. Zone partnership interests.
\50\In the case of a new partnership, it is sufficient if the
partnership is being formed for purposes of being a D.C. Zone business.
A special rule provides that, in the case of business property that
is ``substantially renovated,'' such property need not be acquired by
the taxpayer after December 31, 1997, nor need the original use of such
property in the D.C. Enterprise Zone commence with the taxpayer. For
these purposes, property is treated as ``substantially renovated'' if,
prior to January 1, 2003, additions to basis with respect to such
property in the hands of the taxpayer during any 24-month period
beginning after December 31, 1997, exceed the greater of (1) an amount
equal to the adjusted basis at the beginning of such 24-month period in
the hands of the taxpayer, or (2) $5,000. Thus, substantially renovated
real estate located in the D.C. Enterprise Zone may constitute D.C. Zone
business property. However, the bill specifically excludes land that is
not an integral part of a D.C. Zone business from the definition of D.C.
Zone business property.
In addition, qualified D.C. Zone assets include property that was a
qualified D.C. Zone asset in the hands of a prior owner, provided that
at the time of acquisition, and during substantially all of the
subsequent purchaser's holding period, either (1) substantially all of
the use of the property is in a D.C. Zone business, or (2) the property
is an ownership interest in a D.C. Zone business.\51\
\51\The termination of the D.C. Zone designation will not, by itself,
result in property failing to be treated as a qualified D.C. Zone asset.
However, capital gain eligible for the zero percent capital gains rate
does not include any gain attributable to periods after December 31,
2007.
In general, gain eligible for the zero percent tax rate means gain
from the sale or exchange of a qualified D.C. Zone asset that is (1) a
capital asset or (2) property used in the trade or business as defined
in section 1231(b). Gain attributable to periods before December 31,
1997, and after December 31, 2007, is not qualified capital gain. No
gain attributable to real property, or an intangible asset, which is not
an integral part of a D.C. Zone business qualifies for the zero percent
rate.
The bill provides that property that ceases to be a qualified D.C.
Zone asset because the property is no longer used in (or no longer
represents an ownership interest in) a D.C. Zone business after the
five-year period beginning on the date the taxpayer acquired such
property would continue to be treated as a D.C. Zone asset. Under this
rule, the amount of gain eligible for the zero percent capital gains
rate cannot exceed the amount which would be qualified capital gain had
the property been sold on the date of such cessation.
Special rules are provided for pass-through entities (i.e.,
partnerships, S corporations, regulated investment companies, and common
trust funds). In the case of a sale or exchange of an interest in a
pass-through entity that was not a D.C. Zone business during
substantially all of
the period that the taxpayer held the interest, the zero
percent capital gains rate applies to the extent that the gain is
attributable to amounts that would have been qualified capital gain had
the assets been sold for their fair market value on the date of the sale
or exchange of the interest in the pass-through entity. This rule
applies only if the interest in the pass-through entity were held by the
taxpayer for more than five years. In addition, the rule applies only to
qualified D.C. Zone assets that were held by the pass-through entity for
more than five years, and throughout the period that the taxpayer held
the interest in the pass-through entity.
The bill also provides that in the case of a transfer of a qualified
D.C. Zone asset by gift, at death, or from a partnership to a partner
that held an interest in the partnership at the time that the qualified
D.C. Zone asset was acquired, (1) the transferee is to be treated as
having acquired the asset in the same manner as the transferor, and (2)
the transferee's holding period includes that of the transferor. In
addition, rules similar to those contained in section 1202(i)(2)
regarding treatment of contributions to capital after the original
issuance date and section 1202(j) regarding treatment of certain short
positions apply.
Individual resident tax rate reduction
Individuals who have their principal place of abode in any census
tract that is part of the D.C. Enterprise Zone are entitled to a
10-percent tax rate on all taxable income that currently is subject to a
15-percent Federal income tax rate. Thus, using the 1997 tax rate
schedule, a single taxpayer who resides in the D.C. Enterprise Zone with
$24,650 or more of taxable income will receive a Federal income tax
reduction of $1,233 under the bill. Married taxpayers who reside in the
D.C. Enterprise Zone and file a joint return with taxable income of
$41,200 or more of taxable income will receive a Federal income tax
reduction of $2,060 under the bill.
The special 10-percent rate provision is in effect for the period
1998 2007.
EFFECTIVE DATE
The D.C. tax incentives generally are effective January 1, 1998, and
remain in effect for five years until the termination of the D.C.
Enterprise Zone designation on December 31, 2002. However, the zero
percent tax rate for capital gains and the special 10-percent rate
bracket are effective for the period 1998 2007.
TITLE VIII. WELFARE-TO-WORK TAX CREDIT
(sec. 801 of the bill and new sec. 51A of the Code)
PRESENT LAW
The work opportunity tax credit is available on an elective basis for
employers hiring individuals from one or more of seven targeted groups.
The credit generally is equal to 35 percent of qualified wages.
Qualified wages consist of wages attributable to service rendered by a
member of a targeted group during the one-year period beginning with the
day the individual begins work for the employer. For a vocational
rehabilitation referral, however, the period will begin on the day the
individual begins work for the employer on or after the beginning of the
individual's vocational rehabilitation plan as under prior law.
For purposes of the work opportunity tax credit, the targeted groups
for which the credit is available include (1) families receiving Aid to
Families with Dependent Children (AFDC), (2) qualified ex-felons, (3)
high-risk youth, (4) vocational rehabilitation referrals, (5) qualified
summer youth employees, (6) qualified veterans, and (7) families
receiving food stamps.
Generally, no more than $6,000 of wages during the first year of
employment is permitted to be taken into account with respect to any
individual. Thus, the maximum credit per individual is $2,100. With
respect to qualified summer youth employees, the maximum credit is 35
percent of up to $3,000 of qualified first-year wages, for a maximum
credit of $1,050.
The deduction for wages is reduced by the amount of the credit.
The work opportunity tax credit is effective for wages paid or
incurred to a qualified individual who begins work for an employer after
September 30, 1996, and before October 1, 1997.
REASONS FOR CHANGE
One goal of the Personal Responsibility and Work Opportunity Reform
Act of 1996 (Public Law 104 193) was to move individuals from welfare to
work. The Committee believes that the welfare-to-work credit will
provide to employers an additional incentive to hire these categories of
individuals. This incentive is intended to ease the transition from
welfare to work for the targeted categories of individuals by increasing
access to employment. It is also intended to provide certain employee
benefits to these individuals to encourage training, health coverage,
dependent care and ultimately better job attachment.
EXPLANATION OF PROVISION
The bill provides to employers a credit on the first $20,000 of
eligible wages paid to qualified long-term family assistance (AFDC or
its successor program) recipients during the first two years of
employment. The credit is 35% of the first $10,000 of eligible wages in
the first year of employment and 50% of the first $10,000 of eligible
wages in the second year of employment. The maximum credit is $8,500 per
qualified employee.
Qualified long-term family assistance recipients are: (1) members of
a family that has received family assistance for at least 18 consecutive
months ending on the hiring date; (2) members of a family that has
received family assistance for a total of at least 18 months (whether or
not consecutive) after the date of enactment of this credit if they are
hired within 2 years after the date that the 18-month total is reached;
and (3) members of a family who are no longer eligible for family
assistance because of either Federal or State time limits, if they are
hired within 2 years after the Federal or State time limits made the
family ineligible for family assistance.
Eligible wages are amounts paid by the employer for the following:
(1) educational assistance excludable under a section 127 program (or
that would be excludable but for the expiration of section 127); (2)
health plan coverage for the employee, but not more than the applicable
premium defined under section 4980B(f)(4); and (3) dependent care
assistance excludable under section 129.
EFFECTIVE DATE
The provision is effective for wages paid or incurred to a qualified
individual who begins work for an employer on or after January 1, 1998
and before May 1, 1999.
TITLE IX. MISCELLANEOUS PROVISIONS
A. Excise Tax Provisions
1. REPEAL EXCISE TAX ON DIESEL FUEL USED IN RECREATIONAL MOTORBOATS
(SEC. 901 OF THE BILL AND SECS. 4041 AND 6427 OF THE CODE)
PRESENT LAW
Before a temporary suspension through December 31, 1997 was enacted
in 1996, diesel fuel used in recreational motorboats was subject to the
24.3-cents-per-gallon diesel fuel excise tax. Revenues from this tax
were retained in the General Fund. The tax was enacted by the Omnibus
Budget Reconciliation Act of 1993 as a revenue offset for repeal of the
excise tax on certain luxury boats.
REASONS FOR CHANGE
Many marinas have found it uneconomical to carry both undyed (taxed)
and dyed (untaxed) diesel fuel because the majority of their market is
for uses not subject to tax. As a result, some recreational boaters have
experienced difficulty finding fuels. In 1996, Congress suspended
imposition of the tax on recreational boating while alternative
collection methods were evaluated. No satisfactory alternative has been
found; therefore, the Committee determined that competing needs for boat
fuel availability and preservation of the integrity of the diesel fuel
tax compliance structure are best served by repealing the diesel fuel
tax on recreational motorboat use.
EXPLANATION OF PROVISION
The provision repeals the application of the diesel fuel tax to fuel
used in recreational motorboats.
EFFECTIVE DATE
The provision is effective for fuel sold after December 31, 1997.
2. CONTINUED APPLICATION OF TAX ON IMPORTED RECYCLED HALON-1211 (SEC.
902 OF THE BILL AND SEC. 4682 OF THE CODE)
PRESENT LAW
An excise tax is imposed on the sale or use by the manufacturer or
importer of certain ozone-depleting chemicals (Code sec. 4681). The
amount of tax generally is determined by multiplying the base tax amount
applicable for the calendar year by an ozone-depleting factor assigned
to each taxable chemical. The base tax amount is $6.25 per pound in 1997
and will increase by 45 cents per pound per year thereafter. The
ozone-depleting factors for taxable halons are 3 for halon-1211, 10 for
halon-1301, and 6 for halon-2402.
Taxable chemicals that are recovered and recycled within the United
States are exempt from tax. In addition, exemption is provided for
imported recycled halon-1301 and halon-2402 if such chemicals are
imported from countries that are signatories to the Montreal Protocol on
Substances that Deplete the Ozone Layer. Present law further provides
that exemption is to be provided for imported recycled halon-1211, for
such chemicals imported from countries that are signatories to the
Montreal Protocol on Substances that Deplete the Ozone Layer after
December 31, 1997.
REASONS FOR CHANGE
The Committee understands that in response to the profit incentive
created by the higher price for ozone-depleting chemicals that has
resulted from the tax on these chemicals, entrepreneurs have developed
and are marketing a substitute for halon-1211 that is not ozone
depleting. The Committee believes permitting imported recycled
halon-1211 to compete in the market tax free may destroy this
entrepreneurial and environmental success story.
EXPLANATION OF PROVISION
The bill repeals the present-law exemption for imported recycled
halon-1211.
EFFECTIVE DATE
The provision is effective on the date of enactment.
3. UNIFORM RATE OF EXCISE TAX ON VACCINES (SEC. 903 OF THE BILL AND
SECS. 4131 AND 4132 OF THE CODE)
PRESENT LAW
Under section 4131, a manufacturer's excise tax is imposed on the
following vaccines routinely recommended for administration to children:
DPT (diphtheria, pertussis, tetanus,), $4.56 per dose; DT (diphtheria,
tetanus), $0.06 per dose; MMR (measles, mumps, or rubella), $4.44 per
dose; and polio, $0.29 per dose. In general, if any vaccine is
administered by combining more than one of the listed taxable vaccines,
the amount of tax imposed is the sum of the amounts of tax imposed for
each taxable vaccine. However, in the case of MMR and its components,
any component vaccine of MMR is taxed at the same rate as the
MMR-combined vaccine.
Amounts equal to net revenues from this excise tax are deposited in
the Vaccine Injury Compensation Trust Fund to finance compensation
awards under the Federal Vaccine Injury Compensation Program for
individuals who suffer certain injuries following administration of
the taxable vaccines. This program provides a substitute
Federal, ``no fault'' insurance system for the State-law tort and
private liability insurance systems otherwise applicable to vaccine
manufacturers. All persons immunized after September 30, 1998, with
covered vaccines must pursue compensation under this Federal program
before bringing civil tort actions under State law.
REASONS FOR CHANGE
The Committee understands that the present-law tax rates applicable
to taxable vaccines were chosen to reflect estimated probabilities of
adverse reactions and the severity of the injury that might result from
such reactions. The Committee understands that medical researchers
believe that there is insufficient data to support fine gradations of
estimates of potential harm from the various different childhood
vaccines. In the light of this scientific assessment, the Committee
believes some simplicity can be achieved by taxing such vaccines at the
same rate per dose.
The Committee further believes it is appropriate to review the list
of taxable vaccines from time to time as medical science advances. The
Center for Disease Control has recommended that the vaccines for HIB
(hemophilus influenza type B), Hepatitis B, and varicella (chickenpox)
be widely administered among the nation's children. In light of the
growing number of immunizations using these vaccines, the Committee adds
these vaccines to the list of taxable vaccines.
EXPLANATION OF PROVISION
The bill replaces the present-law excise tax rates, that differ by
vaccine, with a single rate tax of $0.84 per dose on any listed vaccine
component. Thus, the bill provides that the tax applied to any vaccine
that is a combination of vaccine components is 84 cents times the number
of components in the combined vaccine. For example, the MMR vaccine is
to be taxed at a rate of $2.52 per dose and the DT vaccine is to be
taxed at rate of $1.68 per dose.
In addition, the provision adds three new taxable vaccines to the
present-law taxable vaccines: (1) HIB (hemophilus influenza type B); (2)
Hepatitis B; and (3) varicella (chickenpox). The three newly listed
vaccines also are subject to the 84-cents per dose excise tax.
EFFECTIVE DATE
The provision is effective for vaccine purchases after September 30,
1997. No tax is to be collected or refunds permitted for amounts held
for sale on October 1, 1997.
4. TREAT CERTAIN GASOLINE ``CHAIN RETAILERS'' AS WHOLESALE DISTRIBUTORS
UNDER THE GASOLINE EXCISE TAX REFUND RULES (SEC. 904 OF THE BILL AND SEC. 6416 OF
THE CODE)
PRESENT LAW
Gasoline is taxed at 18.3 cents per gallon upon removal from a
registered pipeline or barge terminal facility. The position holder in
the terminal at the time of removal is liable for payment of the tax.
Certain uses of gasoline, including use by States and local governments,
are exempt from tax. In general, these exemptions are realized by
refunds to the exempt users of tax paid by the party that removed the
gasoline from a terminal facility. Present law includes an exception to
the general rule that refunds are made to consumers in the case of
gasoline sold to States and local governments and certain other exempt
users. In those cases, wholesale distributors sell the gasoline net of
tax previously paid and receive the refunds. The term wholesale
distributor includes only persons that sell gasoline to producers,
retailers, or to users in bulk quantities. Retailers do not qualify as
wholesale distributors, regardless of their size.
REASONS FOR CHANGE
During recent years, States and local governments increasingly have
purchased gasoline for their fleets by credit card purchases from retail
outlets. Previously, these purchases were through bulk deliveries to
tanks supplying private pumps at government installations. Currently,
wholesale distributors are eligible to claim gasoline tax refunds on
behalf of these customers. The Committee determined that allowing retail
businesses of comparable size would adapt the gasoline tax rules to
current market conditions without creating new opportunities for tax
evasion.
EXPLANATION OF PROVISION
The definition of wholesale distributor is expanded to include
certain ``chain retailers''--retailers who own and make retail sales
from 10 or more retail gasoline outlets. This modification conforms the
definition of wholesale distributor to that which existed before 1987
when the point of collection of the gasoline tax was moved from the
wholesale distribution level to removal from a terminal facility.
EFFECTIVE DATE
The provision is effective after September 30, 1997.
5. EXEMPTION OF ELECTRIC AND OTHER CLEAN-FUEL MOTOR VEHICLES FROM
LUXURY AUTOMOBILE CLASSIFICATION (SEC. 905 OF THE BILL AND SECS. 4001 AND 4003 OF
THE CODE)
PRESENT LAW
Present law imposes an excise tax on the sale of automobiles whose
price exceeds a designated threshold, currently $34,000. The excise tax
is imposed at a rate of 8-percent for 1997 on the excess of the sales
price above the designated threshold. The 8-percent rate declines by one
percentage point per year until reaching 3 percent in 2002, and no tax
thereafter. The
$34,000 threshold is indexed for inflation. The present-law
index of $34,000 is the result of adjusting a $30,000 threshold
specified in the Code for inflation occurring after 1990 (sec. 4001(e)).
The tax generally applies only to the first retail sale after
manufacture, production, or importation of an automobile. It does not
apply to subsequent sales of taxable automobiles. A 10-percent tax is
imposed on the separate purchase of vehicle and parts and accessories
therefor when the sum of the separate purchases exceeds the luxury tax
threshold (sec. 4003).\52\
\52\The rate of tax under section 4003 is not determined by reference to
section 4001. However, a technical correction under the bill (Title XV)
conforms the tax rate applicable under section 4003 to that applicable
under section 4001.
The tax under section 4001 applies to sales before January 1, 2003.
The tax under section 4003 has no termination date.\53\
\53\A technical correction under the bill (Title XV) conforms the
expiration date of the tax under section 4003 to the expiration date
under section 4001.
REASONS FOR CHANGE
The Committee believes that the price of a clean-burning fuel vehicle
or an electric vehicle does not necessarily represent the consumer's
purchase of a luxury good in the sense intended with the enactment of
the luxury excise tax on automobiles in the Omnibus Budget
Reconciliation Act of 1990. Rather, the higher price of such vehicles
often represents the cost of the technology required to produce an
automobile designed to provide certain environmental benefits. The
Committee believes the cost of this technology should not be considered
a luxury for the purpose of the luxury excise tax on automobiles.
Therefore, the Committee believes it is appropriate to modify the
threshold above which the luxury automobile excise tax applies in the
case of certain clean-burning fuel vehicles and electric vehicles.
EXPLANATION OF PROVISION
The bill modifies the threshold above which the luxury excise tax on
automobiles will apply for each of two identified classes of automobiles
both in the case of a purchase of a vehicle and in the case of the
separate purchase of a vehicle and parts and accessories therefor.
First, for an automobile that is not a clean-burning fuel vehicle to
which retrofit parts and components are installed to make the vehicle a
clean-burning vehicle (as defined under sec. 179A(c)(1)(A)), the
threshold would be $30,000, as adjusted for inflation under present law,
plus an amount equal to the increment to the retail value of the
automobile attributable to the retrofit parts and components installed.
For example, assume that in 1997, after the date of enactment, an
individual purchases a clean-burning fuel vehicle for $43,000. Further
assume that had the individual purchased the identical vehicle, without
having had certain components replaced to qualify it as clean burning,
the price paid would have been $39,000. The incremental increase in the
price of the vehicle due to the installation of the qualified property
is $4,000, and the luxury tax would be applied for the amount paid above
a threshold of $38,000 (the $34,000 base threshold applicable for 1997
plus $4,000 for the value of the incremental components). The tax would
apply to $5,000 of the sales price ($43,000 less the $38,000 threshold).
In the case of a passenger vehicle designed to be propelled primarily
by electricity and built by an original equipment manufacturer, the
threshold applicable for any year is modified to equal 150 percent of
$30,000 with the result increased for inflation occurring after 1990 and
rounded to next lowest multiple of $2,000.
For all other vehicles, the threshold remains equal to that provided
under present law.
EFFECTIVE DATE
The provision is effective for sales and installations occurring on
or after the date of enactment.
B. provisions relating to pensions and other benefits
1. CASH OR DEFERRED ARRANGEMENTS FOR IRRIGATION AND DRAINAGE ENTITIES
(SEC. 911 OF THE BILL AND SEC. 401(K) OF THE CODE)
PRESENT LAW
Under present law, taxable and tax-exempt employers may maintain
qualified cash or deferred arrangements. State and local government
organizations generally are prohibited from establishing qualified cash
or deferred arrangements (``section 401(k) plans''). This prohibition
does not apply to qualified cash or deferred arrangements adopted by a
State or local government before May 6, 1986.
Mutual irrigation or ditch companies are exempt from tax if at least
85 percent of the income of the company consists of amounts collected
from members for the sole purpose of meeting losses and expenses.
REASONS FOR CHANGE
The Committee believes that all mutual irrigation and ditch companies
and water districts should be permitted to maintain a qualified cash or
deferred arrangement, regardless of whether the company or district is a
tax-exempt or taxable entity or part of a State or local government.
EXPLANATION OF PROVISION
Under the bill, mutual irrigation or ditch companies and districts
organized under the laws of a State as a municipal corporation for the
purpose of irrigation, water conservation or drainage (or a national
association of such organizations) are permitted to maintain qualified
cash or deferred arrangements, even if the company or district is a
State or local government organization.
EFFECTIVE DATE
The provision is effective with respect to years beginning after
December 31, 1997.
2. PERMANENT MORATORIUM ON APPLICATION OF NONDISCRIMINATION RULES TO
GOVERNMENTAL PLANS (SEC. 912 OF THE BILL)
PRESENT LAW
Under present law, the rules applicable to governmental plans require
that such plans satisfy certain nondiscrimination and minimum
participation rules. In general, the rules require that a plan not
discriminate in favor of highly compensated employees with regard to the
contribution and benefits provided under the plan, participation in the
plan, coverage under the plan, and compensation taken into account under
the plan. The nondiscrimination rules apply to all governmental plans;
qualified retirement plans (including cash or deferred arrangements
(sec. 401(k) plans) in effect before May 6, 1986) and annuity plans
(sec. 403(b) plans).
For purposes of satisfying the nondiscrimination rules, the Internal
Revenue Service has issued several Notices which extended the effective
date for compliance for governmental plans. Governmental plans will be
required to comply with the nondiscrimination rules beginning with plan
years beginning on or after the later of January 1, 1999, or 90 days
after the opening of the first legislative session beginning on or after
January 1, 1999, of the governing body with authority to amend the plan,
if that body does not meet continuously. For plan years beginning before
the extended effective date, governmental plans are deemed to satisfy
the nondiscrimination requirements.
REASONS FOR CHANGE
The Committee believes that, because of the unique circumstances
applicable to governmental plans and the complexity of compliance, the
moratorium on compliance with the nondiscrimination rules should be made
permanent.
EXPLANATION OF PROVISION
The bill provides that governmental plans will be exempt from the
nondiscrimination and minimum participation rules.
EFFECTIVE DATE
The provision is effective for taxable years beginning on and after
the date of enactment.
3. TREATMENT OF CERTAIN DISABILITY PAYMENTS TO PUBLIC SAFETY EMPLOYEES
(SEC. 913 OF THE BILL AND SEC. 104 OF THE CODE)
PRESENT LAW
Under present law, amounts received under a workmen's compensation
act as compensation for personal injuries or sickness incurred in the
course of employment are excluded from gross income. Compensation
received under a workmen's compensation act by the survivors of a
deceased employee also are excluded from gross income. Nonoccupational
death and disability benefits are not excludable from income as
workmen's compensation benefits.
REASONS FOR CHANGE
The Committee is aware that some State plans were structured so that
the exclusion for workers' compensation benefits was not applicable, and
that some benefit recipients mistakenly thought the exclusion applied.
The Committee believes it appropriate to provide relief in such cases.
EXPLANATION OF PROVISION
Under the bill, certain payments made on behalf of full-time
employees of any police or fire department organized and operated by a
State (or any political subdivision, agency, or instrumentality thereof)
are excludable from income. The bill applies to payments made on account
of heart disease or hypertension of the employee and that were received
in 1989, 1990, 1991 pursuant to a State law as amended on May 19, 1992,
which irrebuttably presumed that heart disease and hypertension are
work-related illnesses, but only for employees separating from service
before July 1, 1992.
The bill provides that claims for refund or credit for overpayment of
tax resulting from the provision could be filed up to 1 year after the
date of enactment, without regard to the otherwise applicable statute of
limitations.
EFFECTIVE DATE
The provision is effective on the date of enactment.
1. PORTABILITY OF PERMISSIVE SERVICE CREDIT UNDER GOVERNMENTAL PENSION
PLANS (SEC. 914 OF THE BILL AND SEC. 415 OF THE CODE)
PRESENT LAW
Under present law, limits are imposed on the contributions and
benefits under qualified pension plans. Certain special rules apply in
the case of State and local governmental plans.
In the case of a defined contribution plan, the limit on annual
additions is the lesser of $30,000 or 25 percent of compensation. Annual
additions include employer contributions, as well as after-tax employee
contributions. In the case of a defined benefit pension plan, the limit
on the annual retirement benefit is the lesser of (1) 100 percent of
compensation or (2) $120,000 (indexed for inflation). The 100 percent of
compensation limitation does not apply in the case of State and local
governmental pension plans.
Amounts contributed by employees to a State or local governmental
plan are treated as made by the employer if the employer ``picks up''
the contribution.
REASONS FOR CHANGE
Many State and local government plans facilitate portability of
pension benefits by permitting employees to purchase credit for service
with another governmental employer and for certain other service as
provided in the plan. The Committee believes it appropriate to modify
the limits on contributions and benefits to encourage portability of
benefits between governmental plans.
EXPLANATION OF PROVISION
Under the bill, in applying the defined benefit pension plan limit,
the annual benefit under a State or local governmental plan includes the
accrued benefit derived from contributions to purchase permissive
service credit. Such contributions are not taken into account in
determining annual additions.
Permissive service credit means credit for a period of service
recognized by the governmental plan if the employee contributes to the
plan an amount (as determined by the plan) which does not exceed the
amount necessary to fund the accrued benefit attributable to such period
of service.
The bill does not affect the treatment of ``pick up'' contributions.
EFFECTIVE DATE
The provision is effective with respect to years beginning after
December 31, 1997.
5. GRATUITOUS TRANSFERS FOR THE BENEFIT OF EMPLOYEES (SEC. 915 OF THE
BILL AND SEC. 664 OF THE CODE)
PRESENT LAW
Employee stock ownership plans
An employee stock ownership plan (``ESOP'') is a qualified stock
bonus plan or a combination stock bonus and money purchase pension plan
under which employer securities are held for the benefit of employees.
The securities, which are held by one or more tax-exempt trusts under
the plan, may be acquired through direct employer contributions or with
the proceeds of a loan to the trust (or trusts).
Charitable remainder trusts
A deduction is allowed for Federal estate tax purposes for transfers
by a decedent to charitable, religious, scientific, etc. organizations
(Code sec. 2055(a)). In the case of a transfer of a remainder interest
to a charity, the remainder interest must be in a charitable remainder
trust (Code sec. 2055(e)). A charitable remainder trust generally is a
trust that is required to pay, no less often than annually, a fixed
dollar amount (charitable remainder annuity trust) or a fixed
percentage of the fair market value of the trust's assets
determined at least annually (charitable remainder unitrust) to
noncharitable beneficiaries, and the remainder of the trust (i.e., after
termination of the annuity or unitrust amounts) to a charitable,
religious, scientific, etc. organization (Code sec. 664).
REASONS FOR CHANGE
The Committee believes it appropriate to encourage certain transfers
of stock to an ESOP.
EXPLANATION OF PROVISION
In general
The bill permits certain limited transfers of qualified employer
securities by charitable remainder trusts to ESOPs without adversely
affecting the status of the charitable remainder trusts under Code
section 664. As a result, the bill provides that a qualified gratuitous
transfer of employer securities to an ESOP is deductible from the gross
estate of a decedent under Code section 2055 to the extent of the
present value of the remainder interest. In addition, an ESOP will not
fail to be a qualified plan because it complies with the requirements
with respect to a qualified gratuitous transfer.
Qualified gratuitous transfer
In order for a transfer of securities to be a ``qualified gratuitous
transfer,'' the following requirements must be satisfied: (1) the
securities transferred must previously have passed from the decedent to
a charitable remainder trust; (2) at the time of the transfer to the
ESOP, family members of the decedent own (directly or indirectly) no
more than 10 percent of the value of the outstanding stock of the
company; (3) immediately after the transfer to the ESOP, the ESOP owns
at least 60 percent\54\
of the value of outstanding stock of the company; and (4) the plan
meets certain requirements. In order to prevent erosion of the
60-percent ownership requirements, an excise tax is imposed on the
employer maintaining the ESOP with respect to certain dispositions of
the transferred stock within 3 years of the transfer.
\54\The 60-percent requirement is determined assuming that outstanding
options have been exercised.
The provision applies in cases in which the ESOP was in existence on
August 1, 1996, and the decedent dies on or before December 31, 1998.
The provision does not fail to apply merely because the ESOP is amended
after August 1, 1996, for example, in order to conform to the
requirements of the provision.
Plan requirements
In order for a transfer to qualify as a gratuitous transfer, the ESOP
must contain certain provisions. First, the plan must provide that plan
participants are entitled to direct the manner in which stock
transferred are to be voted (with respect to all matters). Transferred
securities that have not yet been allocated to participants must be
voted by a trustee that is not a 5-percent owner of the company or a
family member of the decedent.
Second, the plan must provide that participants have the right to
receive distributions in the form of stock and that the participant can
require the employer to repurchase any shares distributed under a fair
valuation formula. For this purpose, a valuation formula is not
considered fair if it takes into account a discount for minority
interests.
Finally, the plan must provide that, if the plan is terminated before
all the transferred stock has been allocated, the remaining stock is to
be transferred to one or more charitable organizations. The employer is
subject to an excise tax designed to recapture the estate taxes that
would have been due had the transfer to the ESOP not occurred if the
plan is terminated and any unallocated shares are not transferred to
charitable organizations.
Treatment of transferred stock and allocation rules
No deduction is permitted under section 404 of the Code with respect
to securities transferred from the charitable remainder trust. The
nondiscrimination requirements (sec. 401(a)(4)) normally applicable to
qualified plans must be satisfied with respect to the securities
transferred. The ESOP is required to treat the securities transferred as
employer securities, except for purposes of determining the amount of
deductible contributions to the plan otherwise permitted by the
employer. The ESOP is required to allocate the transferred securities up
to the limit on contributions and benefits (sec. 415) after allocating
any other employer contributions for the year; any transferred
securities that can not be allocated because of the section 415 limits
would be held in a suspense account and allocated in the same manner in
subsequent years. Transferred securities are not taken into account in
determining whether any other contributions satisfy the section 415
limit. Further, securities transferred to an ESOP by a charitable
remainder trust cannot be allocated to the account of (1) any family
member of the decedent, or (2) any employee owning more than 5 percent
of any class of outstanding stock of the corporation issuing the
securities (or a member of a controlled group of corporations) or the
total value of any class of outstanding stock of any such corporation.
The employer is subject to an excise tax if impermissible allocations
are made.
Definition of qualified employer securities
Qualified employer securities include only employer securities
(within the meaning of sec. 409(l) of the Code), which are issued by a
domestic corporation that has no outstanding stock that is readily
tradable on an established securities market and that has only one class
of stock.
EFFECTIVE DATE
The bill applies to transfers made to trusts to, or for the use of,
an ESOP after the date of enactment.
6. TREATMENT OF CERTAIN TRANSPORTATION ON NONCOMMERCIALLY OPERATED
AIRCRAFT AS A FRINGE BENEFIT (SEC. 916 OF THE BILL AND SEC. 132 OF THE CODE)
PRESENT LAW
Under present law, the value of an employer-provided flight taken for
personal purposes is generally includible in income. However, under a
special rule in regulations, the value of a personal flight is deemed to
be zero (and, therefore, there is no income inclusion) if at least 50
percent of the regular passenger seating capacity of the aircraft is
occupied by individuals whose flights are primarily for the employer's
business (and therefore, excludable from income).
REASONS FOR CHANGE
The Committee believes that the present-law rule for valuing flights
on employer aircraft unfairly results in taxable income in certain
cases.
EXPLANATION OF PROVISION
Under the provision, the value of air transportation for personal
purposes is excludable from income if the flight is made in the ordinary
course of the trade or business of an employer and the flight would have
been made whether or not the employee was transported on the flight, and
the employer incurs no substantial additional cost (including foregone
revenue) in providing the flight to the employee.
EFFECTIVE DATE
The provision is effective for transportation services provided after
December 31, 1998.
7. CASH OUT OF CERTAIN ACCRUED BENEFITS (SEC. 917 OF THE BILL AND SECS.
411 AND 417 OF THE CODE)
PRESENT LAW
Under present law, in the case of an employee whose plan
participation terminates, a qualified plan may involuntarily ``cash
out'' the benefit (i.e., pay out the balance to the credit of a plan
participant without the participant's consent, and, if applicable, the
consent of the participant's spouse) if the present value of the benefit
does not exceed $3,500. If a benefit is cashed out under this rule and
the participant subsequently returns to employment covered by the plan,
then service taken into account in computing benefits payable under the
plan after the return need not include service with respect to which
benefits were cashed out unless the employee ``buys back'' the benefit.
Generally, a cash-out distribution from a qualified plan to a plan
participant can be rolled over, tax free, to an IRA or to another
qualified plan.
REASONS FOR CHANGE
The Committee believes that the limit on involuntary cash-outs should
be raised to $5,000 in recognition of the effects of inflation and the
value of small benefits payable under a qualified pension plan.
EXPLANATION OF PROVISION
The bill increases the limit on involuntary cash-outs to $5,000 from
$3,500. The $5,000 amount is adjusted annually for inflation beginning
after 1997 (in $50 increments).
EFFECTIVE DATE
The provision is effective for plan years beginning on and after the
date of enactment.
8. ESOPS MAINTAINED BY S CORPORATIONS (SEC. 918 OF THE BILL AND SECS.
409 AND 4975 OF THE CODE)
PRESENT LAW
Under present law, an S corporation can have no more than 75
shareholders. Certain tax-exempt organizations, including employee stock
ownership plans (``ESOPs'') can be a shareholder of an S corporation.
ESOPs are generally required to make distributions in the form of
employer securities.
ESOPs are subject to certain prohibited transaction rules designed to
prohibit certain transactions between the plan and certain persons close
to the plan. A number of statutory exceptions are provided to the
prohibited transaction rules, including exceptions for loans between the
plan and plan participants and certain sales of stock to the ESOP. These
statutory exceptions do not apply to shareholder-employees of S
corporations. However, such individuals can obtain an administrative
exception from such rules from the Department of Labor.
REASONS FOR CHANGE
It is possible that an S corporation may lose its status as such if
the ESOP is required to give stock to plan participants, rather than
cash equal to the value of the stock. Changes to the prohibited
transactions rules are appropriate to facilitate the maintenance of an
ESOP by an S corporation.
EXPLANATION OF PROVISION
The bill provides that ESOPs of S corporations may distribute cash to
plan participants. In addition, the bill extends the exception to
certain prohibited transactions rules to S corporations.
EFFECTIVE DATE
The provisions are effective for taxable years beginning after
December 31, 1997.
C. Disaster Relief Provisions
1. AUTHORITY TO POSTPONE CERTAIN TAX-RELATED DEADLINES BY REASON OF
PRESIDENTIALLY DECLARED DISASTER (SEC. 921 OF THE BILL AND NEW SEC. 7508A OF THE
CODE)
PRESENT LAW
In the case of a Presidentially declared disaster, the Secretary of
the Treasury has the authority to postpone some (but not all)
tax-related deadlines.
REASONS FOR CHANGE
The Committee believes that the Secretary should have the authority
to postpone additional tax-related deadlines.
EXPLANATION OF PROVISION
The bill provides that, in the case of a taxpayer determined to be
affected by a Presidentially declared disaster, the Secretary may
specify that, for a period of up to 90 days, certain taxpayer deadlines
are postponed. The deadlines that may be postponed are the same as are
postponed by reason of service in a combat zone. The provision does not
apply for purposes of determining interest on any overpayment or
underpayment.
EFFECTIVE DATE
The provision is effective for any period for performing an act that
has not expired before the date of enactment.
2. USE OF CERTAIN APPRAISALS TO ESTABLISH AMOUNT OF DISASTER LOSS (SEC.
922 OF THE BILL AND SEC. 165 OF THE CODE)
PRESENT LAW
In order to claim a disaster loss, a taxpayer must establish the
amount of the loss. This may, for example, be done through the use of an
appraisal.
REASONS FOR CHANGE
The Committee believes that no impediment should exist to utilizing
alternate types of acceptable appraisals.
EXPLANATION OF PROVISION
The bill provides that nothing in the Code should be construed to
prohibit Treasury from issuing guidance providing that an appraisal for
the purpose of obtaining a Federal loan or Federal loan guarantee as the
result of a Presidentially declared disaster may be used to establish
the amount of a disaster loss.
EFFECTIVE DATE
The provision is effective on the date of enactment.
3. TREATMENT OF LIVESTOCK SOLD ON ACCOUNT OF WEATHER-RELATED CONDITIONS
(SEC. 923 OF THE BILL AND SECS. 451 AND 1033 OF THE CODE)
PRESENT LAW
In general, cash-method taxpayers report income in the year it is
actually or constructively received. However, present law contains two
special rules applicable to livestock sold on account of drought
conditions. Code section 451(e) provides that a cash-method taxpayer
whose principal trade or business is farming who is forced to sell
livestock due to drought conditions may elect to include income from the
sale of the livestock in the taxable year following the taxable year of
the sale. This elective deferral of income is available only if the
taxpayer establishes that, under the taxpayer's usual business
practices, the sale would not have occurred but for drought conditions
that resulted in the area being designated as eligible for Federal
assistance. This exception is generally intended to put taxpayers who
receive an unusually high amount of income in one year in the position
they would have been in absent the drought.
In addition, the sale of livestock (other than poultry) that is held
for draft, breeding, or dairy purposes in excess of the number of
livestock that would have been sold but for drought conditions is
treated as an involuntary conversion under section 1033(e).
Consequently, gain from the sale of such livestock could be deferred by
reinvesting the proceeds of the sale in similar property within a
two-year period.
REASONS FOR CHANGE
The Committee believes that the present-law exceptions to gain
recognition for livestock sold on account of drought should apply to
livestock sold on account of floods and other weather-related conditions
as well.
EXPLANATION OF PROVISION
The bill amends Code section 451(e) to provide that a cash-method
taxpayer whose principal trade or business is farming and who is forced
to sell livestock due not only to drought (as under present law), but
also to floods or other weather-related conditions, may elect to include
income from the sale of the livestock in the taxable year following the
taxable year of the
sale. This elective deferral of income is available only if
the taxpayer establishes that, under the taxpayer's usual business
practices, the sale would not have occurred but for the drought, flood
or other weather-related conditions that resulted in the area being
designated as eligible for Federal assistance.
In addition, the bill amends Code section 1033(e) to provide that the
sale of livestock (other than poultry) that are held for draft,
breeding, or dairy purposes in excess of the number of livestock that
would have been sold but for drought (as under present law), flood or
other weather-related conditions is treated as an involuntary
conversion.
EFFECTIVE DATE
The provision applies to sales and exchanges after December 31, 1996.
4. MORTGAGE BOND FINANCING FOR RESIDENCES LOCATED IN PRESIDENTIALLY
DECLARED DISASTER AREAS (SEC. 924 OF THE BILL AND SEC. 143 OF THE CODE)
PRESENT LAW
Qualified mortgage bonds are private activity tax-exempt bonds issued
by States and local governments acting as conduits to provide mortgage
loans to first-time home buyers who satisfy specified income limits and
who purchase homes that cost less than statutory maximums.
Present law waives the three buyer targeting requirements for a
portion of the loans made with proceeds of a qualified mortgage bond
issue if the loans are made to finance homes in statutorily prescribed
economically distressed areas.
REASONS FOR CHANGE
The Committee believes that availability of mortgage subsidy
financing may help survivors of Presidentially declared disasters
rebuild their homes.
EXPLANATION OF PROVISION
The bill waives the first time homebuyer requirement, the income
limits, and the purchase price limits for loans to finance homes in
certain Presidentially declared disaster areas. The waiver applies only
during the one-year period following the date of the disaster
declaration.
EFFECTIVE DATE
The provision applies to loans financed with bonds issued after
December 31, 1996, and before January 1, 2000.
D. Provisions Relating to Employment Taxes
1. EMPLOYMENT TAX STATUS OF DISTRIBUTORS OF BAKERY PRODUCTS (SEC. 931
OF THE BILL AND SEC. 3121 OF THE CODE)
PRESENT LAW
Under present law, the determination of whether a worker is an
employee or an independent contractor is generally determined under a
common-law facts and circumstances test. An employer-employee
relationship generally exists if the person contracting for the services
has the right to control not only the result of the services, but also
the means by which that result is accomplished.
Under a special statutory rule, bakery distributors are treated as
employees for Social Security payroll tax purposes (even if they are
independent contractors for income tax purposes) if: (1) their services
are part of a continuing relationship with the person for whom they are
performed; (2) the distributor's service contract contemplates that he
or she will perform substantially all of the services personally; and
(3) the distributor does not have a substantial investment in facilities
used in the performance of services, excluding facilities used for
transportation. This provision also applies to distributors of meat,
vegetable, fruit, and beverage (other than milk) products, as well as to
distributors of laundry and dry cleaning services.
Bakery drivers generally take the position that they are not
employees under the statutory rule because they have a substantial
investment in facilities and their contract of service does not
contemplate that substantially all services are to be performed
personally by them.
REASONS FOR CHANGE
The Committee believes that the special rule for determining
employment status of bakery drivers is not consistent with the current
practice of the industry and no longer necessary.
EXPLANATION OF PROVISION
The bill deletes distributors of bakery products from the list of
product and service distributors treated as statutory employees for
Social Security payroll tax purposes. Thus, the status of such workers
is determined under the generally applicable rules.
EFFECTIVE DATE
The provision is effective for services performed after December 31,
1997.
2. CLARIFICATION OF STANDARD TO BE USED IN DETERMINING TAX STATUS OF
RETAIL SECURITIES BROKERS (SEC. 932 OF THE BILL)
PRESENT LAW
Under present law, whether a worker is an employee or independent
contractor is generally determined under a common-law facts and
circumstances test. An employer-employee relationship is generally found
to exist if the service recipient has not only the right to control the
result to be accomplished by the work, but also the means by which the
result is to be accomplished. The Internal Revenue Service (``IRS'')
generally takes the position that the presence and extent of
instructions is important in reaching a conclusion as to whether a
business retains the right to direct and control the methods by which a
worker performs a job, but that it is also important to consider the
weight to be given those instructions if they are imposed by the
business only in compliance with governmental or governing body
regulations. The IRS training manual provides that if a business
requires its workers to comply with rules established by a third party
(e.g., municipal building codes related to construction), the fact that
such rules are imposed should be given little weight in determining the
worker's status.
REASONS FOR CHANGE
Brokerage houses are required to monitor compliance with certain
investor protection laws. The Committee believes that such monitoring
should not be taken into account in determining the status of a broker
for Federal tax purposes.
EXPLANATION OF PROVISION
Under the bill, in determining the status of a registered
representative of a broker-dealer for Federal tax purposes, no weight
may be given to instructions from the service recipient which are
imposed only in compliance with governmental investor protection
standards or investor protection standards imposed by a governing body
pursuant to a delegation by a Federal or State agency.
EFFECTIVE DATE
The provision is effective with respect to services performed after
December 31, 1997. No inference is intended that the treatment under the
proposal is not present law.
3. CLARIFICATION OF EXEMPTION FROM SELF-EMPLOYMENT TAX FOR CERTAIN
TERMINATION PAYMENTS RECEIVED BY FORMER INSURANCE SALESMEN (SEC. 933 OF THE BILL
AND SEC. 1402 OF THE CODE)
PRESENT LAW
As part of the Federal Insurance Contributions Act (``FICA'') a tax
is imposed on employees and employers. The tax consists of two parts:
old-age, survivor, and disability insurance (``OASDI'') and Medicare
Hospital Insurance (``HI''). For wages paid in 1997, the OASDI tax rate
is 6.2 percent of wages up to $65,400 (indexed for inflation) on both
the employer and employee. The HI tax rate on both the employer and the
employee is 1.45 percent of wages (with no wage cap).
Similarly, under the self-employment contributions act (``SECA''),
taxes are imposed on an individual's net earnings from self employment.
In general, net earnings from self employment means the gross income
derived by an individual from any trade or business carried on by such
individual, less the deductions allowed which are attributable to such
trade or business. The SECA tax rate is the same as the combined
employer and employee FICA rates (i.e., 12.4 percent for OASDI and 2.9
percent for HI) and the maximum amount of earnings subject to the OASDI
portion of SECA taxes is coordinated with and is set at the same level
as the maximum level of wages and salaries subject to the OASDI portion
of FICA taxes. There is no limit on the amount of self-employment income
subject to the HI portion of the tax.
Certain insurance salesmen are independent contractors and therefore
subject to tax under SECA.
Under case law, certain payments received by a former insurance
salesmen who had sold insurance as an independent contractor are not net
earnings from self employment and therefore are not subject to SECA.
See, e.g., Jackson v. Comm'r, 108 TC XXNo. 10 (1997); Gump v. U.S., 86
F. 3d 1126 (CA FC 1996); Milligan v. Comm'r, 38 F. 3d 1094 (9th Cir.
1994).
REASONS FOR CHANGE
Clarifying the SECA tax treatment of certain payments would provide
greater certainty to taxpayers and would reduce the need for further
litigation.
EXPLANATION OF PROVISION
The bill codifies case law by providing that net earnings from self
employment do not include any amount received during the taxable year
from an insurance company on account of services performed by such
individual as an insurance salesman for such company if (1) such amount
is received after termination of the individual's agreement to perform
services for the company, (2) the individual performs no services for
the company after such termination and before the close of the taxable
year, (3) the amount of the payment depends solely on policies sold by
the individual during the last year of the agreement and the extent to
which such policies remain in force for some period after such
termination, and does not depend on the length of service or overall
earnings from services performed for the company, and (4) the payments
are conditioned upon the salesman agreeing not to compete with the
company for at least one year following such termination.
The bill will also amend the Social Security Act to provide that such
termination payments are not treated as earnings for purposes of
determining social security benefits.
No inference is intended with respect to the SECA tax treatment of
payments that are not described in the proposal.
EFFECTIVE DATE
The provision is effective with respect to payments after December
31, 1997. No inference is intended that the proposal is not present law.
4. SAFE HARBOR FOR INDEPENDENT CONTRACTORS (SEC. 934 OF THE BILL AND
NEW SEC. 3511 OF THE CODE)
PRESENT LAW
Under present law, whether a worker is an employee or independent
contractor is generally determined under a common-law facts and
circumstances test. An employer-employee relationship is generally found
to exist if the service recipient has not only the right to control the
result to be accomplished by the work, but also the means by which the
result is to be accomplished. The Internal Revenue Service (``IRS'') has
developed a set of 20 factors for use in applying the common-law test.
Under a special safe harbor rule (section 530 of the Revenue Act of
1978), a service recipient may treat a worker as an independent
contractor for employment tax purposes even though the worker is in fact
an employee if the service recipient has a reasonable basis for treating
the worker as an independent contractor and certain other requirements
are met. Section 530 does not apply to the worker and does not apply for
income tax purposes. Section 530 does not apply to technical services
personnel.
REASONS FOR CHANGE
The present-law rules for determining worker status continue to
generate controversies between taxpayers and the IRS. Because the
determination of proper classification of a worker is often factual,
reasonable people may differ as to the correct result given a certain
set of facts. Thus, even though a taxpayer in good faith determines that
a worker is an independent contractor, an IRS agent may reach a
different conclusion by, for example, weighing some of the 20 factors
differently than the taxpayer. The consequences of misclassification can
be severe, particularly if the misclassification was inadvertent. The
Committee believes that providing more specific rules for determining
worker classification will provide greater clarity for taxpayers and
reduce disputes with the IRS.
EXPLANATION OF PROVISION
In general
The bill provides a statutory safe harbor for determining worker
classification for Federal tax purposes. If the standards set forth in
the bill are met, the worker is not treated as an employee and the
service recipient (or payor) is not treated as an employer. If the safe
harbor is not satisfied, the determination of the worker's status is
made under the present-law rules.
Standards for determining whether individuals are not employees
Under the bill, the following three sets of requirements have to be
satisfied in order for a worker not to be treated as an employee: (1)
worker requirements regarding the service recipient; (2) worker
requirements regarding others; and (3) documentation requirements. The
requirements regarding the worker are satisfied if, in connection with
performing the services, the worker: (1) has a significant investment in
assets and/or training; (2) incurs significant unreimbursed expenses;
(3) agrees to perform the services for a particular amount of time or to
complete a specific result and is liable for damages for early
termination without cause; (4) is paid primarily on a commissioned
basis; or (5) purchases products for resale.
The requirements regarding others are satisfied if one of the
following two requirements is met: (1) a place of business requirement;
or (2) a services available to the public requirement. The place of
business requirement is satisfied if the worker: (1) has a principal
place of business; (2) does not primarily perform services in the
service recipient's place of business; or (3) pays a fair market rent
for use of the service recipient's place of business. The services
available to the public requirement is satisfied if the worker is not
required to perform services exclusively for the service recipient, and
during the year (or the preceding or subsequent year) the worker (1) has
performed a significant amount of services for other persons; (2) has
offered to perform services for other persons through advertising,
individual written or oral solicitations, listings with agencies,
brokers, or other organizations that provide referrals, or other similar
activities; or (3) provides service under a business name that is
registered with (or licensed by) a State or a political subdivision (or
an agency or instrumentality of a State or political subdivision).
The documentation requirements are satisfied if the services
performed by the worker are performed pursuant to a written contract
between the worker and the service recipient (or payor) and the contract
provides that the worker will not be treated as an employee.
If the service recipient (or payor) fails to file the appropriate
Federal tax returns (including information returns) with respect to a
worker for a taxable year, the safe harbor is not available for such
year. Thus, the classification of the worker for the year is determined
under the present-law rules.
If the worker performs services through an entity owned in whole or
in part by the worker, then the standards under the bill may be applied
to include the entity as the worker. The term service recipient (and
payor) does not include any entity which is owned in whole or in part by
the worker. Thus, the new standards do not apply to the relationship
between the worker and an entity if the worker has any ownership
interest in the service recipient (or payor) (e.g., if the worker
provides services through a personal service corporation, the bill does
not apply with respect to the relationship between the worker and the
personal service corporation).
EFFECTIVE DATE
The provision is effective with respect to services performed after
December 31, 1997.
E. Provisions Relating to Small Business
1. DELAY IMPOSITION OF PENALTIES FOR FAILURE TO MAKE PAYMENTS
ELECTRONICALLY THROUGH EFTPS UNTIL AFTER DECEMBER 31, 1998 (SEC. 941 OF THE BILL
AND SEC. 6302 OF THE CODE)
PRESENT LAW
Employers are required to withhold income taxes and FICA taxes from
wages paid to their employees. Employers also are liable for their
portion of FICA taxes, excise taxes, and estimated payments of their
corporate income tax liability.
The Code requires the development and implementation of an electronic
fund transfer system to remit these taxes and convey deposit information
directly to the Treasury (Code sec. 6302(h)\55\
). The Electronic Federal Tax Payment System (``EFTPS'') was developed
by Treasury in response to this requirement.\56\
Employers must enroll with one of two private contractors hired by the
Treasury. After enrollment, employers generally initiate deposits either
by telephone or by computer.
\55\This requirement was enacted in 1993 (sec. 523 of P.L. 103 182).
\56\Treasury had earlier developed TAXLINK as the prototype for EFTPS.
TAXLINK has been operational for several years; EFTPS is currently
operational. Employers currently using TAXLINK will ultimately be
required to participate in EFTPS.
The new system is phased in over a period of years by increasing each
year the percentage of total taxes subject to the new EFTPS system. For
fiscal year 1994, 3 percent of the total taxes are required to be made
by electronic fund transfer. These percentages increased gradually for
fiscal years 1995 and 1996. For fiscal year 1996, the percentage was
20.1 percent (30 percent for excise taxes and corporate estimated tax
payments). For fiscal year 1997, these percentages increased
significantly, to 58.3 percent (60 percent for excise taxes and
corporate estimated tax payments). The specific implementation method
required to achieve the target percentages is set forth in Treasury
regulations. Implementation began with the largest depositors.
Treasury had originally implemented the 1997 percentages by requiring
that all employers who deposit more than $50,000 in 1995 must begin
using EFTPS by January 1, 1997. The Small Business Job Protection Act of
1996 provided that the increase in the required percentages for fiscal
year 1997 (which, pursuant to Treasury regulations, was to take effect
on January 1, 1997) will not take effect until July 1, 1997.\57\
This was done to provide additional time prior to implementation of the
1997 requirements so that employers could be better informed about their
responsibilities.
\57\Sec. 1809 of P.L. 104 188.
On June 2, 1997, the IRS announced\58\
that it will not impose penalties through December 31, 1997, on
businesses that make timely deposits using paper federal tax deposit
coupons while converting to the EFTPS system.
\58\IR 97 32.
REASONS FOR CHANGE
The Committee believes that it is necessary to provide small
businesses with additional time prior to implementation of the
requirements so that these employers may be better informed about their
responsibilities.
EXPLANATION OF PROVISION
The bill provides that no penalty shall be imposed solely by reason
of a failure to use EFTPS prior to January 1, 1999, if the taxpayer was
first required to use the EFTPS system on or after July 1, 1997.
EFFECTIVE DATE
The provision is effective on the date of enactment.
2. HOME OFFICE DEDUCTION: CLARIFICATION OF DEFINITION OF PRINCIPAL
PLACE OF BUSINESS (SEC. 942 OF THE BILL AND SEC. 280A OF THE CODE)
PRESENT LAW
A taxpayer's business use of his or her home may give rise to a
deduction for the business portion of expenses related to operating the
home (e.g., a portion of rent or depreciation and repairs). Code section
280A(c)(1) provides, however, that business deductions generally are
allowed only with respect to a portion of a home that is used
exclusively and regularly in one of the following ways: (1) as the
principal place of business for a trade or business; (2) as a place of
business used to meet with patients, clients, or customers in the normal
course of the taxpayer's trade or business; or (3) in connection with
the taxpayer's trade or business, if the portion so used constitutes a
separate structure not attached to the dwelling unit. In the case of an
employee, the Code further requires that the business use of the home
must be for the convenience of the employer (sec. 280A(c)(1)).\59\
These rules apply to houses, apartments, condominiums, mobile homes,
boats, and other similar property used as the taxpayer's home (sec.
280A(f)(1)). Under Internal Revenue Service (IRS) rulings, the
deductibility of expenses incurred for local transportation between a
taxpayer's home and a work location sometimes depends on whether the
taxpayer's home office qualifies under section 280A(c)(1) as a principal
place of business (see Rev. Rul. 94 47, 1994 29 I.R.B. 6).
\59\If an employer provides access to suitable space on the employer's
premises for the conduct by an employee of particular duties, then, if
the employee opts to conduct such duties at home as a matter of personal
preference, the employee's use of the home office is not ``for the
convenience of the employer.'' See e.g., W. Michael Mathes, (1990) T.C.
Memo 1990 483.
Prior to 1976, expenses attributable to the business use of a
residence were deductible whenever they were ``appropriate and helpful''
to the taxpayer's business. In 1976, Congress adopted section 280A, in
order to provide a narrower scope for the home office deduction, but did
not define the term ``principal place of business.'' In Commissioner v.
Soliman, 113 S.Ct. 701 (1993), the Supreme Court reversed lower court
rulings and upheld an IRS interpretation of section 280A that disallowed
a home office deduction for a self-employed anesthesiologist who
practiced at several hospitals but was not provided office space at the
hospitals. Although the anesthesiologist used a room in his home
exclusively to perform administrative and management activities for his
profession (i.e., he spent two or three hours a day in his home office
on bookkeeping, correspondence, reading medical journals, and
communicating with surgeons, patients, and insurance companies), the
Supreme Court upheld the IRS position that the ``principal place of
business'' for the taxpayer was not the home office, because the
taxpayer performed the ``essence of the professional service'' at the
hospitals.\60\
Because the taxpayer did not meet with patients at his home office and
the room was not a separate structure, a deduction was not available
under the second or third exception under section 280A(c)(1) (described
above).
\60\In response to the Supreme Court's decision in Soliman, the IRS
revised its Publication 587, Business Use of Your Home, to more closely
follow the comparative analysis used in Soliman by focusing on the
following two primary factors in determining whether a home office is a
taxpayer's principal place of business: (1) the relative importance of
the activities performed at each business location; and (2) the amount
of time spent at each location.
Section 280A(c)(2) contains a special rule that allows a home office
deduction for business expenses related to a space within a home that is
used on a regular (even if not exclusive) basis as a storage unit for
the inventory or product samples of the taxpayer's trade or business of
selling products at retail or wholesale, but only if the home is the
sole fixed location of such trade or business.
Home office deductions may not be claimed if they create (or
increase) a net loss from a business activity, although such deductions
may be carried over to subsequent taxable years (sec. 280A(c)(5)).
REASONS FOR CHANGE
The Committee believes that the Supreme Court's decision in Soliman
unfairly denies a home office deduction to a growing number of taxpayers
who manage their business activities from their homes. Thus, the
statutory modification adopted by the Committee will reduce the
present-law bias in favor of taxpayers who manage their business
activities from outside their home, thereby enabling more taxpayers to
work efficiently at home, save commuting time and expenses, and spend
additional time with their families. Moreover, the statutory
modification is an appropriate response to the computer and information
revolution, which has made it more practical for taxpayers to manage
trade or business activities from a home office.
EXPLANATION OF PROVISION
Section 280A is amended to specifically provide that a home office
qualifies as the ``principal place of business'' if (1) the office is
used by the taxpayer to conduct administrative or management activities
of a trade or business and (2) there is no other fixed location of the
trade or business where the taxpayer conducts substantial administrative
or management activities of the trade or business. As under present law,
deductions will be allowed for a home office meeting the above two-part
test only if the office is exclusively used on a regular basis as a
place of business by the taxpayer and, in the case of an employee, only
if such exclusive use is for the convenience of the employer.
Thus, under the bill, a home office deduction is allowed (subject to
the present-law ``convenience of the employer'' rule governing
employees) if a portion of a taxpayer's home is exclusively and
regularly used to conduct administrative or management activities for a
trade or business of the taxpayer, who does not conduct substantial
administrative or management activities at any other fixed location of
the trade or business, regardless of whether administrative or
management activities connected with his trade or business (e.g.,
billing activities) are performed by others at other locations. The fact
that a taxpayer also carries out administrative or management activities
at sites that are not fixed locations of the business, such as a car or
hotel room, will not affect the taxpayer's ability to claim a home
office deduction under the bill. Moreover, if a taxpayer conducts some
administrative or management activities at a fixed location of the
business outside the home, the taxpayer still will be eligible to claim
a deduction so long as the administrative or management activities
conducted at any fixed location of the business outside the home are not
substantial (e.g., the taxpayer occasionally does minimal paperwork at
another fixed location of the business). In addition, a taxpayer's
eligibility to claim a home office deduction under the bill will not be
affected by the fact that the taxpayer conducts substantial
non-administrative or non-management business activities at a fixed
location of the business outside the home (e.g., meeting with, or
providing services to, customers, clients, or patients at a fixed
location of the business away from home).
If a taxpayer in fact does not perform substantial administrative or
management activities at any fixed location of the business away from
home, then the second part of the test will be satisfied, regardless of
whether or not the taxpayer opted not to use an office away from home
that was available for the conduct of such activities. However, in the
case of an employee, the question whether an employee chose not to use
suitable space made available by the employer for administrative
activities is relevant to determining whether the present-law
``convenience of the employer'' test is satisfied. In cases where a
taxpayer's use of a home office does not satisfy the provision's
two-part test, the taxpayer nonetheless may be able to claim a home
office
deduction under the present-law ``principal place of
business'' exception or any other provision of section 280A.
EFFECTIVE DATE
The provision applies to taxable years beginning after December 31,
1997.
f. other provisions
1. SHRINKAGE FOR INVENTORY ACCOUNTING (SEC. 951 OF THE BILL AND SEC.
471 OF THE CODE)
PRESENT LAW
Section 471(a) provides that ``(w)henever in the opinion of the
Secretary the use of inventories is necessary in order clearly to
determine the income of any taxpayer, inventories shall be taken by such
taxpayer on such basis as the Secretary may prescribe as conforming as
nearly as may be to the best accounting practice in the trade or
business and as most clearly reflecting income.'' Where a taxpayer
maintains book inventories in accordance with a sound accounting system,
the net value of the inventory will be deemed to be the cost basis of
the inventory, provided that such book inventories are verified by
physical inventories at reasonable intervals and adjusted to conform
therewith.\61\
The physical count is used to determine and adjust for certain items,
such as undetected theft, breakage, and bookkeeping errors, collectively
referred to as ``shrinkage.''
\61\Treas. reg. sec. 1:471 2(d).
Some taxpayers verify and adjust their book inventories by a physical
count taken on the last day of the taxable year. Other taxpayers may
verify and adjust their inventories by physical counts taken at other
times during the year. Still other taxpayers take physical counts at
different locations at different times during the taxable year (cycle
counting).
If a physical inventory is taken at year-end, the amount of shrinkage
for the year is known. If a physical inventory is not taken at year-end,
shrinkage through year-end will have to be based on an estimate, or not
taken into account until the following year. In the first decision in
Dayton Hudson v. Commissioner ,\62\
the U.S. Tax Court held that a taxpayer's method of accounting may
include the use of an estimate of shrinkage occurring through year-end,
provided the method is sound and clearly reflects income. In the second
decision in Dayton Hudson v. Commissioner, \63\
the U.S. Tax Court adhered to this holding. However, the U.S. Tax Court
in the second decision determined that this taxpayer had not established
that its method of accounting clearly reflected income. Other cases
decided by the U.S. Tax Court\64\
have held that taxpayers' methods of accounting that included shrinkage
estimates do clearly reflect income.
\62\101 T.C. 462 (1993).
\63\T.C. Memo (filed June 11, 1997).
\64\ Wal-Mart v. Commissioner, T.C. Memo 1997 1 and Kroger v.
Commissioner, T.C. Memo 1997 2.
The U.S. Tax Court in the second Dayton Hudson opinion noted that
``(i)n most cases, generally accepted accounting principles (GAAP),
consistently applied, will pass muster for tax
purposes. The Supreme Court has made clear, however, that GAAP
does not enjoy a presumption of accuracy that must be rebutted by the
Commissioner.''
REASONS FOR CHANGE
The Committee believes that inventories should be kept in a manner
that clearly reflects income. The Committee also believes that it is
inappropriate to require a physical count of a taxpayer's entire
inventory to be taken exactly at year-end, provided that physical counts
are taken on a regular and consistent basis. Where physical inventories
are not taken at year-end, the Committee believes that income will be
more clearly reflected if the taxpayer makes a reasonable estimate of
the shrinkage occurring through year-end, rather than simply ignoring
it.
The Committee believes that a taxpayer should have the opportunity to
change its method of accounting to a method that keeps inventories using
shrinkage estimates, so long as such method is sound and clearly
reflects income. The Committee does not believe that it is appropriate
to deny a taxpayer access to such a method solely because its current,
acceptable method of accounting does not utilize shrinkage estimates.
EXPLANATION OF PROVISION
The bill provides that a method of keeping inventories will not be
considered unsound, or to fail to clearly reflect income, solely because
it includes an adjustment for the shrinkage estimated to occur through
year-end, based on inventories taken other than at year-end. Such an
estimate must be based on actual physical counts. Where such an estimate
is used in determining ending inventory balances, the taxpayer is
required to take a physical count of inventories at each location on a
regular and consistent basis. A taxpayer is required to adjust its
ending inventory to take into account all physical counts performed
through the end of its taxable year.
EFFECTIVE DATE
The provision is effective for taxable years ending after the date of
enactment.
A taxpayer is permitted to change its method of accounting by this
section if the taxpayer is currently using a method that does not
utilize estimates of inventory shrinkage and wishes to change to a
method for inventories that includes shrinkage estimates based on
physical inventories taken other than at year-end. Such a change is
treated as a voluntary change in method of accounting, initiated by the
taxpayer with the consent of the Secretary of the Treasury, provided the
taxpayer changes to a permissible method of accounting. The period for
taking into account any adjustment required under section 481 as a
result of such a change in method is 4 years.
No inference is intended by the Committee by the adoption of this
provision with regard to the validity of any method of accounting for
inventories under present law.
2. TREATMENT OF WORKMEN'S COMPENSATION LIABILITY UNDER RULES FOR
CERTAIN PERSONAL INJURY LIABILITY ASSIGNMENTS (SEC. 952 OF THE BILL AND SEC. 130
OF THE CODE)
PRESENT LAW
Under present law, an exclusion from gross income is provided for
amounts received for agreeing to a qualified assignment to the extent
that the amount received does not exceed the aggregate cost of any
qualified funding asset (sec. 130). A qualified assignment means any
assignment of a liability to make periodic payments as damages (whether
by suit or agreement) on account of a personal injury or sickness (in a
case involving physical injury or physical sickness), provided the
liability is assumed from a person who is a party to the suit or
agreement, and the terms of the assignment satisfy certain requirements.
Generally, these requirements are that (1) the periodic payments are
fixed as to amount and time; (2) the payments cannot be accelerated,
deferred, increased, or decreased by the recipient; (3) the assignee's
obligation is no greater than that of the assignor; and (4) the payments
are excludable by the recipient under section 104(a)(2) as damages on
account of personal injuries or sickness. Present law provides a
separate exclusion under section 104(a)(1) for the recipient of amounts
received under workmen's compensation acts as compensation for personal
injuries or sickness, but a qualified assignment under section 130 does
not include the assignment of a liability to make such payments.
REASONS FOR CHANGE
Structured settlement arrangements are essentially conduit
arrangements in which the assignor of a liability, the assignee (the
structured settlement company) and the claimant (recipient of benefits)
share the economic benefit of the exclusion from income provided under
present law. The Committee understands that some workmen's compensation
payments involve periodic payments (rather than lump sum payments). The
Committee was persuaded that additional economic security would be
provided to workmen's compensation claimants who receive periodic
payments if the payments are made through a structured settlement
arrangement, where the payor is generally is subject to State insurance
company regulation that is aimed at maintaining solvency of the company,
in lieu of being made directly by self-insuring employers that may not
be subject to comparable solvency-related regulation.
EXPLANATION OF PROVISION
The provision extends the exclusion for qualified assignments under
Code section 130 to amounts assigned for assuming a liability to pay
compensation under any workmen's compensation act. The provision
requires that the assignee assume the liability from a person who is a
party to the workmen's compensation claim, and requires that the
periodic payment be excludable from the recipient's gross income under
section 104(a)(1), in addition to the requirements of present law.
EFFECTIVE DATE
The provision is effective for workmen's compensation claims filed
after the date of enactment.
3. TAX-EXEMPT STATUS FOR CERTAIN STATE WORKMEN'S COMPENSATION ACT
COMPANIES (SEC. 953 OF THE BILL AND SEC. 501(C)(27) OF THE CODE)
PRESENT LAW
In general, the Internal Revenue Service (``IRS'') takes the position
that organizations that provide insurance for their members or other
individuals are not considered to be engaged in a tax-exempt activity.
The IRS maintains that such insurance activity is either (1) a regular
business of a kind ordinarily carried on for profit, or (2) an economy
or convenience in the conduct of members' businesses because it relieves
the members from obtaining insurance on an individual basis.
Certain insurance risk pools have qualified for tax exemption under
Code section 501(c)(6). In general, these organizations (1) assign any
insurance policies and administrative functions to their member
organizations (although they may reimburse their members for amounts
paid and expenses); (2) serve an important common business interest of
their members; and (3) must be membership organizations financed, at
least in part, by membership dues.
State insurance risk pools may also qualify for tax exempt status
under section 501(c)(4) as social welfare organizations or under section
115 as serving an essential governmental function of a State. In seeking
qualification under section 501(c)(4), insurance organizations generally
are constrained by the restrictions on the provision of
``commercial-type insurance'' contained in section 501(m). Section 115
generally provides that gross income does not include income derived
from the exercise of any essential governmental function and accruing to
a State or any political subdivision thereof. However, the IRS may be
reluctant to rule that particular State risk-pooling entities satisfy
the section 501(c)(4) or 115 requirements for tax-exempt status.
REASONS FOR CHANGE
The Committee believes that eliminating uncertainty concerning the
eligibility of certain State workmen's compensation act companies for
tax-exempt status will assist States in ensuring workmen's compensation
coverage for uninsured employers with respect to employees in the State.
EXPLANATION OF PROVISION
The provision clarifies the tax-exempt status of any organization
that is created by State law, and organized and operated exclusively to
provide workmen's compensation insurance and related coverage that is
incidental to workmen's compensation insurance,\65\
and that meets certain additional requirements. The workmen's
compensation insurance must be required by State law, or be insurance
with respect to which State law provides significant disincentives if it
is not purchased by an employer (such as loss of exclusive remedy or
forfeiture of affirmative defenses such as contributory negligence). The
organization must provide workmen's compensation to any employer in the
State (for employees in the State or temporarily assigned out-of-State)
seeking such insurance and meeting other reasonable requirements. The
State must either extend its full faith and credit to debt of the
organization or provide the initial operating capital of such
organization. For this purpose, the initial operating capital can be
provided by providing the proceeds of bonds issued by a State authority;
the bonds may be repaid through exercise of the State's taxing
authority, for example. For periods after the date of enactment, the
assets of the organization must revert to the State upon dissolution.
Finally, the majority of the board of directors (or comparable oversight
body) of the organization must be appointed by an official of the
executive branch of the State or by the State legislature, or by both.
\65\Related coverage that is incidental to workmen's compensation
insurance includes liability under Federal workmen's compensation laws,
for example.
EFFECTIVE DATE
The provision is effective for taxable years beginning after December
31, 1997. No inference is intended as to the status of such
organizations under present law.
4. TREATMENT OF CERTAIN PUBLICLY TRADED PARTNERSHIPS (SEC. 954 OF THE
BILL AND SEC. 7704 OF THE CODE)
A publicly traded partnership generally is treated as a corporation
for Federal tax purposes (sec. 7704). An exception to the rule treating
the partnership as a corporation applies if 90 percent of the
partnership's gross income consists of ``passive-type income,'' which
includes (1) interest (other than interest derived in a financial or
insurance business, or certain amounts determined on the basis of income
or profits), (2) dividends, (3) real property rents (as defined for
purposes of the provision), (4) gain from the sale or other disposition
of real property, (5) income and gains relating to minerals and natural
resources (as defined for purposes of the provision), and (6) gain from
the sale or disposition of a capital asset (or certain trade or business
property) held for the production of income of the foregoing types
(subject to an exception for certain commodities income).
The exception for publicly traded partnerships with ``passive-type
income'' does not apply to any partnership that would be described in
section 851(a) of the Code (relating to regulated investment companies,
or ``RICs''), if that partnership were a domestic corporation. Thus, a
publicly traded partnership that is registered under the Investment
Company Act of 1940 generally is treated as a corporation under the
provision. Nevertheless, if a principal activity of the partnership
consists of buying and selling of commodities (other than inventory or
property
held primarily for sale to customers) or futures, forwards and
options with respect to commodities, and 90 percent of the partnership's
income is such income, then the partnership is not treated as a
corporation.
A publicly traded partnership is a partnership whose interests are
(1) traded on an established securities market, or (2) readily tradable
on a secondary market (or the substantial equivalent thereof).
Treasury regulations provide detailed guidance as to when an interest
is treated as readily tradable on a secondary market or the substantial
equivalent. Generally, an interest is so treated ``if, taking into
account all of the facts and circumstances, the partners are readily
able to buy, sell, or exchange their partnership interests in a manner
that is comparable, economically, to trading on an established
securities market'' (Treas. Reg. sec. 1.7704 1(c)(1)).
When the publicly traded partnership rules were enacted in 1987, a
10-year grandfather rule provided that the provisions apply to certain
existing partnerships only for taxable years beginning after December
31, 1997.\66\
An existing publicly traded partnership is any partnership, if (1) it
was a publicly traded partnership on December 17, 1987, (2) a
registration statement indicating that the partnership was to be a
publicly traded partnership was filed with the Securities and Exchange
Commission with respect to the partnership on or before December 17,
1987, or (3) with respect to the partnership, an application was filed
with a State regulatory commission on or before December 31, 1987,
seeking permission to restructure a portion of a corporation as a
publicly traded partnership. A partnership that otherwise would be
treated as an existing publicly traded partnership ceases to be so
treated as of the first day after December 17, 1987, on which there has
been an addition of a substantial new line of business with respect to
such partnership. A rule is provided to coordinate this grandfather rule
with the exception to the rule treating the partnership as a corporation
applies if 90 percent of the partnership's gross income consists of
passive-type income. The coordination rule provides that passive-type
income exception applies only after the grandfather rule ceases to apply
(whether by passage of time or because the partnership ceases to qualify
for the grandfather rule).
\66\Omnibus Budget Reconciliation Act of 1987 (P.L. 100 203), sec.
10211(c).
REASONS FOR CHANGE
The Committee believes that, in important respects, publicly traded
partnerships generally resemble corporations and should be subject to
tax as corporations, so long as the current corporate income tax applies
to corporate entities. Nevertheless, in the case of certain publicly
traded partnerships that were existing on December 17, 1987, and that
are treated as partnerships under the grandfather rule until December
31, 1997, it is appropriate to permit the continuation of their status
as partnerships, so long as they elect to be subject to a tax that is
intended to approximate the corporate tax they would pay if they were
treated as corporations for Federal tax purposes.
EXPLANATION OF PROVISION
In the case of an existing publicly traded partnership that elects
under the provision to be subject to a tax on gross income from the
active conduct of a trade or business, the rule of present law treating
a publicly traded partnership as a corporation does not apply. An
existing publicly traded partnership is any publicly traded partnership
that is not treated as a corporation, so long as such treatment is not
determined under the passive-type income exception of Code section
7704(c)(1). The election to be subject to the tax on gross trade or
business income, once made, remains in effect until revoked by the
partnership, and cannot be reinstated.
The tax is 15 percent of the partnership's gross income from the
active conduct of a trade or business. The partnership's gross trade or
business income includes its share of gross trade or business income of
any lower-tier partnership. The tax imposed under the provision may not
be offset by tax credits.
EFFECTIVE DATE
The provision is effective for taxable years beginning after December
31, 1997.
5. EXCLUSION FROM UBIT FOR CERTAIN CORPORATE SPONSORSHIP PAYMENTS (SEC.
955 OF THE BILL AND SEC. 513 OF THE CODE)
PRESENT LAW
Although generally exempt from Federal income tax, tax-exempt
organizations are subject to the unrelated business income tax
(``UBIT'') on income derived from a trade or business regularly carried
on that is not substantially related to the performance of the
organization's tax-exempt functions (secs. 511 514). Contributions or
gifts received by tax-exempt organizations generally are not subject to
the UBIT. However, present-law section 513(c) provides that an activity
(such as advertising) does not lose its identity as a separate trade or
business merely because it is carried on within a larger complex of
other endeavors.\67\
If a tax-exempt organization receives sponsorship payments in
connection with an event or other activity, the solicitation and receipt
of such sponsorship payments may be treated as a separate activity. The
Internal Revenue Service (IRS) has taken the position that, under some
circumstances, such sponsorship payments are subject to the UBIT.\68\
\67\See United States v. American College of Physicians, 475 U.S. 834
(1986) (holding that activity of selling advertising in medical journal
was not substantially related to the organization's exempt purposes and,
as a separate business under section 513(c), was subject to tax).
\68\See Prop. Treas. Reg. sec. 1.513 4 (issued January 19, 1993, EE 74
92, IRB 1993 7, 71). These proposed regulations generally exclude from
the UBIT financial arrangements under which the tax-exempt organization
provides so-called ``institutional'' or ``good will'' advertising to a
sponsor (i.e., arrangements under which a sponsor's name, logo, or
product line is acknowledged by the tax-exempt organization). However,
specific product advertising (e.g., ``comparative or qualitative
descriptions of the sponsor's products'') provided by a tax-exempt
organization on behalf of a sponsor is not shielded from the UBIT under
the proposed regulations.
REASONS FOR CHANGE
In order to reduce the uncertainty regarding the treatment for UBIT
purposes of corporate sponsorship payments received by tax-exempt
organizations, the Committee believes that it is appropriate to
distinguish sponsorship payments for which the donor receives no
substantial return benefit other than the use or acknowledgment of the
donor's name or logo as part of a sponsored event (which should not be
subject to the UBIT) from payments made in exchange for advertising
provided by the recipient organization (which should be subject to the
UBIT).
EXPLANATION OF PROVISION
Under the bill, qualified sponsorship payments received by a
tax-exempt organization (or State college or university described in
section 511(a)(2)(B)) are exempt from the UBIT.
``Qualified sponsorship payments'' are defined as any payment made by
a person engaged in a trade or business with respect to which the person
will receive no substantial return benefit other than the use or
acknowledgment of the name or logo (or product lines) of the person's
trade or business in connection with the organization's activities.\69\
Such a use or acknowledgment does not include advertising of such
person's products or services--meaning qualitative or comparative
language, price information or other indications of savings or value, or
an endorsement or other inducement to purchase, sell, or use such
products or services. Thus, for example, if, in return for receiving a
sponsorship payment, an organization promises to use the sponsor's name
or logo in acknowledging the sponsor's support for an educational or
fundraising event conducted by the organization, such payment will not
be subject to the UBIT. In contrast, if the organization provides
advertising of a sponsor's products, the payment made to the
organization by the sponsor in order to receive such advertising will be
subject to the UBIT (provided that the other, present-law requirements
for UBIT liability are satisfied).
\69\In determining whether a payment is a qualified sponsorship payment,
it is irrelevant whether the sponsored activity is related or unrelated
to the organization's exempt purpose.
The bill specifically provides that a qualified sponsorship payment
does not include any payment where the amount of such payment is
contingent, by contract or otherwise, upon the level of attendance at an
event, broadcast ratings, or other factors indicating the degree of
public exposure to an activity. However, the fact that a sponsorship
payment is contingent upon an event actually taking place or being
broadcast, in and of itself, will not cause the payment to fail to be a
qualified sponsorship payment. Moreover, mere distribution or display of
a sponsor's products by the sponsor or the tax-exempt organization to
the general public at a sponsored event, whether for free or for
remuneration, will be considered to be ``use or acknowledgment'' of the
sponsor's product lines (as opposed to advertising), and thus will not
affect the determination of whether a payment made by the sponsor is a
qualified sponsorship payment.
The provision does not apply to the sale of advertising or
acknowledgments in tax-exempt organization periodicals. For this
purpose, the term ``periodical'' means regularly scheduled and printed
material published by (or on behalf of) the payee organization that is
not related to and primarily distributed in connection with a specific
event conducted by the payee organization. For example, the provision
will not apply to payments that lead to acknowledgments in a monthly
journal, but will apply if a sponsor receives an acknowledgment in a
program or brochure distributed at a sponsored event.
The provision specifically provides that, to the extent that a
portion of a payment would (if made as a separate payment) be a
qualified sponsorship payment, such portion of the payment will be
treated as a separate payment. Thus, if a sponsorship payment made to a
tax-exempt organization entitles the sponsor to both product advertising
and use or acknowledgment of the sponsor's name or logo by the
organization, then the UBIT will not apply to the amount of such payment
that exceeds the fair market value of the product advertising provided
to the sponsor. Moreover, the provision of facilities, services or other
privileges by an exempt organization to a sponsor or the sponsor's
designees (e.g., complimentary tickets, pro-am playing spots in golf
tournaments, or receptions for major donors) in connection with a
sponsorship payment will not affect the determination of whether the
payment is a qualified sponsorship payment. Rather, the provision of
such goods or services will be evaluated as a separate transaction in
determining whether the organization has unrelated business taxable
income from the event. In general, if such services or facilities do not
constitute a substantial return benefit or if the provision of such
services or facilities is a related business activity, then the payments
attributable to such services or facilities will not be subject to the
UBIT. Moreover, just as the provision of facilities, services or other
privileges by a tax-exempt organization to a sponsor or the sponsor's
designees (complimentary tickets, pro-am playing spots in golf
tournaments, or receptions for major donors) will be treated as a
separate transaction that does not affect the determination of whether a
sponsorship payment is a qualified sponsorship payment, a sponsor's
receipt of a license to use an intangible asset (e.g., trademark, logo,
or designation) of the tax-exempt organization likewise will be treated
as separate from the qualified sponsorship transaction in determining
whether the organization has unrelated business taxable income.
The exemption provided by the provision will be in addition to other
present-law exceptions from the UBIT (e.g., the exceptions for
activities substantially all the work for which is performed by
volunteers and for activities not regularly carried on). No inference is
intended as to whether any sponsorship payment received prior to 1998
was subject to the UBIT.
EFFECTIVE DATE
The provision applies to qualified sponsorship payments solicited or
received after December 31, 1997.
6. TIMESHARE ASSOCIATIONS (SEC. 956 OF THE BILL AND SEC. 528 OF THE
CODE)
PRESENT LAW
Taxation of homeowners associations making the section 528 election.
--Under present law (sec. 528), condominium management associations and
residential real estate management associations may elect to be taxable
at a 30 percent rate on their ``homeowners association income'' if they
meet certain income, expenditure, and organizational requirements.
``Homeowners association income'' is the excess of the association's
gross income, excluding ``exempt function income,'' over allowable
deductions directly connected with non-exempt function gross income.
``Exempt function income'' includes membership dues, fees, and
assessments for a common activity undertaken by association members or
owners of residential units in the condominium or subdivision.
Homeowners association income includes passive income (e.g., interest
and dividends) earned on reserves and fees for use of association
property (e.g., swimming pools, meeting rooms, etc.).
For an association to qualify for this treatment, (1) at least 60
percent of the association's gross income must consist of membership
dues, fees, or assessments on owners, (2) at least 90 percent of its
expenditures must be for the acquisition, management, maintenance, or
care of ``association property,'' and (3) no part of its net earnings
can inure to the benefit of any private shareholder. ``Association
property'' means: (1) property held by the association; (2) property
commonly held by association members; (3) property within the
association privately held by association members; and (4) property held
by a governmental unit for the benefit of association members. In
addition to these statutory requirements, Treasury regulations require
that the units of the association be used for residential purposes. Use
is not a residential use if the unit is occupied by a person or series
of persons less than 30 days for more than half of the association's
taxable year. Treas. reg. sec. 1.528 4(d).
Taxation of homeowners associations not making the section 528
election.-- Homeowners associations that do not (or cannot) make the
section 528 election are taxed either as a tax-exempt social welfare
organization under section 501(c)(4) or as a regular C corporation. In
order for an organization to qualify as a tax-exempt social welfare
organization, the organization must meet the following three
requirements: (1) the association must serve a ``community'' which bears
a reasonable, recognizable relationship to an area ordinarily identified
as a governmental subdivision or unit; (2) the association may not
conduct activities directed to exterior maintenance of any private
residence, and (3) common areas of association facilities must be for
the use and enjoyment of the general public (Rev. Rul. 74 99, 1974 1
C.B. 131).
Non-exempt homeowners associations are taxed as C corporations,
except that (1) the association may exclude excess assessments that it
refunds to its members or applies to the subsequent year's assessments
(Rev. Rul. 70 604, 1970 2 C.B. 9); (2) gross income does not include
special assessments held in a special bank account (Rev. Rul. 75 370, 75
2 C.B. 25), and (3) assessments for capital improvements are treated as
non-taxable contributions to capital (Rev. Rul. 75 370, 1975 2 C.B. 25).
Taxation of timeshare associations. --Under present law, timeshare
associations are taxed as regular C corporations because (1) they cannot
meet the requirement of the Treasury regulations for the section 528
election that the units be used for residential purposes (i.e., the
30-day rule) and they have relatively large amount of services performed
for its owners (e.g., maid and janitorial services) and (2) they cannot
meet any of requirements of Rev. Rul. 74 99 for tax-exempt status under
section 501(c)(4).
REASONS FOR CHANGE
The Committee understands that the IRS recently has challenged the
exclusions from gross income of timeshare associations of refunds of
excess assessments, special assessments held in a segregated account,
and capital assessments as contributions to capital. See P.L.R. 9539001
(June 8, 1995). The Committee believes that the activities of timeshare
associations are sufficiently similar to those of homeowners
associations that they should be similarly taxed. Accordingly, the
Committee bill would extend the rules for the taxation of homeowners
associations to timeshare associations, except that the rate of tax on
timeshare associations is 32 percent, instead of the 30-percent rate
that applies to homeowner's associations.
EXPLANATION OF PROVISION
The bill amends section 528 to permit timeshare associations to
qualify for taxation under that section. Timeshare associations would
have to meet the requirements of section 528 (e.g., the 60 percent gross
income, 90 percent expenditure, and the non-profit organizational and
operational requirements). Thus, a qualified timeshare association must
receive at least 60 percent of its income from membership dues, fees and
assessments from owners of either (a) timeshare rights to use of, or (b)
timeshare ownership in, property the timeshare association. In addition,
at least 90 percent of the expenditures of the timeshare association
must be for activities provided by the association to, or on behalf of,
members of the timeshare association. No part of the net earnings of the
timeshare association can inure to the benefit (other than by acquiring,
constructing, or providing management, maintenance, and care of property
of the timeshare association or rebate of excess membership dues, fees,
or assessments) of any private shareholder or individual. A member of a
qualified timeshare association must hold a timeshare right to use (or
timeshare ownership in) real property of the association. A qualified
timeshare association cannot be a condominium management association.
Lastly, in order to qualify, the timeshare association must elect to be
taxed under section 528. Timeshare associations electing to be taxed
under section 528 are subject to a tax on their ``timeshare association
income'' at a rate of 32 percent.
EFFECTIVE DATE
The provision is effective for taxable years beginning after December
31, 1996.
7. MODIFICATION OF ADVANCE REFUNDING RULES FOR CERTAIN TAX-EXEMPT BONDS
ISSUED BY THE VIRGIN ISLANDS (SEC. 957 OF THE BILL AND SEC. 149 OF THE CODE)
PRESENT LAW
Advance refundings
Generally a governmental bond originally issued after December 31,
1985, may be advance refunded one time. An advance refunding is any
refunding where all of the refunded bonds are not redeemed within 90
days after the refunding bonds are issued.
Virgin Island bonds
Under present law, the Virgin Islands is required to secure its bonds
with a priority first lien claim on specified revenue streams rather
than being permitted to issue multiple bond issues secured on a parity
basis by a common pool of revenues. Under a proposed non-tax law change,
the priority lien requirement would be repealed.
REASONS FOR CHANGE
The Committee believes that an additional advance refunding is
appropriate in light of changed circumstances with respect to these
bonds.
EXPLANATION OF PROVISION
One additional advance refunding would be allowed for governmental
bonds issued by the Virgin Islands that were advance refunded before
June 9, 1997, if the Virgin Islands debt provisions are changed to
repeal the current priority first lien requirement.
EFFECTIVE DATE
The provision is effective on the date of enactment.
8. DEFERRAL OF GAIN ON CERTAIN SALES OF FARM PRODUCT REFINERS AND
PROCESSORS (SEC. 958 OF THE BILL AND SEC. 1042 OF THE CODE)
PRESENT LAW
Under present law, if certain requirements are satisfied, a taxpayer
may defer recognition of gain on the sale of qualified securities to an
employee stock ownership plan (``ESOP'') or a eligible worker-owed
cooperative to the extent that the taxpayer reinvests the proceeds in
qualified replacement property (sec. 1042). Gain is recognized when the
taxpayer disposes of the qualified replacement property. One of the
requirements that must be satisfied for deferral to apply is that,
immediately after the sale, the ESOP must own at least 30 percent of the
stock of the corporation issuing the qualified securities. In general,
qualified securities are securities issued by a domestic C corporation
that has no stock outstanding that is readily tradeable on an
established securities market. Deferral treatment does not apply to gain
on the sale of qualified securities by a C corporation.
REASONS FOR CHANGE
The Committee believes it appropriate to facilitate the transfer of
refiners and processors to farmers' cooperatives.
EXPLANATION OF PROVISION
The bill extends the deferral provided under section 1042 to the sale
of stock of a qualified refiner or processor to an eligible farmer's
cooperative. A qualified refiner or processor is a domestic corporation
substantially all of the activities of which consist of the active
conduct of the trade or business of refining or processing agricultural
or horticultural products and which purchases more than one-half of such
products to be refined or processed from farmers who make up the
cooperative which is purchasing the stock or the cooperative. An
eligible farmers' cooperative is an organization which is treated as a
cooperative for Federal income tax purposes and which is engaged in the
marketing of agricultural or horticultural products.
The deferral of gain is available only if, immediately after the
sale, the eligible farmers' cooperative owns 100 percent of the
qualified refiner or processor. The provision applies even if the stock
of the qualified refiner or processor is publicly traded. In addition,
the bill applies to gain on the sale of stock by a C corporation.
EFFECTIVE DATE
The provision applies to sales after December 31, 1997.
9. INFORMATION RETURNS ON REAL ESTATE TRANSACTIONS (SEC. 959 OF THE
BILL AND SEC. 6045(E) OF THE CODE)
PRESENT LAW
Persons who close real estate transactions are required to file
informational returns with the IRS. There returns, filed on Form 1099S,
are required to show the name and address of the buyer and seller of the
real estate, details with regard to the gross proceeds of the sale, the
portion of any real property tax which is treated as a tax imposed on
the purchaser, and whether or not any financing of the seller was
federally-subsidized indebtedness.
REASONS FOR CHANGE
The Committee believes that informational returns should not
generally be required on sales of personal residences where the sales
price does not exceed the amount eligible to be excluded from income.
EXPLANATION OF PROVISION
The bill excludes sales of personal residences with a gross sales
price of $500,000 or less ($250,000 or less in the case of a seller who
is not married) from the real estate transaction reporting requirement.
In order to be eligible for this exclusion, the person who would
otherwise be required to file the informational return must obtain
written assurances from the seller of the real estate, in a form
acceptable to the Secretary of the Treasury, that any gain will be
exempt from Federal income tax under section 121(a) and that no
financing of the seller was federally-subsidized indebtedness.
EFFECTIVE DATE
The provision is effective for informational returns otherwise
required to be filed with regard to real estate sales occurring after
the date of enactment.
10. INCREASED DEDUCTION FOR BUSINESS MEALS WHILE OPERATING UNDER
DEPARTMENT OF TRANSPORTATION HOURS OF SERVICE LIMITATIONS (SEC. 960 OF THE BILL
AND SEC. 274(N) OF THE CODE)
PRESENT LAW
Ordinary and necessary business expenses, as well as expenses
incurred for the production of income, are generally deductible, subject
to a number of restrictions and limitations. Generally, the amount
allowable as a deduction for food and beverage is limited to 50 percent
of the otherwise deductible amount. Exceptions to this 50 percent rule
are provided for food and beverages provided to crew members of certain
vessels and offshore oil or gas platforms or drilling rigs.
REASONS FOR CHANGE
Individuals subject to the hours of service limitations of the
Department of Transportation are frequently forced to eat meals away
from home in circumstances where their choice is limited, prices
comparatively high and the opportunity for lavish meals remote. The
Committee believes that it is appropriate to allow a higher percentage
of the cost of food and beverages consumed while away from home by these
individuals to be deducted than is allowed under the general rule.
EXPLANATION OF PROVISION
The bill increases to 80 percent the deductible percentage of the
cost of food and beverages consumed while away from home by an
individual during, or incident to, a period of duty subject to the hours
of service limitations of the Department of Transportation. The increase
in the deductible percentage is phased in according to the following
schedule:
1998, 1999 55
2000, 2001 60
2002, 2003 65
2004, 2005 70
2006, 2007 75
2008 and thereafter 80
EFFECTIVE DATE
The provision is effective for taxable years beginning after 1997.
11. TREATMENT OF CONSTRUCTION ALLOWANCES PROVIDED TO LESSEES (SEC. 961
OF THE BILL AND NEW SEC. 110 OF THE CODE)
PRESENT LAW
Depreciation allowances for property used in a trade or business
generally are determined under the modified Accelerated Cost Recovery
System (``MACRS'') of section 168. Depreciation allowances for
improvements made on leased property are determined under MACRS, even if
the MACRS recovery period assigned to the property is longer than the
term of the lease (sec. 168(i)(8)).\70\
This rule applies regardless whether the lessor or lessee places the
leasehold improvements in service.\71\
If a leasehold improvement constitutes an addition or improvement to
nonresidential real property already placed in service, the improvement
is depreciated using the straight-line method over a 39-year recovery
period, beginning in the month the addition or improvement was placed in
service (secs. 168 (b)(3), (c)(1), (d)(2), and (I)(6)). A lessor of
leased property that disposes of a leasehold improvement that was made
by the lessor for the lessee of the property may take the adjusted basis
of the improvement into account for purposes of determining gain or loss
if the improvement is irrevocably disposed of or abandoned by the lessor
at the termination of the lease (sec. 168(i)(8)).
\70\The Tax Reform Act of 1986 modified the Accelerated cost Recovery
System (``ACRS'') to institute MACRS. Prior to the adoption of ACRS by
the Economic Recovery Act of 1981, taxpayers were allowed to depreciate
the various components of a building a separate assets with separate
useful lives. The use of component depreciation was repealed upon the
adoption of ACRS. The denial of component depreciation also applies
under MACRS, as provided by the Tax Reform Act of 1986.
\71\Former Code sections 168(f)(6) and 178 provided that in certain
circumstances, a lessee could recover the cost of leasehold improvements
made over the remaining term of the lease. These provisions were
repealed by the Tax Reform Act of 1986.
The gross income of a lessor of real property does not include any
amount attributable to the value of buildings erected, or other
improvements made by, a lessee that revert to the lessor at the
termination of a lease (sec. 109).
Issues have arisen as to the proper treatment of amounts provided to
a lessee by a lessor for property to be constructed and used by the
lessee pursuant to the lease (``construction allowances''). Incentive
payments have been includible in income as accessions to wealth.\72\
However, a coordinated issue paper issued by the Internal Revenue
Service on October 8, 1996, provides that amounts received by a lessee
from a lessor and expended by the lessee on assets owned by the lessor
were not includible in the lessee's income. The issue paper provides
that tax ownership is determined by applying a ``benefits and burdens of
ownership'' test and includes an examination of the following factors:
(1) whether legal title passes; (2) how the parties treat the
transaction; (3) whether an equity interest was acquired in the
property; (4) whether the contract creates present obligations on the
seller to execute and deliver a deed and on the buyer to make payments;
(5) whether the right of possession is vested; (6) who pays property
taxes; (7) who bears the risk of loss or damage to the property; (8) who
receives the profits from the operation and sale of the property; (9)
who carries insurance with respect to the property; (10) who is
responsible for replacing the property; and (11) who has the benefits of
any remainder interests in the property.
\72\ John B. White, Inc. v. Comm. , 55 T.C. 729 (1971), aff'd per curiam
458 F. 2d 989 (3d Cir.), cert. denied, 409 U.S. 876 (1972).
REASONS FOR CHANGE
The Committee understands that it is common practice for a lessor to
custom improve retail space for the use by a lessee pursuant to a lease.
Such leasehold improvements generally may be provided by the lessor
constructing the improvements to the lessee's specifications.
Alternatively, the lessee may receive a construction allowance from the
lessor pursuant to the lease in order to build or improve the property.
The Committee believes that the tax treatment of either case should be
the same. The Committee understands that the IRS paper on this issue
reaches a similar conclusion in cases where the lessor is treated as the
tax owner of the constructed or improved property. However, the
Committee is concerned that the traditional factors cited by the IRS in
making the determination of who is the tax owner of the property may be
applied differently by the lessor and the lessee and may lead to
controversies between the IRS and taxpayers. Thus, the bill provides a
safe harbor such that it will be assumed that a construction allowance
is used to construct or improve lessor property (and is properly
excludible by the lessee) when long-lived property is constructed and
used pursuant to a short-term lease. In addition, the bill provides
safeguards to ensure that lessors and lessees consistently treat the
property subject to the construction allowance as nonresidential real
property.
EXPLANATION OF PROVISION
The bill provides that the gross income of a lessee does not include
amounts received in cash (or treated as a rent reduction) from a lessor
under a short-term lease of retail space for the purpose of the lessee's
construction or improvement of qualified long-term real property for use
in the lessee's trade or business at such retail space. The exclusion
only applies to the extent the allowance does not exceed the amount
expended by the lessee on the construction or improvement of qualified
long-term real property. For this purpose, ``qualified long-term real
property'' means nonresidential real property that is part of, or
otherwise present at, retail space used by the lessee and that reverts
to the lessor at the termination of the lease. A ``short-term lease''
means a lease or other agreement for the occupancy or use of retail
space for a term of 15 years or less (as determined pursuant to sec.
168(i)(3)). ``Retail space'' means real property leased, occupied, or
otherwise used by the lessee in its trade or business of selling
tangible personal property or services to the general public.
The bill provides that lessor will treat the amounts expended on the
construction allowance as nonresidential real property. However, the
lessee's exclusion is not dependent upon the lessor's treatment of the
property as nonresidential real property.
The bill contains reporting requirements to ensure that both the
lessor and lessee treat such amounts as nonresidential real property.
Under regulations the lessor and the lessee, shall, at such times and in
such manner as provided by the regulations, furnish to the Secretary of
the Treasury information concerning the amounts received (or treated as
a rent reduction), the amounts expended on qualified long-term real
property, and such other information as the Secretary deems necessary to
carry out the provisions of the bill. It is expected that the Secretary,
in promulgating such regulations, will attempt to minimize the
administrative burdens of taxpayers while ensuring compliance with the
bill.
EFFECTIVE DATE
The provision applies to leases entered into after the date of
enactment. No inference is intended as to the treatment of amounts that
are not subject to the provision.
12. TREATMENT OF CONSOLIDATION OF CERTAIN MUTUAL SAVINGS BANK LIFE
INSURANCE DEPARTMENTS (SEC. 962 OF THE BILL AND SEC. 594 OF THE CODE)
PRESENT LAW
Special rules for mutual savings banks with life insurance business
Present law provides for special treatment of a mutual savings bank
conducting a life insurance business in a separate life insurance
department (Code sec. 594). Under the special rule, the insurance and
noninsurance businesses of such banks are bifurcated, and the tax
imposed is the sum of the partial taxes computed on (a) the taxable
income of the mutual savings bank determined without regard to items
properly allocable to the life insurance business, and (b) the income of
the life insurance department, calculated in accordance with the rules
applicable to life insurance companies (subchapter L of the Code). This
special treatment applies so long as the mutual savings bank is
authorized under State law to engage in the business of issuing life
insurance contracts, the life insurance business is conducted in a
separate department the accounts of which are maintained separately from
the other accounts of the mutual savings bank, and the life insurance
department would qualify as a life insurance company under Code section
816 if it were treated as a separate corporation.
Rules for corporate reorganizations
Present law provides that certain corporate reorganization
transactions, including recapitalizations, generally are treated as
tax-free transactions (sec. 368(a)(1)(E)). No gain or loss is recognized
if stock or securities in a corporation that is a party to a
reorganization are (in pursuance of the plan of reorganization)
exchanged solely for stock or securities in that corporation or in
another corporation that is a party to the reorganization, except that
gain (if any) to the recipient is recognized to the extent the principal
amount of securities received exceeds the principal amount of the
securities surrendered (secs. 354, 356(a)(1)). If such an exchange has
the effect of distribution of a dividend, then the portion of the
distributee's gain that does not exceed his ratable share of the
corporation's earnings and profits is treated as a dividend (sec.
356(a)(2)).
Rules for life insurance companies
A life insurance company generally is permitted to deduct the amount
of policyholder dividends paid or accrued during the taxable year (sec.
808). In the case of a mutual life insurance company, the amount of the
deduction for policyholder dividends is reduced (but not below zero) by
the differential earnings amount (sec. 809). The term policyholder
dividend includes (1) any amount paid or credited (including as an
increase in benefits) if the amount is not fixed in the contract but
depends on the experience of the company or the discretion of the
management; (2) excess interest; (3) premium adjustments; and (4)
experience-rated refunds.
REASONS FOR CHANGE
The Committee believes that the consolidation of life insurance
departments of mutual savings banks should not fail to be treated as a
tax-free consolidation transaction because it meets the requirements of
State law governing the consolidation transaction. Similarly, where the
related distribution to of cash to policyholders whose policies have not
lapsed occurs as a requirement of State law, and the policyholders have
no divisible right to surplus, no right to vote or to approve the
consolidation transaction, the distribution to participating
policyholders whose policies were in effect immediately before the
consolidation should not fail to be treated as a policyholder dividend.
EXPLANATION OF PROVISION
The provision provides that the consolidation of two or more life
insurance departments of mutual savings banks into a single life
insurance company by requirement of State law is treated as a tax-free
reorganization described in section 368(a)(1)(E) (i.e., a
recapitalization). Any payments required to be made to policyholders in
connection with the consolidation are treated as policyholder dividends
deductible by the company under section 808, provided that certain
requirements are met. The requirements are: (a) the payments are only
with respect to policies in effect immediately before the consolidation;
(b) the payments are only with respect to policies that are
participating (i.e., on which policyholder dividends are paid) before
and after the consolidation; (c) the payments cease with respect to any
policy if the policy lapses after the consolidation; (d) the
policyholders before the consolidation had no divisible right to the
surplus of any life insurance department and had no right to vote; and
(e) the approval of the policyholders was not required for the
consolidation. No inference is intended as to the tax treatment of (1)
consolidation, demutualization or other transactions involving, or (2)
payments to policyholders of, any insurer or financial institution other
than the life insurance departments of mutual savings banks.
EFFECTIVE DATE
The provision takes effect on December 31, 1991.
13. OFFSET OF PAST-DUE, LEGALLY ENFORCEABLE STATE TAX OBLIGATIONS
AGAINST FEDERAL OVERPAYMENTS (SEC. 963 OF THE BILL AND SEC. 6402 OF THE CODE)
PRESENT LAW
Overpayments of Federal tax may be credited against any liability in
respect of an internal revenue tax on the part of the person who made
the overpayment. Any overpayment not so credited may be offset against
any past-due support payments and past-due legally enforceable debts
owed to Federal agencies of the person making the overpayment. Any
remaining overpayment is required to be refunded.
REASONS FOR CHANGE
The Committee believes that the collection of legally enforceable
state tax obligations, owed to a State by its residents, should be
facilitated. However, the Committee also believes that the Federal
government should not be made a party to disputes between a State and
residents of another State. Consequently, Federal tax overpayments may
be offset for this purpose only if the return establishing the
overpayment shows an address within the State seeking the offset.
EXPLANATION OF PROVISION
An overpayment of Federal tax could be offset by the amount of any
past-due, legally enforceable State tax obligation, provided the person
making the overpayment has shown on the return establishing the
overpayment an address that is within the State seeking the offset. For
this purpose, a past-due, legally enforceable State tax obligation is a
debt which resulted from a judgement rendered by a court of competent
jurisdiction, or a determination after an administrative hearing, which
determined an amount of State tax to be due and which is no longer
subject to judicial review, as well as from an assessment the time for
which redetermination has expired that has not been delinquent for more
than 10 years. A State tax obligation includes any local tax
administered by the chief tax administration agency of the State.
The Secretary of the Treasury will establish regulations prescribing
the time and manner in which States may submit notices of past-due,
legally enforceable State tax obligations and may require States to pay
a fee to reimburse the Secretary for the cost of applying the offset
procedure.
The offset for a past-due, legally enforceable state tax obligation
of a state resident will apply after the offsets provided in present law
for internal revenue tax liabilities, past-due support, and past-due,
legally enforceable obligations owed a Federal agency. The Secretary of
the Treasury is authorized to issue regulations establishing procedures
for the implementation of this proposal.
EFFECTIVE DATE
The provision is effective for refunds payable after December 31, 1998.
14. EXEMPTION OF THE INCREMENTAL COST OF A CLEAN FUEL VEHICLE FROM THE
LIMITS ON DEPRECIATION FOR VEHICLES (SEC. 964 OF THE BILL AND SEC. 280F OF THE
CODE)
PRESENT LAW
The amount the taxpayer may claim as a depreciation deduction for any
passenger automobile is limited to: $2,560 for the first taxable year in
the recovery period; $4,100 for the second taxable year in the recovery
period; $2,450 for the third taxable year in the recovery period; and
$1,475 for each succeeding taxable year in the recovery period. Each of
the dollar limitations is indexed for inflation after October 1987 by
automobile component of the Consumer Price Index. Consequently, the
limitations applicable for 1997 are $3,160, $5,000, $3,050, and $1,775.
REASONS FOR CHANGE
The Committee believes that the price of a clean-burning fuel vehicle
or an electric vehicle does not necessarily represent the consumer's
purchase of a luxury. Rather, the higher price of such vehicles often
represents the cost of the technology required to produce an automobile
designed to provide certain environmental benefits. The Committee
believes the cost of this technology should not be considered a luxury
for the purpose of the limitation on depreciation that may be claimed on
passenger automobiles. Therefore, the Committee believes it is
appropriate to modify the limitation on depreciation that may be claimed
on passenger automobiles in the case of certain clean-burning fuel
vehicles and electric vehicles.
EXPLANATION OF PROVISION
The bill modifies the section 280F limitation on depreciation in the
case of qualified clean- burning fuel vehicles and certain electric
vehicles. With respect to qualified clean-burning fuel vehicles, those
that are modified to permit such vehicle to be propelled by a clean
burning fuel, the bill generally modifies present-law by applying the
current limitation to that portion of the vehicles cost not represented
by the installed qualified clean-burning fuel property. The taxpayer may
claim an amount otherwise allowable as a depreciation deduction on the
installed qualified clean- burning fuel, without regard to the 280F
limitation. Generally, this has the same effect as only subjecting the
cost of the vehicle before modification to the sec. 280F limitations.
For example, assume that in 1997, after the date of enactment, a
taxpayer purchases a clean-burning fuel vehicle for $43,000. Further
assume that had the taxpayer purchased the identical vehicle, without
having had certain components replaced to qualify it as clean burning,
the price paid would have been $39,000. The cost of the qualified
retrofit parts and components is $4,000. The depreciation that the
taxpayer may claim for this vehicle in any year is the depreciation that
could be claimed under present law section 280F for that portion of the
vehicle worth $39,000, plus the depreciation that can be claimed under
section 168 for the $4,000 worth of qualified retrofit parts and
components.
In the case of a passenger vehicle designed to be propelled primarily
by electricity and built by an original equipment manufacturer, the
base-year limitation amounts of $2,560 for the first taxable year in the
recovery period, $4,100 for the second taxable year in the recovery
period, $2,450 for the third taxable year in the recovery period, and
$1,475 for each succeeding taxable year in the recovery period are
tripled to $7,680, $12,300, $7,350, and $4,425, respectively, and then
adjusted for inflation after October 1987 by the automobile component of
the Consumer Price Index.
EFFECTIVE DATE
The provision is effective for property placed in service on or after
the date of enactment and before January 1, 2005.
15. EXEMPTION FROM TAX UPON DEATH OF A POLICY OFFICER IN THE LINE OF
DUTY (SEC. 965 OF THE BILL AND NEW SEC. 138 OF THE CODE)
PRESENT LAW
Survivors of military service personnel (such as those killed in
combat) are generally entitled to survivor benefits (38 U.S.C. sec.
1310). These survivor benefits are generally exempt from taxation (38
U.S.C. sec. 5301). Survivor means the surviving spouse or surviving
dependent child of the military service personnel.
Survivor annuity benefits paid under a governmental retirement plan
to a survivor of a law enforcement officer killed in the line of duty
are generally includible in income. Amounts contributed to the plan by
the officer and previously included in the officer's income would not be
includible in the survivor's income.
REASONS FOR CHANGE
The Committee believes that it is appropriate to apply to the
survivors of law enforcement officers who are killed in the line of duty
the rules regarding the taxation of certain survivor benefits provided
to survivors of military personnel.
EXPLANATION OF PROVISION
The bill generally provides that an amount paid as a survivor annuity
on account of the death of a law enforcement officer who is killed in
the line of duty will be excludable from income to the extent the
survivor annuity is attributable to the officer's service as a law
enforcement officer. The survivor annuity must be provided under a
governmental plan to the surviving spouse (or former spouse) of the law
enforcement officer or to a child of the officer.
EFFECTIVE DATE
The provision applies to amounts received in taxable years beginning
after December 31, 1996, with respect to individuals dying after that
date.
16. TEMPORARY SUSPENSION OF TAXABLE INCOME LIMIT ON PERCENTAGE
DEPLETION FOR MARGINAL PRODUCTION (SEC. 966 OF THE BILL AND SEC. 613A OF THE CODE)
PRESENT LAW
The Code permits taxpayers to recover their investments in oil and
gas wells through depletion deductions (sec. 613A). In the case of
certain properties, the deductions may be determined using the
percentage depletion method. Among the limitations that apply in
calculating percentage depletion deductions is a restriction that these
deductions may not exceed 65 percent of the taxpayer's taxable income
(excluding, for this purpose, percentage depletion net operating loss
carrybacks, and capital loss carrybacks). If a portion of percentage
depletion deductions are disallowed by this limitation, the disallowed
amount may be deducted in the following year.
Specific percentage depletion rules apply to oil and gas production
from ``marginal'' properties. Marginal production is defined as domestic
crude oil and natural gas production from stripper well property or from
property substantially all of the production from which during the
calendar year is heavy oil. Stripper well property is property from
which the average daily production is 15 barrel equivalents or less,
determined by dividing the average daily production of domestic crude
oil and domestic natural gas from producing wells on the property for
the calendar year by the number of wells.
REASONS FOR CHANGE
The Committee determined that a limited modification of the net
income limit for marginal oil and gas production is an appropriate part
of overall national energy security policy.
EXPLANATION OF PROVISION
The 65-percent-of-net-income limitation is suspended for domestic oil
and gas production from marginal properties during taxable years
beginning after December 31, 1997, and before January 1, 2000.
EFFECTIVE DATE
The provision is effective on the date of enactment.
g. extension of duty-free treatment under generalized system of
preferences; tariff treatment of certain equipment and repair of vehicles
1. GENERALIZED SYSTEM OF PREFERENCES (SEC. 971 OF THE BILL)
Section 971 of the bill reauthorizes Title V of the Trade Act of
1974, as amended (Generalized System of Preferences, ``GSP'') for two
years to expire on May 31, 1999.
PRIOR LAW
Title V of the Trade Act of 1974, as amended, (Generalized System of
Preferences), grants authority to the President to provide duty-free
treatment on imports of eligible articles from designated beneficiary
developing countries, subject to specific conditions and limitations. To
qualify for GSP privileges each beneficiary country is subject to
various mandatory and discretionary eligibility criteria. Import
sensitive products are ineligible for GSP. The President's authority to
grant GSP benefits expired on May 31, 1997.
EXPLANATION OF PROVISION
The bill reauthorizes the GSP program for two years, to expire on May
31, 1999. The bill provides for refunds, upon request of the importer,
of any duty paid between May 31, 1997, and the date of enactment.
EFFECTIVE DATE
The provision is effective upon date of enactment.
2. TEMPORARY SUSPENSION OF VESSEL REPAIR DUTY (SHIPBUILDING) (SEC. 972
OF THE BILL AND SEC. 466 OF THE TARIFF ACT OF 1930)
Present Law
Section 466 of the Tariff Act of 1930 establishes a 50-percent duty
of repairs made outside the United States to U.S. flag vessels.
REASONS FOR CHANGE
A permanent repeal of the vessel repair statute was included in H.R.
2754 during the 104th Congress, the bill to implement the Shipbuilding
Agreement negotiated under the auspices of the Organization for Economic
Cooperation and Development (``OECD''), in order to meet U.S.
obligations under that Agreement. H.R. 2754 was never enacted into law.
The Committee intends that this provision be considered a temporary,
one-time measure to aid ship operators while the Congress continues to
try to implement the Shipbuilding Agreement. The Committee strongly
supports the Shipbuilding Agreement and hopes that it can be implemented
so that it may take effect as soon as possible, with the inclusion at
that time of a permanent repeal of the vessel repair duty.
EXPLANATION OF PROVISION
The bill suspends for a one-year period beginning on date of
enactment the current 50-percent duty on repairs to U.S. flag vessels
made in countries that are signatories to the OECD Shipbuilding
Agreement.
EFFECTIVE DATE
The provision is effective for repair activities occurring for a
one-year period beginning on the date of enactment.
H. United States-Caribbean Basin Trade Partnership Act (secs. 981 988 of
the bill)
Subtitle H of Title IX provides additional trade benefits to
Caribbean Basin Initiative (CBI) countries comparable to tariff and
quota treatment under the North American Free Trade Agreement (NAFTA) on
products not already eligible for CBI treatment subject to certain
conditions and limitations.
1. FINDINGS AND POLICY (SEC. 982 OF THE BILL)
PRESENT LAW
The CBI program was established by the Caribbean Basin Economic
Recovery Act (CBERA), which was enacted on August 5, 1983. This
legislation authorized the President to grant duty-free treatment to the
imports of eligible articles from designated Caribbean countries. The
basic purpose of the CBI program, as originally proposed by President
Ronald Reagan, was to respond to an economic crisis in the Caribbean by
encouraging industrial development primarily through preferential access
to the U.S. market. The goal was to promote political and social
stability in the strategically important region. CBI trade benefits were
made permanent in 1990.
EXPLANATION OF PROVISION
Section 982 contains findings of the Congress that:
(1) The United States apparel industry is a major component of the
United States manufacturing sector of the United States, employing more
than 650,000 people.
(2) In 1973 the United States apparel industry supplied 88 percent
of the garments consumed by Americans, and in 1995 that share fell to
less than 50 percent.
(3) Countries in the Western Hemisphere offer the greatest
opportunities for increased exports of United States textile and apparel
industry.
(4) Given the greater propensity of countries located in the Western
Hemisphere to use United States components and to purchase United States
products compared to other countries, increased trade and economic
activity between the United States and countries in the Western
Hemisphere will create new jobs in the United States as a result of
expanding opportunities.
(5) The Caribbean Basin Initiative represents a permanent commitment
by the United States to encourage the development of strong democratic
governments and revitalized economies in neighboring countries in the
Caribbean Basin region.
(6) The economic security of the countries in the Caribbean Basin is
potentially threatened by the diversion of investment to Mexico as a
result of the North America Free Trade Agreement (NAFTA).
(7) To preserve the U.S. commitment to Caribbean Basin beneficiary
countries, and to help further their economic development, it is
necessary to offer temporary benefits equivalent to the trade treatment
accorded to products of NAFTA members.
(8) Offering NAFTA equivalent benefits to Caribbean Basin Initiative
countries, pending their eventual accession to the NAFTA, will promote
the growth of free enterprise and economic opportunity in the region and
thereby enhance the national security interests of the United States.
Section 982 states that it is, therefore, the policy of the United
States to: (1) assure that the domestic textile and apparel industry
remains competitive in the global marketplace by encouraging the
formation and expansion of ``partnerships'' between the textile and
apparel industry of the United States and the textile and apparel
industry of various countries located in the Western Hemisphere; and,
(2) offer Caribbean Basin partnership countries tariff and quota
treatment equivalent to that accorded to products of NAFTA countries,
and to seek the accession of these partnership countries to the NAFTA or
a free trade agreement comparable to the NAFTA at the earliest possible
date, with the goal of achieving full NAFTA participation by all
Caribbean countries by January 1, 2005. This date is consistent with the
goals of completing negotiations of the ``Free Trade Area of the
Americas'' which was announced by the hemisphere's leaders at the Summit
of the Americas in December 1994.
2. TEMPORARY DUTY AND QUOTA TREATMENT PROVIDED TO PARTNERSHIP COUNTRIES
(SEC. 984 OF THE BILL)
PRESENT LAW
Under the CBERA, imports from CBI, except for certain products that
are statutorily excluded, are granted duty-free treatment, subject to
specific eligibility requirements. Statutorily excluded articles are
ineligible for duty-free treatment under the CBI. These excluded
products are: textile and apparel articles that are subject to textile
agreements, canned tuna, petroleum and petroleum products, footwear,
handbags, luggage, flat goods, work gloves, and leather-wearing apparel.
Also excluded are certain watches and watch products.
Under NAFTA, imports of these products from Mexico (excluded from CBI
and listed above) receive either declining tariff or duty-free and
quota-free treatment.
EXPLANATION OF PROVISION
Section 984 of the bill amends section 213(b) of the CBERA to provide
tariff and quota treatment on imports from CBI beneficiary countries of
excluded articles that is identical to
tariff and quota treatment accorded like articles imported
from Mexico under the NAFTA during a temporary period of up to one year.
a. Rules of origin
PRESENT LAW
Chapter Four of the NAFTA establishes rules of origin for identifying
goods that are to be treated as ``originating in the territories of the
NAFTA parties'' and are therefore eligible for preferential treatment
accorded to originating goods under the NAFTA, including reduced duties
and duty-free and quota-free treatment.
EXPLANATION OF PROVISION
The bill provides that NAFTA tariff and quota treatment would apply
to CBI articles which meet NAFTA rules of origin (treating the United
States and CBI beneficiary countries as ``parties'' under the agreement
for this purpose). Customs procedures applicable to exporters under the
NAFTA also must be met for partnership countries to qualify for parity
treatment. Imports of articles currently excluded under CBI, which do
not meet the conditions of NAFTA parity, would continue to be excluded
from the CBI program.
b. Effective date and termination of temporary treatment
PRESENT LAW
CBI trade benefits were made permanent in 1990.
EXPLANATION OF PROVISION
Under section 984 a temporary transitional period would begin January
1, 1998, and end on the date that either NAFTA accession or a reciprocal
free trade agreement enters into force with the beneficiary country, or
on December 31, 1998, whichever is earlier.
c. General review of beneficiary countries
PRESENT LAW
Section 212(f) of the CBERA requires the President, every three
years, to submit to the Congress a complete report regarding the
operation of the CBI program, including the results of a general review
of beneficiary countries.
EXPLANATION OF PROVISION
Section 984 of the bill amends section 212(f) of the CBERA to provide
that the next review takes place one year after the effective date of
the bill and subsequent reviews occur at three year intervals
thereafter. The bill requires the President to conduct and report to
Congress on triennial reviews of the benefits accorded under the bill.
The review will be based on the 17 eligibility criteria listed in
section 212 of the CBERA, as further interpreted by the bill. These
criteria include intellectual property protection, investment
protection, market access, worker rights, cooperation in administering
the program, and the degree to which the country follows accepted rules
of international trade provided for under the World Trade Organization.
The President may determine, based on the review, whether to withdraw,
suspend, or limit new parity benefits. Existing authority in the CBERA
would continue to withdraw, suspend, or limit current benefits at any
time based on present criteria.
The Subcommittee is aware that questions periodically arise regarding
beneficiary countries' adherence to the eligibility criteria under
section 212 of the CBERA, as amended. As part of the implementation of
this legislation, the Subcommittee expects the President to offer
adequate opportunities for interested parties to present information
concerning CBERA beneficiaries' adherence to the eligibility criteria.
d. Safeguards
PRESENT LAW
The import relief procedures and authorities under section 201 204 of
the Trade Act of 1974 apply to imports from CBI partnership countries,
as they do to imports from other countries. If CBI imports cause or
threaten to cause serious injury to the domestic industry producing a
like or directly competitive article, section 213(e) of the CBERA
authorizes the President to suspend CBI duty-free treatment and proclaim
a rate of duty or other relief measures.
Under NAFTA, the U.S. may invoke a special safeguard provision at any
time during the tariff phase-out period if a NAFTA-origin textile or
apparel good is being imported in such increased quantities and under
such conditions as to cause ``serious damage, or actual threat
thereof,'' to a domestic industry producing a like or directly
competitive good. The President is authorized to either suspend further
duty reductions or increase the rate of duty to the most-favored-nation
rate for up to three years. The NAFTA also provides for a ``quantitative
restriction'' safeguard, which the United States or Mexico may invoke
against ``non-originating'' textile or apparel goods, using the standard
of ``serious damage, or actual threat thereof.''
EXPLANATION OF PROVISION
Normal safeguard authorities under CBERA would apply to imports of
all products except textiles and apparel. NAFTA equivalent safeguard
authorities would apply to imports of textile and apparel products from
CBI countries, except that, under the bill, the President would not be
obligated to provide equivalent trade liberalizing compensation to the
exporting country.
Nothing in this provision is intended to limit the rights of
the United States or of the Caribbean nations under the Uruguay Round
Agreement on Textiles and Clothing, especially in light of the fact that
the binational panel review system established under NAFTA does not
apply to the Caribbean.
e. Treatment of textile and apparel imports from Caribbean
countries and Mexico
1. GAL Program
PRESENT LAW
The ``Special Access Program for Textiles,'' established by
regulation in February 1986, provides flexible Guaranteed Access Levels
(GALs) to the U.S. market for textile or apparel and ``made up'' textile
product categories (not fabric, yarn, or other textile products)
assembled in CBI countries from fabrics wholly formed and cut in the
United States, under bilateral agreements negotiated at the request of
each Caribbean government. GALs are separate limits from (and usually
significantly higher than) standard quota levels, and are generally
increased upon request of the exporting country.
EXPLANATION OF PROVISION
Section 984 eliminates import restraint and consultation levels and
duties on textile and apparel articles originating in a partnership
country. Under the bill, duty-free and quota free treatment applies to
apparel that is: (1) subject to the ``GAL'' program, and which meets the
NAFTA yarn-forward rule of origin; (2) cut and sewn in a partnership
country from fabrics wholly formed in the United States, from yarns
wholly formed in the United States; (3) is knit-to-shape from yarns
wholly formed in the United States; and (4) is made from fabric knit in
a partnership country from yarn wholly formed in the United States.
Hand-made, hand-loomed and folklore articles of the region also qualify
for duty-free and quota-free treatment.
2. Originating textile and apparel goods
PRESENT LAW
Certain textile and apparel articles from major supplying CBI
countries are subject to import quotas under bilateral agreements
negotiated on a product-category basis under authority of Section 204 of
the Agricultural Act of 1956 and in accordance with the Uruguay Round
Agreement on Textiles and Clothing. Articles under quota may be
assembled from U.S. and/or foreign components.
EXPLANATION OF PROVISION
Under section 984, imports of textile and apparel products meeting
NAFTA rules of origin would receive NAFTA equivalent tariff treatment
and enter quota-free. There would be no change in the treatment of
non-originating textile products currently subject to import quotas
under bilateral and multilateral textile agreements.
3. Trade Preference Levels (TPLs)
PRESENT LAW
Appendix 6(B) of the NAFTA provides a limited exception to the NAFTA
rules of origin for textile and apparel goods. The exception takes the
form of Tariff Preference Levels (TPLs) under which specific quantities
of goods from each NAFTA country that do not meet NAFTA ``yarn-forward''
rules of origin will nonetheless be accorded NAFTA preferential tariff
rates. Imports of such goods that exceed these quantities will be
subject to MFN duty rates. Under NAFTA, TPLs are available for three
broad categories of products: (1) cotton or man-made apparel; (2) wool
apparel; and (3) goods entered under subheading 9802.00.80 of the HTS.
EXPLANATION OF PROVISION
Section 984 authorizes the USTR to establish TPLs for Caribbean
textile and apparel products which are similar to those established for
Mexico in the NAFTA. After consulting with the domestic industry and
other interested parties, USTR is authorized to establish TPLs in the
following categories at specified levels: not more than 45,000,000
square meter equivalents of cotton or man-made fiber apparel; not more
1,500,000 square meter equivalents of wool apparel; and, not more than
25,000,000 square meter equivalents of goods entered under subheading
9802.00.80 of the HTS.
The bill requires that these amounts be allocated among the seven
partnership countries which have the largest volume of textile and
apparel exports to the United States, based on a pro rata share of the
volume of their textile and apparel exports.
f. Customs procedures and penalties for transshipment
PRESENT LAW
Under NAFTA, Parties to the Agreement must observe Customs procedures
and documentation requirements which are established in Chapter 5 of the
NAFTA. Requirements regarding Certificates of Origin for imports
receiving preferential tariffs are detailed in Article 502.1 of the
NAFTA.
EXPLANATION OF PROVISION
The bill directs the Secretary of the Treasury to prescribe
regulations that require, as a condition of entry, that any importer of
record that claims preferential tariff treatment for textile and apparel
products under the bill must comply with requirements similar in all
material
respects to the requirements regarding Certificates of Origin
contained in 502.1 of the NAFTA, for a similar importation from Mexico.
In addition, if an exporter is determined under the laws of the United
States to have engaged in illegal transshipment of textile or apparel
products from a partnership country, then the President shall deny all
benefits under the bill to such exporter, and to any successors of such
exporter, for a period of 2 years.
5. TREATMENT OF SUGAR IMPORTS (SEC. 985 OF THE BILL)
PRESENT LAW
Under the tariff-rate quota system for sugar, which was proclaimed by
the President on December 23, 1994, the Secretary of Agriculture
establishes the quota quantity that can be entered at the lower tier
import duty-rate. The USTR allocates quantities to CBI countries that
receive duty-free treatment. Imports above the in-quota amount from CBI
countries are tariffed at the higher over-quota rates.
The quantity of sugar which may be imported duty-free from Mexico is
governed by Section A of Annex 703.2 of the NAFTA. Under NAFTA, access
grows over time to unlimited duty-free access for exports of sugar from
Mexico beginning in the year 2009.
EXPLANATION OF PROVISION
Section 985 responds to concerns raised by CBI beneficiary
governments that additional access to the U.S. sugar market could
potentially result in a decrease in access for exports of sugar from the
Caribbean and thereby reduce employment in the region. Section 102
requires the President to monitor the effects, if any, of the NAFTA on
access to the U.S. sugar market by CBI beneficiary countries. If the
President considers that NAFTA implementation is affecting or likely
will affect market access adversely, the President shall: (1) take
action by Executive authority after consulting with interested parties
and appropriate committees, or (2) propose legislation necessary or
appropriate to ameliorate such effects.
6. RUM IMPORTS (SEC. 986 OF THE BILL)
PRESENT LAW
Rum and beverages made with rum are eligible for duty-free entry into
the United States both under the CBI program and NAFTA, provided they
meet the CBI or NAFTA rules of origin and other requirements. When
Caribbean rum is processed in Canada into a rum beverage and the
beverage is exported from Canada into the United States, it is not
eligible for duty-free treatment under either the CBI or the NAFTA. The
beverage is ineligible for duty-free treatment under CBI because it is
not shipped directly from a beneficiary country to the United States as
the CBI rules require. The beverage does not qualify for NAFTA duty-free
treatment because the processing in Canada is not sufficient to qualify
it as a NAFTA ``originating good.''
EXPLANATION OF PROVISION
To address this situation Section 986 amends the CBERA to accord
duty-free treatment to certain beverages imported from Canada if: (1)
the rum is the growth, product, or manufacture of a beneficiary country
or the U.S. Virgin Islands; (2) the rum is imported directly into
Canada, and the beverages made from it are imported directly from Canada
into the United States; and, (3) the rum accounts for at least 90
percent by volume of the alcoholic content of the beverages.
7. MEETING OF CARIBBEAN TRADE MINISTERS AND USTR (SEC. 987 OF THE BILL)
PRESENT LAW
No provision.
EXPLANATION OF PROVISION
Section 987 directs the President to convene a meeting with the trade
ministers of CBI beneficiary countries in order to establish a schedule
of regular meetings, to commence as soon as practicable, of the trade
ministers and the USTR. The purpose of the meetings shall be to further
consultations between the U.S. and partnership countries concerning the
likely timing and procedures for initiating negotiations for partnership
countries to: (1) accede to NAFTA; or (2) enter into comprehensive,
mutually advantageous trade agreements with the United States that
contain comparable provisions to the NAFTA, and would make substantial
progress in achieving the negotiation objectives listed in Section
108(b)(5) of Public Law 103 182. (These are general trade negotiating
objectives for future free trade agreements which were included in the
NAFTA implementing bill.)
TITLE X. REVENUE-INCREASE PROVISIONS
A. Financial Products
1. REQUIRE RECOGNITION OF GAIN ON CERTAIN APPRECIATED POSITIONS IN
PERSONAL PROPERTY (SEC. 1001(A) OF THE BILL AND NEW SEC. 1259 OF THE CODE)
PRESENT LAW
In general, gain or loss is taken into account for tax purposes when
realized. Gain or loss generally is realized with respect to a capital
asset at the time the asset is sold, exchanged, or otherwise disposed
of. Gain or loss is determined by comparing the amount realized with the
adjusted basis of the particular property sold. In the case of corporate
stock, the basis of shares purchased at different dates or different
prices generally is determined by reference to the actual lot sold if it
can be identified. Special rules under the Code can defer or accelerate
recognition in certain situations.
The recognition of gain or loss is postponed for open transactions.
For example, in the case of a ``short sale'' (i.e., when a taxpayer
sells borrowed property such as stock and closes the sale by returning
identical property to the lender), no gain or loss on the transaction is
recognized until the closing of the borrowing.
Transactions designed to reduce or eliminate risk of loss on
financial assets generally do not cause realization. For example, a
taxpayer may lock in gain on securities by entering into a ``short sale
against the box,'' i.e., when the taxpayer owns securities that are the
same as, or substantially identical to, the securities borrowed and sold
short. The form of the transaction is respected for income tax purposes
and gain on the substantially identical property is not recognized at
the time of the short sale. Pursuant to rules that allow specific
identification of securities delivered on a sale, the taxpayer can
obtain open transaction treatment by identifying the borrowed securities
as the securities delivered. When it is time to close out the borrowing,
the taxpayer can choose to deliver either the securities held or
newly-purchased securities. The Code provides rules only to prevent
taxpayers from using short sales against the box to accelerate loss or
to convert short-term capital gain into long-term capital gain or
long-term capital loss into short-term capital loss (sec. 1233(b)).
Taxpayers also can lock in gain on certain property by entering into
offsetting positions in the same or similar property. Under the straddle
rules, when a taxpayer realizes a loss on one offsetting position in
actively-traded personal property, the taxpayer generally can deduct
this loss only to the extent the loss exceeds the unrecognized gain in
the other positions in the straddle. In addition, rules similar to the
short sale rules prevent taxpayers from changing the tax character of
gains and losses recognized on the offsetting positions in a straddle
(sec. 1092).
Taxpayers may engage in other arrangements, such as ``futures
contracts,'' ``forward contracts,'' ``equity swaps'' and other
``notional principal contracts'' where the risk of loss and opportunity
for gain with respect to property are shifted to another party (the
``counterparty''). These arrangements do not result in the recognition
of gain by the taxpayer.
The Code accelerates the recognition of gains and losses in certain
cases. For example, taxpayers are required each year to mark to market
certain regulated futures contracts, foreign currency contracts,
non-equity options, and dealer equity options, and to take any capital
gain or loss thereon into account as 40 percent short-term gain and 60
percent long-term gain (sec. 1256).
REASONS FOR CHANGE
In general, a taxpayer cannot completely eliminate risk of loss (and
opportunity for gain) with respect to property without disposing of the
property in a taxable transaction. In recent years, however, several
financial transactions have been developed or popularized which allow
taxpayers to substantially reduce or eliminate their risk of loss (and
opportunity for gain) without a taxable disposition. Like most taxable
dispositions, many of these transactions also provide the taxpayer with
cash or other property in return for the interest that the taxpayer has
given up.
One of these transactions is the ``short sale against the box.'' In
such a transaction, a taxpayer borrows and sells shares identical to the
shares the taxpayer holds. By holding two precisely offsetting
positions, the taxpayer is insulated from economic fluctuations in the
value of the stock. While the short against the box is in place, the
taxpayer generally can borrow a substantial portion of the value of the
appreciated long stock so that, economically, the transaction strongly
resembles a sale of the stock held.
Other transactions that have been used by taxpayers to transfer risk
of loss (and opportunity for gain) involve entering into notional
principal contracts or futures or forward contracts to deliver the same
stock. For example, a taxpayer holding appreciated stock may enter into
an ``equity swap'' which requires the taxpayer to make payments equal to
the dividends and any increase in the stock's value for a specified
period, and entitles the taxpayer to receive payments equal to any
depreciation in value. The terms of such swaps also frequently entitle
the shareholder to receive payments during the swap period of a market
rate of return (e.g., the Treasury-bill rate) on a notional principal
amount equal to the value of the shareholder's appreciated stock, making
the transaction strongly resemble a taxable exchange of the appreciated
stock for an interest-bearing asset.
EXPLANATION OF PROVISION
General rule
The bill requires a taxpayer to recognize gain (but not loss) upon
entering into a constructive sale of any appreciated position in stock,
a partnership interest or certain debt instruments as if such position
were sold, assigned or otherwise terminated at its fair market value on
the date of the constructive sale.
If the requirements for a constructive sale are met, the taxpayer
would recognize gain in a constructive sale as if the position were sold
at its fair market value on the date of the sale and immediately
repurchased. Except as provided in Treasury regulations, a constructive
sale would generally not be treated as a sale for other Code purposes.
An appropriate adjustment in the basis of the appreciated financial
position would be made in the amount of any gain realized on a
constructive sale, and a new holding period of such position
would begin as if the taxpayer had acquired the position on the date of
the constructive sale.
A taxpayer is treated as making a constructive sale of an appreciated
position when the taxpayer (or, in certain circumstances, a person
related to the taxpayer) does one of the following: (1) enters into a
short sale of the same property, (2) enters into an offsetting notional
principal contract with respect to the same property, or (3) enters into
a futures or forward contact to deliver the same property. A
constructive sale under any part of the definition occurs if the two
positions are in property that, although not the same, is substantially
identical. In addition, for a taxpayer that has entered into a short
sale, a notional principal contract or a futures or forward contract,
the taxpayer is treated as making a constructive sale when it acquires
the same property as the underlying property for the position. Finally,
to the extent provided in Treasury regulations, a taxpayer is treated as
making a constructive sale when it enters into one or more other
transactions, or acquires one or more other positions, that have
substantially the same effect as any of the transactions described.
The positions of two related persons are treated as together
resulting in a constructive sale if the relationship is one described in
section 267 or section 707(b) and the transaction is entered into with a
view toward avoiding the purposes of the provision.
Whether any part of the constructive sale definition is met by one or
more appreciated financial positions and offsetting transactions
generally will be determined as of the date the last of such positions
or transactions is entered into. More than one appreciated financial
position or more than one offsetting transaction can be aggregated to
determine whether a constructive sale has occurred. For example, it is
possible that no constructive sale would result if one appreciated
financial position and one offsetting transaction were considered in
isolation, but that a constructive sale would result if the appreciated
financial position were considered in combination with two transactions.
Where the standard for a constructive sale is met with respect to only a
pro rata portion of a taxpayer's appreciated financial position (e.g.,
some, but not all, shares of stock), that portion would be treated as
constructively sold under the provision. If there is a constructive sale
of less than all of any type of property held by the taxpayer, the
specific property deemed sold would be determined under the rules
governing actual sales, after adjusting for previous constructive sales
under the bill. Under the regulations to be issued by the Treasury,
either a taxpayer's appreciated financial position or its offsetting
transaction might in some circumstances be disaggregated on a non-pro
rata basis for purposes of the constructive sale determination.
The bill provides an exception from constructive sale treatment for
any transaction that is closed before the end of the 30th day after the
close of the taxable year in which it was entered into. This exception
does not apply, however, where a transaction is closed during the last
60 days of the taxable year or within 30 days thereafter unless (1) the
taxpayer holds the appreciated financial position to which the
transaction relates (e.g., the stock where the offsetting transaction is
a short sale) throughout the 60-day period beginning on the date the
transaction is closed and (2) at no time during such 60-day period is
the taxpayer's risk of loss reduced (under the principles of section
246(c)(4)) by holding positions with respect to substantially similar or
related property.
A transaction that has resulted in a constructive sale of an
appreciated financial position (e.g., a short sale) is not to be treated
as resulting in a constructive sale of another appreciated financial
position so long as the taxpayer holds the position which was treated as
constructively sold. However, when that position is assigned, terminated
or disposed of by the taxpayer, the taxpayer immediately thereafter is
treated as entering into the transaction that resulted in the
constructive sale (e.g., the short sale) if it remains open at that
time. Thus, the transaction can cause a constructive sale of another
appreciated financial position at any time thereafter. For example,
assume a taxpayer holds two stock positions and one offsetting short
sale, and the taxpayer identifies the short sale as offsetting one of
the stock positions. If the taxpayer then sells the stock position that
was identified, the identified short position would cause a constructive
sale of the taxpayer's other stock position at that time.
Definitions
An appreciated financial position is defined as any position with
respect to any stock, debt instrument, or partnership interest, if there
would be gain upon a taxable disposition of the position for its fair
market value. A ``position'' is defined as an interest, including a
futures or forward contract, short sale, or option. An exception is
provided for debt instruments the interest on which is not contingent on
profits, the borrower's discretion, or similar factors and which are not
convertible, directly or indirectly, into stock. Other debt instruments,
including those identified as part of a hedging or straddle transaction,
are appreciated financial positions.
A notional principal contract is treated as an offsetting notional
principal contract, and thus, results in a constructive sale of an
appreciated financial position, if it requires the holder of the
appreciated financial position to pay (or provide a contractual credit
for) all or substantially all of the investment yield and appreciation
on the position for a specified period and also gives the holder a right
to be reimbursed for (or receive credit for) all or substantially all of
any decline in value of the position.
A forward contract results in a constructive sale of an appreciated
financial position only if the forward contract provides for delivery of
a substantially fixed amount of property and a substantially fixed
price. Thus, a forward contract providing for delivery of an amount of
property, such as shares of stock, that is subject to significant
variation under the contract terms does not result in a constructive
sale.
A constructive sale does not include a transaction involving an
appreciated financial position that is marked to market, including
positions governed by section 475 (mark to market for securities
dealers) or section 1256 (mark to market for futures contracts, options
and currency contracts). Nor does a constructive sale include any
contract for sale of an appreciated financial position which is not a
``marketable security'' (as defined in section 453(f)) if the contract
settles within one year after the date it is entered into.
Treasury guidance
The provision provides regulatory authority to the Treasury to treat
as constructive sales
certain transactions that have substantially the same effect
as those specified (i.e., short sales, offsetting notional principal
contracts and futures or forward contracts to deliver the same or
substantially similar property). Under section 7805(b)(2), the Treasury
generally is prohibited from issuing regulations that are retroactive,
unless such regulations are issued within 18 months of the date of
enactment of the provision.
It is anticipated that the Treasury will use the provision's
authority to treat as constructive sales other financial transactions
that, like those specified in the provision, have the effect of
eliminating substantially all of the taxpayer's risk of loss and
opportunity for income or gain with respect to the appreciated financial
position. Because this standard requires reduction of both risk of loss
and opportunity for gain, it is intended that transactions that reduce
only risk of loss or only opportunity for gain will not be covered.
Thus, for example, it is not intended that a taxpayer who holds an
appreciated financial position in stock will be treated as having made a
constructive sale when the taxpayer enters into a put option with an
exercise price equal to the current market price (an ``at the money''
option). Because such an option reduces only the taxpayer's risk of
loss, and not its opportunity for gain, the above standard would not be
met.
For purposes of the provision, it is not intended that risk of loss
and opportunity for gain be considered separately. Thus, if a
transaction has the effect of eliminating a portion of the taxpayer's
risk of loss and a portion of the taxpayer's opportunity for gain with
respect to an appreciated financial position which, taken together, are
substantially all of the taxpayer's risk of loss and opportunity for
gain, it is intended that Treasury regulations will treat this
transaction as a constructive sale of the position.
It is anticipated that the Treasury regulations, when issued, will
provide specific standards for determining whether several common
transactions will be treated as constructive sales. One such transaction
is a ``collar''. In a collar, a taxpayer commits to an option requiring
him to sell a financial position at a fixed price (the ``call strike
price'') and has the right to have his position purchased at a lower
fixed price (the ``put strike price''). For example, a shareholder may
enter into a collar for a stock currently trading at $100 with a put
strike price of $95 and a call strike price of $110. The effect of the
transaction is that the seller has transferred the rights to all gain
above the $110 call strike price and all loss below the $95 put strike
price; the seller has retained all risk of loss and opportunity for gain
in the range price between $95 and $110. A collar can be a single
contract or can be effected by using a combination of put and call
options.
In order to determine whether collars have substantially the same
effect as the transactions specified in the provision, it is anticipated
that Treasury regulations will provide specific standards that take into
account various factors with respect to the appreciated financial
position, including its volatility. Similarly, it is expected that
several aspects of the collar transaction will be relevant, including
the spread between the put and call prices, the period of the
transaction, and the extent to which the taxpayer retains the right to
periodic payments on the appreciated financial position (e.g., the
dividends on collared stock).
Another common transaction for which a specific regulatory standard
may be appropriate is a so-called ``in-the-money'' option, i.e., a put
option where the strike price is significantly above the current market
price or a call option where the strike price is significantly below the
current market price. For example, if a shareholder purchases a put
option exercisable at a future date (a so-called ``European'' option)
with a strike price of $120 with respect to stock currently trading at
$100, the shareholder has eliminated all risk of loss on the position
for the option period and assured himself of all yield and gain on the
stock for any appreciation up to $120. In determining whether such a
transaction will be treated as a constructive sale, it is anticipated
that Treasury regulations will provide a specific standard that takes
into account many of the factors described above with respect to
collars, including the yield and volatility of the stock and the period
and other terms of the option.
For collars, options and some other transactions, one approach that
Treasury might take in issuing regulations is to rely on option prices
and option pricing models. The price of an option represents the payment
the market requires to eliminate risk of loss (for a put option) and to
purchase the right to receive yield and gain (for a call option). Thus,
option pricing offers one model for quantifying both the total risk of
loss and opportunity for gain with respect to an appreciated financial
position, as well as the proportions of these total amounts that the
taxpayer has retained.
In addition to setting specific standards for treatment of these and
other transactions, it may be appropriate for Treasury regulations to
establish ``safe harbor'' rules for common financial transactions that
do not result in constructive sale treatment. An example might be a
collar with a sufficient spread between the put and call prices, a
sufficiently limited period and other relevant terms such that,
regardless of the particular characteristics of the stock, the collar
probably would not transfer substantially all risk of loss and
opportunity for gain.
EFFECTIVE DATE
The provision is effective for constructive sales entered into after
June 8, 1997. A special rule is provided for transactions before this
date which would have been constructive sales under the provision. The
positions in such a transaction will not be taken into account in
determining whether a constructive sale after June 8, 1997, has
occurred, provided that the taxpayer identifies the offsetting positions
of the earlier transaction within 30 days after the date of enactment.
The special rule will cease to apply to on the date the taxpayer ceases
to hold any of the positions so identified.
In the case of a decedent dying after June 8, 1997, if (1) a
constructive sale of an appreciated financial position (as defined in
the proposal) occurred before such date, (2) the transaction remains
open for not less than two years, and (3) the transaction is not closed
in a taxable transaction within 30 days after the date of enactment,
such position (and any property related to it, under principles of the
provision) will be treated as property constituting rights to receive
income in respect of a decedent under section 691.
2. ELECTION OF MARK TO MARKET FOR SECURITIES TRADERS AND FOR TRADERS
AND DEALERS IN COMMODITIES (SEC. 1001(B) OF THE BILL AND NEW SEC. 475(D) OF THE
CODE)
PRESENT LAW
A dealer in securities must compute its income pursuant to a
mark-to-market method of accounting (sec. 475). Any security that is
inventory must be included in inventory at its fair market value, and
any security that is not inventory and that is held at year end is
treated as sold for its fair market value. There is an exception to
mark-to-market treatment for any security identified as held for
investment or not held for sale to customers (or a hedge of such a
security). For this purpose, a ``dealer in securities'' is a person who
(1) regularly purchases securities from or sells securities to customers
in the ordinary course of a trade or business, or (2) regularly offers
to enter into, assume, offset, assign or otherwise terminate positions
in securities with customers in the ordinary course of a trade or
business. For this purpose, ``security'' means any stock in a
corporation; any partnership or beneficial ownership interest in a
widely-held or publicly-traded partnership or trust; any note, bond,
debenture, or other evidence of indebtedness; an interest rate, currency
or equity notional principal contract; any evidence of an interest in,
or a derivative financial instrument of any security described above;
and certain positions identified as hedges of any of the above. Any gain
or loss taken into account under these provisions generally is treated
as ordinary gain or loss.
Traders in securities generally are taxpayers who engage in a trade
or business involving active sales or exchanges of securities on the
market, rather than to customers. The mark-to-market treatment
applicable to securities dealers does not apply to traders in securities
or to dealers in other property.
REASONS FOR CHANGE
Mark-to-market accounting generally provides a clear reflection of
income with respect to assets that are traded in established markets.
For market-valued assets, mark-to-market accounting imposes few burdens
and offers few opportunities for manipulation. Securities and
exchange-traded commodities have determinable market values, and
securities traders and commodities traders and dealers regularly
calculate year-end values of their assets in determining their income
for financial statement purposes. Many commodities dealers also utilize
year-end values in adjusting their inventory using the
lower-of-cost-or-market method for Federal income tax purposes.
EXPLANATION OF PROVISION
The bill allows securities traders and commodities traders and
dealers to elect application of the mark-to-market accounting rules,
which apply only to securities dealers under present law. All securities
held by an electing taxpayer in connection with a trade or business as a
securities trader, and all commodities held by an electing taxpayer in
connection with a trade or business as a commodities dealer or trader,
are subject to mark-to-market treatment. The taxpayer is allowed to
identify property not held in connection with its trade or business as
not subject to the election. As for securities dealers under present
law, gain or loss recognized by an electing taxpayer under the provision
is ordinary gain or loss.
With respect to a commodities dealer, all of the provisions of
present law section 475 apply as if commodities were securities.
Commodities for purposes of the provision would include only commodities
of a kind customarily dealt in on an organized commodities exchange. It
is anticipated that Treasury regulations will provide that section
475(c)(4), which prevents a dealer from treating certain notional
principal contracts and other derivative financial instruments as held
for investment, will apply only to contacts and instruments referenced
to commodities in the case of a commodities dealer.
For securities traders, some of the provisions of present law section
475 apply, but others that are specific to dealers do not. For example,
because a securities trader does not hold inventory, the mark-to-market
rules for inventory are not applicable to traders. In addition,
securities that are not held in connection with the trade or business of
a securities trader are excluded from mark-to-market treatment if the
trader identifies the securities in the trader's records before the
close of the day on which they are acquired under rules similar to those
of section 475(b)(2) for dealers. The provisions applicable to
securities traders apply to commodities traders as if commodities were
securities.
The election is to be made separately with respect to the taxpayer's
entire business as (1) a securities trader, (2) a commodities trader, or
(3) a commodities dealer. Thus, a taxpayer that is both a commodities
dealer and a securities trader may make the election with respect to one
business, but not the other. The election will be made in the time and
manner prescribed by the Secretary of the Treasury and will be effective
for the taxable year for which it is made and all subsequent taxable
years, unless revoked with the consent of the Secretary.
EFFECTIVE DATE
The provision would apply to taxable years of securities traders
ending after the date of enactment. For a taxpayer making the election,
the adjustments required under section 481 as a result of the change in
accounting method are required to be taken into account ratably over a
four-year period.
For elections made for the first taxable year ending after the date
of enactment, the taxpayer must identify the securities or commodities
to which the election will apply within 30 days of the date of
enactment.
3. LIMITATION ON EXCEPTION FOR INVESTMENT COMPANIES UNDER SECTION 351
(SEC. 1002 OF THE BILL AND SEC. 351(E) OF THE CODE)
PRESENT LAW
A contribution of property to a corporation does not result in gain
or loss to the contributing shareholder if the contributor is part of a
group of contributors who own 80 percent of the voting stock of each
class of stock entitled to vote. A contribution of property to a
partnership generally does not result in recognition of gain or loss to
the contributing partner.
Certain Code sections provide exceptions to the general rule for
deferral of pre-contribution gain and loss. Gain or loss is recognized
upon a contribution by a shareholder to a corporation that is an
investment company (sec. 351(e)(1)). Gain, but not loss, is recognized
upon a contribution by a partner to a partnership that would be treated
as an investment company
if the partnership were a corporation (sec. 721(b)). Under
Treasury regulations, a contribution of property by a shareholder to a
corporation, or by a partner to a partnership, is treated as a transfer
to an investment company only if (1) the contribution results, directly
or indirectly, in a diversification of the transferor's interests, and
(2) the transferee is (a) a regulated investment company (``RIC''), (b)
a real estate investment trust (``REIT''), or (c) a corporation more
than 80 percent of the assets of which by value (excluding cash and
non-convertible debt instruments) are readily marketable stocks or
securities or interests in RICs or REITs that are held for investment
(Treas. reg. sec. 1.351 1(c)(1)).
REASONS FOR CHANGE
Under present law and regulations, a partnership or a corporation is
not treated as an investment company even though more than 80 percent of
its assets are a combination of readily marketable stock and securities
and other high-quality investment assets of determinable values, such as
non-convertible debt instruments, notional principal contracts, foreign
currency and interests in metals. Thus, under present law, a partner may
contribute stock, securities or other assets to an investment
partnership, and a shareholder may contribute such assets to a
corporation (e.g., a RIC) and, without current taxation, receive an
interest in an entity that is essentially a pool of high-quality
investment assets. Where, as a result of such a transaction, the partner
or shareholder has diversified or otherwise changed the nature of the
financial assets in which it has an interest, the transaction has the
effect of a taxable exchange. Of particular concern to the Committee is
the reappearance of so-called ``swap funds,'' which are partnerships or
RICs that are structured to fall outside the definition of an investment
company, and thereby allow contributors to make tax-free contributions
of stock and securities in exchange for an interest in an entity that
holds similar assets.
EXPLANATION OF PROVISION
The bill modifies the definition of an investment company for
purposes of determining whether a transfer of property to a partnership
or corporation results in gain recognition (secs. 351(e) and 721(b)) by
requiring that certain assets be taken into account for purposes of the
definition, in addition to marketable stock and securities as under
present law.
Under the bill, an investment company includes a RIC or REIT as under
present law. In addition, under the bill, an investment company includes
any corporation or partnership if more than 80 percent of its assets by
value consist of money, financial instruments, foreign currency,
interests in REITs, RICs, common trust funds and publicly-traded
partnerships, and certain interests in precious metals and entities that
hold the above-listed items.\1\
In addition, the bill grants regulatory authority to the Treasury to
add other assets to the list set out in the provision.
\1\Where assets are defined by reference to provisions of section
731(c)(2), it is intended that the Treasury regulations promulgated
under those provisions will also be applicable.
The bill is intended to change only the types of assets considered in
the definition of an investment company in the present Treasury
regulations (Treas. reg. sec. 1.351 1(c)(1)(ii)) and not to override the
other provisions of those regulations. For example, the bill does not
override (1) the requirement that only assets held for investment are
considered for purposes of the definition (Treas. reg. sec. 1.351
1(c)(3)), (2) the rule treating the assets of a subsidiary as owned
proportionally by a parent owning 50 percent or more of its stock
(Treas. reg. sec. 1.351 1(c)(4)), (3) the requirement that the
investment company determination consider any plan with regard to an
entity's assets in existence at the time of transfer (Treas. reg. sec.
1.351 1(c)(2)), and (4) the requirement that a contribution of property
to an investment company result in diversification in order for gain to
be recognized (Treas. reg. sec. 1.351 1(c)(1)(i)).
EFFECTIVE DATE
The provision applies to all transfers after June 8, 1997, in taxable
years ending after such date. An exception is provided for transfers of
a fixed amount of securities made pursuant to a binding written contract
in effect on June 8, 1997, and at all times thereafter until the
transfer.
4. DISALLOWANCE OF INTEREST ON INDEBTEDNESS ALLOCABLE TO TAX-EXEMPT
OBLIGATIONS (SEC. 1003 OF THE BILL AND SEC. 265 OF THE CODE)
PRESENT LAW
In general
Present law disallows a deduction for interest on indebtedness
incurred or continued to purchase or carry obligations the interest on
which is not subject to tax (tax-exempt obligations) (sec. 265). This
rule applies to tax-exempt obligations held by individual and corporate
taxpayers. The rule also applies to certain cases in which a taxpayer
incurs or continues indebtedness and a related person acquires or holds
tax-exempt obligations.\2\
\2\Code section 7701(f) (as enacted in the Deficit Reduction Act of 1984
(sec. 53(c) of P.L. 98 369)) provides that the Treasury Secretary shall
prescribe such regulations as may be necessary or appropriate to prevent
the avoidance of any income tax rules which deal with linking of
borrowing to investment or diminish risk through the use of related
persons, pass-through entities, or other intermediaries.
Application to non-financial corporations
General guidelines. --In Rev. Proc. 72 18, 1972 1 C.B. 740, the IRS
provided guidelines for application of the disallowance provision to
individuals, dealers in tax-exempt obligations, other business
enterprises, and banks in certain situations. Under Rev. Proc. 72 18, a
deduction is disallowed only when indebtedness is incurred or continued
for the purpose of purchasing or carrying tax-exempt obligations.
This purpose may be established either by direct or circumstantial
evidence. Direct evidence of a purpose to purchase tax-exempt
obligations exists when the proceeds of
indebtedness are directly traceable to the purchase of
tax-exempt obligations or when such obligations are used as collateral
for indebtedness. In the absence of direct evidence, a deduction is
disallowed only if the totality of facts and circumstances establishes a
sufficiently direct relationship between the borrowing and the
investment in tax-exempt obligations.
Two-percent de minimis exception.-- In the case of an individual,
interest on indebtedness generally is not disallowed if during the
taxable year the average adjusted basis of the tax-exempt obligations
does not exceed 2 percent of the average adjusted basis of the
individual's portfolio investments and trade or business assets. In the
case of a corporation other than a financial institution or a dealer in
tax-exempt obligations, interest on indebtedness generally is not
disallowed if during the taxable year the average adjusted basis of the
tax-exempt obligations does not exceed 2 percent of the average adjusted
basis of all assets held in the active conduct of the trade or business.
These safe harbors are inapplicable to financial institutions and
dealers in tax-exempt obligations.
Interest on installment sales to State and local governments.-- If a
taxpayer sells property to a State or local government in exchange for
an installment obligation, interest on the obligation may be exempt from
tax. Present law has been interpreted to not disallow interest on a
taxpayer's indebtedness if the taxpayer acquires nonsalable tax-exempt
obligations in the ordinary course of business in payment for services
performed for, or goods supplied to, State or local governments.\3\
\3\ R.B. George Machinery Co., 26 B.T.A. 594 (1932) acq. C.B.XI 2, 4;
Rev. Proc. 72 18, as modified by Rev. Proc. 87 53, 1987 2 C.B. 669.
Application to financial corporations and dealers in
tax-exempt obligations
In the case of a financial institution, the allocation of the
interest expense of the financial institution (which is not otherwise
allocable to tax-exempt obligations) is based on the ratio of the
average adjusted basis of the tax-exempt obligations acquired after
August 7, 1987, to the average adjusted basis of all assets of the
taxpayer (sec. 265). In the case of an obligation of an issuer which
reasonably anticipates to issue not more than $10 million of tax-exempt
obligations (other than certain private activity bonds) within a
calendar year (the ``small issuer exception''), only 20 percent of the
interest allocable to such tax-exempt obligations is disallowed (sec.
291(a)(3)). A similar pro rata rule applies to dealers in tax-exempt
obligations, but there is no small issuer exception, and the 20-percent
disallowance rule does not apply (Rev. Proc. 72 18).
Treatment of insurance companies
Present law provides that a life insurance company's deduction for
additions to reserves is reduced by a portion of the company's income
that is not subject to tax (generally, tax-exempt interest and
deductible intercorporate dividends) (secs. 807 and 812). The portion by
which the life insurance company's reserve deduction is reduced is
related to its earnings rate. Similarly, in the case of property and
casualty insurance companies, the deduction for losses incurred is
reduced by a percentage (15 percent) of (1) the insurer's tax-exempt
interest and (2) the deductible portion of dividends received (with
special rules for dividends from affiliates) (sec. 832(b)(5)(B)). If the
amount of this reduction exceeds the amount otherwise deductible as
losses incurred, the excess is includible in the property and casualty
insurer's income.
REASONS FOR CHANGE
The Committee believes that the rules adopted by the Internal Revenue
Service to administer the interest disallowance rule as they apply to
corporations needs modifications. The Committee believes that the
Internal Revenue Service is correct that the interest disallowance rule
should not apply to tax-exempt holdings by corporations that acquired
those tax-exempt obligations in the ordinary course of business as
payment for goods and services provided to State and local governments.
On the other hand, the Committee believes that the present law 2 percent
safe harbor is inappropriately large to be considered as de minimis in
the case of large corporations. Instead, the Committee believes that
more appropriate de minimis exception is where holdings of tax-exempt
obligations are less than $1 million (or 2 percent of the corporation's
assets, if less). The Committee believes that more objective rules need
to be adopted to enforce the interest disallowance rule. Specifically,
the Committee believes that a pro rata allocation of debt to tax-exempt
obligations assets is appropriate in determining the amount of interest
to be disallowed because a pro rata rule (1) is consistent with its view
that money generally is fungible and, consequently, that all borrowings
of a corporation finance (or carry) all of the corporation's assets,
including tax-exempt obligations, and (2) avoids the difficult and often
subjective inquiry relating to when indebtedness is incurred or
continued to purchase or carry tax-exempt obligations. In addition, the
Committee believes that rules need to be adopted to enforce the interest
disallowance rule in the case of consolidated and affiliated groups of
corporations and partnerships with corporate partners. The Committee
believes that the pro rata disallowance rule should not apply to
insurance companies since present law contains rules that address
holdings of tax-exempt obligations by insurance companies.
EXPLANATION OF PROVISION
General rule
The bill extends to all corporations (other than insurance companies)
the rule that applies to financial institutions that disallows interest
deductions of a taxpayer (that are not otherwise disallowed as allocable
under present law to tax-exempt obligations) in the same proportion as
the average basis of its tax-exempt obligations bears to the average
basis of all of the taxpayer's assets. However, the bill does not extend
the small-issuer exception to taxpayers which are not financial
institutions.
Exceptions
The provision does not apply to nonsalable tax-exempt debt acquired
by a corporation in the ordinary course of business in payment for goods
or services sold to a State or local government. In addition, the bill
provides a de minimis exception under which the disallowance rule does
not apply to corporations, other than financial institutions and dealers
in tax-exempt obligations, if the average adjusted basis of tax exempt
obligations acquired after August 7,
1986, is less than the lesser of $1 million or 2 percent of
the basis of all of the corporation's assets. Under the bill, insurance
companies are not subject to the pro rata rule but would continue to be
subject to present law.
Holdings by related persons
The provision applies the interest disallowance provision to all
related persons that are members of the same consolidated group as if
all the members of the group were a single taxpayer. The consolidated
group rule is to be applied without regard to any member that is an
insurance company. In the case of affiliated corporations that are not
members of the same consolidated group, tracing rules apply as if all of
the related persons are a single entity.
In the case of a corporation (other than a financial institution)
that is a partner in a partnership, the corporate partners are treated
as holding their allocable shares of all of the assets of the
partnership.
The provision is not intended to affect the application of section
265 to related parties under current law.
EFFECTIVE DATE
The proposal is effective for taxable years beginning after the date
of enactment with respect to obligations acquired after June 8, 1997.
5. GAINS AND LOSSES FROM CERTAIN TERMINATIONS WITH RESPECT TO PROPERTY
(SEC. 1004 OF THE BILL AND SEC. 1234A OF THE CODE)
PRESENT LAW
Treatment of gains and losses.-- Gain from the ``sale or other
disposition'' is the excess of the amount realized therefrom over its
adjusted basis; loss is the excess of adjusted basis over the amount
realized. The definition of capital gains and losses in section 1222
requires that there be a ``sale or exchange'' of a capital asset.\4\
The U.S. Supreme Court has held that the term ``sale or exchange'' is a
narrower term than ``sale or other disposition.''\5\
Thus, it is possible from there to be a taxable income from the sale or
other disposition of an asset without that gain being treated as a
capital gain.
\4\Code section 1221 defines a capital asset to mean property held by
the taxpayer other than (1) property properly includible in inventory of
the taxpayer or primarily held for sale to customers in the ordinary
course of the taxpayer's trade or business, (2) depreciable and real
property used in the taxpayer's trade or business, (3) a copyright, a
literary musical; or artistic composition, letter or memorandum, or
similar property that was created by the taxpayer (or whose basis is
determined, in whole or in part, the basis of the creator, (4) accounts
or notes receivable acquired in the ordinary course of the taxpayer's
trade or business, and (5) a publication of the United States Government
which was received from the Government other than by sale.
\5\ Helvering v. William Flaccus Oak Leather Co., 313 U.S. 247 (1941).
Treatment of capital gains and losses.-- Long-term capital gains of
individuals are subject to a maximum rate of tax of 28 percent.\6\
Capital losses of individuals are allowed to the extent of capital
gains or the lower of those gains or $3,000.
\6\See bill section 311, which provides an alternative tax rates on
long-term capital gains of 10 percent or 20 percent for taxpayers
otherwise marginal bracket is 15 percent or greater than 15 percent,
respectively.
Long-term capital gains of corporations are subject to the same rate
of tax as ordinary income.\7\
Capital losses of corporations are allowed only to the extent of the
corporation's capital gains; excess capital losses may be carried back
to the 3 preceding years and carried forward for the succeeding years.
\7\See bill section 321, which provides an alternative tax rate of 30
percent on corporate capital gains on assets held lower than 5 years.
In the case of gains and losses from the sale or exchange of property
used in a trade or business, net gains generally are treated as capital
gain while net losses are treated as ordinary losses (sec. 1231).
Court decisions interpreting the ``sale or exchange'' requirement.--
There has been a considerable amount of litigation dealing with whether
modifications of legal relationships between taxpayers is be treated as
a ``sale or exchange.'' For example, in Douglass Fairbanks v. U.S., 306
U.S. 436 (1939), the U.S. Supreme Court held that gain realized on the
redemption of bonds before their maturity is not entitled to capital
gain treatment because the redemption was not a ``sale or exchange''.\8\
Several court decisions interpreted the ``sale or exchange''
requirement to mean that a disposition, that occurs as a result of a
lapse, cancellation, or abandonment, is not a sale or exchange of a
capital asset, but produces ordinary income or loss. For example, in
Commissioner v. Pittston Co., 252 F. 2d 344 (2d Cir), cert. denied, 357
U.S. 919 (1958), the taxpayer was treated as receiving ordinary income
from amounts received for acquisition from the mine owner of a contract
that the taxpayer had made with mine owner to buy all of the coal mined
at a particular mine for a period of 10 years on the grounds that the
payments were in lieu of subsequent profits that would have been taxed
as ordinary income. Similarly, Commissioner v. Starr Brothers, 205 F. 2d
673 (1953), the Second Circuit held that a payment that a retail
distributor received from a manufacturer in exchange for waiving a
contract provision prohibiting the manufacturer from selling to the
distributor's competition was not a sale or exchange. Likewise, in
General Artists Corp. v. Commissioner, 205 F. 2d 360 , cert. denied 346
U.S. 866 (1953), the Second Circuit held that amounts received by a
booking agent for cancellation of a contract to be the exclusive agent
of a singer was not a sale or exchange. In National-Standard Company v.
Commissioner, 749 F. 2d 369, the Sixth Circuit held that a loss incurred
the transfer of foreign currency to discharge the taxpayer's liability
was an ordinary loss, since transfer was not a ``sale or exchange'' of
that currency. More recently, in Stoller v. Commissioner, 994 F. 2d 855,
93-1 U.S.T.C. par. 50349 (1993), the Court of Appeals for the District
of Columbia held, in a transaction that preceded the effective date of
section 1234A, that losses incurred on the cancellation of forward
contracts to buy and sell short-term Government securities that formed a
straddle were ordinary because the cancellation of the contracts was not
a ``sale or exchange.''
\8\(The result in this case was overturned by enactment in 1934 of the
predecessor of present law sec. 1271(a), see below). See section 117 of
the Revenue Act of 1934, 28 Stat. 680, 714 715.
Extinguishment treated as sale or exchange-- The Internal Revenue
Code contains provisions that deem certain transactions to be a sale or
exchange and, therefore, any resulting gain or loss is to be treated as
a capital gain or loss. These rules generally provide for ``sale or
exchange'' treatment as a way of extending capital gain or loss
treatment of those transactions. Under one special provision, gains and
losses attributable to the cancellation, lapse, expiration, or other
termination of a right or obligation with respect to certain personal
property are treated as gains or losses from the sale of a capital asset
(sec. 1234A). Personal property subject to this rule is (1) personal
property of a type which is actively traded\9\
and which is, or would be on acquisition, a capital asset in the hands
of the taxpayer (other than stock that is not part of straddle or of a
corporation that is not formed or availed of to take positions which
offset positions in personal property of its shareholders) and (2) a
``section 1256 contract''\10\
which is capital asset in the hands of the taxpayer.\11\
Section 1234A does not apply to the retirement of a debt instrument.
\9\Treasury Regulations generally define ``actively traded'' as any
personal property for which there are an established financial market.
In addition, those regulations provided that ``notional principal
contract constitutes personal property of a type that is actively traded
if contracts based on the same or substantially similar specified
indices are purchased, sold, or entered into on an established financial
market'' and that ``rights and obligations of a party to a notional
principal contract are rights and obligations with respect to personal
property and constitute an interest is personal property.'' Treas. Reg.
sec. 1.092(c) 1(c).
\10\A ``section 1256 contract'' means (1) any regulated futures
contract, (2) foreign currency contract, (3) nonequity option, or (4)
dealer equity option.
\11\The present law provision (sec. 1234A) which treats cancellation,
lapse, expiration, or other termination of a right or obligation with
respect to personal property as a sale of a capital asset was added by
Congress in 1981 when Congress adopted a number of provisions dealing
with tax straddles. There are two components or ``legs'' to a straddle,
where the value of one leg changes inversely with the value of the other
leg. Without a special rule, taxpayers were able to ``leg-out'' of the
loss leg of the straddle, while retaining the gain leg, resulting the
creation of an ordinary loss. In 1981, Congress believed that the
effective ability of taxpayer to elect the character of a gain or loss
leg of a straddle was unwarranted and provided the present law rule that
a cancellation, lapse, expiration or other termination of a right is a
sale or exchange. However, since straddles were the focus of the 1981
legislation, that legislation was limited to types of property which
were the subject of straddles, i.e., personal property (other than
stock) of a type which is actively traded which is, or would be on
acquisition, a capital asset in the hands of the taxpayer. The provision
subsequently was extended to section 1256 contracts.
Retirement of debt obligations treated as sale or exchange.
--Amounts received on the retirement of any debt instrument are treated
as amounts received in exchange therefore (sec. 1271(a)(1)). In
addition, gain on the sale or exchange of a debt instrument with OID\12\
generally is treated as ordinary income to the extent of its OID if
there was an intention at the time of its issuance to call the debt
instrument before maturity (sec. 1271(a)(2)). These rules do not apply
to (1) debt issued by a natural person or (2) debt issued before July 2,
1982, by a noncorporate or nongovernment issuer. As a result of this
exemption, the character of gain or loss realized on retirement of an
obligation issued by a natural person under present law is governed by
case law.
\12\The issuer of a debt instrument with OID generally accrues and
deducts the discount, as interest, over the life of the obligation even
though the amount of such interest is not paid until the debt matures.
The holder of such a debt instrument also generally includes the OID in
income as it accrues as interest on an accrual basis. The mandatory
inclusion of OID in income does not apply, among other exceptions, to
debt obligations issued by natural persons before March 2, 1984, and
loans of less than $10,000 between natural persons if such loan is not
made in the ordinary course of business of the lender (secs. 1272(a)(2)
(D) and (E)).
REASONS FOR CHANGE
Extinguishment treated as sale or exchange. --In general, the
Committee believes that present law is deficient since it (1) taxes
similar economic transactions differently, (2) effectively provides
some, but not all, taxpayers with an election, and (3) its lack of
certainty makes the tax laws unnecessarily difficult to administer.
The Committee believes that some transactions, such as settlements of
contracts to deliver a capital asset, are economically equivalent to a
sale or exchange of such contracts since the value of any asset is the
present value of the future income that such asset will produce. In
addition, to the extent that present law treats modifications of
property rights as not being a sale or exchange, present law effectively
provides, in many cases, taxpayers with an election to treat the
transaction as giving rise to capital gain, subject to more favorable
rates than ordinary income, or an ordinary loss that can offset
higher-taxed ordinary income and not be subject to limitations on use of
capital losses. The effect of an election can be achieved by selling the
property right if the resulting transaction results in a gain or
providing for the extinguishment of the property right if the resulting
transaction results in a loss.
Courts have given different answers as to whether transactions which
terminate contractual interests are treated as a ``sale or exchange.''
This lack of uniformity has caused uncertainty to both taxpayers and the
Internal Revenue Service in the administration of the tax laws.
Accordingly, the Committee bill treats the cancellation, lapse,
expiration, or other termination of a right or obligation with respect
to property which is (or on acquisition would be) a capital asset in the
hands of the taxpayer to all types of property as a ``sale or
exchange.'' A major effect of the Committee bill would be to remove the
effective ability of a taxpayer to elect the character of gains and
losses from certain transactions. Another significant effect of the
Committee bill would be to reduce the uncertainty concerning the tax
treatment of modifications of property rights.
Character of gain on retirement of debt obligations issued by
natural persons. --Similar objections can be raised about the rule which
exempts debt of natural persons from the deemed sale or exchange rule
applicable to debt of other taxpayers. The Committee believes that the
debt of natural persons and other taxpayers is sufficiently economically
similar to be similarly taxed upon their retirement. Accordingly, the
Committee believes that the exception to the deemed sale or exchange
rule on retirement of debt of a natural person should be repealed.
EXPLANATION OF PROVISION
Extension of relinquishment rule to all types of property. --The
bill extends to all types of property the rule which treats gain or loss
from the cancellation, lapse, expiration, or other termination of a
right or obligation with respect to property which is (or on acquisition
would be) a capital asset in the hands of the taxpayer.
By definition, the extension of the ``sale or exchange rule'' of
present law section 1234A to all property will only affect property that
is not personal property which is actively traded on an established
exchange. Thus, the Committee bill will apply to (1) interests in real
property and (2) non-actively traded personal property. An example of
the first type of property interest that will be affected by the
Committee bill is the tax treatment of amounts received to release a
lessee from a requirement that the premise be restored on termination of
the lease.\13\
An example of the second type of property interest that is affected by
the Committee bill is the forfeiture of a down payment under a contract
to purchase stock.\14\
The Committee bill does not affect whether a right is ``property'' or
whether property is a ``capital asset.''
\13\See Billy Rose Diamond Horseshoe, Inc. v. Commissioner, 448 F.2d 549
(1971), where the Second Circuit held that payments were not entitled to
capital gain treatment because there was no sale or exchange. See also,
Sirbo Holdings, Inc. v. Commissioner, 509 F.2d 1220 (2d Cir. 1975).
\14\See U.S. Freight Co. v. U.S. 422 F.2d 887 (Ct. Cl. 1970), holding
that forfeiture was an ordinary loss.
Character of gain or loss on retirement of debt obligations issued
by natural persons. --The Committee bill repeals the provision that
exempts debt obligations issued by natural persons from the rule which
treats gain or loss realized on retirement of the debt as gain or loss
realized
on an exchange. Thus, under the bill, gain or loss on the
retirement of such debt will be capital gain or loss. The provision
retains the present-law exceptions for debt issued before July 2, 1982,
by noncorporations or nongovernments.
EFFECTIVE DATE
Extension of relinquishment rule to all types of property. --The
extension of the extinguishment rule applies to property acquired or
positions established 30 day after the date of enactment of the
provision.
Character of gain or loss on retirement of debt obligations issued
by natural persons. --The repeal of the exception to the character of
gain on retirement of debt instruments issued by natural persons or
obligations issued before July 2, 1982, applies to purchases and debt
issued 30 days after date of enactment of the provision.
6. DETERMINATION OF ORIGINAL ISSUE DISCOUNT WHERE POOLED DEBT
OBLIGATIONS SUBJECT TO ACCELERATION (SEC. 1005 OF THE BILL AND SEC. 1272 OF THE
CODE)
PRESENT LAW
Inclusion of interest income, in general
A taxpayer generally must include in gross income the amount of
interest received or accrued within the taxable year on indebtedness
held by the taxpayer. If the principal amount of an indebtedness may be
paid without interest by a specified date (as is the case with certain
credit card balances), under present law, the holder of the indebtedness
is not required to accrue interest until after the specified date has
passed.
Original issue discount
The holder of a debt instrument with original issue discount
(``OID'') generally accrues and incudes in gross income, as interest,
the OID over the life of the obligation, even though the amount of the
interest may not be received until the maturity of the instrument.
The amount of OID with respect to a debt instrument is the excess of
the stated redemption price at maturity over the issue price of the debt
instrument. The stated redemption price at maturity includes all amounts
payable at maturity. The amount of OID in a debt instrument is allocated
over the life of the instrument through a series of adjustments to the
issue price for each accrual period. The adjustment to the issue price
is determined by multiplying the adjusted issue price (i.e., the issue
price increased by adjustments prior to the accrual period) by the
instrument's yield to maturity, and then subtracting the interest
payable during the accrual period. Thus, in order to compute the amount
of OID and the portion of OID allocable to a period, the stated
redemption price at maturity and the time of maturity must be known.
Issuers of OID instruments accrue and deduct the amount of OID as
interest expense in the same manner as the holder.
Special rules for determining the amount of OID allocated to a period
apply to certain instruments that may be subject to prepayment. First,
if a borrower can reduce the yield on a debt by exercising a prepayment
option, the OID rules assume that the borrower will prepay the debt. In
addition, in the case of (1) any regular interest in a REMIC, (2)
qualified mortgages held by a REMIC, or (3) any other debt instrument if
payments under the instrument may be accelerated by reason of
prepayments of other obligations securing the instrument, the daily
portions of the OID on such debt instruments are determined by taking
into account an assumption regarding the prepayment of principal for
such instruments.
REASONS FOR CHANGE
Interest income generally accrues over the period an amount is
borrowed and repaid. Certain debt instruments, such as credit card
receivables, do not require the debtors to pay interest if they pay
their accounts by a specified date. The operation of the OID and
interest accrual rules of present law provide that, in such instances,
the holder of the debt may assume that the debtors will remit their
balances in a timely manner and thus avoid the interest charges. In a
the case of a large pool of such debt instruments, this prepayment
assumption, as applied to all debtors in the pool, is unrealistic and
may result in the mismeasurement of income with respect to the interest
charged to those debtors that do not prepay their account balances.
EXPLANATION OF PROVISION
The bill applies the special OID rule applicable to any regular
interest in a REMIC, qualified mortgages held by a REMIC, or certain
other debt instruments to any pool of debt instruments the payments on
which may be accelerated by reason of prepayments. Thus, under the bill,
if a taxpayer holds a pool of credit card receivables that require
interest to be paid if the borrowers do not pay their accounts by a
specified date, the taxpayer would be required to accrue interest or OID
on such pool based upon a reasonable assumption regarding the timing of
the payments of the accounts in the pool. In cases where the payments in
the pool occur soon after year end and before the taxpayer files its tax
return for such year end, the taxpayer may accrue interest based on its
actual experience rather than based upon reasonable assumptions.
The bill operates as follows. Assume that a calendar year taxpayer
issues credit cards, the terms of which provide that if charges for a
calendar month are paid within 30 days after the close of the month, no
interest will accrue with respect to such charges. However, if the
balances are not paid within this 30-day grace period, interest will
accrue from the date of the charge until the balance is paid. Further
assume that the taxpayer issues a significant number of such credit
cards and the card holders incur charges of $10 million in December
1997. Under present law (depending upon the taxpayer's accounting
method), the taxpayer is not required to include any interest income in
1997 with respect to the December charges because it is possible that
all the credit card holders will pay off the $10 million cumulative
December balance by January 30, 1998, and therefore will not be subject
to interest with respect to such charges. If some of the credit card
holders do not pay their December charges by January 30, 1998, the
balances of those holders will be subject to interest charges under the
terms of the credit cards and the taxpayer would accrue such interest in
income in 1998. Under the bill, the taxpayer, in computing its 1997
taxable income, would be required to make a reasonable assumption as to
what portion of the $10 million balances will not be paid off
within the 30-day grace period and would be required to accrue interest
income through December 31, 1997, with respect to such portion. The
taxpayer would then adjust such accrual in 1998 to reflect the extent to
which such prepayment assumption reflected the actual payments received
in January.
In addition, the Secretary of the Treasury is authorized to provide
appropriate exemptions from the provision, including exemptions for
taxpayers that hold a limited amount of debt instruments, such as small
retailers.
EFFECTIVE DATE
The provision is effective for taxable years beginning after the date
of enactment. If a taxpayer is required to change its method of
accounting under the bill, such change would be treated as initiated by
the taxpayer with the consent of the Secretary of the Treasury and any
section 481 adjustment would be included in income ratably over a
four-year period. It is understood that some taxpayers presently use a
method of accounting similar to the method required to be used under the
bill and have asked the Secretary of the Treasury for permission to
change to a different method for pre-effective date years. So as not to
require taxpayers to change methods of accounting multiple times, it is
expected that the Secretary would not grant these pending requests.
7. DENY INTEREST DEDUCTION ON CERTAIN DEBT INSTRUMENTS (SEC. 1006 OF
THE BILL AND SEC. 163 OF THE CODE)
PRESENT LAW
Whether an instrument qualifies for tax purposes as debt or equity is
determined under all the facts and circumstances based on principles
developed in case law. If an instrument qualifies as equity, the issuer
generally does not receive a deduction for dividends paid and the holder
generally includes such dividends in income (although corporate holders
generally may obtain a dividends-received deduction of at least 70
percent of the amount of the dividend). If an instrument qualifies as
debt, the issuer may receive a deduction for accrued interest and the
holder generally includes interest in income, subject to certain
limitations.
Original issue discount (``OID'') on a debt instrument is the excess
of the stated redemption price at maturity over the issue price of the
instrument. An issuer of a debt instrument with OID generally accrues
and deducts the discount as interest over the life of the instrument
even though interest may not be paid until the instrument matures. The
holder of such a debt instrument also generally includes the OID in
income on an accrual basis.
REASONS FOR CHANGE
The Committee is concerned that corporate taxpayers may issue
instruments denominated as debt but that more closely resemble equity
transactions for which an interest deduction is not appropriate.
EXPLANATION OF PROVISION
Under the bill, no deduction is allowed for interest or OID on an
instrument issued by a corporation (or issued by a partnership to the
extent of its corporate partners) that is payable in stock of the issuer
or a related party (within the meaning of sections 267(b) and 707(b)),
including an instrument a substantial portion of which is mandatorily
convertible or convertible at the issuer's option into stock of the
issuer or a related party. In addition, an instrument is be treated as
payable in stock if a substantial portion of the principal or interest
is required to be determined, or may be determined at the option of the
issuer or related party, by reference to the value of stock of the
issuer or related party. An instrument also is treated as payable in
stock if it is part of an arrangement designed to result in such payment
of the instrument with or by reference to such stock, such as in the
case of certain issuances of a forward contract in connection with the
issuance of debt, nonrecourse debt that is secured principally by such
stock, or certain debt instruments that are convertible at the holder's
option when it is substantially certain that the right will be
exercised. For example, it is not expected that the provision will
affect debt with a conversion feature where the conversion price is
significantly higher than the market price of the stock on the issue
date of the debt. The bill does not affect the treatment of a holder of
an instrument.
The bill is not intended to affect the characterization of
instruments as debt or equity under present law; and no inference is
intended as to the treatment of any instrument under present law.
EFFECTIVE DATE
The provision is effective for instruments issued after June 8, 1997,
but will not apply to such instruments (1) issued pursuant to a written
agreement which was binding on such date and at all times thereafter,
(2) described in a ruling request submitted to the Internal Revenue
Service on or before such date, or (3) described in a public
announcement or filing with the Securities and Exchange Commission on or
before such date.
B. Corporate Organizations and Reorganizations
1. REQUIRE GAIN RECOGNITION FOR CERTAIN EXTRAORDINARY DIVIDENDS (SEC.
1011 OF THE BILL AND SEC. 1059 OF THE CODE)
PRESENT LAW
A corporate shareholder generally can deduct at least 70 percent of a
dividend received from another corporation. This dividends received
deduction is 80 percent if the corporate shareholder owns at least 20
percent of the distributing corporation and generally 100 percent if the
shareholder owns at least 80 percent of the distributing corporation.
Section 1059 of the Code requires a corporate shareholder that
receives an ``extraordinary dividend'' to reduce the basis of the stock
with respect to which the dividend was received by the nontaxed portion
of the dividend. Whether a dividend is ``extraordinary'' is determined,
among other things, by reference to the size of the dividend in relation
to the adjusted basis of the shareholder's stock. Also, a dividend
resulting from a non pro rata redemption or a partial liquidation is an
extraordinary dividend. If the reduction in basis of stock exceeds the
basis in the stock with respect to which an extraordinary dividend is
received, the excess is taxed as gain on the sale or disposition of such
stock, but not until that time (sec. 1059(a)(2)). The reduction in basis
for this purpose occurs immediately before any sale or disposition of
the stock (sec. 1059(d)(1)(A)). The Treasury Department has general
regulatory authority to carry out the purposes of the section.
Except as provided in regulations, the extraordinary dividend
provisions do not apply to result in a double reduction in basis in the
case of distributions between members of an affiliated group filing
consolidated returns, where the dividend is eliminated or excluded under
the consolidated return regulations. Double inclusion of earnings and
profits (i.e., from both the dividend and from gain on the disposition
of stock with a reduced basis) also should generally be prevented.\15\
Treasury regulations provide for application of the provision when a
corporation is a partner in a partnership that receives a
distribution.\16\
\15\See H Rept. 99 841, II 166, 99th Cong. 2d Sess. (September 18,
1986).
\16\See Treas. reg. sec. 1.701 2(f), Example (2).
In general, a distribution in redemption of stock is treated as a
dividend, rather than as a sale of the stock, if it is essentially
equivalent to a dividend (sec. 302). A redemption of the stock of a
shareholder generally is essentially equivalent to a dividend if it does
not result in a meaningful reduction in the shareholder's proportionate
interest in the distributing corporation. Section 302(b) also contains
several specific tests (e.g., a substantial reduction computation and a
termination test) to identify redemptions that are not essentially
equivalent to dividends. The determination whether a redemption is
essentially equivalent to a dividend includes reference to the
constructive ownership rules of section 318, including the option
attribution rules of section 318(a)(4). The rules relating to treatment
of cash or other property received in a reorganization contain a similar
reference (sec. 356(a)(2)).
REASONS FOR CHANGE
Corporate taxpayers have attempted to dispose of stock of other
corporations in transactions structured as redemptions, where the
redeemed corporate shareholder apparently expects to take the position
that the transactions are dividends that qualify for the dividends
received deduction. Thus, the redeemed corporate shareholder attempts to
exclude from income a substantial portion of the amount received. In
some cases, it appears that the taxpayers' interpretations of the option
attribution rules of section 318(a)(4) are important to the taxpayers'
contentions that their interests in the distributing corporation are not
meaningfully reduced, and are, therefore, dividends.\17\
Some taxpayers may argue that certain options have sufficient economic
reality that they should be recognized as stock ownership for purposes
of determining whether a taxpayer has substantially reduced its
ownership.
\17\For example, it has been reported that Seagram Corporation intends
to take the position that the corporate dividends-received deduction
will eliminate tax on significant distributions received from DuPont
Corporation in a redemption of almost all the DuPont stock held by
Seagram, coupled with the issuance of certain rights to reacquire DuPont
stock. (See, e.g., Landro and Shapiro, ``Hollywood Shuffle,'' Wall
Street Journal, pp. Al and All (April 7, 1995); Sloan, ``For Seagram and
DuPont, a Tax Deal that No One Wants to Brandy About,'' Washington Post,
p. D3 (April 11, 1995); Sheppard, ``Can Seagram Bail Out of DuPont
without Capital Gain Tax,'' Tax Notes Today, (April 10, 1995, 95 TNT 75
4).
Even in the absence of options, the present law rules dealing with
extraordinary dividends may permit inappropriate deferral of gain
recognition when the portion of the distribution that is excluded due to
the dividends received deduction exceeds the basis of the stock with
respect to which the extraordinary dividend is received.
EXPLANATION OF PROVISION
Under the bill, except as provided in regulations, a corporate
shareholder recognizes gain immediately with respect to any redemption
treated as a dividend (in whole or in part) when the nontaxed portion of
the dividend exceeds the basis of the shares surrendered, if the
redemption is treated as a dividend due to options being counted as
stock ownership.\18\
\18\Thus, for example, where a portion of such a distribution would not
have been treated as a dividend due to insufficient earnings and
profits, the rule applies to the portion treated as a dividend.
In addition, the bill requires immediate gain recognition whenever
the basis of stock with respect to which any extraordinary dividend was
received is reduced below zero. The reduction in basis of stock would be
treated as occurring at the beginning of the ex-dividend date of the
extraordinary dividend to which the reduction relates.
Reorganizations or other exchanges involving amounts that are treated
as dividends under section 356 of the Code are treated as redemptions
for purposes of applying the rules relating to redemptions under section
1059(e). For example, if a recapitalization or other transaction that
involves a dividend under section 356 has the effect of a non pro rata
redemption or is treated as a dividend due to options being counted as
stock, the rules of section 1059 apply. Redemptions of shares, or other
extraordinary dividends on shares, held by a partnership will be subject
to section 1059 to the extent there are corporate partners (e.g.,
appropriate adjustments to the basis of the shares held by the
partnership and to the basis of the corporate partner's partnership
interest will be required).
Under continuing section 1059(g) of present law, the Treasury
Department is authorized to issue regulations where necessary to carry
out the purposes and prevent the avoidance of the provision.
EFFECTIVE DATE
The provision generally is effective for distributions after May 3,
1995, unless made pursuant to the terms of a written binding contract in
effect on May 3, 1995 and at all times thereafter before such
distribution, or a tender offer outstanding on May 3, 1995.\19\
However, in applying the new gain recognition rules to any distribution
that is not a partial liquidation, a non pro rata redemption, or a
redemption that is treated as a dividend by reason of options, September
13, 1995 is substituted for May 3, 1995 in applying the transition
rules.
\19\Thus, for example, in the case of a distribution prior to the
effective date, the provisions of present law would continue to apply,
including the provisions of present-law sections 1059(a) and 1059(d)(1),
requiring reduction in basis immediately before any sale or disposition
of the stock, and requiring of gain at the time of such sale or
disposition.
No inference is intended regarding the tax treatment under present
law of any transaction within the scope of the provision, including
transactions utilizing options.
In addition, no inference is intended regarding the rules under
present law (or in any case where the treatment is not specified in the
provision) for determining the shares of stock with respect to which a
dividend is received or that experience a basis reduction.
2. REQUIRE GAIN RECOGNITION ON CERTAIN DISTRIBUTIONS OF CONTROLLED
CORPORATION STOCK (SEC. 1012 OF THE BILL AND SECS. 355, 351(C), AND 368(A)(2)(H)
OF THE CODE)
PRESENT LAW
A corporation generally is required to recognize gain on the
distribution of property (including stock of a subsidiary) as if such
property had been sold for its fair market value. The shareholders
generally treat the receipt of property as a taxable event as well.
Section 355 of the Internal Revenue Code provides an exception to this
rule for certain ``spin-off'' type distributions of stock of a
controlled corporation, provided that various requirements are met,
including certain restrictions relating to acquisitions and dispositions
of stock of the distributing corporation (``distributing'') or the
controlled corporation (``controlled'') prior and subsequent to a
distribution.
In cases where the form of the transaction involves a contribution of
assets to the particular controlled corporation that is distributed in
connection with the distribution, there are specific Code requirements
that distributing corporation's shareholders own ``control'' of the
distributed corporation immediately after the distribution. Control is
defined for this purpose as 80 percent of the voting power of all
classes of stock entitled to vote and 80 percent of each other class of
stock. (Sections 368(a)(1)(D), 368(c), and 351(a) and (c)). In addition,
it is a requirement for qualification of any section 355 distribution
that the distributing corporation distribute control of the controlled
corporation (defined by reference to the same 80-percent test).\20\
Present law has the effect of imposing more restrictive requirements on
certain types of acquisitions or other transfers following a
distribution if the company involved is the controlled corporation
rather than the distributing corporation.
\20\If a controlled corporation is acquired after a distribution, an
issue may arise whether under step-transaction concepts, the acquisition
can be viewed as having occurred before the distribution, with the
result that the distributing corporation would not be viewed as having
distributed the necessary 80 percent control. The Internal Revenue
Service has indicated that it will not rule on requests for section 355
treatment in cases in which there have been negotiations, agreements, or
arrangements with respect to transactions or events which, if
consummated before the distribution, would result in the distribution of
stock or securities of a corporation which is not ``controlled'' by the
distributing corporation. Rev. Proc. 96 39, 1996 33 I.R.B. 11; see also
Rev. Rul. 96 30, 1996 1 C.B. 36; Rev. Rul. 70 225, 1970 1 C.B. 80.
REASONS FOR CHANGE
The Committee believes that section 355 was intended to permit the
tax-free division of existing business arrangements among existing
shareholders. In cases in which it is intended that new shareholders
will acquire ownership of a business in connection with a spin off, the
transaction more closely resembles a corporate level disposition of the
portion of the business that is acquired.
The Committee is also concerned that spin-off transactions within a
single corporate group can have the effect of avoiding other present law
rules that create or recapture excess loss accounts in affiliated groups
filing consolidated returns.\21\
Such intra-group distributions can also generally have the effect of
permitting possibly inappropriate basis increases (or preventing basis
decreases) following a distribution, due to the differences between the
basis allocation rules that govern spin-offs and those that apply to
other distributions.
\21\Excess loss accounts in consolidation generally are created when a
parent corporation derives a benefit in the form of a distribution, or
the use of otherwise unavailable losses, that exceed the basis of the
parent in the stock of the subsidiary providing the benefit. In general,
such excess benefits in consolidation are permitted to be deferred
rather than causing immediate taxable gain. Nevertheless, they are
recaptured when a subsidiary leaves the group or in certain other
situations. However, such excess loss accounts are not recaptured in
certain cases where there is an internal spin-up prior to a subsidiary
leaving the group. See. Treas. Reg. Sec. 1.1502 19(g). In addition, an
excess loss account may not be created at all in certain cases that are
similar economically to a distribution that would reduce the stock basis
of the distributing subsidiary corporation, if the distributing from the
subsidiary is structured to meet the form of a section 355 distribution.
However, the Committee believes that the difference in treatment of
certain transactions following a spin-off, depending upon whether the
distributing or controlled corporation engages in the transaction,
should be minimized.
EXPLANATION OF PROVISION
The bill adopts additional restrictions under section 355 on
acquisitions and dispositions of the stock of the distributing or
controlled corporation.
Under the bill, if, pursuant to a plan or arrangement in existence on
the date of distribution, either the controlled or distributing
corporation is acquired, gain is recognized by the other corporation as
of the date of the distribution.
In the case of an acquisition of a controlled corporation, the amount
of gain recognized by the distributing corporation is the amount of gain
that the distributing corporation would have recognized had stock of the
controlled corporation been sold for fair market value on the date of
distribution. In the case of an acquisition of the distributing
corporation, the amount of gain recognized by the controlled corporation
is the amount of net gain that the distributing corporation would have
recognized had it sold its assets for fair market value immediately
after the distribution. This gain is treated as long-term capital gain.
No adjustment to the basis of the stock or assets of either corporation
is allowed by reason of the recognition of the gain.
Whether a corporation is acquired is determined under rules similar
to those of present law section 355(d), except that acquisitions would
not be restricted to ``purchase'' transactions. Thus, an acquisition
occurs if one or more persons acquire 50 percent or more of the vote or
value of the stock of the controlled or distributing corporation
pursuant to a plan or arrangement. For example, assume a corporation
(``P'') distributes the stock of its wholly owned subsidiary (``S'') to
its shareholders. If, pursuant to a plan or arrangement, 50 percent or
more of the vote or value of either P or S is acquired by one or more
persons, the bill proposal requires gain recognition by the corporation
not acquired. Except as provided in Treasury regulations, if the assets
of the distributing or controlled corporation are acquired by a
successor in a merger or other transaction under section 368(a)(1) (A),
(C) or (D) of the Code, the shareholders (immediately before the
acquisition) of the corporation acquiring such assets are treated as
acquiring stock in the corporation from which the assets were acquired.
Under Treasury regulations, other asset transfers also could be subject
to this rule. However, in any transaction, stock received directly or
indirectly by former shareholders of distributing or controlled, in a
successor or new controlling corporation of either, is not treated as
acquired stock if it is attributable to such shareholders' stock in
distributing or controlled that was not acquired as part of a plan or
arrangement to acquire 50 percent or more of such successor or other
corporation.
Acquisitions occurring within the four-year period beginning two
years before the date of distribution are presumed to have occurred
pursuant to a plan or arrangement. Taxpayers can avoid gain recognition
by showing that an acquisition occurring during this four-year period
was unrelated to the distribution.
The bill does not apply to distributions that would otherwise be
subject to section 355(d) of present law, which imposes corporate level
tax on certain disqualified distributions.
The bill does not apply to a distribution pursuant to a title 11 or
similar case.
The Treasury Department is authorized to prescribe regulations as
necessary to carry out the purposes of the proposal, including
regulations to provide for the application of the proposal in the case
of multiple transactions.
Except as provided in regulations, in the case of distributions of
stock within an affiliated group of corporations filing a consolidated
return, section 355 does not apply to any distribution of the stock of
one member of the group to another member. In the case of such a
distribution of stock, the Secretary of the Treasury is to provide
appropriate rules for the treatment of the distribution, including rules
governing adjustments to the adjusted basis of the stock and the
earnings and profits of the members of the group.
The bill also modifies certain rules for determining control
immediately after a distribution in the case of certain divisive
transactions in which a controlled corporation is distributed and the
transaction meets the requirements of section 355. In such cases, under
section 351 and modified section 368(a)(2)(H) with respect to certain
reorganizations under section 368(a)(1)(D), those shareholders receiving
stock in the distributed corporation are treated as in control of the
distributed corporation immediately after the distribution if they hold
stock representing a 50 percent or greater interest in the vote and
value of stock of the distributed corporation.
The bill does not change the present-law requirement under section
355 that the distributing corporation must distribute 80 percent of the
voting power and 80 percent of each other class of stock of the
controlled corporation. It is expected that this requirement will be
applied by the Internal Revenue Service taking account of the provisions
of the proposal regarding plans that permit certain types of planned
restructuring of the distributing corporation following the
distribution, and to treat similar restructurings of the controlled
corporation in a similar manner. Thus, the 80-percent control
requirement is expected to be administered in a manner that would
prevent the tax-free spin-off of a less-than-80-percent controlled
subsidiary, but would not generally impose additional restrictions on
post-distribution restructurings of the controlled corporation if such
restrictions would not apply to the distributing corporation.
EFFECTIVE DATE
The bill is generally effective for distributions after April 16,
1997. However, the part of the bill providing a 50-percent control
requirement immediately after certain section 351 and 368(a)(1)(D)
distributions will be effective for transfers after the date of
enactment.
No part of the bill will apply to a distribution (or transfer, as the
case may be) after April 16, 1997, if such distribution or transfer is
(1) made pursuant to a written agreement which was binding on such date
and at all times thereafter; (2) described in a ruling request submitted
to the Internal Revenue Service on or before such date; or (3) described
on or before such date in a public announcement or in a filing with the
Securities and Exchange Commission required solely by reason of the
distribution. Any written agreement, ruling request, or public
announcement is not within the scope of these transition provisions
unless it identifies the unrelated acquiror of the distributing
corporation or of any controlled corporation, whichever is applicable.
3. REFORM TAX TREATMENT OF CERTAIN CORPORATE STOCK TRANSFERS (SEC. 1013
OF THE BILL AND SECS. 304 AND 1059 OF THE CODE)
PRESENT LAW
Under section 304, if one corporation purchases stock of a related
corporation, the transaction generally is recharacterized as a
redemption. In determining whether a transaction so recharacterized is
treated as a sale or a dividend, reference is made to the changes in the
selling corporation's ownership of stock in the issuing corporation
(applying the constructive ownership rules of section 318(a) with
modifications under section 304(c)). Sales proceeds received by a
corporate transferor that are characterized as a dividend may qualify
for the dividends received deduction under section 243, and such
dividend may bring with it foreign tax credits under section 902.
Section 304 does not apply to transfers of stock between members of a
consolidated group.
Section 1059 applies to ``extraordinary dividends,'' including
certain redemption transactions treated as dividends qualifying for the
dividends received deduction. If a redemption results in an
extraordinary dividend, section 1059 generally requires the shareholder
to reduce its basis in the stock of the redeeming corporation by the
nontaxed portion of such dividend.
REASONS FOR CHANGE
Section 304 is directed primarily at preventing a controlling
shareholder from claiming basis recovery and capital gain treatment on
transactions that result in a withdrawal of earnings from corporate
solution. There concerns are most relevant where the shareholder is an
individual. Different concerns may be present if the shareholder is a
corporation, due in part to the presence of the dividends received
deduction. A corporation often may prefer a transaction to be
characterized as a dividend, as opposed to a sale or exchange.
Accordingly, a corporation may intentionally seek to apply section 304
to a transaction which is in substance a sale or exchange. Corporations
that are related for purposes of section 304 need not be 80-percent
controlled by a common parent. The separate rules for corporations
filing a consolidated return, that would generally reduce basis for
untaxed dividends received, do not apply. Furthermore, in some
situations where the selling corporation does not in fact own any stock
of the acquiring corporation before or after the transaction (except by
attribution), it is possible that current law may lead to inappropriate
results.
As one example, in certain related-party sales the selling
corporation may take the position that its basis in any shares of stock
it may have retained (or possibly in any shares of the acquiring
corporation that it may own) need not be reduced by the amount of its
dividends received deduction. This could result in an inappropriate
shifting of basis. The result can be artificial reduction of gain or
creation of loss on disposition of any such retained shares.
As one example, assume that domestic corporation X owns 70 percent of
the shares of domestic corporation S and all the shares of domestic
corporation B. S owns all the shares of domestic corporation T with a
basis of $100. Assume that corporation B has sufficient earnings and
profits so that any distribution of property would be treated as a
dividend. Assume that S sells all but one of its shares in T to B for
$99, their fair market value. Under present law, the transfer is treated
as a redemption of shares of B, which redemption is treated as dividend
to S because, even though S in fact owns no shares of B, it is deemed to
own all the shares of B before and after the transaction through
attribution from X. Taxpayers may contend that the one share of T
retained (worth $1) retains the entire original basis of $100. Although
S has received $99 from B for its other shares of T, and has not paid
full tax on that receipt due to the dividends received deduction, S may
now attempt to claim a $99 loss on disposing of the remaining share of
T.
In international cases, a U.S. corporation owned by a foreign
corporation may inappropriately claim foreign tax credits from a section
304 transaction. For example, if a foreign-controlled domestic
corporation sells the stock of a subsidiary to a foreign sister
corporation, the domestic corporation may take the position that it is
entitled to credit foreign taxes that were paid by the foreign sister
corporation. See Rev. Rul. 92 86, 1992 2 C.B. 199; Rev. Rul. 91 5, 1991
1 C.B. 114. However, if the foreign sister corporation had actually
distributed its earnings and profits to the common foreign parent, no
foreign tax credits would have been available to the domestic
corporation.
EXPLANATION OF PROVISION
Under the bill, to the extent that a section 304 transaction is
treated as a distribution under section 301, the transferor and the
acquiring corporation are treated as if (1) the transferor had
transferred the stock involved in the transaction to the acquiring
corporation in exchange for stock of the acquiring corporation in a
transaction to which section 351(a) applies, and (2) the acquiring
corporation had then redeemed the stock it is treated as having issued.
Thus, the acquiring corporation is treated for all purposes as having
redeemed the stock it is treated as having issued to the transferor. In
addition, the bill amends section 1059 so that, if the section 304
transaction is treated as a dividend to which the dividends received
deduction applies, the dividend is treated as an extraordinary dividend
in which only the basis of the transferred shares would be taken into
account under section 1059.
Under the bill, a special rule applies to section 304 transactions
involving acquisitions by foreign corporations. The bill limits the
earnings and profits of the acquiring foreign corporation
that are taken into account in applying section 304. The
earnings and profits of the acquiring foreign corporation to be taken
into account will not exceed the portion of such earnings and profits
that (1) is attributable to stock of such acquiring corporation held by
a corporation or individual who is the transferor (or a person related
thereto) and who is a U.S. shareholder (within the meaning of sec,
951(b)) of such corporation, and (2) was accumulated during periods in
which such stock was owned by such person while such acquiring
corporation was a controlled foreign corporation. For purposes of this
rule, except as otherwise provided by the Secretary of the Treasury, the
rules of section 1248(d) (relating to certain exclusions from earnings
and profits) would apply. The Secretary of the Treasury is to prescribe
regulations as appropriate, including regulations determining the
earnings and profits that are attributable to particular stock of the
acquiring corporation.
No inference is intended as to the treatment of any transaction under
present law.
EFFECTIVE DATE
The provision is effective for distributions or acquisitions after
June 8, 1997 except that the provision will not apply to any such
distribution or acquisition (1) made pursuant to a written agreement
which was binding on such date and at all times thereafter, (2)
described in a ruling request submitted to the Internal Revenue Service
on or before such date, or (3) described in a public announcement or
filing with the Securities and Exchange Commission on or before such
date.
4. MODIFY HOLDING PERIOD FOR DIVIDENDS-RECEIVED DEDUCTION (SEC. 1014 OF
THE BILL AND SEC. 246(C) OF THE CODE)
PRESENT LAW
If an instrument issued by a U.S. corporation is classified for tax
purposes as stock, a corporate holder of the instrument generally is
entitled to a dividends received deduction for dividends received on
that instrument. This deduction is 70 percent of dividends received if
the recipient owns less than 20 percent (by vote and value) of stock of
the payor. If the recipient owns more than 20 percent of the stock the
deduction is increased to 80 percent. If the recipient owns more than 80
percent of the payor's stock, the deduction is further increased to 100
percent for qualifying dividends.
The dividends-received deduction is allowed to a corporate
shareholder only if the shareholder satisfies a 46-day holding period
for the dividend-paying stock (or a 91-day period for certain dividends
on preferred stock). The 46- or 91-day holding period generally does not
include any time in which the shareholder is protected from the risk of
loss otherwise inherent in the ownership of an equity interest. The
holding period must be satisfied only once, rather than with respect to
each dividend received.
REASONS FOR CHANGE
Under present law, dividend-paying stocks can be marketed to
corporate investors with accompanying attempts to hedge or relieve the
holder from risk for much of the holding period of the stock, after the
initial holding period has been satisfied. In addition, because of the
limited application of section 1059 of the Code requiring basis
reduction, many investors whose basis includes a price paid with the
expectation of a dividend may be able to sell the stock after the
receipt of a dividend not subject to tax at an artificial loss, even
though the holder may actually have been relieved of the risk of loss
for much of the period it has held the stock.
The Committee believes that no deduction for a distribution on stock
should be allowed when the owner of stock does not bear the risk of loss
otherwise inherent in the ownership of an equity interest at a time
proximate to the time the distribution is made.
EXPLANATION OF PROVISION
The bill provides that a taxpayer is not entitled to a
dividends-received deduction if the taxpayer's holding period for the
dividend-paying stock is not satisfied over a period immediately before
or immediately after the taxpayer becomes entitled to receive the
dividend.
EFFECTIVE DATE
The provision is effective for dividends paid or accrued after the
30th day after the date of the enactment of the bill.
c. other corporate provisions
1. REGISTRATION OF CONFIDENTIAL CORPORATE TAX SHELTERS AND SUBSTANTIAL
UNDERSTATEMENT PENALTY (SEC. 1021 OF THE BILL AND SECS. 6111 AND 6662 OF THE CODE)
PRESENT LAW
Tax shelter registration
An organizer of a tax shelter is required to register the shelter
with the Internal Revenue Service (IRS) (sec. 6111). If the principal
organizer does not do so, the duty may fall upon any other participant
in the organization of the shelter or any person participating in its
sale or management. The shelter's identification number must be
furnished to each investor who purchases or acquires an interest in the
shelter. Failure to furnish this number to the tax shelter investors
will subject the organizer to a $100 penalty for each such failure (sec.
6707(b)).
A penalty may be imposed against an organizer who fails without
reasonable cause to timely register the shelter or who provides false or
incomplete information with respect to it. The penalty is the greater of
one percent of the aggregate amount invested in the shelter or $500. Any
person claiming any tax benefit with respect to a shelter must report
its registration number on her return. Failure to do so without
reasonable cause will subject that person to a $250 penalty (sec.
6707(b)(2)).
A person who organizes or sells an interest in a tax shelter subject
to the registration rule or in any other potentially abusive plan or
arrangement must maintain a list of the investors (sec. 6112). A $50
penalty may be assessed for each name omitted from the list. The maximum
penalty per year is $100,000 (sec. 6708).
For this purpose, a tax shelter is defined as any investment that
meets two requirements. First, the investment must be (1) required to be
registered under a Federal or state law regulating securities, (2) sold
pursuant to an exemption from registration requiring the filing of a
notice with a Federal or state agency regulating the offering or sale of
securities, or (3) a substantial investment. Second, it must be
reasonable to infer that the ratio of deductions and 350 percent of
credits to investment for any investor (i.e., the tax shelter ratio) may
be greater than two to one as of the close of any of the first five
years ending after the date on which the investment is offered for sale.
An investment that meets these requirements will be considered a tax
shelter regardless of whether it is marketed or customarily designated
as a tax shelter (sec. 6111(c)(1)).
Accuracy-related penalty
The accuracy-related penalty, which is imposed at a rate of 20
percent, applies to the portion of any underpayment that is attributable
to (1) negligence, (2) any substantial understatement of income tax, (3)
any substantial valuation misstatement, (4) any substantial
overstatement of pension liabilities, or (5) any substantial estate or
gift tax valuation understatement.
The substantial understatement penalty applies in the following
manner. If the correct income tax liability of a taxpayer for a taxable
year exceeds that reported by the taxpayer by the greater of 10 percent
of the correct tax or $5,000 ($10,000 in the case of most corporations),
then a substantial understatement exists and a penalty may be imposed
equal to 20 percent of the underpayment of tax attributable to the
understatement. In determining whether a substantial understatement
exists, the amount of the understatement is reduced by any portion
attributable to an item if (1) the treatment of the item on the return
is or was supported by substantial authority, or (2) facts relevant to
the tax treatment of the item were adequately disclosed on the return or
on a statement attached to the return and there was a reasonable basis
for the tax treatment of the item. Special rules apply to tax shelters.
With respect to tax shelter items of non-corporate taxpayers, the
penalty may be avoided only if the taxpayer establishes that, in
addition to having substantial authority for his position, he reasonably
believed that the treatment claimed was more likely than not the proper
treatment of the item. This reduction in the penalty is unavailable to
corporate tax shelters. The reduction in the understatement for items
disclosed on the return is inapplicable to both corporate and
non-corporate tax shelters. For this purpose, a tax shelter is a
partnership or other entity, plan, or arrangement the principal purpose
of which is the avoidance or evasion of Federal income tax.
The Secretary may waive the penalty with respect to any item if the
taxpayer establishes reasonable cause for his treatment of the item and
that he acted in good faith.
REASONS FOR CHANGE
The provision will improve compliance with the tax laws by giving the
Treasury Department earlier notification than it generally receives
under present law of transactions that may not comport with the tax
laws. In addition, the provision will improve compliance by discouraging
taxpayers from entering into questionable transactions. Also, the
provision will improve economic efficiency, because investments that are
not economically motivated, but that are instead tax-motivated, may
reduce the supply of capital available for economically motivated
activities, which could cause a loss of economic efficiency.
EXPLANATION OF PROVISION
Tax shelter registration
The provision requires a promoter of a corporate tax shelter to
register the shelter with the Secretary. Registration is required not
later than the next business day after the day when the tax shelter is
first offered to potential users. If the promoter is not a U.S. person,
or if a required registration is not otherwise made, then any U.S.
participant is required to register the shelter. An exception to this
special rule provides that registration would not be required if the
U.S. participant notifies the promoter in writing not later than 90 days
after discussions began that the U.S. participant will not participate
in the shelter and the U.S. person does not in fact participate in the
shelter.
A corporate tax shelter is any investment, plan, arrangement or
transaction (1) a significant purpose of the structure of which is tax
avoidance or evasion by a corporate participant, (2) that is offered to
any potential participant under conditions of confidentiality, and (3)
for which the tax shelter promoters may receive total fees in excess of
$100,000.
A transaction is offered under conditions of confidentiality if: (1)
an offeree (or any person acting on its behalf) has an understanding or
agreement with or for the benefit of any promoter to restrict or limit
its disclosure of the transaction or any significant tax features of the
transaction; or (2) the promoter claims, knows or has reason to know (or
the promoter causes another person to claim or otherwise knows or has
reason to know that a party other than the potential offeree claims)
that the transaction (or one or more aspects of its structure) is
proprietary to the promoter or any party other than the offeree, or is
otherwise protected from disclosure or use. The promoter includes
specified related parties.
Registration will require the submission of information identifying
and describing the tax shelter and the tax benefits of the tax shelter,
as well as such other information as the Treasury Department may
require.
Tax shelter promoters are required to maintain lists of those who
have signed confidentiality agreements, or otherwise have been subjected
to nondisclosure requirements, with respect to particular tax shelters.
In addition, promoters must retain lists of those paying fees with
respect to plans or arrangements that have previously been registered
(even though the particular party may not have been subject to
confidentiality restrictions).
All registrations will be treated as taxpayer information under the
provisions of section 6103 and will therefore not be subject to any
public disclosure.
The penalty for failing to timely register a corporate tax shelter is
the greater of $10,000 or 50 percent of the fees payable to any promoter
with respect to offerings prior to the date of late registration (i.e.,
this part of the penalty does not apply to fee payments with respect to
offerings after late registration). A similar penalty is applicable to
actual participants in any corporate tax shelter who were required to
register the tax shelter but did not. With respect to participants,
however, the 50-percent penalty is based only on fees paid by that
participant. Intentional disregard of the requirement to register by
either a promoter or a participant increases the 50-percent penalty to
75 percent of the applicable fees.
Substantial understatement penalty
The provision makes two modifications to the substantial
understatement penalty. The first modification affects the reduction in
the amount of the understatement which is attributable to an item if
there is a reasonable basis for the treatment of the item. The provision
provides that in no event would a corporation have a reasonable basis
for its tax treatment of an item attributable to a multi-party financing
transaction if such treatment does not clearly reflect the income of the
corporation. No inference is intended that such a multi-party financing
transaction could not also be a tax shelter as defined under the
modification described below or under present law.
The second modification affects the special tax shelter rules, which
define a tax shelter as an entity the principal purpose of which is the
avoidance or evasion of Federal income tax. The provision instead
provides that a significant purpose (rather than the principal purpose)
of the entity must be the avoidance or evasion of Federal income tax for
the entity to be considered a tax shelter. This modification conforms
the definition of tax shelter for purposes of the substantial
understatement penalty to the definition of tax shelter for purposes of
these new confidential corporate tax shelter registration requirements.
Treasury report
The provision also directs the Treasury Department, in consultation
with the Department of Justice, to issue a report to the tax-writing
committees on the following tax shelter issues: (1) a description of
enforcement efforts under section 7408 of the Code (relating to actions
to enjoin promoters of abusive tax shelters) with respect to corporate
tax shelters and the lawyers, accountants, and others who provide
opinions (whether or not directly addressed to the taxpayer) regarding
aspects of corporate tax shelters; (2) an evaluation of whether the
penalties regarding corporate tax shelters are generally sufficient; and
(3) an evaluation of whether confidential tax shelter registration
should be extended to transactions where the investor (or potential
investor) is not a corporation. The report is due one year after the
date of enactment.
EFFECTIVE DATE
The tax shelter registration provision applies to any tax shelter
offered to potential participants after the date the Treasury Department
issues guidance with respect to the filing requirements. The
modifications to the substantial understatement penalty apply to items
with respect to transactions entered into after the date of enactment.
2. TREAT CERTAIN PREFERRED STOCK AS ``BOOT'' (SEC. 1022 OF THE BILL AND
SECS. 351, 354, 355, 356 AND 1036 OF THE CODE)
PRESENT LAW
In reorganization transactions within the meaning of section 368 and
certain other retructurings, no gain or loss is recognized except to the
extent ``other property'' (often called ``boot'') is received, that is,
property other than certain stock, including preferred stock. Thus,
preferred stock can be received tax-free in a reorganization. Upon the
receipt of ``other property,'' gain but not loss can be recognized. A
special rule permits debt securities to be received tax-free, but only
to the extent debt securities of no lesser principal amount are
surrendered in the exchange. Other than this debt-for-debt rule, similar
rules generally apply to transactions described in section 351.
REASONS FOR CHANGE
Certain preferred stocks have been widely used in corporate
transactions to afford taxpayers non-recognition treatment, even though
the taxpayer may receive relatively secure instruments in exchange for
relatively risky instruments.
As one example, a shareholder of a corporation that is to be acquired
for cash may not wish to recognize gain on a sale of his or her stock at
that time. Transactions are structured so that a new holding company is
formed, to which the shareholder contributes common stock of the company
to be acquired, and receives in exchange a preferred stock. The
acquiring corporation contributes cash to a holding company, which uses
the cash to acquire the stock of the other shareholders. In the final
acquisition structure, the shareholder who received the preferred stock
may also have the additional benefit that the holding company, in which
the shareholder now owns preferred stock, may itself own highly secure
investments. (Similar results might also be obtained if the corporation
to be acquired recapitalized by issuing the preferred stock in exchange
for the common stock of the shareholder.) Features such as puts and
calls may effectively determine the period within which total payment is
to occur. In the case of an individual shareholder, the preferred stock
may be puttable or redeemable only at death, in which case the
shareholder obtains a basis step-up and never recognizes gain on the
transaction.
Similarly, as another type of example, so called ``auction rate''
preferred stock has a mechanism to reset the dividend rate on preferred
stock so that it tracks changes in interest rates over the term of the
instrument, thus diminishing any risk that the ``principal'' amount of
stock would change if interest rates changed.
The Committee believes that when such preferred stock instruments are
received in certain exchange transactions, it is appropriate to view
such instruments as taxable consideration since the investor has often
obtained a more secure form of investment.
EXPLANATION OF PROVISION
The bill amends the relevant provisions (secs. 351, 354, 355, 356 and
1036) to treat certain preferred stock as ``other property'' (i.e.,
``boot'') subject to certain exceptions. Thus, when a taxpayer exchanges
property for this preferred stock in a transaction that qualifies under
either section 351, 355, 368, or 1036, gain but not loss is recognized.
The bill applies to preferred stock (i.e., stock that is limited and
preferred as to dividends and does not participate, including through a
conversion privilege, in corporate growth to any significant extent),
where (1) the holder has the right to require the issuer or a related
person (within the meaning of secs. 267(b) and 707(b)) to redeem or
purchase the stock, (2) the issuer or a related person is required to
redeem or purchase the stock, (3) the issuer (or a related person) has
the right to redeem or purchase the stock and, as of the issue date, it
is more likely than not that such right will be exercised, or (4) the
dividend rate on the stock varies in whole or in part (directly or
indirectly) with reference to interest rates, commodity prices, or other
similar indices, regardless of whether such varying rate is provided as
an express term of the stock (for example, in the case of an adjustable
rate stock) or as a practical result of other aspects of the stock (for
example, in the case of auction rate stock). For this purpose, the rules
of (1), (2), and (3) apply if the right or obligation may be exercised
within 20 years of the date the instrument is issued and such right or
obligation is not subject to a contingency which, as of the issue date,
makes remote the likelihood of the redemption or purchase. In addition,
if neither the stock surrendered nor the stock received in the exchange
is stock of a corporation any class of stock of which (or of a related
corporation) is publicly traded, a right or obligation is disregarded if
it may be exercised only upon the death, disability, or mental
incompetency of the holder. Also, a right or obligation is disregarded
in the case of stock transferred in connection with the performance of
services if it may be exercised only upon the holder's separation from
service.
The following exchanges are excluded from this gain recognition: (1)
certain exchanges of preferred stock for comparable preferred stock of
the same or lesser value; (2) an exchange of preferred stock for common
stock; (3) certain exchanges of debt securities for preferred stock of
the same or lesser value; and (4) exchanges of stock in certain
recapitalizations of family-owned corporations. For this purpose, a
family-owned corporation is defined as any corporation if at least 50
percent of the total voting power and value of the stock of such
corporation is owned by members of the same family for five years
preceding the recapitalization. In addition, a recapitalization does not
qualify for the exception if the same family does not own 50 percent of
the total voting power and value of the stock throughout the three-year
period following the recapitalization. Members of the same family are
defined by reference to the definition in section 447(e). Thus, a family
includes children, parents, brothers, sisters, and spouses, with a
limited attribution for directly and indirectly owned stock of the
corporation. Shares held by a family member are treated as not held by a
family member to the extent a non-family member had a right, option or
agreement to acquire the shares (directly or indirectly, for example,
through redemptions by the issuer), or with respect to shares as to
which a family member has reduced its risk of loss with respect to the
share, for example, through an equity swap. Even though the provision
excepts certain family recapitalizations, the special valuation rules of
section 2701 for estate and gift tax consequences continue to apply.
An exchange of nonqualified preferred stock for nonqualified
preferred stock in an acquiring corporation may qualify for tax-free
treatment under section 354, but not section 351. In cases in which both
sections 354 and 351 may apply to a transaction, section 354 generally
will apply for purposes of this proposal. Thus, in that situation, the
exchange would be tax free.
The Treasury Secretary has regulatory authority to (1) apply
installment sale-type rules to preferred stock that is subject to this
proposal in appropriate cases and (2) prescribe treatment of preferred
stock subject to this provision under other provisions of the Code
(e.g., secs. 304, 306, 318, and 368(c)). Until regulations are issued,
preferred stock that is subject to the proposal shall continue to be
treated as stock under other provisions of the Code.
EFFECTIVE DATE
The provision is effective for transactions after June 8, 1997, but
will not apply to such transactions (1) made pursuant to a written
agreement which was binding on such date and at all times thereafter,
(2) described in a ruling request submitted to the Internal Revenue
Service on or before such date, or (3) described in a public
announcement or filing with the Securities and Exchange Commission on or
before such date.
D. Administrative Provisions
1. REPORTING OF CERTAIN PAYMENTS MADE TO ATTORNEYS (SEC. 1031 OF THE
BILL AND SEC. 6045 OF THE CODE)
PRESENT LAW
Information reporting is required by persons engaged in a trade or
business and making payments in the course of that trade or business of
``rent, salaries, wages, * * * or other fixed or determinable gains,
profits, and income'' (Code sec. 6041(a)). Treas. reg. sec. 1.6041
1(d)(2) provides that attorney's fees are required to be reported if
they are paid by a person in a trade or business in the course of a
trade or business. Reporting is required to be done on Form 1099 Misc.
If, on the other hand, the payment is a gross amount and it is not known
what portion is the attorney's fee, no reporting is required on any
portion of the payment.
REASONS FOR CHANGE
The provision will have a positive impact on compliance with the tax
laws by requiring additional information reporting. Although some might
consider it inappropriate to single out payments to one profession for
additional information reporting, requiring reporting is appropriate in
this instance because attorneys are generally the only professionals who
receive this type of payment, a portion of which may be income to them
and a portion of which may belong to their client.
EXPLANATION OF PROVISION
The provision requires gross proceeds reporting on all payments to
attorneys made by a trade or business in the course of that trade or
business. It is anticipated that gross proceeds reporting would be
required on Form 1099 B (currently used by brokers to report gross
proceeds). The only exception to this new reporting requirement would be
for any payments reported on either Form 1099 Misc under section 6041
(reports of payment of income) or on Form W 2 under section 6051
(payments of wages).
In addition, the present exception in the regulations exempting from
reporting any payments made to corporations will not apply to payments
made to attorneys. Treasury regulation section 1.6041 3(c) exempts
payments to corporations generally (although payments to most
corporations providing medical services must be reported). Reporting
will be required under both Code sections 6041 and 6045 (as proposed)
for payments to corporations that provide legal services. The exception
of Treasury regulation section 1.6041 3(g) exempting from reporting
payments of salaries or profits paid or distributed by a partnership to
the individual partners would continue to apply to both sections (since
these amounts are required to reported on Form K 1).
First, the provision applies to payments made to attorneys regardless
of whether the attorney is the exclusive payee. Second, payments to law
firms are payments to attorneys, and therefore are subject to this
reporting provision. Third, attorneys are required to promptly supply
their TINs to persons required to file these information reports,
pursuant to section 6109. Failure to do so could result in the attorney
being subject to penalty under section 6723 and the payments being
subject to backup withholding under section 3406. Fourth, the IRS should
administer this provision so that there is no overlap between reporting
under section 6041 and reporting under section 6045. For example, if two
payments are simultaneously made to an attorney, one of which represents
the attorney's fee and the second of which represents the settlement
with the attorney's client, the first payment would be reported under
section 6041 and the second payment would not be reported under either
section 6041 or section 6045, since it is known that the entire payment
represents the settlement with the client (and therefore no portion of
it represents income to the attorney).
EFFECTIVE DATE
The provision is effective for payments made after December 31, 1997.
Consequently, the first information reports will be filed with the IRS
(and copies will be provided to recipients of the payments) in 1999,
with respect to payments made in 1998.
2. INFORMATION REPORTING ON PERSONS RECEIVING CONTRACT PAYMENTS FROM
CERTAIN FEDERAL AGENCIES (SEC. 1032 OF THE BILL AND SEC. 6041A OF THE CODE)
PRESENT LAW
A service recipient (i.e., a person for whom services are performed)
engaged in a trade or business who makes payments of remuneration in the
course of that trade or business to any person for services performed
must file with the IRS an information return reporting such payments
(and the name, address, and taxpayer identification number of the
recipient) if the remuneration paid to the person during the calendar
year is $600 or more (sec. 6041A(a)). A similar statement must also be
furnished to the person to whom such payments were made (sec. 6041A(e)).
Treasury regulations explicitly exempt from this reporting requirement
payments made to a corporation (Treas. reg. sec. 1.6041A 1(d)(2)).
The head of each Federal executive agency must file an information
return indicating the name, address, and taxpayer identification number
(TIN) of each person (including corporations) with which the agency
enters into a contract (sec. 6050M). The Secretary of the Treasury has
the authority to require that the returns be in such form and be made at
such time as is necessary to make the returns useful as a source of
information for collection purposes. The Secretary is given the
authority both to establish minimum amounts for which no reporting is
necessary as well as to extend the reporting requirements to Federal
license grantors and subcontractors of Federal contracts. Treasury
regulations provide that no reporting is required if the contract is for
$25,000 or less (Treas. reg. sec. 1.6050M 1(c)(1)(i)).
REASONS FOR CHANGE
Lowering the information reporting threshold from $25,000 to $600
will improve compliance because additional, small-dollar value contracts
will be reported.
EXPLANATION OF PROVISION
The provision requires reporting of all payments of $600 or more made
by a Federal executive agency to any person (including a corporation)
for services. In addition, the provision requires that a copy of the
information return be sent by the Federal agency to the recipient of the
payment. An exception is provided for certain classified or confidential
contracts.
EFFECTIVE DATE
The provision is effective for returns the due date for which
(without regard to extensions) is more than 90 days after the date of
enactment.
3. DISCLOSURE OF TAX RETURN INFORMATION FOR ADMINISTRATION OF CERTAIN
VETERANS PROGRAMS (SEC. 1033 OF THE BILL AND SEC. 6103 OF THE CODE)
PRESENT LAW
The Internal Revenue Code prohibits disclosure of tax returns and
return information, except to the extent specifically authorized by the
Internal Revenue Code (sec. 6103). Unauthorized disclosure is a felony
punishable by a fine not exceeding $5,000 or imprisonment of not more
than five years, or both (sec. 7213). An action for civil damages also
may be brought for unauthorized disclosure (sec. 7431). No tax
information may be furnished by the Internal Revenue Service (``IRS'')
to another agency unless the other agency establishes procedures
satisfactory to the IRS for safeguarding the tax information it receives
(sec. 6103(p)).
Among the disclosures permitted under the Code is disclosure to the
Department of Veterans Affairs (``DVA'') of self-employment tax
information and certain tax information supplied to the Internal Revenue
Service and Social Security Administration by third parties. Disclosure
is permitted to assist DVA in determining eligibility for, and
establishing correct benefit amounts under, certain of its needs-based
pension, health care, and other programs (sec. 6103(1)(7)(D)(viii)). The
income tax returns filed by the veterans themselves are not disclosed to
DVA.
The DVA is required to comply with the safeguards currently contained
in the Code and in section 1137(c) of the Social Security Act (governing
the use of disclosed tax information). These safeguards include
independent verification of tax data, notification to the individual
concerned, and the opportunity to contest agency findings based on such
information.
The DVA disclosure provision is scheduled to expire after September
30, 1998.
REASONS FOR CHANGE
It is appropriate to permit disclosure of otherwise confidential tax
information to ensure the correctness of government benefits payments.
EXPLANATION OF PROVISION
The provision permanently extends the DVA disclosure provision.
EFFECTIVE DATE
The provision is effective on the date of enactment.
4. ESTABLISH IRS CONTINUOUS LEVY AND IMPROVE DEBT COLLECTION (SECS.
1034, 1035, AND 1036 OF THE BILL AND SECS. 6331 AND 6334 OF THE CODE)
a. Continuous levy
PRESENT LAW
If any person is liable for any internal revenue tax and does not pay
it within 10 days after notice and demand\22\
by the IRS, the IRS may then collect the tax by levy upon all property
and rights to property belonging to the person,\23\
unless there is an explicit statutory restriction on doing so. A levy
is the seizure of the person's property or rights to property. Property
that is not cash is sold pursuant to statutory requirements.\24\
\22\Notice and demand is the notice given to a person liable for tax
stating that the tax has been assessed and demanding that payment be
made. The notice and demand must be mailed to the person's last known
address or left at the person's dwelling or usual place of business
(Code sec. 6303).
\23\Code sec. 6331.
\24\Code secs. 6335 6343.
In general, a levy does not apply to property acquired after the date
of the levy,\25\
regardless of whether the property is held by the taxpayer or by a
third party (such as a bank) on behalf of a taxpayer. Successive
seizures may be necessary if the initial seizure is insufficient to
satisfy the liability.\26\
The only exception to this rule is for salary and wages.\27\
A levy on salary and wages is continuous from the date it is first made
until the date it is fully paid or becomes unenforceable.
\25\Code sec. 6331(b).
\26\Code sec. 6331(c).
\27\Code sec. 6331(e).
A minimum exemption is provided for salary and wages.\28\
It is computed on a weekly basis by adding the value of the standard
deduction plus the aggregate value of personal exemptions to which the
taxpayer is entitled, divided by 52.\29\
For a family of four for taxable year 1996, the weekly minimum
exemption is $325.\30\
\28\Code sec. 6334(a)(9).
\29\Code sec. 6334(d).
\30\Standard deduction of $6,700 plus four personal exemptions at $2,550
each equals $16,900, which when divided by 52 equals $325.
REASONS FOR CHANGE
The extension of the continuous levy provisions will substantially
ease the administrative burdens of collecting taxes by levy. The
Committee anticipates that taxpayers who already comply with the tax
laws will have a positive view of increased collections of taxes owed by
taxpayers who have not complied with the tax laws.
EXPLANATION OF PROVISION
The provision amends the Code to provide that a continuous levy is
also applicable to non-means tested recurring Federal payments. This is
defined as a Federal payment for which eligibility is not based on the
income and/or assets of a payee. For example, Social Security payments,
which are subject to levy under present law, would become subject to
continuous levy.
In addition, the provision provides that this levy would attach up to
15 percent of any specified payment due the taxpayer. This rule
explicitly replaces the other specifically enumerated exemptions from
levy in the Code. A continuous levy of up to 15 percent would also apply
to unemployment benefits and means-tested public assistance.
The bill also permits the disclosure of otherwise confidential tax
return information to the Treasury Department's Financial Management
Service only for the purpose of, and to the extent necessary in,
implementing these levy provisions.
EFFECTIVE DATE
The provision is effective for levies issued after the date of
enactment.
b. Modifications of levy exemptions
PRESENT LAW
The Code exempts from levy workmen's compensation payments\31\
and annuity or pension payments under the Railroad Retirement Act and
benefits under the Railroad Unemployment Insurance Act\32\
described above, unemployment benefits\33\
and means-tested public assistance.\34\
\31\Code sec. 6334(a)(7).
\32\Code sec. 6334(a)(6).
\33\Sec. 6334(a)(4).
\34\Sec. 6334(a)(11).
REASONS FOR CHANGE
The Committee believes that if wages are subject to levy, wage
replacement payments should also be subject to levy. In addition, the
Committee believes that it is inappropriate to exempt from levy one type
of annuity or pension payment while most other types of these payments
are subject to levy.
EXPLANATION OF PROVISION
The provision provides that the following property is not exempt from
levy if the Secretary of the Treasury (or his delegate) approves the
levy of such property:
(1) workmen's compensation payments,
(2) annuity or pension payments under the Railroad Retirement Act
and benefits under the Railroad Unemployment Insurance Act,
(3) unemployment benefits, and
(4) means-tested public assistance.
EFFECTIVE DATE
The provision applies to levies issued after the date of enactment.
5. CONSISTENCY RULE FOR BENEFICIARIES OF TRUSTS AND ESTATES (SEC. 1037
OF THE BILL AND SEC. 6034A OF THE CODE)
PRESENT LAW
An S corporation is required to file a return for the taxable year
and is required to furnish to its shareholders a copy of certain
information shown on such return. The shareholder is required to file
its return in a manner that is consistent with the information received
from the S corporation, unless the shareholder files with the Secretary
of the Treasury a notification of inconsistent treatment (sec. 6037(c)).
Similar rules apply in the case of partnerships and their partners (sec.
6222).
The fiduciary of an estate or trust that is required to file a return
for any taxable year is required to furnish to beneficiaries certain
information shown on such return (generally via a Schedule K-1) (sec.
6034A). In addition, a U.S. person that is treated as the owner of any
portion of a foreign trust is required to ensure that the trust files a
return for the taxable year and furnishes certain required information
to each U.S. person who is treated as an owner of a portion of the trust
or who receives any distribution from the trust (sec. 6048(b)). However,
rules comparable to the consistency rules that apply to S corporation
shareholders and partners in partnerships are not specified in the case
of beneficiaries of estates and trusts.
REASONS FOR CHANGE
Both partners in partnerships and shareholders of S corporations are
required either to file their returns on a basis that is consistent with
the information received from the partnership or S corporation or to
identify any inconsistent treatment. The Committee believes that it is
appropriate to apply such requirement also to beneficiaries of estates
and trusts.
EXPLANATION OF PROVISION
Under the bill, a beneficiary of an estate or trust is required to
file its return in a manner that is consistent with the information
received from the estate or trust, unless the beneficiary files with its
return a notification of inconsistent treatment identifying the
inconsistency.
EFFECTIVE DATE
The provision is effective for returns filed after date of enactment.
E. Excise Tax Provisions
1. EXTENSION AND MODIFICATION OF AIRPORT AND AIRWAY TRUST FUND EXCISE
TAXES (SEC. 1041 OF THE BILL AND SECS. 4081, 4091, AND 4261 OF THE CODE)
PRESENT LAW
Present law imposes a variety of excise taxes on air transportation
to finance the Airport and Airway Trust Fund programs administered by
the Federal Aviation Administration (the ``FAA''). In general, the full
cost of FAA capital programs is financed from the Airport and Airway
Trust Fund, while only a portion of FAA operational expenses is Trust
Fund-financed. Overall, the portion of total FAA expenditures that has
been financed from the Trust Fund has declined from 75 percent through
the early 1990s to 62 percent for the 1997 fiscal year. The balance is
financed by general taxpayers, rather than directly by program users.
Each of the Airport and Airway Trust Fund excise taxes is scheduled to
expire after September 30, 1997.
Commercial air passenger transportation taxes
Domestic air passenger transportation is subject to an ad valorem
excise tax equal to 10 percent of the amount paid for the
transportation. Taxable domestic air transportation includes both travel
within the United States and certain travel between the United States
and points in Canada or Mexico that are within 225 miles of the U.S.
border (the ``225-mile zone'').
International air passenger transportation is subject to a $6
departure excise tax imposed on passengers departing the United States
for other countries. No tax is imposed on passengers arriving in the
United States from other countries. International transportation is
defined to include separate domestic flights that connect to
international flights, provided that stopover time at any point within
the United States does not exceed 12 hours. Thus, these ``domestic
legs'' associated with international transportation (e.g., a flight from
Los Angeles to New York from which the passenger boards a connecting
flight to London) are exempt from the 10-percent ad valorem excise tax
otherwise imposed on such transportation between two domestic points.
Because both the domestic and international air passenger excise
taxes are imposed only on transportation for which an amount is paid, no
tax is imposed on ``free'' travel (e.g., frequent flyer travel and
airline industry employee travel for which the passenger is not directly
charged) even if third parties (e.g., credit card companies) make cash
or in kind payments for the right to award the ``free'' or reduced-rate
travel to their customers.
The air passenger transportation excise taxes are imposed on
passengers; transportation providers (generally airlines) are
responsible for collecting and remitting the taxes to the Federal
Government. In general, both the domestic and international air
passenger transportation excise taxes are imposed without regard to
whether the transportation is purchased within the United States. An
exception provides that travel between the United States and the
225-mile zone is subject to the ad valorem domestic tax only if it is
purchased within the United States.
The Code requires all advertising for taxable air passenger
transportation either (1) to state the fare on a tax-inclusive basis or
(2) if the Federal tax is stated separately, to state the amount of the
tax at least as prominently as the underlying airline fare and to
identify that amount as ``user taxes to pay for airport construction and
airway safety and operations'' (sec. 7275(b)).
The amount of air passenger transportation excise tax collected from
a passenger must be stated separately on the ticket.
Commercial air cargo transportation
Domestic air cargo transportation is subject to a 6.25-percent ad
valorem excise tax. This tax, like the air passenger excise taxes, is
imposed on the consumer, with the transportation provider being required
to collect and remit the tax to the Federal Government. However, there
is no requirement that the tax be stated separately on shipping
invoices.
Noncommercial aviation
Noncommercial aviation, or transportation on private aircraft which
is not ``for hire,'' is subject to excise taxes imposed on fuel in lieu
of the commercial air passenger ticket and air cargo excise taxes. The
current Airport and Airway Trust Fund tax rates on these fuels are 15
cents per gallon on aviation gasoline and 17.5 cents per gallon on jet
fuel.
The aviation gasoline excise tax is imposed on removal of the fuel
from a registered terminal facility (the same point as the highway
gasoline excise tax). The jet fuel excise tax is imposed on sale of the
fuel by a wholesale distributor. Many larger airports have dedicated
pipeline facilities that directly service aircraft; in such a case, the
tax effectively is imposed at the retail level. The person removing the
gasoline from a terminal facility or the wholesale distributor of the
jet fuel is liable for these taxes.
General Fund aviation fuels excise tax
Fuels used in air transportation are subject to a
4.3-cents-per-gallon excise tax, receipts from which are retained in the
General Fund. This fuels tax is identical to taxes also imposed on motor
fuels used in other transportation sectors, including highway, inland
waterway, and rail.
Deposit of air transportation excise taxes
Under present law, the air passenger ticket and freight excise taxes
are collected from passengers and freight shippers by the commercial air
carriers. The air carriers then remit the funds to the Treasury
Department; however, the air carriers are not required to remit monies
immediately. Excise tax returns are filed quarterly (similar to annual
income tax returns) with taxes being deposited on a semi-monthly basis
(similar to estimated income taxes). For air transportation sold during
a semi-monthly period, air carriers may elect to treat the taxes as
collected on the last day of the first week of the second following
semi-monthly period. Under these ``deemed collected'' rules, for
example, the taxes on air transportation sold between August
1 and August 15, are treated as collected by the air carriers
on or before September 7, with the amounts generally being deposited
with the Treasury Department by September 10. A special rule requires
certain amounts deemed collected during the second half of September to
be deposited by September 29.
Semi-monthly deposits and quarterly excise tax returns also are
required with respect to the fuels excise taxes imposed on air
transportation.
Overflight user fees
Non-tax user fees are imposed on air transportation (both commercial
and noncommercial aviation) that travels through airspace for which the
United States provides air traffic control services, but that neither
lands in nor takes off from a point in the United States. These fees are
imposed and collected by the FAA with respect to mileage actually flown,
and apply both to travel within U.S. territorial airspace and to travel
within international oceanic airspace for which the United States is
responsible for providing air traffic control services.
REASONS FOR CHANGE
The Committee determined that provisions to ensure a long-term,
stable funding source for the Airport and Airway Trust Fund should be
enacted at this time. As illustrated by the recent events when a
shortfall in fiscal year 1997 FAA funding was narrowly averted by an
emergency extension of the present-law excise taxes through September
30, 1997, longer-term assurance of these funding needs is imperative.
Therefore, the bill extends (with certain modifications) the current
Airport and Airway excise taxes for a 10-year period, a move that is
believed will resolve, for this period, concerns about the availability
of adequate user tax revenues to fund the portion of FAA programs to be
appropriated from the Airport and Airway Trust Fund.
The Committee determined limited modifications to the current
passenger excise tax structure are warranted. First, the structure of
the tax is modified to include a reduced ad valorem rate and a fixed
dollar amount tax rate applicable to all revenue passengers. In
addition, the Committee determined that the perceived fairness of the
passenger air transportation excise taxes will be improved if certain
currently untaxed payments and passengers were required to contribute to
the financing of the FAA programs from which they benefit. In
furtherance of this goal, the bill extends the tax to internationally
arriving passengers and clarifies that the tax applies to payments to
airlines (and related parties) from credit card and other companies in
exchange for the right to award frequent flyer or other reduced air
travel rights.
EXPLANATION OF PROVISION
Extension of Airport and Airway Trust Fund taxes
The Airport and Airway Trust Fund excise taxes, as modified below,
are extended for 10 years, for the period October 1, 1997, through
September 30, 2007. The taxes that are extended include the domestic and
international air passenger excise taxes, the air cargo excise tax, and
the noncommercial aviation fuels taxes. Gross receipts from these taxes
will continue to be deposited in the Airport and Airway Trust Fund.
Modification of commercial air passenger transportation taxes
Modify tax rates. --The current 10-percent domestic air passenger
excise tax is changed to a tax equal to the total of 7.5 percent of the
gross amount paid by the passenger for the transportation plus a $2.00
fixed dollar amount per flight segment. The fixed dollar amount per
flight segment will be increased each January 1 for a four-year period,
as follows:
Per flight segment charge
Calendar year:
1999
$2.25
2000
2.50
2001
2.75
2002
3.00
Beginning on January 1, 2003, and each January 1 thereafter, the
fixed dollar amount per flight segment will be indexed annually for
inflation occurring after 2001, measured by changes in the Consumer
Price Index (the ``CPI'') rounded to the nearest 10 cents. Inflation
adjustments will be effective for transportation provided beginning
after December 31, 2002, and in each subsequent calendar year.
The term ``flight segment'' is defined as transportation involving a
single take-off and a single landing.\35\
The bill provides that there is no change in the number of flight
segments for which a passenger is charged (increase or decrease) in the
case of transportation routing changes initiated by the air carrier,
provided there is no change in the fare charged. Generally, this rule
applies to flight changes for travel between the same origin and
destination as a result of, e.g., aircraft mechanical problems. The rule
similarly covers itinerary changes such as a diversion to another
intermediate or destination airport as a result of inclement weather
conditions.
\35\For example, travel from New York to San Francisco, with an
intermediate stop in Chicago, would consist of two flight segments
(without regard to whether the passenger changed aircraft in Chicago).
All transportation between points within the 48 contiguous States
(and within Hawaii or Alaska), other than domestic segments associated
with international transportation, is subject to tax at the 7.5 percent
and $2.00 rates.
The current $6 international departure tax is increased to $15.50 per
departure, and an identical $15.50 per passenger tax is imposed on
arrivals in the United States from international locations. The
international departure and arrival taxes are indexed for inflation
occurring after 1997, measured by changes in the CPI rounded to the
nearest 10 cents. Inflation adjustments will be effective for
transportation provided beginning after December 31, 1998, and each
subsequent calendar year.
As under present law, certain air transportation between the United
States and points within the 225-mile zone of Canada or Mexico is taxed
as domestic transportation subject to the 7.5 percent and $2.00 rates.
The present-law rules classifying transportation between the 48
contiguous States and Alaska or Hawaii (or between those States) as part
domestic and part international are retained, without change, other than
a clarification that a single flight segment between the 48 contiguous
States and Alaska or Hawaii (or between those States) is subject to only
one $15.50 per passenger international tax despite the fact that the
flight both departs into and arrives from international airspace.
Extension of tax to certain currently exempt passengers. --As
described above, passengers arriving in the United States from other
countries, who currently are the only group of travelers whose
transportation is subject neither to an excise tax nor a user fee for
U.S.-provided aviation services, are subject to tax on their arriving
international flights.
Clarification further is provided that any amounts paid to air
carriers (in cash or in kind) for the right to award or otherwise
distribute free or reduced-rate air transportation are treated as
amounts paid for taxable air transportation, subject to the 7.5 percent
ad valorem tax rate. Examples of such taxable amounts include (1)
payments for frequent flyer miles purchased by credit card companies,
telephone companies, rental car companies, television networks,
restaurants and hotels, and other businesses for distribution to their
customers and others and (2) amounts received by airlines pursuant to
joint venture credit card or other marketing arrangements. The Treasury
Department is authorized specifically to disregard accounting
allocations or other arrangements which have the effect of reducing
artificially the base to which the 7.5-percent tax is applied. No
inference is intended from this provision as to the proper treatment of
these payments under present law.
Advertising requirements. --The Code advertising requirements are
modified to mandate that the Federal air transportation tax be stated
separately. The tax must be stated proximate to the airfare in type at
least 50 percent as large as the fare is stated, and be identified as a
user tax as required under present law.
Liability for tax. --The present-law provision imposing liability
for the tax on passengers (with transportation providers being liable
for collecting and remitting revenues to the Federal Government) are
modified to impose secondary liability on air carriers. As with the
current tax, the aggregate tax will continue to be required to be stated
separately on passenger tickets.
Transfer of 4.3-cents-per-gallon fuels excise tax to Airport
and Airway Trust Fund
The 4.3-cents-per-gallon excise tax on aviation gasoline and jet fuel
will be deposited in the Airport and Airway Trust Fund, rather than in
the General Fund, beginning with fuels sold or removed after September
30, 1997.
Modify air passenger excise tax deposit rules
The deposit rules with respect to the commercial air passenger excise
taxes are modified to permit payment of these taxes that otherwise would
have been required to be deposited during the period August 15, 1997
through September 30, 1997, to be deposited on October 10, 1997.
EFFECTIVE DATE
These provisions generally are effective on the date of enactment,
for air transportation beginning after September 30, 1997.
Present law requires transportation providers to continue collecting
the commercial aviation excise taxes (at the current rates) on
transportation to be provided after September 30, 1997, if the
transportation is purchased before October 1, 1997. The bill requires
transportation providers to collect the taxes at the modified rates for
transportation purchased after the date of enactment for travel
beginning after September 30, 1997.
The extension of the general aviation fuels excise taxes is effective
for fuels removed or sold after September 30, 1997.
The provision clarifying application of the commercial air passenger
excise tax to certain amounts paid for the right to award air
transportation is effective for amounts paid (or benefits transferred)
after September 30, 1997, except payments (or transfers) between related
parties occurring after June 11, 1997 and before October 1, 1997, are
subject to tax if the payments relate to rights to transportation to be
awarded or otherwise distributed after September 30, 1997.
The provisions transferring certain General Fund fuels tax revenues
and modifying the commercial air passenger excise tax deposit rules are
effective on the date of enactment.
2. EXTEND DIESEL FUEL EXCISE TAX RULES TO KEROSENE (SEC. 1042 OF THE
BILL AND SEC. 4081 4083 OF THE CODE)
PRESENT LAW
Diesel fuel used as a transportation motor fuel generally is taxed at
24.3 cents per gallon. This tax is collected on all diesel fuel upon
removal from a pipeline or barge terminal unless the fuel is indelibly
dyed and is destined for a nontaxable use. Diesel fuel also commonly is
used as heating oil; diesel fuel used as heating oil is not subject to
tax. Certain other uses also are exempt from tax, and some
transportation uses (e.g., rail and intercity buses) are taxed at
reduced rates. Both exemptions and reduced-rates are realized through
refund claims if undyed diesel fuel is used in a qualifying use.
Aviation gasoline and jet fuel (both commercial and noncommercial
use) currently are subject to a 4.3-cents-per-gallon General Fund tax
rate. In addition, through September 30, 1997, gasoline and jet fuel
used in noncommercial aviation are subject to an additional
15-cents-per- gallon rate (gasoline) and 17.5-cents-per-gallon rate (jet
fuel) for the Airport and Airway Trust Fund. These combined rates
produce an aggregate tax of 21.8 cents per gallon on noncommercial
aviation jet fuel and 19.3 cents per gallon on noncommercial aviation
gasoline.
The tax on non-gasoline aviation fuel is imposed on the sale
of the fuel by a ``producer,'' typically a wholesale distributor. Thus,
this tax is imposed at a point in the fuel distribution chain subsequent
to removal from a terminal facility.
Kerosene is used both as a transportation fuel and as an aviation
fuel. Kerosene also is blended with diesel fuel destined both for
taxable (highway) and nontaxable (heating oil) uses to, among other
things, prevent gelling of the diesel fuel in colder temperatures. Under
present law, kerosene is not subject to excise tax unless it is blended
with taxable diesel fuel or is sold for use as aviation fuel. When
kerosene is blended with dyed diesel fuel to be used in a nontaxable
use, the dye concentration of the fuel mixture must be adjusted to
ensure that it meets Treasury Department requirements for untaxed, dyed
diesel fuel.
Clear, low-sulphur kerosene (K 1) also is used in space heaters, and
often is sold for this purpose at retail service stations. As with other
heating oil uses, kerosene used in space heaters, is not subject to
Federal excise tax. Although heating oil often has minor amounts of
kerosene blended with it in colder weather, this blending typically
occurs before removal of the fuel from the terminal facilities where
Federal excise taxes are imposed. However, it may be necessary during
periods of extreme or unseasonably cold weather to add kerosene to
heating oil after its removal from the terminal. Other nontaxable uses
of kerosene include feedstock use in the petrochemical industry.
REASONS FOR CHANGE
The Internal Revenue Service has discovered significant evidence that
kerosene is being blended with taxable highway diesel fuel during
periods when the blending is not necessary due to colder weather
conditions. Some wholesale distributors of diesel fuel also have
suggested that their competitors have not been paying the tax on the
kerosene that they blend with diesel fuel for highway use. These reports
of increased use of kerosene as a taxable highway fuel without payment
of tax coincided with implementation of enhanced diesel fuel tax
compliance measures that have significantly reduced opportunities to
evade that tax. The Committee determined therefore, that these same
compliance measures should be extended to kerosene.
EXPLANATION OF PROVISION
The diesel fuel-excise tax rules are extended to kerosene. Thus,
kerosene is be taxed when it is removed from a registered terminal
unless it is indelibly dyed and destined for a nontaxable use. However,
aviation-grade kerosene that is removed from the terminal by a
registered producer of aviation fuel is not subject to the dyeing
requirement and would be taxed under the present law rules applicable to
aviation fuel. Feedstock kerosene that a registered industrial user
receives by pipeline or vessel also is exempt from the dyeing
requirement. Other feedstock kerosene would be exempt from the dyeing
requirement to the extent and under conditions (including satisfaction
of registration and certification requirements) prescribed by Treasury
Department regulation.
To accommodate State safety regulations that require the use of clear
(K 1) kerosene in certain space heaters, a refund procedure would be
provided under which registered ultimate vendors may claim refunds of
the tax paid on kerosene sold for that use. In addition, the Internal
Revenue Service is given discretion to refund to a registered ultimate
vendor the tax paid on kerosene that is blended with heating oil for use
during periods of extreme or unseasonable cold.
EFFECTIVE DATE
The provision is effective for kerosene removed from terminal
facilities after June 30, 1998. Appropriate floor stocks taxes will be
imposed on kerosene held beyond the point of taxation on July 1, 1998.
3. MODIFY TAX BENEFITS FOR ETHANOL AND RENEWABLE SOURCE METHANOL (SEC.
1043 OF THE BILL AND SECS. 40, 4041, 4081, 4091, AND 6427, AND NEW SEC. 4476 OF
THE CODE)
PRESENT LAW
Present law provides a 54-cents-per-gallon income tax credit for
ethanol and a 60-cents-per-gallon income tax credit for methanol
produced from renewable sources (e.g., biomass) that are used as a motor
fuel or that are blended with other fuels (e.g., gasoline) for such a
use. As an alternative to claiming the income tax credits directly,
these tax benefits may be claimed as a reduction in the amount of excise
tax paid on gasoline or diesel fuel with which the ethanol or renewable
source methanol are blended or as a reduction in the special motor fuels
rate applicable to ``neat'' ethanol or renewable source methanol fuels.
The excise tax delivery of the benefits occurs either through reduced
tax rate sales to registered blenders of e.g., gasoline or diesel fuel,
or through expedited refunds of gasoline or diesel fuel tax paid.
In addition to these general ethanol benefits, a separate
10-cents-per-gallon credit is provided for small ethanol producers,
defined generally as persons whose production does not exceed 15 million
gallons per year and whose production capacity does not exceed 30
million gallons per year. No comparable small producer credit is
provided for small renewable source methanol producers.
Treasury Department regulations provide that ethyl tertiary butyl
ether (``ETBE''), which is made using ethanol, qualifies for the blender
income tax credit and the excise tax exemption.
The alcohol fuels tax benefits are scheduled to expire after December
31, 2000. The provision allowing the ethanol blender benefits to be
claimed through the motor fuels excise tax system is scheduled to expire
after September 30, 2000.
REASONS FOR CHANGE
The ethanol tax subsidies originally were enacted in 1978 to promote
development of alternative fuels at a time when oil prices were
projected to exceed $50 per barrel. The benefits were assumed to be
temporary measures that would allow these fuels to become economical
without permanent Federal subsidies. Nearly 20 years have passed since
that enactment, and neither the projected prices of oil nor the ability
of ethanol to be a viable fuel without Federal
subsidies has been realized. The Committee determined,
therefore, that enactment of an orderly termination of this Federal
subsidy program is appropriate at this time.
EXPLANATION OF PROVISION
The bill retains the current blender ethanol (at a reduced level) and
renewable source methanol benefits through their scheduled expirations
in 2000, but limits the amount of production of these fuels eligible for
tax benefits. The bill also clarifies that ETBE and similar ethers are
not eligible for the alcohol fuel tax benefits.
Limit on production eligible for tax benefits
The alcohol fuels income tax credits (other than the small ethanol
producer tax credit) and the excise tax exemptions for ethanol and
methanol from renewable sources will be available only for alcohol fuels
produced by distilling equipment placed in service before June 9,
1997.\36\
Additionally, producers other than small producers (defined as under
present law) will receive these benefits only to the extent that annual
production after December 31, 1997, does not exceed average annual
production of fuel alcohol by the equipment during a prescribed
three-year period (the ``eligible production ceiling''). The eligible
production ceiling is determined first by ascertaining annual production
during each year of the five-year period ending on May 31, 1997. The
year when production was the greatest and the year when production was
the lowest are eliminated. The production ceiling equals the average of
the annual production during the remaining three years. A safe-harbor
production level equal to 50 percent of capacity as of June 8, 1997, is
provided.
\36\Property placed in service after June 8, 1997, pursuant to a binding
contract entered into before June 9, 1997, would be treated as if placed
in service before June 9, 1997.
To ensure that only eligible production continues to receive the
blender tax benefits after the date of the bill's enactment, an ``excess
production penalty'' is imposed on all production from equipment placed
in service after June 8, 1997, and on production from existing equipment
(by producers other than small producers) that exceeds the producer's
eligible production ceiling. Beginning on January 1, 2001, all ethanol
production will be treated as ``excess'' production, but the penalty
will not apply during any period when no ethanol or renewable source
methanol tax benefits are statutorily available. The penalty is
non-deductible for Federal income tax purposes. Receipts from the
penalty will be deposited in the Highway Trust Fund. The penalty offsets
the benefit provided to excess production by the current general income
tax and excise tax provisions; therefore, no changes (other than those
described herein) are made to those provisions. Thus, blenders will
remain eligible to claim the tax benefits in the same manner as provided
under present law, through 2000.
Reduce ethanol tax benefits to reflect carbon dioxide
by-product value; offset for small producers
Carbon dioxide is a naturally occurring by-product of ethanol
production. This carbon dioxide is commercially valuable and currently
is being captured and sold by ethanol producers. The 54-cents-per-gallon
ethanol income tax credit and the 5.4-cents-per-gallon ethanol excise
tax exemptions are reduced to 51 cents per gallon and 5.1 cents per
gallon, respectively, to reflect the value of carbon dioxide recovered
as a by-product in ethanol production.
The present-law small ethanol producers credit is increased from 10
cents per gallon to 13 cents per gallon to offset the effect of this
reduction for small producers.
ETBE and similar ethers not to qualify
Statutory clarification is provided that ETBE and similar ethers (and
alcohol used to produce these ethers) are not qualified alcohol fuels
for either the ethanol or methanol from renewable sources tax benefits.
EFFECTIVE DATE
Limit on eligible production
The provision limiting production eligible for the alcohol fuels tax
benefits to production from facilities placed in service before June 9,
1997, is effective on the date of enactment. The production limits
applicable to such grandfathered facilities is effective for production
occurring after December 31, 1997.
Reduce ethanol tax benefits to reflect carbon dioxide by-product value
The reduction in the ethanol blenders credit and excise tax exemption
to reflect the value of carbon dioxide produced as a by-product and the
offsetting increase in the small producer's income tax credit are
effective on January 1, 1998.
ETBE and similar ethers not to qualify
The provision reversing the Treasury Department regulations defining
ethers as qualified alcohol fuels is effective for ethers produced after
December 31, 1997.
4. REINSTATE LEAKING UNDERGROUND STORAGE TANK TRUST FUND EXCISE TAX
(SEC. 1044 OF THE BILL AND SECS. 4041(D), 4081(A)(2), AND 4081(D)(2) OF THE CODE)
PRESENT LAW
Before January 1, 1996, an excise tax of 0.1 cent per gallon was
imposed on gasoline, diesel fuel (including train diesel fuel), special
motor fuels (other than liquefied petroleum gas), aviation fuels, and
inland waterways fuels. Revenues from the tax were dedicated to the
Leaking Underground Storage Tank Trust Fund to finance cleanups of
leaking underground storage tanks.
REASONS FOR CHANGE
The Committee determined that the Leaking Underground Storage Tank
Trust Fund excise tax should be reinstated for a 5-year period to ensure
the availability of funds to pay cleanup costs of leaking underground
storage tanks.
EXPLANATION OF PROVISION
The bill reinstates for a 5-year period the prior-law Leaking
Underground Storage Tank Trust Fund excise tax.
EFFECTIVE DATE
The provision is effective on the date of enactment.
5. APPLICATION OF COMMUNICATIONS TAX TO LONG-DISTANCE PREPAID TELEPHONE
CARDS (SEC. 1045 OF THE BILL AND SEC. 4251 OF THE CODE)
PRESENT LAW
A 3-percent excise tax is imposed on amounts paid for local and toll
(long-distance) telephone service and teletypewriter exchange service.
The tax is collected by the provider of the service from the consumer
(business and personal service).
REASONS FOR CHANGE
The Committee understands that communication service providers
sometimes sell units of long-distance service to third parties who, in
turn, resell or distribute these units of long-distance telephone
service to the ultimate customer in the form of prepaid telephone cards
or similar arrangements. The Committee believes that such payments
clearly represent payments for long-distance telephone service and
clarifies that such payments are subject to the communications excise
tax.
EXPLANATION OF PROVISION
The bill provides that any amounts paid to communications service
providers (in cash or in kind) for the right to award or otherwise
distribute free or reduced-rate long-distance telephone service are
treated as amounts paid for taxable communication services, subject to
the 3-percent ad valorem tax rate. Examples of such taxable amounts
include (1) prepaid telephone cards offered through service stations,
convenience stores and other businesses to their customers and others
and (2) amounts received by communication service providers pursuant to
joint venture credit card or other marketing arrangements. The Treasury
Department is authorized specifically to disregard accounting
allocations or other arrangements which have the effect of reducing
artificially the base to which the 3-percent tax is applied. No
inference is intended from this provision as to the proper treatment of
these payments under present law.
EFFECTIVE DATE
The provision is effective for amounts paid on or after the date of
enactment.
f. provisions relating to tax-exempt entities
1. EXTEND UBIT RULES TO SECOND-TIER SUBSIDIARIES AND AMEND CONTROL TEST
(SEC. 1051 OF THE BILL AND SEC. 512(B)(13) OF THE CODE)
PRESENT LAW
In general, interest, rents, royalties and annuities are excluded
from unrelated taxable business income (UBTI) of tax-exempt
organizations. However, section 512(b)(13) treats otherwise excluded
rent, royalty, annuity, and interest income as UBTI if such income is
received from a taxable or tax-exempt subsidiary that is 80 percent
controlled by the parent tax-exempt organization.\37\
In the case of a stock subsidiary, the 80 percent control test is met
if the parent organization owns 80 percent or more of the voting stock
and all other classes of stock of the subsidiary.\38\
In the case of a non-stock subsidiary, the applicable Treasury
regulations look to factors such as the representation of the parent
corporation on the board of directors of the nonstock subsidiary, or the
power of the parent corporation to appoint or remove the board of
directors of the subsidiary.\39\
\37\For this purpose, a ``controlled organization'' is defined under
section 368(c). Under present law, rent, royalty. annuity, and interest
payments are treated as UBTI when received by the parent organization
based on the percentage of the subsidiary's income that is UBTI (either
in the hands of the subsidiary if the subsidiary is tax-exempt, or in
the hands of the parent organization if the subsidiary is taxable).
\38\Treas. reg. sec. 1.512(b) 1(1)(4)(I)(a).
\39\Treas. reg. sec. 1.512(b) 1(1)(4)(I)(b).
The control test under section 512(b)(13) does not, however,
incorporate any indirect ownership rules.\40\
Consequently, rents, royalties, annuities and interest derived from
second-tier subsidiaries generally do not constitute UBTI to the
tax-exempt parent organization.\41\
\40\See PLR 9338003 (June 16, 1993) (holding that because no indirect
ownership rules are applicable under section 512(b)(13), rents paid by a
second-tier taxable subsidiary are not UBTI to a tax-exempt parent
organization). In contrast, an example of an indirect ownership rule can
be found in Code section 318. Section 318(a)(2)(C) provides that if 50
precent or more in value of the stock in a corporation is owned,
directly or indirectly, by or for any person, such person shall be
considered as owning the stock owned, directly or indirectly by or for
such corporation, in the proportion the value of the person's stock
ownership bears to the total value of all stock in the corporation.
\41\See PLR 9542045 (July 28, 1995) (holding that first-tier holding
company and second-tier operating subsidiary were organized with bona
fide business functions and were not agents of the tax-exempt parent
organization; therefore, rents, royalties, and interest received by
tax-exempt parent organization from second-tier subsidiary were not
UBTI).
REASONS FOR CHANGE
Section 512(b)(13) was enacted to prevent subsidiaries of tax-exempt
organizations from reducing their otherwise taxable income by borrowing,
leasing, or licensing assets from a tax-exempt parent organization at
inflated levels. Because section 512(b)(13) was narrowly drafted,
organizations were able to circumvent its application through, for
example, the issuance of 21 percent of nonvoting stock with nominal
value to a separate friendly party or through the use of tiered or
brother/sister subsidiaries. The Committee believes that the
modifications to the control requirement and inclusion of attribution
rules will ensure that section 512(b)(13) operate consistent with its
intended purpose.
EXPLANATION OF PROVISION
The bill modifies the test for determining control for purposes of
section 512(b)(13). Under the bill, ``control'' means (in the case of a
stock corporation) ownership by vote or value of more than 50 percent of
the stock. In the case of a partnership or other entity, control means
ownership of more than 50 percent of the profits, capital or beneficial
interests.
In addition, the bill applies the constructive ownership rules of
section 318 for purposes of section 512(b)(13). Thus, a parent exempt
organization is deemed to control any subsidiary in which it holds more
than 50 percent of the voting power or value, directly (as in the case
of a first-tier subsidiary) or indirectly (as in the case of a
second-tier subsidiary).
The bill also makes technical modifications to the method provided in
section 512(b)(13) for determining how much of an interest, rent,
annuity, or royalty payment made by a controlled entity to a tax-exempt
organization is includible in the latter organization's UBTI. Such
payments are subject to the unrelated business income tax to the extent
the payment reduces the net unrelated income (or increases any net
unrelated loss) of the controlled entity.
EFFECTIVE DATE
The modification of the control test to one based on vote or value,
the application of the constructive ownership rules of section 318, and
the technical modifications to the flow-through method apply to taxable
years beginning after the date of enactment. The reduction of the
ownership threshold for purposes of the control test from 80 percent to
more than 50 percent applies to taxable years beginning after December
31, 1998.
2. LIMITATION ON INCREASE IN BASIS OF PROPERTY RESULTING FROM SALE BY
TAX-EXEMPT ENTITY TO RELATED PERSON (SEC. 1052 OF THE BILL AND SEC. 1061 OF THE
CODE)
PRESENT LAW
If a tax-exempt entity transfers assets to a controlled taxable
entity in a transaction that is treated as a sale, the transferee
taxable entity obtains a fair market value basis in the assets. Because
the transferor is tax-exempt, no gain is recognized on the transfer
except to the extent of certain unrelated business taxable income, if
any.
Other provisions of the Code deny certain tax benefits when a
transferor and transferee are related parties. For example, losses on
sales between related parties are not recognized (sec. 267).
REASONS FOR CHANGE
The Committee recognizes that a tax-exempt entity can sell assets to
a taxable party without recognition of gain, while that party receives a
fair market value basis in the property. However, the Committee is
concerned that tax-exempt entities may in effect structure transactions
in which assets are transferred to taxable entities controlled by the
tax-exempt entity, in a form such that a stepped-up basis and
depreciation are available to reduce the amount that would otherwise
have been taxable unrelated business income, if the tax-exempt entity
had converted the same assets to taxable operation and operated the
business itself.
EXPLANATION OF PROVISION
In the case of a sale or exchange of property directly or indirectly
between a tax-exempt entity and a related person, the basis of the
related person in the property will not exceed the adjusted basis of
such property immediately before the sale in the hands of the tax-exempt
entity, increased by the amount of any gain recognized to the tax-exempt
entity under the unrelated business taxable income rules of section 511.
A related person means any person having a relationship to the
tax-exempt entity described in section 267(b) or 707(b)(1) (generally,
certain more-than-50-percent relationships, with specified attribution
rules). For purposes of applying section 267(b)(2), such an entity is
treated as if it were an individual.
EFFECTIVE DATE
The provision applies to sales or exchanges after June 8, 1997;
except that it will not apply to a sale or exchange made pursuant to a
written agreement which was binding on such date and at all times
thereafter.
3. REPORTING AND PROXY TAX REQUIREMENTS FOR POLITICAL AND LOBBYING
EXPENDITURES OF CERTAIN TAX-EXEMPT ORGANIZATIONS (SEC. 1053 OF THE BILL AND SEC.
6033(E) OF THE CODE)
PRESENT LAW
Section 162(e) denies deductions as a trade or business expense for
certain lobbying and political expenditures. Section 162(e)(3) provides
a flow-through rule to disallow a deduction for a portion of membership
dues or similar payments paid to a tax-exempt organization if the
organization notifies the member under section 6033(e) that such portion
of the membership dues is allocable to political or lobbying activities
engaged in by the organization.
Under section 6033(e), tax-exempt organizations (other than charities
described in section 501(c)(3)) that engage in lobbying or political
campaign activities must disclose the amount of members' dues allocable
to lobbying or political campaign expenditures to their members and to
the Internal Revenue Service (IRS), except for certain in-house, de
minimis expenses.\42\
If an organization fails to meet the disclosure requirement under
section 6033(e), then the organization generally is subject to a
so-called ``proxy tax'' equal to 35 percent of the amount of members'
dues allowable to lobbying or political campaign expenditures. However,
under section 6033(e)(3), organizations are exempt from the disclosure
requirements and proxy tax if they can establish to the satisfaction of
the Secretary of the Treasury that substantially all dues or other
similar amounts received by the organization are not deductible without
regard to whether or not the organization conducts lobbying or political
campaign activities. In Rev. Proc. 95 35, the IRS announced that all
tax-exempt organizations--other than (1) organizations described in
section 501(c)(4) that are not veterans organizations, (2) agricultural
and horticultural organizations described in section 501(c)(5), and (3)
trade associations and other organizations described in section
501(c)(6)--are deemed automatically to qualify for the section
6033(e)(3) exemption from the general disclosure requirements and proxy
tax. Rev. Proc. 95 35 further provides that an organization described in
section 501(c)(4) or an agricultural or horticultural organization
described in section 501(c)(5) qualified for the section 6033(e)(3)
exemption if the organization receives at least 90 percent of its dues
from (a) members with annual dues of less than $50 or (b) other
tax-exempt organizations. Under Rev. Proc. 95 35, a trade association or
other organization described in section 501(c)(6) qualifies for the
section 6033(e)(3) exemption if the organization receives at least 90
percent of its dues from other tax-exempt organizations.\43\
\42\Such disclosure is not required, however with respect to political
expenditures if tax is imposed on the organization with respect to such
expenditures under section 527(f) (see sec. 6033(e)(1)(B)(iii)).
\43\In addition, Rev. Proc. 95 35 provides that any organization may
establish that it satisfies the section 6033(e)(3) exemption by (1)
maintaining records establishing that 90 percent or more of the annual
dues paid to the organization are not deductible without regard to
whether or not the organization conducts lobbying or political campaign
activities, and (2) notifying the IRS that it is described in section
6033(e)(3) on any Form 990 (i.e., annual information return) that is
required to file. Additionally, an organization may request a private
letter ruling that the organization is eligible for the section
6033(e)(3) exemption.
REASONS FOR CHANGE
The Committee believes that it is appropriate to modify present-law
section 6033(e) to ensure that tax-exempt organizations (other than
charities and organizations that receive annual dues of less than $100)
do not use tax-deductible dues payments to fund lobbying or political
activities, the costs of which would not be deductible for Federal
income tax purposes if incurred directly by members of the organization.
EXPLANATION OF PROVISION
Section 6033(e)(3) is amended to provide that an exemption from the
general disclosure requirements and proxy tax of section 6033(e) is
available to a tax-exempt organization if more than 90 percent of the
amount of aggregate annual dues (or similar payments) received by the
organization are paid by (1) individuals or families whose annual dues
(or similar amounts) are less than $100,\44\
or (2) tax-exempt entities. For purposes of the provision, all
organizations sharing a name, charter, historic affiliation, or similar
characteristics and coordinating their activities would be treated as a
single entity. As under present law, charities described in section
501(c)(3) are not subject to the section 6033(e) disclosure requirements
and proxy tax.
\44\The $100 amount will be indexed for inflation after December 31,
1997 (rounded to the nearest multiple of $5).
EFFECTIVE DATE
The provision is effective for taxable years beginning after December
31, 1997.
4. REPEAL GRANDFATHER RULE WITH RESPECT TO PENSION BUSINESS OF CERTAIN
INSURERS (SEC. 1054 OF THE BILL AND SEC. 1012(C) OF THE TAX REFORM ACT OF 1986)
PRESENT LAW
Present law provides that an organization described in sections
501(c) (3) or (4) of the Code is exempt from tax only if no substantial
part of its activities consists of providing commercial-type insurance.
When this rule was enacted in 1986, certain treatment (described below)
applied to Blue Cross and Blue Shield organizations providing health
insurance that (1) were in existence on August 16, 1986; (2) were
determined at any time to be tax-exempt under a determination that had
not been revoked; and (3) were tax-exempt for the last taxable year
beginning before January 1, 1987 (when the present-law rule became
effective), provided that no material change occurred in the structure
or operations of the organizations after August 16, 1986, and before the
close of 1986 or any subsequent taxable year.
The treatment applicable to such organizations, which became taxable
organizations under the provision, is as follows. A special deduction
applies with respect to health business equal to 25 percent of the
claims and expenses incurred during the taxable year less the adjusted
surplus at the beginning of the year. An exception is provided for such
organizations from the application of the 20-percent reduction in the
deduction for increases in unearned premiums that applies generally to
property and casualty insurance companies. A fresh start was provided
with respect to changes in accounting methods resulting from the change
from tax-exempt to taxable status. Thus, no adjustment was made under
section 481 on account of an accounting method change. Such an
organization was required to compute its ending 1986 loss reserves
without artificial changes that would reduce 1987 income. Thus, any
reserve weakening after August 16, 1986 was treated as occurring in the
organization's first taxable year beginning after December 31, 1986. The
basis of such an organization's assets was deemed to be equal to the
amount of the assets' fair market value on the first day of the
organization's taxable year beginning after December 31, 1986, for
purposes of determining gain or loss (but not for determining
depreciation or for other purposes).
Grandfather rules were provided in the 1986 Act relating to the
provision. It was provided that the provision does not apply to that
portion of the business of the Teachers Insurance Annuity
Association-College Retirement Equities Fund which is attributable to
pension business, nor does the provision apply with respect to that
portion of the business of Mutual of America which is attributable to
pension business. Pension business means the administration of any plan
described in section 401(a) of the Code which includes a trust exempt
from tax under section 501(a), and plan under which amounts are
contributed by an individual's employer for an annuity contract
described in section 403(b) of the Code, any individual retirement plan
described in section 408 of the Code, and any eligible deferred
compensation plan to which section 457(a) of the Code applies.
REASONS FOR CHANGE
The Committee is concerned that the continued tax-exempt status of
certain organizations that engage in insurance activities gives such
organizations an unfair competitive advantage. The Committee believes
that the provision of insurance at a price sufficient to cover the costs
of insurance generally constitutes an activity that is commercial. Thus,
the Committee believes, it is no longer appropriate to continue the
grandfather rule that permits certain organizations to retain tax-exempt
status with respect to pension business that constitutes commercial-type
insurance.
EXPLANATION OF PROVISION
The provision repeals the grandfather rules applicable to that
portion of the business of the Teachers Insurance Annuity
Association-College Retirement Equities Fund which is attributable to
pension business and to that portion of the business of Mutual of
America which is attributable to pension business. The Teachers
Insurance Annuity Association and College Retirement Equities Fund and
Mutual of America are to be treated for Federal tax purposes as life
insurance companies.
A fresh start is provided with respect to changes in accounting
methods resulting from the change from tax-exempt to taxable status.
Thus, no adjustment is made under section 481 on account of an
accounting method change. The Teachers Insurance Annuity Association and
College Retirement Equities Fund and Mutual of America are required to
compute ending 1997 loss reserves without artificial changes that would
reduce 1998 income. Thus, any reserve weakening after June 8, 1997, is
treated as occurring in the organization's first taxable year beginning
after December 31, 1997. The basis of assets of Teachers Insurance
Annuity Association and College Retirement Equities Fund and Mutual of
America is deemed to be equal to the amount of the assets' fair market
value on the first day of the organization's taxable year beginning
after December 31, 1997, for purposes of determining gain or loss (but
not for determining depreciation or for other purposes).
EFFECTIVE DATE
The provision is effective for taxable years beginning after December
31, 1997.
G. Other Revenue-Increase Provisions
1. PHASE OUT SUSPENSE ACCOUNTS FOR CERTAIN LARGE FARM CORPORATIONS
(SEC. 1061 OF THE BILL AND SEC. 477 OF THE CODE)
PRESENT LAW
A corporation (or a partnership with a corporate partner) engaged in
the trade or business of farming must use an accrual method of
accounting for such activities unless such corporation (or partnership),
for each prior taxable year beginning after December 31, 1975, did not
have gross receipts exceeding $1 million. If a farm corporation is
required to change its method of accounting, the section 481 adjustment
resulting from such change is included in gross income ratably over a
10-year period, beginning with the year of change. This rule does not
apply to a family farm corporation.
A provision of the Revenue Act of 1987 (``1987 Act'') requires a
family corporation (or a partnership with a family corporation as a
partner) to use an accrual method of accounting for its farming business
unless, for each prior taxable year beginning after December 31, 1985,
such corporation (and any predecessor corporation) did not have gross
receipts exceeding $25 million. A family corporation is one where at 50
percent or more of the stock of the corporation is held by one (or in
some limited cases, two or three) families.
A family farm corporation that must change to an accrual method of
accounting as a result of the 1987 Act provision is to establish a
suspense account in lieu of including the entire amount of the section
481 adjustment in gross income. The initial balance of the suspense
account equals the lesser of (1) the section 481 adjustment otherwise
required for the year of change, or (2) the section 481 adjustment
computed as if the change in method of accounting had occurred as of the
beginning of the taxable year preceding the year of change.
The amount of the suspense account is required to be included in
gross income if the corporation ceases to be a family corporation. In
addition, if the gross receipts of the corporation attributable to
farming for any taxable year decline to an amount below the lesser of
(1) the gross receipts attributable to farming for the last taxable year
for which an accrual method of accounting was not required, or (2) the
gross receipts attributable to farming for the most recent taxable year
for which a portion of the suspense account was required to be included
in income, a portion of the suspense account is required to be included
in gross income.
REASONS FOR CHANGE
The Committee believes that an accrual method of accounting more
accurately measures the economic income of a corporation than does the
cash receipts and disbursements method and that changes from one method
of accounting to another should be taken into account under section 481.
However, the Committee believes that it may be appropriate for a family
farm corporation to retain the use of the cash method of accounting
until such corporation reaches a certain size. At that time, the
corporation should be subject to tax accounting rules to which other
corporations are so subject. In addition, the Committee believes that
the present-law suspense account provision applicable to large family
farm corporations may effectively provide an exclusion for, rather than
a deferral of, amounts otherwise properly taken into account under
section 481 upon the required change in the method of accounting for
such corporations. However, the Committee recognizes that requiring the
recognition of previously established suspense accounts may impose
liquidity concerns upon some farm corporations. Thus, the Committee
provides an extended period over which existing suspense accounts must
be restored to income and provides further deferral where the
corporation has insufficient income for the year.
EXPLANATION OF PROVISION
The bill repeals the ability of a family farm corporation to
establish a suspense account when it is required to change to an accrual
method of accounting. Thus, under the bill, any family farm corporation
required to change to an accrual method of accounting would restore the
section 481 adjustment applicable to the change in gross income ratably
over a 10-year period beginning with the year of change.
In addition, any taxpayer with an existing suspense account is
required to restore the account into income ratably over a 20-year
period beginning in the first taxable year beginning after June 8, 1997,
subject to the present-law requirements to restore such accounts more
rapidly. The amount required to be restored to income for a taxable year
pursuant to the 20-year spread period shall not exceed the net operating
loss of the corporation for the year (in the case of a corporation with
a net operating loss) or 50 percent of the net income of the taxpayer
for the year (for corporations with taxable income). For this purpose, a
net operating loss or taxable income is determined without regard to the
amount restored to income under the bill. Any reduction in the amount
required to be restored to income is taken into account ratably over the
remaining years in the 20-year period or, if applicable, after the end
of the 20-year period. Amounts that extend beyond the 20-year period
remain subject to the net operating loss and 50-percent-of-taxable
income rules. The net operating loss and 50-percent-of-taxable income
rules do not apply to restorations of suspense accounts pursuant to
present law.
EFFECTIVE DATE
The provision is effective for taxable years ending after June 8, 1997.
2. MODIFY NET OPERATING LOSS CARRYBACK AND CARRYFORWARD RULES (SEC.
1062 OF THE BILL AND SEC. 172 OF THE CODE)
PRESENT LAW
The net operating loss (``NOL'') of a taxpayer (generally, the amount
by which the business deductions of a taxpayer exceeds its gross income)
may be carried back three years and carried forward 15 years to offset
taxable income in such years. A taxpayer may elect to forgo the
carryback of an NOL. Special rules apply to real estate investment
trusts (``REITs'') (no carrybacks), specified liability losses (10-year
carryback), and excess interest losses (no carrybacks).
REASON FOR CHANGE
The Committee recognizes that while Federal income tax reporting
requires a taxpayer to report income and file returns based on a
12-month period, the natural business cycle of a taxpayer may exceed 12
months. However, the Committee believes that allowing a two-year
carryback of NOLs is sufficient to account for these business cycles,
particularly since (1) many deductions allowed for tax purposes relate
to future, rather than past, income streams and (2) certain deductions
that do relate to past income streams are granted special, longer
carryback periods under present law (which are retained by the bill).
EXPLANATION OF PROVISION
The bill limits the NOL carryback period to two years and extends the
NOL carryforward period to 20 years. The bill does not apply to the
carryback rules relating to REITs, specified liability losses, excess
interest losses, and corporate capital losses. In addition, the bill
does not apply to NOLs arising from casualty losses of individual
taxpayers.
EFFECTIVE DATE
The provision is effective for NOLs arising in taxable years
beginning after the date of enactment.
3. EXPAND THE LIMITATIONS ON DEDUCTIBILITY OF PREMIUMS AND INTEREST
WITH RESPECT TO LIFE INSURANCE, ENDOWMENT AND ANNUITY CONTRACTS (SEC. 1063 OF THE
BILL AND SEC. 264 OF THE CODE)
PRESENT LAW
Exclusion of inside buildup and amounts received by reason of death
No Federal income tax generally is imposed on a policyholder with
respect to the earnings under a life insurance contract (``inside
buildup'').\45\
Further, an exclusion from Federal income tax is provided for amounts
received under a life insurance contract paid by reason of the death of
the insured (sec. 101(a)).
\45\This favorable tax treatment is available only if a life insurance
contract meets certain requirements designed to limit the investment
character of the contract (sec. 7702). Distributions from a life
insurance contract (other than a modified endowment contract) that are
made prior to the death of the insured generally are includible in
income, to the extent that the amounts distributed exceed the taxpayer's
basis in the contract; such distributions generally are treated first as
a tax-free recovery of basis, and then as income (sec. 72(e)). In the
case of a modified endowment contract, however, in general,
distributions are treated as income first, loans are treated as
distributions (i.e., income rather than basis recovery first), and an
additional 10 percent tax is imposed on the income portion of
distributions made before age 59\1/2\ and in certain other circumstances
(secs. 72(e) and (v)). A modified endowment contract is a life insurance
contract that does not meet a statutory ``7-pay'' test, i.e., generally
is funded more rapidly than 7 annual level premiums (sec. 7702A).
Certain amounts received under a life insurance contract on the life of
a terminally or chronically ill individual, and certain amounts paid for
the sale or assignment to viatical settlement provider of a life
insurance contract on the life of terminally ill or chronically ill
individual, are treated as excludable as if paid of the death of insured
(sec. 101(g)).
Premium deduction limitation
No deduction is permitted for premiums paid on any life insurance
policy covering the life of any officer or employee, or of any person
financially interested in any trade or business carried on by the
taxpayer, when the taxpayer is directly or indirectly a beneficiary
under such policy (sec. 264(a)(1)).
Interest deduction disallowance with respect to life insurance
Present law provides generally that no deduction is allowed for
interest paid or accrued on any indebtedness with respect to one or more
life insurance contracts or annuity or endowment contracts owned by the
taxpayer covering any individual who is or was (1) an officer or
employee of, or (2) financially interested in, any trade or business
currently or formerly carried on by the taxpayer (the ``COLI'' rules).
This interest deduction disallowance rule generally does not apply to
interest on debt with respect to contracts purchased on or before June
20, 1986; rather, an interest deduction limit based on Moody's Corporate
Bond Yield Average--Monthly Average Corporates applies in the case of
such contract.\46\
\46\Phase-in rules apply generally with respect to otherwise deductible
interest paid or accrued after December 31, 1995, and before January 1,
1999, in the case of debt incurred before January 1, 1996. In addition,
transition rules apply.
An exception to this interest disallowance rule is provided for
interest on indebtedness with respect to life insurance policies
covering up to 20 key persons. A key person is an individual who is
either an officer or a 20-percent owner of the taxpayer. The number of
individuals that can be treated as key persons may not exceed the
greater of (1) 5 individuals, or (2) the lesser of 5 percent of the
total number of officers and employees of the taxpayer, or 20
individuals. For determining who is a 20-percent owner, all members of a
controlled group are treated as one taxpayer. Interest paid or accrued
on debt with respect to a contract covering a key person is deductible
only to the extent the rate of interest does not exceed Moody's
Corporate Bond Yield Average--Monthly Average Corporates for each month
beginning after December 31, 1995, that interest is paid or accrued.
The foregoing interest deduction limitation was added in 1996 to
existing interest deduction limitations with respect to life insurance
and similar contracts.\47\
\47\Since 1942, a limitation has applied to the deductibility of
interest with respect to single premium contracts (sec. 264(a)(2)). For
this purpose, a contract is treated as a single premium contract if (1)
substantially all the premiums on the contract are paid within a period
of 4 years from the date on which the contract is purchased, or (2) and
amount is deposited with the insurer for payment of a substantial number
of future premiums on the contract. Further, under a limitation added in
1964, no deduction is allowed for any amount paid or accrued on debt
incurred or continued to purchase or carry a life insurance, endowment,
or annuity contract pursuant to a plan of purchase that contemplates the
systematic direct or indirect borrowing of part or all the increases in
the cash value of the contract (sec. 264(a)(3)). An exception to the
latter rule is provided, permitting deductibility of interest on bona
fide debt that is part of such a plan, if no part of 4 of the annual
premiums due during the first 7 years is paid by means of debt (the
``4-out-of-7 rule'') (sec. 264(a)(1)). In addition to the specific
disallowance rules of section 264, generally applicable principles of
tax law apply.
Interest deduction limitation with respect to tax-exempt interest income
Present law provides that no deduction is allowed for interest on
debt incurred or continued to purchase or carry obligations the interest
on which is wholly exempt from Federal income tax (sec. 265(a)(2)). In
addition, in the case a financial institution, a proration rule provides
that no deduction is allowed for that portion of the taxpayer's interest
that is allocable to tax-exempt interest (sec. 265(b)). The portion of
the interest deduction that is disallowed under this rule generally is
the portion determined by the ratio of the taxpayer's (1) average
adjusted bases of tax-exempt obligations acquired after August 7, 1986,
to (2) the average adjusted bases for all of the taxpayer's assets (sec.
265(b)(2)).\48\
\48\Special rules apply for certain tax-exempt obligations of small
issuers (sec. 265(b)(3)).
REASONS FOR CHANGE
The Committee understands that, under applicable State laws, the
holder of a life insurance policy generally is required to have an
insurable interest in the life of the insured individual only when the
policyholder purchases the life insurance policy. The Committee
understands that under State laws relating to insurable interests, a
taxpayer generally has an insurable interest in the lives of its
debtors. Further, rules governing permitted investments of financial
institutions may allow the institutions to acquire cash value life
insurance covering the lives of debtors, as well as the lives of
individuals with other relationships to the taxpayer such as
shareholders, employees or officers. In addition, insurable interest
laws in many States have been expanded in recent years, and States could
decide in the future to expand further the range of persons in whom a
taxpayer has an insurable interest.
For example, a business could purchase cash value life insurance on
the lives of its debtors, and increase the investment in these contracts
as the debt diminishes and even after the debt is repaid. If a mortgage
lender can (under applicable State law and banking regulations) buy a
cash value life insurance policy on the lives of mortgage borrowers, the
lender may be able to deduct premiums or interest on debt with respect
to such a contract, if no other deduction disallowance rule or principle
of tax law applies to limit the deductions. The premiums or interest
could be deductible even after the individual's mortgage loan is sold to
another lender or to a mortgage pool. If the loan were sold to a second
lender, the second lender might also be able to buy a cash value life
insurance contract on the life of the same borrower, and to deduct
premiums or interest with respect to that contract. The Committee bill
addresses this issue by providing that no deduction is allowed for
premiums on any life insurance policy, or endowment or annuity contract,
if the taxpayer is directly or indirectly a beneficiary under the policy
or contract, and by providing that no deduction is allowed for interest
paid or accrued on any indebtedness with respect to life insurance
policy, or endowment or annuity contract, covering the life of any
individual.
In addition, the Committee understands that taxpayers may be seeking
new means of deducting interest on debt that in substance funds the
tax-free inside build-up of life insurance, annuity and endowment
contracts.\49\
The Committee believes that present law was not intended to promote tax
arbitrage by allowing financial or other business that have the ongoing
ability to borrow funds from depositors, bondholders, investors or other
lenders to concurrently invest a portion of their assets in cash value
life insurance contracts, or endowment or annuity contracts. Therefore,
the bill provides that, for taxpayers other than natural persons, no
deduction is allowed for the portion of the taxpayer's interest expense
that is allocable to unborrowed policy cash surrender values of any life
insurance policy or annuity or endowment contract issued after June 8,
1997.
\49\See ``Fannie Mae Designing a Program to Link Life Insurance,
Loans,'' Washington Post, p. E3, February 8, 1997; ``Fannie Mae
Considers Whether to Bestow Mortgage Insurance,'' Wall St. Journal, p.
C1, April 22, 1997.
EXPLANATION OF PROVISION
Expansion of premium deduction limitation to individuals in
whom taxpayer has an insurable interest
Under the provision, the present-law premium deduction limitation is
modified to provide that no deduction is permitted for premiums paid on
any life insurance, annuity or endowment contract, if the taxpayer is
directly or indirectly a beneficiary under the contract.
Expansion of interest disallowance to individuals in whom
taxpayer has insurable interest
Under the provision, no deduction is allowed for interest paid or
accrued on any indebtedness with respect to life insurance policy, or
endowment or annuity contract, covering the life of any individual.
Thus, the provision limits interest deductibility in the case of such a
contract covering any individual in whom the taxpayer has an insurable
interest when the
contract is first issued under applicable State law, except as
otherwise provided under present law with respect to key persons and
pre-1986 contracts.
Pro rata disallowance of interest on debt to fund life insurance
In the case of a taxpayer other than a natural person, no deduction
is allowed for the portion of the taxpayer's interest expense that is
allocable to unborrowed policy cash surrender values with respect to any
life insurance policy or annuity or endowment contract issued after June
8, 1997. Interest expense is so allocable based on the ratio of (1) the
taxpayer's average unborrowed policy cash values of life insurance
policies, and annuity and endowment contracts, issued after June 8,
1997, to (2) the average adjusted bases for all assets of the taxpayer.
This rule does not apply to any policy or contract owned by an entity
engaged in a trade or business, covering any individual who is an
employee, officer or director of the trade or business at the time first
covered by the policy or contract. Such a policy or contract is not
taken into account in determining unborrowed policy cash values.
The unborrowed policy cash values means the cash surrender value of
the policy or contract determined without regard to any surrender
charge, reduced by the amount of any loan with respect to the policy or
contract. The cash surrender value is to be determined without regard to
any other contractual or noncontractual arrangement that artificially
depresses the cash value of a contract.
If a trade or business (other than a sole proprietorship or a trade
or business of performing services as an employee) is directly or
indirectly the beneficiary under any policy or contract, then the policy
or contract is treated as held by the trade or business. For this
purpose, the amount of the unborrowed cash value is treated as not
exceeding the amount of the benefit payable to the trade or business. In
the case of a partnership or S corporation, the provision applies at the
partnership or corporate level. The amount of the benefit is intended to
take into account the amount payable to the business under the contract
(e.g., as a death benefit) or pursuant to another agreement (e.g., under
a split dollar agreement). The amount of the benefit is intended also to
include any amount by which liabilities of the business would be reduced
by payments under the policy or contract (e.g., when payments under the
policy reduce the principal or interest on a liability owed to or by the
business).
As provided in regulations, the issuer or policyholder of the life
insurance policy or endowment or annuity contract is required to report
the amount of the amount of the unborrowed cash value in order to carry
out this rule.
If interest expense is disallowed under other provisions of section
264 (limiting interest deductions with respect to life insurance
policies or endowment or annuity contracts) or under section 265
(relating to tax-exempt interest), then the disallowed interest expense
is not taken into account under this provision, and the average adjusted
bases of assets is reduced by the amount of debt, interest on which is
so disallowed. The provision is applied before present-law rules
relating to capitalization of certain expenses where the taxpayer
produces property (sec. 263A).
An aggregation rule is provided, treating related persons as one for
purposes of the provision.
The provision does not apply to any insurance company subject to tax
under subchapter L of the Code. Rather, the rules reducing certain
deductions for losses incurred, in the case of property and casualty
companies, and reducing reserve deductions or dividends received
deductions of life insurance companies, are modified to take into
account the increase in cash values of life insurance policies or
annuity or endowment contracts held by insurance companies.
EFFECTIVE DATE
The provisions apply with respect to contracts issued after June 8,
1997. For this purpose, a material increase in the death benefit or
other material change in the contract causes the contract to be treated
as a new contract. To the extent of additional covered lives under a
contract after June 8, 1997, the contract is treated as a new contract.
In the case of an increase in the death benefit of a contract that is
converted to extended term insurance pursuant to nonforfeiture
provisions, in a transaction to which section 501(d)(2) of the Health
Insurance Portability and Accountability Act of 1996 applies, the
contract is not treated as a new contract.
4. ALLOCATION OF BASIS OF PROPERTIES DISTRIBUTED TO A PARTNER BY A
PARTNERSHIP (SEC. 1064 OF THE BILL AND SEC. 732(C) OF THE CODE)
PRESENT LAW
In general
The partnership provisions of present law generally permit partners
to receive distributions of partnership property without recognition of
gain or loss (sec. 731).\50\
Rules are provided for determining the basis of the distributed
property in the hands of the distributee, and for allocating basis among
multiple properties distributed, as well as for determining adjustments
to the distributee partner's basis in its partnership interest. Property
distributions are tax-free to a partnership. Adjustments to the basis of
the partnership's remaining undistributed assets are not required unless
the partnership has made an election that requires basis adjustments
both upon partnership distributions and upon transfers of partnership
interests (sec. 754).
\50\Exceptions to this nonrecognition rule apply: (1) when money (and
the fair market value of marketable securities) received exceeds a
partner's adjusted basis in the partnership sec. 731(a)(1)); (2) when
only money, inventory and unrealized receivables are received in
liquidation of partner's interest and loss is realized (sec., 731
(a)(2)); (3) to certain disproportionate distributions involving
inventory and unrealized receivables (sec. 751(b)); and (4) to certain
distributions relating to contributed property (secs. 704(c) and 737).
In addition, if a partner engages in a transaction with a partnership
other than in its capacity as a member of the partnership, the
transaction generally is considered as occurring between the partnership
and one who is not a partner (sec. 707).
Partner's basis in distributed properties and partnership interest
Present law provides two different rules for determining a partner's
basis in distributed property, depending on whether or not the
distribution is in liquidation of the partner's interest in the
partnership. Generally, a substituted basis rule applies to property
distributed to a partner in liquidation. Thus, the basis of property
distributed in liquidation of a partner's interest is equal to the
partner's adjusted basis in its partnership interest (reduced by any
money distributed in the same transaction) (sec. 732(b)).
By contrast, generally, a carryover basis rule applies to property
distributed to a partner other than in liquidation of its partnership
interest, subject to a cap (sec. 732(a)). Thus, in a non-liquidating
distribution, the distributee partner's basis in the property is equal
to the partnership's adjusted basis in the property immediately before
the distribution, but not to exceed the partner's adjusted basis in its
partnership interest (reduced by any money distributed in the same
transaction). In a non-liquidating distribution, the partner's basis in
its partnership interest is reduced by the amount of the basis to the
distributee partner of the property distributed and is reduced by the
amount of any money distributed (sec. 733).
Allocating basis among distributed properties
In the event that multiple properties are distributed by a
partnership, present law provides allocation rules for determining their
bases in the distributee partner's hands. An allocation rule is needed
when the substituted basis rule for liquidating distributions applies,
in order to assign a portion of the partner's basis in its partnership
interest to each distributed asset. An allocation rule is also needed in
a non-liquidating distribution of multiple assets when the total
carryover basis would exceed the partner's basis in its partnership
interest, so a portion of the partner's basis in its partnership
interest is assigned to each distributed asset.
Present law provides for allocation in proportion to the
partnership's adjusted basis. The rule allocates basis first to
unrealized receivables and inventory items in an amount equal to the
partnership's adjusted basis (or if the allocated basis is less than
partnership basis, then in proportion to the partnership's basis), and
then among other properties in proportion to their adjusted bases to the
partnership (sec. 732(c)).\51\
Under this allocation rule, in the case of a liquidating distribution,
the distributee partner can have a basis in the distributed property
that exceeds the partnership's basis in the property.
\51\A special rule allows a partner that acquired a partnership interest
by transfer within two years of a distribution to elect to allocate the
basis of property received in the distribution as if the partnership had
a section 754 election in effect (sec. 732(d)). The special rule also
allows the Service to require such an allocation where the value at the
time of transfer of the property received exceeds 110 percent of its
adjusted basis to the partnership (sec. 732(d)). Tres. Reg. sec. 1.732
1(d)(4) generally requires the application of section 732(d) where the
allocation of basis under section 732(c) upon a liquidation of the
partner's interest would have resulted in a shift of basis from
non-depreciable property to depreciable property.
REASONS FOR CHANGE
The rule providing that distributee partners allocate basis in
proportion to the partnership's adjusted basis in the distributed
property gives rise to problems in application.\52\
The Committee is concerned that the present-law rule permits basis
shifting transactions in which basis is allocated so as to increase
basis artificially, giving rise to inflated depreciation deductions or
artificially large losses, for example. The Committee believes that
these problems would be significantly reduced by taking into account the
fair market value of property distributed by a partnership for purposes
of allocating basis in the hands of the distributee partner.
\52\``The failure of these rules to take fair market value into account
puts a high premium on tax planning in connection with in-kind
liquidating distributions. Allocation of the portion of the basis in
excess of the partnerships basis in the distributed assets according to
their relative market values would be a conceptually sound approach, and
would eliminate the strange results and manipulation possibilities . .
.'' W. McKee, W. Nelson and R. Whitmire, Federal Taxation of
Partnerships and Partners (3rd ed. 1997), para. 19.06.
EXPLANATION OF PROVISION
The provision modifies the basis allocation rules for distributee
partners. It allocates a distributee partner's basis adjustment among
distributed assets first to unrealized receivables and inventory items
in an amount equal to the partnership's basis in each such property (as
under present law).
Under the provision, basis is allocated first to the extent of each
distributed property's adjusted basis to the partnership. Any remaining
basis adjustment, if an increase, is allocated among properties with
unrealized appreciation in proportion to their respective amounts of
unrealized appreciation (to the extent of each property's appreciation),
and then in proportion to their respective fair market values. For
example, assume that a partnership with two assets, A and B, distributes
them both in liquidation to a partner whose basis in its interest is 55.
Neither asset consists of inventory or unrealized receivables. Asset A
has a basis to the partnership of 5 and a fair market value of 40, and
asset B has a basis to the partnership of 10 and a fair market value of
10. Under the provision, basis is first allocated to asset in the amount
of 5 and to asset B in the amount of 10 (their adjusted bases to the
partnership). The remaining basis adjustment is an increase totaling 40
(the partner's 55 basis minus the partnership's total basis in
distributed assets of 15). Basis is then allocated to asset A in the
amount of 35, its unrealized appreciation, with no allocation to asset B
attributable to unrealized appreciation because its fair market value
equals the partnership's adjusted basis. The remaining basis adjustment
of 5 is allocated in the ratio of the assets' fair market values, i.e.,
4 to asset A (for a total basis of 44) and 1 to asset B (for a total
basis of 11).
If the remaining basis adjustment is a decrease, it is allocated
among properties with unrealized depreciation in proportion to their
respective amounts of unrealized depreciation (to the extent of each
property's depreciation), and then in proportion to their respective
adjusted
bases (taking into account the adjustments already made). A
remaining basis adjustment that is a decrease arises under the provision
when the partnership's total adjusted basis in the distributed
properties exceeds the amount of the partner's basis in its partnership
interest, and the latter amount is the basis to be allocated among the
distributed properties. For example, assume that a partnership with two
assets, C and D, distributes them both in liquidation to a partner whose
basis in its partnership interest is 20. Neither asset consists of
inventory or unrealized receivables. Asset C has a basis to the
partnership of 15 and a fair market value of 15, and asset D has a basis
to the partnership of 15 and a fair market value of 5. Under the
provision, basis is first allocated to the extent of the partnership's
basis in each distributed property, or 15 to each distributed property,
for a total of 30. Because the partner's basis in its interest is only
20, a downward adjustment of 10 (30 minus 20) is required. The entire
amount of the 10 downward adjustment is allocated to the property D,
reducing its basis to 5. Thus, the basis of property C is 15 in the
hands of the distributee partner, and the basis of property D is 5 in
the hands of the distributee partner.
EFFECTIVE DATE
The provision applies to partnership distributions after the date of
enactment.
5. TREATMENT OF INVENTORY ITEMS OF A PARTNERSHIP (SEC. 1065 OF THE BILL
AND SEC. 751 OF THE CODE)
PRESENT LAW
Under present law, upon the sale or exchange of a partnership
interest, any amount received that is attributable to unrealized
receivables, or to inventory that has substantially appreciated, is
treated as an amount realized from the sale or exchange of property that
is not a capital asset (sec. 751(a)).
Present law provides a similar rule to the extent that a distribution
is treated as a sale or exchange of a partnership interest. A
distribution by a partnership in which a partner receives substantially
appreciated inventory or unrealized receivables in exchange for its
interest in certain other partnership property (or receives certain
other property in exchange for its interest in substantially appreciated
inventory or unrealized receivables) is treated as a taxable sale or
exchange of property, rather than as a nontaxable distribution (sec.
751(b)).
For purposes of these rules, inventory of a partnership generally is
treated as substantially appreciated if the fair market value of the
inventory exceeds 120 percent of adjusted basis of the inventory to the
partnership (sec. 751(d)(1)(A)). In applying this rule, inventory
property is excluded from the calculation if a principal purpose for
acquiring the inventory property was to avoid the rules relating to
inventory (sec. 751(d)(1)(B)).
REASONS FOR CHANGE
The substantial appreciation requirement with respect to inventory of
a partnership has been criticized as both ineffective at insulating
partnerships from the potential complexity of the disproportionate
distribution rules of section 751(b), and also ineffective at properly
treating income attributable to inventory as ordinary income under the
section 751 rules for partnerships with profit margins below 20
percent.\53\
Because the Committee believes that income attributable to inventory
should be treated as ordinary income, the bill repeals the substantial
appreciation requirement with respect to inventory, in the case of
partnership sales, exchanges and distributions.
\53\The 1984 ALI study on partnership rules referred to the substantial
appreciation requirement as subject to manipulation and tax planning
(American Law Institute, Federal Income Tax Project: Subchapter K:
Proposals on the Taxation of Partners (R. Cohen, reporter, 1984), 26. In
1993 the definition of substantially appreciated inventory was modified,
and the present-law test relating to a principal purpose of avoidance
was added (Omnibus Budget Reconciliation Act of 1993, P.L. 103 66, sec.
13206(e)(1)). Nevertheless, the substantial appreciation requirement is
still criticized as ineffective (W. McKee, W. Nelson and R. Whitmire,
Federal Taxation of Partners and Partnerships, (3rd ed. 1997) sec.
16.04[2]).
EXPLANATION OF PROVISION
The provision eliminates the requirement that inventory be
substantially appreciated in order to give rise to ordinary income under
the rules relating to sales and exchanges of partnership interests and
certain partnership distributions. This conforms the treatment of
inventory to the treatment of unrealized receivables under these rules.
EFFECTIVE DATE
The provision is effective for sales, exchanges, and distributions
after the date of enactment.
6. TREATMENT OF APPRECIATED PROPERTY CONTRIBUTED TO A PARTNERSHIP (SEC.
1066 OF THE BILL AND SECS. 704(C)(1)(B) AND 737 OF THE CODE)
PRESENT LAW
Under present law, if a partner contributes appreciated property to a
partnership, no gain is recognized to the contributing partner at the
time of the contribution. The contributing partner's basis in its
partnership interest is increased by the basis of the contributed
property at the time of the contribution. The pre-contribution gain is
reflected in the difference between the partner's capital account and
its basis in its partnership interest (``book/tax differential'').
Income, gain, loss, and deduction with respect to the contributed
property must be shared among the partners so as to take account of the
variation between the basis of the property to the partnership and its
fair market value at the time of contribution (sec. 704(c)(1)(A)).
If the property is subsequently distributed to another partner within
5 years of the contribution, the contributing partner generally
recognizes gain as if the property had been sold for its fair market
value at the time of the distribution (sec. 704(c)(1)(B)). Similarly,
the
contributing partner generally includes pre-contribution gain
in income to the extent that the value of other property distributed by
the partnership to that partner exceeds its adjusted basis in its
partnership interest, if the distribution by the partnership is made
within 5 years after the contribution of the appreciated property (sec.
737).
If a partnership distributes property to a partner, the partner does
not recognize gain except to the extent any money (including marketable
securities) received in the distribution exceeds the partner's basis for
its partnership interest (sec. 731(a)). In addition, a partnership does
not recognize gain on a distribution to a partner (sec. 731(b)).
REASONS FOR CHANGE
The Committee is concerned that the inconsistency in treatment of
partnership sales and partnership distributions of property contributed
by partners makes it possible for partners to circumvent the rule
requiring pre-contribution gain on contributed property to be allocated
to the contributing partner. In order to limit the inconsistency and to
reduce opportunities for circumventing this rule, the Committee believes
that the contributing partner should recognize pre-contribution gain
when the contributed property is distributed to another partner, or the
partnership distributes to the contributing partner other property whose
value exceeds that partner's basis in its partnership interest, within
10 years after the contribution of the appreciated property.
EXPLANATION OF PROVISION
The provision extends to 10 years the period in which a partner
recognizes pre-contribution gain with respect to property contributed to
a partnership. Thus, under the provision, a partner that contributes
appreciated property to a partnership generally recognizes
pre-contribution gain in the event that the partnership distributes the
contributed property to another partner, or distributes to the
contributing partner other property whose value exceeds that partner's
basis in its partnership interest, if the distribution occurs within 10
years after the contribution to the partnership.
EFFECTIVE DATE
The provision is effective for property contributed to a partnership
after June 8, 1997.
7. EARNED INCOME CREDIT COMPLIANCE PROVISIONS (SEC. 1067 OF THE BILL
AND SECS. 32, 6213(G) AND 6695 OF THE CODE)
OVERVIEW
Certain eligible low-income workers are entitled to claim a
refundable earned income credit on their income tax return. A refundable
credit is a credit that not only reduces an individual's tax liability
but allows refunds to the individual in excess of income tax liability.
The amount of the credit an eligible individual may claim depends upon
whether the individual has one, more than one, or no qualifying
children, and is determined by multiplying the credit rate by the
individual's\54\
earned income up to an earned income amount. The maximum amount of the
credit is the product of the credit rate and the earned income amount.
The credit is reduced by the amount of the alternative minimum tax
(``AMT'') the taxpayer owes for the year. The credit is phased out above
certain income levels. For individuals with earned income (or AGI, if
greater) in excess of the beginning of the phaseout range, the maximum
credit amount is reduced by the phaseout rate multiplied by the amount
of earned income (or AGI, if greater) in excess of the beginning of the
phaseout range. For individuals with earned income (or AGI, if greater)
in excess of the end of the phaseout range, no credit is allowed. The
definition of AGI used for phasing out the earned income credit
disregards certain losses. The losses disregarded are: (1) net capital
losses (if greater than zero); (2) net losses from trusts and estates;
(3) net losses from nonbusiness rents and royalties; and (4) 50 percent
of the net losses from business, computed separately with respect to
sole proprietorships (other than in farming), sole proprietorships in
farming, and other businesses. Also, an individual is not eligible for
the earned income credit if the aggregate amount of ``disqualified
income'' of the taxpayer for the taxable year exceeds $2,250.
Disqualified income is the sum of: (1) interest (taxable and
tax-exempt); (2) dividends; (3) net rent and royalty income (if greater
than zero); (4) capital gain net income; and (5) net passive income (if
greater than zero) that is not self-employment income. The earned income
amount, the phaseout amount and the disqualified income amount are
indexed for inflation.
\54\In the case of a married individual who files a joint return with
his or her spouse, the income for purposes of these tests is the
combined income of the couple.
The parameters for the credit depend upon the number of qualifying
children the individual claims. For 1997, the parameters are given in
the following table:
PRESENT-LAW EARNED INCOME CREDIT PARAMETERS
Two or more qualifying children One qualifying child No qualifying children
Credit rate (percent) 40.00 34.00 7.65
Earned income amount $9,140 $6,500 $4,340
Maximum credit $3,656 $2,210 $332
Phaseout begins $11,930 $11,930 $5,430
Phaseout rate (percent) 21.06 15.98 7.65
Phaseout ends $29,290 $25,760 $9,770
In order to claim the credit, an individual must either have a
qualifying child or meet other requirements. A qualifying child must
meet a relationship test, an age test, an identification test, and a
residence test. In order to claim the credit without a qualifying child,
an individual must not be a dependent and must be over age 24 and under
age 65.
a. Deny EIC eligibility for prior acts of recklessness or
fraud (sec. 1067 of the bill and sec. 32 of the Code)
PRESENT LAW
The accuracy-related penalty, which is imposed at a rate of 20
percent, applies to the portion of any underpayment that is attributable
to (1) negligence, (2) any substantial understatement of income tax, (3)
any substantial valuation overstatement, (4) any substantial
overstatement of pension liabilities, or (5) any substantial estate or
gift tax valuation understatement (sec. 6662). Negligence includes any
careless, reckless, or intentional disregard of rules or regulations, as
well as any failure to make a reasonable attempt to comply with the
provisions of the Code.
The fraud penalty, which is imposed at a rate of 75 percent, applies
to the portion of any underpayment that is attributable to fraud (sec.
6663).
Neither the accuracy-related penalty nor the fraud penalty is imposed
with respect to any portion of an underpayment if it is shown that there
was a reasonable cause for that portion and that the taxpayer acted in
good faith with respect to that portion.
REASON FOR CHANGE
The Committee believes that taxpayers who fraudulently claim the EIC
or recklessly or intentionally disregard EIC rules or regulations should
be penalized for doing so.
EXPLANATION OF PROVISION
A taxpayer who fraudulently claims the earned income credit (EIC) is
ineligible to claim the EIC for a subsequent period of 10 years. In
addition, a taxpayer who erroneously claims the EIC due to reckless or
intentional disregard of rules or regulations is ineligible to claim the
EIC for a subsequent period of two years. These sanctions are in
addition to any other penalty imposed under present law. The
determination of fraud or of reckless or intentional disregard of rules
or regulations are made in a deficiency proceeding (which provides for
judicial review).
EFFECTIVE DATE
The provision is effective for taxable years beginning after December
31, 1996.
b. Recertification required when taxpayer found to be
ineligible for EIC in past (sec. 1067 of the bill and secs. 32 and
6213(g) of the Code)
PRESENT LAW
If an individual fails to provide a correct TIN and claims the EIC,
such omission is treated as a mathematical or clerical error. Also, if
an individual who claims the EIC with respect to net earnings from self
employment fails to pay the proper amount of self-employment tax on such
net earnings, the failure is treated as a mathematical or clerical error
for purposes of the amount of EIC claimed. Generally, taxpayers have 60
days in which they can either provide a correct TIN or request that the
IRS follow the current-law deficiency procedures. If a taxpayer fails to
respond within this period, he or she must file an amended return with a
correct TIN or clarify that any self-employment tax has been paid in
order to obtain the EIC originally claimed.
The IRS must follow deficiency procedures when investigating other
types of questionable EIC claims. Under these procedures, contact
letters are first sent to the taxpayer. If the necessary information is
not provided by the taxpayer, a statutory notice of deficiency is sent
by certified mail, notifying the taxpayer that the adjustment will be
assessed unless the taxpayer files a petition in Tax Court within 90
days. If a petition is not filed within that time and there is no other
response to the statutory notice, the assessment is made and the EIC is
denied.
REASON FOR CHANGE
The Committee believes that the requirement of additional information
to determine EIC eligibility is prudent for taxpayers who have
incorrectly claimed the EIC in the past.
EXPLANATION OF PROVISION
A taxpayer who has been denied the EIC as a result of deficiency
procedures is ineligible to claim the EIC in subsequent years unless
evidence of eligibility for the credit is provided by the taxpayer. To
demonstrate current eligibility, the taxpayer is required to meet
evidentiary requirements established by the Secretary of the Treasury.
Failure to provide this information when claiming the EIC is treated as
a mathematical or clerical error. If a taxpayer is recertified as
eligible for the credit, the taxpayer is required to provide this
information in the future unless the IRS again denies the EIC as a
result of a deficiency procedure. Ineligibility for the EIC under the
provision is subject to review by the courts.
EFFECTIVE DATE
The provision is effective for taxable years beginning after December
31, 1996.
c. Due diligence requirements for paid preparers (sec. 1067
of the bill and sec. 6695 of the Code)
PRESENT LAW
There are several penalties that apply in the case of an
understatement of tax that is caused by an income tax return preparer.
First, if any part of an understatement of tax on a return or claim for
refund is attributable to a position for which there was not a realistic
possibility of being sustained on its merits and if any person who is an
income tax return preparer with respect to such return or claim for
refund knew (or reasonably should have known) of such position and such
position was not disclosed or was frivolous, then that return preparer
is subject to a penalty of $250 with respect to that return or claim
(sec. 6694(a)). The penalty is not
imposed if there is reasonable cause for the understatement
and the return preparer acted in good faith.
In addition, if any part of an understatement of tax on a return or
claim for refund is attributable to a willful attempt by an income tax
return preparer to understate the tax liability of another person or to
any reckless or intentional disregard of rules or regulations by an
income tax return preparer, then the income tax return preparer is
subject to a penalty of $1,000 with respect to that return or claim
(sec. 6694(b)).
Also, a penalty for aiding and abetting the understatement of tax
liability is imposed in cases where any person aids, assists in,
procures, or advises with respect to the preparation or presentation of
any portion of a return or other document if (1) the person knows or has
reason to believe that the return or other document will be used in
connection with any material matter arising under the tax laws, and (2)
the person knows that if the portion of the return or other document
were so used, an understatement of the tax liability of another person
would result (sec. 6701).
Additional penalties are imposed on return preparers with respect to
each failure to (1) furnish a copy of a return or claim for refund to
the taxpayer, (2) sign the return or claim for refund, (3) furnish his
or her identifying number, (4) retain a copy or list of the returns
prepared, and (5) file a correct information return (sec. 6695). The
penalty is $50 for each failure and the total penalties imposed for any
single type of failure for any calendar year are limited to $25,000.
REASON FOR CHANGE
The Committee believes that more thorough efforts by return preparers
are important to improving EIC compliance.
EXPLANATION OF PROVISION
Return preparers are required to fulfill certain due diligence
requirements with respect to returns they prepare claiming the EIC. The
penalty for failure to meet these requirements is $100. This penalty is
in addition to any other penalty imposed under present law.
EFFECTIVE DATE
The provision is effective for taxable years beginning after December
31, 1996.
8. ELIGIBILITY FOR INCOME FORECAST METHOD (SEC. 1068 OF THE BILL AND
SECS. 167 AND 168 OF THE CODE)
PRESENT LAW
A taxpayer generally recovers the cost of property used in a trade or
business through depreciation or amortization deductions over time.
Tangible property generally is depreciated under the modified
Accelerated Cost Recovery System (``MACRS'') of section 168, which
applies specific recovery periods and depreciation methods to the cost
of various types of depreciable property. Intangible property generally
is amortized under section 197, which applies a 15-year recovery period
and the straight-line method to the cost of applicable property.
MACRS does not apply to certain property, including any motion
picture film, video tape, or sound recording or to other any property if
the taxpayer elects to exclude such property from MACRS and the taxpayer
applies a unit-of-production method or other method of depreciation not
expressed in a term of years. Section 197 does not apply to certain
intangible property, including property produced by the taxpayer or any
interest in a film, sound recording, video tape, book or similar
property not acquired in transaction (or a series of related
transactions) involving the acquisition of assets constituting a trade
or business or substantial portion thereof. Thus, the cost of a film,
video tape, or similar property that is produced by the taxpayer or is
acquired on a ``stand-alone'' basis by the taxpayer may not be recovered
under either the MACRS depreciation provisions or under the section 197
amortization provisions. The cost of such property may be depreciated
under the ``income forecast'' method.
The income forecast method is considered to be a method of
depreciation not expressed in a term of years. Under the income forecast
method, the depreciation deduction for a taxable year for a property is
determined by multiplying the cost of the property (less estimated
salvage value) by a fraction, the numerator of which is the income
generated by the property during the year and the denominator of which
is the total forecasted or estimated income to be derived from the
property during its useful life. The income forecast method is available
to any property if (1) the taxpayer elects to exclude such property from
MACRS and (2) for the first taxable year for which depreciation is
allowable, the property is properly depreciated under such method. The
income forecast method has been held to be applicable for computing
depreciation deductions for motion picture films, television films and
taped shows, books, patents, master sound recordings and video
games.\55\
Most recently, the income forecast method has been held applicable to
consumer durable property subject to short-term ``rent-to-own''
leases.\56\
\55\See, e.g., Rev. Rul. 60 358, 1960 2 C.B. 68; Rev. Rul. 64 273, 1964
2 C.B. 62; Rev. Rul. 79 285, 1979 2 C.B. 91; and Rev. Rul. 89 62, 1989 1
C.B. 78.
\56\See, ABC Rentals of San Antonio v. Comm., No. 95 9008 (10th Cir.
9/27/96), where the Tenth Circuit decision reversed the holding of ABC
Rentals of San Antonio v. Comm., 68 TCM 1362 (1994) and held that
consumer durable property subject to short-term, ``rent-to-own'' leases
were eligible for the income forecast method. For decisions supporting
the Tax Court memorandum decision denying eligibility for certain
tangible personal property, see El Charro TV Rental v. Comm., No. 95
60301 (5th Cir., 1995) (rent-to-own property not eligible) and Carland,
Inc. v. Comm., 90 T.C. 505 (1988), aff'd on this issue, 909 F.2d 1101
(8th Cir., 1990) (railroad rolling stock subject to a lease not
eligible).
REASONS FOR CHANGE
Depreciation allowances attempt to measure the decline in the value
of property due to wear, tear, and obsolescence and to match the cost
recovery for the property with the income
stream produced by the property. The Committee believes that
the income forecast method of depreciation is, in theory, an appropriate
method to match the recovery of cost of property with the income stream
produced by the property. However, when compared to MACRS, the income
forecast method involves significant complexities, including the
determination of the income estimated to be generated by the property,
the determination of the residual value of the property, and the
application of the look-back method. Thus, the Committee believes that
the availability of the income forecast method should be limited to
instances where the economic depreciation of the property cannot be
adequately reflected by the passage of time alone or where the income
stream from the property is sufficiently unpredictable or uneven such
that the application of another method of depreciation may result in the
distortion of income. In addition, because the income forecast method is
elective, the Committee is concerned about taxpayer selectivity.
Finally, the Committee provides a MACRS class life for consumer
durables subject to rent-to-own contracts, in order to avoid future
controversies with respect to the proper treatment of such property.
EXPLANATION OF PROVISION
The bill clarifies the types of property to which the income forecast
method may be applied. Under the bill, the income forecast method is
available to motion picture films, television films and taped shows,
books, patents, master sound recordings, copyrights, and other such
property as designated by the Secretary of the Treasury. It is expected
that the Secretary will exercise this authority such that the income
forecast method will be available to property the economic depreciation
of which cannot be adequately measured by the passage of time alone or
to property the income from which is sufficiently unpredictable or
uneven so as to result in the distortion of income. The mere fact that
property is subject to a lease should not make the property eligible for
the income forecast method. The income forecast method is not be
applicable to property to which section 197 applies.
In addition, consumer durables subject to rent-to-own contracts are
provided a three-year recovery period and a four-year class life for
MACRS purposes (and would not be eligible for the income forecast
method). Such property generally is described in Rev. Proc. 95 38, 1995
34 I.R.B. 25.
EFFECTIVE DATE
The provision is effective for property placed in service after the
date of enactment.
9. REQUIRE TAXPAYERS TO INCLUDE RENTAL VALUE OF RESIDENCE IN INCOME
WITHOUT REGARD TO PERIOD OF RENTAL (SEC. 1069 OF THE BILL AND SECS. 280A AND 1016
OF THE CODE)
PRESENT LAW
Gross income for purposes of the Internal Revenue Code generally
includes all income from whatever source derived, including rents. The
Code (sec. 280A(g)) provides a de minimis exception to this rule where a
dwelling unit is used during the taxable year by the taxpayer as a
residence and such dwelling unit is actually rented for less than 15
days during the taxable year. In this case, the income from such rental
is not included in gross income and no deductions arising from such
rental use are allowed as a deduction.
REASONS FOR CHANGE
The de minimis exception allows certain taxpayers to exclude from
income large rental payments for the short-term rental of the taxpayer's
residence. The Committee believes that such amounts generally should be
included in income of the taxpayers.
EXPLANATION OF PROVISION
The bill repeals the 15-day rules of section 280A(g). The bill also
provides that no reduction in basis is required if the taxpayer: (1)
rented the dwelling unit for less than 15 days during the taxable year
and (2) did not claim depreciation on the dwelling unit for the period
of rental.
EFFECTIVE DATE
The provision applies to taxable years beginning after December 31,
1997.
10. MODIFY THE EXCEPTION TO THE RELATED PARTY RULE OF SECTION 1033 FOR
INDIVIDUALS TO ONLY PROVIDE AN EXCEPTION FOR DE MINIMIS AMOUNTS (SEC. 1070 OF THE
BILL AND SEC. 1033 OF THE CODE)
PRESENT LAW
Under section 1033, gain realized by a taxpayer from certain
involuntary conversions of property is deferred to the extent the
taxpayer purchases property similar or related in service or use to the
converted property within a specified replacement period of time.
Pursuant to a provision of Public Law 104 7, subchapter C corporations
(and certain partnerships with corporate partners) are not entitled to
defer gain under section 1033 if the replacement property or stock is
purchased from a related person. A person is treated as related to
another person if the person bears a relationship to the other person
described in section 267(b) or 707(b)(1). An exception to this related
party rule provides that a taxpayer could purchase replacement property
or stock from a related person and defer gain under section 1033 to the
extent the related person acquired the replacement property or stock
from an unrelated person within the replacement period.
REASONS FOR CHANGE
The Committee believes that, except for de minimis cases, individuals
should be subject to the same rules with respect to the acquisition of
replacement property from a related person as are other taxpayers.
EXPLANATION OF PROVISION
The bill expands the present-law denial of the application of section
1033 to any other taxpayer (including an individual) that acquires
replacement property from a related party (as defined by secs. 267(b)
and 707(b)(1)) unless the taxpayer has aggregate realized gain of
$100,000 or less for the taxable year with respect to converted property
with aggregate realized gains. In the case of a partnership (or S
corporation), the annual $100,000 limitation applies to both the
partnership (or S corporation) and each partner (or shareholder).
EFFECTIVE DATE
The provision applies to involuntary conversions occurring after June
8, 1997.
11. REPEAL OF EXCEPTION FOR CERTAIN SALES BY MANUFACTURERS TO DEALER
(SEC. 1071 OF THE BILL AND SEC. 811(C)(9) OF THE TAX REFORM ACT OF 1986 (P.L. 99
514))
PRESENT LAW
In general, the installment sales method of accounting may not be
used by dealers in personal property. Present law provides an exception
which permits the use of the installment method for installment
obligations arising from the sale of tangible personal property by a
manufacturer of the property (or an affiliate of the manufacturer) to a
dealer,\57\
but only if the dealer is obligated to make payments of principal only
when the dealer resells (or rents) the property, the manufacturer has
the right to repurchase the property at a fixed (or ascertainable) price
after no longer than a nine month period following the sale to the
dealer, and certain other conditions are met. In order to meet the other
conditions, the aggregate face amount of the installment obligations
that otherwise qualify for the exception must equal at least 50 percent
of the total sales to dealers that gave rise to such receivables (the
``fifty percent test'') in both the taxable year and the preceding
taxable year, except that, if the taxpayer met all of the requirements
for the exception in the preceding taxable year, the taxpayer would not
be treated as failing to meet the fifty percent test before the second
consecutive year in which the taxpayer did not actually meet the test.
For purposes of applying the fifty percent test, the aggregate face
amount of the taxpayer's receivables is computed using the weighted
average of the taxpayer's receivables outstanding at the end of each
month during the taxpayer's taxable year. In addition, these
requirements must be met by the taxpayer in its first taxable year
beginning after October 22, 1986, except that obligations issued before
that date are treated as meeting the applicable requirements if such
obligations were conformed to the requirements of the provision within
60 days of that date.
\57\I.e, the sale of the property must be intended to be for resale or
leasing by the dealer.
REASONS FOR CHANGE
The Committee believes that the special exception that permitted
certain dealers to use the installment method is no longer necessary or
appropriate and the installment sale method of accounting should not be
available to such dealers. Accordingly, the Committee bill repeals that
exception.
EXPLANATION OF PROVISION
The bill repeals the exception that permits the use of the
installment method of accounting for certain sales by manufacturers to
dealers.
EFFECTIVE DATE
The provision is effective for taxable years beginning after the date
of enactment. Any resulting adjustment from a required change in
accounting will be includible ratably over the 4-year taxable years
beginning after that date.
TITLE XI. FOREIGN TAX PROVISIONS
A. General Provisions
1. ELIGIBILITY OF LICENSES OF COMPUTER SOFTWARE FOR FOREIGN SALES
CORPORATION BENEFITS (SEC. 1101 OF THE BILL AND SEC. 927 OF THE CODE)
PRESENT LAW
Under special tax provisions that provide an export benefit, a
portion of the foreign trade income of an eligible foreign sales
corporation (``FSC'') is exempt from Federal income tax. Foreign trade
income is defined as the gross income of an FSC that is attributable to
foreign trading gross receipts. The term ``foreign trading gross
receipts'' includes the gross receipts of an FSC from the sale, lease,
or rental of export property and from services related and subsidiary to
such sales, leases, or rentals.
For purposes of the FSC rules, export property is defined as property
(1) which is manufactured, produced, grown, or extracted in the United
States by a person other than an FSC; (2) which is held primarily for
sale, lease, or rental in the ordinary conduct of a trade or business by
or to an FSC for direct use, consumption, or disposition outside the
United States; and (3) not more than 50 percent of the fair market value
of which is attributable to articles imported into the United States.
Intangible property generally is excluded from the definition of export
property for purposes of the FSC rules; this exclusion applies to
copyrights other than films, tapes, records, or similar reproductions
for commercial or home use. The temporary Treasury regulations provide
that a license of a master recording tape for reproduction outside the
United States is not excluded from the definition of export property
(Treas. Reg. sec. 1.927(a) 1T(f)(3)). The statutory exclusion for
intangible property does not contain any specific reference to computer
software. However, the temporary Treasury regulations provide that a
copyright on computer software does not constitute export property, and
that standardized, mass marketed computer software constitutes export
property if such software is not accompanied by a right to reproduce for
external use (Treas. Reg. sec. 1.927(a) 1T(f)(3)).
REASONS FOR CHANGE
For purposes of the FSC provisions, films, tapes, records and similar
reproductions explicitly are included within the definition of export
property. In light of technological developments, the Committee believes
that computer software is virtually indistinguishable from the
enumerated films, tapes, and records. Accordingly, the Committee
believes that the benefits of the FSC provisions similarly should be
available to computer software.
EXPLANATION OF PROVISION
The bill provides that computer software licensed for reproduction
abroad is not excluded from the definition of export property for
purposes of the FSC provisions. Accordingly, computer software that is
exported with a right to reproduce is eligible for the benefits of the
FSC provisions. In light of the rapid innovations in the computer and
software industries, the Committee intends that the term ``computer
software'' be construed broadly to accommodate technological changes in
the products produced by both industries. No inference is intended
regarding the qualification as export property of computer software
licensed for reproduction abroad under present law.
EFFECTIVE DATE
The provision generally applies to gross receipts from computer
software licenses attributable to periods after December 31, 1997.
Accordingly, in the case of a multi-year license, the provision applies
to gross receipts attributable to the period of such license that is
after December 31, 1997. In the case of gross receipts attributable to
1998, the provision applies to only one-third of such gross receipts. In
the case of gross receipts attributable to 1999, the provision applies
to only two-thirds of such gross receipts.
2. INCREASE DOLLAR LIMITATION ON SECTION 911 EXCLUSION (SEC. 1102 OF
THE BILL AND SEC. 911 OF THE CODE)
PRESENT LAW
U.S. citizens generally are subject to U.S. income tax on all their
income, whether derived in the United States or elsewhere. A U.S.
citizen who earns income in a foreign country also may be taxed on such
income by that foreign country. A credit against the U.S. income tax
imposed on foreign source income is allowed for foreign taxes paid on
such income.
U.S. citizens living abroad may be eligible to exclude from their
income for U.S. tax purposes certain foreign earned income and foreign
housing costs. In order to qualify for these exclusions, a U.S. citizen
must be either (1) a bona fide resident of a foreign country for an
uninterrupted period that includes an entire taxable year or (2) present
overseas for 330 days out of any 12 consecutive month period. In
addition, the taxpayer must have his or her tax home in a foreign
country.
The exclusion for foreign earned income generally applies to income
earned from sources outside the United States as compensation for
personal services actually rendered by the taxpayer. The maximum
exclusion for foreign earned income for a taxable year is $70,000.
The exclusion for housing costs applies to reasonable expenses, other
than deductible interest and taxes, paid or incurred by or on behalf of
the taxpayer for housing for the taxpayer and his or her spouse and
dependents in a foreign country. The exclusion amount for housing costs
for a taxable year is equal to the excess of such housing costs for the
taxable year over an amount computed pursuant to a specified formula.
The combined earned income exclusion and housing cost exclusion may
not exceed the taxpayer's total foreign earned income. The taxpayer's
foreign tax credit is reduced by the amount the credit that is
attributable to excluded income.
REASONS FOR CHANGE
The Committee recognizes that for U.S. businesses to be effective
competitors overseas it is necessary to dispatch U.S. citizens or
residents to sites of foreign operations. Being stationed abroad
typically imposes additional financial burdens on the employee and his
family. These burdens may arise from maintaining two homes (one in the
United States and one abroad), additional personal travel to maintain
family ties, or the added expenses of living in a foreign location that
has a high cost of living. Businesses often remunerate their employees
for these additional burdens by paying higher wages. Because the
increased remuneration is offset by larger burdens, the remuneration
does not truly reflect an increase in economic well being. The
Committee, therefore, believes that the exclusion of section 911 is a
simple way to prevent taxpayers from facing an increased tax burden when
there has been no increase in economic well being by accepting an
overseas assignment.
The Committee further observes that the present-law $70,000 exclusion
has remained unchanged for the past 10 years, while the extra costs from
working abroad have increased with worldwide inflation. The Committee,
therefore, believes it is appropriate to increase the exclusion
permitted under section 911. In addition, as a rough measure for the
increased burden that may be expected to arise from future inflation,
the Committee believes it is appropriate to index the level of the
section 911 exclusion amount to future changes in the domestic cost of
living.
EXPLANATION OF PROVISION
Under the bill, the $70,000 limitation on the exclusion for foreign
earned income is increased to $80,000, in increments of $2,000 each year
beginning in 1998. Under the bill, the limitation on the exclusion for
foreign earned income then is indexed for inflation beginning in 2008
(for inflation after 2006).
EFFECTIVE DATE
The provision is effective for taxable years beginning after December
31, 1997.
3. SIMPLIFY FOREIGN TAX CREDIT LIMITATION FOR INDIVIDUALS (SEC. 1103 OF
THE BILL AND SEC. 904 OF THE CODE)
PRESENT LAW
In order to compute the foreign tax credit, a taxpayer computes
foreign source taxable income and foreign taxes paid in each of the
applicable separate foreign tax credit limitation categories. In the
case of an individual, this requires the filing of IRS Form 1116.
In many cases, individual taxpayers who are eligible to credit
foreign taxes may have only a modest amount of foreign source gross
income, all of which is income from investments. Taxable income of this
type ordinarily is includible in the single foreign tax credit
limitation category for passive income. However, under certain
circumstances, the Code treats investment-type income (e.g., dividends
and interest) as income in one of several other separate limitation
categories (e.g., high withholding tax interest income or general
limitation income). For this reason, any taxpayer with foreign source
gross income is required to provide sufficient detail on Form 1116 to
ensure that foreign source taxable income from investments, as well as
all other foreign source taxable income, is allocated to the correct
limitation category.
REASONS FOR CHANGE
The Committee believes that a significant number of individuals are
entitled to credit relatively small amounts of foreign tax imposed at
modest effective tax rates on foreign source investment income. For
taxpayers in this class, the applicable foreign tax credit limitations
typically exceed the amounts of taxes paid. Therefore, exempting these
taxpayers from the foreign tax credit limitation rules significantly
reduces the complexity of the tax law without significantly altering
actual tax liabilities. At the same time, however, the Committee
believes that this exemption should be limited to those cases where the
taxpayer receives a payee statement showing the amount of the foreign
source income and the foreign tax.
EXPLANATION OF PROVISION
The bill allows individuals with no more than $300 ($600 in the case
of married persons filing jointly) of creditable foreign taxes, and no
foreign source income other than passive income, an exemption from the
foreign tax credit limitation rules. (The Committee intends that an
individual electing this exemption will not be required to file Form
1116 in order to obtain the benefit of the foreign tax credit.) An
individual making this election is not entitled to any carryover of
excess foreign taxes to or from a taxable year to which the election
applies.
For purposes of this election, passive income generally is defined to
include all types of income that is foreign personal holding company
income under the subpart F rules, plus income inclusions from foreign
personal holding companies and passive foreign investment companies,
provided that the income is shown on a payee statement furnished to the
individual. For purposes of this election, creditable foreign taxes
include only foreign taxes that are shown on a payee statement furnished
to the individual.
EFFECTIVE DATE
The provision applies to taxable years beginning after December 31,
1997.
4. SIMPLIFY TRANSLATION OF FOREIGN TAXES (SEC. 1104 OF THE BILL AND
SECS. 905(C) AND 986 OF THE CODE)
PRESENT LAW
Translation of foreign taxes
Foreign income taxes paid in foreign currencies are required to be
translated into U.S. dollar amounts using the exchange rate as of the
time such taxes are paid to the foreign country or U.S. possession. This
rule applies to foreign taxes paid directly by U.S. taxpayers, which
taxes are creditable in the year paid or accrued, and to
foreign taxes paid by foreign corporations that are deemed paid by a
U.S. corporation that is a shareholder of the foreign corporation, and
hence creditable, in the year that the U.S. corporation receives a
dividend or has an income inclusion from the foreign corporation.
Redetermination of foreign taxes
For taxpayers that utilize the accrual basis of accounting for
determining creditable foreign taxes, accrued and unpaid foreign tax
liabilities denominated in foreign currencies are translated into U.S.
dollar amounts at the exchange rate as of the last day of the taxable
year of accrual. If a difference exists between the dollar value of
accrued foreign taxes and the dollar value of those taxes when paid, a
redetermination of foreign taxes arises. A foreign tax redetermination
may occur in the case of a refund of foreign taxes. A foreign tax
redetermination also may arise because the amount of foreign currency
units actually paid differs from the amount of foreign currency units
accrued. In addition, a redetermination may arise due to fluctuations in
the value of the foreign currency relative to the dollar between the
date of accrual and the date of payment.
As a general matter, a redetermination of foreign tax paid or accrued
directly by a U.S. person requires notification of the Internal Revenue
Service and a redetermination of U.S. tax liability for the taxable year
for which the foreign tax was claimed as a credit. The Treasury
regulations provide exceptions to this rule for de minimis cases. In the
case of a redetermination of foreign taxes that qualify for the indirect
(or ``deemed-paid'') foreign tax credit under sections 902 and 960, the
Treasury regulations generally require taxpayers to make appropriate
adjustments to the payor foreign corporation's pools of earnings and
profits and foreign taxes.
REASONS FOR CHANGE
The Committee believes that the administrative burdens associated
with the foreign tax credit can be reduced significantly by permitting
foreign taxes to be translated using reasonably accurate average
translation rates for the period in which the tax payments are made.
This approach will reduce, sometimes substantially, the number of
translation calculations that are required to be made. In addition, the
Committee believes that taxpayers that are on the accrual basis of
accounting for purposes of determining creditable foreign taxes should
be permitted to translate those taxes into U.S. dollar amounts in the
year to which those taxes relate, and should not be required to make
adjustments or redetermination to those translated amounts, if actual
tax payments are made within a reasonably short period of time after the
close of such year. Moreover, the Committee believes that it is
appropriate to use an average exchange rate for the taxable year with
respect to which such foreign taxes relate for purposes of translating
those taxes. On the other hand, the Committee believes that a foreign
tax not paid within a reasonably short period after the close of the
year to which the taxes relate should not be treated as a foreign tax
for such year. By drawing a bright line between those foreign tax
payment delays that do and do not require a redetermination, the
Committee believes that a reasonable degree of certainty and clarity
will be added to the law in this area.
EXPLANATION OF PROVISION
Translation of foreign taxes
Translation of certain accrued foreign taxes
With respect to taxpayers that take foreign income taxes into account
when accrued, the bill generally provides for foreign taxes to be
translated at the average exchange rate for the taxable year to which
such taxes relate. This rule does not apply (1) to any foreign income
tax paid after the date two years after the close of the taxable year to
which such taxes relate, (2) with respect to taxes of an accrual-basis
taxpayer that are actually paid in a taxable year prior to the year to
which they relate, or (3) to tax payments that are denominated in an
inflationary currency (as defined by regulations).
Translation of all other foreign taxes
Under the bill, foreign taxes not eligible for application of the
preceding rule generally are translated into U.S. dollars using the
exchange rates as of the time such taxes are paid. The bill provides the
Secretary of the Treasury with authority to issue regulations that would
allow foreign tax payments to be translated into U.S. dollar amounts
using an average exchange rate for a specified period.
Redetermination of foreign taxes
Under the bill, a redetermination is required if: (1) accrued taxes
when paid differ from the amounts claimed as credits by the taxpayer,
(2) accrued taxes are not paid before the date two years after the close
of the taxable year to which such taxes relate, or (3) any tax paid is
refunded in whole or in part. Thus, for example, the bill provides that
if at the close of the second taxable year after the taxable year to
which an accrued tax relates, any portion of the tax so accrued has not
yet been paid, a foreign tax redetermination under section 905(c) is
required for the amount representing the unpaid portion of that accrued
tax. In other words, the previous accrual of any tax that is unpaid as
of that date is denied. In cases where a redetermination is required, as
under present law, the bill specifies that the taxpayer must notify the
Secretary, who will redetermine the amount of the tax for the year or
years affected. In the case of indirect foreign tax credits, regulatory
authority is granted to prescribe appropriate adjustments to the foreign
tax credit pools in lieu of such a redetermination.
The bill provides that in the case of accrued taxes not paid within
the date two years after the close of the taxable year to which such
taxes relate, any such taxes if subsequently paid are taken into account
for the taxable year to which such taxes relate. These taxes are
translated into U.S. dollar amounts using the exchange rates in effect
as of the time such taxes are paid.
For example, assume that in year 1 a taxpayer accrues 1,000 units of
foreign tax that relate to year 1 and that the currency involved is not
inflationary. Further assume that as of the end of year 1 the tax is
unpaid. In this case, the bill provides that the taxpayer translates
1,000 units of accrued foreign tax into U.S. dollars at the average
exchange rate for year 1. If the 1,000
units of tax are paid by the taxpayer in either year 2 or year
3, no redetermination of foreign tax is required. If any portion of the
tax so accrued remains unpaid as of the end of year 3, however, the
taxpayer is required to redetermine its foreign tax accrued in year 1 to
eliminate the accrued but unpaid tax, thereby reducing its foreign tax
credit for such year. If the taxpayer pays the disallowed taxes in year
4, the taxpayer again redetermines its foreign taxes (and foreign tax
credit) for year 1, but the taxes paid in year 4 are translated into
U.S. dollars at the exchange rate for year 4.
EFFECTIVE DATE
The provision generally is effective for foreign taxes paid (in the
case of taxpayers using the cash basis for determining the foreign tax
credit) or accrued (in the case of taxpayers using the accrual basis for
determining the foreign tax credit) in taxable years beginning after
December 31, 1997. The provision's changes to the foreign tax
redetermination rules apply to foreign taxes which relate to taxable
years beginning after December 31, 1997.
5. ELECTION TO USE SIMPLIFIED FOREIGN TAX CREDIT LIMITATION FOR
ALTERNATIVE MINIMUM TAX PURPOSES (SEC. 1105 OF THE BILL AND SEC. 59 OF THE CODE)
PRESENT LAW
Computing foreign tax credit limitations requires the allocation and
apportionment of deductions between items of foreign source income and
items of U.S. source income. Foreign tax credit limitations must be
computed both for regular tax purposes and for purposes of the
alternative minimum tax (AMT). Consequently, the allocation and
apportionment of deductions must be done separately for regular tax
foreign tax credit limitation purposes and AMT foreign tax credit
limitation purposes.
REASONS FOR CHANGE
The process of allocating and apportioning deductions for purposes of
calculating the regular and AMT foreign tax credit limitations can be
complex. Taxpayers that have allocated and apportioned deductions for
regular tax purposes generally must reallocate and reapportion the same
deductions for AMT foreign tax credit purposes, based on assets and
income that reflect AMT adjustments (including depreciation). However,
the differences between regular taxable income and alternative minimum
taxable income often are relevant primarily to U.S. source income. The
Committee believes that permitting taxpayers to use foreign source
regular taxable income in computing their AMT foreign tax credit
limitation would provide an appropriate simplification of the necessary
computations by eliminating the need to reallocate and reapportion every
deduction.
EXPLANATION OF PROVISION
The provision permits taxpayers to elect to use as their AMT foreign
tax credit limitation fraction the ratio of foreign source regular
taxable income to entire alternative minimum taxable income, rather than
the ratio of foreign source alternative minimum taxable income to entire
alternative minimum taxable income. Under this election, foreign source
regular taxable income is used, however, only to the extent it does not
exceed entire alternative minimum taxable income. In the event that
foreign source regular taxable income does exceed entire alternative
minimum taxable income, and the taxpayer has income in more than one
foreign tax credit limitation category, the Committee intends that the
foreign source taxable income in each such category generally would be
reduced by a pro rata portion of that excess.
The election is available only in the first taxable year beginning
after December 31, 1997 for which the taxpayer claims an AMT foreign tax
credit. The Committee intends that a taxpayer will be treated, for this
purpose, as claiming an AMT foreign tax credit for any taxable year for
which the taxpayer chooses to have the benefits of the foreign tax
credit and in which the taxpayer is subject to the alternative minimum
tax or would be subject to the alternative minimum tax but for the
availability of the AMT foreign tax credit. The election, once made,
will apply to all subsequent taxable years, and may be revoked only with
the consent of the Secretary of the Treasury.
EFFECTIVE DATE
The provision applies to taxable years beginning after December 31,
1997.
6. SIMPLIFY TREATMENT OF PERSONAL TRANSACTIONS IN FOREIGN CURRENCY
(SEC. 1106 OF THE BILL AND SEC. 988 OF THE CODE)
PRESENT LAW
When a U.S. taxpayer makes a payment in a foreign currency, gain or
loss (referred to as ``exchange gain or loss'') generally arises from
any change in the value of the foreign currency relative to the U.S.
dollar between the time the currency was acquired (or the obligation to
pay was incurred) and the time that the payment is made. Gain or loss
results because foreign currency, unlike the U.S. dollar, is treated as
property for Federal income tax purposes.
Exchange gain or loss can arise in the course of a trade or business
or in connection with an investment transaction. Exchange gain or loss
also can arise where foreign currency was acquired for personal use. For
example, the IRS has ruled that a taxpayer who converts U.S. dollars to
a foreign currency for personal use while traveling abroad realizes
exchange gain or loss on reconversion of appreciated or depreciated
foreign currency (Rev. Rul. 74 7, 1974 1 C.B. 198).
Prior to the Tax Reform Act of 1986 (``1986 Act''), most of the rules
for determining the Federal income tax consequences of foreign currency
transactions were embodied in a series of court cases and revenue
rulings issued by the IRS. Additional rules of limited application were
provided by Treasury regulations. Pre-1986 law was believed to be
unclear regarding the character, the timing of recognition, and the
source of gain or loss due to fluctuations in the exchange rate of
foreign currency. The 1986 Act provided a comprehensive set of rules for
the U.S. tax treatment of transactions involving foreign currencies.
However, the 1986 Act provisions designed to clarify the treatment of
currency transactions, primarily found in section 988 of the Code, apply
to transactions entered into by an individual only to the extent that
expenses attributable to such transactions are deductible under section
162 (as a trade or business expense) or section 212 (as an expense of
producing income). Therefore, the principles of pre-1986 law continue to
apply to personal currency transactions.
REASONS FOR CHANGE
An individual who lives or travels abroad generally cannot use U.S.
dollars to make all of the purchases incident to daily life. If an
individual must treat foreign currency in this instance as property
giving rise to U.S.-dollar income or loss every time the individual, in
effect, ``barters the foreign currency for goods or services, the U.S.
individual living in or visiting a foreign country will have a
significant administrative burden that may bear little or no relation to
whether U.S.-dollar measured income has increased or decreased. The
Committee believes that individuals should be given relief from the
requirement to keep track of exchange gains on a
transaction-by-transaction basis in de minimis cases.
EXPLANATION OF PROVISION
If an individual acquires foreign currency and disposes of it in a
personal transaction and the exchange rate changes between the
acquisition and disposition of such currency, the provision applies
nonrecognition treatment to any resulting exchange gain, provided that
such gain does not exceed $200. The provision does not change the
treatment of resulting exchange losses. The Committee understands that
under other Code provisions such losses typically are not deductible by
individuals (e.g., sec. 165(c)).
EFFECTIVE DATE
The provision applies to taxable years beginning after December 31,
1997.
7. SIMPLIFY FOREIGN TAX CREDIT LIMITATION FOR DIVIDENDS FROM 10/50
COMPANIES (SEC. 1107 OF THE BILL AND SEC. 904 OF THE CODE)
PRESENT LAW
U.S. persons may credit foreign taxes against U.S. tax on foreign
source income. The amount of foreign tax credits that can be claimed in
a year is subject to a limitation that prevents taxpayers from using
foreign tax credits to offset U.S. tax on U.S. source income. Separate
limitations are applied to specific categories of income.
Special foreign tax credit limitation rules apply in the case of
dividends received from a foreign corporation in which the taxpayer owns
at least 10 percent of the stock by vote and which is not a controlled
foreign corporation (a so-called ``10/50 company''). Dividends received
by the taxpayer from each 10/50 company are subject to a separate
foreign tax credit limitation.
REASONS FOR CHANGE
The Committee finds that the present-law rule that subjects the
dividends received from each so-called 10/50 company to a separate
foreign tax credit limitation imposes a substantial record-keeping
burden on companies and has the additional negative effect of
discouraging minority-position joint ventures abroad. Indeed, the
Committee is aware that recent academic research suggests that the
present-law requirements may distort the form and amount of overseas
investment undertaken by U.S.-based enterprises. The research findings
suggest that the present-law limitation ``greatly reduces the
attractiveness of joint ventures to American investors, particularly
ventures in low-tax foreign countries. Aggregate data indicate that U.S.
participation in international joint ventures fell sharply after
[enactment of present law] in 1986. The decline in U.S. joint venture
activity is most pronounced in low-tax countries. * * * Moreover, joint
ventures in low-tax countries use more debt and pay greater royalties to
their U.S. parents after 1986, which reflects their incentives to
economize on dividend payments.''\58\
\58\See, Mihir A. Desai and James R. Hines, Jr., ```Basket' Cases:
International Joint Ventures after the Tax Reform Act of 1986,''
National Bureau of Economic Research, Working Paper #5755, September
1996.
The Committee believes that the joint venture can be an efficient way
for American business to exploit its know-how and technology in foreign
markets. If the present-law limitation is discouraging such joint
ventures or altering the structure of new ventures, the ability of
American business to succeed abroad may be diminished. The Committee
believes it is appropriate to modify the present-law limitation to
promote simplicity and the ability of American business to compete
abroad.
EXPLANATION OF PROVISION
Under the bill, a single foreign tax credit limitation generally
applies to dividends received by the taxpayer from all 10/50 companies.
However, separate foreign tax credit limitations continue to apply to
dividends received by the taxpayer from each 10/50 company that
qualifies as a passive foreign investment company. Regulatory authority
is granted to provide rules regarding the treatment of distributions out
of earning and profits for periods prior to the taxpayer's acquisition
of such stock. To the extent the regulations treat distributions from a
foreign corporation out of earnings and profits for pre-acquisition
periods as subject to a separate foreign tax credit limitation, it is
expected that the regulations would allow the taxpayer to elect to apply
that separate foreign tax credit limitation (rather than the limitation
applicable to dividends from all 10/50 companies) also to distributions
out of post-acquisition earnings and profits of such corporation.
EFFECTIVE DATE
The provision is effective for taxable years beginning after December
31, 2001.
B. General Provisions Affecting Treatment of Controlled Foreign
Corporations (secs. 1111 1113 of the bill and secs. 902, 904, 951, 952,
959, 960, 961, 964, and 1248 of the Code)
PRESENT LAW
If an upper-tier controlled foreign corporation (``CFC'') sells stock
of a lower-tier CFC, the gain generally is included in the income of
U.S. 10-percent shareholders as subpart F income and such U.S.
shareholder's basis in the stock of the first-tier CFC is increased to
account for the inclusion. The inclusion is not characterized for
foreign tax credit limitation purposes by reference to the nature of the
income of the lower-tier CFC; instead it generally is characterized as
passive income.
For purposes of the foreign tax credit limitations applicable to
so-called 10/50 companies, a CFC is not treated as a 10/50 company with
respect to any distribution out of its earnings and profits for periods
during which it was a CFC and, except as provided in regulations, the
recipient of the distribution was a U.S. 10-percent shareholder in such
corporation.
If subpart F income of a lower-tier CFC is included in the gross
income of a U.S. 10-percent shareholder, no provision of present law
allows adjustment of the basis of the upper-tier CFC's stock in the
lower-tier CFC.
The subpart F income earned by a foreign corporation during its
taxable year is taxed to the persons who are U.S. 10-percent
shareholders of the corporation on the last day, in that year, on which
the corporation is a CFC. In the case of a U.S. 10-percent shareholder
who acquired stock in a CFC during the year, such inclusions are reduced
by all or a portion of the amount of dividends paid in that year by the
foreign corporation to any person other than the acquiror with respect
to that stock.
As a general rule, subpart F income does not include income earned
from sources within the United States if the income is effectively
connected with the conduct of a U.S. trade or business by the CFC. This
general rule does not apply, however, if the income is exempt from, or
subject to a reduced rate of, U.S. tax pursuant to a provision of a U.S.
treaty.
A U.S. corporation that owns at least 10 percent of the voting stock
of a foreign corporation is treated as if it had paid a share of the
foreign income taxes paid by the foreign corporation in the year in
which the foreign corporation's earnings and profits become subject to
U.S. tax as dividend income of the U.S. shareholder. A U.S. corporation
also may be deemed to have paid taxes paid by a second- or third-tier
foreign corporation if certain conditions are satisfied.
REASONS FOR CHANGE
The Committee believes that complexities are caused by uncertainties
and gaps in the present statutory schemes for taxing gains on
dispositions of stock in CFCs as dividend income or subpart F income.
The Committee believes that it is appropriate to reduce complexities by
rationalizing these rules.
The Committee also understands that certain arbitrary limitations
placed on the operation of the indirect foreign tax credit may have
resulted in taxpayers undergoing burdensome and sometimes costly
corporate restructuring. In other cases, there is concern that these
limitations may have contributed to decisions by U.S. companies against
acquiring foreign subsidiaries. The Committee deems it appropriate to
ease these restrictions.
EXPLANATION OF PROVISION
Lower-tier CFCs
Characterization of gain on stock disposition
Under the bill, if a CFC is treated as having gain from the sale or
exchange of stock in a foreign corporation, the gain is treated as a
dividend to the same extent that it would have been so treated under
section 1248 if the CFC were a U.S. person. This provision, however,
does not affect the determination of whether the corporation whose stock
is sold or exchanged is a CFC.
Thus, for example, if a U.S. corporation owns 100 percent of the
stock of a foreign corporation, which owns 100 percent of the stock of a
second foreign corporation, then under the bill, any gain of the first
corporation upon a sale or exchange of stock of the second corporation
is treated as a dividend for purposes of subpart F income inclusions to
the U.S. shareholder, to the extent of earnings and profits of the
second corporation attributable to periods in which the first foreign
corporation owned the stock of the second foreign corporation while the
latter was a CFC with respect to the U.S. shareholder.
Gain on disposition of stock in a related corporation created or
organized under the laws of, and having a substantial part of its assets
in a trade or business in, the same foreign country as the gain
recipient, even if recharacterized as a dividend under the proposal, is
not excluded from foreign personal holding company income under the
same-country exception that applies to actual dividends.
Under the bill, for purposes of this rule, a CFC is treated as having
sold or exchanged stock if, under any provision of subtitle A of the
Code, the CFC is treated as having gain from the sale or exchange of
such stock. Thus, for example, if a CFC distributes to its shareholder
stock in a foreign corporation, and the distribution results in gain
being recognized by the CFC under section 311(b) as if the stock were
sold to the shareholder for fair market value, the bill makes clear
that, for purposes of this rule, the CFC is treated as having sold or
exchanged the stock.
The bill also repeals a provision added to the Code by the Technical
and Miscellaneous Revenue Act of 1988 that, except as provided by
regulations, requires a recipient of a distribution from a CFC to have
been a U.S. 10-percent shareholder of that CFC for the period during
which the earnings and profits which gave rise to the distribution were
generated in order
to avoid treating the distribution as one coming from a 10/50
company. Thus, under the bill, a CFC is not treated as a 10/50 company
with respect to any distribution out of its earnings and profits for
periods during which it was a CFC, whether or not the recipient of the
distribution was a U.S. 10-percent shareholder of the corporation when
the earnings and profits giving rise to the distribution were generated.
Adjustments to basis of stock
Under the bill, when a lower-tier CFC earns subpart F income, and
stock in that corporation is later disposed of by an upper-tier CFC, the
resulting income inclusion of the U.S. 10-percent shareholders, under
regulations, is to be adjusted to account for previous inclusions, in a
manner similar to the adjustments provided to the basis of stock in a
first-tier CFC. Thus, just as the basis of a U.S. 10-percent shareholder
in a first-tier CFC rises when subpart F income is earned and falls when
previously taxed income is distributed, so as to avoid double taxation
of the income on a later disposition of the stock of that company, the
subpart F income from gain on the disposition of a lower-tier CFC
generally is reduced by income inclusions of earnings that were not
subsequently distributed by the lower-tier CFC.
For example, assume that a U.S. person is the owner of all of the
stock of a first-tier CFC which, in turn, is the sole shareholder of a
second-tier CFC. In year 1, the second-tier CFC earns $100 of subpart F
income which is included in the U.S. person's gross income for that
year. In year 2, the first-tier CFC disposes of the second-tier CFC's
stock and recognizes $300 of income with respect to the disposition. All
of that income constitutes subpart F foreign personal holding company
income. Under the bill, the Secretary is granted regulatory authority to
reduce the U.S. person's year 2 subpart F inclusion by $100--the amount
of year 1 subpart F income of the second-tier CFC that was included, in
that year, in the U.S. person's gross income. Such an adjustment, in
effect, allows for a step-up in the basis of the stock of the
second-tier CFC to the extent of its subpart F income previously
included in the U.S. person's gross income.
Subpart F inclusions in year of acquisition
If a U.S. 10-percent shareholder acquires the stock of a CFC from
another U.S. 10-percent shareholder during a taxable year of the CFC in
which it earns subpart F income, the proposal reduces the acquiror's
subpart F income inclusion for that year by a portion of the amount of
the dividend deemed (under sec. 1248) to be received by the transferor.
The portion by which the inclusion is reduced (as is the case if a
dividend was paid to the previous owner of the stock) does not exceed
the lesser of the amount of dividends with respect to such stock deemed
received (under sec. 1248) by other persons during the year or the
amount determined by multiplying the subpart F income for the year by
the proportion of the year during which the acquiring shareholder did
not own the stock.
Treatment of U.S. income earned by a CFC
Under the bill, an exemption or reduction by treaty of the branch
profits tax that would be imposed under section 884 on a CFC does not
affect the general statutory exemption from subpart F income that is
granted for U.S. source effectively connected income. For example,
assume a CFC earns income of a type that generally would be subpart F
income, and that income is earned from sources within the United States
in connection with business operations therein. Further assume that
repatriation of that income is exempted from the U.S. branch profits tax
under a provision of an applicable U.S. income tax treaty. The bill
provides that, notwithstanding the treaty's effect on the branch tax,
the income is not treated as subpart F income as long as it is not
exempt from U.S. taxation (or subject to a reduced rate of tax) under
any other treaty provision.
Extension of indirect foreign tax credit
The bill extends the application of the indirect foreign tax credit
(secs. 902 and 960) to taxes paid or accrued by certain fourth-, fifth-,
and sixth-tier foreign corporations. In general, three requirements are
required to be satisfied by a foreign company at any of these tiers to
qualify for the credit. First, the company must be a CFC. Second, the
U.S. corporation claiming the credit under section 902(a) must be a U.S.
shareholder (as defined in sec. 951(b)) with respect to the foreign
company. Third, the product of the percentage ownership of voting stock
at each level from the U.S. corporation down must equal at least 5
percent. The bill limits the application of the indirect foreign tax
credit below the third tier to taxes paid or incurred in taxable years
during which the payor is a CFC. Foreign taxes paid below the sixth tier
of foreign corporations remain ineligible for the indirect foreign tax
credit.
EFFECTIVE DATES
Lower-tier CFCs. --The provision that treats gains on dispositions
of stock in lower-tier CFCs as dividends under section 1248 principles
applies to gains recognized on transactions occurring after the date of
enactment.
The provision that expands look-through treatment, for foreign tax
credit limitation purposes, of dividends from CFCs is effective for
distributions after the date of enactment.
The provision that provides for regulatory adjustments to U.S.
shareholder inclusions, with respect to gains of CFCs from dispositions
of stock in lower-tier CFCs is effective for determining inclusions for
taxable years of U.S. shareholders beginning after December 31, 1997.
Thus, the bill permits regulatory adjustments to an inclusion occurring
after the effective date to account for income that was previously taxed
under the subpart F provisions either prior to or subsequent to the
effective date.
Subpart F inclusions in year of acquisition. --The provision that
permits dispositions of stock to be taken into consideration in
determining a U.S. shareholder's subpart F inclusion for a taxable year
is effective with respect to dispositions occurring after the date of
enactment.
Treatment of U.S. source income earned by a CFC. --The provision
concerning the effect of treaty exemptions from, or reductions of, the
branch profits tax on the determination of subpart F income is effective
for taxable years beginning after December 31, 1986.
Extension of indirect foreign tax credit. --The provision that
extends application of the indirect foreign tax credit to certain CFCs
below the third tier is effective for foreign taxes paid or incurred by
CFCs for taxable years of such corporations beginning after the date of
enactment.
In the case of any chain of foreign corporations, the taxes of which
would be eligible for the indirect foreign tax credit, under present law
or under the bill, but for the denial of indirect credits below the
third or sixth tier, as the case may be, no liquidation, reorganization,
or similar transaction in a taxable year beginning after the date of
enactment will have the effect of permitting taxes to be taken into
account under the indirect foreign tax credit provisions of the Code
which could not have been taken into account under those provisions but
for such transaction.
C. Modification of Passive Foreign Investment Company Provisions to
Eliminate Overlap with Subpart F and to Allow Mark-to-Market Election
(secs. 1121 1123 of the bill and secs. 1291-1297 of the Code)
PRESENT LAW
Overview
U.S. citizens and residents and U.S. corporations (collectively,
``U.S. persons'') are taxed currently by the United States on their
worldwide income, subject to a credit against U.S. tax on foreign income
based on foreign income taxes paid with respect to such income. A
foreign corporation generally is not subject to U.S. tax on its income
from operations outside the United States.
Income of a foreign corporation generally is taxed by the United
States when it is repatriated to the United States through payment to
the corporation's U.S. shareholders, subject to a foreign tax credit.
However, a variety of regimes imposing current U.S. tax on income earned
through a foreign corporation have been reflected in the Code. Today the
principal anti-deferral regimes set forth in the Code are the controlled
foreign corporation rules of subpart F (secs. 951 964) and the passive
foreign investment company rules (secs. 1291 1297). Additional
anti-deferral regimes set forth in the Code are the foreign personal
holding company rules (secs. 551 558); the personal holding company
rules (secs. 541 547); the accumulated earnings tax (secs. 531 537); and
the foreign investment company and electing foreign investment company
rules (secs. 1246 1247). The anti-deferral regimes included in the Code
overlap such that a given taxpayer may be subject to multiple sets of
anti-deferral rules.
Controlled foreign corporations
A controlled foreign corporation (CFC) is defined generally as any
foreign corporation if U.S. persons own more than 50 percent of the
corporation's stock (measured by vote or value), taking into account
only those U.S. persons that own at least 10 percent of the stock
(measured by vote only) (sec. 957). Stock ownership includes not only
stock owned directly, but also stock owned indirectly or constructively
(sec. 958).
Certain income of a CFC (referred to as ``subpart F income'') is
subject to current U.S. tax. The United States generally taxes the U.S.
10-percent shareholders of a CFC currently on their pro rata shares of
the subpart F income of the CFC. In effect, the Code treats those U.S.
shareholders as having received a current distribution out of the CFC's
subpart F income. Such shareholders also are subject to current U.S. tax
on their pro rata shares of the CFC's earnings invested in U.S.
property. The foreign tax credit may reduce the U.S. tax on these
amounts.
Passive foreign investment companies
The Tax Reform Act of 1986 established an anti-deferral regime for
passive foreign investment companies (PFICs). A PFIC is any foreign
corporation if (1) 75 percent or more of its gross income for the
taxable year consists of passive income, or (2) 50 percent or more of
the average fair market value of its assets consists of assets that
produce, or are held for the production of, passive income. Two
alternative sets of income inclusion rules apply to U.S. persons that
are shareholders in a PFIC. One set of rules applies to PFICs that are
``qualified electing funds,'' under which electing U.S. shareholders
include currently in gross income their respective shares of the PFIC's
total earnings, with a separate election to defer payment of tax,
subject to an interest charge, on income not currently received. The
second set of rules applies to PFICs that are not qualified electing
funds (``nonqualified funds''), under which the U.S. shareholders pay
tax on income realized from the PFIC and an interest charge that is
attributable to the value of deferral.
Overlap between subpart F and the PFIC provisions
A foreign corporation that is a CFC is also a PFIC if it meets the
passive income test or the passive asset test described above. In such a
case, the 10-percent U.S. shareholders are subject both to the subpart F
provisions (which require current inclusion of certain earnings of the
corporation) and to the PFIC provisions (which impose an interest charge
on amounts distributed from the corporation and gains recognized upon
the disposition of the corporation's stock, unless an election is made
to include currently all of the corporation's earnings).
REASONS FOR CHANGE
The anti-deferral rules for U.S. persons owning stock in foreign
corporations are very complex. Moreover, the interactions between the
anti-deferral regimes cause additional complexity. The overlap between
the subpart F rules and the PFIC provisions is of particular concern to
the Committee. The PFIC provisions, which do not require a threshold
level of ownership by U.S. persons, apply where the U.S.-ownership
requirements of subpart F are not satisfied. However, the PFIC
provisions also apply to a U.S. shareholder that is subject to the
current inclusion rules of subpart F with respect to the same
corporation. The Committee believes that the additional complexity
caused by this overlap is unnecessary.
The Committee also understands that the interest-charge method for
income inclusion provided in the PFIC rules is a substantial source of
complexity for shareholders of PFICs. Even without eliminating the
interest-charge method, significant simplification can be achieved by
providing an alternative income inclusion method for shareholders of
PFICs. Further, some taxpayers have argued that they would have
preferred choosing the current-inclusion method afforded by the
qualified fund election, but were unable to do so because they could not
obtain the necessary information from the PFIC. Accordingly, the
Committee believes that a mark-to-market election would provide PFIC
shareholders with a fair alternative method for including income with
respect to the PFIC.
EXPLANATION OF PROVISION
Elimination of overlap between subpart F and the PFIC provisions
In the case of a PFIC that is also a CFC, the bill generally treats
the corporation as not a PFIC with respect to certain 10-percent
shareholders. This rule applies if the corporation is a CFC (within the
meaning of section 957(a)) and the shareholder is a U.S. shareholder
(within the meaning of section 951(b)) of such corporation (i.e., if the
shareholder is subject to the current inclusion rules of subpart F with
respect to such corporation). Moreover, the rule applies for that
portion of the shareholder's holding period with respect to the
corporation's stock which is after December 31, 1997 and during which
the corporation is a CFC and the shareholder is a U.S. shareholder.
Accordingly, a shareholder that is subject to current inclusion under
the subpart F rules with respect to stock of a PFIC that is also a CFC
generally is not subject also to the PFIC provisions with respect to the
same stock. The PFIC provisions continue to apply in the case of a PFIC
that is also a CFC to shareholders that are not subject to subpart F
(i.e., to shareholders that are U.S. persons and that own (directly,
indirectly, or constructively) less than 10 percent of the corporation's
stock by vote).
If a shareholder of a PFIC is subject to the rules applicable to
nonqualified funds before becoming eligible for the special rules
provided under the proposal for shareholders that are subject to subpart
F, the stock held by such shareholder continues to be treated as PFIC
stock unless the shareholder makes an election to pay tax and an
interest charge with respect to the unrealized appreciation in the stock
or the accumulated earnings of the corporation.
If, under the bill, a shareholder is not subject to the PFIC
provisions because the shareholder is subject to subpart F and the
shareholder subsequently ceases to be subject to subpart F with respect
to the corporation, for purposes of the PFIC provisions, the
shareholder's holding period for such stock is treated as beginning
immediately after such cessation. Accordingly, in applying the rules
applicable to PFICs that are not qualified electing funds, the earnings
of the corporation are not attributed to the period during which the
shareholder was subject to subpart F with respect to the corporation and
was not subject to the PFIC provisions.
Mark-to-market election
The bill allows a shareholder of a PFIC to make a mark-to-market
election with respect to the stock of the PFIC, provided that such stock
is marketable (as defined below). Under such an election, the
shareholder includes in income each year an amount equal to the excess,
if any, of the fair market value of the PFIC stock as of the close of
the taxable year over the shareholder's adjusted basis in such stock.
The shareholder is allowed a deduction for the excess, if any, of the
adjusted basis of the PFIC stock over its fair market value as of the
close of the taxable year. However, deductions are allowable under this
rule only to the extent of any net mark-to-market gains with respect to
the stock included by the shareholder for prior taxable years.
Under the bill, this mark-to-market election is available only for
PFIC stock that is ``marketable.'' For this purpose, PFIC stock is
considered marketable if it is regularly traded on a national securities
exchange that is registered with the Securities and Exchange Commission
or on the national market system established pursuant to section 11A of
the Securities and Exchange Act of 1934. In addition, PFIC stock is
considered marketable if it is regularly traded on any exchange or
market that the Secretary of the Treasury determines has rules
sufficient to ensure that the market price represents a legitimate and
sound fair market value. Any option on stock that is considered
marketable under the foregoing rules is treated as marketable, to the
extent provided in regulations. PFIC stock also is treated as
marketable, to the extent provided in regulations, if the PFIC offers
for sale (or has outstanding) stock of which it is the issuer and which
is redeemable at its net asset value in a manner comparable to a U.S.
regulated investment company (RIC).
In addition, the bill treats as marketable any PFIC stock owned by a
RIC that offers for sale (or has outstanding) any stock of which it is
the issuer and which is redeemable at its net asset value. The bill
treats as marketable any PFIC stock held by any other RIC that otherwise
publishes net asset valuations at least annually, except to the extent
provided in regulations. It is believed that even for RICs that do not
make a market in their own stock, but that do regularly report their net
asset values in compliance with the securities laws, inaccurate
valuation may bring exposure to legal liabilities, and this exposure may
ensure the reliability of the values such RICs assign to the PFIC stock
they hold.
The shareholder's adjusted basis in the PFIC stock is adjusted to
reflect the amounts included or deducted under this election. In the
case of stock owned indirectly by a U.S. person through a foreign entity
(as discussed below), the basis adjustments for mark-to-market gains and
losses apply to the basis of the PFIC in the hands of the intermediary
owner, but only for purposes of the subsequent application of the PFIC
rules to the tax treatment of the indirect U.S. owner. In addition,
similar basis adjustments are made to the adjusted basis of the property
actually held by the U.S. person by reason of which the U.S. person is
treated as owning PFIC stock.
Amounts included in income pursuant to a mark-to-market election, as
well as gain on the actual sale or other disposition of the PFIC stock,
is treated as ordinary income. Ordinary loss treatment also applies to
the deductible portion of any mark-to-market loss on PFIC stock, as well
as to any loss realized on the actual sale or other disposition of PFIC
stock to the extent that the amount of such loss does not exceed the net
mark-to-market gains previously included with respect to such stock. The
source of amounts with respect to a mark-to-market election generally is
determined in the same manner as if such amounts were gain or loss from
the sale of stock in the PFIC.
An election to mark to market applies to the taxable year for which
made and all subsequent taxable years, unless the PFIC stock ceases to
be marketable or the Secretary of the Treasury consents to the
revocation of such election.
Under constructive ownership rules, U.S. persons that own PFIC stock
through certain foreign entities may make this election with respect to
the PFIC. These constructive ownership rules apply to treat PFIC stock
owned directly or indirectly by or for a foreign partnership, trust, or
estate as owned proportionately by the partners or beneficiaries, except
as provided in regulations. Stock in a PFIC that is thus treated as
owned by a person is treated as actually owned by that person for
purposes of again applying the constructive ownership rules. In the case
of a U.S. person that is treated as owning PFIC stock by application of
this constructive ownership rule, any disposition by the U.S. person or
by any other person that results in the U.S. person being treated as no
longer owning the PFIC stock, as well as any disposition by the
person actually owning the PFIC stock, is treated as a
disposition by the U.S. person of the PFIC stock.
In addition, a CFC that owns stock in a PFIC is treated as a U.S.
person that may make the election with respect to such PFIC stock. Any
amount includible (or deductible) in the CFC's gross income pursuant to
this mark-to-market election is treated as foreign personal holding
company income (or a deduction allocable to foreign personal holding
company income). The source of such amounts, however, is determined by
reference to the actual residence of the CFC.
In the case of a taxpayer that makes the mark-to-market election with
respect to stock in a PFIC that is a nonqualified fund after the
beginning of the taxpayer's holding period with respect to such stock, a
coordination rule applies to ensure that the taxpayer does not avoid the
interest charge with respect to amounts attributable to periods before
such election. A similar rule applies to RICs that make the
mark-to-market election under this bill after the beginning of their
holding period with respect to PFIC stock (to the extent that the RIC
had not previously marked to market the stock of the PFIC).
Except as provided in the coordination rules described above, the
rules of section 1291 (with respect to nonqualified funds) do not apply
to a shareholder of a PFIC if a mark-to-market election is in effect for
the shareholder's taxable year. Moreover, in applying section 1291 in a
case where a mark-to-market election was in effect for any prior taxable
year, the shareholder's holding period for the PFIC stock is treated as
beginning immediately after the last taxable year for which such
election applied.
A special rule applicable in the case of a PFIC shareholder that
becomes a U.S. person treats the adjusted basis of any PFIC stock held
by such person on the first day of the year in which such shareholder
becomes a U.S. person as equal to the greater of its fair market value
on such date or its adjusted basis on such date. Such rule applies only
for purposes of the mark-to- market election.
EFFECTIVE DATE
The provision is effective for taxable years of U.S. persons
beginning after December 31, 1997, and taxable years of foreign
corporations ending with or within such taxable years of U.S. persons.
d. simplify formation and operation of international joint ventures
(secs. 1131, 1141 1145, and 1151 of the bill and secs. 367, 721, 1491
1494, 6031, 6038, 6038B, 6046A, and 6501 of the code)
PRESENT LAW
Under section 1491, an excise tax generally is imposed on transfers
of property by a U.S. person to a foreign corporation as paid-in surplus
or as a contribution to capital or to a foreign partnership, estate or
trust. The tax is 35 percent of the amount of gain inherent in the
property transferred but not recognized for income tax purposes at the
time of the transfer. However, several exceptions to the section 1491
excise tax are available. Under section 1494(c), a substantial penalty
applies in the case of a failure to report a transfer described in
section 1491.
Section 367 applies to require gain recognition upon certain
transfers by U.S. persons to foreign corporations. Under section 367(d),
a U.S. person that contributes intangible property to a foreign
corporation is treated as having sold the property to the corporation
and is treated as receiving deemed royalty payments from the
corporation. These deemed royalty payments are treated as U.S. source
income. A U.S. person may elect to apply similar rules to a transfer of
intangible property to a foreign partnership that otherwise would be
subject to the section 1491 excise tax.
A foreign partnership may be required to file a partnership return.
If a foreign partnership fails to file a required return, losses and
credits with respect to the partnership may be disallowed to the
partnership. A U.S. person that acquires or disposes of an interest in a
foreign partnership, or whose proportional interest in the partnership
changes substantially, may be required to file an information return
with respect to such event.
A partnership generally is considered to be a domestic partnership if
it is created or organized in the United States or under the laws of the
United States or any State. A foreign partnership generally is any
partnership that is not a domestic partnership.
REASONS FOR CHANGE
The Committee understands that the present-law rules imposing an
excise tax on certain transfers of appreciated property to a foreign
entity unless the requirements for an exception from such excise tax are
satisfied operate as a trap for the unwary. The Committee further
understands that the special source rule of present law for deemed
royalty payments with respect to a transfer of an appreciated intangible
to a foreign corporation was intended to discourage such transfers. The
Committee believes that the imposition of enhanced information reporting
obligations with respect to both foreign partnerships and foreign
corporations would eliminate the need for both of these sets of rules.
EXPLANATION OF PROVISION
The bill repeals the sections 1491 1494 excise tax rules that apply
to certain transfers of appreciated property by a U.S. person to a
foreign entity. Instead of the excise tax that applies under present law
to transfers to a foreign estate or trust, gain recognition is required
upon a transfer of appreciated property by a U.S. person to a foreign
estate or trust. Instead of the excise tax that applies under present
law to certain transfers to foreign corporations, regulatory authority
is granted under section 367 to deny nonrecognition treatment to such a
transfer in a transaction that is not otherwise described in section
367. Instead of the excise tax that applies under present law to
transfers to foreign partnerships, regulatory authority is granted to
provide for gain recognition on a transfer of appreciated property to a
partnership in cases where such gain otherwise would be transferred to a
foreign partner. In addition, regulatory authority is granted to deny
the nonrecognition treatment that is provided under section 1035 to
certain exchanges of insurance policies, where the transfer is to a
foreign person.
The bill repeals the rule that treats as U.S. source income any
deemed royalty arising under section 367(d). Under the bill, in the case
of a transfer of intangible property to a foreign corporation, the
deemed royalty payments under section 367(d) are treated as foreign
source income to the same extent that an actual royalty payment would be
considered to be foreign source income. Regulatory authority is granted
to provide similar treatment in the case of a transfer of intangible
property to a foreign partnership.
The bill provides detailed information reporting rules in the case of
foreign partnerships. A foreign partnership generally is required to
file a partnership return for a taxable year if the partnership has U.S.
source income or is engaged in a U.S. trade or business, except to the
extent provided in regulations.
Under the bill, reporting rules similar to those applicable under
present law in the case of controlled foreign corporations apply in the
case of foreign partnerships. A U.S. partner that controls a foreign
partnership is required to file an annual information return with
respect to such partnership. For this purpose, a U.S. partner is
considered to control a foreign partnership if the partner holds a more
than 50 percent or greater interest in the capital, profits, or, to the
extent provided in regulations, losses, of the partnership. Similar
information reporting also will be required from a U.S. 10-percent
partner of a foreign partnership that is controlled by U.S. 10-percent
partners. A $10,000 penalty applies to a failure to comply with these
reporting requirements; additional penalties of up to $50,000 apply in
the case of continued noncompliance after notification by the Secretary
of the Treasury. Under the bill, the penalties for failure to report
information with respect to a controlled foreign corporation are
conformed with these penalties.
Under the bill, reporting by a U.S. person of an acquisition or
disposition of an interest in a foreign partnership, or a change in the
person's proportional interest in the partnership, is required only in
the case of acquisitions, dispositions, or changes involving at least a
10-percent interest. A $10,000 penalty applies to a failure to comply
with these reporting requirements; additional penalties of up to $50,000
apply in the case of continued noncompliance after notification by the
Secretary. Under the bill, the penalties for failure to report
information with respect to a foreign corporation are conformed with
these penalties.
Under the bill, reporting rules similar to those applicable under
present law in the case of transfers by U.S. persons to foreign
corporations apply in the case of transfers to foreign
partnerships. These reporting rules apply in the case of a
transfer to a foreign partnership only if the U.S. person holds at least
a 10-percent interest in the partnership or the value of the property
transferred by such person to the partnership during a 12-month period
exceeded $100,000. A penalty equal to 10 percent of the value of the
property transferred applies to a failure to comply with these reporting
requirements. Under the bill, the penalty under present law for failure
to report transfers to a foreign corporation is conformed with this
penalty. In the case of a transfer to a foreign partnership, failure to
comply also results in gain recognition with respect to the property
transferred.
Under the bill, in the case of a failure to report required
information with respect to a foreign corporation, partnership, or
trust, the statute of limitations with respect to any event or period to
which such information relates not expire before the date that is three
years after the date on which such information is provided.
Under the bill, regulatory authority is granted to provide rules
treating a partnership as a foreign partnership where such treatment is
more appropriate. It is expected that a recharcterization of a
partnership as foreign rather than domestic under such regulations will
be based only on material factors such as the residence of the partners
and the extent to which the partnership is engaged in business in the
United States or earns U.S. source income. It also is expected that such
regulations will provide guidance regarding the determination of whether
an entity that is a partnership for Federal income tax purposes is to be
considered to be created or organized in the United States or under the
law of the United States or any State.
EFFECTIVE DATE
The provisions with respect to the repeal of sections 1491 1494 are
effective upon date of enactment. The provisions with respect to the
source of a deemed royalty under section 367(d) also are effective for
transfers made and royalties deemed received after date of enactment.
The provisions regarding information reporting with respect to
foreign partnerships generally are effective for partnership taxable
years beginning after date of enactment. The provisions regarding
information reporting with respect to interests in, and transfers to,
foreign partnerships are effective for transfers to, and changes in
interest in, foreign partnerships after date of enactment. Taxpayers may
elect to apply these rules to transfers made after August 20, 1996 (and
thereby avoid a penalty under section 1494(c)) and the Secretary may
prescribe simplified reporting requirements for these cases. The
provision with respect to the statute of limitations in the case of
noncompliance with reporting requirements is effective for information
returns due after date of enactment.
The provision granting regulatory authority with respect to the
treatment of partnerships as foreign or domestic is effective for
partnership taxable years beginning after date of enactment.
e. modification of reporting threshold for stock ownership of a foreign
corporation (sec. 1146 of the bill and sec. 6046 of the Code)
PRESENT LAW
Several provisions of the Code require U.S. persons to report
information with respect to a foreign corporation in which they are
shareholders or officers or directors. Sections 6038 and 6035 generally
require every U.S. citizen or resident who is an officer, or director,
or who owns at least 10 percent of the stock, of a foreign corporation
that is a controlled foreign corporation or a foreign personal holding
company to file Form 5471 annually.
Section 6046 mandates the filing of information returns by certain
U.S. persons with respect to a foreign corporation upon the occurrence
of certain events. U.S. persons required to file these information
returns are those who acquire 5 percent or more of the value of the
stock of a foreign corporation, others who become U.S. persons while
owning that percentage of the stock of a foreign corporation, and U.S.
citizens and residents who are officers or directors of foreign
corporations with such U.S. ownership.
A failure to file the required information return under section 6038
may result in monetary penalties or reduction of foreign tax credit
benefits. A failure to file the required information returns under
sections 6035 or 6046 may result in monetary penalties.
REASONS FOR CHANGE
The Committee believes that it is appropriate to make the stock
ownership threshold at which reporting with respect to an ownership
interest in a foreign corporation is required generally parallel to the
thresholds that apply in the case of other annual information reporting
with respect to foreign corporations. The Committee believes that
increasing the threshold for such reporting from 5 percent to 10 percent
will reduce the compliance burdens on taxpayers.
EXPLANATION OF PROVISION
The bill increases the threshold for stock ownership of a foreign
corporation that results in information reporting obligations under
section 6046 from 5 percent (based on value) to 10 percent (based on
vote or value).
EFFECTIVE DATE
The provision is effective for reportable transactions occurring
after December 31, 1997.
f. other foreign simplification provisions
1. TRANSITION RULE FOR CERTAIN TRUSTS (SEC. 1161 OF THE BILL AND SEC.
7701(A)(30) OF THE CODE)
PRESENT LAW
Under rules enacted with the Small Business Job Protection Act of
1996, a trust is considered to be a U.S. trust if two criteria are met.
First, a court within the United States must be able to exercise primary
supervision over the administration of the trust. Second, U.S.
fiduciaries of the trust must have the authority to control all
substantial decisions of the trust. A trust that does not satisfy both
of these criteria is considered to be a foreign trust. These rules for
defining a U.S. trust generally are effective for taxable years of a
trust that begin after December 31, 1996. A trust that qualified as a
U.S. trust under prior law could fail to qualify as a U.S. trust under
these new criteria.
REASONS FOR CHANGE
The change in the criteria for qualification as a U.S. trust could
cause large numbers of existing domestic trusts to become foreign
trusts, unless they are able to make the modifications necessary to
satisfy the new criteria. The Committee believes that an election is
appropriate for those existing domestic trusts that prefer to continue
to be subject to tax as U.S. trusts.
EXPLANATION OF PROVISION
Under the bill, the Secretary of the Treasury is granted authority to
allow nongrantor trusts that had been treated as U.S. trusts under prior
law to elect to continue to be treated as U.S. trusts, notwithstanding
the new criteria for qualification as a U.S. trust.
EFFECTIVE DATE
The provision is effective for taxable years beginning after December
31, 1996.
2. SIMPLIFY APPLICATION OF THE STOCK AND SECURITIES TRADING SAFE HARBOR
(SEC. 1162 OF THE BILL AND SEC. 864(B)(2)(A) OF THE CODE)
PRESENT LAW
A non-resident alien individual or foreign corporation that is
engaged in a trade or business within the United States is subject to
U.S. taxation on its net income that is effectively connected with the
trade or business, at graduated rates of tax. Under a ``safe harbor''
rule, foreign persons that trade in stocks or securities for their own
accounts are not treated as engaged in a U.S. trade or business for this
purpose.
For a foreign corporation to qualify for the safe harbor, it must not
be a dealer in stock or securities. In addition, if the principal
business of the foreign corporation is trading in stock or securities
for its own account, the safe harbor generally does not apply if the
principal office of the corporation is in the United States.
For foreign persons who invest in securities trading partnerships,
the safe harbor applies only if the partnership is not a dealer in stock
and securities. In addition, if the principal business of the
partnership is trading stock or securities for its own account, the safe
harbor generally does not apply if the principal office of the
partnership is in the United States.
Under Treasury regulations which apply to both corporations and
partnerships, the determination of the location of the entity's
principal office turns on the location of various functions relating to
operation of the entity, including communication with investors and the
general public, solicitation and acceptance of sales of interests, and
maintenance and audits of its books of account (Treas. reg. sec. 1.864
2(c)(2)(iii)). Under the regulations, the location of the entity's
principal office does not depend on the location of the entity's
management or where investment decisions are made.
REASONS FOR CHANGE
The stock and securities trading safe harbor serves to promote
foreign investment in U.S. capital markets. The Committee understands
that the principal office rule operates simply to shift certain
administrative functions with respect to securities trading--and the
associated jobs--offshore. The Committee believes that the elimination
of this rule would facilitate the foreign investment in U.S. markets
that the safe harbor was designed to promote.
EXPLANATION OF PROVISION
The bill modifies the stock and securities trading safe harbor by
eliminating the requirement for both partnerships and foreign
corporations that trade stock or securities for their own account that
the entity's principal office not be within the United States.
EFFECTIVE DATE
The provision is effective for taxable years beginning after December
31, 1997.
g. other foreign provisions
1. INCLUSION OF INCOME FROM NOTIONAL PRINCIPAL CONTRACTS AND STOCK
LENDING TRANSACTIONS UNDER SUBPART F (SEC. 1171 OF THE BILL AND SEC. 954 OF THE
CODE)
PRESENT LAW
Under the subpart F rules, the U.S. 10-percent shareholders of a
controlled foreign corporation (``CFC'') are subject to U.S. tax
currently on certain income earned by the CFC, whether or not such
income is distributed to the shareholders. The income subject to current
inclusion under the subpart F rules includes, among other things,
``foreign personal holding company income.''
Foreign personal holding company income generally consists of the
following: dividends, interest, royalties, rents and annuities; net
gains from sales or exchanges of (1) property that gives rise to the
foregoing types of income, (2) property that does not give rise to
income, and (3) interests in trusts, partnerships, and REMICs; net gains
from commodities transactions; net gains from foreign currency
transactions; and income that is equivalent to interest. Income from
notional principal contracts referenced to commodities, foreign
currency, interest rates, or indices thereon is treated as foreign
personal holding company income; income from equity swaps or other types
of notional principal contracts is not treated as foreign personal
holding company income. Income derived from transfers of debt securities
(but not equity securities) pursuant to the rules governing securities
lending transactions (sec. 1058) is treated as foreign personal holding
company income.
Income earned by a CFC that is a regular dealer in the property sold
or exchanged generally is excluded from the definition of foreign
personal holding company income. However, no exception is available for
a CFC that is a regular dealer in financial instruments referenced to
commodities.
A U.S. shareholder of a passive foreign investment company (``PFIC'')
is subject to U.S. tax and an interest charge with respect to certain
distributions from the PFIC and gains on dispositions of the stock of
the PFIC, unless the shareholder elects to include in income currently
for U.S. tax purposes its share of the earnings of the PFIC. A foreign
corporation is a PFIC if it satisfies either a passive income test or a
passive assets test. For this purpose, passive income is defined by
reference to foreign personal holding company income.
REASONS FOR CHANGE
The Committee understands that income from notional principal
contracts and stock-lending transactions is economically equivalent to
types of income that are treated as foreign personal holding company
income under present law. Accordingly, the Committee believes that the
categories of foreign personal holding company income should be expanded
to cover such income. In addition, the Committee believes that an
exception from the foreign personal holding company income rules should
be available for dealers in financial instruments referenced to
commodities.
EXPLANATION OF PROVISION
The bill treats net income from all types of notional principal
contracts as a new category of foreign personal holding company income.
However, income, gain, deduction or loss from a notional principal
contract entered into to hedge an item of income in another category of
foreign personal holding company income is included in that other
category.
The bill treats payments in lieu of dividends derived from equity
securities lending transactions pursuant to section 1058 as another new
category of foreign personal holding company income.
The bill provides an exception from foreign personal holding company
income for certain income, gain, deduction, or loss from transactions
(including hedging transactions) entered into in the ordinary course of
a CFC's business as a regular dealer in property, forward contracts,
options, notional principal contracts, or similar financial instruments
(including instruments referenced to commodities).
These modifications to the definition of foreign personal holding
company income apply for purposes of determining a foreign corporation's
status as a PFIC.
EFFECTIVE DATE
The provision applies to taxable years beginning after the date of
enactment.
2. RESTRICT LIKE-KIND EXCHANGE RULES FOR CERTAIN PERSONAL PROPERTY
(SEC. 1172 OF THE BILL AND SEC. 1031 OF THE CODE)
PRESENT LAW
Like-kind exchanges
An exchange of property, like a sale, generally is a taxable event.
However, no gain or loss is recognized if property held for productive
use in a trade or business or for investment is exchanged for property
of a ``like-kind'' which is to be held for productive use in a trade or
business or for investment (sec. 1031). In general, any kind of real
estate is treated as of a like-kind with other real property as long as
the properties are both located either within or both outside the United
States. In addition, certain types of property, such as inventory,
stocks and bonds, and partnership interests, are not eligible for
nonrecognition treatment under section 1031.
If section 1031 applies to an exchange of properties, the basis of
the property received in the exchange is equal to the basis of the
property transferred, decreased by any money received by the taxpayer,
and further adjusted for any gain or loss recognized on the exchange.
Application of depreciation rules
Tangible personal property that is used predominantly outside the
United States generally is accorded a less favorable depreciation regime
than is property that is used predominantly within the United States.
Thus, under present law, if a taxpayer exchanges depreciable U.S.
property with a low adjusted basis (relative to its fair market value)
for similar property situated outside the United States, the adjusted
basis of the acquired property will be the same as the adjusted basis of
the relinquished property, but the depreciation rules applied to such
acquired property generally will be different than the rules that were
applied to the relinquished property.
REASONS FOR CHANGE
The Committee believes that the depreciation rules applicable to
foreign- and domestic-use are sufficiently dissimilar so as to treat
such property as not ``like-kind'' property for purposes of section
1031.
EXPLANATION OF PROVISION
The bill provides that personal property predominantly used within
the United States and personal property predominantly used outside the
United States are not ``like-kind'' properties. For this purpose, the
use of the property surrendered in the exchange will be determined based
upon the use during the 24 months immediately prior to the exchange.
Similarly, for section 1031 to apply, property received in the exchange
must continue in the same use (i.e., foreign or domestic) for the 24
months immediately after the exchange.
The 24-month period is reduced to such lesser time as the taxpayer
held the property, unless such shorter holding period is a result of a
transaction (or series of transactions) structured to avoid the purposes
of the provision. Property described in section 168(g)(4) (generally,
property used both within and without the United States that is eligible
for accelerated depreciation as if used in the United States) will be
treated as property predominantly used in the United States.
EFFECTIVE DATE
The provision is effective for exchanges after June 8, 1997, unless
the exchange is pursuant to a binding contract in effect on such date
and all times thereafter. A contract will not fail to be considered to
be binding solely because (1) it provides for a sale in lieu of an
exchange or (2) either the property to be disposed of as relinquished
property or the property to be acquired as replacement property
(whichever is applicable) was not identified under the contract before
June 9, 1997.
3. IMPOSE HOLDING PERIOD REQUIREMENT FOR CLAIMING FOREIGN TAX CREDITS
WITH RESPECT TO DIVIDENDS (SEC. 1173 OF THE BILL AND NEW SEC. 901(K) OF THE CODE)
PRESENT LAW
A U.S. person that receives a dividend from a foreign corporation
generally is entitled to a credit for income taxes paid to a foreign
government on the dividend, regardless of the U.S. person's holding
period for the foreign corporation's stock. A U.S. corporation that
receives a dividend from a foreign corporation in which it has a
10-percent or greater voting interest may be entitled to a credit for
the foreign taxes paid by the foreign corporation, also without regard
to the U.S. shareholder's holding period for the corporation's stock
(sections 902 and 960).
As a consequence of the foreign tax credit limitations of the Code,
certain taxpayers are unable to utilize their creditable foreign taxes
to reduce their U.S. tax liability. U.S. shareholders that are
tax-exempt receive no U.S. tax benefit for foreign taxes paid on
dividends they receive.
REASONS FOR CHANGE
Although present law imposes a holding period requirement for the
dividends-received deduction for a corporate shareholder (sec. 246),
there is no similar holding period requirement for foreign tax credits
with respect to dividends. As a result, some U.S. persons have engaged
in tax-motivated transactions designed to transfer foreign tax credits
from persons that are unable to benefit from such credits (such as a
tax-exempt entity or a taxpayer whose use of foreign tax credits is
prevented by the limitation) to persons that can use such credits. These
transactions sometimes involve a short-term transfer of ownership of
dividend-paying shares. Other transactions involve the use of
derivatives to allow a person that cannot benefit from the foreign tax
credits with respect to a dividend to retain the economic benefit of the
dividend while another person receives the foreign tax credit benefits.
EXPLANATION OF PROVISION
The bill denies a shareholder the foreign tax credits normally
available with respect to a dividend from a corporation or a regulated
investment company (``RIC'') if the shareholder has not held the stock
for a minimum period during which it is not protected from risk of loss.
Under the bill, the minimum holding period for dividends on common stock
is 16 days. The minimum holding period for preferred stock is 46 days.
Where the holding period requirement is not met for stock of a
foreign corporation, the bill disallows the foreign tax credits for the
foreign withholding taxes that are paid with respect to a dividend. Such
credits are denied both to the shareholder and any other taxpayer who
would otherwise be entitled to claim foreign tax credits for such
withholding taxes (secs. 853, 902 and 960). In addition, the bill
applies to all foreign tax credits otherwise allowable for taxes paid by
a lower-tier foreign corporation (secs. 902 and 960) and for foreign
taxes credits of a RIC that elects to treat its foreign taxes as paid by
the shareholders (section 853). The bill denies such credits where any
of the stock in the chain of ownership that is a requirement for
claiming the credits is held for less than the required holding period.
The bill denies these same foreign tax credit benefits, regardless of
the shareholder's holding period for the stock, to the extent that the
taxpayer has an obligation to make payments related to the dividend
(whether pursuant to a short sale or otherwise) with respect to
substantially similar or related property.
The 16- or 46-day holding period under the bill (whichever applies)
must be satisfied over a period immediately before or immediately after
the shareholder becomes entitled to receive each dividend. For purposes
of determining whether the required holding period is met, any period
during which the shareholder has protected itself from risk of loss
(under the rules of section 246(c)(4)) would not be included. For
example, assume a taxpayer buys foreign common stock. Assume also that,
the day after stock is purchased, the taxpayer enters into an equity
swap under which the taxpayer is entitled to receive payments equal to
the losses on the stock, and the taxpayer retains the swap position for
the entire period it holds the stock. Under the bill, the taxpayer would
not be able to claim any foreign tax credits with respect to dividends
on the stock because the taxpayer's holding period is limited to the
single day during which the loss on the stock was not protected. The
bill provides a special rule that treats a bona fide contract to sell
stock as not protecting a stockholder from risk of loss for purposes of
the holding period requirement.
The bill provides an exception for foreign tax credits with respect
to certain dividends received by active dealers in securities. In order
to qualify for the exception, the following requirements must be met (1)
the dividend must be received by the entity on stock which it holds in
its capacity as a dealer in securities, (2) the entity must be subject
to net income taxation on the dividend (on either a residence or
worldwide income basis) in a foreign country, and (3) the foreign taxes
to which the exception applies must be taxes that are creditable under
the foreign country's tax system. A securities dealer for purposes of
the exception must be an entity which (1) regularly enters into stock or
securities transactions with customers (section 475(c)(1)) and (2) is
registered as a securities dealer under the Securities Exchange Act of
1934 or is licenced or authorized to sell stock to or from customers and
subject to bona fide regulation by the securities regulatory authority
of the foreign country in which the relevant dividend is subject to
net-basis taxation. Under the bill, the Treasury is granted authority to
issue regulations necessary or appropriate to prevent abuse of this
exception. It is expected that such regulations will provide guidance as
to the determination of whether stock is held in a taxpayer's capacity
as a dealer or in connection with its securities trading activities.
If a taxpayer is denied foreign tax credits under the bill because
the 16- or 46-day holding period requirement is not satisfied, the
taxpayer would be entitled to a deduction for the foreign taxes for
which the credit is disallowed. This deduction would be available even
if the taxpayer claimed the foreign tax credit for other taxes in the
same taxable year.
No inference is intended as to the treatment under present law of
tax-motivated transactions intended to transfer foreign tax credit
benefits.
EFFECTIVE DATE
The provision would be effective for dividends paid or accrued more
than 30 days after the date of enactment.
4. PENALTIES FOR FAILURE TO FILE DISCLOSURE OF EXEMPTION FOR INCOME
FROM THE INTERNATIONAL OPERATION OF SHIPS OR AIRCRAFT BY FOREIGN PERSONS (SEC.
1174 OF THE BILL AND SEC. 872 AND 883 OF THE CODE)
PRESENT LAW
The United States generally imposes a 4-percent tax on the
U.S.-source gross transportation income of foreign persons that is not
effectively connected with the foreign person's conduct of a U.S. trade
or business (sec. 887). Foreign persons generally are subject to U.S.
tax at regular graduated rates on net income, including transportation
income, that is effectively connected with a U.S. trade or business
(secs. 871(b) and 882).
Transportation income is any income derived from, or in connection
with, the use (or hiring or leasing for use) of a vessel or aircraft (or
a container used in connection therewith) or the performance of services
directly related to such use (sec. 863(c)(3)). Income attributable to
transportation that begins and ends in the United States is treated as
derived from sources in the United States (sec. 863(c)(1)). In the case
of transportation that either begins or ends in the United States,
generally 50 percent of such income is treated as U.S. source and 50
percent is treated as foreign source (sec. 863(c)(2)). U.S.-source
transportation income is treated as effectively connected with a foreign
person's conduct of U.S. trade or business only if the foreign person
has a fixed place of business in the United States that is involved in
the earning of such income and substantially all of such income of the
foreign person is attributable to regularly scheduled transportation
(sec. 887(b)(4)).
An exemption from U.S. tax is provided for income derived by a
nonresident alien individual or foreign corporation from the
international operation of a ship or aircraft, provided that the foreign
country in which such individual is resident or such corporation is
organized grants an equivalent exemption to individual residents of the
United States or corporations organized in the United States (secs.
872(b) (1) and (2) and 883(a) (1) and (2)).
Pursuant to guidance published by the Internal Revenue Service, a
nonresident alien individual or foreign corporation that is entitled to
an exemption from U.S. tax for its income from the international
operation of ships or aircraft must file a U.S. income tax return and
must attach to such return a statement claiming the exemption (Rev.
Proc. 91 12, 1991 1 C.B. 473). If the foreign person is claiming an
exemption based on an applicable income tax treaty, the foreign person
must disclose that fact as required by the Secretary of the Treasury
(sec. 6114). The penalty for failure to make disclosure of a
treaty-based position as required under section 6114 is $1,000 for an
individual and $10,000 for a corporation (sec. 6712).
At the time the 4-percent tax on U.S.-source gross transportation
income was enacted, concern was expressed about whether compliance with
the tax, which is collected by return, would be adequate. It was
intended that the tax-writing committees of Congress and the Secretary
of the Treasury would study the issue of compliance and that the
Secretary would make recommendations if compliance did not prove
adequate. Joint Committee on Taxation, ``General Explanation of the Tax
Reform Act of 1986'' (JCS 10 87), May 4, 1987, at 930.
REASONS FOR CHANGE
The Committee understands that there is an extremely high level of
noncompliance by foreign persons that have U.S.-source shipping income.
The Committee believes that, in order to
address these noncompliance problems, it is appropriate to
impose significant penalties for a failure to satisfy the filing
requirements for claiming the exemption from U.S. tax that is available
to certain foreign persons with respect to income from the international
operation of ships or aircraft.
EXPLANATION OF PROVISION
Under the bill, a foreign person that claims exemption from U.S. tax
for income from the international operation of ships or aircraft, but
does not satisfy the filing requirements for claiming such exemption, is
subject to the penalty of the denial of such exemption and any
deductions or credits otherwise allowable in determining the U.S. tax
liability with respect to such income. If a foreign person that has a
fixed place of business in the United States fails to satisfy the filing
requirements for claiming an exemption from U.S. tax for its income from
the international operation of ships or aircraft, such person is subject
to the additional penalty that foreign source income from the
international operation of ships or aircraft would be treated as
effectively connected with the conduct of a U.S. trade or business, but
only to the extent that such income is attributable to such fixed place
of business in the United States. Income so treated as effectively
connected with a U.S. business is subject to U.S. tax at graduated rates
(and is subject to the disallowance of deductions and credits described
above). These penalties do not apply in the case of a failure to
disclose that is due to reasonable cause. The provision would not apply
to the extent the application would be contrary to any treaty obligation
of the United States.
The bill also provides for the provision of information by the U.S.
Customs Service to the Secretary of the Treasury regarding foreign-flag
ships engaged in shipping to or from the United States.
EFFECTIVE DATE
The provision is effective for taxable years beginning after December
31, 1997.
5. LIMITATION ON TREATY BENEFITS FOR PAYMENTS TO HYBRID ENTITIES (SEC.
1175 OF THE BILL)
PRESENT LAW
Nonresident alien individuals and foreign corporations (collectively,
foreign persons) that are engaged in business in the United States are
subject to U.S. tax on the income from such business in the same manner
as a U.S. person. In addition, the United States imposes tax on certain
types of U.S. source income, including interest, dividends and
royalties, of foreign persons not engaged in business in the United
States. Such tax is imposed on a gross basis and is collected through
withholding. The statutory rate of this withholding tax is 30 percent.
However, most U.S. income tax treaties provide for a reduction in rate,
or elimination, of this withholding tax. Treaties generally provide for
different applicable withholding tax rates for different types of
income. Moreover, the applicable withholding tax rates differ among
treaties. The specific withholding tax rates pursuant to a treaty are
the result of negotiations between the United States and the treaty
partner.
The application of the withholding tax is more complicated in the
case of income derived through an entity, such as a limited liability
company, that is treated as a partnership for U.S. tax purposes but may
be treated as a corporation for purposes of the tax laws of a treaty
partner. The Treasury regulations include specific rules that apply in
the case of income derived through an entity that is treated as a
partnership for U.S. tax purposes. In the case of a payment of an item
of U.S. source income to a U.S. partnership, the partnership is required
to impose the withholding tax to the extent the item of income is
includible in the distributive share of a partner who is a foreign
person. Tax-avoidance opportunities may arise in applying the reduced
rates of withholding tax provided under a treaty to cases involving
income derived through a limited liability company or other hybrid
entity (e.g., an entity that is treated as a partnership for U.S. tax
purposes but as a corporation for purposes of the treaty partner's tax
laws). Regulations that have been proposed but not yet finalized would
address this issue in the case of an item received by a foreign entity
by allowing an interest holder in that entity to claim a reduced rate of
withholding tax with respect to that item under a treaty only if the
treaty partner requires the interest holder to include in income its
distributive share of the entity's income on a flow-through basis. Prop.
Treas. Reg. Sec. 1.1441 6(b)(4). This provision in the proposed
regulations does not apply in the case of a U.S. entity.
REASONS FOR CHANGE
The Committee is concerned about the potential tax-avoidance
opportunities available for foreign persons that invest in the United
States through hybrid entities. In particular, the Committee understands
that the interaction of the tax laws and the applicable tax treaty may
provide a business structuring opportunity that would allow Canadian
corporations with U.S. subsidiaries to avoid both U.S. and Canadian
income taxes with respect to those U.S. operations. The Committee
believes that such tax-avoidance opportunities should be eliminated.
EXPLANATION OF PROVISION
The bill limits the availability of a reduced rate of withholding tax
pursuant to an income tax treaty in order to prevent tax avoidance.
Under the bill, a foreign person is entitled to a reduced rate of
withholding tax under a treaty with a foreign country on an item of
income derived through an entity that is a partnership (or is otherwise
treated as transparent) for U.S. tax purposes only if such item is
treated for purposes of the taxation laws of such foreign country as an
item of income of such person. This rule does not apply if the treaty
itself contains a provision addressing the applicability of the treaty
in the case of income derived through a partnership. Moreover, the rule
does not apply if the foreign country imposes tax on an actual
distribution of such item of income from such partnership to such
person. In this regard, the foreign country will be considered to impose
tax on a distribution even though such tax may be reduced or eliminated
by reason of deductions or credits otherwise available to the taxpayer.
This bill addresses a potential tax-avoidance opportunity for
Canadian corporations with U.S. subsidiaries that arises because of the
interaction between the U.S. tax law, the Canadian tax law, and the
income tax treaty between the United States and Canada. Through the use
of a U.S. limited liability company, which is treated as a partnership
for U.S. tax purposes but as a
corporation for Canadian tax purposes, a payment of interest
(which is deductible for U.S. tax purposes) may be converted into a
dividend (which is excludable for Canadian tax purposes). Accordingly,
interest paid by a U.S. subsidiary through a U.S. limited liability
company to a Canadian parent corporation would be deducted by the U.S.
subsidiary for U.S. tax purposes and would be excluded by the Canadian
parent corporation for Canadian tax purposes; the only tax on such
interest would be a U.S. withholding tax, which may be imposed at a
reduced rate of 10 percent (rather than the full statutory rate of 30
percent) pursuant to the income tax treaty between the United States and
Canada. Under the bill, withholding tax is imposed at the full statutory
rate of 30 percent in such case. The bill would not apply if the
U.S.-Canadian income tax treaty is amended to include a provision
reaching a similar result. In this regard, the United States and Canada
recently negotiated a proposed protocol that would amend the provision
in the treaty governing cross-border social security payments and this
issue could be addressed in the context of that protocol or an
additional protocol. Moreover, the bill would not apply if Canada were
to impose tax on the Canadian parent on dividends received from the U.S.
limited liability company.
The Committee believes that the provision generally is consistent
with U.S. treaty obligations, including the U.S.-Canada treaty. The
United States has recognized authority to implement its tax treaties so
as to avoid abuses.
EFFECTIVE DATE
The provision is effective upon date of enactment.
6. INTEREST ON UNDERPAYMENT REDUCED BY FOREIGN TAX CREDIT CARRYBACK
(SEC. 1176 OF THE BILL AND SECS. 6601 AND 6611 OF THE CODE)
PRESENT LAW
U.S. persons may credit foreign taxes against U.S. tax on foreign
source income. The amount of foreign tax credits that can be claimed in
a year is subject to a limitation that prevents taxpayers from using
foreign tax credits to offset U.S. tax on U.S. source income. Separate
limitations are applied to specific categories of income. The amount of
creditable taxes paid or accrued in any taxable year which exceeds the
foreign tax credit limitation is permitted to be carried back two years
and carried forward five years.
For purposes of the computation of interest on overpayments of tax,
if an overpayment for a taxable year results from a foreign tax credit
carryback from a subsequent taxable year, the overpayment is deemed not
to arise prior to the filing date for the subsequent taxable year in
which the foreign taxes were paid or accrued (sec. 6611(g)).
Accordingly, interest does not accrue on the overpayment prior to the
filing date for the year of the carryback that effectively created such
overpayment. In Fluor Corp. v. United States, 35 Fed. Cl. 520 (1996),
the court held that in the case of an underpayment of tax (rather than
an overpayment) for a taxable year that is eliminated by a foreign tax
credit carryback from a subsequent taxable year, interest does not
accrue on the underpayment that is eliminated by the foreign tax credit
carryback. The Government has filed an appeal in the Fluor case.
REASONS FOR CHANGE
The Committee believes that the application of the interest rules in
the case of a deficiency that is reduced or eliminated by a foreign tax
credit carryback must be consistent with the application of the interest
rules in the case of an overpayment that is created by a foreign tax
credit carryback. The Committee believes that in such cases the
deficiency cannot be considered to have been eliminated, and the
overpayment cannot be considered to have been created, until the filing
date for the taxable year in which the foreign tax credit carryback
arises. Accordingly, interest should continue to accrue on the
deficiency through such date. In addition, the Committee believes that
it is appropriate to clarify the interest rules that apply in the case
of a foreign tax credit carryback that is itself triggered by another
carryback from a subsequent year.
EXPLANATION OF PROVISION
Under the bill, if an underpayment for a taxable year is reduced or
eliminated by a foreign tax credit carryback from a subsequent taxable
year, such carryback does not affect the computation of interest on the
underpayment for the period ending with the filing date for such
subsequent taxable year in which the foreign taxes were paid or accrued.
The bill also clarifies the application of the interest rules of both
section 6601 and section 6611 in the case of a foreign tax credit
carryback that is triggered by a net operating loss or net capital loss
carryback; in such a case, a deficiency is not considered to have been
reduced, and an overpayment is not considered to have been created,
until the filing date for the subsequent year in which the loss
carryback arose. No inference is intended regarding the computation of
interest under present law in the case of a foreign tax credit carryback
(including a foreign tax credit carryback that is triggered by a net
operating loss or net capital loss carryback).
EFFECTIVE DATE
The provision is effective for foreign taxes actually paid or accrued
in taxable years beginning after date of enactment.
7. DETERMINATION OF PERIOD OF LIMITATIONS RELATING TO FOREIGN TAX
CREDITS (SEC. 1177 OF THE BILL AND SEC. 6511(D) OF THE CODE)
PRESENT LAW
U.S. persons may credit foreign taxes against U.S. tax on foreign
source income. The amount of foreign tax credits that can be claimed in
a year is subject to a limitation that prevents taxpayers from using
foreign tax credits to offset U.S. tax on U.S. source income. Separate
limitations are applied to specific categories of income. The amount of
creditable taxes paid or accrued in any taxable year which exceeds the
foreign tax credit limitation is permitted to be carried back two years
and carried forward five years.
For purposes of the period of limitations on filing claims for credit
or refund, in the case of a claim relating to an overpayment
attributable to foreign tax credits, the limitations period is ten years
from the filing date for the taxable year with respect to which the
claim is made. The
Internal Revenue Service has taken the position that, in the
case of a foreign tax credit carryforward, the period of limitations is
determined by reference to the year in which the foreign taxes were paid
or accrued (and not the year to which the foreign tax credits are
carried ) (Rev. Rul. 84 125, 1984 2 C.B. 125). However, the court in
Ampex Corp. v. United States, 620 F.2d 853 (1980), held that, in the
case of a foreign tax credit carryforward, the period of limitations is
determined by reference to the year to which the foreign tax credits are
carried (and not the year in which the foreign taxes were paid or
accrued).
REASONS FOR CHANGE
The Committee believes that it is appropriate to identify clearly the
date on which the ten-year period of limitations for claims with respect
to foreign tax credits begins.
EXPLANATION OF PROVISION
Under the bill, in the case of a claim relating to an overpayment
attributable to foreign tax credits, the limitations period is
determined by reference to the year in which the foreign taxes were paid
or accrued (and not the year to which the foreign tax credits are
carried). No inference is intended regarding the determination of such
limitations period under present law.
EFFECTIVE DATE
The provision is effective for foreign taxes paid or accrued in
taxable years beginning after date of enactment.
8. CLARIFICATION OF DETERMINATION OF FOREIGN TAXES DEEMED PAID (SEC.
1178(A) OF THE BILL AND SEC. 902 OF THE CODE)
PRESENT LAW
Under section 902, a domestic corporation that receives a dividend
from a foreign corporation in which it owns 10 percent or more of the
voting stock is deemed to have paid a portion of the foreign taxes paid
by such foreign corporation. The domestic corporation that receives a
dividend is deemed to have paid a portion of the foreign corporation's
post-1986 foreign income taxes based on the ratio of the amount of such
dividend to the foreign corporation's post-1986 undistributed earnings.
The foreign corporation's post-1986 foreign income taxes is the sum of
the foreign income taxes with respect to the taxable year in which the
dividend is distributed plus certain foreign income taxes with respect
to prior taxable years (beginning after December 31, 1986).
REASONS FOR CHANGE
The Committee believes that it is appropriate to clarify the
determination of foreign taxes deemed paid for purposes of the indirect
foreign tax credit.
EXPLANATION OF PROVISION
The bill clarifies that, for purposes of the deemed paid credit under
section 902 for a taxable year, a foreign corporation's post-1986
foreign income taxes includes foreign income taxes with respect to prior
taxable years (beginning after December 31, 1986) only to the extent
such taxes are not attributable to dividends distributed by the foreign
corporation in prior taxable years. No inference is intended regarding
the determination of foreign taxes deemed paid under present law.
EFFECTIVE DATE
The provision is effective on date of enactment.
9. CLARIFICATION OF FOREIGN TAX CREDIT LIMITATION FOR FINANCIAL
SERVICES INCOME (SEC. 1178(B) OF THE BILL AND SEC. 904 OF THE CODE)
PRESENT LAW
Under section 904, separate foreign tax credit limitations apply to
various categories of income. Two of these separate limitation
categories are passive income and financial services income. For
purposes of the separate foreign tax credit limitation applicable to
passive income, certain income that is treated as high-taxed income is
excluded from the definition of passive income. For purposes of the
separate foreign tax credit limitation applicable to financial services
income, the definition of financial services income generally
incorporates passive income as defined for purposes of the separate
limitation applicable to passive income.
REASONS FOR CHANGE
The Committee believes that it is appropriate to clarify that
high-taxed income is not excluded from the separate foreign tax credit
limitation for financial services income.
EXPLANATION OF PROVISION
The bill clarifies that the exclusion of income that is treated as
high-taxed income does not apply for purposes of the separate foreign
tax credit limitation applicable to financial services income. No
inference is intended regarding the treatment of high-taxed income for
purposes of the separate foreign tax credit limitation applicable to
financial services income under present law.
EFFECTIVE DATE
The provision is effective on date of enactment.
TITLE XII. SIMPLIFICATION PROVISIONS RELATING TO INDIVIDUALS AND
BUSINESSES
A. Provisions Relating to Individuals
1. MODIFICATIONS TO STANDARD DEDUCTION OF DEPENDENTS; AMT TREATMENT OF
CERTAIN MINOR CHILDREN (SEC. 1201 OF THE BILL AND SECS. 59(J) AND 63(C)(5) OF THE
CODE)
PRESENT LAW
Standard deduction of dependents. --The standard deduction of a
taxpayer for whom a dependency exemption is allowed on another
taxpayer's return can not exceed the lesser of (1) the standard
deduction for an individual taxpayer (projected to be $4,250 for 1998)
or (2) the greater of $500 (indexed)\1\
or the dependent's earned income (sec. 63(c)(5)).
\1\The indexed amount is projected to be $700 for 1998.
Taxation of unearned income of children under age 14. --The tax on a
portion of the unearned income (e.g., interest and dividends) of a child
under age 14 is the additional tax that the child's custodial parent
would pay if the child's unearned income were included in that parent's
income. The portion of the child's unearned income which is taxed at the
parent's top marginal rate is the amount by which the child's unearned
income is more than the sum of (1) $500\2\
(indexed) plus (2) the greater of (a) $500\3\
(indexed) or (b) the child's itemized deductions directly connected
with the production of the unearned income (sec. 1(g)).
\2\Projected to be $700 for 1998.
\3\Projected to be $700 for 1998.
Alternative minimum tax (``AMT'') exemption for children under age
14. --Single taxpayers are entitled to an exemption from the alternative
minimum tax (``AMT'') of $33,750. However, in the case of a child under
age 14, his exemption from the AMT, in substance, is the unused
alternative minimum tax exemption of the child's custodial parent,
limited to sum of earned income and $1,400 (sec. 59(j)).
REASONS FOR CHANGE
The Committee believes that significant simplification of the
existing income tax system can be achieved by providing larger
exemptions such that taxpayers with incomes less than the exemption are
not required to compute and pay any tax. The Committee particularly
believes that the present-law exemptions of dependent children are too
small.
EXPLANATION OF PROVISION
Standard deduction of dependents. --The bill increases the standard
deduction for a taxpayer with respect to whom a dependency exemption is
allowed on another taxpayer's return to the lesser of (1) the standard
deduction for individual taxpayers or (2) the greater of: (a) $500\4\
(indexed for inflation as under present law), or (b) the individual's
earned income plus $250. The $250 amount is indexed for inflation after
1998.
\4\Projected to be $700 for 1998.
Alternative minimum tax exemption for children under age 14. --The
bill increases the AMT exemption amount for a child under age 14 to the
lesser of (1) $33,750 or (2) the sum of the child's earned income plus
$5,000. The $5,000 amount is indexed for inflation after 1998.
EFFECTIVE DATE
The provision is effective for taxable years beginning after December
31, 1997.
2. INCREASE DE MINIMIS THRESHOLD FOR ESTIMATED TAX TO $1,000 FOR
INDIVIDUALS (SEC. 1202 OF THE BILL AND SEC. 6654 OF THE CODE)
PRESENT LAW
An individual taxpayer generally is subject to an addition to tax for
any underpayment of estimated tax (sec. 6654). An individual generally
does not have an underpayment of estimated tax if he or she makes timely
estimated tax payments at least equal to: (1) 100 percent of the tax
shown on the return of the individual for the preceding year (the ``100
percent of last year's liability safe harbor'') or (2) 90 percent of the
tax shown on the return for the current year. The 100 percent of last
year's liability safe harbor is modified to be a 110 percent of last
year's liability safe harbor for any individual with an AGI of more than
$150,000 as shown on the return for the preceding taxable year. Income
tax withholding from wages is considered to be a payment of estimated
taxes. In general, payment of estimated taxes must be made quarterly.
The addition to tax is not imposed where the total tax liability for the
year, reduced by any withheld tax and estimated tax payments, is less
than $500.
REASONS FOR CHANGE
Raising the individual estimated tax de minimis threshold will
simplify the tax laws for a number of taxpayers.
EXPLANATION OF PROVISION
The bill increases the $500 individual estimated tax de minimis
threshold to $1,000.
EFFECTIVE DATE
The provision is effective for taxable years beginning after December
31, 1997.
3. OPTIONAL METHODS FOR COMPUTING SECA TAX COMBINED (SEC. 1203 OF THE
BILL AND SEC. 1402 OF THE CODE)
PRESENT LAW
The Self-Employment Contributions Act (``SECA'') imposes taxes on net
earnings from self-employment to provide social security coverage to
self-employed workers. The maximum amount of earnings subject to the
SECA tax is coordinated with, and is set at the same level as, the
maximum level of wages and salaries subject to FICA taxes ($65,000 for
OASDI taxes in 1997 and indexed annually, and without limit for the
Hospital Insurance tax). Special rules allow certain self-employed
individuals to continue to maintain social security coverage during a
period of low income. The method applicable to farmers is slightly more
favorable than the method applicable to other self-employed persons.
A farmer may increase his or her self-employment income, for purposes
of obtaining social security coverage, by reporting two-thirds of the
first $2,400 of gross income as net earnings from self-employment, i.e.,
the optional amount of net earnings from self-employment would not
exceed $1,600. There is no limit on the number of times a farmer may use
this method. The optional method for non farm income is similar, also
permitting two-thirds of the first $2,400 of gross income to be treated
as self-employment income. However, the optional non farm method may not
be used more than five times by any individual, and may only be used if
the taxpayer had net earnings from self-employment of $400 or more in at
least two of the three years immediately preceding the year in which the
optional method is elected.
In general, to receive benefits, including Disability Insurance
Benefits, under the Social Security Act, a worker must have a minimum
number of quarters of coverage. A minimum amount of wages or
self-employment income must be reported to obtain a quarter of coverage.
A maximum of four quarters of coverage may be obtained each year. In
1978, the amount of earnings required to obtain a quarter of coverage
began increasing each year. Starting in 1994, a farmer could obtain only
two quarters of coverage under the optional method applicable to
farmers.
REASONS FOR CHANGE
The Committee believes that providing different optional methods for
farm and non farm income is unduly complex and unwarranted. In addition,
current law is misleading in that a worker may qualify for the optional
method but not be eligible for a full four quarters of Social Security
coverage. A single optional method benefits self-employed workers by
simplifying the rules for obtaining Social Security coverage.
EXPLANATION OF PROVISION
The bill combines the farm and non farm optional methods into a
single combined optional method applicable to all self-employed workers.
A self-employed worker may elect to use the optional method an unlimited
number of times. If it is used, it must be applied to all
self-employment earnings for the year, both farm and non farm.
The $2,400 amount is increased to an amount which would provide four
quarters of coverage in 1998 (the ``lower limit''). Such amount
increases each year based on the earnings requirements under the Social
Security Act.
The optional method in this provision is elected on a year-by-year
basis. An election for a taxable year must be filed with the original
Federal income tax return for the year, and may not be made
retroactively by filing an amended return.
EFFECTIVE DATE
The provision is effective for taxable years beginning after January
1, 1998.
4. TREATMENT OF CERTAIN REIMBURSED EXPENSES OF RURAL LETTER CARRIERS'
VEHICLES (SEC. 1204 OF THE BILL AND SEC. 162 OF THE CODE)
PRESENT LAW
A taxpayer who uses his or her automobile for business purposes may
deduct the business portion of the actual operation and maintenance
expenses of the vehicle, plus depreciation (subject to the limitations
of sec. 280F). Alternatively, the taxpayer may elect to utilize a
standard mileage rate in computing the deduction allowable for business
use of an automobile that has not been fully depreciated. Under this
election, the taxpayer's deduction equals the applicable rate multiplied
by the number of miles driven for business purposes and is taken in lieu
of deductions for depreciation and actual operation and maintenance
expenses.
An employee of the U.S. Postal Service may compute his deduction for
business use of an automobile in performing services involving the
collection and delivery of mail on a rural route by using, for all
business use mileage, 150 percent of the standard mileage rate.
Rural letter carriers are paid an equipment maintenance allowance
(EMA) to compensate them for the use of their personal automobiles in
delivering the mail. The tax consequences of the EMA are determined by
comparing it with the automobile expense deductions that each carrier is
allowed to claim (using either the actual expenses method or the 150
percent of the standard mileage rate). If the EMA exceeds the allowable
automobile expense deductions, the excess generally is subject to tax.
If the EMA falls short of the allowable automobile expense deductions, a
deduction is allowed only to the extent that the sum of this shortfall
and all other miscellaneous itemized deductions exceeds two percent of
the taxpayer's adjusted gross income.
REASONS FOR CHANGE
The filing of tax returns by rural letter carriers can be complex.
Under present law, those who are reimbursed at more than the 150 percent
rate must report their reimbursement as income and deduct their expenses
as miscellaneous itemized deductions (subject to the two-percent floor).
Permitting the income and expenses to wash, so that neither will have to
be reported on the rural letter carrier's tax return, will simplify
these tax returns.
EXPLANATION OF PROVISION
The bill repeals the special rate for Postal Service employees of 150
percent of the standard mileage rate. In its place, the bill requires
that the rate of reimbursement provided by the Postal Service to rural
letter carriers be considered to be equivalent to their expenses. The
rate of reimbursement that is considered to be equivalent to their
expenses is the rate of reimbursement contained in the 1991 collective
bargaining agreement, which may be increased by no more than the rate of
inflation.
EFFECTIVE DATE
The provision is effective for taxable years beginning after December
31, 1997.
5. TRAVEL EXPENSES OF FEDERAL EMPLOYEES PARTICIPATING IN A FEDERAL
CRIMINAL INVESTIGATION (SEC. 1205 OF THE BILL AND SEC. 162 OF THE CODE)
PRESENT LAW
Unreimbursed ordinary and necessary travel expenses paid or incurred
by an individual in connection with temporary employment away from home
(e.g., transportation costs and the cost of meals and lodging) are
generally deductible, subject to the two-percent floor on miscellaneous
itemized deductions. Travel expenses paid or incurred in connection with
indefinite employment away from home, however, are not deductible. A
taxpayer's employment away from home in a single location is indefinite
rather than temporary if it lasts for one year or more; thus, no
deduction is permitted for travel expenses paid or incurred in
connection with such employment (sec. 162(a)). If a taxpayer's
employment away from home in a single location lasts for less than one
year, whether such employment is temporary or indefinite is determined
on the basis of the facts and circumstances.
REASONS FOR CHANGE
The Committee believes that it would be inappropriate if this
provision in the tax laws were to be a hindrance to the investigation of
a Federal crime.
EXPLANATION OF PROVISION
The one-year limitation with respect to deductibility of expenses
while temporarily away from home does not include any period during
which a Federal employee is certified by the Attorney General (or the
Attorney General's designee) as traveling on behalf of the Federal
Government in a temporary duty status to investigate or provide support
services to the investigation of a Federal crime. Thus, expenses for
these individuals during these periods are fully deductible, regardless
of the length of the period for which certification is given (provided
that the other requirements for deductibility are satisfied).
EFFECTIVE DATE
The provision is effective for amounts paid or incurred with respect
to taxable years ending after the date of enactment.
6. PAYMENT OF TAXES BY COMMERCIALLY ACCEPTABLE MEANS (SEC. 1206 OF THE
BILL AND SEC. 6311 OF THE CODE)
PRESENT LAW
Payment of taxes may be made by checks or money orders, to the extent
and under the conditions provided by Treasury regulations (sec. 6311).
REASONS FOR CHANGE
Additional payment mechanisms (such as credit cards, debit cards, and
charge cards) have become commonly used and reliable forms of payment.
Some taxpayers may find paying taxes by these mechanisms more convenient
than paying by check or money order.
EXPLANATION OF PROVISION
In general
The Internal Revenue Service (IRS) is engaged in a long-term
modernization of its information systems, the Tax Systems Modernization
(TSM) Program. This modernization is intended to address deficiencies in
the current IRS information systems and to plan effectively for future
information system needs and requirements. The systems changes are
designed to reduce the burden on taxpayers, generate additional revenue
through improved voluntary compliance, and achieve productivity gains
throughout the IRS. One key element of this program is electronic filing
of tax returns.
At the present time, increasing reliance is being placed upon
electronic funds transfers for payment of obligations. In light of this,
the IRS seeks to integrate these payment methods in its TSM program,
including electronic filing of returns, as well as into its traditional
collection functions. The bill allows the IRS to accept payment by any
commercially acceptable means that the Secretary deems appropriate, to
the extent and under the conditions provided in Treasury regulations.
This will include, for example, electronic funds transfers, including
those arising from credit cards, debit cards, and charge cards.
The IRS contemplates that it will proceed to negotiate contracts to
implement this provision with one or more private sector credit and
debit card systems. The bill provides that the Federal Government may
pay fees with respect to any such contracts only out of amounts
specifically appropriated for that purpose.
Billing error resolution
In the course of processing these transactions, it will be necessary
to resolve billing errors and other disputes. The Internal Revenue Code
contains mechanisms for the determination of tax
liability, defenses and other taxpayer protections, and the
resolution of disputes with respect to those liabilities. The
Truth-in-Lending Act contains provisions for determination of credit
card liabilities, defenses and other consumer protections, and the
resolution of disputes with respect to these liabilities.
The bill excludes credit card, debit card, and charge card issuers
and processing mechanisms from the resolution of tax liability, but
makes IRS subject to the Truth-in-Lending provisions insofar as those
provisions impose obligations and responsibilities with regard to the
``billing error'' resolution process. It is not intended that consumers
obtain additional ways to dispute their tax liabilities under the
Truth-in-Lending provisions.
The bill also specifically includes the use of debit cards in this
provision and provides that the corresponding defenses and ``billing
error'' provisions of the Electronic Fund Transfer Act will apply in a
similar manner.
The bill adds new section 6311(d)(3) to the Code. This section
describes the circumstances under which section 161 of the
Truth-in-Lending Act (``TILA'') and section 908 of the Electronic Fund
Transfer Act (``EFTA'') apply to disputes that may arise in connection
with payments of taxes made by credit card or debit card. Subsections
(A) through (C) recognize that ``billing errors'' relating to the credit
card account, such as an error arising from a credit card transaction
posted to a cardholder's account without the cardholder's authorization,
an amount posted to the wrong cardholder's account, or an incorrect
amount posted to a cardholder's account as a result of a computational
error or numerical transposition, are governed by the billing error
provisions of section 161 of TILA. Similarly, subsections 6311(d)(3) (A)
(C) provide that errors such as those described above which arise in
connection with payments of internal revenue taxes made by debit card,
are governed by section 908 of EFTA.
The Internal Revenue Code provides that refunds are only authorized
to be paid to the person who made the overpayment (generally the
taxpayer). Subsection 6311(d)(3)(E), however, provides that where a
taxpayer is entitled to receive funds as a result of the correction of a
billing error made under section 161 of TILA in connection with a credit
card transaction, or under section 908 of EFTA in connection with a
debit card transaction, the IRS is authorized to utilize the appropriate
credit card or debit card system to initiate a credit to the taxpayer's
credit card or debit card account. The IRS may, therefore, provide such
funds through the taxpayer's credit card or debit card account rather
than directly to the taxpayer.
On the other hand, subsections 6311(d)(3)(A)-(C) provide that any
alleged error or dispute asserted by a taxpayer concerning the merits of
the taxpayer's underlying tax liability or tax return is governed solely
by existing tax laws, and is not subject to section 161 or section 170
of TILA, section 908 of EFTA, or any similar provisions of State law.
Absent the exclusion from section 170 of TILA, in a collection action
brought against the cardholder by the card issuer the cardholder might
otherwise assert as a defense that the IRS had incorrectly computed his
tax liability. A collection action initiated by a credit card issuer
against the taxpayer/cardholder will be an inappropriate vehicle for the
determination of a taxpayer's tax liability, especially since the United
States will not be a party to such an action.
Similarly, without the exclusion from section 161 of TILA and section
908 of EFTA, a taxpayer could contest the merits of his tax liability by
putting the charge which appears on the credit card bill in dispute.
Pursuant to TILA or EFTA, the taxpayer's card issuer will have to
investigate the dispute, thereby finding itself in the middle of a
dispute between the IRS and the taxpayer. It is believed that it is
improper to attempt to resolve tax disputes through the billing process.
It is also noted that the taxpayer retains the traditional, existing
remedies for resolving tax disputes, such as resolving the dispute
administratively with the IRS, filing a petition with the Tax Court
after receiving a statutory notice of deficiency, or paying the disputed
tax and filing a claim for refund (and subsequently filing a refund suit
if the claim is denied or not acted upon).
Creditor status
The TILA imposes various responsibilities and obligations on
creditors. Although the definition of the term ``creditor'' set forth in
15 U.S.C. sec. 1602 is limited, and will generally not include the IRS,
in the case of an open-end credit plan involving a credit card, the card
issuer and any person who honors the credit card are, pursuant to 15
U.S.C. sec. 1602(f), creditors.
In addition, 12 CFR sec. 226.12(e) provides that the creditor must
transmit a credit statement to the card issuer within 7 business days
from accepting the return or forgiving the debt. There is a concern that
the response deadlines otherwise imposed by 12 CFR sec. 226.12(e), if
applicable, will be difficult for the IRS to comply with (given the
volume of payments the IRS is likely to receive in peak periods). This
could subject the IRS to unwarranted damage actions. Consequently, the
bill generally provides an exception to creditor status for the IRS.
Privacy protections
The bill also addresses privacy questions that arise from the IRS'
participation in credit card processing systems. It is believed that
taxpayers expect that the maximum possible protection of privacy will be
accorded any transactions they have with the IRS. Accordingly, the bill
provides the greatest possible protection of taxpayers' privacy that is
consistent with developing and operating an efficient tax administration
system. It is expected that the principle will be fully observed in the
implementation of this provision.
A key privacy issue is the use and redisclosure of tax information by
financial institutions for purposes unrelated to the processing of
credit card charges, i.e., marketing and related uses. To accept credit
card charges by taxpayers, the IRS will have to disclose tax information
to financial institutions to obtain payment and to resolve billing
disputes. To obtain payment, the IRS will have to disclose, at a
minimum, information on the ``credit slip,'' i.e., the dollar amount of
the payment and the taxpayer's credit card number.
The resolution of billing disputes may require the disclosure of
additional tax information to financial institutions. In most cases,
providing a copy of the credit slip and verifying the transaction amount
will be sufficient. Conceivably, financial institutions could require
some information regarding the underlying liability even where the
dispute concerns a ``billing
dispute'' matter. This additional information will not
necessarily be shared as widely as the initial payment data. In lieu of
disclosing further information, the IRS may elect to allow disputed
amounts to be charged back to the IRS and to reinstate the corresponding
tax liability.
Despite the language in most cardholder agreements that permits
redisclosure of credit card transaction information, the public may be
largely unaware of how widely that information is shared. For example,
some financial institutions may share credit, payment, and purchase
information with private credit bureaus, who, in turn, may sell this
information to direct mail marketers, and others. Without use and
redisclosure restrictions, taxpayers may discover that some
traditionally confidential tax information might be widely disseminated
to direct mail marketers and others.
It is intended that credit or debit card transaction information will
generally be restricted to those uses necessary to process payments and
resolve billing errors, as well as other purposes that are specified in
the statute. The bill directs the Secretary to issue published
procedures on what constitutes authorized uses and disclosures. It is
anticipated that the Secretary's published procedures will prohibit the
use of transaction information for marketing tax-related services by the
issuer or any marketing that targets only those who use their credit
card to pay their taxes. It is also anticipated that the published
procedures will prohibit the sale of transaction information to a third
party.
EFFECTIVE DATE
The provision is effective nine months after the date of enactment.
The IRS may, in this interim period, conduct internal tests and
negotiate with card issuers, but may not accept credit or debit cards
for payment of tax liability.
B. Provisions Relating to Businesses Generally
1. MODIFICATIONS TO LOOK-BACK METHOD FOR LONG-TERM CONTRACTS (SEC. 1211
OF THE BILL AND SECS. 460 AND 167(G) OF THE CODE)
PRESENT LAW
Taxpayers engaged in the production of property under a long-term
contract generally must compute income from the contract under the
percentage of completion method. Under the percentage of completion
method, a taxpayer must include in gross income for any taxable year an
amount that is based on the product of (1) the gross contract price and
(2) the percentage of the contract completed as of the end of the year.
The percentage of the contract completed as of the end of the year is
determined by comparing costs incurred with respect to the contract as
of the end of the year with estimated total contract costs.
Because the percentage of completion method relies upon estimated,
rather than actual, contract price and costs to determine gross income
for any taxable year, a ``look-back method'' is applied in the year a
contract is completed in order to compensate the taxpayer (or the
Internal Revenue Service) for the acceleration (or deferral) of taxes
paid over the contract term. The first step of the look-back method is
to reapply the percentage of completion method using actual contract
price and costs rather than estimated contract price and costs. The
second step generally requires the taxpayer to recompute its tax
liability for each year of the contract using gross income as
reallocated under the look-back method. If there is any difference
between the recomputed tax liability and the tax liability as previously
determined for a year, such difference is treated as a hypothetical
underpayment or overpayment of tax to which the taxpayer applies a rate
of interest equal to the overpayment rate, compounded daily.\5\
The taxpayer receives (or pays) interest if the net amount of interest
applicable to hypothetical overpayments exceeds (or is less than) the
amount of interest applicable to hypothetical underpayments.
\5\The overpayment rate equals the applicable Federal short-term rate
plus two percentage points. This rate is adjusted quarterly by the IRS.
Thus, in applying the look-back method for a contract year, a taxpayer
may be required to use five different interest rates.
The look-back method must be reapplied for any item of income or
cost that is properly taken into account after the completion of the
contract.
The look-back method does not apply to any contract that is completed
within two taxable years of the contract commencement date and if the
gross contract price does not exceed the lesser of (1) $1 million or (2)
one percent of the average gross receipts of the taxpayer for the
preceding three taxable years. In addition, a simplified look-back
method is available to certain pass-through entities and, pursuant to
Treasury regulations, to certain other taxpayers. Under the simplified
look-back method, the hypothetical underpayment or overpayment of tax
for a contract year generally is determined by applying the highest rate
of tax applicable to such taxpayer to the change in gross income as
recomputed under the look-back method.
REASONS FOR CHANGE
Present law may require multiple applications of the look-back method
with respect to a single contract or may otherwise subject contracts to
the look-back method even though amounts necessitating the look-back
calculations are de minimis relative to the aggregate contract income.
In addition, the use of multiple interest rates complicates the
mechanics of the look-back calculation. The Committee wishes to address
these concerns.
EXPLANATION OF PROVISION
Election not to apply the look-back method for de minimis amounts
The provision provides that a taxpayer may elect not to apply the
look-back method with respect to a long-term contract if for each prior
contract year, the cumulative taxable income (or loss) under the
contract as determined using estimated contract price and costs is
within 10 percent of the cumulative taxable income (or loss) as
determined using actual contract price and costs.
Thus, under the election, upon completion of a long-term contract, a
taxpayer would be required to apply the first step of the look-back
method (the reallocation of gross income using actual, rather than
estimated, contract price and costs), but is not required to apply the
additional steps of the look-back method if the application of the first
step resulted in de minimis changes to the amount of income previously
taken into account for each prior contract year.
The election applies to all long-term contracts completed during the
taxable year for which the election is made and to all long-term
contracts completed during subsequent taxable years, unless the election
is revoked with the consent of the Secretary of the Treasury.
Example 1. --A taxpayer enters into a three-year contract and upon
completion of the contract, determines that annual net income under the
contract using actual contract price and costs is $100,000, $150,000,
and $250,000, respectively, for Years 1, 2, and 3 under the percentage
of completion method. An electing taxpayer need not apply the look-back
method to the contract if it had reported cumulative net taxable income
under the contract using estimated contract price and costs of between
$90,000 and $110,000 as of the end of Year 1; and between $225,000 and
$275,000 as of the end of Year 2.
Election not to reapply the look-back method
The provision provides that a taxpayer may elect not to reapply the
look-back method with respect to a contract if, as of the close of any
taxable year after the year the contract is completed, the cumulative
taxable income (or loss) under the contract is within 10 percent of the
cumulative look-back income (or loss) as of the close of the most recent
year in which the look-back method was applied (or would have applied
but for the other de minimis exception described above). In applying
this rule, amounts that are taken into account after completion of of
the contract are not discounted.
Thus, an electing taxpayer need not apply or reapply the look-back
method if amounts that are taken into account after the completion of
the contract are de minimis.
The election applies to all long-term contracts completed during the
taxable year for which the election is made and to all long-term
contracts completed during subsequent taxable years, unless the election
is revoked with the consent of the Secretary of the Treasury.
Example 2. --A taxpayer enters into a three-year contract and
reports taxable income of $12,250, $15,000 and $12,750, respectively,
for Years 1 through 3 with respect to the contract. Upon completion of
the contract, cumulative look-back income with respect to the contract
is $40,000, and 10 percent of such amount is $4,000. After the
completion of the contract, the taxpayer incurs additional costs of
$2,500 in each of the next three succeeding years (Years 4, 5, and 6)
with respect to the contract. Under the provision, an electing taxpayer
does not reapply the look-back method for Year 4 because the cumulative
amount of contract taxable income ($37,500) is within 10 percent of
contract look-back income as of the completion of the contract
($40,000). However, the look-back method must be applied for Year 5
because the cumulative amount of contract taxable income ($35,000) is
not within 10 percent of contract look-back income as of the completion
of the contract ($40,000). Finally, the taxpayer does not reapply the
look-back method for Year 6 because the cumulative amount of contract
taxable income ($32,500) is within 10 percent of contract look-back
income as of the last application of the look-back method ($35,000).
Interest rates used for purposes of the look-back method
The provision provides that for purposes of the look-back method,
only one rate of interest is to apply for each accrual period. An
accrual period with respect to a taxable year begins on the day after
the return due date (determined without regard to extensions) for the
taxable year and ends on such return due date for the following taxable
year. The applicable rate of interest is the overpayment rate in effect
for the calendar quarter in which the accrual period begins.
EFFECTIVE DATE
The provision applies to contracts completed in taxable years ending
after the date of enactment. The change in the interest rate calculation
also applies for purposes of the look-back method applicable to the
income forecast method of depreciation for property placed in service
after September 13, 1995.
2. MINIMUM TAX TREATMENT OF CERTAIN PROPERTY AND CASUALTY INSURANCE
COMPANIES (SEC. 1212 OF THE BILL AND SEC. 56(G)(4)(B) OF THE CODE)
PRESENT LAW
Present law provides that certain property and casualty insurance
companies may elect to be taxed only on taxable investment income for
regular tax purposes (sec. 831(b)). Eligible property and casualty
insurance companies are those whose net written premiums (or if greater,
direct written premiums) for the taxable year exceed $350,000 but do not
exceed $1,200,000.
Under present law, all corporations including insurance companies are
subject to an alternative minimum tax. Alternative minimum taxable
income is increased by 75 percent of the excess of adjusted current
earnings over alternative minimum taxable income (determined without
regard to this adjustment and without regard to net operating losses).
REASONS FOR CHANGE
The Committee believes that property and casualty companies small
enough to be eligible to simplify their regular tax computation by
electing to be taxed only on taxable investment income should be
accorded comparable simplicity in the calculation of their alternative
minimum tax. Under present law, the simplicity under the regular tax is
nullified because electing companies must calculate underwriting income
for tax purposes under the alternative minimum tax. The provision thus
simplifies the entire Federal income tax calculation for a group of
small taxpayers whom Congress has previously determined merit a simpler
tax calculation.
EXPLANATION OF PROVISION
The bill provides that a property and casualty insurance company that
elects for regular tax purposes to be taxed only on taxable investment
income determines its adjusted current earnings under the alternative
minimum tax without regard to any amount not taken into account in
determining its gross investment income under section 834(b). Thus,
adjusted current earnings of an electing company is determined without
regard to underwriting income (or underwriting expense, as provided in
sec. 56(g)(4)(B)(I)(II)).
EFFECTIVE DATE
The provision is effective for taxable years beginning after December
31, 1997.
C. Partnership Simplification Provisions
1. GENERAL PROVISIONS
a. Simplified flow-through for electing large partnerships
(sec. 1221 of the bill and new secs. 771 777 of the Code)
PRESENT LAW
Treatment of partnerships in general
A partnership generally is treated as a conduit for Federal income
tax purposes. Each partner takes into account separately his
distributive share of the partnership's items of income, gain, loss,
deduction or credit. The character of an item is the same as if it had
been directly realized or incurred by the partner. Limitations affecting
the computation of taxable income generally apply at the partner level.
The taxable income of a partnership is computed in the same manner as
that of an individual, except that no deduction is permitted for
personal exemptions, foreign taxes, charitable contributions, net
operating losses, certain itemized deductions, or depletion. Elections
affecting the computation of taxable income derived from a partnership
are made by the partnership, except for certain elections such as those
relating to discharge of indebtedness income and the foreign tax credit.
Capital gains
The net capital gain of an individual is taxed generally at the same
rates applicable to ordinary income, subject to a maximum marginal rate
of 28 percent. Net capital gain is the excess of net long-term capital
gain over net short-term capital loss. Individuals with a net capital
loss generally may deduct up to $3,000 of the loss each year against
ordinary income. Net capital losses in excess of the $3,000 limit may be
carried forward indefinitely.
A special rule applies to gains and losses on the sale, exchange or
involuntary conversion of certain trade or business assets (sec. 1231).
In general, net gains from such assets are treated as long-term capital
gains but net losses are treated as ordinary losses.
A partner's share of a partnership's net short-term capital gain or
loss and net long-term capital gain or loss from portfolio investments
is separately reported to the partner. A partner's share of a
partnership's net gain or loss under section 1231 generally is also
separately reported.
Deductions and credits
Miscellaneous itemized deductions (e.g., certain investment expenses)
are deductible only to the extent that, in the aggregate, they exceed
two percent of the individual's adjusted gross income.
In general, taxpayers are allowed a deduction for charitable
contributions, subject to certain limitations. The deduction allowed an
individual generally cannot exceed 50 percent of the individual's
adjusted gross income for the taxable year. The deduction allowed a
corporation generally cannot exceed 10 percent of the corporation's
taxable income. Excess contributions are carried forward for five years.
A partner's distributive share of a partnership's miscellaneous
itemized deductions and charitable contributions is separately reported
to the partner.
Each partner is allowed his distributive share of credits against his
taxable income.
Foreign taxes
The foreign tax credit generally allows U.S. taxpayers to reduce U.S.
income tax on foreign income by the amount of foreign income taxes paid
or accrued with respect to that income. In lieu of electing the foreign
tax credit, a taxpayer may deduct foreign taxes. The total amount of the
credit may not exceed the same proportion of the taxpayer's U.S. tax
which the taxpayer's foreign source taxable income bears to the
taxpayer's worldwide taxable income for the taxable year.
Unrelated business taxable income
Tax-exempt organizations are subject to tax on income from unrelated
businesses. Certain types of income (such as dividends, interest and
certain rental income) are not treated as unrelated business taxable
income. Thus, for a partner that is an exempt organization, whether
partnership income is unrelated business taxable income depends on the
character of the underlying income. Income from a publicly traded
partnership, however, is treated as unrelated business taxable income
regardless of the character of the underlying income.
Special rules related to oil and gas activities
Taxpayers involved in the search for and extraction of crude oil and
natural gas are subject to certain special tax rules. As a result, in
the case of partnerships engaged in such activities, certain specific
information is separately reported to partners.
A taxpayer who owns an economic interest in a producing deposit of
natural resources (including crude oil and natural gas) is permitted to
claim a deduction for depletion of the deposit as the minerals are
extracted. In the case of oil and gas produced in the United States, a
taxpayer generally is permitted to claim the greater of a deduction for
cost depletion or percentage depletion. Cost depletion is computed by
multiplying a taxpayer's adjusted basis in the depletable property by a
fraction, the numerator of which is the amount of current year
production from the property and the denominator of which is the
property's estimated reserves as of the beginning of that year.
Percentage depletion is equal to a specified percentage (generally, 15
percent in the case of oil and gas) of gross income from production.
Cost depletion is limited to the taxpayer's basis in the depletable
property; percentage depletion is not
so limited. Once a taxpayer has exhausted its basis in the
depletable property, it may continue to claim percentage depletion
deductions (generally referred to as ``excess percentage depletion'').
Certain limitations apply to the deduction for oil and gas percentage
depletion. First, percentage depletion is not available to oil and gas
producers who also engage (directly or indirectly) in significant levels
of oil and gas retailing or refining activities (so-called ``integrated
producers'' of oil and gas). Second, the deduction for percentage
depletion may be claimed by a taxpayer only with respect to up to 1,000
barrels-per-day of production. Third, the percentage depletion deduction
may not exceed 100 percent of the taxpayer's net income for the taxable
year from the depletable oil and gas property. Fourth, a percentage
depletion deduction may not be claimed to the extent that it exceeds 65
percent of the taxpayer's pre-percentage depletion taxable income.
In the case of a partnership that owns depletable oil and gas
properties, the depletion allowance is computed separately by the
partners and not by the partnership. In computing a partner's basis in
his partnership interest, basis is increased by the partner's share of
any partnership-related excess percentage depletion deductions and is
decreased (but not below zero) by the partner's total amount of
depletion deductions attributable to partnership property.
Intangible drilling and development costs (``IDCs'') incurred with
respect to domestic oil and gas wells generally may be deducted at the
election of the taxpayer. In the case of integrated producers, no more
than 70 percent of IDCs incurred during a taxable year may be deducted.
IDCs not deducted are capitalized and generally are either added to the
property's basis and recovered through depletion deductions or amortized
on a straight-line basis over a 60-month period.
The special treatment granted to IDCs incurred in the pursuit of oil
and gas may give rise to an item of tax preference or (in the case of
corporate taxpayers) an adjusted current earnings (``ACE'') adjustment
for the alternative minimum tax. The tax preference item is based on a
concept of ``excess IDCs.'' In general, excess IDCs are the excess of
IDCs deducted for the taxable year over the amount of those IDCs that
would have been deducted had they been capitalized and amortized on a
straight-line basis over 120 months commencing with the month production
begins from the related well. The amount of tax preference is then
computed as the difference between the excess IDC amount and 65 percent
of the taxpayer's net income from oil and gas (computed without a
deduction for excess IDCs). For IDCs incurred in taxable years beginning
after 1992, the ACE adjustment related to IDCs is repealed for taxpayers
other than integrated producers. Moreover, beginning in 1993, the IDC
tax preference generally is repealed for taxpayers other than integrated
producers. In this case, however, the repeal of the excess IDC
preference may not result in more than a 40 percent reduction (30
percent for taxable years beginning in 1993) in the amount of the
taxpayer's alternative minimum taxable income computed as if that
preference had not been repealed.
Passive losses
The passive loss rules generally disallow deductions and credits from
passive activities to the extent they exceed income from passive
activities. Losses not allowed in a taxable year are suspended and
treated as current deductions from passive activities in the next
taxable year. These losses are allowed in full when a taxpayer disposes
of the entire interest in the passive activity to an unrelated person in
a taxable transaction. Passive activities include trade or business
activities in which the taxpayer does not materially participate.
(Limited partners generally do not materially participate in the
activities of a partnership.) Passive activities also include rental
activities (regardless of the taxpayer's material participation).\6\
Portfolio income (such as interest and dividends), and expenses
allocable to such income, are not treated as income or loss from a
passive activity.
\6\An individual who actively participates in a rental real estate
activity and holds at least a 10-percent interest may deduct up to
$25,000 of passive losses. The $25,000 amount phases out as the
individual's income increases from $100,000 to $150,000.
The $25,000 allowance also applies to low-income housing and
rehabilitation credits (on a deduction equivalent basis), regardless of
whether the taxpayer claiming the credit actively participates in the
rental real estate activity generating the credit. In addition, the
income phaseout range for the $25,000 allowance for rehabilitation
credits is $200,000 to $250,000 (rather than $100,000 to $150,000). For
interests acquired after December 31, 1989 in partnerships holding
property placed in service after that date, the $25,000
deduction-equivalent allowance is permitted for the low-income housing
credit without regard to the taxpayer's income.
A partnership's operations may be treated as multiple activities for
purposes of the passive loss rules. In such case, the partnership must
separately report items of income and deductions from each of its
activities.
Income, loss and other items from a publicly traded partnership are
treated as separate from income and loss from any other publicly traded
partnership, and also as separate from any income or loss from passive
activities.
The Omnibus Budget Reconciliation Act of 1993 added a rule, effective
for taxable years beginning after December 31, 1993, treating a
taxpayer's rental real estate activities in which he materially
participates as not subject to limitation under the passive loss rules
if the taxpayer meets eligibility requirements relating to real property
trades or businesses in which he performs services (sec. 469(c)(7)).
Real property trade or business means any real property development,
redevelopment, construction, reconstruction, acquisition, conversion,
rental, operation, management, leasing, or brokerage trade or business.
An individual taxpayer generally meets the eligibility requirements if
(1) more than half of the personal services the taxpayer performs in
trades or business during the taxable year are performed in real
property trades or businesses in which the taxpayer materially
participates, and (2) such taxpayer performs more than 750 hours of
services during the taxable year in real property trades or businesses
in which the taxpayer materially participates.
REMICs
A tax is imposed on partnerships holding a residual interest in a
real estate mortgage investment conduit (``REMIC''). The amount of the
tax is the amount of excess inclusions allocable to partnership
interests owned by certain tax-exempt organizations (``disqualified
organizations'') multiplied by the highest corporate tax rate.
Contribution of property to a partnership
In general, a partner recognizes no gain or loss upon the
contribution of property to a partnership. However, income, gain, loss
and deduction with respect to property contributed to a partnership by a
partner must be allocated among the partners so as to take into account
the difference between the basis of the property to the partnership and
its fair market value at the time of contribution. In addition, the
contributing partner must recognize gain or loss equal to such
difference if the property is distributed to another partner within five
years of its contribution (sec. 704(c)), or if other property is
distributed to the contributor within the five year period (sec. 737).
Election of optional basis adjustments
In general, the transfer of a partnership interest or a distribution
of partnership property does not affect the basis of partnership assets.
A partnership, however, may elect to make certain adjustments in the
basis of partnership property (sec. 754). Under a section 754 election,
the transfer of a partnership interest generally results in an
adjustment in the partnership's basis in its property for the benefit of
the transferee partner only, to reflect the difference between that
partner's basis for his interest and his proportionate share of the
adjusted basis of partnership property (sec. 743(b)). Also under the
election, a distribution of property to a partner in certain cases
results in an adjustment in the basis of other partnership property
(sec. 734(b)).
Terminations
A partnership terminates if either (1) all partners cease carrying on
the business, financial operation or venture of the partnership, or (2)
within a 12-month period 50 percent or more of the total partnership
interests are sold or exchanged (sec. 708).
REASONS FOR CHANGE
The requirement that each partner take into account separately his
distributive share of a partnership's items of income, gain, loss,
deduction and credit can result in the reporting of a large number of
items to each partner. The schedule K 1, on which such items are
reported, contains space for more than 40 items. Reporting so many
separately stated items is burdensome for individual investors with
relatively small, passive interests in large partnerships. In many
respects such investments are indistinguishable from those made in
corporate stock or mutual funds, which do not require reporting of
numerous separate items.
In addition, the number of items reported under the current regime
makes it difficult for the Internal Revenue Service to match items
reported on the K 1 against the partner's income tax return. Matching is
also difficult because items on the K 1 are often modified or limited at
the partner level before appearing on the partner's tax return.
By significantly reducing the number of items that must be separately
reported to partners by an electing large partnership, the provision
eases the reporting burden of partners and facilitates matching by the
IRS. Moreover, it is understood that the Internal Revenue Service is
considering restricting the use of substitute reporting forms by large
partnerships. Reduction of the number of items makes possible a short
standardized form.
EXPLANATION OF PROVISIONS
In general
The bill modifies the tax treatment of an electing large partnership
(generally, any partnership that elects under the provision, if the
number of partners in the preceding taxable year is 100 or more) and its
partners. The provision provides that each partner takes into account
separately the partner's distributive share of the following items,
which are determined at the partnership level: (1) taxable income or
loss from passive loss limitation activities; (2) taxable income or loss
from other activities (e.g., portfolio income or loss); (3) net capital
gain or loss to the extent allocable to passive loss limitation
activities and other activities; (4) tax-exempt interest; (5) net
alternative minimum tax adjustment separately computed for passive loss
limitation activities and other activities; (6) general credits; (7)
low-income housing credit; (8) rehabilitation credit; (9) credit for
producing fuel from a nonconventional source; (10) creditable foreign
taxes and foreign source items; and (11) any other items to the extent
that the Secretary determines that separate treatment of such items is
appropriate.\7\
Separate treatment may be appropriate, for example, should changes in
the law necessitate such treatment for any items.
\7\In determining the amounts required to be separately taken into
account by a partner, those provisions of the large partnership rules
governing computations of taxable income are applied * * * separately
with respect to that partner by taking into account that partner's
distributive share of the partnership's items of income, gain, loss,
deduction or credit. This rule permits partnerships to make otherwise
valid special allocations of partnership items to partners.
Under the bill, the taxable income of an electing large partnership
is computed in the same manner as that of an individual, except that the
items described above are separately stated and certain modifications
are made. These modifications include disallowing the deduction for
personal exemptions, the net operating loss deduction and certain
itemized deductions.\8\
All limitations and other provisions affecting the computation of
taxable income or any credit (except for the at risk, passive loss and
itemized deduction limitations, and any other provision specified in
regulations) are applied at the partnership (and not the partner) level.
\8\An electing large partnership is allowed a deduction under section
212 for expenses incurred for the production of income, subject to
70-percent disallowance. No income from an electing large partnership is
treated as fishing or farming income.
All elections affecting the computation of taxable income or any
credit generally are made by the partnership.
Capital gains
Under the bill, netting of capital gains and losses occurs at the
partnership level. A partner in a large partnership takes into account
separately his distributive share of the partnership's net capital gain
or net capital loss.\9\
Such net capital gain or loss is treated as long-term capital gain or
loss.
\9\The term ``net capital gain'' has the same meaning as in section
1222(11). The term ``net capital loss'' means the excess of the losses
from sales or exchanges of capital assets over the gains from sales or
exchanges of capital assets. Thus, the partnership cannot offset any
portion of capital losses against ordinary income.
Any excess of net short-term capital gain over net long-term capital
loss is consolidated with the partnership's other taxable income and is
not separately reported.
A partner's distributive share of the partnership's net capital gain
is allocated between passive loss limitation activities and other
activities. The net capital gain is allocated to passive loss limitation
activities to the extent of net capital gain from sales and exchanges of
property used in connection with such activities, and any excess is
allocated to other activities. A similar rule applies for purposes of
allocating any net capital loss.
Any gains and losses of the partnership under section 1231 are netted
at the partnership level. Net gain is treated as long-term capital gain
and is subject to the rules described above. Net loss is treated as
ordinary loss and consolidated with the partnership's other taxable
income.
Deductions
The bill contains two special rules for deductions. First,
miscellaneous itemized deductions are not separately reported to
partners. Instead, 70 percent of the amount of such deductions is
disallowed at the partnership level;\10\
the remaining 30 percent is allowed at the partnership level in
determining taxable income, and is not subject to the two- percent floor
at the partner level.
\10\The 70 percent figure is intended to approximate the amount of such
deductions that would be denied at the partner level as a result of the
two-percent floor.
Second, charitable contributions are not separately reported to
partners under the bill. Instead, the charitable contribution deduction
is allowed at the partnership level in determining taxable income,
subject to the limitations that apply to corporate donors.
Credits in general
Under the bill, general credits are separately reported to partners
as a single item. General credits are any credits other than the
low-income housing credit, the rehabilitation credit and the credit for
producing fuel from a nonconventional source. A partner's distributive
share of general credits is taken into account as a current year general
business credit. Thus, for example, the credit for clinical testing
expenses is subject to the present law limitations on the general
business credit. The refundable credit for gasoline used for exempt
purposes and the refund or credit for undistributed capital gains of a
regulated investment company are allowed to the partnership, and thus
are not separately reported to partners.
In recognition of their special treatment under the passive loss
rules, the low-income housing and rehabilitation credits are separately
reported.\11\
In addition, the credit for producing fuel from a nonconventional
source is separately reported.
\11\It is understood that the rehabilitation and low-income housing
credits which are subject to the same passive loss rules (i.e., in the
case of the low-income housing credit, where the partnership interest
was acquired or the property was placed in service before 1990) could be
reported together on the same line.
The bill imposes credit recapture at the partnership level and
determines the amount of recapture by assuming that the credit fully
reduced taxes. Such recapture is applied first to reduce the
partnership's current year credit, if any; the partnership is liable for
any excess over that amount. Under the bill, the transfer of an interest
in an electing large partnership does not trigger recapture.
Foreign taxes
The bill retains present-law treatment of foreign taxes. The
partnership reports to the partner creditable foreign taxes and the
source of any income, gain, loss or deduction taken into account by the
partnership. Elections, computations and limitations are made by the
partner.
Tax-exempt interest
The bill retains present-law treatment of tax-exempt interest.
Interest on a State or local bond is separately reported to each
partner.
Unrelated business taxable income
The bill retains present-law treatment of unrelated business taxable
income. Thus, a tax-exempt partner's distributive share of partnership
items is taken into account separately to the extent necessary to comply
with the rules governing such income.
Passive losses
Under the bill, a partner in an electing large partnership takes in
an electing to account separately his distributive share of the
partnership's taxable income or loss from passive loss limitation
activities. The term ``passive loss limitation activity'' means any
activity involving the conduct of a trade or business (including any
activity treated as a trade or business under sec. 469(c)(5) or (6)) and
any rental activity. A partner's share of an electing large
partnership's taxable income or loss from passive loss limitation
activities is treated as an item of income or loss from the conduct of a
trade or business which is a single passive activity, as defined in the
passive loss rules. Thus, an electing large partnership generally is not
required to separately report items from multiple activities.
A partner in an electing large partnership also takes into account
separately his distributive share of the partnership's taxable income or
loss from activities other than passive loss limitation activities. Such
distributive share is treated as an item of income or expense with
respect to property held for investment. Thus, portfolio income (e.g.,
interest and dividends) is reported separately and is reduced by
portfolio deductions and allocable investment interest expense.
In the case of a partner holding an interest in an electing large
partnership which is not a limited partnership interest, such partner's
distributive share of any items are taken into account separately to the
extent necessary to comply with the passive loss rules. Thus, for
example, income of an electing large partnership is not treated as
passive income with respect to the general partnership interest of a
partner who materially participates in the partnership's trade or
business.
Under the bill, the requirement that the passive loss rule be
separately applied to each publicly traded partnership (sec. 469(k) of
the Code) continues to apply.
Alternative minimum tax
Under the bill, alternative minimum tax (``AMT'') adjustments and
preferences are combined at the partnership level. An electing large
partnership would report to partners a net AMT adjustment separately
computed for passive loss limitation activities and other activities. In
determining a partner's alternative minimum taxable income, a partner's
distributive share of any net AMT adjustment is taken into account
instead of making separate AMT adjustments with respect to partnership
items. The net AMT adjustment is determined by using the adjustments
applicable to individuals (in the case of partners other than
corporations), and by using the adjustments applicable to corporations
(in the case of corporate partners). Except as provided in regulations,
the net AMT adjustment is treated as a deferral preference for purposes
of the section 53 minimum tax credit.
Discharge of indebtedness income
If an electing large partnership has income from the discharge of any
indebtedness, such income is separately reported to each partner. In
addition, the rules governing such income (sec. 108) are applied without
regard to the large partnership rules. Partner-level elections under
section 108 are made by each partner separately. Thus, for example, the
large partnership provisions do not affect section 108(d)(6), which
provides that certain section 108 rules apply at the partner level, or
section 108(b)(5), which provides for an election to reduce the basis of
depreciable property. The large partnership provisions also do not
affect the election under 108(c) (added by the Omnibus Budget
Reconciliation Act of 1993) to exclude discharge of indebtedness income
with respect to qualified real property business indebtedness.
REMICs
For purposes of the tax on partnerships holding residual interests in
REMICs, all interests in an electing large partnership are treated as
held by disqualified organizations. Thus, an electing large partnership
holding a residual interest in a REMIC is subject to a tax equal to the
excess inclusions multiplied by the highest corporate rate. The amount
subject to tax is excluded from partnership income.
Election of optional basis adjustments
Under the bill, an electing large partnership may still elect to
adjust the basis of partnership assets with respect to transferee
partners. The computation of an electing large partnership's taxable
income is made without regard to the section 743(b) adjustment. As under
present law, the section 743(b) adjustment is made only with respect to
the transferee partner. In addition, an electing large partnership is
permitted to adjust the basis of partnership property under section
734(b) if property is distributed to a partner, as under present law.
Terminations
The bill provides that an electing large partnership does not
terminate for tax purposes solely because 50 percent of its interests
are sold or exchanged within a 12-month period.
Partnerships and partners subject to large partnership rules
Definition of electing large partnership
An ``electing large partnership'' is any partnership that elects
under the provision, if the number of partners in the preceding taxable
year is 100 or more. The number of partners is determined by counting
only persons directly holding partnership interests in the taxable year,
including persons holding through nominees; persons holding indirectly
(e.g., through another partnership) are not counted. Regulations may
provide, however, that if the number of partners in any taxable year
falls below 100, the partnership may not be treated as an electing large
partnership. The election applies to the year for which made and all
subsequent years and cannot be revoked without the Secretary's consent.
Special rules for certain service partnerships
An election under this provision is not effective for any partnership
if substantially all the partners are: (1) individuals performing
substantial services in connection with the partnership's activities, or
personal service corporations the owner-employees of which perform such
services;
(2) retired partners who had performed such services; or (3)
spouses of partners who had performed such services. In addition, the
term ``partner'' does not include any individual performing substantial
services in connection with the partnership's activities and holding a
partnership interest, or an individual who formerly performed such
services and who held a partnership interest at the time the individual
performed such services.
Exclusion for commodity partnerships
An election under this provision is not effective for any partnership
the principal activity of which is the buying and selling of commodities
(not described in sec. 1221(1)), or options, futures or forwards with
respect to commodities.
Special rules for partnerships holding oil and gas properties
Simplified reporting treatment of electing large
partnerships with oil and gas activities
The bill provides special rules for electing large partnerships with
oil and gas activities that operate under the simplified reporting
regime. These partnerships are collectively referred to herein as ``oil
and gas large partnerships.'' Generally, the bill provides that an oil
and gas large partnership reports information to its partners under the
general simplified large partnership reporting regime described above.
To prevent the extension of percentage depletion deductions to persons
excluded therefrom under present law, however, certain partners are
treated as disqualified persons under the bill.
The treatment of a disqualified person's distributive share of any
item of income, gain, loss, deduction, or credit attributable to any
partnership oil or gas property is determined under the bill without
regard to the special rules applicable to large partnerships. Thus, an
oil and gas large partnership reports information related to oil and gas
activities to a partner who is a disqualified person in the same manner
and to the same extent that it reports such information to that partner
under present law. The simplified reporting rules of the bill, however,
apply with respect to reporting such a partner's share of items not
related to oil and gas activities.
The bill defines two categories of taxpayers as disqualified persons.
The first category encompasses taxpayers who do not qualify for the
deduction for percentage depletion under section 613A (i.e., integrated
producers of oil and gas). The second category includes any person whose
average daily production of oil and gas (for purposes of determining the
depletable oil and natural gas quantity under section 613A(c)(2)) is at
least 500 barrels for its taxable year in which (or with which) the
partnership's taxable year ends. In making this computation, all
production of domestic crude oil and natural gas attributable to the
partner is taken into account, including such partner's proportionate
share of any production of the large partnership.
A taxpayer that falls within a category of disqualified person has
the responsibility of notifying any large partnership in which it holds
a direct or indirect interest (e.g., through a pass-through entity) of
its status as such. Thus, for example, if an integrated producer owns an
interest in a partnership which in turn owns an interest in an oil and
gas large partnership, it is responsible for providing the management of
the electing large partnership information regarding its status as a
disqualified person and details regarding its indirect interest in the
electing large partnership.
Under the bill, an oil and gas large partnership computes its
deduction for oil and gas depletion under the general statutory rules
(subject to certain exceptions described below) under the assumptions
that the partnership is the taxpayer and that it qualifies for the
percentage depletion deduction. The amount of the depletion deduction,
as well as other oil and gas related items, generally are reported to
each partner (other than to partners who are disqualified persons) as
components of that partner's distributive share of taxable income or
loss from passive loss limitation activities. The bill provides that in
computing the partnership's oil and gas percentage depletion deduction,
the 1,000-barrel-per-day limitation does not apply. In addition, an oil
and gas large partnership is allowed to compute percentage depletion
under the bill without applying the 65-percent-of-taxable-income
limitation under section 613A(d)(1).
As under present law, an election to deduct IDCs under section 263(c)
is made at the partnership level. Since the bill treats those taxpayers
required by the Code (sec. 291) to capitalize 30 percent of IDCs as
disqualified persons, an oil and gas large partnership may pass through
a full deduction of IDCs to its partners who are not disqualified
persons. In contrast to present law, an oil and gas large partnership
also has the responsibility with respect to its partners who are not
disqualified persons for making an election under section 59(e) to
capitalize and amortize certain specified IDCs. Partners who are
disqualified persons are permitted to make their own separate section
59(e) elections under the bill.
Consistent with the general reporting regime for electing large
partnerships, the bill provides that a single AMT adjustment (under
either corporate or non-corporate principles, as the case may be) is
made and reported to the partners (other than disqualified persons) of
an oil and gas large partnership as a separate item. This
separately-reported item is affected by the limitation on the repeal of
the tax preference for excess IDCs. For purposes of computing this
limitation, the bill treats an oil and gas large partnership as the
taxpayer. Thus, the limitation on repeal of the IDC preference is
applied at the partnership level and is based on the cumulative
reduction in the partnership's alternative minimum taxable income
resulting from repeal of that preference.
The bill provides that in making partnership-level computations, any
item of income, gain, loss, deduction, or credit attributable to a
partner who is a disqualified person is disregarded. For example, in
computing the partnership's net income from oil and gas for purposes of
determining the IDC preference (if any) to be reported to partners who
are not disqualified persons as part of the AMT adjustment, disqualified
persons' distributive shares of the partnership's net income from oil
and gas are not to be taken into account.
Regulatory authority
The Secretary of the Treasury is granted authority to prescribe such
regulations as may be appropriate to carry out the purposes of the
provisions.
EFFECTIVE DATE
The provisions generally apply to partnership taxable years beginning
after December 31, 1997.
B. SIMPLIFIED AUDIT PROCEDURES FOR ELECTING LARGE PARTNERSHIPS (SEC.
1222 OF THE BILL AND SECS. 6240, 6241, 6242, 6245, 6246, 6247, 6249, 6251, 6255,
AND 6256 OF THE CODE)
PRESENT LAW
In general
Prior to 1982, regardless of the size of a partnership, adjustments
to a partnership's items of income, gain, loss, deduction, or credit had
to be made in separate proceedings with respect to each partner
individually. Because a large partnership sometimes had many partners
located in different audit districts, adjustments to items of income,
gains, losses, deductions, or credits of the partnership had to be made
in numerous actions in several jurisdictions, sometimes with conflicting
outcomes.
The Tax Equity and Fiscal Responsibility Act of 1982 (``TEFRA'')
established unified audit rules applicable to all but certain small (10
or fewer partners) partnerships. These rules require the tax treatment
of all ``partnership items'' to be determined at the partnership, rather
than the partner, level. Partnership items are those items that are more
appropriately determined at the partnership level than at the partner
level, as provided by regulations.
Under the TEFRA rules, a partner must report all partnership items
consistently with the partnership return or must notify the IRS of any
inconsistency. If a partner fails to report any partnership item
consistently with the partnership return, the IRS may make a
computational adjustment and immediately assess any additional tax that
results.
Administrative proceedings
Under the TEFRA rules, a partner must report all partnership items
consistently with the partnership return or must notify the IRS of any
inconsistency. If a partner fails to report any partnership item
consistently with the partnership return, the IRS may make a
computational adjustment and immediately assess any additional tax that
results.
The IRS may challenge the reporting position of a partnership by
conducting a single administrative proceeding to resolve the issue with
respect to all partners. But the IRS must still assess any resulting
deficiency against each of the taxpayers who were partners in the year
in which the understatement of tax liability arose.
Any partner of a partnership can request an administrative adjustment
or a refund for his own separate tax liability. Any partner also has the
right to participate in partnership-level administrative proceedings. A
settlement agreement with respect to partnership items binds all parties
to the settlement.
Tax Matters Partner
The TEFRA rules establish the ``Tax Matters Partner'' as the primary
representative of a partnership in dealings with the IRS. The Tax
Matters Partner is a general partner designated by the partnership or,
in the absence of designation, the general partner with the largest
profits interest at the close of the taxable year. If no Tax Matters
Partner is designated, and it is impractical to apply the largest
profits interest rule, the IRS may select any partner as the Tax Matters
Partner.
Notice requirements
The IRS generally is required to give notice of the beginning of
partnership-level administrative proceedings and any resulting
administrative adjustment to all partners whose names and addresses are
furnished to the IRS. For partnerships with more than 100 partners,
however, the IRS generally is not required to give notice to any partner
whose profits interest is less than one percent.
Adjudication of disputes concerning partnership items
After the IRS makes an administrative adjustment, the Tax Matters
Partner (and, in limited circumstances, certain other partners) may file
a petition for readjustment of partnership items in the Tax Court, the
district court in which the partnership's principal place of business is
located, or the Claims Court.
Statute of limitations
The IRS generally cannot adjust a partnership item for a partnership
taxable year if more than 3 years have elapsed since the later of the
filing of the partnership return or the last day for the filing of the
partnership return.
REASONS FOR CHANGE
Present audit procedures for large partnerships are inefficient and
more complex than those for other large entities. The IRS must assess
any deficiency arising from a partnership audit against a large number
of partners, many of whom cannot easily be located and some of whom are
no longer partners. In addition, audit procedures are cumbersome and can
be complicated further by the intervention of partners acting
individually.
EXPLANATION OF PROVISION
The bill creates a new audit system for electing large partnerships.
The provision defines ``electing large partnership'' the same way for
audit and reporting purposes (generally, any partnership that elects
under the reporting provisions, if the number of partners in the
preceding taxable year is 100 or more).
As under present law, electing large partnerships and their partners
are subject to unified audit rules. Thus, the tax treatment of
``partnership items'' are determined at the partnership, rather than the
partner, level. The term ``partnership items'' is defined as under
present law.
Unlike present law, however, partnership adjustments generally will
flow through to the partners for the year in which the adjustment takes
effect. Thus, the current-year partners' share of current-year
partnership items of income, gains, losses, deductions, or credits will
be adjusted to reflect partnership adjustments that take effect in that
year. The adjustments generally will not affect prior-year returns of
any partners (except in the case of changes to any partner's
distributive shares).
In lieu of flowing an adjustment through to its partners, the
partnership may elect to pay an imputed underpayment. The imputed
underpayment generally is calculated by netting the adjustments to the
income and loss items of the partnership and multiplying that amount by
the highest tax rate (whether individual or corporate). A partner may
not file a claim for credit or refund of his allocable share of the
payment. A partnership may make this election only if it meets
requirements set forth in Treasury regulations designed to ensure
payment (for example, in the case of a foreign partnership).
Regardless of whether a partnership adjustment flows through to the
partners, an adjustment must be offset if it requires another adjustment
in a year after the adjusted year and before the year the offsetted
adjustment takes effect. For example, if a partnership expensed a $1,000
item in year 1, and it was determined in year 4 that the item should
have been capitalized and amortized ratably over 10 years, the
adjustment in year 4 would be $700, apart from any interest or penalty.
(The $900 adjustment for the improper deduction would be offset by $200
of adjustments for amortization deductions.) The year 4 partners would
be required to include an additional $700 in income for that year. The
partnership may ratably amortize the remaining $700 of expenses in years
4 10.
In addition, the partnership, rather than the partners individually,
generally is liable for any interest and penalties that result from a
partnership adjustment. Interest is computed for the period beginning on
the return due date for the adjusted year and ending on the earlier of
the return due date for the partnership taxable year in which the
adjustment takes effect or the date the partnership pays the imputed
underpayment. Thus, in the above example, the partnership would be
liable for 4 years' worth of interest (on a declining principal amount).
Penalties (such as the accuracy and fraud penalties) are determined
on a year-by-year basis (without offsets) based on an imputed
underpayment. All accuracy penalty criteria and waiver criteria (such as
reasonable cause, substantial authority, etc.) are determined as if the
partnership were a taxable individual. Accuracy and fraud penalties are
assessed and accrue interest in the same manner as if asserted against a
taxable individual.
Any payment (for Federal income taxes, interest, or penalties) that
an electing large partnership is required to make is non-deductible.
If a partnership ceases to exist before a partnership adjustment
takes effect, the former partners are required to take the adjustment
into account, as provided by regulations. Regulations are also
authorized to prevent abuse and to enforce efficiently the audit rules
in circumstances that present special enforcement considerations (such
as partnership bankruptcy).
Administrative proceedings
Under the electing large partnership audit rules, a partner is not
permitted to report any partnership items inconsistently with the
partnership return, even if the partner notifies the IRS of the
inconsistency. The IRS may treat a partnership item that was reported
inconsistently by a partner as a mathematical or clerical error and
immediately assess any additional tax against that partner.
As under present law, the IRS may challenge the reporting position of
a partnership by conducting a single administrative proceeding to
resolve the issue with respect to all partners. Unlike under present
law, however, partners will have no right individually to participate in
settlement conferences or to request a refund.
Partnership representative
The bill requires each electing large partnership to designate a
partner or other person to act on its behalf. If an electing large
partnership fails to designate such a person, the IRS is permitted to
designate any one of the partners as the person authorized to act on the
partnership's behalf. After the IRS's designation, an electing large
partnership could still designate a replacement for the IRS-designated
partner.
Notice requirements
Unlike under present law, the IRS is not required to give notice to
individual partners of the commencement of an administrative proceeding
or of a final adjustment. Instead, the IRS is authorized to send notice
of a partnership adjustment to the partnership itself by certified or
registered mail. The IRS could give proper notice by mailing the notice
to the last known address of the partnership, even if the partnership
had terminated its existence.
Adjudication of disputes concerning partnership items
As under present law, an administrative adjustment could be
challenged in the Tax Court, the district court in which the
partnership's principal place of business is located, or the Claims
Court. However, only the partnership, and not partners individually, can
petition for a readjustment of partnership items.
If a petition for readjustment of partnership items is filed by the
partnership, the court with which the petition is filed will have
jurisdiction to determine the tax treatment of all partnership items of
the partnership for the partnership taxable year to which the notice of
partnership adjustment relates, and the proper allocation of such items
among the partners. Thus, the court's jurisdiction is not limited to the
items adjusted in the notice.
Statute of limitations
Absent an agreement to extend the statute of limitations, the IRS
generally could not adjust a partnership item of an electing large
partnership more than 3 years after the later of the
filing of the partnership return or the last day for the
filing of the partnership return. Special rules apply to false or
fraudulent returns, a substantial omission of income, or the failure to
file a return. The IRS would assess and collect any deficiency of a
partner that arises from any adjustment to a partnership item subject to
the limitations period on assessments and collection applicable to the
year the adjustment takes effect (secs. 6248, 6501 and 6502).
Regulatory authority
The Secretary of the Treasury is granted authority to prescribe
regulations as may be necessary to carry out the simplified audit
procedure provisions, including regulations to prevent abuse of the
provisions through manipulation. The regulations may include rules that
address transfers of partnership interests, in anticipation of a
partnership adjustment, to persons who are tax-favored (e.g.,
corporations with net operating losses, tax-exempt organizations, and
foreign partners) or persons who are expected to be unable to pay tax
(e.g., shell corporations). For example, if prior to the time a
partnership adjustment takes effect, a taxable partner transfers a
partnership interest to a nonresident alien to avoid the tax effect of
the partnership adjustment, the rules may provide, among other things,
that income related to the partnership adjustment is treated as
effectively connected taxable income, that the partnership adjustment is
treated as taking effect before the partnership interest was
transferred, or that the former partner is treated as a current partner
to whom the partnership adjustment is allocated.
EFFECTIVE DATE
The provision applies to partnership taxable years beginning after
December 31, 1997.
c. Due date for furnishing information to partners of
electing large partnerships (sec. 1223 of the bill and sec. 6031(b) of
the Code)
PRESENT LAW
A partnership required to file an income tax return with the Internal
Revenue Service must also furnish an information return to each of its
partners on or before the day on which the income tax return for the
year is required to be filed, including extensions. Under regulations, a
partnership must file its income tax return on or before the fifteenth
day of the fourth month following the end of the partnership's taxable
year (on or before April 15, for calendar year partnerships). This is
the same deadline by which most individual partners must file their tax
returns.
REASONS FOR CHANGE
Information returns that are received on or shortly before April 15
(or later) are difficult for individuals to use in preparing their tax
returns (or in computing their payments) that are due on that date.
EXPLANATION OF PROVISION
The bill provides that an electing large partnership must furnish
information returns to partners by the first March 15 following the
close of the partnership's taxable year. Electing large partnerships are
those partnerships subject to the simplified reporting and audit rules
(generally, any partnership that elects under the reporting provision,
if the number of partners in the preceding taxable year is 100 or more).
The provision also provides that, if the partnership is required to
provide copies of the information returns to the Internal Revenue
Service on magnetic media, each schedule (such as each Schedule K 1)
with respect to each partner is treated as a separate information return
with respect to the corrective periods and penalties that are generally
applicable to all information returns.
EFFECTIVE DATE
The provision is effective for partnership taxable years beginning
after December 31, 1997.
d. Partnership returns required on magnetic media (sec. 1224
of the bill and sec. 6011 of the Code)
PRESENT LAW
Partnerships are permitted, but not required, to provide the tax
return of the partnership (Form 1065), as well as copies of the
schedules sent to each partner (Form K 1), to the Internal Revenue
Service on magnetic media.
REASONS FOR CHANGE
Most entities that file large numbers of documents with the Internal
Revenue Service must do so on magnetic media. Conforming the reporting
provisions for partnerships to the generally applicable information
reporting rules will facilitate integration of partnership information
into already existing data systems.
EXPLANATION OF PROVISION
The bill provides generally that any partnership is required to
provide the tax return of the partnership (Form 1065), as well as copies
of the schedule sent to each partner (Form K 1), to the Internal Revenue
Service on magnetic media. An exception is provided for partnerships
with 100 or fewer partners.
EFFECTIVE DATE
The provision is effective for partnership taxable years beginning
after December 31, 1997.
e. Treatment of partnership items of individual retirement
arrangements (sec. 1225 of the bill and sec. 6012 of the Code)
PRESENT LAW
Return filing requirements
An individual retirement account (``IRA'') is a trust which generally
is exempt from taxation except for the taxes imposed on income from an
unrelated trade or business. A fiduciary of a trust that is exempt from
taxation (but subject to the taxes imposed on income from an unrelated
trade or business) generally is required to file a return on behalf of
the trust for a taxable year if the trust has gross income of $1,000 or
more included in computing unrelated business taxable income for that
year (Treas. Reg. sec. 1.6012-3(a)(5)).
Unrelated business taxable income is the gross income (including
gross income from a partnership) derived by an exempt organization from
an unrelated trade or business, less certain deductions which are
directly connected with the carrying on of such trade or business (sec.
512(a)(1). In calculating unrelated business taxable income, exempt
organizations (including IRAs) generally also are permitted a specific
deduction of $1,000 (sec. 512(b)(12)).
Unified audits of partnerships
All but certain small partnerships are subject to unified audit rules
established by the Tax Equity and Fiscal Responsibility Act of 1982.
These rules require the tax treatment of all ``partnership items'' to be
determined at the partnership, rather than the partner, level.
Partnership items are those items that are more appropriately determined
at the partnership level than at the partner level, including such items
as gross income and deductions of the partnership.
REASONS FOR CHANGE
Under present law, tax returns often must be filed for IRAs that have
no taxable income and, consequently, no tax liability. The filing of
these returns by taxpayers, and the processing of these returns by the
IRS, impose significant costs. Imposing this burden is unnecessary to
the extent that the income of the IRA has been derived from an interest
in a partnership that is subject to partnership-level audit rules. In
these circumstances, the appropriateness of any deductions may be
determined at the partnership level, and an additional filing is
unnecessary to facilitate this determination.
EXPLANATION OF PROVISION
The bill modifies the filing threshold for an IRA with an interest in
a partnership that is subject to the partnership-level audit rules. A
fiduciary of such an IRA could treat the trust's share of partnership
taxable income as gross income, for purposes of determining whether the
trust meets the $1,000 gross income filing threshold. A fiduciary of an
IRA that receives taxable income from a partnership that is subject to
partnership-level audit rules of less than $1,000 (before the $1,000
specific deduction) is not required to file an income tax return if the
IRA does not have any other income from an unrelated trade or business.
EFFECTIVE DATE
The provision applies to taxable years beginning after December 31,
1997.
2. OTHER PARTNERSHIP AUDIT RULES
a. Treatment of partnership items in deficiency proceedings
(sec. 1231 of the bill and sec. 6234 of the Code)
PRESENT LAW
Partnership proceedings under rules enacted in TEFRA\12\
must be kept separate from deficiency proceedings involving the
partners in their individual capacities. Prior to the Tax Court's
opinion in Munro v. Commissioner, 92 T.C. 71 (1989), the IRS computed
deficiencies by assuming that all items that were subject to the TEFRA
partnership procedures were correctly reported on the taxpayer's return.
However, where the losses claimed from TEFRA partnerships were so large
that they offset any proposed adjustments to nonpartnership items, no
deficiency could arise from a non-TEFRA proceeding, and if the
partnership losses were subsequently disallowed in a partnership
proceeding, the non-TEFRA adjustments might be uncollectible because of
the expiration of the statute of limitations with respect to
nonpartnership items.
\12\Tax Equity and Fiscal Responsibility Act of 1982.
Faced with this situation in Munro, the IRS issued a notice of
deficiency to the taxpayer that presumptively disallowed the taxpayer's
TEFRA partnership losses for computational purposes only. Although the
Tax Court ruled that a deficiency existed and that the court had
jurisdiction to hear the case, the court disapproved of the methodology
used by the IRS to compute the deficiency. Specifically, the court held
that partnership items (whether income, loss, deduction, or credit)
included on a taxpayer's return must be completely ignored in
determining whether a deficiency exists that is attributable to
nonpartnership items.
REASONS FOR CHANGE
The opinion in Munro creates problems for both taxpayers and the IRS.
For example, a taxpayer would be harmed in the case where he has
invested in a TEFRA partnership and is also subject to the deficiency
procedures with respect to nonpartnership item adjustments, since
computing the tax liability without regard to partnership items will
have the same effect as if the partnership items were disallowed. If the
partnership items were losses, the effect will be a greatly increased
deficiency for the nonpartnership items. If, when the partnership
proceedings are completed, the taxpayer is ultimately allowed any part
of the losses, the taxpayer will receive part of the increased
deficiency back in the form of an overpayment. However, in the interim,
the taxpayer will have been subject to assessment and
collection of a deficiency inflated by items still in dispute in the
partnership proceeding. In essence, a taxpayer in such a case would be
deprived of a prepayment forum with respect to the partnership item
adjustments. The IRS would be harmed if a taxpayer's income is primarily
from a TEFRA partnership, since the IRS may be unable to adjust
nonpartnership items such as medical expense deductions, home mortgage
interest deductions or charitable contribution deductions because there
would be no deficiency since, under Munro, the income must be ignored.
EXPLANATION OF PROVISION
The bill overrules Munro and allow the IRS to return to its prior
practice of computing deficiencies by assuming that all TEFRA items
whose treatment has not been finally determined had been correctly
reported on the taxpayer's return. This eliminates the need to do
special computations that involve the removal of TEFRA items from a
taxpayer's return, and will restore to taxpayers a prepayment forum with
respect to the TEFRA items. In addition, the provision provides a
special rule to address the factual situation presented in Munro .
Specifically, the bill provides a declaratory judgment procedure in
the Tax Court for adjustments to an oversheltered return. An
oversheltered return is a return that shows no taxable income and a net
loss from TEFRA partnerships. In such a case, the IRS is authorized to
issue a notice of adjustment with respect to non-TEFRA items,
notwithstanding that no deficiency would result from the adjustment.
However, the IRS could only issue such a notice if a deficiency would
have arisen in the absence of the net loss from TEFRA partnerships.
The Tax Court is granted jurisdiction to determine the correctness of
such an adjustment as well as to make a declaration with respect to any
other item for the taxable year to which the notice of adjustment
relates, except for partnership items and affected items which require
partner-level determinations. No tax is due upon such a determination,
but a decision of the Tax Court is treated as a final decision,
permitting an appeal of the decision by either the taxpayer or the IRS.
An adjustment determined to be correct would thus have the effect of
increasing the taxable income that is deemed to have been reported on
the taxpayer's return. If the taxpayer's partnership items were then
adjusted in a subsequent proceeding, the IRS has preserved its ability
to collect tax on any increased deficiency attributable to the
nonpartnership items.
Alternatively, if the taxpayer chooses not to contest the notice of
adjustment within the 90-day period, the bill provides that when the
taxpayer's partnership items are finally determined, the taxpayer has
the right to file a refund claim for tax attributable to the items
adjusted by the earlier notice of adjustment for the taxable year.
Although a refund claim is not generally permitted with respect to a
deficiency arising from a TEFRA proceeding, such a rule is appropriate
with respect to a defaulted notice of adjustment because taxpayers may
not challenge such a notice when issued since it does not require the
payment of additional tax.
In addition, the bill incorporates a number of provisions intended to
clarify the coordination between TEFRA audit proceedings and individual
deficiency proceedings. Under these provisions, any adjustment with
respect to a non-partnership item that caused an increase in tax
liability with respect to a partnership item would be treated as a
computational adjustment and assessed after the conclusion of the TEFRA
proceeding. Accordingly, deficiency procedures do not apply with respect
to this increase in tax liability, and the statute of limitations
applicable to TEFRA proceedings is controlling.
EFFECTIVE DATE
The provision is effective for partnership taxable years ending after
the date of enactment.
b. Partnership return to be determinative of audit
procedures to be followed (sec. 1232 of the bill and sec. 6231 of the
Code)
PRESENT LAW
TEFRA established unified audit rules applicable to all partnerships,
except for partnerships with 10 or fewer partners, each of whom is a
natural person (other than a nonresident alien) or an estate, and for
which each partner's share of each partnership item is the same as that
partner's share of every other partnership item. Partners in the
exempted partnerships are subject to regular deficiency procedures.
REASONS FOR CHANGE
The IRS often finds it difficult to determine whether to follow the
TEFRA partnership procedures or the regular deficiency procedures. If
the IRS determines that there were fewer than 10 partners in the
partnership but was unaware that one of the partners was a nonresident
alien or that there was a special allocation made during the year, the
IRS might inadvertently apply the wrong procedures and possibly
jeopardize any assessment. Permitting the IRS to rely on a partnership's
return would simplify the IRS' task.
EXPLANATION OF PROVISION
The bill permits the IRS to apply the TEFRA audit procedures if,
based on the partnership's return for the year, the IRS reasonably
determines that those procedures should apply. Similarly, the provision
permits the IRS to apply the normal deficiency procedures if, based on
the partnership's return for the year, the IRS reasonably determines
that those procedures should apply.
EFFECTIVE DATE
The provision is effective for partnership taxable years ending after
the date of enactment.
c. Provisions relating to statute of limitations
i. Suspend statute when an untimely petition is filed (sec.
1233(a) of the bill and sec. 6229 of the Code)
PRESENT LAW
In a deficiency case, section 6503(a) provides that if a proceeding
in respect of the deficiency is placed on the docket of the Tax Court,
the period of limitations on assessment and collection is suspended
until the decision of the Tax Court becomes final, and for 60 days
thereafter. The counterpart to this provision with respect to TEFRA
cases is contained in section 6229(d). That section provides that the
period of limitations is suspended for the period during which an action
may be brought under section 6226 and, if an action is brought during
such period, until the decision of the court becomes final, and for 1
year thereafter. As a result of this difference in language, the running
of the statute of limitations in a TEFRA case will only be tolled by the
filing of a timely petition whereas in a deficiency case, the statute of
limitations is tolled by the filing of any petition, regardless of
whether the petition is timely.
REASONS FOR CHANGE
Under present law, if an untimely petition is filed in a TEFRA case,
the statute of limitations can expire while the case is still pending
before the court. To prevent this from occurring, the IRS must make
assessments against all of the investors during the pendency of the
action and if the action is in the Tax Court, presumably abate such
assessments if the court ultimately determines that the petition was
timely. These steps are burdensome to the IRS and to taxpayers.
EXPLANATION OF PROVISION
The bill conforms the suspension rule for the filing of petitions in
TEFRA cases with the rule under section 6503(a) pertaining to deficiency
cases. Under the provision, the statute of limitations in TEFRA cases is
suspended by the filing of any petition under section 6226, regardless
of whether the petition is timely or valid, and the suspension will
remain in effect until the decision of the court becomes final, and for
one year thereafter. Hence, if the statute of limitations is open at the
time that an untimely petition is filed, the limitations period would no
longer continue to run and possibly expire while the action is pending
before the court.
EFFECTIVE DATE
The provision is effective with respect to all cases in which the
period of limitations has not expired under present law as of the date
of enactment.
ii. Suspend statute of limitations during bankruptcy
proceedings (sec. 1233(b) of the bill and sec. 6229 of the Code)
PRESENT LAW
The period for assessing tax with respect to partnership items
generally is the longer of the periods provided by section 6229 or
section 6501. For partnership items that convert to nonpartnership
items, section 6229(f) provides that the period for assessing tax shall
not expire before the date which is 1 year after the date that the items
become nonpartnership items. Section 6503(h) provides for the suspension
of the limitations period during the pendency of a bankruptcy
proceeding. However, this provision only applies to the limitations
periods provided in sections 6501 and 6502.
Under present law, because the suspension provision in section
6503(h) applies only to the limitations periods provided in section 6501
and 6502, some uncertainty exists as to whether section 6503(h) applies
to suspend the limitations period pertaining to converted items provided
in section 6229(f) when a petition naming a partner as a debtor in a
bankruptcy proceeding is filed. As a result, the limitations period
provided in section 6229(f) may continue to run during the pendency of
the bankruptcy proceeding, notwithstanding that the IRS is prohibited
from making an assessment against the debtor because of the automatic
stay provisions of the Bankruptcy Code.
REASONS FOR CHANGE
The ambiguity in present law makes it difficult for the IRS to adjust
partnership items that convert to nonpartnership items by reason of a
partner going into bankruptcy. In addition, any uncertainty may result
in increased requests for the bankruptcy court to lift the automatic
stay to permit the IRS to make an assessment with respect to the
converted items.
EXPLANATION OF PROVISION
The bill clarifies that the statute of limitations is suspended for a
partner who is named in a bankruptcy petition. The suspension period is
for the entire period during which the IRS is prohibited by reason of
the bankruptcy proceeding from making an assessment, and for 60 days
thereafter. The provision does not purport to create any inference as to
the proper interpretation of present law.
EFFECTIVE DATE
The provision is effective with respect to all cases in which the
period of limitations has not expired under present law as of the date
of enactment.
iii. Extend statute of limitations for bankrupt TMPs (sec.
1233(c) of the bill and sec. 6229 of the Code)
PRESENT LAW
Section 6229(b)(1)(B) provides that the statute of limitations is
extended with respect to all partners in the partnership by an agreement
entered into between the tax matters partner (TMP) and the IRS. However,
Temp. Treas. Reg. secs. 301.6231(a)(7) 1T(l)(4) and 301.6231(c) 7T(a)
provide that upon the filing of a petition naming a partner as a debtor
in a bankruptcy proceeding, that partner's partnership items convert to
nonpartnership items, and if the debtor was the tax matters partner,
such status terminates. These rules are necessary because of the
automatic stay provision contained in 11 U.S.C. sec. 362(a)(8). As a
result, if a consent to extend the statute of limitations is signed by a
person who would be the TMP but for the fact that
at the time that the agreement is executed the person was a
debtor in a bankruptcy proceeding, the consent would not be binding on
the other partners because the person signing the agreement was no
longer the TMP at the time that the agreement was executed.
REASONS FOR CHANGE
The IRS is not automatically notified of bankruptcy filings and
cannot easily determine whether a taxpayer is in bankruptcy, especially
if the audit of the partnership is being conducted by one district and
the taxpayer resides in another district, as is frequently the situation
in TEFRA cases. If the IRS does not discover that a person signing a
consent is in bankruptcy, the IRS may mistakenly rely on that consent.
As a result, the IRS may be precluded from assessing any tax
attributable to partnership item adjustments with respect to any of the
partners in the partnership.
EXPLANATION OF PROVISION
The bill provides that unless the IRS is notified of a bankruptcy
proceeding in accordance with regulations, the IRS can rely on a statute
extension signed by a person who is the tax matters partner but for the
fact that said person was in bankruptcy at the time that the person
signed the agreement. Statute extensions granted by a bankrupt TMP in
these cases are binding on all of the partners in the partnership. The
provision is not intended to create any inference as to the proper
interpretation of present law.
EFFECTIVE DATE
The provision is effective for extension agreements entered into
after the date of enactment.
d. Expansion of small partnership exception (sec. 1234 of
the bill and sec. 6231 of the Code)
PRESENT LAW
TEFRA established unified audit rules applicable to all partnerships,
except for partnerships with 10 or fewer partners, each of whom is a
natural person (other than a nonresident alien) or an estate, and for
which each partner's share of each partnership item is the same as that
partner's share of every other partnership item. Partners in the
exempted partnerships are subject to regular deficiency procedures.
REASONS FOR CHANGE
The mere existence of a C corporation as a partner or of a special
allocation does not warrant subjecting the partnership and its partners
of an otherwise small partnership to the TEFRA procedures.
EXPLANATION OF PROVISION
The bill permits a small partnership to have a C corporation as a
partner or to specially allocate items without jeopardizing its
exception from the TEFRA rules. However, the provision retains the
prohibition of present law against having a flow-through entity (other
than an estate of a deceased partner) as a partner for purposes of
qualifying for the small partnership exception.
EFFECTIVE DATE
The provision is effective for partnership taxable years ending after
the date of enactment.
e. Exclusion of partial settlements from 1-year limitation
on assessment (sec. 1235 of the bill and sec. 6229(f) of the Code)
PRESENT LAW
The period for assessing tax with respect to partnership items
generally is the longer of the periods provided by section 6229 or
section 6501. For partnership items that convert to nonpartnership
items, section 6229(f) provides that the period for assessing tax shall
not expire before the date which is 1 year after the date that the items
become nonpartnership items. Section 6231(b)(1)(C) provides that the
partnership items of a partner for a partnership taxable year become
nonpartnership items as of the date the partner enters into a settlement
agreement with the IRS with respect to such items.
REASONS FOR CHANGE
When a partial settlement agreement is entered into, the assessment
period for the items covered by the agreement may be different than the
assessment period for the remaining items. This fractured statute of
limitations poses a significant tracking problem for the IRS and
necessitates multiple computations of tax with respect to each partner's
investment in the partnership for the taxable year.
EXPLANATION OF PROVISION
The bill provides that if a partner and the IRS enter into a
settlement agreement with respect to some but not all of the partnership
items in dispute for a partnership taxable year and other partnership
items remain in dispute, the period for assessing any tax attributable
to the settled items is determined as if such agreement had not been
entered into. Consequently, the limitations period that is applicable to
the last item to be resolved for the partnership taxable year is
controlling with respect to all disputed partnership items for the
partnership taxable year. The provision does not purport to create any
inference as to the proper interpretation of present law.
EFFECTIVE DATE
The provision is effective for settlements entered into after the
date of enactment.
f. Extension of time for filing a request for administrative
adjustment (sec. 1236 of the bill and sec. 6227 of the Code)
PRESENT LAW
If an agreement extending the statute is entered into with respect to
a non-TEFRA statute of limitations, that agreement also extends the
statute of limitations for filing refund claims (sec. 6511(c)). There is
no comparable provision for extending the time for filing refund claims
with respect to partnership items subject to the TEFRA partnership
rules.
REASONS FOR CHANGE
The absence of an extension for filing refund claims in TEFRA
proceedings hinders taxpayers that may want to agree to extend the TEFRA
statute of limitations but want to preserve their option to file a
refund claim later.
EXPLANATION OF PROVISION
The bill provides that if a TEFRA statute extension agreement is
entered into, that agreement also extends the statute of limitations for
filing refund claims attributable to partnership items or affected items
until 6 months after the expiration of the limitations period for
assessments.
EFFECTIVE DATE
The provision is effective as if included in the amendments made by
section 402 of the Tax Equity and Fiscal Responsibility Act of 1982.
g. Availability of innocent spouse relief in context of
partnership proceedings (sec. 1237 of the bill and sec. 6230 of the
Code)
PRESENT LAW
In general, an innocent spouse may be relieved of liability for tax,
penalties and interest if certain conditions are met (sec. 6013(e)).
However, existing law does not provide the spouse of a partner in a
TEFRA partnership with a judicial forum to raise the innocent spouse
defense with respect to any tax or interest that relates to an
investment in a TEFRA partnership.
REASONS FOR CHANGE
Providing a forum in which to raise the innocent spouse defense with
respect to liabilities attributable to adjustments to partnership items
(including penalties, additions to tax and additional amounts) would
make the innocent spouse rules more uniform.
EXPLANATION OF PROVISION
The bill provides both a prepayment forum and a refund forum for
raising the innocent spouse defense in TEFRA cases.
With respect to a prepayment forum, the provision provides that
within 60 days of the date that a notice of computational adjustment
relating to partnership items is mailed to the spouse of a partner, the
spouse could request that the assessment be abated. Upon receipt of such
a request, the assessment is abated and any reassessment will be subject
to the deficiency procedures. If an abatement is requested, the statute
of limitations does not expire before the date which is 60 days after
the date of the abatement. If the spouse files a petition with the Tax
Court, the Tax Court only has jurisdiction to determine whether the
requirements of section 6013(e) have been satisfied. In making this
determination, the treatment of the partnership items that gave rise to
the liability in question is conclusive.
Alternatively, the bill provides that the spouse of a partner could
file a claim for refund to raise the innocent spouse defense. The claim
has to be filed within 6 months from the date that the notice of
computational adjustment is mailed to the spouse. If the claim is not
allowed, the spouse could file a refund action. For purposes of any
claim or suit under this provision, the treatment of the partnership
items that gave rise to the liability in question is conclusive.
EFFECTIVE DATE
The provision is effective as if included in the amendments made by
section 402 of the Tax Equity and Fiscal Responsibility Act of 1982.
h. Determination of penalties at partnership level (sec.
1238 of the bill and sec. 6221 of the Code)
PRESENT LAW
Partnership items include only items that are required to be taken
into account under the income tax subtitle. Penalties are not
partnership items since they are contained in the procedure and
administration subtitle. As a result, penalties may only be asserted
against a partner through the application of the deficiency procedures
following the completion of the partnership-level proceeding.
REASONS FOR CHANGE
Many penalties are based upon the conduct of the taxpayer. With
respect to partnerships, the relevant conduct often occurs at the
partnership level. In addition, applying penalties at the partner level
through the deficiency procedures following the conclusion of the
unified proceeding at the partnership level increases the administrative
burden on the IRS and can significantly increase the Tax Court's
inventory.
EXPLANATION OF PROVISION
The bill provides that the partnership-level proceeding is to include
a determination of the applicability of penalties at the partnership
level. However, the provision allows partners to raise any partner-level
defenses in a refund forum.
EFFECTIVE DATE
The provision is effective for partnership taxable years ending after
the date of enactment.
i. Provisions relating to Tax Court jurisdiction (sec. 1239
of the bill and secs. 6225 and 6226 of the Code)
PRESENT LAW
Improper assessment and collection activities by the IRS during the
150-day period for filing a petition or during the pendency of any Tax
Court proceeding, ``may be enjoined in the proper court.'' Present law
may be unclear as to whether this includes the Tax Court.
For a partner other than the Tax Matters Partner to be eligible to
file a petition for redetermination of partnership items in any court or
to participate in an existing case, the period for assessing any tax
attributable to the partnership items of that partner must not have
expired. Since such a partner would only be treated as a party to the
action if the statute of limitations with respect to them was still
open, the law is unclear whether the partner would have standing to
assert that the statute of limitations had expired with respect to them.
REASONS FOR CHANGE
Clarifying the Tax Court's jurisdiction simplifies the resolution of
tax cases.
EXPLANATION OF PROVISION
The bill clarifies that an action to enjoin premature assessments of
deficiencies attributable to partnership items may be brought in the Tax
Court. The provision also permits a partner to participate in an action
or file a petition for the sole purpose of asserting that the period of
limitations for assessing any tax attributable to partnership items has
expired for that person. Additionally, the provision clarifies that the
Tax Court has overpayment jurisdiction with respect to affected items.
EFFECTIVE DATE
The provision is effective for partnership taxable years ending after
the date of enactment.
j. Treatment of premature petitions filed by notice partners
or 5-percent groups (sec. 1240 of the bill and sec. 6226 of the Code)
PRESENT LAW
The Tax Matters Partner is given the exclusive right to file a
petition for a readjustment of partnership items within the 90-day
period after the issuance of the notice of a final partnership
administrative adjustment (FPAA). If the Tax Matters Partner does not
file a petition within the 90-day period, certain other partners are
permitted to file a petition within the 60-day period after the close of
the 90-day period. There are ordering rules for determining which action
goes forward and for dismissing other actions.
REASONS FOR CHANGE
A petition that is filed within the 90-day period by a person who is
not the Tax Matters Partner is dismissed. Thus, if the Tax Matters
Partner does not file a petition within the 90-day period and no timely
and valid petition is filed during the succeeding 60-day period,
judicial review of the adjustments set forth in the notice of FPAA is
foreclosed and the adjustments are deemed to be correct.
EXPLANATION OF PROVISION
The bill treats premature petitions filed by certain partners within
the 90-day period as being filed on the last day of the following 60-day
period under specified circumstances, thus affording the partnership
with an opportunity for judicial review that is not available under
present law.
EFFECTIVE DATE
The provision is effective with respect to petitions filed after the
date of enactment.
k. Bonds in case of appeals from certain proceedings (sec.
1241 of the bill and sec. 7485 of the Code)
PRESENT LAW
A bond must be filed to stay the collection of deficiencies pending
the appeal of the Tax Court's decision in a TEFRA proceeding. The amount
of the bond must be based on the court's estimate of the aggregate
deficiencies of the partners.
REASONS FOR CHANGE
The Tax Court cannot easily determine the aggregate changes in tax
liability of all of the partners in a partnership who will be affected
by the Court's decision in the proceeding. Clarifying the calculation of
the bond amount would simplify the Tax Court's task.
EXPLANATION OF PROVISION
The bill clarifies that the amount of the bond should be based on the
Tax Court's estimate of the aggregate liability of the parties to the
action (and not all of the partners in the partnership). For purposes of
this provision, the amount of the bond could be estimated by applying
the highest individual rate to the total adjustments determined by the
Tax Court and doubling that amount to take into account interest and
penalties.
EFFECTIVE DATE
The provision is effective as if included in the amendments made by
section 402 of the Tax Equity and Fiscal Responsibility Act of 1982.
l. Suspension of interest where delay in computational
adjustment resulting from certain settlements (sec. 1242 of the bill and
sec. 6601 of the Code)
PRESENT LAW
Interest on a deficiency generally is suspended when a taxpayer
executes a settlement agreement with the IRS and waives the restrictions
on assessments and collections, and the IRS does not issue a notice and
demand for payment of such deficiency within 30 days. Interest on a
deficiency that results from an adjustment of partnership items in TEFRA
proceedings, however, is not suspended.
REASONS FOR CHANGE
Processing settlement agreements and assessing the tax due takes a
substantial amount of time in TEFRA cases. A taxpayer is not afforded
any relief from interest during this period.
EXPLANATION OF PROVISION
The bill suspends interest where there is a delay in making a
computational adjustment relating to a TEFRA settlement.
EFFECTIVE DATE
The provision is effective with respect to adjustments relating to
taxable years beginning after the date of enactment.
m. Special rules for administrative adjustment requests with
respect to bad debts or worthless securities (sec. 1243 of the bill and
sec. 6227 of the Code)
PRESENT LAW
The non-TEFRA statute of limitations for filing a claim for credit or
refund generally is the later of (1) three years from the date the
return in question was filed or (2) two years from the date the claimed
tax was paid, whichever is later (sec. 6511(b)). However, an extended
period of time, seven years from the date the return was due, is
provided for filing a claim for refund of an overpayment resulting from
a deduction for a worthless security or bad debt (sec. 6511(d)).
Under the TEFRA partnership rules, a request for administrative
adjustment (``RAA'') must be filed within three years after the later of
(1) the date the partnership return was filed or (2) the due date of the
partnership return (determined without regard to extensions) (sec.
6227(a)(1)). In addition, the request must be filed before a final
partnership administrative adjustment (``FPAA'') is mailed for the
taxable year (sec. 6227(a)(2)). There is no special provision for
extending the time for filing an RAA that relates to a deduction for a
worthless security or an entirely worthless bad debt.
REASONS FOR CHANGE
Whether and when a stock or debt becomes worthless is a question of
fact that may not be determinable until after the year in which it
appears the loss has occurred. An extended statute of limitations allows
partners in a TEFRA partnership the same opportunity to file a delayed
claim for refund in these difficult factual situations as other
taxpayers are permitted.
Further, on past occasions, the IRS issued FPAAs that did not adjust
the partnership's tax return. This action created wasteful paperwork,
and may have, in some cases truncated the appeals rights of individual
partners. A special rule is necessary to permit partners who may have
been adversely impacted by this past practice of the IRS to avail
themselves of the extended period irrespective of whether an FPAA has
been issued.
EXPLANATION OF PROVISION
The bill extends the time for the filing of an RAA relating to the
deduction by a partnership for a worthless security or bad debt. In
these circumstances, in lieu of the three-year period provided in sec.
6227(a)(1), the period for filing an RAA is seven years from the date
the partnership return was due with respect to which the request is made
(determined without regard to extensions). The RAA is still required to
be filed before the FPAA is mailed for the taxable year.
EFFECTIVE DATE
The provision is effective as if included in the amendments made by
section 402 of the Tax Equity and Fiscal Responsibility Act of 1982.
3. CLOSING OF PARTNERSHIP TAXABLE YEAR WITH RESPECT TO DECEASED PARTNER
(SEC. 1246 OF THE BILL AND SEC. 706(C)(2)(A) OF THE CODE)
PRESENT LAW
The partnership taxable year closes with respect to a partner whose
entire interest is sold, exchanged, or liquidated. Such year, however,
generally does not close upon the death of a partner. Thus, a decedent's
entire share of items of income, gain, loss, deduction and credit for
the partnership year in which death occurs is taxed to the estate or
successor in interest rather than to the decedent on his or her final
income tax return. See Estate of Hesse v. Commissioner , 74 T.C. 1307,
1311 (1980).
REASONS FOR CHANGE
The rule leaving open the partnership taxable year with respect to a
deceased partner was adopted in 1954 to prevent the bunching of income
that could occur with respect to a partnership reporting on a fiscal
year other than the calendar year. Without this rule, as many as 23
months of income might have been reported on the partner's final return.
Legislative changes occurring since 1954 have required most partnerships
to adopt a calendar year, reducing the possibility of bunching.
Consequently, income and deductions are better matched if the
partnership taxable year closes upon a partner's death and partnership
items are reported on the decedent's last return.
Present law closes the partnership taxable year with respect to a
deceased partner only if the partner's entire interest is sold or
exchanged pursuant to an agreement existing at the time of death. By
closing the taxable year automatically upon death, the provision reduces
the need for such agreements.
EXPLANATION OF PROVISION
The bill provides that the taxable year of a partnership closes with
respect to a partner whose entire interest in the partnership
terminates, whether by death, liquidation or otherwise. The bill does
not change present law with respect to the effect upon the partnership
taxable year of a transfer of a partnership interest by a debtor to the
debtor's estate (under Chapters 7 or 11 of Title 11, relating to
bankruptcy).
EFFECTIVE DATE
The provision applies to partnership taxable years beginning after
December 31, 1997.
d. modifications of rules for real estate investment trusts (secs. 1251
1263 of the bill and secs. 856 and 857 of the code)
PRESENT LAW
Overview
In general, a real estate investment trust (``REIT'') is an entity
that receives most of its income from passive real estate related
investments and that receives conduit treatment for income that is
distributed to shareholders. If an entity meets the qualifications for
REIT status, the portion of its income that is distributed to the
investors each year generally is taxed to the investors without being
subjected to a tax at the REIT level; the REIT generally is subject to a
corporate tax only on the income that it retains and on certain income
from property that qualifies as foreclosure property.
Election to be treated as a REIT
In order to qualify as a REIT, and thereby receive conduit treatment,
an entity must elect REIT status. A newly-electing entity generally
cannot have earnings and profits accumulated from any year in which the
entity was in existence and not treated as a REIT (sec. 857(a)(3)). To
satisfy this requirement, the entity must distribute, during its first
REIT taxable year, any earnings and profits that were accumulated in
non-REIT years. For this purpose, distributions by the entity generally
are treated as being made from the most recently accumulated earnings
and profits.
Taxation of REITs
Overview
In general, if an entity qualifies as a REIT by satisfying the
various requirements described below, the entity is taxable as a
corporation on its ``real estate investment trust taxable income''
(``REITTI''), and also is taxable on certain other amounts (sec. 857).
REITTI is the taxable income of the REIT with certain adjustments (sec.
857(b)(2)). The most significant adjustment is a deduction for dividends
paid. The allowance of this deduction is the mechanism by which the REIT
becomes a conduit for income tax purposes.
Capital gains
A REIT that has a net capital gain for a taxable year generally is
subject to tax on such capital gain under the capital gains tax regime
generally applicable to corporations (sec. 857(b)(3)). However, a REIT
may diminish or eliminate its tax liability attributable to such capital
gain by paying a ``capital gain dividend'' to its shareholders (sec.
857(b)(3)(C)). A capital gain dividend is any dividend or part of a
dividend that is designated by the payor REIT as a capital gain dividend
in a written notice mailed to shareholders. Shareholders who receive
capital gain dividends treat the amount of such dividends as long-term
capital gain regardless of their holding period of the stock (sec.
857(b)(3)(C)).
A regulated investment company (``RIC''), but not a REIT, may elect
to retain and pay income tax on net long-term capital gains it received
during the tax year. If a RIC makes this election, the RIC shareholders
must include in their income as long-term capital gains their
proportionate share of these undistributed long-term capital gains as
designated by the RIC. The shareholder is deemed to have paid the
shareholder's share of the tax, which can be credited or refunded to the
shareholder. Also, the basis of the shareholder's shares is increased by
the amount of the undistributed long-term capital gains (less the amount
of capital gains tax paid by the RIC) included in the shareholder's
long-term capital gains.
Income from foreclosure property
In addition to tax on its REITTI, a REIT is subject to tax at the
highest rate of tax paid by corporations on its net income from
foreclosure property (sec. 857(b)(4)). Net income from foreclosure
property is the excess of the sum of gains from foreclosure property
that is held for sale to customers in the ordinary course of a trade or
business and gross income from foreclosure property (other than income
that otherwise would qualify under the 75-percent income test described
below) over all allowable deductions directly connected with the
production of such income.
Foreclosure property is any real property or personal property
incident to such real property that is acquired by a REIT as a result of
default or imminent default on a lease of such property or indebtedness
secured by such property, provided that (unless acquired as foreclosure
property), such property was not held by the REIT for sale to customers
(sec. 856(e)). A property generally may be treated as foreclosure
property for a period of two years after the date the property is
acquired by the REIT. The IRS may grant extensions of the period for
treating the property as foreclosure property if the REIT establishes
that an extension of the grace period is necessary for the orderly
liquidation of the REIT's interest in the property. The grace period
cannot be extended beyond six years from the date the property is
acquired by the REIT.
Property will cease to be treated as foreclosure property if, after
90 days after the date of acquisition, the REIT operates the foreclosure
property in a trade or business other than through an independent
contractor from whom the REIT does not derive or receive any income
(sec. 856(e)(4)(C)).
Income or loss from prohibited transactions
In general, a REIT must derive its income from passive sources and
not engage in any active trade or business. Accordingly, in addition to
the tax on its REITTI and on its net income from foreclosure property, a
100 percent tax is imposed on the net income of a REIT from ``prohibited
transactions'' (sec. 857(b)(6)). A prohibited transaction is the sale or
other disposition of property described in section 1221(1) of the Code
(property held for sale in the ordinary course of a trade or business)
other than foreclosure property. Thus, the 100 percent tax on prohibited
transactions helps to ensure that the REIT is a passive entity and may
not engage in ordinary retailing activities such as sales to customers
of condominium units or subdivided lots in a development project. A safe
harbor is provided for certain sales that otherwise might be considered
prohibited transactions (sec. 857(b)(6)(C)). The safe harbor is limited
to seven or
fewer sales a year or, alternatively, any number of sales
provided that the aggregate adjusted basis of the property sold does not
exceed 10 percent of the aggregate basis of all the REIT's assets at the
beginning of the REIT's taxable year.
Requirements for REIT status
A REIT must satisfy four tests on a year-by-year basis:
organizational structure, source of income, nature of assets, and
distribution of income. These tests are intended to allow conduit
treatment in circumstances in which a corporate tax otherwise would be
imposed, only if there really is a pooling of investment arrangement
that is evidenced by its organizational structure, if its investments
are basically in real estate assets, and if its income is passive income
from real estate investment, as contrasted with income from the
operation of business involving real estate. In addition, substantially
all of the entity's income must be passed through to its shareholders on
a current basis.
Organizational structure requirements
To qualify as a REIT, an entity must be for its entire taxable year a
corporation or an unincorporated trust or association that would be
taxable as a domestic corporation but for the REIT provisions, and must
be managed by one or more trustees (sec. 856(a)). The beneficial
ownership of the entity must be evidenced by transferable shares or
certificates of ownership. Except for the first taxable year for which
an entity elects to be a REIT, the beneficial ownership of the entity
must be held by 100 or more persons, and the entity may not be so
closely held by individuals that it would be treated as a personal
holding company if all its adjusted gross income constituted personal
holding company income. A REIT is disqualified for any year in which it
does not comply with regulations to ascertain the actual ownership of
the REIT's outstanding shares.
Income requirements
Overview
In order for an entity to qualify as a REIT, at least 95 percent of
its gross income generally must be derived from certain passive sources
(the ``95-percent test''). In addition, at least 75 percent of its
income generally must be from certain real estate sources (the
``75-percent test''), including rents from real property.
In addition, less than 30 percent of the entity's gross income may be
derived from gain from the sale or other disposition of stock or
securities held for less than one year, real property held less than
four years (other than foreclosure property, or property subject to an
involuntary conversion within the meaning of sec. 1033), and property
that is sold or disposed of in a prohibited transaction (sec.
856(c)(4)).
Definition of rents
For purposes of the income requirements, rents from real property
generally include rents from interests in real property, charges for
services customarily rendered or furnished in connection with the rental
of real property, whether or not such charges are separately stated, and
rent attributable to personal property that is leased under or in
connection with a lease of real property, but only if the rent
attributable to such personal property does not exceed 15 percent of the
total rent for the year under the lease (sec. 856(d)(1)).
Services provided to tenants are regarded as customary if, in the
geographic market within which the building is located, tenants in
buildings that are of a similar class (for example, luxury apartment
buildings) are customarily provided with the service. The furnishing of
water, heat, light, and air conditioning, the cleaning of windows,
public entrances, exits, and lobbies, the performance of general
maintenance, and of janitorial and cleaning services, the collection of
trash, the furnishing of elevator services, telephone answering
services, incidental storage space, laundry equipment, watchman or guard
service, parking facilities and swimming pool facilities are examples of
services that are customarily furnished to tenants of a particular class
of buildings in many geographical marketing areas (Treas. Reg. sec.
1.856 4(b)).
In addition, amounts are not treated as qualifying rent if received
from certain parties in which the REIT has an ownership interest of 10
percent or more (sec. 856(d)(2)(B)). For purposes of determining the
REIT's ownership interest in a tenant, the attribution rules of section
318 apply, except that 10 percent is substituted for 50 percent where it
appears in subparagraph (C) of section 318(a)(2) and 318(a)(3) (sec.
856(d)(5)).
Finally, where a REIT furnishes or renders services to the tenants of
rented property, amounts received or accrued with respect to such
property generally are not treated as qualifying rents unless the
services are furnished through an independent contractor (sec.
856(d)(2)(C)). A REIT may furnish or render a service directly, however,
if the service would not generate unrelated business taxable income
under section 512(b)(3) if provided by an organization described in
section 511(a)(2). In general, an independent contractor is a person who
does not own more than a 35 percent interest in the REIT, and in which
no more than a 35 percent interest is held by persons with a 35 percent
or greater interest in the REIT (sec. 856(d)(3)).
Hedging instruments
Interest rate swaps or cap agreements that protect a REIT from
interest rate fluctuations on variable rate debt incurred to acquire or
carry real property are treated as securities under the 30-percent test
and payments under these agreements are treated as qualifying under the
95-percent test (sec. 856(c)(6)(G)).
Treatment of shared appreciation mortgages
For purposes of the income requirements for qualification as a REIT,
and for purposes of the prohibited transaction provisions, any income
derived from a ``shared appreciation provision'' is treated as gain
recognized on the sale of the ``secured property.'' For these purposes,
a shared appreciation provision is any provision that is in connection
with an obligation that is held by the REIT and secured by an interest
in real property, which provision entitles the REIT to receive a
specified portion of any gain realized on the sale or exchange
of such real property (or of any gain that would be realized if the
property were sold on a specified date). Secured property for these
purposes means the real property that secures the obligation that has
the shared appreciation provision.
In addition, for purposes of the income requirements for
qualification as a REIT, and for purposes of the prohibited transactions
provisions, the REIT is treated as holding the secured property for the
period during which it held the shared appreciation provision (or, if
shorter, the period during which the secured property was held by the
person holding such property), and the secured property is treated as
property described in section 1221(1) if it is such property in the
hands of the obligor on the obligation to which the shared appreciation
provision relates (or if it would be such property if held by the REIT).
For purposes of the prohibited transaction safe harbor, the REIT is
treated as having sold the secured property at the time that it
recognizes income on account of the shared appreciation provision, and
any expenditures made by the holder of the secured property are treated
as made by the REIT.
Asset requirements
To satisfy the asset requirements to qualify for treatment as a REIT,
at the close of each quarter of its taxable year, an entity must have at
least 75 percent of the value of its assets invested in real estate
assets, cash and cash items, and government securities (sec.
856(c)(5)(A)). Moreover, not more than 25 percent of the value of the
entity's assets can be invested in securities of any one issuer (other
than government securities and other securities described in the
preceding sentence). Further, these securities may not comprise more
than five percent of the entity's assets or more than 10 percent of the
outstanding voting securities of such issuer (sec. 856(c)(5)(B)). The
term real estate assets is defined to mean real property (including
interests in real property and mortgages on real property) and interests
in REITs (sec. 856(c)(6)(B)).
REIT subsidiaries
Under present law, all the assets, liabilities, and items of income,
deduction, and credit of a ``qualified REIT subsidiary'' are treated as
the assets, liabilities, and respective items of the REIT that owns the
stock of the qualified REIT subsidiary. A subsidiary of a REIT is a
qualified REIT subsidiary if and only if 100 percent of the subsidiary's
stock is owned by the REIT at all times that the subsidiary is in
existence. If at any time the REIT ceases to own 100 percent of the
stock of the subsidiary, or if the REIT ceases to qualify for (or
revokes an election of) REIT status, such subsidiary is treated as a new
corporation that acquired all of its assets in exchange for its stock
(and assumption of liabilities) immediately before the time that the
REIT ceased to own 100 percent of the subsidiary's stock, or ceased to
be a REIT as the case may be.
Distribution requirements
To satisfy the distribution requirement, a REIT must distribute as
dividends to its shareholders during the taxable year an amount equal to
or exceeding (i) the sum of 95 percent of its REITTI other than net
capital gain income and 95 percent of the excess of its net income from
foreclosure property over the tax imposed on that income minus (ii)
certain excess noncash income (described below).
Excess noncash items include (a) the excess of the amounts that the
REIT is required to include in income under section 467 with respect to
certain rental agreements involving deferred rents, over the amounts
that the REIT otherwise would recognize under its regular method of
accounting, (2) in the case of a REIT using the cash method of
accounting, the excess of the amount of original issue discount and
coupon interest that the REIT is required to take into account with
respect to a loan to which section 1274 applies, over the amount of
money and fair market value of other property received with respect to
the loan, and (3) income arising from the disposition of a real estate
asset in certain transactions that failed to qualify as like-kind
exchanges under section 1031.
REASONS FOR CHANGE
The REIT serves as a means whereby numerous small investors can have
a practical opportunity to invest in a diversified portfolio of real
estate assets and have the benefit of professional management. The
Committee believes that the asset requirements of present law ensure
that a REIT acts as a pass-through entity for taxpayers wishing to
invest in real estate. Therefore, the Committee finds the 30-percent
gross income test unnecessary and administratively burdensome. The
Committee further finds that financial markets have changed over the
past decade such that interest risk can be managed by many strategies
other than swaps and caps. Recognizing these developments in the
financial markets, the Committee believes it necessary to modify the
classification of income from certain hedging instruments to provide
flexibility to REITs in managing risk for their shareholders. The
Committee also believes that, as a pass-through entity, REITs should be
permitted to retain the proceeds of realized capital gains in a manner
comparable to that accorded to RICs.
EXPLANATION OF PROVISIONS
Overview
The bill modifies many of the provisions relating to the requirements
for qualification as, and the taxation of, a REIT. In particular, the
modifications relate to the general requirements for qualification as a
REIT, the taxation of a REIT, the income requirements for qualification
as a REIT, and certain other provisions.
Clarification of limitation on maximum number of shareholders
(sec. 1251 of the bill and secs. 856(k), 857(a), and 857(f) of the Code)
The bill replaces the rule that disqualifies a REIT for any year in
which the REIT failed to comply with Treasury regulations to ascertain
its ownership, with an intermediate penalty for failing to do so. The
penalty would be $25,000 ($50,000 for intentional violations) for any
year in which the REIT did not comply with the ownership regulations.
The REIT also is required, when requested by the IRS, to send curative
demand letters.
In addition, a REIT that complied with the Treasury regulations for
ascertaining its ownership, and which did not know, or have reason to
know, that it was so closely held as to be classified as a personal
holding company, is treated as meeting the requirement that it not be a
personal holding company.
De minimis rule for tenant service income (sec. 1252 of the
bill and sec. 856(d) of the Code)
The bill permits a REIT to render a de minimis amount of
impermissible services to tenants, or in connection with the management
of property, and still treat amounts received with respect to that
property as rent. The value of the impermissible services may not exceed
one percent of the gross income from the property. For these purposes,
the services may not be valued at less than 150 percent of the REIT's
direct cost of the services.
Attribution rules applicable to tenant ownership (sec. 1253
of the bill and sec, 856(d)(5) of the Code)
The bill modifies the application of section 318(a)(3)(A)
(attribution to partnerships) for purposes of defining rent in section
856(d)(2), so that attribution occurs only when a partner owns a 25
percent or greater interest in the partnership.
Credit for tax paid by REIT on retained capital gains (sec.
1254 of the bill and sec. 857(b)(3) of the Code)
The bill permits a REIT to elect to retain and pay income tax on net
long-term capital gains it received during the tax year, just as a RIC
is permitted under present law. Thus, if a REIT made this election, the
REIT shareholders would include in their income as long-term capital
gains their proportionate share of the undistributed long-term capital
gains as designated by the REIT. The shareholder would be deemed to have
paid the shareholder's share of the tax, which would be credited or
refunded to the shareholder. Also, the basis of the shareholder's shares
would be increased by the amount of the undistributed long-term capital
gains (less the amount of capital gains tax paid by the REIT) included
in the shareholder's long-term capital gains.
Repeal of 30-percent gross income requirement (sec. 1255 of
the bill and sec. 856(c) of the Code
The bill repeals the rule that requires less than 30 percent of a
REIT's gross income be derived from gain from the sale or other
disposition of stock or securities held for less than one year, certain
real property held less than four years, and property that is sold or
disposed of in a prohibited transaction.
Modification of earnings and profits for determining whether
REIT has earnings and profits from non-REIT year (sec. 1256 of the bill
and sec. 857(d) of the Code
The bill changes the ordering rule for purposes of the requirement
that newly-electing REITs distribute earnings and profits that were
accumulated in non-REIT years. Under the bill, distributions of
accumulated earnings and profits generally are treated as made from the
entity's earliest accumulated earnings and profits, rather than the most
recently accumulated earnings and profits. These distributions are not
treated as distributions for purposes of calculating the dividends paid
deduction.
Treatment of foreclosure property (sec. 1257 of the bill and
sec. 856(e) of the Code
The bill lengthens the original grace period for foreclosure property
until the last day of the third full taxable year following the
election. The grace period also could be extended for an additional
three years by filing a request to the IRS. Under the bill, a REIT could
revoke an election to treat property as foreclosure property for any
taxable year by filing a revocation on or before its due date for filing
its tax return.
In addition, the bill conforms the definition of independent
contractor for purposes of the foreclosure property rule (sec.
856(e)(4)(C)) to the definition of independent contractor for purposes
of the general rules (sec. 856(d)(2)(C)).
Payments under hedging instruments (sec. 1258 of the bill and
sec. 856(c)(5)(G) of the Code
The bill treats income from all hedges that reduce the interest rate
risk of REIT liabilities, not just from interest rate swaps and caps, as
qualifying income under the 95-percent test. Thus, payments to a REIT
under an interest rate swap, cap agreement, option, futures contract,
forward rate agreement or any similar financial instrument entered into
by the REIT to hedge its indebtedness incurred or to be incurred (and
any gain from the sale or other disposition of these instruments) are
treated as qualifying income for purposes of the 95-percent test.
Excess noncash income (sec. 1259 of the bill and sec.
857(e)(2) of the Code
The bill (1) expands the class of excess noncash items that are not
subject to the distribution requirement to include income from the
cancellation of indebtedness and (2) extends the treatment of original
issue discount and coupon interest as excess noncash items to REITs that
use an accrual method of taxation.
Prohibited transaction safe harbor (sec. 1260 of the bill and
sec. 856(b)(6)(C) of the Code)
The bill excludes from the prohibited sales rules property that was
involuntarily converted.
Shared appreciation mortgages (sec. 1261 of the bill and sec.
856(j) of the Code)
The bill provides that interest received on a shared appreciation
mortgage is not subject to the tax on prohibited transactions where the
property subject to the mortgage is sold within 4 years of the REIT's
acquisition of the mortgage pursuant to a bankruptcy plan of the
mortgagor unless the REIT acquired the mortgage knew or had reason to
know that the property subject to the mortgage would be sold in a
bankruptcy proceeding.
Wholly-owned REIT subsidiaries (sec. 1262 of the bill and
sec. 856(I)(2)of the Code)
The bill permits any corporation wholly-owned by a REIT to be treated
as a qualified subsidiary, regardless of whether the corporation had
always been owned by the REIT. Where the REIT acquired an existing
corporation, the bill treats any such corporation as being liquidated as
of the time of acquisition by the REIT and then reincorporated (thus,
any of the subsidiary's pre-REIT built-in gain would be subject to tax
under the normal rules of section 337). In addition, any pre-REIT
earnings and profits of the subsidiary must be distributed before the
end of the REIT's taxable year.
EFFECTIVE DATE
The bill is effective for taxable years beginning after the date of
enactment.
E. Repeal of the Short-Short Test for Regulated Investment Companies
(sec. 1271 of the bill and sec. 851(b)(3) of the Code)
PRESENT LAW
To qualify as a Regulated Investment Company (RIC), a company must
derive less than 30 percent of its gross income from the sale or other
disposition of stock or securities held for less than 3 months (the
``30-percent test'' or ``short-short rule'').
REASONS FOR CHANGE
The short-short rule restricts the investment flexibility of RICs.
The rule can, for example, limit a RIC's ability to ``hedge'' its
investments (e.g., to use options to protect against adverse market
moves).
The rule also burdens a RIC with significant recordkeeping,
compliance, and administration costs. The RIC must keep track of the
holding periods of assets and the relative percentages of short-term
gain that it realizes throughout the year. The Committee believes that
the short-short test places unnecessary limitations upon a RIC's
activities.
EXPLANATION OF PROVISION
The 30-percent test (or short-short rule) is repealed.
EFFECTIVE DATE
The provision is effective for taxable years ending after the date of
enactment.
F. Taxpayer Protections
1. PROVIDE REASONABLE CAUSE EXCEPTION FOR ADDITIONAL PENALTIES (SEC.
1281 OF THE BILL AND SECS. 6652, 6683, 7519 OF THE CODE)
PRESENT LAW
Many penalties in the Code may be waived if the taxpayer establishes
reasonable cause. For example, the accuracy-related penalty (sec. 6662)
may be waived with respect to any item if the taxpayer establishes
reasonable cause for his treatment of the item and that he acted in good
faith (sec. 6664(c)).
REASONS FOR CHANGE
The Committee believes that it is appropriate to provide a reasonable
cause exception for several additional penalties where one does not
currently exist.
EXPLANATION OF PROVISION
The bill provides that the following penalties may be waived if the
failure is shown to be due to reasonable cause and not willful neglect:
(1) the penalty for failure to make a report in connection with
deductible employee contributions to a retirement savings plan (sec.
6652(g));
(2) the penalty for failure to make a report as to certain small
business stock (sec. 6652(k));
(3) the penalty for failure of a foreign corporation to file a
return of personal holding company tax (sec. 6683); and
(4) the penalty for failure to make required payments for entities
electing not to have the required taxable year (sec. 7519).
EFFECTIVE DATE
The provision is effective for taxable years beginning after the date
of enactment.
2. CLARIFICATION OF PERIOD FOR FILING CLAIMS FOR REFUNDS (SEC. 1282 OF
THE BILL AND SEC. 6512 OF THE CODE)
PRESENT LAW
The Code contains a series of limitations on tax refunds. Section
6511 of the Code provides both a limitation on the time period in which
a claim for refund can be made (section 6511(a)) and a limitation on the
amount that can be allowed as a refund (section 6511(b)).
Section 6511(a) provides the general rule that a claim for
refund must be filed within 3 years of the date of the return or 2 years
of the date of payment of the taxes at issue, whichever is later.
Section 6511(b) limits the refund amount that can be covered: if a
return was filed, a taxpayer can recover amounts paid within 2 years
before the claim. Section 6512(b)(3) incorporates these rules where
taxpayers who challenge deficiency notices in Tax Court are found to be
entitled to refunds.
In Commissioner v. Lundy, 116 S. Ct. 647 (1996), the taxpayer had not
filed a return, but received a notice of deficiency within 3 years after
the date the return was due and challenged the proposed deficiency in
Tax Court. The Supreme Court held that the taxpayer could not recover
overpayments attributable to withholding during the tax year, because no
return was filed and the 2-year ``look back'' rule applied. Since
overwithheld amounts are deemed paid as of the date the taxpayer's
return was first due (i.e., more than 2 years before the notice of
deficiency was issued), such overpayments could not be recovered. By
contrast, if the same taxpayer had filed a return on the date the notice
of deficiency was issued, and then claimed a refund, the 3-year ``look
back'' rule would apply, and the taxpayer could have obtained a refund
of the overwithheld amounts.
REASONS FOR CHANGE
The Committee believes that it is appropriate to eliminate this
disparate treatment.
EXPLANATION OF PROVISION
The bill permits taxpayers who initially fail to file a return, but
who receive a notice of deficiency and file suit to contest it in Tax
Court during the third year after the return due date, to obtain a
refund of excessive amounts paid within the 3-year period prior to the
date of the deficiency notice.
EFFECTIVE DATE
The provision applies to claims for refund with respect to tax years
ending after the date of enactment.
3. REPEAL OF AUTHORITY TO DISCLOSE WHETHER A PROSPECTIVE JUROR HAS BEEN
AUDITED (SEC. 1283 OF THE BILL AND SEC. 6103 OF THE CODE)
PRESENT LAW
In connection with a civil or criminal tax proceeding to which the
United States is a party, the Secretary must disclose, upon the written
request of either party to the lawsuit, whether an individual who is a
prospective juror has or has not been the subject of an audit or other
tax investigation by the Internal Revenue Service (sec. 6103(h)(5)).
REASONS FOR CHANGE
This disclosure requirement, as it has been interpreted by several
recent court decisions, has created significant difficulties in the
civil and criminal tax litigation process. First, the litigation process
can be substantially slowed. It can take the Secretary a considerable
period of time to compile the information necessary for a response (some
courts have required searches going back as far as 25 years). Second,
providing early release of the list of potential jurors to defendants
(which several recent court decisions have required, to permit
defendants to obtain disclosure of the information from the Secretary)
can provide an opportunity for harassment and intimidation of potential
jurors in organized crime, drug, and some tax protester cases. Third,
significant judicial resources have been expended in interpreting this
procedural requirement that might better be spent resolving substantive
disputes. Fourth, differing judicial interpretations of this provision
have caused confusion. In some instances, defendants convicted of
criminal tax offenses have obtained reversals of those convictions
because of failures to comply fully with this provision.
EXPLANATION OF PROVISION
The bill repeals the requirement that the Secretary disclose, upon
the written request of either party to the lawsuit, whether an
individual who is a prospective juror has or has not been the subject of
an audit or other tax investigation by the Internal Revenue Service.
EFFECTIVE DATE
The provision is effective for judicial proceedings commenced after
the date of enactment.
4. CLARIFY STATUTE OF LIMITATIONS FOR ITEMS FROM PASS-THROUGH ENTITIES
(SEC. 1284 OF THE BILL AND SEC. 6501 OF THE CODE)
PRESENT LAW
Pass through entities (such as S corporations, partnerships, and
certain trusts) generally are not subject to income tax on their taxable
income. Instead, these entities file information returns and the
entities' shareholders (or beneficial owners) report their pro rata
share of the gross income and are liable for any taxes due.
Some believe that, prior to 1993, it may have been unclear as to
whether the statute of limitations for adjustments that arise from
distributions from passthrough entities should be applied at the entity
or individual level (i.e., whether the 3-year statute of limitations for
assessments runs from the time that the entity files its information
return or from the time that a shareholder timely files his or her
income tax return). In 1993, the Supreme Court held that the limitations
period for assessing the income tax liability of an S corporation
shareholder runs from the date the shareholder's return is filed (
Bufferd v. Comm., 113 S. Ct. 927 (1993)).
REASONS FOR CHANGE
Uncertainty regarding the correct statute of limitations hinders the
resolution of factual and legal issues and creates needless litigation
over collateral matters.
EXPLANATION OF PROVISION
The bill clarifies that the return that starts the running of the
statute of limitations for a taxpayer is the return of the taxpayer and
not the return of another person from whom the taxpayer has received an
item of income, gain, loss, deduction, or credit.
EFFECTIVE DATE
The provision is effective for taxable years beginning after the date
of enactment.
5. AWARDING OF ADMINISTRATIVE COSTS AND ATTORNEYS FEES (SEC. 1285 OF
THE BILL AND SEC. 7430 OF THE CODE)
PRESENT LAW
Any person who substantially prevails in any action brought by or
against the United States in connection with the determination,
collection, or refund of any tax, interest, or penalty may be awarded
reasonable administrative costs incurred before the IRS and reasonable
litigation costs incurred in connection with any court proceeding.
No time limit is specified for the taxpayer to apply to the IRS for
an award of administrative costs. In addition, no time limit is
specified for a taxpayer to appeal to the Tax Court an IRS decision
denying an award of administrative costs. Finally, the procedural rules
for adjudicating a denial of administrative costs are unclear.
REASONS FOR CHANGE
The proper procedures for applying for a cost award are uncertain in
some instances. Clarifying these procedures will decrease litigation
over these procedural issues and will provide for expedited settlement
of these claims.
EXPLANATION OF PROVISION
The bill provides that a taxpayer who seeks an award of
administrative costs must apply for such costs within 90 days of the
date on which the taxpayer was determined to be a prevailing party. The
bill also provides that a taxpayer who seeks to appeal an IRS denial of
an administrative cost award must petition the Tax Court within 90 days
after the date that the IRS mails the denial notice.
The bill clarifies that dispositions by the Tax Court of petitions
relating only to administrative costs are to be reviewed in the same
manner as other decisions of the Tax Court.
EFFECTIVE DATE
The provision is effective with respect to costs incurred in civil
actions or proceedings commenced after the date of enactment.
6. PROHIBITION ON BROWSING (SECS. 1286 AND 1287 OF THE BILL AND SECS.
7213A AND 7431 OF THE CODE)
PRESENT LAW
The Internal Revenue Code prohibits disclosure of tax returns and
return information, except to the extent specifically authorized by the
Internal Revenue Code (sec. 6103). Unauthorized willful disclosure is a
felony punishable by a fine not exceeding $5,000 or imprisonment of not
more than five years, or both (sec. 7213). An action for civil damages
also may be brought for unauthorized disclosure (sec. 7431).
There is no explicit criminal penalty in the Internal Revenue Code
for unauthorized inspection (absent subsequent disclosure) of tax
returns and return information. Such inspection is, however, explicitly
prohibited by the Internal Revenue Service (``IRS'').\13\
In a recent case, an individual was convicted of violating the Federal
wire fraud statute (18 U.S.C. 1343 and 1346) and a Federal computer
fraud statute (18 U.S.C. 1030) for unauthorized inspection. However, the
U.S. First Circuit Court of Appeals overturned this conviction.\14\
Unauthorized inspection of information of any department or agency of
the United States (including the IRS) via computer was made a crime
under 18 U.S.C. 1030 by the Economic Espionage Act of 1996.\15\
This provision does not apply to unauthorized inspection of paper
documents.
\13\IRS Declaration of Privacy Principles, May 9, 1994.
\14\ U.S. v. Czubinski, DTR 2/25/97, P. K 2.
\15\P.L. 104 294, sec. 201 (October 11, 1996).
REASONS FOR CHANGE
The Committee believes that it is important to have a criminal
penalty in the Internal Revenue Code to punish this type of behavior.
The Committee also believes that it is appropriate to provide for civil
damages for unauthorized inspection parallel to civil damages for
unauthorized disclosure.
EXPLANATION OF PROVISIONS
Criminal penalties
The bill creates a new criminal penalty in the Internal Revenue Code.
The penalty is imposed for willful inspection (except as authorized by
the Code) of any tax return or return information by any Federal
employee or IRS contractor. The penalty also applies to willful
inspection (except as authorized) by any State employee or other person
who acquired the tax
return or return information under specific provisions of
section 6103. Upon conviction, the penalty is a fine in any amount not
exceeding $1,000,\16\
or imprisonment of not more than 1 year, or both, together with the
costs of prosecution. In addition, upon conviction, an officer or
employee of the United States would be dismissed from office or
discharged from employment.
\16\Pursuant to 18 U.S.C. sec. 3571 (added by the Sentencing Reform Act
of 1984), the amount of the fine is not more than the greater of the
amount specified in this new Code section or $100,000.
The Congress views any unauthorized inspection of tax returns or
return information as a very serious offense; this new criminal penalty
reflects that view. The Congress also believes that unauthorized
inspection warrants very serious personnel sanctions against IRS
employees who engage in unauthorized inspection, and that it is
appropriate to fire employees who do this.
Civil damages
The bill amends the provision providing for civil damages for
unauthorized disclosure by also providing for civil damages for
unauthorized inspection. Damages are available for unauthorized
inspection that occurs either knowingly or by reason of negligence.
Accidental or inadvertent inspection that may occur (such as, for
example, by making an error in typing in a TIN) would not be subject to
damages because it would not meet this standard. The bill also provides
that no damages are available to a taxpayer if that taxpayer requested
the inspection or disclosure.
The bill also requires that, if any person is criminally charged by
indictment or information with inspection or disclosure of a taxpayer's
return or return information in violation of section 7213 (a) or (b),
section 7213A (as added by the bill), or 18 USC section 1030(a)(2)(B),
the Secretary notify that taxpayer as soon as practicable of the
inspection or disclosure.
EFFECTIVE DATE
The bill is effective for violations occurring on or after the date
of enactment.
TITLE XIII. ESTATE, GIFT, AND TRUST TAX SIMPLIFICATION
1. ELIMINATE GIFT TAX FILING REQUIREMENTS FOR GIFTS TO CHARITIES (SEC.
1301 OF THE BILL AND SEC. 6019 OF THE CODE)
PRESENT LAW
A gift tax generally is imposed on lifetime transfers of property by
gift (sec. 2501). In computing the amount of taxable gifts made during a
calendar year, a taxpayer generally may deduct the amount of any gifts
made to a charity (sec. 2522). Generally, this charitable gift deduction
is available for outright gifts to charity, as well as gifts of certain
partial interests in property (such as a remainder interest). A gift of
a partial interest in property must be in a prescribed form in order to
qualify for the deduction.
Individuals who make gifts in excess of $10,000 to any one donee
during the calendar year generally are required to file a gift tax
return (sec. 6019). This filing requirement applies to all gifts,
whether charitable or noncharitable, and whether or not the gift
qualifies for a gift tax charitable deduction. Thus, under current law,
a gift tax return is required to be filed for gifts to charity in excess
of $10,000, even though no gift tax is payable on the transfer.
REASONS FOR CHANGE
Because a charitable gift does not give rise to a gift tax liability,
many donors are unaware of the requirement to file a gift tax return for
charitable gifts in excess of $10,000. Failure to file a gift tax return
under these circumstances could expose the donor to penalties. The bill
eliminates this potential trap for the unwary.
EXPLANATION OF PROVISION
The bill provides that gifts to charity are not subject to the gift
tax filing requirements of section 6019, as long as the entire value of
the transferred property qualifies for the gift tax charitable deduction
under section 2522. The filing requirements for gifts of partial
interests in property remain unchanged.
EFFECTIVE DATE
The provision is effective for gifts made after the date of enactment.
2. CLARIFICATION OF WAIVER OF CERTAIN RIGHTS OF RECOVERY (SEC. 1302 OF
THE BILL AND SECS. 2207A AND 2207B OF THE CODE)
PRESENT LAW
For estate and gift tax purposes, a marital deduction is allowed for
qualified terminable interest property (QTIP). Such property generally
is included in the surviving spouse's gross estate upon his or her
death. The surviving spouse's estate is entitled to recover the portion
of the estate tax
attributable to inclusion of QTIP from the person receiving
the property, unless the spouse directs otherwise by will (sec. 2207A).
For this purpose, a will provision specifying that all taxes shall be
paid by the estate is sufficient to waive the right of recovery.
A decedent's gross estate includes the value of previously
transferred property in which the decedent retains enjoyment or the
right to income (sec. 2036). The estate is entitled to recover from the
person receiving the property a portion of the estate tax attributable
to the inclusion (sec. 2207B). This right may be waived only by a
provision in the will (or revocable trust) specifically referring to
section 2207B.
REASONS FOR CHANGE
It is understood that persons utilizing standard testamentary
language often inadvertently waive the right of recovery with respect to
QTIP. Similarly, persons waiving a right to contribution are unlikely to
refer to the code section granting the right. Accordingly, allowing the
right of recovery (or right of contribution) to be waived only by
specific reference should simplify the drafting of wills by better
conforming with the testator's likely intent.
EXPLANATION OF PROVISION
The bill provides that the right of recovery with respect to QTIP is
waived only to the extent that language in the decedent's will or
revocable trust specifically so indicates (e.g., by a specific reference
to QTIP, the QTIP trust, section 2044, or section 2207A). Thus, a
general provision specifying that all taxes be paid by the estate is no
longer sufficient to waive the right of recovery.
The bill also provides that the right of contribution for property
over which the decedent retained enjoyment or the right to income is
waived by a specific indication in the decedent's will or revocable
trust, but specific reference to section 2207B is no longer required.
EFFECTIVE DATE
The provision applies to decedents dying after the date of enactment.
3. TRANSITIONAL RULE UNDER SECTION 2056A (SEC. 1303 OF THE BILL AND
SEC. 2056A OF THE CODE)
PRESENT LAW
A ``marital deduction'' generally is allowed for estate and gift tax
purposes for the value of property passing to a spouse. The Technical
and Miscellaneous Revenue Act of 1988 (``TAMRA'') denied the marital
deduction for property passing to an alien spouse outside a qualified
domestic trust (``QDT''). An estate tax generally is imposed on corpus
distributions from a QDT.
TAMRA defined a QDT as a trust that, among other things, required all
trustees be U.S. citizens or domestic corporations. This provision was
modified in the Omnibus Budget Reconciliation Acts of 1989 and 1990 to
require that at least one trustee be a U.S. citizen or domestic
corporation and that no corpus distribution be made unless such trustee
has the right to withhold any estate tax imposed on the distribution
(the ``withholding requirement'').
REASONS FOR CHANGE
Wills drafted under the TAMRA rules must be revised to conform with
the withholding requirement, even though both the TAMRA rule and its
successor ensure that a U.S. trustee is personally liable for the estate
tax on a QDT. Reinstatement of the TAMRA rule for wills drafted in
reliance upon it reduces the number of will revisions necessary to
comply with statutory changes, thereby simplifying estate planning.
EXPLANATION OF PROVISION
Certain trusts created before the enactment of the Omnibus Budget
Reconciliation Act of 1990 are treated as satisfying the withholding
requirement if the governing instruments require that all trustees be
U.S. citizens or domestic corporations.
EFFECTIVE DATE
The provision applies as if included in the Omnibus Budget
Reconciliation Act of 1990.
4. CLARIFICATIONS RELATING TO DISCLAIMERS (SEC. 1304 OF THE BILL AND
SEC. 2518 OF THE CODE)
PRESENT LAW
Historically, there must be acceptance of a gift in order for the
gift to be completed under State law and there is no taxable gift for
Federal gift tax purposes unless there is a completed gift. Most States
have rules that provide that, where there is a disclaimer of a gift, the
property passes to the person who is entitled to the property had the
disclaiming party died before the purported transfer.
In the Tax Reform Act of 1976, Congress provided a uniform disclaimer
rule (section 2518) that specified how and when a disclaimer under State
law must be made in order to be effective for Federal transfer tax
purposes. Under section 2518, a State law type disclaimer is effective
for Federal transfer tax purposes if it is an irrevocable and
unqualified refusal to accept an interest in property and certain other
requirements are satisfied. One of these other requirements is that the
disclaimer generally must be made in writing not later than nine months
after the transfer creating the interest occurs. Section 2518 is not
presently effective for Federal tax purposes other than transfer taxes.
In 1981, Congress added a rule to section 2518 that allowed certain
transfers of property to be treated as a qualified disclaimer. In order
to qualify, these transfer-type disclaimers must be a written transfer
of the disclaimant's ``entire interest in the property'' to persons who
would have received the property had there been a valid disclaimer under
State law (sec. 2518(c)(3)). Like other disclaimers, the transfer-type
disclaimer generally must be made within nine months of the transfer
creating the interest.
REASONS FOR CHANGE
Under present law, a State law type disclaimer can be a qualified
disclaimer even (1) where it is only a partial disclaimer of the
property interest, or (2) where the disclaimant spouse retains an
interest in the property. In contrast, it is presently unclear whether a
transfer-type disclaimer can qualify under similar circumstances. Thus,
in order to equalize the treatment of State law type disclaimers and
transfer-type disclaimers, the Committee believes it is appropriate to
allow a transfer-type disclaimer of an undivided portion of property or
a transfer-type disclaimer where the disclaimant spouse has retained an
interest in the property to be treated as a qualified disclaimer for
transfer tax purposes.
The Committee also believes that qualified disclaimers should be
effective for Federal income tax purposes, as well as transfer tax
purposes.
EXPLANATION OF PROVISION
The bill allows a transfer-type disclaimer of an ``undivided
portion'' of the disclaimant transferor's interest in property to
qualify under section 2518. Also, the bill allows a spouse to make a
qualified transfer-type disclaimer where the disclaimed property is
transferred to a trust in which the disclaimant spouse has an interest
(e.g., a credit shelter trust). Finally, the bill provides that a
qualified disclaimer for transfer tax purposes under section 2518 is
also effective for Federal income tax purposes (e.g., disclaimers of
interests in annuities and income in respect of a decedent).
None of the foregoing provisions are intended to create an inference
regarding the Federal tax treatment of disclaimers under present law.
EFFECTIVE DATE
The provision applies to disclaimers made after the date of enactment.
5. AMEND ``5 OR 5 POWER'' (SEC. 1305 OF THE BILL AND SECS. 2041(B)(2)
AND 2514(E) OF THE CODE)
PRESENT LAW
The exercise or release of a general power of appointment generally
is considered a gift by the person holding the power (sec. 2514(b)). A
special rule, however, provides that the lapse of a power of appointment
during the life of the person holding the power is considered a release
(and thus a taxable gift) only to the extent that the value of the
property over which the power lapsed exceeds the greater of $5,000 or
five percent of the value of the assets of the trust (sec. 2514(e)). A
similar provision applies for purposes of estate taxation (sec.
2041(b)(2)).
REASONS FOR CHANGE
Because the present-law limitation equals the greater of $5,000 or
five percent of the value of the assets of the trust, the $5,000
limitation has the practical effect of being binding only on those
trusts with assets of $200,000 or less. The Committee understands that
the limitation often is avoided through a series of complicated drafting
techniques. Raising the limitation to $10,000 will ease the burden on
these smaller trusts by eliminating the need to engage in such
complicated drafting techniques.
EXPLANATION OF PROVISION
The bill increases the limitations in sections 2514(e) and 2041(b)(2)
to the greater of $10,000 or 5 percent.
EFFECTIVE DATE
The provision applies to lapses occurring in taxable years beginning
after the date of enactment.
6. TREATMENT FOR ESTATE TAX PURPOSES OF SHORT-TERM OBLIGATIONS HELD BY
NONRESIDENT ALIENS (SEC. 1306 OF THE BILL AND SEC. 2105 OF THE CODE)
PRESENT LAW
The United States imposes estate tax on assets of noncitizen
nondomiciliaries that were situated in the United States at the time of
the individual's death. Debt obligations of a U.S. person, the United
States, a political subdivision of a State, or the District of Columbia
are considered property located within the United States if held by a
nonresident not a citizen of the United States (sec. 2014(c)).
Special rules apply to treat certain bank deposits and debt
instruments the income from which qualifies for the bank deposit
interest exemption and the portfolio interest exemption as property from
without the United States despite the fact that such items are
obligations of a U.S. person, the United States, a political subdivision
of a State, or the District of Columbia (sec. 2105(b)). Income from such
items is exempt from U.S. income tax in the hands of the nonresident
recipient (secs. 871(h) and 871(I)(2)(A)). The effect of these special
rules is to exclude these items from the U.S. gross estate of a
nonresident not a citizen of the United States. However, because of an
amendment to section 871(h) made by the Tax Reform Act of 1986, these
special rules no longer cover obligations that generate short-term OID
income despite the fact that such income is exempt from U.S. income tax
in the hands of the nonresident recipient (sec. 871(g)(1)(B)(I)).
REASONS FOR CHANGE
The Committee believes that the income and estate tax treatments of
short-term OID obligations held by nonresident aliens should conform. A
purpose of exempting short-term OID income derived by nonresident aliens
from U.S. income tax is to enhance the ability of U.S. borrowers to
raise funds from foreign lenders, and such purpose is hindered by the
lack of a corresponding exemption for U.S. estate tax. Moreover, to the
extent the interest from such an obligation is exempt from U.S. income
tax, the inclusion of the instrument in the nonresident noncitizen's
U.S. estate would be a trap for the unwary.
EXPLANATION OF PROVISION
The bill provides that any debt obligation, the income from which
would be eligible for the exemption for short-term OID under section
871(g)(1)(B)(I) if such income were received by the decedent on the date
of his death, is treated as property located outside of the United
States in determining the U.S. estate tax liability of a nonresident not
a U.S. citizen. No inference is intended with respect to the estate tax
treatment of such obligations under present law.
EFFECTIVE DATE
The provision is effective for estates of decedents dying after the
date of enactment.
7. CERTAIN REVOCABLE TRUSTS TREATED AS PART OF ESTATE (SEC. 1307 OF THE
BILL AND SECS. 646 AND 2652(B)(1) OF THE CODE)
PRESENT LAW
Both estates and revocable inter vivos trusts can function to settle
the affairs of a decedent and distribute assets to heirs. In the case of
revocable inter vivos trusts, the grantor transfers property into a
trust which is revocable during his or her lifetime. Upon the grantor's
death, the power to revoke ceases and the trustee then performs the
settlement functions typically performed by the executor of an estate.
While both estates and revocable trusts perform essentially the same
function after the testator or grantor's death, there are a number of
ways in which an estate and a revocable trust operate differently.
First, there can be only one estate per decedent while there can be more
than one revocable trust. Second, estates are in existence only for a
reasonable period of administration; revocable trusts can perform the
same settlement functions as an estate, but may continue in existence
thereafter as testamentary trusts.
Numerous differences presently exist between the income tax treatment
of estates and revocable trusts, including: (1) estates are allowed a
charitable deduction for amounts permanently set aside for charitable
purposes while post death revocable trusts are allowed a charitable
deduction only for amounts paid to charities; (2) the active
participation requirement the passive loss rules under section 469 is
waived in the case of estates (but not revocable trusts) for two years
after the owner's death; and (3) estates can qualify for section 194
amortization of reforestation expenditures, while trusts do not.
REASONS FOR CHANGE
The use of revocable trusts may offer certain non-tax advantages for
estate planning as compared to a traditional estate plan. There are
several differences, however, between the Federal tax treatment of
revocable trusts and an estate. These differences may discourage
individuals from utilizing revocable trusts for estate planning where
they might otherwise be appropriate or efficient. Accordingly, in an
effort to minimize these tax differences, the Committee believes it is
appropriate to allow an election to treat a revocable trust as part of
the decedent's estate during a reasonable period of administration.
EXPLANATION OF PROVISION
The bill provides an irrevocable election to treat a qualified
revocable trust as part of the decedent's estate for Federal income tax
purposes. This elective treatment is effective from the date of the
decedent's death until two years after his or her death (if no estate
tax return is required) or, if later, six months after the final
determination of estate tax liability (if an estate tax return is
required). The election must be made by both the executor of the
decedent's estate (if any) and the trustee of the revocable trust no
later than the time required for filing the income tax return of the
estate for its first taxable year, taking into account any extensions. A
conforming change is made to section 2652(b) for generation-skipping
transfer tax purposes.
For this purpose, a qualified revocable trust is any trust (or
portion thereof) which was treated under section 676 as owned by the
decedent with respect to whom the election is being made, by reason of a
power in the grantor (i.e., trusts that are treated as owned by the
decedent solely by reason of a power in a nonadverse party would not
qualify).
As described below, the separate share rule may apply when a
qualified revocable trust is treated as part of the decedent's estate.
EFFECTIVE DATE
The provision applies to decedents dying after the date of enactment.
8. DISTRIBUTIONS DURING FIRST 65 DAYS OF TAXABLE YEAR OF ESTATE (SEC.
1308 OF THE BILL AND SEC. 663(B) OF THE CODE)
PRESENT LAW
In general, trusts and estates are treated as conduits for Federal
income tax purposes; income received by a trust or estate that is
distributed to a beneficiary in the trust or estate's taxable year
``ending with or within'' the taxable year of the beneficiary is taxable
to the beneficiary in that year; income that is retained by the trust or
estate is initially taxable to the trust or estate. In the case of
distributions of previously accumulated income by trusts (but not
estates), there may be additional tax under the so-called ``throwback''
rules if the beneficiary to whom the distributions were made has
marginal rates higher than those of the trust. Under the ``65-day
rule,'' a trust may elect to treat distributions paid within 65 days
after the close of its taxable year as paid on the last day of its
taxable year. The 65-day rule is not applicable to estates.
REASONS FOR CHANGE
In order to minimize the tax differences between estates and
revocable trusts, the Committee believes that the 65-day rule should be
allowed to estates as well as to trusts.
EXPLANATION OF PROVISION
The bill extends application of the 65-day rule to distributions by
estates. Thus, an executor can elect to treat distributions paid within
65 days after the close of the estate's taxable year as having been paid
on the last day of such taxable year.
EFFECTIVE DATE
The provision applies to taxable years beginning after the date of
enactment.
9. SEPARATE SHARE RULES AVAILABLE TO ESTATES (SEC. 1309 OF THE BILL AND
SEC. 663(C) OF THE CODE)
PRESENT LAW
Trusts with more than one beneficiary must use the ``separate share''
rule in order to provide different tax treatment of distributions to
different beneficiaries to reflect the income earned by different shares
of the trust's corpus.\17\
Treasury regulations provide that ``[t]he application of the separate
share rule . . . will generally depend upon whether distributions of the
trust are to be made in substantially the same manner as if separate
trusts had been created. . . . Separate share treatment will not be
applied to a trust or portion of a trust subject to a power to
distribute, apportion, or accumulate income or distribute corpus to or
for the use of one or more beneficiaries within a group or class of
beneficiaries, unless the payment of income, accumulated income, or
corpus of a share of one beneficiary cannot affect the proportionate
share of income, accumulated income, or corpus of any shares of the
other beneficiaries, or unless substantially proper adjustment must
thereafter be made under the governing instrument so that substantially
separate and independent shares exist.'' (Treas. Reg. sec. 1.663(c) 3).
The separate share rule presently does not apply to estates.
\17\Application for the separate share rule is not elective; it is
mandatory if there are separate shares in the trust.
REASONS FOR CHANGE
The Committee understands that estates typically do not have separate
shares. Nonetheless, where separate shares do exist in an estate, the
inapplicability of the separate share rule to estates may result in one
beneficiary or class of beneficiaries being taxed on income payable to,
or accruing to, a separate beneficiary or class of beneficiaries.
Accordingly, the Committee believes that a more equitable taxation of an
estate and its beneficiaries would be achieved with the application of
the separate share rule to an estate where, under the provisions of the
decedent's will or applicable local law, there are separate shares in
the estate.
EXPLANATION OF PROVISION
The bill extends the application of the separate share rule to
estates. There are separate shares in an estate when the governing
instrument of the estate (e.g., the will and applicable local law)
creates separate economic interests in one beneficiary or class of
beneficiaries such that the economic interests of those beneficiaries
(e.g., rights to income or gains from specified items of property) are
not affected by economic interests accruing to another separate
beneficiary or class of beneficiaries. For example, a separate share in
an estate would exist where the decedent's will provides that all of the
shares of a closely-held corporation are devised to one beneficiary and
that any dividends paid to the estate by that corporation should be paid
only to that beneficiary and any such dividends would not affect any
other amounts which that beneficiary would receive under the will. As in
the case of trusts, the application of the separate share rule is
mandatory where separate shares exist.
EFFECTIVE DATE
The provision applies to decedents dying after the date of enactment.
10. EXECUTOR OF ESTATE AND BENEFICIARIES TREATED AS RELATED PERSONS FOR
DISALLOWANCE OF LOSSES (SEC. 1310 OF THE BILL AND SECS. 267(B) AND 1239(B) OF THE
CODE)
PRESENT LAW
Section 267 disallows a deduction for any loss on the sale of an
asset to a person related to the taxpayer. For the purposes of section
267, the following parties are related persons: (1) a trust and the
trust's grantor, (2) two trusts with the same grantor, (3) a trust and a
beneficiary of the trust, (4) a trust and a beneficiary of another
trust, if both trusts have the same grantor, and (5) a trust and a
corporation the stock of which is more than 50 percent owned by the
trust or the trust's grantor.
Section 1239 disallows capital gain treatment on the sale of
depreciable property to a related person. For purposes of section 1239,
a trust and any beneficiary of the trust are treated as related persons,
unless the beneficiary's interest is a remote contingent interest.
Neither section 267 or section 1239 presently treat an estate and a
beneficiary of the estate as related persons.
REASONS FOR CHANGE
The Committee believes that the disallowance rules under sections 267
and 1239 with respect to transactions between related parties should
apply to an estate and a beneficiary of that estate for the same reasons
that such rules apply to a trust and a beneficiary of that trust.
EXPLANATION OF PROVISION
Under the bill, an estate and a beneficiary of that estate are
treated as related persons for purposes of sections 267 and 1239, except
in the case of a sale or exchange in satisfaction of a pecuniary
bequest.
EFFECTIVE DATE
The provision applies to taxable years beginning after the date of
enactment.
11. LIMITATION ON TAXABLE YEAR OF ESTATES (SEC. 1311 OF THE BILL AND
SEC. 645 OF THE CODE)
PRESENT LAW
The taxability of distributions from a trust or estate is based on
the amount of income received by the trust or estate in the trust or
estate's taxable year ``ending with or within'' the taxable year of the
beneficiary (typically a calendar year). Trusts are required to use a
calendar year and, consequently, income of a trust that is distributed
to a calendar-year beneficiary in the year earned is taxed to the
beneficiary in the year earned. Estates, on the other hand, are allowed
to use any fiscal year. Consequently, in the case of estates, the
taxation of distributions to a calendar-year beneficiary in up to the
last 11 months of the calendar year can be deferred until the next
taxable year depending upon the fiscal year selected.
REASONS FOR CHANGE
The Committee believes that allowing an estate to use a taxable year
significantly different than the calendar year may result in an improper
deferral of income by the beneficiaries of the estate. Thus, the
Committee believes that the choice of taxable years allowable to an
estate should be appropriately limited.
EXPLANATION OF PROVISION
The bill limits the taxable year of an estate to a year ending on
October 31, November 30, or December 31.\18\
Thus, the maximum deferral allowable to a calendar-year beneficiary is
with respect to distributions made in the last two months of the
calendar year.
\18\If an election is made to treat a revocable trust as part of the
estate under section 14601 of the bill, such trust would switch to the
taxable year of the estate during the period that the election was
effective.
EFFECTIVE DATE
The provision applies to decedents dying after the date of enactment.
12. SIMPLIFIED TAXATION OF EARNINGS OF PRE-NEED FUNERAL TRUSTS (SEC.
1312 OF THE BILL AND SEC. 684 OF THE CODE)
PRESENT LAW
A pre-need funeral trust is an arrangement where an individual
purchases funeral services or merchandise from a funeral home in advance
of the individual's death. The individual enters into a contract with
the provider of such services or merchandise whereby the individual
selects the services or merchandise to be provided upon his or her
death, and agrees to pay for them in advance of his or her death. Such
amounts (or a portion thereof) are held in trust during the individual's
lifetime and are paid to the seller upon the individual's death.
Under present law, pre-need funeral trusts generally are treated as
grantor trusts, and the annual income earned by such trusts is taxed to
the purchaser/grantor of the trust. Rev. Rul. 87 127. Any amount
received from the trust by the seller (as payment for services or
merchandise) is includible in the gross income of the seller.
REASONS FOR CHANGE
To the extent that pre-need funeral trusts are treated as grantor
trusts under present law, numerous individual taxpayers are required to
account for the earnings of such trusts on their tax returns, even
though the earnings with respect to any one taxpayer may be small. The
Committee believes that this recordkeeping burden on individuals could
be eased, and that compliance with the tax laws would be improved, if
such trusts instead were taxed at the entity level, with one simplified
annual return filed by the trustee reporting the aggregate income from
all such trusts administered by the trustee.
EXPLANATION OF PROVISION
The bill allows the trustee of a pre-need funeral trust to elect
special tax treatment for such a trust, to the extent the trust would
otherwise be treated as a grantor trust. A qualified funeral trust is
defined as one which meets the following requirements: (1) the trust
arises as the result of a contract between a person engaged in the trade
or business of providing funeral or burial services or merchandise and
one or more individuals to have such services or property provided upon
such individuals' death; (2) the only beneficiaries of the trust are
individuals who have entered into contracts to have such services or
merchandise provided upon their death; (3) the only contributions to the
trust are contributions by or for the benefit of the trust
beneficiaries; (4) the trust's only purpose is to hold and invest funds
that will be used to make payments for funeral or burial services or
merchandise for the trust beneficiaries; and (5) the trust has not
accepted contributions totaling more than $7,000 by or for the benefit
of any individual. For this purpose, ``contributions'' include all
amounts transferred to the trust, regardless of how denominated in the
contract. Contributions do not, however, include income or gain earned
with respect to property in the trust. For purposes of applying the
$7,000 limit, if a purchaser has more than one contract with a single
trustee (or related trustees), all such trusts are treated as one trust.
Similarly, if the Secretary of Treasury determines that a purchaser has
entered into separate contracts with unrelated trustees to avoid the
$7,000 limit described above, the Secretary may require that such trusts
be treated as one trust. For contracts entered into after 1998, the
$7,000 limit is indexed annually for inflation.
The trustee's election to have this provision apply to a qualified
funeral trust is to be made separately with respect to each purchaser's
trust. It is anticipated that the Department of Treasury will issue
prompt guidance with respect to the simplified reporting requirements so
that if the election is made, a single annual trust return may be filed
by the trustee, separately listing the amount of income earned with
respect to each purchaser. If the election is made, the trust is not
treated as a grantor trust and the amount of tax paid with respect to
each purchaser's trust is determined in accordance with the income tax
rate schedule generally applicable to estates and trusts (Code sec.
1(e)), but no deduction is allowed under section 642(b). The tax on the
annual earnings of the trust is payable by the trustee.
As under present law, amounts received from the trust by the seller
are treated as payments for services and merchandise and are includible
in the gross income of the seller. No gain or loss is recognized to the
beneficiary of the trust for payments from the trust to the beneficiary
upon cancellation of the contract, and the beneficiary takes a carryover
basis in any assets received from the trust upon cancellation.
EFFECTIVE DATE
The provision is effective for taxable years beginning after the date
of enactment.
13. ADJUSTMENTS FOR GIFTS WITHIN THREE YEARS OF DECEDENT'S DEATH (SEC.
1313 OF THE BILL AND SECS. 2035 AND 2038 OF THE CODE)
PRESENT LAW
The first $10,000 of gifts of present interests to each donee during
any one calendar year are excluded from Federal gift tax.
The value of the gross estate includes the value of any previously
transferred property if the decedent retained the power to revoke the
transfer (sec. 2038). The gross estate also includes the value of any
property with respect to which such power is relinquished during the
three years before death (sec. 2035). There has been significant
litigation as to whether these rules require that certain transfers made
from a revocable trust within three years of death be includible in the
gross estate. See, e.g., Jalkut Estate v. Commissioner , 96 T.C. 675
(1991) (transfers from revocable trust includible in gross estate);
McNeely v. Commissioner , 16 F.3d 303 (8th Cir. 1994) (transfers from
revocable trust not includible in gross estate); Kisling v. Commissioner
, 32 F.3d 1222 (8th Cir. 1994) (acq.) (transfers from revocable trust
not includible in gross estate).
REASONS FOR CHANGE
The inclusion of certain property transferred during the three years
before death is directed at transfers that would otherwise reduce the
amount subject to estate tax by more than the amount subject to gift
tax, disregarding appreciation between the times of gift and death.
Because all amounts transferred from a revocable trust are subject to
the gift tax, the Committee believes that inclusion of such amounts is
unnecessary where the transferor has retained no power over the property
transferred out of the trust. The Committee believes that clarifying
these rules statutorily will lend certainty to these rules.
EXPLANATION OF PROVISION
The provision codifies the rule set forth in the McNeely and Kisling
cases to provide that a transfer from a revocable trust (i.e., a trust
described under section 676) is treated as if made directly by the
grantor. Thus, an annual exclusion gift from such a trust is not
included in the gross estate.
The provision also revises section 2035 to improve its clarity.
EFFECTIVE DATE
The provision applies to decedents dying after the date of enactment.
14. CLARIFY RELATIONSHIP BETWEEN COMMUNITY PROPERTY RIGHTS AND
RETIREMENT BENEFITS (SEC. 1314 OF THE BILL AND SEC. 2056(B)(7)(C) OF THE CODE)
PRESENT LAW
Community property
Under state community property laws, each spouse owns an undivided
one-half interest in each community property asset. In community
property jurisdictions, a nonparticipant spouse may be treated as having
a vested community property interest in either his or her spouse's
qualified plan, individual retirement arrangement (``IRA''), or
simplified employee pension (``SEP'') plan.
Transfer tax treatment of qualified plans
In the Retirement Equity Act of 1984 (``REA''), qualified retirement
plans were required to provide automatic survivor benefits (1) in the
case of a participant who retires under the plan, in the form of a
qualified joint and survivor annuity, and (2) in the case of a vested
participant who dies before the annuity starting date and who has a
surviving spouse, in the form of a preretirement survivor annuity. A
participant generally is permitted to waive such annuities, provided he
or she obtains the written consent of his or her spouse.
The Tax Reform Act of 1986 repealed the estate tax exclusion,
formerly contained in sections 2039(c) and 2039(d), for certain
interests in qualified plans owned by a nonparticipant spouse
attributable to community property laws and made certain other changes
to conform the transfer tax treatment of qualified and nonqualified
plans.
As a result of these changes made by REA and the Tax Reform Act of
1986, the transfer tax treatment of married couples residing in a
community property state is unclear where either spouse is covered by a
qualified plan.
REASONS FOR CHANGE
The Committee believes that survivorship interests in annuities in
community property States should be accorded similar treatment to the
tax treatment of interests in such annuities in non-community property
States. Accordingly, the bill would clarify that the transfer at death
of a survivorship interest in an annuity to a surviving spouse will be a
deductible marital transfer under the QTIP rules regardless of whether
the decedent's annuity interest arose out of his or her employment or
arose under community property laws by reason of the employment of his
or her spouse.
EXPLANATION OF PROVISION
The bill clarifies that the marital deduction is available with
respect to a nonparticipant spouse's interest in an annuity attributable
to community property laws where he or she predeceases the participant
spouse. Under the bill, the nonparticipant spouse's interest in an
annuity arising under the community property laws of a State that passes
to the surviving participant spouse may qualify for treatment as QTIP
under section 2056(b)(7).
The provision is not intended to create an inference regarding the
treatment under present law of a transfer to a surviving spouse of the
decedent spouse's interest in an annuity arising under community
property laws.
EFFECTIVE DATE
The provision applies to decedents dying, or waivers, transfers and
disclaimers made, after the date of enactment.
15. TREATMENT UNDER QUALIFIED DOMESTIC TRUST RULES OF FORMS OF
OWNERSHIP WHICH ARE NOT TRUSTS (SEC. 1315 OF THE BILL AND SEC. 2056A(C) OF THE
CODE)
PRESENT LAW
A marital deduction generally is allowed for estate and gift tax
purposes for the value of property passing to a spouse. The marital
deduction is not available for property passing to an alien spouse
outside a qualified domestic trust (``QDT''). An estate tax generally is
imposed on corpus distributions from a QDT.
Trusts are not permitted in some countries. (e.g., many civil law
countries).\19\
As a result, it is not possible to create a QDT in those countries.
\19\Note that in some civil law States (e.g., Louisiana) an entity
similar to a trust, called a usufruct, exists.
REASONS FOR CHANGE
The estate of a decedent with a nonresident spouse should not be
precluded from qualifying for the marital deduction in situations where
the use of a trust is prohibited by another country. Accordingly, the
Committee believes it is appropriate to grant regulatory authority to
allow qualification for the marital deduction in such situations where
the Treasury Department determines that another similar arrangement
allows the U.S. to retain jurisdiction and provides adequate security
for the payment of U.S. transfer taxes on subsequent transfers by the
surviving spouse of the property transferred by the decedent.
EXPLANATION OF PROVISION
The bill provides the Treasury Department with regulatory authority
to treat as trusts legal arrangements that have substantially the same
effect as a trust. It is anticipated that such regulations, if any,
would only permit a marital deduction with respect to non-trust
arrangements under which the U.S. would retain jurisdiction and adequate
security to impose U.S. transfer tax on transfers by the surviving
spouse of the property transferred by the decedent. Possible
arrangements could include the adoption of a bilateral treaty that
provides for the collection of U.S. transfer tax from the noncitizen
surviving spouse or a closing agreement process under which the
surviving spouse waives treaty benefits, allows the U.S. to retain
taxing jurisdiction and provides adequate security with respect to such
transfer taxes.
EFFECTIVE DATE
The provision applies to decedents dying after the date of enactment.
16. OPPORTUNITY TO CORRECT CERTAIN FAILURES UNDER SECTION 2032A (SEC.
1316 OF THE BILL AND SEC. 2032A OF THE CODE)
PRESENT LAW
For estate tax purposes, an executor may elect to value certain real
property used in farming or other closely held business operations at
its current use value rather than its highest and best use (sec. 2032A).
A written agreement signed by each person with an interest in the
property must be filed with the election.
In 1984, section 2032A was amended to provide that if an executor
makes a timely election that substantially complies with Treasury
regulations, but fails to provide all required information or the
signatures of all persons required to enter into the agreement, the
executor may supply the missing information within a reasonable period
of time (not exceeding 90 days) after notification by the Treasury
Department.
Treasury regulations require that a notice of election and certain
information be filed with the Federal estate tax return (Treas. Reg.
sec. 20.2032A 8). The administrative policy of the Treasury Department
is to disallow current use valuation elections unless the required
information is supplied.
REASONS FOR CHANGE
It is understood that executors commonly fail to include with the
filed estate tax return a recapture agreement signed by all persons with
an interest in the property or all information required by Treasury
regulations. It is believed that allowing such signatures or information
to be supplied later is consistent with the legislative intent of
section 2032A and eases return filing.
EXPLANATION OF PROVISION
The bill extends the procedures allowing subsequent submission of
information to any executor who makes the election and submits the
recapture agreement, without regard to compliance with the Treasury
regulations. Thus, the bill allows the current use valuation election if
the executor supplies the required information within a reasonable
period of time (not exceeding 90 days) after
notification by the IRS. During that time period, the bill
also allows the addition of signatures to a previously filed agreement.
The Committee believes that the Treasury Department has taken an
unnecessarily restrictive view of the 1984 amendment to section 2032A
and intends no inference that the Treasury Department lacks the power,
under the law in effect prior to the date of enactment, to correct the
situation addressed by this provision. The Committee intends that, with
respect to technically defective 2032A elections made prior to the date
of enactment, prior law should be applied in a manner consistent with
the provision.
EFFECTIVE DATE
The provision applies to decedents dying after the date of enactment.
17. AUTHORITY TO WAIVE REQUIREMENT OF U.S. TRUSTEE FOR QUALIFIED
DOMESTIC TRUSTS (SEC. 1317 OF THE BILL AND SEC. 2056A(A)(1)(A) OF THE CODE)
PRESENT LAW
In order for a trust to be a QDT, a U.S. trustee must have the power
to approve all corpus distributions from the trust. In some countries,
trusts cannot have any U.S. trustees. As a result, trusts established in
those countries cannot qualify as a QDT.
REASONS FOR CHANGE
The estate of a decedent with a nonresident spouse should not be
precluded from qualifying for the marital deduction in situations where
the use of a U.S. trustee is prohibited by another country. Accordingly,
the Committee believes it is appropriate to grant regulatory authority
to allow qualification for the marital deduction in such situations
where the Treasury Department determines that the U.S. can retain
jurisdiction and other adequate security has been provided for the
payment of U.S. transfer taxes on subsequent transfers by the surviving
spouse of the property transferred by the decedent.
EXPLANATION OF PROVISION
In order to permit the establishment of a QDT in those situations
where a country prohibits a trust from having a U.S. trustee, the bill
provides the Treasury Department with regulatory authority to waive the
requirement that a QDT have a U.S. trustee. It is anticipated that such
regulations, if any, provide an alternative mechanism under which the
U.S. would retain jurisdiction and adequate security to impose U.S.
transfer tax on transfers by the surviving spouse of the property
transferred by the decedent. For example, one possible mechanism would
be a closing agreement process under which the surviving spouse waives
treaty benefits, allows the U.S. to retain taxing jurisdiction and
provides adequate security with respect to such transfer taxes.
EFFECTIVE DATE
The provision applies to decedents dying after the date of enactment.
TITLE XIV. EXCISE TAX AND OTHER SIMPLIFICATION PROVISIONS
A. Excise Tax Simplification Provisions
1. INCREASE DE MINIMIS LIMIT FOR AFTER-MARKET ALTERATIONS SUBJECT TO
HEAVY TRUCK AND LUXURY AUTOMOBILE EXCISE TAXES (SEC. 1401 OF THE BILL AND SEC.
4001 AND 4051 OF THE CODE)
PRESENT LAW
An excise tax is imposed on retail sales of truck chassis and truck
bodies suitable for use in a vehicle with a gross vehicle weight of over
33,000 pounds. The tax is equal to 12 percent of the retail sales price.
An excise tax also is imposed on retail sales of luxury automobiles. The
tax currently is equal to 8 percent of the amount by which the retail
sales price exceeds an inflation-adjusted $30,000 base. (The rate is
scheduled to be reduced by 1 percentage point per year through 2002, and
the tax is not imposed after 2002.) Anti-abuse rules prevent the
avoidance of these taxes through separate purchases of major component
parts. With certain exceptions, tax at the rate applicable to the
vehicle is imposed on the subsequent installation of parts and
accessories within six months after purchase of a taxable vehicle. The
exceptions include a de minimis exception for parts and accessories with
an aggregate price that does not exceed $200 (or such other amount as
Treasury may by regulation prescribe).
REASONS FOR CHANGE
Retailers are generally responsible for taxes on truck chassis and
bodies and luxury automobiles. In the case of a subsequent installation,
however, the owner or operator of the vehicle is responsible for paying
the tax attributable to the installation and the installer is
secondarily liable. Increasing the de minimis amount should
significantly reduce the number of return filers and relieve many
persons from the administrative burden of filing an excise tax return
reporting a very small amount of tax.
EXPLANATION OF PROVISION
The tax on subsequent installation of parts and accessories does not
apply to parts and accessories with an aggregate price that does not
exceed $1,000. Parts and accessories installed on a vehicle on or before
that date are taken into account in determining whether the $1,000
threshold is exceeded. If the aggregate price of the pre-effective date
parts and accessories does not exceed $200, they will not be subject to
tax unless the aggregate price of all additions exceeds $1,000.
EFFECTIVE DATE
The increase in the threshold for taxing after-market additions under
the heavy truck and luxury car excise taxes is effective on January 1,
1998.
2. MODIFY TREATMENT OF TIRES UNDER THE HEAVY HIGHWAY VEHICLE RETAIL
EXCISE TAX (SEC. 1402 OF THE BILL AND SEC. 4071 OF THE CODE)
PRESENT LAW
A 12-percent retail excise tax is imposed on certain heavy highway
trucks and trailers, and on highway tractors. A separate manufacturers'
excise tax is imposed on tires weighing more than 40 pounds. This tire
tax is imposed as a fixed dollar amount which varies based on the weight
of the tire. Because tires are taxed separately, the value of tires
installed on a highway vehicle is excluded from the 12-percent excise
tax on heavy highway vehicles. The determination of value is factual and
has given rise to numerous tax audit challenges.
REASONS FOR CHANGE
Allowing a credit for the tire tax actually paid on truck tires will
simplify the application of the retail truck tax.
EXPLANATION OF PROVISION
The current exclusion of the value of tires installed on a taxable
highway vehicle is repealed. Instead, a credit for the amount of
manufacturers' excise tax actually paid on the tires is allowed.
EFFECTIVE DATE
The provision is effective after December 31, 1997.
3. SIMPLIFICATION OF EXCISE TAXES ON DISTILLED SPIRITS, WINE, AND BEER
(SECS. 1411 1422 OF THE BILL AND SECS. 5008, 5044, 5053, 5055, 5115, 5175, AND
5207, AND NEW SECS. 5222 AND 5418 OF THE CODE)
PRESENT LAW
Imported distilled spirits returned to plant. --Excise tax that has
been paid on domestic distilled spirits is credited or refunded if the
spirits are later returned to bonded premises. Tax is imposed on
imported bottled spirits when they are withdrawn from customs custody,
but the tax is not refunded or credited if the spirits are later
returned to bonded premises.
Cancellation of export bonds. --An exporter that withdraws distilled
spirits from bonded warehouses for export or transportation to a customs
bonded warehouse without the payment of tax must furnish a bond to cover
the withdrawal. The required bonds are canceled ``on the submission of
such evidence, records, and certification indicating exportation as the
Secretary may by regulations prescribe.''
Location of records of distilled spirits plant. --Proprietors of
distilled spirits plants are required to maintain records and reports
relating to their production, storage, denaturation, and processing
activities on the premises where the operations covered by the record
are carried on.
Transfers from brewery to distilled spirits plant. --A distilled
spirits plant may receive on its bonded premises beer to be used in the
production of distilled spirits only if the beer is produced on
contiguous brewery premises.
Sign not required for wholesale dealers. --Wholesale liquor dealers
are required to post a sign identifying the firm as such. Failure to do
so is subject to a penalty.
Refund on returns of merchantable wine. --Excise tax paid on
domestic wine that is returned to bond as unmerchantable is refunded or
credited, and the wine is once again treated as wine in bond on the
premises of a bonded wine cellar.
Increased sugar limits for certain wine. --Natural wines may be
sweetened to correct high acid content. For most wines, however, sugar
cannot constitute more than 35 percent (by volume) of the combined sugar
and juice used to produce the wine. Up to 60 percent sugar may be used
in wine made from loganberries, currants, and gooseberries. If the
amount of sugar used exceeds the applicable limitation, the wine must be
labeled ``substandard.''
Beer withdrawn for embassy use. --Imported beer to be used for the
family and official use of representatives of foreign governments or
public international organizations may be withdrawn from customs bonded
warehouses without payment of excise tax. No similar exemption applies
to domestic beer withdrawn from a brewery or entered into a bonded
customs warehouse for the same authorized use.
Beer withdrawn for destruction. --Removals of beer from a brewery
are exempt from tax if the removal is for export, because the beer is
unfit for beverage use, for laboratory analysis, research, development
and testing, for the brewer's personal or family use, or as supplies for
certain vessels and aircraft.
Drawback on exported beer. --A domestic producer that exports beer
may recover the tax (receive a ``drawback'') found to have been paid on
the exported beer upon the ``submission of such evidence, records and
certificates indicating exportation'' required by regulations.
Imported beer transferred in bulk to brewery and imported wine
transferred in bulk to wineries. --Imported beer and wine are subject to
tax when removed from customs custody.
REASONS FOR CHANGE
Until 1980, the method of collecting alcohol excise taxes required
the regular presence of Treasury Department inspectors at alcohol
production facilities. In 1980, the method of collecting tax was changed
to a bonded premises system under which examinations and collection
procedures are similar to those used in connection with other Federal
excise taxes.
A number of reporting and recordkeeping requirements need to be
modified to conform to the current collection system. Appropriate
modification will allow the Bureau of Alcohol, Tobacco, and Firearms to
administer alcohol excise taxes more efficiently and relieve taxpayers
of unnecessary paperwork burdens.
The current rules under which the Code permits tax-free removals of
alcoholic beverages (or allows a credit or refund of tax on a return to
bonded premises) result in inappropriate disparities in the treatment of
different types of alcoholic beverages. In addition, these rules unduly
limit available options for complying with environmental and other laws
that regulate the destruction and disposition of alcoholic beverages.
Under the bonded premises system, these rules can be liberalized without
jeopardizing the collection of tax revenues.
Other provisions of current law (i.e., the sign requirement and the
sugar limits for certain wine) are outdated and should be repealed or
revised.
EXPLANATION OF PROVISIONS
Imported distilled spirits returned to plant. --Refunds or credits
of the tax are available for imported bottled spirits that are returned
to distilled spirits plants.
Cancellation of export bonds. --The certification requirement is
relaxed to allow the bonds to be canceled if there is such proof of
exportation as the Secretary may require.
Location of records of distilled spirits plant. --Records and
reports are permitted to be maintained elsewhere other than on the plant
premises.
Transfers from brewery to distilled spirits plant. --Beer may be
brought from any brewery for use in the production of spirits. Such beer
is exempt from excise tax, subject to Treasury regulations.
Sign not required for wholesale dealers. --The requirement that a
sign be posted is repealed.
Refund on returns of merchantable wine. --A refund or credit is
available in the case of all domestic wine returned to bond, whether or
not unmerchantable.
Increased sugar limits for certain wine. --Up to 60 percent sugar is
permitted in any wine made from juice, such as cranberry or plum juice,
with an acid content of 20 or more parts per thousand.
Beer withdrawn for embassy use. --Subject to Treasury's regulatory
authority, an exemption similar to that currently available for imported
beer is provided for domestic beer.
Beer withdrawn for destruction. --An exemption from tax is added for
removals for destruction, subject to Treasury regulations.
Drawback on exported beer. --The certification requirement is
relaxed to allow a drawback of tax paid if there is such proof of
exportation as the Secretary may by regulations require.
Imported beer transferred in bulk to brewery and imported wine
transferred in bulk to wineries. --Subject to Treasury regulations, beer
imported in bulk may be withdrawn from customs custody and transferred
in bulk to a brewery without payment of tax. The proprietor of the
brewery to which the beer is transferred or of the winery to which the
wine is transferred will be liable for the tax imposed on the withdrawal
from customs custody and the importer will be relieved of liability.
EFFECTIVE DATE
The provision to repeal the requirement that wholesale liquor dealers
post a sign outside their place of business takes effect on the date of
enactment. The other provisions take effect on the first day of the
calendar quarter that begins at least 90 days after the date of
enactment.
4. AUTHORITY FOR INTERNAL REVENUE SERVICE TO GRANT EXEMPTIONS FROM
EXCISE TAX REGISTRATION REQUIREMENTS (SEC. 1431 OF THE BILL AND SEC. 4222 OF THE
CODE)
PRESENT LAW
The Code exempts certain types of sales (e.g., sales for use in
further manufacture, sales for export, and sales for use by a State or
local government or a nonprofit educational organization) from excise
taxes imposed on manufacturers and retailers. These exemptions generally
apply only if the seller, the purchaser, and any person to whom the
article is resold by the purchaser (the second purchaser) are registered
with the Internal Revenue Service. The IRS can waive the registration
requirement for the purchaser and second purchaser in some but not all
cases.
REASONS FOR CHANGE
Allowing the IRS to waive the registration requirement for purchasers
and second purchasers in all cases will permit more efficient
administration of the exemptions and reduce paperwork burdens on
taxpayers.
EXPLANATION OF PROVISION
The IRS is authorized to waive the registration requirement for
purchasers and second purchasers in all cases.
EFFECTIVE DATE
The provision applies to sales made pursuant to waivers issued after
the date of enactment.
5. REPEAL OF EXCISE TAX DEADWOOD PROVISIONS (SEC. 1432 OF THE BILL AND
SECS. 4051, 4495 4498, AND 4681 4682 OF THE CODE)
PRESENT LAW
The Code includes a provision relating to a temporary reduction in
the tax on piggyback trailers sold before July 18, 1985, and provisions
relating to the tax on the removal of hard minerals from the deep seabed
before June 28, 1990.
An excise tax is imposed on the sale or use by the manufacturer or
importer of certain ozone-depleting chemicals (sec. 4681). The amount of
the tax generally is determined by multiplying the base tax amount
applicable for the calendar year by an ozone-depleting factor assigned
to each taxable chemical. The base tax amount was $5.80 per pound in
1996 and will increase by 45 cents per pound per year thereafter. The
Code contains provisions for special rates of tax applicable to years
before 1996 (e.g., sec. 4282(g)(1), (2), (3), and (5)).
REASONS FOR CHANGE
The elimination of out-of-date, ``deadwood'' provisions will simplify
the Code by removing unneeded Code sections.
EXPLANATION OF PROVISION
These provisions are repealed, as ``deadwood''.
EFFECTIVE DATE
The provisions are effective on the date of enactment.
B. Tax-Exempt Bond Provisions
Overview
Interest on State and local government bonds generally is excluded
from gross income for purposes of the regular individual and corporate
income taxes if the proceeds of the bonds are used to finance direct
activities of these governmental units (Code sec. 103).
Unlike the interest on governmental bonds, described above, interest
on private activity bonds generally is taxable. A private activity bond
is a bond issued by a State or local governmental unit acting as a
conduit to provide financing for private parties in a manner violating
either (1) a private business use and payment test or (2) a private loan
restriction. However, interest on private activity bonds is not taxable
if (1) the financed activity is specified in the Code and (2) at least
95 percent of the net proceeds of the bond issue is used to finance the
specified activity.
Issuers of State and local government bonds must satisfy numerous
other requirements, including arbitrage restrictions (for all such
bonds) and annual State volume limitations (for most private activity
bonds) for the interest on these bonds to be excluded from gross income.
1. REPEAL OF $100,000 LIMITATION ON UNSPENT PROCEEDS UNDER 1-YEAR
EXCEPTION FROM REBATE (SEC. 1441 OF THE BILL AND SEC. 148 OF CODE)
PRESENT LAW
Subject to limited exceptions, arbitrage profits from investing bond
proceeds in investments unrelated to the governmental purpose of the
borrowing must be rebated to the Federal Government. No rebate is
required if the gross proceeds of an issue are spent for the
governmental purpose of the borrowing within six months after issuance.
This six-month exception is deemed to be satisfied by issuers of
governmental bonds (other than tax and revenue anticipation notes) and
qualified 501(c)(3) bonds if (1) all proceeds other than an amount not
exceeding the lesser of five percent or $100,000 are so spent within six
months and (2) the remaining proceeds are spent within one year after
the bonds are issued.
REASONS FOR CHANGE
Exemption of interest paid on State and local bonds from Federal
income tax provides an implicit subsidy to State and local governments
for their borrowing costs. The principal Federal policy concern
underlying the arbitrage rebate requirement is to discourage the earlier
and larger than necessary issuance of tax-exempt bonds to take advantage
of the opportunity to profit by investing funds borrowed at low-cost
tax-exempt rates in higher yielding taxable investments. If at least 95
percent of the proceeds of an issue is spent within six months, and the
remainder is spent within one year, opportunities for such arbitrage
profit are significantly limited.
EXPLANATION OF PROVISION
The $100,000 limit on proceeds that may remain unspent after six
months for certain governmental and qualified 501(c)(3) bonds otherwise
exempt from the rebate requirement is deleted. Thus, if at least 95
percent of the proceeds of these bonds is spent within six months after
their issuance, and the remainder is spent within one year, the
six-month exception is deemed to be satisfied.
EFFECTIVE DATE
The provision applies to bonds issued after the date of enactment.
2. EXCEPTION FROM REBATE FOR EARNINGS ON BONA FIDE DEBT SERVICE FUND
UNDER CONSTRUCTION BOND RULES (SEC. 1442 OF THE BILL AND SEC. 148 OF THE CODE)
PRESENT LAW
In general, arbitrage profits from investing bond proceeds in
investments unrelated to the governmental purpose of the borrowing must
be rebated to the Federal Government. An exception is provided for
certain construction bond issues if the bonds are governmental bonds,
qualified 501(c)(3) bonds, or exempt-facility private activity bonds for
governmentally-owned property.
This exception is satisfied only if the available construction
proceeds of the issue are spent at minimum specified rates during the
24-month period after the bonds are issued. The exception does not apply
to bond proceeds invested after the 24-month expenditure period as part
of a reasonably required reserve or replacement fund, a bona fide debt
service fund, or to certain other investments (e.g., sinking funds).
Issuers of these construction bonds also may elect to comply with a
penalty regime in lieu of rebating arbitrage profits if they fail to
satisfy the exception's spending requirements.
REASONS FOR CHANGE
Bond proceeds invested in a bona fide debt service fund generally
must be spent at least annually for current debt service. The short-term
nature of investments in such funds results in only limited potential
for generating arbitrage profits. If the spending requirements of the
24-month rebate exception are satisfied, the administrative complexity
of calculating rebate on these proceeds outweighs the other Federal
policy concerns addressed by the rebate requirement.
EXPLANATION OF PROVISION
The bill exempts earnings on bond proceeds invested in bona fide debt
service funds from the arbitrage rebate requirement and the penalty
requirement of the 24-month exception if the spending requirements of
that exception are otherwise satisfied.
EFFECTIVE DATE
The provision applies to bonds issued after the date of enactment.
3. REPEAL OF DEBT SERVICE-BASED LIMITATION ON INVESTMENT IN CERTAIN
NONPURPOSE INVESTMENTS (SEC. 1443 OF THE BILL AND SEC. 148 OF THE CODE)
PRESENT LAW
Issuers of all tax-exempt bonds generally are subject to two sets of
restrictions on investment of their bond proceeds to limit arbitrage
profits. The first set requires that tax-exempt bond proceeds be
invested at a yield that is not materially higher (generally defined as
0.125 percentage points) than the bond yield (``yield restrictions'').
Exceptions are provided to this restriction for investments during any
of several ``temporary periods'' pending use of the proceeds and,
throughout the term of the issue, for proceeds invested as part of a
reasonably required reserve or replacement fund or a ``minor'' portion
of the issue proceeds.
Except for temporary periods and amounts held pending use to pay
current debt service, present law also limits the amount of the proceeds
of private activity bonds (other than qualified 501(c)(3) bonds) that
may be invested at materially higher yields at any time during a bond
year to 150 percent of the debt service for that bond year. This
restriction affects primarily investments in reasonably required reserve
or replacement funds. Present law further restricts the amount of
proceeds from the sale of bonds that may be invested in these reserve
funds to ten percent of such proceeds.
The second set of restrictions requires generally that all arbitrage
profits earned on investments unrelated to the governmental purpose of
the borrowing be rebated to the Federal Government (``arbitrage
rebate''). Arbitrage profits include all earnings (in excess of bond
yield) derived from the investment of bond proceeds (and subsequent
earnings on any such earnings).
REASONS FOR CHANGE
The 150-percent of debt service limit was enacted before enactment of
the arbitrage rebate requirement and the ten-percent limit on the size
of reasonably required reserve or replacement funds. It was intended to
eliminate arbitrage-motivated activities available from investment of
such reserve funds. Provided that comprehensive yield restriction and
arbitrage rebate requirements and the present-law overall size limit on
reserve funds are maintained, the 150-percent of debt service yield
restriction limit is duplicative.
EXPLANATION OF PROVISION
The bill repeals the 150-percent of debt service yield restriction.
EFFECTIVE DATE
The provision applies to bonds issued after the date of enactment.
4. REPEAL OF EXPIRED PROVISIONS RELATING TO STUDENT LOAN BONDS (SEC.
1444 OF THE BILL AND SEC. 148 OF THE CODE)
PRESENT LAW
Present law includes two special exceptions to the arbitrage rebate
and pooled financing temporary period rules for certain qualified
student loan bonds. These exceptions applied only to bonds issued before
January 1, 1989.
EXPLANATION OF PROVISION
These special exceptions are deleted as ``deadwood.''
EFFECTIVE DATE
The provision applies to bonds issued after the date of enactment. It
has no effect on bonds issued prior to the date of enactment.
C. Tax Court Procedures
1. OVERPAYMENT DETERMINATIONS OF TAX COURT (SEC. 1451 OF THE BILL AND
SEC. 6512 OF THE CODE)
PRESENT LAW
The Tax Court may order the refund of an overpayment determined by
the Court, plus interest, if the IRS fails to refund such overpayment
and interest within 120 days after the Court's decision becomes final.
Whether such an order is appealable is uncertain.
In addition, it is unclear whether the Tax Court has jurisdiction
over the validity or merits of certain credits or offsets (e.g.,
providing for collection of student loans, child support, etc.) made by
the IRS that reduce or eliminate the refund to which the taxpayer was
otherwise entitled.
REASONS FOR CHANGE
Clarification of the jurisdiction of the Tax Court and the ability to
appeal orders of the Tax Court would provide for greater certainty for
taxpayers and the government in conducting cases before the Tax Court.
Clarification will also reduce litigation.
EXPLANATION OF PROVISION
The bill clarifies that an order to refund an overpayment is
appealable in the same manner as a decision of the Tax Court. The bill
also clarifies that the Tax Court does not have jurisdiction over the
validity or merits of the credits or offsets that reduce or eliminate
the refund to which the taxpayer was otherwise entitled.
EFFECTIVE DATE
The provision is effective on the date of enactment.
2. REDETERMINATION OF INTEREST PURSUANT TO MOTION (SEC. 1452 OF THE
BILL AND SEC. 7481 OF THE CODE)
PRESENT LAW
A taxpayer may seek a redetermination of interest after certain
decisions of the Tax Court have become final by filing a petition with
the Tax Court.
REASONS FOR CHANGE
It would be beneficial to taxpayers if a proceeding for a
redetermination of interest supplemented the original deficiency action
brought by the taxpayer to redetermine the deficiency determination of
the IRS. A motion, rather than a petition, is a more appropriate
pleading for relief in these cases.
EXPLANATION OF PROVISION
The bill provides that a taxpayer must file a ``motion'' (rather than
a ``petition'') to seek a redetermination of interest in the Tax Court.
EFFECTIVE DATE
The provision is effective on the date of enactment.
3. APPLICATION OF NET WORTH REQUIREMENT FOR AWARDS OF LITIGATION COSTS
(SEC. 1453 OF THE BILL AND SEC. 7430 OF THE CODE)
PRESENT LAW
Any person who substantially prevails in any action brought by or
against the United States in connection with the determination,
collection, or refund of any tax, interest, or penalty may be awarded
reasonable administrative costs incurred before the IRS and reasonable
litigation costs incurred in connection with any court proceeding. A
person who substantially prevails must meet certain net worth
requirements to be eligible for an award of administrative or litigation
costs. In general, only an individual whose net worth does not exceed
$2,000,000 is eligible for an award, and only a corporation or
partnership whose net worth does not exceed $7,000,000 is eligible for
an award. (The net worth determination with respect to a partnership or
S corporation applies to all actions that are in substance partnership
actions or S corporation actions, including unified entity-level
proceedings under sections 6226 or 6228, that are nominally brought in
the name of a partner or a shareholder.)
REASONS FOR CHANGE
Although the net worth requirements are explicit for individuals,
corporations, and partnerships, it is not clear which net worth
requirement is to apply to other potential litigants. It is also unclear
how the individual net worth rules are to apply to individuals filing a
joint tax return. Clarifying these rules will provide certainty for
potential claimants and will decrease needless litigation over
procedural issues.
EXPLANATION OF PROVISION
The bill provides that the net worth limitations currently applicable
to individuals also apply to estates and trusts. The bill also provides
that individuals who file a joint tax return shall be treated as one
individual for purposes of computing the net worth limitations.
Consequently, the net worth of both spouses is aggregated for purposes
of this computation. An exception to this rule is provided in the case
of a spouse otherwise qualifying for innocent spouse relief.
EFFECTIVE DATE
The provision applies to proceedings commenced after the date of
enactment.
4. TAX COURT JURISDICTION FOR DETERMINATION OF EMPLOYMENT STATUS (SEC.
1454 OF THE BILL AND NEW SEC. 7435 OF THE CODE)
PRESENT LAW
The Tax Court is a court of limited jurisdiction, established under
Article I of the Constitution. The Tax Court only has the jurisdiction
that is expressly conferred on it by statute (sec. 7442).
REASONS FOR CHANGE
It will be advantageous to taxpayers to have the option of going to
the Tax Court to resolve certain disputes regarding employment status.
EXPLANATION OF PROVISION
The bill provides that, in connection with the audit of any person,
if there is an actual controversy involving a determination by the IRS
as part of an examination that (a) one or more individuals performing
services for that person are employees of that person or (b) that person
is not entitled to relief under section 530 of the Revenue Act of 1978,
the Tax Court would have jurisdiction to determine whether the IRS is
correct. For example, one way the IRS could make the required
determination is through a mechanism similar to the employment tax early
referral procedures.\20\
\20\See Annoucement 96 13 and Announcement 97 52.
The bill provides for de novo review (rather than review of the
administrative record). Assessment and collection of the tax would be
suspended while the matter is pending in the Tax Court. Any
determination by the Tax Court would have the force and effect of a
decision of the Tax Court and would be reviewable as such; accordingly,
it would be binding on the parties. Awards of costs and certain fees
(pursuant to section 7430) would be available to eligible taxpayers with
respect to Tax Court determinations pursuant to the bill. The bill also
provides a number of procedural rules to incorporate this new
jurisdiction within the existing procedures applicable in the Tax Court.
EFFECTIVE DATE
The provision takes effect on the date of enactment.
D. Other Provisions
1. DUE DATE FOR FIRST QUARTER ESTIMATED TAX PAYMENTS BY PRIVATE
FOUNDATIONS (SEC. 1461 OF THE BILL AND SEC. 6655 OF THE CODE)
PRESENT LAW
Under section 4940, tax-exempt private foundations generally are
required to pay an excise tax equal to two percent of their net
investment income for the taxable year. Under section 6655(g)(3),
private foundations are required to pay estimated tax with respect to
their excise tax liability under section 4940 (as well as any unrelated
business income tax (UBIT) liability under section 511).\21\
Section 6655(c) provides that this estimated tax is payable in
quarterly installments and that, for calendar-year foundations, the
first quarterly installment is due on April 15th. Under section 6655(I),
foundations with taxable years other than the calendar year must make
their quarterly estimated tax payments no later than the dates in their
fiscal years that correspond to the dates applicable to calendar-year
foundations.
\21\Generally, the amount of the first quarter payment must be at least
25 percent of the lesser of (1) the preceding year's tax liability, as
shown on he foundation's Form 990 PF, or (2) 95 percent of the
foundation's current-year tax liability.
REASONS FOR CHANGE
Because a private foundation's estimated tax payments are determined,
in part, by reference to the foundation's tax liability for the
preceding year, the due date of a foundation's first-quarter estimated
tax payment should be the same date for filing the foundation's annual
return (Form 990 PF) for the preceding year.
EXPLANATION OF PROVISION
The bill amends section 6655(g)(3) to provide that a calendar-year
foundation's first-quarter estimated tax payment is due on May 15th
(which is the same day that its annual return, Form 990 PF, for the
preceding year is due). As a result of the operation of present-law
section 6655(I), fiscal-year foundations will be required to make their
first-quarter estimated tax payment no later than the 15th day of the
fifth month of their taxable year.
EFFECTIVE DATE
The provision applies to taxable years beginning after the date of
enactment.
2. WITHHOLDING OF COMMONWEALTH INCOME TAXES FROM THE WAGES OF FEDERAL
EMPLOYEES (SEC. 1462 OF THE BILL AND SEC. 5517 OF TITLE 5, UNITED STATES CODE)
PRESENT LAW
If State law provides generally for the withholding of State income
taxes from the wages of employees in a State, the Secretary of the
Treasury shall (upon the request of the State) enter into an agreement
with the State providing for the withholding of State income taxes from
the wages of Federal employees in the State. For this purpose, a State
is a State, territory, or possession of the United States. The Court of
Appeals for the Federal Circuit recently held in Romero v. United States
(38 F.3d 1204 (1994)) that Puerto Rico was not encompassed within this
definition; consequently, the court invalidated an agreement between the
Secretary of the Treasury and Puerto Rico that provided for the
withholding of Puerto Rico income taxes from the wages of Federal
employees.
REASONS FOR CHANGE
The Committee believes that employees of the United States should be
in no better or worse position than other employees vis-a-vis local
withholding.
EXPLANATION OF PROVISION
The bill makes any Commonwealth eligible to enter into an agreement
with the Secretary of the Treasury that would provide for income tax
withholding from the wages of Federal employees.
EFFECTIVE DATE
The provision is effective January 1, 1998.
3. CERTAIN NOTICES DISREGARDED UNDER PROVISION INCREASING INTEREST RATE
ON LARGE CORPORATE UNDERPAYMENTS (SEC. 1463 OF THE BILL AND SEC. 6621 OF THE CODE)
PRESENT LAW
The interest rate on a large corporate underpayment of tax is the
Federal short-term rate plus five percentage points. A large corporate
underpayment is any underpayment by a subchapter C corporation of any
tax imposed for any taxable period, if the amount of such underpayment
for such period exceeds $100,000. The large corporate underpayment rate
generally applies to periods beginning 30 days after the earlier of the
date on which the first letter of proposed deficiency, a statutory
notice of deficiency, or a nondeficiency letter or notice of assessment
or proposed assessment is sent. For this purpose, a letter or notice is
disregarded if the taxpayer makes a payment equal to the amount shown on
the letter or notice within that 30 day period.
REASONS FOR CHANGE
The large corporate underpayment rate generally applies if the
underpayment of tax for a taxable period exceeds $100,000, even if the
initial letter or notice of deficiency, proposed deficiency, assessment,
or proposed assessment is for an amount less than $100,000. Thus, for
example, under present law, a nondeficiency notice relating to a
relatively minor mathematical error by the taxpayer may result in the
application of the large corporate underpayment rate to a subsequently
identified income tax deficiency.
EXPLANATION OF PROVISION
For purposes of determining the period to which the large corporate
underpayment rate applies, any letter or notice is disregarded if the
amount of the deficiency, proposed deficiency, assessment, or proposed
assessment set forth in the letter or notice is not greater than
$100,000 (determined by not taking into account any interest, penalties,
or additions to tax).
EFFECTIVE DATE
The provision is effective for purposes of determining interest for
periods after December 31, 1997.
TECHNICAL CORRECTIONS TO THE SMALL BUSINESS JOB PROTECTION ACT OF 1996
A. Small Business-Related Provisions
1. RETURNS RELATING TO PURCHASES OF FISH (SEC. 1501(A)(1) OF THE BILL
AND SEC. 6050R(C)(1) OF THE CODE)
PRESENT LAW
Every person engaged in the trade or business of purchasing fish for
resale must file an informational return reporting its purchases from
any person that is engaged in the trade or business of catching fish
which are in excess of $600 for any calendar year. Persons filing such
an informational return relating to the purchase of fish must furnish a
statement showing the name and address of the person filing the return,
as well as the amount shown on the return, to each person whose name is
required to be disclosed on the return.
EXPLANATION OF PROVISION
Every person filing an informational return relating to the purchase
of fish must furnish a statement showing the phone number of the person
filing the return, as well as such person's name, address and the amount
shown on the return, to each person whose name is required to be
disclosed on the return.
2. CHARITABLE REMAINDER TRUSTS NOT ELIGIBLE TO BE ELECTING SMALL
BUSINESS TRUSTS (SEC. 1502(C)(1) OF THE BILL AND SEC. 1361(C)(1)(B) OF THE CODE)
PRESENT LAW
Under present law, an electing small business trust may be a
shareholder in an S corporation. In order to qualify for this treatment,
all beneficiaries of the electing small business trust generally must be
individuals or estates eligible to be S corporation shareholders. An
exempt trust may not qualify as an electing small business trust.
DESCRIPTION OF PROVISION
The provision clarifies that charitable remainder annuity trusts and
charitable remainder unitrusts may not be electing small business
trusts.
3. CLARIFY THE EFFECTIVE DATE FOR POST-TERMINATION TRANSITION PERIOD
PROVISION (SEC. 1501(C)(2) OF THE BILL)
PRESENT LAW
Distributions made by a former S corporation during its
post-termination period are treated in the same manner as if the
distributions were made by an S corporation (e.g., treated by
shareholders as nontaxable distributions to the extent of the
accumulated adjustment account). Distributions made after the
post-termination period are generally treated as made by a C corporation
(i.e., treated by shareholders as taxable dividends to the extent of
earnings and profits).
The ``post-termination period'' is the period beginning on the day
after the last day of the last taxable year of the S corporation and
ending on the later of: (1) a date that is one year later, or (2) the
due date for filing the return for the last taxable year and the 120-day
period beginning on the date of a determination that the corporation's S
corporation election had terminated for a previous taxable year.
The Small Business Act expanded the post-termination period to
include the 120-day period beginning on the date of any determination
pursuant to an audit of the taxpayer that follows the termination of the
S corporation's election and that adjusts a subchapter S item of income,
loss or deduction of the S corporation during the S period. In addition,
the definition of ``determination'' was expanded to include a final
disposition of the Secretary of the Treasury of a claim for refund and,
under regulations, certain agreements between the Secretary and any
person, relating to the tax liability of the person. The Small Business
Act provision was effective for taxable years beginning after December
31, 1996.
EXPLANATION OF PROVISION
The technical correction clarifies that the effective date for the
Small Business Act provision affecting the post-termination transition
period is for determinations after December 31, 1996, not for
determinations with respect to taxable years beginning after December
31, 1996. However, in no event will the post-termination transition
period expanded by the Small Business Act end before the end of the
120-day period beginning after the date of enactment of this Act.
4. TREATMENT OF QUALIFIED SUBCHAPTER S SUBSIDIARIES (SEC. 1501(C)(3) OF
THE BILL AND SEC. 1361(B)(3) OF THE CODE)
PRESENT LAW
Pursuant to a provision of the Small Business Act, an S corporation
is allowed to own a qualified subchapter S subsidiary. The term
``qualified subchapter S subsidiary'' means a domestic corporation that
(1) is not an ineligible corporation (i.e., a corporation that would be
eligible to be an S corporation if the stock of the corporation were
held directly by the shareholders of its parent S corporation) if 100
percent of the stock of the subsidiary were held by its S corporation
parent and (2) which the parent elects to treat as a qualified
subchapter S subsidiary. Under the election, for all purposes of the
Code, the qualified subchapter S subsidiary is not treated as a separate
corporation and all the assets, liabilities, and items of income,
deduction, and credit of the subsidiary are treated as the assets,
liabilities, and items of income, deduction, and credit of the parent S
corporation.
The legislative history of the provision provides that if an election
is made to treat an existing corporation as a qualified subchapter S
subsidiary, the subsidiary will be deemed to have liquidated under
sections 332 and 337 immediately before the election is effective.
EXPLANATION OF PROVISION
The technical correction provides that the Secretary of the Treasury
may provide, by regulations, instances where the separate corporate
existence of a qualified subchapter S subsidiary may be taken into
account for purposes of the Code. Thus, if an S corporation owns 100
percent of the stock of a bank (as defined in sec. 581) and elects to
treat the bank as a qualified subchapter S subsidiary, it is expected
that Treasury regulations would treat the bank as a separate legal
entity for purposes of those Code provisions that apply specifically to
banks (e.g., sec. 582).
Treasury regulations also may provide exceptions to the general rule
that the qualified subchapter S subsidiary election is treated as a
deemed section 332 liquidation of the subsidiary in appropriate cases.
In addition, if the effect of a qualified subchapter S subsidiary
election is to invalidate an election to join in the filing of a
consolidated return for a group of subsidiaries that formerly joined in
such filing, Treasury regulations may provide guidance as to the
consolidated return effects of the S election.
B. Pension Provisions
1. SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSIONS (``SARSEPS'') (SEC.
1501(D)(1)(B) OF THE BILL AND SEC. 408(K)(6) OF THE CODE)
PRESENT LAW
SARSEPs were repealed for years beginning after December 31, 1996,
unless the SARSEP was established before January 1, 1997. Consequently,
an employer was not permitted to establish a SARSEP after December 31,
1996. SARSEPs established before January 1, 1997, may continue to
receive contributions under the rules in effect prior to January 1,
1997.
EXPLANATION OF PROVISION
The bill amends Code section 408(k)(6) to clarify that new employees
of an employer hired after December 31, 1996, may participate in a
SARSEP of an employer established before January 1, 1997.
2. SIMPLE RETIREMENT PLANS
a. Reporting requirements for SIMPLE IRAs (sec.
1501(d)(1)(A) of the bill and sec. 408(i) of the Code)
PRESENT LAW
A trustee of an individual retirement account and the issuer of an
individual retirement annuity must furnish reports regarding the account
or annuity to the individual for whom the account or annuity is
maintained not later than January 31 of the calendar year following the
year to which the reports relate. In the case of a SIMPLE IRA, such
reports are to be furnished within 30 days after each calendar year.
EXPLANATION OF PROVISION
The bill conforms the time for providing reports for SIMPLE IRAs to
that for IRA reports generally. Thus, the bill would provide that the
report required to be furnished to the individual under a SIMPLE IRA
would be provided within 31 days after each calendar year.
b. Notification requirement for SIMPLE IRAs (sec.
1501(d)(1)(C) of the bill and secs. 408(l)(2) and 6693(c) of the Code)
PRESENT LAW
The trustee of any SIMPLE IRA is required to provide the employer
maintaining the arrangement a summary plan description containing basic
information about the plan. At least once a year, the trustee is also
required to furnish an account statement to each individual maintaining
a SIMPLE account. In addition, the trustee is required to file an annual
report with
the Secretary. A trustee who fails to provide any of such
reports or descriptions will be subject to a penalty of $50 per day
until such failure is corrected, unless the failure is due to reasonable
cause.
EXPLANATION OF PROVISION
The bill provides that issuers of annuities for SIMPLE IRAs have the
same reporting requirements as SIMPLE IRA trustees.
c. Maximum dollar limitation for SIMPLE IRAs (sec.
1501(d)(1)(D) of the bill and sec. 408(p) of the Code)
PRESENT LAW
The Small Business Act created a simplified retirement plan for small
business called the savings incentive match plan for employees
(``SIMPLE'') retirement plan. A SIMPLE plan can be either an individual
retirement arrangement (``IRA'') for each employee or part of a
qualified cash or deferred arrangement (``a 401(k) plan''). A SIMPLE IRA
permits employees to make elective contributions up to $6,000 per year
to their IRA. The employer is required to satisfy one of two
contribution formulas. Under the matching contribution formula, the
employer generally is required to match employee elective contributions
on a dollar-for-dollar basis up to 3 percent of the employee's
compensation, unless the employer elects a lower percentage matching
contribution (but not less than 1 percent of each employee's
compensation). Alternatively, an employer is permitted to elect, in lieu
of making matching contributions, to make a 2 percent of compensation
nonelective contribution on behalf of each eligible employee. The
employer contribution amounts are contributed to the employee's IRA. The
maximum contribution limitation to an IRA is $2,000.
EXPLANATION OF PROVISION
The bill provides that in the case of a SIMPLE IRA, the $2,000
maximum limitation applicable to IRAs is increased to the limitations in
effect for contributions made under a qualified salary reduction
arrangement. This includes employee elective contributions and required
employer contributions.
d. Application of exclusive plan requirement for SIMPLE IRAs
to noncollectively bargained employees (sec. 1501(d)(1)(E) of the bill
and sec. 408(p)(2)(D) of the Code)
PRESENT LAW
A SIMPLE IRA will be treated as a qualified salary reduction
arrangement provided the employer does not maintain a qualified plan
during the same time period the SIMPLE IRA is maintained. Collectively
bargained employees can be excluded from participation in the SIMPLE IRA
and may be covered under a plan established by the employer as a result
of a good faith bargaining agreement.
EXPLANATION OF PROVISION
The bill provides that an employer who maintains a plan for
collectively bargained employees is permitted to maintain a SIMPLE IRA
for noncollectively bargained employees.
e. Application of exclusive plan requirement for SIMPLE IRAs
in the case of mergers and acquisitions (sec. 1501(d)(1)(F) of the bill
and sec. 408(p)(2) of the Code)
PRESENT LAW
Only employers who employ 100 or fewer employees who received
compensation for the preceding year of at least $5,000 are eligible to
establish a SIMPLE IRA. An eligible employer maintaining a SIMPLE IRA
who fails to be an eligible employer due to an acquisition, disposition
or similar transaction is treated as an eligible employer for the 2
years following the last year the employer was eligible provided rules
similar to the special coverage rules of section 410(b)(6)(C)(i) apply.
There is no parallel provision with respect to an employer who, because
of an acquisition, disposition or similar transaction, maintains a
qualified plan and a SIMPLE IRA at the same time.
EXPLANATION OF PROVISION
The bill provides that if an employer maintains a qualified plan and
a SIMPLE IRA in the same year due to an acquisition, disposition or
similar transaction the SIMPLE IRA is treated as a qualified salary
reduction arrangement for the year of the transaction and the following
calendar year.
f. Top-heavy exemption for SIMPLE 401(k) arrangements (sec.
1501(d)(2)(A) of the bill and sec. 401(k)(11)(D) of the Code)
PRESENT LAW
A plan meeting the SIMPLE 401(k) requirements for any year is not
treated as a top-heavy plan under section 416 for the year. This rule
was intended to apply only to SIMPLE 401(k)s, and not other plans
maintained by the employer.
EXPLANATION OF PROVISION
The bill provides that the top-heavy exemption applies to a plan
which permits only contributions required to satisfy the SIMPLE 401(k)
requirements.
g. Cost of living adjustments for SIMPLE 401(k) arrangements
(sec. 1501(d)(2)(B) of the bill and sec. 401(k)(11) of the Code)
PRESENT LAW
The $6,000 limit on deferrals to a SIMPLE IRA is subject to a
cost-of-living adjustment. There is no parallel provision applicable to
a SIMPLE 401(k) arrangement.
EXPLANATION OF PROVISION
The bill provides that the $6,000 limit on elective deferrals under a
SIMPLE 401(k) arrangement will be adjusted at the same time and in the
same manner as for SIMPLE IRAs.
h. Employer deduction for SIMPLE 401(k) arrangements (sec.
1501(d)(2)(C) of the bill and sec. 404(a)(3) of the Code)
PRESENT LAW
Contributions paid by an employer to a profit sharing or stock bonus
plan are deductible by the employer for a taxable year to the extent the
contributions do not exceed 15-percent of the compensation otherwise
paid or accrued during the taxable year to the participants under the
plan. Contributions paid by an employer to a profit sharing or stock
bonus plan that are not deductible because they are in excess of the
15-percent limitation are subject to a 10-percent excise tax payable by
the employer making the contribution.
EXPLANATION OF PROVISION
The bill provides that to the extent that contributions paid by an
employer to a SIMPLE 401(k) arrangement satisfy the contribution
requirements of section 401(k)(11)(B), such contributions is deductible
by the employer for the taxable year.
i. Notification and election periods for SIMPLE 401(k)
arrangements (sec. 1501(d)(2)(D) of the bill and sec. 401(k)(11) of the
Code)
PRESENT LAW
An employer maintaining a SIMPLE 401(k) arrangement is required to
make a matching contribution for employees making elective deferrals of
up to 3-percent of compensation (or, alternatively, elect to make a
2-percent of compensation nonelective contribution on behalf of all
eligible employees). An employer electing to make a 2-percent
nonelective contribution is required to notify all employees of such
election within a reasonable period of time before the 60th day before
the beginning of the year.
An employer maintaining a SIMPLE IRA is required to notify each
employee of the employee's opportunity to make or modify salary
reduction contributions as well as the contribution alternative chosen
by the employer within a reasonable period of time before the employee's
election period. The employee's election period is the 60-day period
before the beginning of any year (and the 60-day period before the first
day such employee is eligible to participate).
EXPLANATION OF PROVISION
The bill extends the employer notice and employee election
requirements of SIMPLE IRAs to SIMPLE 401(k) arrangements.
EFFECTIVE DATE
The bill is effective with respect to calendar years beginning after
the date of enactment.
j. Treatment of Indian tribal governments under section
403(b) (sec. 1501(d)(5) of the bill and sec. 403(b) of the Code)
PRESENT LAW
Any 403(b) annuity contract purchased in a plan year beginning before
January 1, 1995, by an Indian tribal government is treated as purchased
by an entity permitted to maintain a tax- sheltered annuity plan. Such
contracts may be rolled over into a section 401(k) plan maintained by
the Indian tribal government in accordance with the rollover rules of
section 403(b)(8).
EXPLANATION OF PROVISION
The bill clarifies that an employee participating in a 403(b) annuity
contract of the Indian tribal government would be permitted to roll over
amounts from such contract to a section 401(k) plan maintained by the
Indian tribal government whether or not the annuity contract is
terminated.
C. Foreign Provisions
1. MEASUREMENT OF EARNINGS OF CONTROLLED FOREIGN CORPORATIONS (SEC.
1501(E) OF THE BILL, SUBTITLE E OF THE ACT, AND SECTION 956 OF THE CODE)
PRESENT LAW
U.S. 10-percent shareholders of a controlled foreign corporation
(CFC) are subject to current U.S. tax on their pro rata shares of the
CFC's earnings invested in United States property. For this purpose,
earnings include both current earnings and profits (not including a
deficit) referred to in section 316(a)(1) and accumulated earnings and
profits referred to in section 316(a)(2). It could be argued that this
definition of earnings takes current year earnings into account twice.
EXPLANATION OF PROVISION
The technical correction clarifies that accumulated earnings and
profits of a CFC taken into account for purposes of determining the
CFC's earnings invested in United States property do not include current
earnings (which are taken into account separately). A similar technical
correction to the definition of earnings for purposes of prior-law
section 956A (relating to a CFC's earnings invested in excess passive
assets) was enacted with the Small Business Job Protection Act of 1996
(section 1703(i)(2)).
2. TRANSFERS TO FOREIGN TRUSTS AT FAIR MARKET VALUE (SEC. 1501(I)(2) OF
THE BILL, SEC. 1903 OF THE ACT, AND SEC. 679 OF THE CODE)
PRESENT LAW
A U.S. person who transfers property to a foreign trust which has
U.S. beneficiaries generally is treated as the owner of such trust.
However, this rule does not apply where the U.S. person transfers
property to a trust in exchange for fair market value consideration. In
determining whether the U.S. person receives fair market value
consideration, obligations of certain related persons are not taken into
account. For this purpose, related persons include the trust, any
grantor or beneficiary of the trust, and certain persons who are related
to any such grantor or beneficiary.
EXPLANATION OF PROVISION
The technical correction clarifies that, for purposes of determining
whether a U.S. person's transfer to a trust is for fair market value
consideration, the related persons whose obligations are disregarded
include any owner of the trust and certain persons who are related to
any such owner.
3. TREATMENT OF TRUST AS U.S. PERSON (SEC. 1501(I)(3) OF THE BILL, SEC.
1907 OF THE ACT, AND SECS. 641 AND 7701(A)(30) OF THE CODE)
PRESENT LAW
A trust is considered to be a U.S. person if two criteria are met.
First, a court within the United States must be able to exercise primary
supervision over the administration of the trust. Second, one or more
U.S. fiduciaries must have the authority to control all substantial
decisions of the trust.
These criteria regarding the treatment of a trust as a U.S. person
are effective for taxable years beginning after December 31, 1996. The
Internal Revenue Service announced procedures under which a U.S. trust
in existence on August 20, 1996 may continue to file returns as a U.S.
trust for taxable years beginning after December 31, 1996. To qualify
for such treatment, the trustee (1) must initiate modification of the
trust to conform to the new criteria by the due date for filing the
trust's return for its first taxable year beginning after 1996, (2) must
complete the modification within two years of such date, and (3) must
attach the required statement to the trust returns for the taxable years
beginning after 1996.\1\
\1\Notice 96 65, I.R.B. 1996 52. See Joint Committee on Taxation,
``General Explanation of Tax Legislation Enacted in the 104th Congree''
(JCS 12 96), December 12, 1996, pp. 277 278.
EXPLANATION OF PROVISION
The technical correction clarifies that a trust is treated as a U.S.
person as long as one or more U.S. persons have the authority to control
all substantial decisions of the trust (and a U.S. court can exercise
primary supervision). Accordingly, the fact that a substantial decision
of the trust is controlled by a U.S. person who is not a fiduciary would
not cause the trust not to be treated as a U.S. person. In addition, the
technical correction clarifies that a trust that is a foreign trust
under these criteria is not considered to be present or resident in the
United States at any time. Finally, the technical correction provides
the Secretary of Treasury with authority to allow reasonable time for
U.S. trusts in existence on August 20, 1996 to make modifications in
order to comply with the new criteria for treatment of a trust as a U.S.
person.
D. EXCISE TAX PROVISIONS
1. Repeal ``deadwood'' provisions relating to previous
allowance of advance refunds of diesel fuel tax (sec. 1501(f)(2) of the
bill and sec. 9503 of the Code)
PRESENT LAW
The Small Business Tax Act repealed a provision allowing purchasers
of diesel-powered automobiles and light trucks to claim a tax credit
equal to an assumed amount of diesel fuel tax that they would pay over
the life of the vehicle. Several accounting provisions in the Code's
Highway Trust Fund that relate to this repealed provision were
inadvertently retained.
EXPLANATION OF PROVISION
The bill repeals the Highway Trust Fund provisions relating to the
diesel fuel advance refunds, as deadwood.
2. Phaseout and expiration of excise tax on luxury
automobiles (sec. 1502(f)(3) of the bill and secs. 4001 and 4003 of the
Code)
PRESENT LAW
Present law imposes an excise tax on the sale of automobiles whose
price exceeds a designated threshold, currently $34,000. The excise tax
imposed at a rate of 8-percent on the excess of the sales price above
the designated threshold. The 8-percent rate declines by one percentage
point per year until reaching three percent in 2002. The $34,000
threshold is indexed for inflation.
The tax generally applies only to the first retail sale after
manufacturer, production, or importation of an automobile. It does not
apply to subsequent sales of taxable automobiles. However, under section
4003 of the Code, a 10-percent tax is imposed on the ``separate purchase
of vehicle and parts and accessories therefor'' when the sum of the
separate purchases exceeds the luxury tax threshold. The rate of tax
under section 4003 is not determined by reference to section 4001.
The tax under sec. 4001 applies to sales before January 1, 2003. The
tax under sec. 4003 has no termination date.
EXPLANATION OF PROVISION
The bill clarifies that the phased reduction in luxury excise tax
rates and the expiration date of December 31, 2002, enacted as part of
the Small Business Act, apply both for the tax imposed on the purchase
of new automobiles under section 4001 and for the tax imposed for the
separate purchase of vehicles and parts and accessories therefor under
section 4003.
3. Clarify scope of aviation excise tax exemption for
emergency medical aircraft (sec. 1501(f)(4) of the bill and sec. 4041 of
the Code)
PRESENT LAW
The Small Business Tax Act provided that fixed-wing aircraft that are
equipped for and exclusively dedicated to the provision of emergency
medical services (i.e., air ambulances) are exempt from the aviation
excise taxes.
EXPLANATION OF PROVISION
The bill clarifies that this exemption is applied on a
flight-by-flight basis.
4. Clarify effective date of technical correction related to
ethanol refunds (sec. 1501(g)(1) of the bill and sec. 6427 of the Code)
PRESENT LAW
Present law includes a 54-cents-per-gallon income tax credit for
ethanol used as a motor fuel. This tax benefit may be claimed through
reduced-rate gasoline sales or expedited refunds of gasoline tax paid
when the ethanol is blended with gasoline. The Small Business Tax Act
corrected a previous technical error in the expiration date of the
expedited refund provision, but the correction inadvertently failed to
include refunds for periods before its enactment.
EXPLANATION OF PROVISION
The bill clarifies that the technical correction relating to the
expedited ethanol refunds was retroactive to the provision's expiration
after September 30, 1995. Claims for refunds of tax paid during the
period October 1, 1995, through the date of enactment of the Small
Business Tax Act must be filed before 60 days after enactment of this
bill.
E. Other Provisions
1. TREATMENT OF CERTAIN RESERVES OF THRIFT INSTITUTIONS (SEC.
1501(F)(5) OF THE BILL AND SECS. 593(E) AND 1374 OF THE CODE)
PRESENT LAW
A provision of the Small Business Act repealed the
percentage-of-taxable income method for deducting bad debts applicable
to thrift institutions. The portion of the section 481(a) adjustment
applicable to pre-1988 reserves of an institution required to change its
method of accounting generally is not restored to income unless the
institution makes a distribution to which section 593(e) applies.
Section 593(e) provides that if a institution makes a nonliquidating
distribution in an amount in excess of its post-1951 accumulated
earnings and profits, such excess will be treated as a distribution of
the post-1987 reserve for bad debts, requiring recapture of such amount.
Another provision of the Small Business Act allows a bank or a thrift
institution to elect to be treated as an S corporation so long as the
entity does not use a reserve method of accounting for bad debts. The
earnings of an S corporation increase the corporation's accumulated
adjustments account, but do not increase its accumulated earnings and
profits (sec. 1368). In addition, any net unrealized built-in gains of a
C corporation that converts to S corporation status that are recognized
during the 10-year period beginning with the date of such conversion
generally are subject to corporate-level tax (sec. 1374). Section 481(a)
adjustments taken into account during the 10-year period generally are
subject to section 1374.
EXPLANATION OF PROVISION
The bill provides rules to clarify the section 593(e) treatment of
pre-1988 bad debt reserves of thrift and former thrift institutions that
become S corporations. The technical corrections provide that (1) the
accumulated adjustments account of an S corporation would be treated the
same as post-1951 earnings and profits for purposes of section 593(e)
and (2) section 593(e) would apply irrespective of section 1374 (e.g.,
distributions that trigger section 593(e) would be subject to
corporate-level recapture even if such distributions occur after the
10-year period of section 1374).
2. ``FASIT'' TECHNICAL CORRECTIONS (SEC. 1501(F)(6) OF THE BILL AND
SEC. 860L OF THE CODE)
PRESENT LAW
In general
A ``financial asset securitization investment trust'' (``FASIT'') is
designed to facilitate the securitization of debt obligations such as
credit card receivables, home equity loans, and auto loans. A FASIT
generally is not taxable; the FASIT's taxable income or net loss flows
through to the owner of the FASIT.
The ownership interest of a FASIT generally is required to be
entirely held by a single domestic C corporation. In addition, a FASIT
generally must hold only qualified debt obligations, and certain other
specified assets, and is subject to certain restrictions on its
activities. An entity that qualifies as a FASIT can issue instruments
(called ``regular interests'') that meet certain specified requirements
and treat those instruments as debt for Federal income tax purposes. In
general, those requirements must be met ``after the startup date.''
Instruments bearing yields to maturity over 5 percentage points above
the yield to maturity on specified United States government obligations
(i.e., ``high-yield interests'') may be held only by domestic C
corporations that are not exempt from income tax.
Income from prohibited transactions
The owner of a FASIT is required to pay a penalty excise tax equal to
100 percent of net income derived from (1) an asset that is not a
permitted asset, (2) any disposition of an asset other than a permitted
disposition, (3) any income attributable to loans originated by the
FASIT, and (4) compensation for services (other than fees for a waiver,
amendment, or consent under permitted assets not acquired through
foreclosure). A permitted disposition is any disposition of any
permitted asset (1) arising from complete liquidation of a class of
regular interests (i.e., a qualified liquidation)\2\
; (2) incident to the foreclosure, default, or imminent default of the
asset; (3) incident to the bankruptcy or insolvency of the FASIT; (4)
necessary to avoid a default on any indebtedness of the FASIT
attributable to a default (or imminent default) on an asset of the
FASIT; (5) to facilitate a clean-up call; (6) to substitute a permitted
debt instrument for another such instrument; or (7) in order to reduce
over-collateralization where a principal purpose of the disposition was
not to avoid recognition of gain arising from an increase in its market
value after its acquisition by the FASIT.
\2\For this purpose, a ``qualified liquidation'' has the same meaning as
it does purposes of the exemption from the tax on prohibited
transactions of a real estate mortgage investment conduit (``REMIC'') in
section 860F(a)(4).
Definition of ``FASIT''
For an entity or arrangement to qualify as a FASIT, substantially all
of its assets must consist of the following ``permitted assets'': (1)
cash and cash equivalents; (2) certain permitted debt instruments; (3)
certain foreclosure property; (4) certain instruments or contracts that
represent a hedge or guarantee of debt held or issued by the FASIT; (5)
contract rights to acquire permitted debt instruments or hedges; (6) a
regular interest in another FASIT; and (7) a regular interest in a
REMIC. A FASIT must meet the asset test at the 90th day after its
formation and at all times thereafter. Permitted assets may be acquired
at any time by a FASIT, including any time after its formation.
EXPLANATION OF PROVISION
Definition of regular interest
The bill provides that the requirement of a ``regular interest'' must
be met ``on or after the startup date,'' instead of just ``after the
startup date.''
Correction of cross reference
The bill corrects an incorrect cross reference in section 860L(d)
from section 860L(c)(2) to section 860L(b)(2).
Tax on prohibited transactions
The bill provides that the tax on prohibited transactions would not
apply to dispositions of foreclosure property or hedges using the
similar exception applicable to REMICs.
3. QUALIFIED STATE TUITION PLANS (SEC. 1501(H)(1) OF THE BILL AND SEC.
529 OF THE CODE)
PRESENT LAW
Section 529 provides tax-exempt status to certain qualified State
tuition programs and provides rules for the tax treatment of
distributions from such programs. Section 529 was effective on the date
of enactment of the Small Business Job Protection Act of 1996, but a
special transition rule provides that if (1) a State maintains (on the
date of enactment) a program under which persons may purchase tuition
credits on behalf of, or make contributions for educational expenses of,
a designated beneficiary, and (2) such program meets the requirements of
a qualified State tuition program before the later of (a) one year after
the date of enactment, or (b) the first day of the first calendar
quarter after the close of the first regular session of the State
legislature that begins after the date of enactment, then the provisions
of the Small Business Act will apply to contributions (and earnings
allocable thereto) made before the date the program meets the
requirements of a qualified State tuition program, without regard to
whether the requirements of a qualified State tuition program are
satisfied with respect to such contributions and earnings (e.g., even if
the interest in the tuition or educational savings program covers not
only qualified higher education expenses but also room and board
expenses).
EXPLANATION OF PROVISION
The provision clarifies that, if a State program under which persons
may purchase tuition credits comes into compliance with the requirements
of a ``qualified State tuition program'' as defined in section 529
within a specified time period, then such program will be treated as a
qualified State tuition program with respect to any contributions (and
earnings allocable thereto) made pursuant to a contract entered into
under the program before the date on which the program comes into
compliance with the present-law requirements of a qualified State
tuition program under section 529.
4. ADOPTION CREDIT (SEC. 1501(H)(2) OF THE BILL, SEC. 1807 OF THE SMALL
BUSINESS ACT, AND SEC. 23 OF THE CODE)
PRESENT LAW
Taxpayers are allowed a maximum nonrefundable tax credit against
income tax liability of $5,000 per child for qualified adoption expenses
($6,000 in the case of certain domestic adoptions) paid or incurred by
the taxpayer. Qualified adoption expenses are reasonable and necessary
adoption fees, court costs, attorneys' fees, and other expenses that are
directly related to the legal adoption of an eligible child.
Otherwise qualified adoption expenses paid or incurred in one taxable
year are not taken into account for purposes of the credit until the
next taxable year unless the expenses are paid or incurred in the year
the adoption becomes final.
EXPLANATION OF PROVISION
The technical correction conforms the treatment of otherwise
qualified adoption expenses paid or incurred in years after the year the
adoption becomes final to the treatment of expenses paid or incurred in
the year the adoption becomes final. Another technical correction
repeals as ``deadwood'' an ordering rule inadvertently included in the
credit.
5. PHASEOUT OF ADOPTION ASSISTANCE EXCLUSION (SEC. 1501(H)(2) OF THE
BILL, SEC. 1807 OF THE SMALL BUSINESS ACT, AND SEC. 137 OF THE CODE)
PRESENT LAW
The adoption tax credit and the exclusion for employer provided
adoption assistance are generally phased out ratably for taxpayers with
modified adjusted gross income (AGI) above $75,000, and are fully phased
out at $115,000 of modified AGI. For these purposes modified AGI is
computed by increasing the taxpayer's AGI by the amount otherwise
excluded from gross income under Code sections 911, 931, or 933
(relating to the exclusion of income of U.S. citizens or residents
living abroad; residents of Guam, American Samoa, and the Northern
Mariana Islands, and residents of Puerto Rico, respectively).
EXPLANATION OF PROVISION
The technical correction conforms the phaseout range of the adoption
assistance exclusion to the phaseout range of the credit for qualified
adoption expenses.
HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996
1. MEDICAL SAVINGS ACCOUNTS (SEC. 1502(A) OF THE BILL AND SEC. 220 OF
THE CODE)
a. Additional tax on distributions not used for medical purposes
PRESENT LAW
Under present law, distributions from a medical savings account
(``MSA'') that are not used for medical expenses are includible in gross
income and subject to a 15-percent additional tax unless the
distribution is after age 65 or death or on account of disability. A
similar additional 10-percent tax is imposed on early withdrawals from
individual retirement arrangements and qualified pension plans. The
10-percent additional tax on early withdrawals is not treated as tax
liability for purposes of the minimum tax. No such rule applies to the
15-percent additional tax applicable to MSAs.
EXPLANATION OF PROVISION
The bill provides that the 15-percent tax on nonmedical withdrawals
from an MSA is not treated as tax liability for purposes of the minimum
tax.
b. Definition of permitted coverage
PRESENT LAW
Under present law, in order to be eligible to have an MSA an
individual must be covered under a high deductible health plan and no
other health plan, except for plans that provide certain permitted
coverage. Medicare supplemental plans are one of the types of permitted
coverage, even though an individual covered by Medicare is not eligible
to have an MSA.
EXPLANATION OF PROVISION
Under the bill, Medicare supplemental plans would be deleted from the
types of permitted coverage an individual may have and still qualify for
an MSA.
c. Taxation of distributions
PRESENT LAW
Under present law, in order to be eligible to have a medical savings
account (``MSA'') an individual must be covered under a high deductible
health plan and no other health plan, except for plans that provide
certain permitted coverage and must be either (1) a self-employed
individual, or (2) employed by a small employer. Distributions from an
MSA for the medical expenses of the MSA account holder and his or her
spouse or dependents are generally excludable from income. However, in
any year for which a contribution is made to an MSA, withdrawals from
the MSA are excludable from income only if the individual for whom the
expenses were incurred was an eligible individual for the month in which
the expenses were incurred. This rule is designed to ensure that MSAs
are used in conjunction with a high deductible plan and that they are
not primarily used by other individuals who have health plans that are
not high deductible plans.
EXPLANATION OF PROVISION
The bill would clarify that, in any year for which a contribution is
made to an MSA, withdrawals from the MSA are excludable from income only
if the individual for whom the expenses were incurred was covered under
a high deductible health plan (and no other health plan except for plans
that provide certain permitted coverage) in the month in which the
expenses were incurred. That is, the individual for whom the expenses
were incurred does not have to be self employed or employed by a small
employer in order for a withdrawal for medical expenses to be
excludible.
d. Penalty for failure to provide required reports
PRESENT LAW
Trustees of an MSA are required to provide such reports to the
Secretary and the account holder as the Secretary may require. A penalty
of $50 applies with respect to each failure to provide a required
report. Under present law, separate penalties apply to information
returns required by the Code.
EXPLANATION OF PROVISION
The bill provides that the $50 penalty does not apply to information
returns.
2. DEFINITION OF CHRONICALLY ILL INDIVIDUAL UNDER A QUALIFIED LONG-TERM
CARE INSURANCE CONTRACT (SEC. 1502(B) OF THE BILL AND SEC. 7702B(C)(2) OF THE
CODE)
PRESENT LAW
Under the long-term care insurance rules, a chronically ill
individual is one who has been certified within the previous 12 months
by a licensed health care practitioner as (1) being unable to perform
(without substantial assistance) at least 2 activities of daily living
for at least 90 days due to a loss of functional capacity, (2) having a
level of disability similar (as determined under regulations prescribed
by the Secretary in consultation with the Secretary of Health and Human
Services) to the level of disability described above, or (3) requiring
substantial supervision to protect the individual from threats to health
and safety due to severe cognitive impairment. A contract is not treated
as a qualified long-term care insurance contract unless the
determination of whether an individual is a chronically ill individual
takes into account at least 5 of such activities.
EXPLANATION OF PROVISION
The technical correction clarifies that the five-activity
requirement--i.e., that the number of activities of daily living that
are taken into account not be less than five--applies only for purposes
of the first of three alternative definitions of a chronically ill
individual (Code sec. 7702B(c)(2)(A)(i)), that is, by reason of the
individual being unable to perform (without substantial assistance) at
least 2 activities of daily living for at least 90 days due to a loss of
functional capacity. Thus, the requirement does not apply to the
determination of whether an individual is a chronically ill individual
either (1) by virtue of severe cognitive impairment, or (2) if the
insured satisfies a standard (if any) that is not based upon activities
of daily living, as determined under regulations.
3. DEDUCTION FOR LONG-TERM CARE INSURANCE OF SELF-EMPLOYED INDIVIDUALS
(SEC. 1502(C) OF THE BILL AND SEC. 162(L)(2) OF THE CODE)
PRESENT LAW
Present law provides that the deduction for health insurance expenses
of a self-employed individual is not available for a month for which the
individual is eligible to participate in any subsidized health plan
maintained by any employer of the individual or the individual's spouse.
Present law also provides that in the case of a qualified long-term care
insurance contract, only eligible long-term care premiums (as defined
for purposes of the medical expense deduction) are taken into account in
determining the deduction for health insurance expenses of a
self-employed individual.
EXPLANATION OF PROVISION
The technical correction applies the rules for the deduction for
health insurance expenses of a self-employed individual separately with
respect to (1) plans that include coverage for qualified long-term care
services or that are qualified long-term care insurance contracts, and
(2) plans that do not include such coverage and are not such contracts.
Thus, the provision clarifies that the fact that an individual is
eligible for employer-subsidized health insurance does not affect the
ability of such an individual to deduct long-term care insurance
premiums, so long as the individual is not eligible for
employer-subsidized long-term care insurance.
4. APPLICABILITY OF REPORTING REQUIREMENTS OF LONG-TERM CARE CONTRACTS
AND ACCELERATED DEATH BENEFITS (SEC. 1502(D) OF THE BILL AND SEC. 6050Q OF THE
CODE)
PRESENT LAW
Present law provides that amounts (other than policyholder dividends
or premium refunds) received under a long-term care insurance contract
generally are excludable as amounts received for personal injuries and
sickness, subject to a dollar cap on per diem contracts only. If the
aggregate amount of periodic payments under all qualified long-term care
contracts exceeds the dollar cap for the period, then the amount of such
excess payments is excludable only to the extent of the individual's
costs (that are not otherwise compensated for by insurance or otherwise)
for long-term care services during the period.
Present law also provides an exclusion from gross income as an amount
paid by reason of the death of an insured for (1) amounts received under
a life insurance contract and (2) amounts received for the sale or
assignment of any portion of the death benefit under a life insurance
contract to a qualified viatical settlement provider, provided that the
insured under the life insurance contract is either terminally ill or
chronically ill (the accelerated death benefit rules).
A payor of long-term care benefits (defined for this purpose to
include any amount paid under a product advertised, marketed or offered
as long-term care insurance), and a payor of amounts treated as subject
to reporting under the accelerated death benefit rules, is required to
report to the IRS the aggregate amount of such benefits paid to any
individual during any calendar year, and the name, address and taxpayer
identification number of such individual. A payor is also required to
report the name, address, and taxpayer identification number of the
chronically ill individual on account of whose condition the amounts are
paid, and whether the contract under which the amount is paid is a per
diem-type contract. A copy of the report must be provided to the payee
by January 31 following the year of payment, showing the name of the
payor and the aggregate amount of benefits paid to the individual during
the calendar year. Failure to file the report or provide the copy to the
payee is subject to the generally applicable penalties for failure to
file similar information reports.
EXPLANATION OF PROVISION
The technical correction clarifies that the reporting requirements
include the need to report the address and phone number of the
information contact. This conforms these reporting requirements to the
requirements of the Taxpayer Bill of Rights 2.
5. CONSUMER PROTECTION PROVISIONS FOR LONG-TERM CARE INSURANCE
CONTRACTS (SEC. 1502(E) OF THE BILL AND SEC. 7702B(G)(4)(B) OF THE CODE)
PRESENT LAW
The long-term care insurance rules of present law include consumer
protection provisions (sec. 7702B(g)). Among these provisions is a
requirement that the issuer of a contract offer to the policyholder a
nonforfeiture provision that meets certain requirements. The
requirements include a rule that the nonforfeiture provision shall
provide for a benefit available in the event of a default in the payment
of any premiums and the amount of the benefit may be adjusted subsequent
to being initially granted only as necessary to reflect changes in
claims, persistency, and interest as reflected in changes in rates for
premium paying policies approved by the Secretary for the same contract
form.
EXPLANATION OF PROVISION
The technical correction clarifies that the nonforfeiture provision
shall provide for a benefit available in the event of a default in the
payment of any premiums and the amount of the benefit may be adjusted
subsequent to being initially granted only as necessary to reflect
changes in claims, persistency, and interest as reflected in changes in
rates for premium paying policies
approved by the appropriate State regulatory authority (not
by the Secretary) for the same contract form.
6. INSURABLE INTERESTS UNDER THE COLI PROVISION (SEC. 1502(F)(1) OF THE
BILL AND SEC. 264(A)(4) OF THE CODE)
PRESENT LAW
No deduction is allowed for interest paid or accrued on any
indebtedness with respect to one or more life insurance policies or
annuity or endowment contracts owned by the taxpayer covering any
individual who is (1) an officer or employee of, or (2) is financially
interested in, any trade or business carried on by the taxpayer (the
COLI rule). An exception is provided for interest on indebtedness with
respect to life insurance policies covering up to 20 key persons,
subject to an interest rate cap.
EXPLANATION OF PROVISION
The technical correction is intended to prevent unintended avoidance
of the COLI rule by clarifying that the rule relates to life insurance
policies or annuity or endowment contracts covering any individual who
(1) is or was an officer or employee of, or (2) is or was financially
interested in, any trade or business carried on currently or formerly by
the taxpayer. Thus, for example, the provision would clarify the
treatment of interest on debt with respect to contracts covering former
employees of the taxpayer. As another example, the provision would
clarify the treatment of interest on debt with respect to a business
formerly conducted by the taxpayer and transferred to an affiliate of
the taxpayer. No inference is intended as the interpretation of this
provision under prior law.
7. APPLICABLE PERIOD FOR PURPOSES OF APPLYING THE INTEREST RATE FOR A
VARIABLE RATE CONTRACT UNDER THE COLI RULES (SEC. 1502(F)(2) OF THE BILL AND SEC.
264(D)(2)(B)(II) OF THE CODE)
PRESENT LAW
No deduction is allowed for interest paid or accrued on any
indebtedness with respect to one or more life insurance policies or
annuity or endowment contracts owned by the taxpayer covering any
individual who is (1) an officer or employee of, or (2) is financially
interested in, any trade or business carried on by the taxpayer. An
exception is provided for interest on indebtedness with respect to life
insurance policies covering up to 20 key persons, subject to an interest
rate cap.
This provision generally does not apply to interest on debt with
respect to contracts purchased on or before June 20, 1986. If the policy
loan interest rate under such a contract does not provide for a fixed
rate of interest, then interest on such a contract paid or accrued after
December 31, 1995, is allowable only to the extent the rate of interest
for each fixed period selected by the taxpayer does not exceed Moody's
Corporate Bond Yield Average--Monthly Average Corporates, for the third
month preceding the first month of the fixed period. The fixed period
must be 12 months or less.
EXPLANATION OF PROVISION
The technical correction provides that an election of an applicable
period for purposes of applying the interest rate for a variable rate
contract can be made no later than the 90th date after the date of
enactment of the proposal, and applies to the taxpayer's first taxable
year ending on or after October 13, 1995. If no election is made, the
applicable period is the policy year. The policy year is the 12-month
period beginning on the anniversary date of the policy.
8. DEFINITION OF 20-PERCENT OWNER FOR PURPOSES OF KEY PERSON EXCEPTION
UNDER COLI RULE (SEC. 1502(F)(3) OF THE BILL AND SEC. 264(D)(4) OF THE CODE)
PRESENT LAW
No deduction is allowed for interest paid or accrued on any
indebtedness with respect to one or more life insurance policies or
annuity or endowment contracts owned by the taxpayer covering any
individual who is (1) an officer or employee of, or (2) is financially
interested in, any trade or business carried on by the taxpayer. An
exception is provided for interest on indebtedness with respect to life
insurance policies covering up to 20 key persons, subject to an interest
rate cap.
A key person is an individual who is either an officer or a
20-percent owner of the taxpayer. The number of individuals that can be
treated as key persons may not exceed the greater of (1) 5 individuals,
or (2) the lesser of 5 percent of the total number of officers and
employees of the taxpayer, or 20 individuals. Employees are to be
full-time employees, for this purpose. A 20-percent owner is an
individual who directly owns 20 percent or more of the total combined
voting power of the corporation. If the taxpayer is not a corporation,
the statute states that a 20-percent owner is an individual who directly
owns 20 percent or more of the capital or profits interest of the
employer.
EXPLANATION OF PROVISION
The technical correction clarifies that, in determining a key person,
if the taxpayer is not a corporation, a 20-percent owner is an
individual who directly owns 20 percent or more of the capital or
profits interest of the taxpayer.
9. EFFECTIVE DATE OF INTEREST RATE CAP ON KEY PERSONS AND PRE-1986
CONTRACTS UNDER THE COLI RULE (SEC. 1502(F)(4) OF THE BILL AND SEC. 501(C) OF
HIPA)
PRESENT LAW
No deduction is allowed for interest paid or accrued on any
indebtedness with respect to one or more life insurance policies or
annuity or endowment contracts owned by the taxpayer covering any
individual who is (1) an officer or employee of, or (2) is financially
interested in, any trade or business carried on by the taxpayer. An
exception is provided for interest on indebtedness with respect to life
insurance policies covering up to 20 key persons, subject to an interest
rate cap.
This provision generally does not apply to interest on debt with
respect to contracts purchased on or before June 20, 1986. If the policy
loan interest rate under such a contract does not provide for a fixed
rate of interest, then interest on such a contract paid or accrued after
December 31, 1995, is allowable only to the extent the rate of interest
for each fixed period selected by the taxpayer does not exceed Moody's
Corporate Bond Yield Average--Monthly Average Corporates, for the third
month preceding the first month of the fixed period. The fixed period
must be 12 months or less.
The interest rate cap on key persons and pre-1986 contracts is
effective with respect to interest paid or accrued for any month
beginning after December 31, 1995. Another part of the provision
provides that the interest rate cap on key employees and pre-1986
contracts applies to interest paid or accrued after October 13, 1995.
EXPLANATION OF PROVISION
The technical correction clarifies that, under the COLI rule, the
interest rate cap on key persons and pre-1986 contracts applies to
interest paid or accrued for any month beginning after December 31,
1995. This technical correction eliminates the discrepancy between the
October and the December dates in the grandfather rule for pre-1986
contracts.
10. CLARIFICATION OF CONTRACT LAPSES UNDER EFFECTIVE DATE PROVISIONS OF
THE COLI RULE (SEC. 1502(F)(5) OF THE BILL AND SEC. 501(D)(2) OF HIPA)
PRESENT LAW
No deduction is allowed for interest paid or accrued on any
indebtedness with respect to one or more life insurance policies or
annuity or endowment contracts owned by the taxpayer covering any
individual who is (1) an officer or employee of, or (2) is financially
interested in, any trade or business carried on by the taxpayer. An
exception is provided for interest on indebtedness with respect to life
insurance policies covering up to 20 key persons, subject to an interest
rate cap.
Additional limitations are imposed on the deductibility of interest
with respect to single premium contracts, and interest on debt incurred
or continued to purchase or carry a life insurance, endowment, or
annuity contract pursuant to a plan of purchase that contemplates the
systematic direct or indirect borrowing of part or all of the increases
in the cash value of the contract. An exception to the latter rule is
provided, permitting deductibility of interest on bona fide debt that is
part of such a plan, if no part of 4 of the annual premiums due during
the first 7 years is paid by means of debt (the ``4-out-of-7'' rule).
Present law provides that the COLI rule is phased in. In connection
with the phase-in rule, a transition rule provides that any amount
included in income during 1996, 1997, or 1998, that is received under a
contract described in the provision on the complete surrender,
redemption or maturity of the contract or in full discharge of the
obligation under the contract that is in the nature of a refund of the
consideration paid for the contract, is includable ratably over the
first 4 taxable years beginning with the taxable year the amount would
otherwise have been includable. The lapse of a contract after October
13, 1995, due to nonpayment of premiums does not cause interest paid or
accrued prior to January 1, 1999, to be nondeductible solely by reason
of (1) failure to meet the 4-out-of-7 rule of present law, or (2)
causing the contract to be treated as a single premium contract within
the meaning of section 264(b)(1). This lapse provision states that the
relief is provided in the following case: solely by reason of no
additional premiums being received by reason of a lapse.
EXPLANATION OF PROVISION
The technical correction clarifies that, under the transition relief
provided under the COLI rule, the 4-out-of-7 rule and the single premium
rule of present law are not to apply solely by reason of a lapse
occurring by reason of no additional premiums being received under the
contract after October 13, 1995.
11. REQUIREMENT OF GAIN RECOGNITION ON CERTAIN EXCHANGES (SEC. 1502(G)
(1) AND (2) OF THE BILL, SEC. 511 OF THE ACT, AND SEC. 877(D)(2) OF THE CODE)
PRESENT LAW
Under the expatriation tax provisions in section 877, special tax
treatment applies to certain former U.S. citizens and former long-term
U.S. residents for 10 years following the date of loss of U.S.
citizenship or U.S. residency status. Gain recognition is required on
certain exchanges of property following loss of U.S. citizenship or U.S.
residency status, unless a gain recognition agreement is entered into.
In addition, regulatory authority is granted to apply this rule to the
15-year period beginning 5 years before the loss of U.S. citizenship or
U.S. residency status.
EXPLANATION OF PROVISION
The technical correction clarifies that the period to which the
general rule requiring gain recognition on certain exchanges applies is
the 10-year period that begins on the date of loss of U.S. citizenship
or U.S. residency status. In addition, the technical correction
clarifies that in the case of an exchange occurring during the 5-year
period before the loss of U.S. citizenship or U.S. residency status, any
gain required to be recognized under regulations is to be recognized
immediately after the date of such loss of U.S. citizenship.
12. SUSPENSION OF 10-YEAR PERIOD IN CASE OF SUBSTANTIAL DIMINUTION OF
RISK OF LOSS (SEC. 1502(G)(3) OF THE BILL, SEC. 511 OF THE ACT, AND SEC. 877(D)(3)
OF THE CODE)
PRESENT LAW
Under the expatriation tax provisions in section 877, special tax
treatment applies to certain former U.S. citizens and former long-term
U.S. residents for 10 years following the date of loss of U.S.
citizenship or U.S. residency status. The running of this period with
respect to gain on the sale or exchange of any property is suspended for
any period during which the individual's risk of loss with respect to
the property is substantially diminished.
EXPLANATION OF PROVISION
The technical correction clarifies that the period to which the rule
suspending such period in the case of a substantial diminution of risk
of loss applies is the 10-year period that begins on the date of loss of
U. S. citizenship or U.S. residency status.
13. TREATMENT OF PROPERTY CONTRIBUTED TO CERTAIN FOREIGN CORPORATIONS
(SEC. 1502(G)(4) OF THE BILL, SEC. 511 OF THE ACT, AND SEC. 877(D)(4) OF THE CODE)
PRESENT LAW
Under the expatriation tax provisions in section 877, special tax
treatment applies to certain former U.S. citizens and former long-term
U.S. residents for 10 years following the date of loss of U.S.
citizenship or U.S. residency status. Special rules apply in the case of
certain contributions of U.S. property by such an individual to a
foreign corporation during such period.
EXPLANATION OF PROVISION
The technical correction clarifies that the period to which the rule
regarding certain contributions to foreign corporations applies is the
10-year period that begins on the date of loss of U.S. citizenship or
U.S. residency status. The technical correction also clarifies that the
rule applies in the case of property the income from which, immediately
before the contribution, was from U.S. sources.
14. CREDIT FOR FOREIGN ESTATE TAX (SEC. 1502(G)(6) OF THE BILL, SEC.
511 OF THE ACT, AND SEC. 2107(C) OF THE CODE)
PRESENT LAW
Under the expatriation tax provisions in section 2107, special estate
tax treatment applies to certain former U.S. citizens and former
long-term U.S. residents who die within 10 years following the date of
loss of U.S. citizenship or U.S. residency status. Special rules provide
a credit against the U.S. estate tax for foreign estate taxes paid with
respect to property that is includible in the decedent's U.S. estate
solely by reason of the expatriation estate tax provisions.
EXPLANATION OF PROVISION
The technical correction clarifies the formula for determining the
amount of the foreign tax credit allowable against U.S. estate taxes on
property includible in the decedent's U.S. estate solely by reason of
the expatriation estate tax provisions. The credit for the estate taxes
paid to any foreign country generally is limited to the lesser of (1)
the foreign estate taxes attributable to the property includible in the
decedent's U.S. estate solely by reason of the expatriation estate tax
provisions or (2) the U.S. estate tax attributable to property that is
subject to estate tax in such foreign country and is includible in the
decedent's U.S. estate solely by reason of the expatriation tax
provisions. The amount of taxes attributable to such property is
determined on a pro rata basis.
TECHNICAL CORRECTIONS TO THE TAXPAYER BILL OF RIGHTS 2
1. REASONABLE CAUSE ABATEMENT FOR FIRST-TIER INTERMEDIATE SANCTIONS
EXCISE TAX (SEC. 1503(A) OF THE BILL AND SECTION 4962 OF THE CODE)
PRESENT LAW
Section 4958 imposes penalty excise taxes as an intermediate sanction
in cases where organizations exempt from tax under sections 501(c)(3) or
501(c)(4) (other than private foundations) engage in an ``excess benefit
transaction.'' The excise tax may be imposed on certain disqualified
persons (i.e., insiders) who improperly benefit from an excess benefit
transaction and on organization managers who participate in such a
transaction knowing that it is improper.
A disqualified person who benefits from an excess benefit transaction
is subject to a first-tier penalty tax equal to 25 percent of the amount
of the excess benefit. Organization managers who participate in an
excess benefit transaction knowing that it is improper are subject to a
first-tier penalty tax of 10 percent of the amount of the excess
benefit. Additional second-tier taxes equal to 200 percent of the amount
of the excess benefit may be imposed on a disqualified person if there
is no correction of the transaction within a specified time period.
Under section 4962, the IRS has the authority to abate certain
first-tier taxes if the taxable event was due to reasonable cause and
not to willful neglect and the event was corrected within the applicable
correction period. First-tier taxes which may be abated include, among
others, the taxes imposed under sections 4941 (on acts of self-dealing
between private foundations and disqualified persons), 4942 (for failure
by private foundations to distribute a minimum amount of income), and
4943 (on private foundations with excess business holdings).
In enacting the new excise taxes on excess benefit transactions,
Congress explicitly intended to provide the IRS with abatement authority
under section 4962.\3\
However, the abatement rules of section 4962 apply only to qualified
first-tier taxes imposed by subchapter A or C of Chapter 42. The section
4958 excise tax is located in subchapter D of Chapter 42. The failure to
cross reference subchapter D in section 4962 means that IRS does not
have such abatement authority with respect to the section 4958 excise
taxes.
\3\See Ways and Means Committee Report 104 506 accompanying H.R. 2377,
p. 59.
EXPLANATION OF PROVISION
The bill amends section 4962(b) to include a cross-reference to
first-tier taxes imposed by subchapter D (i.e., the section 4958 excise
taxes on excess benefit transactions). Thus, the IRS has authority to
abate the first-tier excise taxes on excess benefit transactions in
cases where it is established that the violation was due to reasonable
cause and not due to willful neglect and the transaction at issue was
corrected within the specified period.
2. REPORTING BY PUBLIC CHARITIES WITH RESPECT TO INTERMEDIATE SANCTIONS
AND CERTAIN OTHER EXCISE TAX PENALTIES (SEC. 1503(B) OF THE BILL AND SEC. 6033 OF
THE CODE)
PRESENT LAW
Section 4958 imposes penalty excise taxes as an intermediate sanction
in cases where organizations exempt from tax under sections 501(c)(3) or
501(c)(4) (other than private foundations) engage in an ``excess benefit
transaction.'' The excise tax may be imposed on certain disqualified
persons (i.e., insiders) who improperly benefit from an excess benefit
transaction and on organization managers who participate in such a
transaction knowing that it is improper. No tax is imposed on the
organization itself with respect under section 4958.
Section 4911 imposes an excise tax penalty on excess lobbying
expenditures made by public charities. The tax is imposed on the
organization itself. Section 4912 imposes a penalty excise tax on
certain public charities that make disqualifying lobbying expenditures
and section 4955 imposes a penalty excise tax on political expenditures
of section 501(c)(3) organizations. Both of these penalty taxes are
imposed not only on the affected organization, but also on organization
managers who agree to an expenditure knowing that it is improper.
Under section 4962, the IRS has the authority to abate certain
first-tier taxes if the taxable event was due to reasonable cause and
not to willful neglect and the event was corrected within the applicable
correction period. First-tier taxes which may be abated include, among
others, the taxes imposed under section 4955.\4\
\4\A separate provision in the bill makes a technical correction to
section 4962(b) to permit the abatement of first-tier penalty excise
taxes imposed under section 4958.
Under section 6033(b)(10), 501(c)(3) organizations are required to
report annually on Form 990 any amounts paid by the organization under
section 4911, 4912, and 4955. Thus, although sections 4912 and 4955
impose excise taxes on organization managers, organizations technically
are not required to report any such excise taxes paid by such managers.
In addition, under section 6033(b)(11), an organization exempt from
tax under section 501(c)(3) must report on Form 990 any amount of excise
tax on excess benefit transactions paid by the organization, or any
disqualified person with respect to such organization, during the
taxable year. The Code does not explicitly require the reporting of any
excess benefit excise taxes paid by an organization manager solely in
his or her capacity as such (i.e., an organization manager might also be
a disqualified person with respect to an excess benefit transaction, in
which case any tax paid would be reported).
EXPLANATION OF PROVISION
The bill makes the reporting requirements of section 6033(b)(10) and
(11) consistent with the excise tax penalty provisions to which they
relate. Thus, section 6033(b)(10) is amended to require 501(c)(3)
organizations to report any amounts of tax imposed under sections 4911,
4912, and 4955 on the organization or any organization manager of the
organization. In addition, the bill requires reporting with respect to
any reimbursements paid by an organization with respect to taxes imposed
under sections 4912 or 4955 on any organization manager of the
organization. Section 6033(b)(11) is amended to require 501(c)(3)
organizations to report any amounts of tax imposed under section 4958 on
any organization manager or any disqualified person, as well as any
reimbursements of section 4958 excise tax liability paid by the
organization to such organization managers or disqualified persons.
In addition, the bill clarifies that no reporting is required under
sections 6033(b)(10) or (11) in the event a first-tier penalty excise
tax imposed under section 4955 or section 4958 is abated by the IRS
pursuant to its authority under section 4962.
TECHNICAL CORRECTIONS TO OTHER ACTS
1. CORRECTION OF GATT INTEREST AND MORTALITY RATE PROVISIONS IN THE
RETIREMENT PROTECTION ACT (SEC. 1504(B)(3) OF THE BILL AND SEC. 1449(A) OF THE
SMALL BUSINESS ACT)
PRESENT LAW
The Retirement Protection Act of 1994, enacted as part of the
implementing legislation for the General Agreements on Tariffs and Trade
(``GATT''), modified the actuarial assumptions that must be used in
adjusting benefits and limitations under section 415. In general, in
adjusting a benefit that is payable in a form other than a straight life
annuity and in adjusting the dollar limitation if benefits begin before
age 62, the interest rate to be used cannot be less than the greater of
5 percent or the rate specified by the plan. Under GATT, the benefit is
payable in a form subject to the requirements of section 417(e)(3), then
the interest rate on 30-year Treasury securities is substituted for 5
percent. Also under GATT, for purposes of adjusting any limit or
benefit, the mortality table prescribed by the Secretary must be used.
This provision of GATT was generally effective as of the first day of
the limitation year beginning in 1995.
The Small Business Act conformed the effective date of these changes
to the effective date of similar changes by providing generally that, in
the case of a plan that was adopted and in effect before December, 8,
1994, the GATT change is not effective with respect to benefits accrued
before the earlier of (1) the later of the date a plan amendment
applying the amendments is adopted or made effective or (2) the first
day of the first limitation year beginning after December 31, 1999. The
Small Business Act provides that ``Determinations under section
415(b)(2)(E) before such earlier date are to be made with respect to
such benefits on the basis of such section as in effect on December 7,
1994 (except that the modification made by section 1449(b) of the Small
Business Job Protection Act of 1996 shall be taken into account), and
the provisions of the plan as in effect on December 7, 1994, but only if
such provisions of the plan meet the requirements of such section (as so
in effect).''
EXPLANATION OF PROVISION
The provision in the Small Business Act was intended to permit plans
to apply pre-GATT law under section 415(b)(2)(E) for a transition
period. The bill conforms the statute to this intent by providing that
determinations under section 415(b)(2)(E) before such earlier date are
to be made with respect to such benefits on the basis of such section as
in effect on December 7, 1994 and the provisions of the plan as in
effect on December 7, 1994, but only if such provisions of the plan meet
the requirements of such section (as so in effect).
2. CLARIFY DEFINITION OF INDIAN RESERVATION UNDER SECTION 168(J)(6)
(SEC. 1504(C) OF THE BILL AND SEC 168(J)(6) OF THE CODE)
PRESENT LAW
Section 168(j)(6) provides for accelerated depreciation for certain
property located on Indian reservations. For this purpose, provides that
the term ``Indian reservation'' means a
reservation as defined in either (a) section 3(d) of the
Indian Financing Act of 1974 (25 U.S.C. 1452(d)), or (b) section 4(10)
of the Indian Child Welfare Act of 1978 (25 U.S.C. 1903(10)). In
addition, section 45A (which provides for an incremental Indian
employment credit) incorporates by reference the same definition of
``Indian reservation'' contained in section 168(j)(6). Section 3(d) of
the Indian Financing Act of 1974 includes not only officially designated
Indian reservations and public domain Indian allotments, but also all
``former Indian reservations in Oklahoma,'' which covers most of the
State of Oklahoma even though parts of such ``former Indian
reservations'' may no longer have a significant nexus to an Indian
tribe.
EXPLANATION OF PROVISION
For purposes of the section 168(j)(6) definition of ``Indian
reservation,'' the term ``former reservations in Oklahoma'' is defined
as lands that are (1) within the jurisdictional area of an Oklahoma
Indian tribe as determined by the Secretary of the Interior, and (2)
recognized by such Secretary as an area eligible for trust land status
under 25 C.F.R. Part 51.
EFFECTIVE DATE
The provision generally is effective as if included in the Omnibus
Budget Reconciliation Act of 1993 (i.e., the technical correction
applies to property placed in service and wages paid on or after January
1, 1994). However, the provision does not apply to wages claimed on any
original return filed prior to March 18, 1997, nor does it apply to
property placed in service with a 10-year life or less (without regard
to section 168(j)) if accelerated depreciation under section 168(j) was
claimed with respect to such property on an original return filed prior
to March 18, 1997.
3. RELATED PARTIES DETERMINED BY REFERENCE TO SECTION 267 (SEC. 1504(E)
OF THE BILL AND SEC. 267(F) OF THE CODE)
PRESENT LAW
Section 267 disallows loses arising in transactions between certain
defined related parties. In the case of related corporations, such
losses may be deferred. Several Code provisions, in defining related
parties, often incorporate the relationships described in section 267 by
cross-reference to such section.
EXPLANATION OF PROVISION
Any provision of the Internal Revenue Code of 1986 that refers to a
relationship that would result in loss disallowance under section 267
also refers to relationships where loss is deferred, where such
relationship is applicable to the provision.
III. VOTES OF THE COMMITTEE
In compliance with clause 2(l)(2)(B) of rule XI of the Rules of the
House of Representatives, the following statements are made concerning
the votes of the Committee on Ways and Means in its consideration of
budget reconciliation revenue recommendations.
Motion to report budget reconciliation revenue recommendations
The Committee's budget reconciliation revenue recommendations were
ordered favorably reported on June 13, 1997, by a rollcall vote of 22
yeas to 16 nays (with a quorum being present). The vote was as follows:
Representatives Yea Nay Present Representatives Yea Nay Present
Mr. Archer X Mr. Rangel X
Mr. Crane X Mr. Stark X
Mr. Thomas X Mr. Matsui X
Mr. Shaw X Mrs. Kennelly X
Mrs. Johnson X Mr. Coyne X
Mr. Bunning X Mr. Levin X
Mr. Houghton X Mr. Cardin X
Mr. Herger X Mr. McDermott
Mr. McCrery X Mr. Kleczka X
Mr. Camp X Mr. Lewis X
Mr. Ramstad X Mr. Neal X
Mr. Nussle X Mr. McNulty X
Mr. Johnson X Mr. Jefferson X
Ms. Dunn X Mr. Tanner X
Mr. Collins X Mr. Becerra X
Mr. Portman X Mrs. Thurman X
Mr. English X
Mr. Ensign X
Mr. Christensen X
Mr. Watkins X
Mr. Hayworth X
Mr. Weller X
Mr. Hulshof X
Votes on amendments
An amendment by Mrs. Kennelly to Title I of the Chairman's Mark to
strike the offset to the child credit equal to 50 percent of the
dependent care credit and strike the provision that would provide a
special tax rate for capital gains for corporations was defeated by a
rollcall vote of 16 yeas to 22 nays. The vote was as follows:
Representatives Yea Nay Present Representatives Yea Nay Present
Mr. Archer X Mr. Rangel X
Mr. Crane X Mr. Stark
Mr. Thomas X Mr. Matsui X
Mr. Shaw X Mrs. Kennelly X
Mrs. Johnson X Mr. Coyne X
Mr. Bunning X Mr. Levin X
Mr. Houghton X Mr. Cardin X
Mr. Herger X Mr. McDermott X
Mr. McCrery X Mr. Kleczka X
Mr. Camp X Mr. Lewis X
Mr. Ramstad X Mr. Neal X
Mr. Nussle X Mr. McNulty X
Mr. Johnson X Mr. Jefferson X
Ms. Dunn X Mr. Tanner X
Mr. Collins X Mr. Becerra X
Mr. Portman X Mrs. Thurman X
Mr. English X
Mr. Ensign X
Mr. Christensen X
Mr. Watkins X
Mr. Hayworth X
Mr. Weller X
Mr. Hulshof X
An amendment by Mr. Matsui to Title I to require that the child
credit be taken on the tax return (i.e., ``stacked'') before the earned
income tax credit and strike Part II of Subtitle B of Title III
(relating to corporate capital gains) and impose a capital gains benefit
recapture tax was defeated by a rollcall vote of 15 yeas to 23 nays. The
vote was as follows:
Representatives Yea Nay Present Representatives Yea Nay Present
Mr. Archer X Mr. Rangel X
Mr. Crane X Mr. Stark
Mr. Thomas X Mr. Matsui X
Mr. Shaw X Mrs. Kennelly X
Mrs. Johnson X Mr. Coyne X
Mr. Bunning X Mr. Levin X
Mr. Houghton X Mr. Cardin X
Mr. Herger X Mr. McDermott X
Mr. McCrery X Mr. Kleczka X
Mr. Camp X Mr. Lewis X
Mr. Ramstad X Mr. Neal X
Mr. Nussle X Mr. McNulty X
Mr. Johnson X Mr. Jefferson X
Ms. Dunn X Mr. Tanner X
Mr. Collins X Mr. Becerra X
Mr. Portman X Mrs. Thurman X
Mr. English X
Mr. Ensign X
Mr. Christensen X
Mr. Watkins X
Mr. Hayworth X
Mr. Weller X
Mr. Hulshof X
An amendment by Mr. McDermott to Title I to strike the child credit
and replace it with a family credit that would be allowed against income
taxes and social security taxes, and phased out for upper income
taxpayers was defeated by a rollcall vote of 15 yeas to 23 nays. The
vote was as follows:
Representatives Yea Nay Present Representatives Yea Nay Present
Mr. Archer X Mr. Rangel X
Mr. Crane X Mr. Stark
Mr. Thomas X Mr. Matsui X
Mr. Shaw X Mrs. Kennelly X
Mrs. Johnson X Mr. Coyne X
Mr. Bunning X Mr. Levin X
Mr. Houghton X Mr. Cardin X
Mr. Herger X Mr. McDermott X
Mr. McCrery X Mr. Kleczka X
Mr. Camp X Mr. Lewis X
Mr. Ramstad X Mr. Neal X
Mr. Nussle X Mr. McNulty X
Mr. Johnson X Mr. Jefferson X
Ms. Dunn X Mr. Tanner X
Mr. Collins X Mr. Becerra X
Mr. Portman X Mrs. Thurman X
Mr. English X
Mr. Ensign X
Mr. Christensen X
Mr. Watkins X
Mr. Hayworth X
Mr. Weller X
Mr. Hulshof X
An amendment by Mr. Rangel to Title II to strike all the education
incentive provisions and insert the Hope credit as proposed by the
Administration with modifications was defeated by a rollcall vote of 15
yeas to 21 nays. The vote was as follows:
Representatives Yea Nay Present Representatives Yea Nay Present
Mr. Archer X Mr. Rangel X
Mr. Crane X Mr. Stark X
Mr. Thomas X Mr. Matsui X
Mr. Shaw X Mrs. Kennelly X
Mrs. Johnson X Mr. Coyne X
Mr. Bunning X Mr. Levin X
Mr. Houghton Mr. Cardin X
Mr. Herger X Mr. McDermott X
Mr. McCrery X Mr. Kleczka X
Mr. Camp X Mr. Lewis X
Mr. Ramstad X Mr. Neal X
Mr. Nussle X Mr. McNulty X
Mr. Johnson Mr. Jefferson X
Ms. Dunn X Mr. Tanner X
Mr. Collins X Mr. Becerra
Mr. Portman X Mrs. Thurman X
Mr. English X
Mr. Ensign X
Mr. Christensen X
Mr. Watkins X
Mr. Hayworth X
Mr. Weller X
Mr. Hulshof X
An amendment by Mr. Kleczka to Title II to extend permanently the
exclusion for employer-provided educational assistance and strike the
corporate capital gains tax reduction was defeated by a rollcall vote of
16 yeas to 23 nays. The vote was as follows:
Representatives Yea Nay Present Representatives Yea Nay Present
Mr. Archer X Mr. Rangel X
Mr. Crane X Mr. Stark X
Mr. Thomas X Mr. Matsui X
Mr. Shaw X Mrs. Kennelly X
Mrs. Johnson X Mr. Coyne X
Mr. Bunning X Mr. Levin X
Mr. Houghton X Mr. Cardin X
Mr. Herger X Mr. McDermott X
Mr. McCrery X Mr. Kleczka X
Mr. Camp X Mr. Lewis X
Mr. Ramstad X Mr. Neal X
Mr. Nussle X Mr. McNulty X
Mr. Johnson X Mr. Jefferson X
Ms. Dunn X Mr. Tanner X
Mr. Collins X Mr. Becerra X
Mr. Portman X Mrs. Thurman X
Mr. English X
Mr. Ensign X
Mr. Christensen X
Mr. Watkins X
Mr. Hayworth X
Mr. Weller X
Mr. Hulshof X
An amendment by Mr. Cardin to Title II to limit contributions to an
education investment account and provide a tax credit for tutoring
programs for grades K through 12 was agreed to by a rollcall vote of 22
yeas to 17 nays. The vote was as follows:
Representatives Yea Nay Present Representatives Yea Nay Present
Mr. Archer X Mr. Rangel X
Mr. Crane X Mr. Stark X
Mr. Thomas X Mr. Matsui X
Mr. Shaw X Mrs. Kennelly X
Mrs. Johnson X Mr. Coyne X
Mr. Bunning X Mr. Levin X
Mr. Houghton X Mr. Cardin X
Mr. Herger X Mr. McDermott X
Mr. McCrery X Mr. Kleczka X
Mr. Camp X Mr. Lewis X
Mr. Ramstad X Mr. Neal X
Mr. Nussle X Mr. McNulty X
Mr. Johnson X Mr. Jefferson X
Ms. Dunn X Mr. Tanner X
Mr. Collins X Mr. Becerra X
Mr. Portman X Mrs. Thurman X
Mr. English X
Mr. Ensign X
Mr. Christensen X
Mr. Watkins X
Mr. Hayworth X
Mr. Weller X
Mr. Hulshof X
An amendment by Mr. McDermott to Title III to provide an increase to
100 percent of health insurance deductibility for self-employed and
strike the provision relating to a reduction of alternative capital
gains tax for corporations was defeated by a rollcall vote of 15 yeas to
22 nays. The vote was as follows:
Representatives Yea Nay Present Representatives Yea Nay Present
Mr. Archer X Mr. Rangel X
Mr. Crane X Mr. Stark X
Mr. Thomas X Mr. Matsui X
Mr. Shaw X Mrs. Kennelly X
Mrs. Johnson X Mr. Coyne X
Mr. Bunning X Mr. Levin X
Mr. Houghton X Mr. Cardin X
Mr. Herger X Mr. McDermott X
Mr. McCrery X Mr. Kleczka X
Mr. Camp X Mr. Lewis X
Mr. Ramstad X Mr. Neal X
Mr. Nussle X Mr. McNulty X
Mr. Johnson X Mr. Jefferson X
Ms. Dunn X Mr. Tanner X
Mr. Collins X Mr. Becerra
Mr. Portman X Mrs. Thurman X
Mr. English X
Mr. Ensign X
Mr. Christensen X
Mr. Watkins X
Mr. Hayworth X
Mr. Weller X
Mr. Hulshof X
An amendment by Mr. McDermott to Title III to increase over the 10
years the standard deduction for joint returns so that it equals twice
the amount allowed for single taxpayers, and strike the corporate AMT
provisions, corporate capital gains, and independent contractor ``safe
harbor,'' and impose a capital gains tax reduction recapture tax was
defeated by a rollcall vote of 13 yeas to 24 nays. The vote was as
follows:
Representatives Yea Nay Present Representatives Yea Nay Present
Mr. Archer X Mr. Rangel X
Mr. Crane X Mr. Stark X
Mr. Thomas X Mr. Matsui X
Mr. Shaw X Mrs. Kennelly X
Mrs. Johnson X Mr. Coyne X
Mr. Bunning X Mr. Levin X
Mr. Houghton X Mr. Cardin X
Mr. Herger X Mr. McDermott X
Mr. McCrery X Mr. Kleczka X
Mr. Camp X Mr. Lewis X
Mr. Ramstad X Mr. Neal X
Mr. Nussle X Mr. McNulty X
Mr. Johnson Mr. Jefferson X
Ms. Dunn X Mr. Tanner X
Mr. Collins X Mr. Becerra
Mr. Portman X Mrs. Thurman X
Mr. English X
Mr. Ensign X
Mr. Christensen X
Mr. Watkins X
Mr. Hayworth X
Mr. Weller X
Mr. Hulshof X
An amendment by Mr. Jefferson to Title III to reduce the real estate
depreciation recapture rate to 22 percent for years 1997 through 2002
and to 20 percent thereafter and strike the corporate capital gains tax
rate reduction was defeated by a rollcall vote of 14 yeas to 23 nays.
The vote was as follows:
Representatives Yea Nay Present Representatives Yea Nay Present
Mr. Archer X Mr. Rangel X
Mr. Crane X Mr. Stark X
Mr. Thomas X Mr. Matsui X
Mr. Shaw X Mrs. Kennelly X
Mrs. Johnson X Mr. Coyne X
Mr. Bunning X Mr. Levin X
Mr. Houghton X Mr. Cardin X
Mr. Herger X Mr. McDermott
Mr. McCrery X Mr. Kleczka X
Mr. Camp X Mr. Lewis X
Mr. Ramstad X Mr. Neal X
Mr. Nussle X Mr. McNulty X
Mr. Johnson X Mr. Jefferson X
Ms. Dunn X Mr. Tanner X
Mr. Collins X Mr. Becerra X
Mr. Portman X Mrs. Thurman X
Mr. English X
Mr. Ensign X
Mr. Christensen X
Mr. Watkins
Mr. Hayworth X
Mr. Weller X
Mr. Hulshof X
An amendment by Mrs. Thurman to Title III to impose a 1.4 percent
``medicare taxes'' on capital gains from the sale of securities and
dedicate the proceeds to the Medicare Trust Fund was defeated by a
rollcall vote of 12 yeas to 26 nays. The vote was as follows:
Representatives Yea Nay Present Representatives Yea Nay Present
Mr. Archer X Mr. Rangel X
Mr. Crane X Mr. Stark X
Mr. Thomas X Mr. Matsui X
Mr. Shaw X Mrs. Kennelly X
Mrs. Johnson X Mr. Coyne X
Mr. Bunning X Mr. Levin X
Mr. Houghton X Mr. Cardin X
Mr. Herger X Mr. McDermott
Mr. McCrery X Mr. Kleczka X
Mr. Camp X Mr. Lewis X
Mr. Ramstad X Mr. Neal X
Mr. Nussle X Mr. McNulty X
Mr. Johnson X Mr. Jefferson X
Ms. Dunn X Mr. Tanner X
Mr. Collins X Mr. Becerra X
Mr. Portman X Mrs. Thurman X
Mr. English X
Mr. Ensign X
Mr. Christensen X
Mr. Watkins X
Mr. Hayworth X
Mr. Weller X
Mr. Hulshof X
An amendment by Mr. Nussle and Mr. Tanner to Title III to strike
section 1043 of the Mark relating to the reduction of incentives for
alcohol fuels and limit the reduction in corporate capital gains rates
was defeated by a rollcall vote of 17 yeas to 21 nays. The vote was as
follows:
Representatives Yea Nay Present Representatives Yea Nay Present
Mr. Archer X Mr. Rangel X
Mr. Crane X Mr. Stark X
Mr. Thomas X Mr. Matsui X
Mr. Shaw X Mrs. Kennelly X
Mrs. Johnson X Mr. Coyne X
Mr. Bunning X Mr. Levin X
Mr. Houghton X Mr. Cardin X
Mr. Herger X Mr. McDermott
Mr. McCrery X Mr. Kleczka X
Mr. Camp X Mr. Lewis X
Mr. Ramstad X Mr. Neal X
Mr. Nussle X Mr. McNulty X
Mr. Johnson X Mr. Jefferson X
Ms. Dunn X Mr. Tanner X
Mr. Collins X Mr. Becerra X
Mr. Portman X Mrs. Thurman X
Mr. English X
Mr. Ensign X
Mr. Christensen X
Mr. Watkins X
Mr. Hayworth X
Mr. Weller X
Mr. Hulshof X
An amendment by Messrs. Matsui, Stark, and Kleczka to Title IX to
strike section 934 of the Mark relating to an independent contractor
``safe harbor'' was defeated by a rollcall vote of 15 yeas to 20 nays.
The vote was as follows:
Representatives Yea Nay Present Representatives Yea Nay Present
Mr. Archer X Mr. Rangel X
Mr. Crane Mr. Stark
Mr. Thomas X Mr. Matsui X
Mr. Shaw X Mrs. Kennelly X
Mrs. Johnson X Mr. Coyne X
Mr. Bunning X Mr. Levin X
Mr. Houghton X Mr. Cardin X
Mr. Herger X Mr. McDermott
Mr. McCrery X Mr. Kleczka X
Mr. Camp X Mr. Lewis X
Mr. Ramstad X Mr. Neal X
Mr. Nussle X Mr. McNulty X
Mr. Johnson X Mr. Jefferson X
Ms. Dunn X Mr. Tanner
Mr. Collins X Mr. Becerra X
Mr. Portman X Mrs. Thurman X
Mr. English X
Mr. Ensign X
Mr. Christensen X
Mr. Watkins X
Mr. Hayworth X
Mr. Weller X
Mr. Hulshof X
An amendment by Mr. Bunning to Title IX to modify passive loss
limitations relating to equine activities and to limit the corporate
capital gains reduction was defeated by a rollcall vote of 16 yeas to 22
nays. The vote was as follows:
Representatives Yea Nay Present Representatives Yea Nay Present
Mr. Archer X Mr. Rangel X
Mr. Crane X Mr. Stark X
Mr. Thomas X Mr. Matsui X
Mr. Shaw X Mrs. Kennelly X
Mrs. Johnson X Mr. Coyne X
Mr. Bunning X Mr. Levin. X
Mr. Houghton X Mr. Cardin X
Mr. Herger X Mr. McDermott
Mr. McCrery X Mr. Kleczka X
Mr. Camp X Mr. Lewis X
Mr. Ramstad X Mr. Neal X
Mr. Nussle X Mr. McNulty X
Mr. Johnson X Mr. Jefferson X
Ms. Dunn X Mr. Tanner X
Mr. Collins X Mr. Becerra X
Mr. Portman X Mrs. Thurman X
Mr. English X
Mr. Ensign X
Mr. Christensen X
Mr. Watkins X
Mr. Hayworth X
Mr. Weller X
Mr. Hulshof X
An amendment by Mr. Stark to Title X to provide a tax credit of up to
90 percent to subsidize the cost of private insurance for uninsured
children and increase the tax on tobacco products was defeated by a
rollcall vote of 13 yeas to 25 nays. The vote was as follows:
Representatives Yea Nay Present Representatives Yea Nay Present
Mr. Archer X Mr. Rangel X
Mr. Crane X Mr. Stark X
Mr. Thomas X Mr. Matsui X
Mr. Shaw X Mrs. Kennelly X
Mrs. Johnson X Mr. Coyne X
Mr. Bunning X Mr. Levin X
Mr. Houghton X Mr. Cardin X
Mr. Herger X Mr. McDermott
Mr. McCrery X Mr. Kleczka X
Mr. Camp X Mr. Lewis X
Mr. Ramstad X Mr. Neal X
Mr. Nussle X Mr. McNulty X
Mr. Johnson X Mr. Jefferson X
Ms. Dunn X Mr. Tanner X
Mr. Collins X Mr. Becerra X
Mr. Portman X Mrs. Thurman X
Mr. English X
Mr. Ensign X
Mr. Christensen X
Mr. Watkins X
Mr. Hayworth X
Mr. Weller X
Mr. Hulshof X
An amendment by Mr. Hayworth to Title X to repeal the treatment of
Indian tribal organizations under the unrelated business income tax and
increase the tax on international air arrivals and departures was agreed
to by a rollcall vote of 22 yeas to 16 nays. The vote was as follows:
Representatives Yea Nay Present Representatives Yea Nay Present
Mr. Archer X Mr. Rangel X
Mr. Crane X Mr. Stark X
Mr. Thomas X Mr. Matsui X
Mr. Shaw X Mrs. Kennelly X
Mrs. Johnson X Mr. Coyne X
Mr. Bunning X Mr. Levin X
Mr. Houghton X Mr. Cardin X
Mr. Herger X Mr. McDermott
Mr. McCrery X Mr. Kleczka X
Mr. Camp X Mr. Lewis X
Mr. Ramstad X Mr. Neal X
Mr. Nussle X Mr. McNulty X
Mr. Johnson X Mr. Jefferson X
Ms. Dunn X Mr. Tanner X
Mr. Collins X Mr. Becerra X
Mr. Portman X Mrs. Thurman X
Mr. English X
Mr. Ensign X
Mr. Christensen X
Mr. Watkins X
Mr. Hayworth X
Mr. Weller X
Mr. Hulshof X
An amendment, in the nature of a substitute, by Mr. Rangel was
defeated by a rollcall vote of 15 yeas to 22 nays. The vote was as
follows:
Representatives Yea Nay Present Representatives Yea Nay Present
Mr. Archer X Mr. Rangel X
Mr. Crane X Mr. Stark X
Mr. Thomas X Mr. Matsui X
Mr. Shaw X Mrs. Kennelly X
Mrs. Johnson X Mr. Coyne X
Mr. Bunning X Mr. Levin X
Mr. Houghton X Mr. Cardin X
Mr. Herger Mr. McDermott
Mr. McCrery X Mr. Kleczka X
Mr. Camp X Mr. Lewis X
Mr. Ramstad X Mr. Neal X
Mr. Nussle X Mr. McNulty X
Mr. Johnson X Mr. Jefferson X
Ms. Dunn X Mr. Tanner X
Mr. Collins X Mr. Becerra X
Mr. Portman X Mrs. Thurman X
Mr. English X
Mr. Ensign X
Mr. Christensen X
Mr. Watkins X
Mr. Hayworth X
Mr. Weller X
Mr. Hulshof X
IV. BUDGET EFFECTS OF THE BILL
A. committee estimates of budgetary effects
In compliance with clause 7(a) of rule XIII of the Rules of the House
of Representatives, the following statement is made concerning the
estimated budget effects of the Committee's revenue reconciliation
provisions for fiscal years 1997 2007:
Offset Folios 447 to 461 Insert here
b. budget authority and tax expenditures
Budget authority
In compliance with subdivision (B) of clause 2(l)(3) of rule XI of
the Rules of the House of Representatives, the Committee states that the
revenue reconciliation provisions involve no new or increased budget
authority. The earned income compliance provisions (sec. 1067) will
reduce outlays (and budget authority). (See the revenue table in Part
IV.A., above).
Tax expenditures
In compliance with subdivision (B) of clause 2(l)(3) of rule XI of
the Rules of the House of Representatives, the Committee states that the
provisions relative to income tax reductions generally involve increased
tax expenditures and that the provisions relating to increased income
tax revenues generally involve reduced tax expenditures (see revenue
table, above). Non-income tax provisions are not classified as tax
expenditures under the Budget Act. Also, certain compliance
simplification provisions and technical corrections provisions do not
involve tax expenditures.
c. cost estimate prepared by the congressional budget office
In compliance with subdivision (c) of clause 2(l)(3) of rule XI of
the Rules of the House of Representatives, requiring a cost estimate
prepared by the Congressional Budget Office (CBO), the following
statement by CBO is provided.
U.S. Congress,
Congressional Budget Office,
Washington, DC, June 16, 1997.
Hon. Bill Archer, Chairman, Committee on Ways and Means
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has prepared the
enclosed cost estimate for the revenue reconciliation recommendations of
the House Committee on Ways and Means.
The estimate shows the budgetary effects of the committee's proposals
over the 1998 2002 period, and attached tables show the effects through
2007. CBO understands that the Committee on the Budget will be
responsible for interpreting how these proposals compare with the
reconciliation instructions in the budget resolution.
If you wish further details on this estimate, we will be pleased to
provide them. The CBO staff contact is Stephanie Weiner.
Sincerely,
Paul Van de Water
(For June E. O'Neill, Director).
Enclosure.
Revenue reconciliation recommendations of the House Committee
on Ways and Means
Summary: The revenue reconciliation provisions recommended by the
Committee on Ways and Means would make many changes to the Internal
Revenue Code. A new credit for children under age 17 would result in the
largest reduction in revenue. Other major reductions in revenue would
result from a new tax credit for students, back-loaded IRAs, educational
investment accounts, and modifications to the alternative minimum tax
and to the estate and gift tax. Lower taxation of capital gains
realizations would raise revenue in the first five years but lose
revenue over the first ten years. The provisions also include changes
that would generate revenue--about three-quarters of the extra revenue
would come from extending and modifying aviation excise taxes.
Estimated cost to the Federal Government: The Joint Committee on
Taxation (JCT) provided estimates for most of the revenue reconciliation
provisions, and CBO concurs with their estimates. CBO and JCT estimate
that these provisions, including Earned Income Credit (EIC) compliance
proposals, would reduce governmental receipts by $84.653 billion over
the 1997 2002 period. The EIC provisions also would reduce outlays by
about $0.078 billion over the five year period. In addition CBO
estimates that the provision to phase out the ethanol tax credit would
increase Commodity Credit Corporation outlays by about $0.051 billion
over the 1998 2002 period. Please refer to the enclosed CBO and JCT
tables for a more detailed estimate of the provisions.
ESTIMATED BUDGETARY IMPACT OF THE REVENUE RECONCILIATION RECOMMENDATIONS OF THE HOUSE COMMITTEE ON WAYS AND MEANS
By fiscal year in billions of dollars--
1997 1998 1999 2000 2001 2002
REVENUES
Projected Revenues Under Current Law\1\ 1,554.894 1,609.184 1,675.264 1,750.097 1,827.964 1,910.260
Proposed Changes:\2\ 0.007 7.218 -17.084 -26.586 -27.623 -20.320
Projected Revenues Under the Recommendations 1,554.901 1,616.288 1,658.133 1,723.471 1,800.301 1,889.914
OUTLAYS
Projected Commodity Credit Corporation Outlays Under Current Law 5.331 7,093 6.830 6.298 5.140 4.826
Proposed Changes (\4\) (\4\) (\4\) (\4\) 0.002 0.049
Projected Commodity Credit Corporation Outlay Under the Recommendations 5.331 7.093 6.830 6.298 5.142 4.875
Projected EIC Outlays\1\ Under Current Law 20.822 21.685 22.495 23.333 23.965 24.732
Proposed Changes (\4\) -0.016 -0.022 -0.021 -0.019 -0.019
Projected EIC Outlays Under the Recommendations 20.822 21.669 22.473 23.312 23.946 24.713
\1\Projections consistent with the FY 1998 Budget Resolution.
\2\Includes the revenue effect of EIC compliance proposals.
\3\The following five provisions would affect social security revenues, which are off budget: employer provided education assistance, phase out the exclusion for qualified tuition reduction, independent contract for bakery drivers, safe harbor for independent contractors, and optional methods for computing SECA combined.
\4\Less than $500,000.
The outlay effects of this legislation fall within budget functions
350 (agriculture) and 600 (income security)
Intergovernmental and private-sector impact: In accordance with the
requirements of Public Law 104 4, the Unfunded Mandates Reform Act of
1995, JCT has determined that the bill contains several private sector
mandates. Please refer to the enclosed letter for a more detailed
account of these provisions. These provisions would impose direct cost
on the private sector of more than $100 million in each year from 1996
2000. The JCT estimates the direct mandate cost of tax increases in the
bill would total $8,990 billion in 1998, and $47.064 billion over the
1998 2002 period, as shown below:
ESTIMATED FEDERAL PRIVATE SECTOR MANDATE IMPACT OF THE REVENUE RECONCILIATION RECOMMENDATIONS OF THE HOUSE COMMITTEE ON WAYS AND MEANS
By fiscal years, in billions of dollars--
1998 1999 2000 2001 2002
Private Sector Mandates 8.990 8.302 9.095 9.994 10.683
In addition, JCT has determined that the provision to extend and
modify the Airport and Airway Trust Fund excise taxes and the provision
to modify the vaccine excise tax may impose an intergovernmental mandate
on State, local, and tribal governments. JCT estimates that the direct
cost of complying with these intergovernmental mandates will not exceed
$50 million in either the first fiscal year or in any of the 4 fiscal
years following the first fiscal year.
Estimate prepared by: Stephanie Weiner (226 2720).
Estimate approved by: Rick Kasten, Deputy Assistant Director for Tax
Analysis.
ESTIMATED BUDGETARY EFFECTS OF THE REVENUE RECONCILIATION RECOMMENDATIONS OF THE HOUSE COMMITTEE ON WAYS AND MEANS
[In billions of dollars, by fiscal years]
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 1998 2007 total
CHANGES IN REVENUES
On Budget Revenues\1\ 7.218 -17.084 -26.586 -27.623 -20.320 -26.575 -29.231 -31.470 -35.647 -40.421 -247.739
Off Budget Revenues -0.116 -0.048 -0.040 -0.034 -0.026 -0.020 -0.021 -0.021 -0.021 -0.021 -0.368
--------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------------
Total 7.102 -17.132 -26.626 -27.657 -20.346 -26.595 -29.252 -31.491 -35.668 -40.442 -248.107
========= ========== ========== ========== ========== ========== ========== ========== ========== ========== =================
CHANGES IN DIRECT SPENDING
Commodity Credit Corporation Outlays (\2\) (\2\) (\2\) 0.002 0.049 0.059 0.045 0.032 0.022 0.018 0.227
Earned Income Credit Outlays (\2\) -0.016 -0.022 -0.021 -0.019 -0.019 -0.019 -0.018 -0.018 -0.018 -0.170
--------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------------
Total (\2\) -0.016 -0.022 -0.019 0.030 0.040 0.026 0.014 0.004 0.000 0.057
\1\Includes the revenue effects of the Earned Income Credit compliance proposals.
\2\Less than $500,000.
COMMITTEE ON WAYS AND MEANS ESTIMATED BUDGET EFFECTS OF CHAIRMAN'S MARK RELATING TO EARNED INCOME CREDIT COMPLIANCE PROPOSALS; FISCAL YEARS 1998 2007
[In millions of dollars]
Provision Effective 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 1998 02 1998 07
Earned Income Credit Compliance (``EIC'') Proposals: (a) deny eligibility for prior acts of recklessness; (b) recertification required when EIC denied in past; and (c) due diligence requirement for paid preparers tyba 12/31/96 \1\9 18 25 24 21 21 21 21 21 21 88 88
\1\Gains of less than $500,000.
Note. Details may not add to totals due to rounding.
Legend for ``Effective'' column: tyba=taxable years beginning after.
Source: Joint Committee on Taxation.
Congress of the United States,
Joint Committee on Taxation,
Washington, DC, June 14, 1997.
Mrs. June O'Neill, Director, Congressional Budget Office, U.S. Congress, Washington, DC.
Dear Mrs. O'Neill: The Staff of the Joint Committee on Taxation has
reviewed the revenue reconciliation provisions ordered to be reported by
the House Committee on Ways and Means on June 14, 1997. In accordance
with requirements of Public Law 104 4, the Unfunded Mandates Reform Act
of 1995 (the ``Unfunded Mandates Act''), we have determined that the
following provisions contain Federal private sector mandates:
Phase out the exclusion for qualified tuition reduction (sec. 117(d));
Modify excise tax on imported halons;
Constructive sales treatment for appreciated financial positions;
Disallowance of interest on indebtedness allocable to tax-exempt
obligations;
Gains or losses from certain terminations with respect to property;
Determination of original issue discount where pooled debt
obligations subject to acceleration;
Tax treatment of extraordinary dividends;
Recognition of gain in certain section 355 transactions;
Tax treatment of redemptions involving related corporations;
Modify holding period for dividends received deduction;
Registration and other provisions relating to confidential corporate
tax shelters;
Certain preferred stock treated as ``boot'';
Reporting of certain payments made to attorneys;
Consistency requirement for returns of beneficiaries of estates and
trusts;
Extend and modify Airport and Airway Trust Fund excise taxes;
Tax kerosene in the same manner as diesel fuel;
Reduce ethanol tax credit and excise tax exemptions;
Modify control test and include attribution rules to determine UBIT
consequences of certain payments from subsidiaries to tax-exempt
organizations;
Carryover basis on sale of property by tax-exempt related party;
Extend reporting and proxy tax requirements for political and
lobbying expenditures to all section 501(c) organizations except
charitable organizations;
Repeal 1986 Act grandfather rules for pension business of certain
insurers;
Termination of suspense accounts for family farm corporations;
2-year carryback and 20-year carryforward of net operating losses;
Modification of treatment of company-owned life insurance;
Modify the basis allocation rules for distributee partners;
Eliminate the substantial appreciation requirement for inventory of
a partnership;
Extend the 5-year time limit for taxing pre-contribution gain to 10
years;
Restrict income forecast method;
Repeal 14-day rule on rental of vacation properties;
Expansion of requirement that involuntarily converted property be
replaced with property acquired from an unrelated person;
Repeal installment sales grandfather rules of 1986 Act;
Inclusion of income from notional principal contracts and stock
lending transactions under Subpart F;
Further restrict like-kind exchanges involving foreign personal
property;
Impose holding period requirement for claiming foreign tax credits
with respect to dividends;
Penalties for failure to file disclosure of exemption for income
from the international operation of ships or aircraft by foreign
persons;
Limitation on treaty benefits for payments to hybrid entities;
Interest on underpayment reduced by foreign tax credit carryback;
Determination of period of limitations relating to foreign tax credits;
Optional methods for computing SECA combined;
Simplified reporting for partners of partnerships;
Simplified audit procedure for large partnerships;
Treatment of funeral trusts;
Replace truck excise tax deduction for tire value with tax credit
for excise tax paid on tires;
Reinstate LUST excise tax and extend through 9/30/02;
Modify vaccine excise tax;
Impose telephone excise tax on prepaid telephone cards; and
Earned income credit compliance provisions.
The attached revenue table (items highlighted in bold) generally
reflects amounts that are no greater than the aggregate estimated
amounts that the private sector will be required to spend in order to
comply with these Federal private sector mandates.
There are two provisions that may impose a Federal intergovernmental
mandate on State, local, and tribal governments. These provisions are
the following:
Extend and modify the Airport and Airway Trust Fund excise taxes; and
Modify vaccine excise tax.
The staff of the Joint Committee on Taxation estimates that the
direct costs of complying with these Federal intergovernmental mandates
will not exceed $50,000,000 in either the first fiscal year or in any of
the 4 fiscal years following the first fiscal year.
If you would like to discuss this information in further detail,
please feel free to contact me. Thank you for your cooperation in this
matter.
Sincerely,
Kenneth J. Kies.
Chief of Staff.
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE
a. committee oversight findings and recommendations
With respect to subdivision (A) of clause 2(l)(3) of rule XI of the
Rules of the House of Representatives (relating to oversight findings),
the Committee advises that it was the result of the Committee's
oversight review concerning tax burdens of families, expanded
educational tax benefits, savings and investment incentives, estate and
gift tax burdens on families and closely-held businesses, extension of
certain expiring tax provisions, District of Columbia tax incentives,
welfare-to-work tax credit, various miscellaneous tax provisions,
revenue-offset provisions (including a 10-year extension of financing of
the Airport and Airway Trust Fund and corporate and other tax reforms),
numerous tax simplification provisions (most of which have been
previously approved by the Committee and the Congress in the Balanced
Budget Act of 1995 in the 104th Congress, but not enacted), needed
technical corrections to recently-passed tax legislation, and an
increase in the public debt limit as projected under the Balanced Budget
Agreement and the Fiscal Year 1998 Budget Resolution, that the Committee
concluded that it is appropriate and timely to enact the revenue
reconciliation provisions included in the Committee's budget
reconciliation recommendations.
b. summary of findings and recommendations of the committee on
government reform and oversight
With respect to subdivision (D) of clause 2(l)(3) of rule XI of the
Rules of the House of Representatives, the Committee advises that no
oversight findings or recommendations have been submitted to the
Committee by the Committee on Government Reform and Oversight.
c. constitutional authority statement
With respect to clause 2(l)(4) of rule XI of the Rules of the House
of Representatives (relating to Constitutional authority), the Committee
states that the Committee's action in reporting these revenue
reconciliation provisions is derived from Article I of the Constitution,
Section 7 (``All bills for raising revenue shall originate in the House
of Representatives'') and Section 8 (``The Congress shall have power to
lay and collect taxes, duties, imposts and excises, to pay the debts...
of the United States''), and from the 16th Amendment to the
Constitution.
d. information relating to unfunded mandates
This information is provided in accordance with section 423 of the
Unfunded Mandates Reform Act of 1995 (P.L. 104 4).
The Committee has determined that the following provisions of the
bill contain Federal mandates on the private sector:
Phase out the exclusion for qualified tuition reduction (sec. 117(d));
Modify excise tax on imported halons;
Constructive sales treatment for appreciated financial positions;
Disallowance of interest on indebtedness allocable to tax-exempt
obligations;
Gains or losses from certain terminations with respect to property;
Determination of original issue discount where pooled debt
obligations subject to acceleration;
Tax treatment of extraordinary dividends;
Recognition of gain in certain section 355 transactions;
Tax treatment of redemptions involving related corporations;
Modify holding period for dividends received deduction;
Registration and other provisions relating to confidential corporate
tax shelters;
Certain preferred stock treated as ``boot'';
Reporting of certain payments made to attorneys;
Consistency requirement for returns of beneficiaries of estates and
trusts;
Extend and modify Airport and Airway Trust fund excise taxes;
Tax kerosene in the same manner as diesel fuel;
Reduce ethanol tax credit and excise tax exemptions;
Modify control test and include attribution rules to determine UBIT
consequences of certain payments from subsidiaries to tax-exempt
organizations;
Carryover basis on sale of property by tax-exempt related party;
Extend reporting and proxy tax requirements for political and
lobbying expenditures to all section 501(c) organizations except
charitable organizations;
Repeal 1986 Act grandfather rules for pension business of certain
insurers;
Termination of suspense accounts for family farm corporations;
2-year carryback and 20-year carryforward of net operating losses;
Modification of treatment of company-owned life insurance;
Modify the basis allocation rules for distributee partners;
Eliminate the substantial appreciation requirement for inventory of
a partnership;
Extend the 5-year time limit for taxing pre-contribution gain to 10
years;
Restrict income forecast method;
Repeal 14-day rule on rental of vacation properties;
Expansion of requirement that involuntarily converted property be
replaced with property acquired from an unrelated person;
Repeal installment sales grandfather rules of 1986 Act;
Inclusion of income from notional principal contracts and stock
lending transactions under Subpart F;
Further restrict like-kind exchanges involving foreign personal
property;
Impose holding period requirement for claiming foreign tax credits
with respect to dividends;
Penalties for failure to file disclosure of exemption for income
from the international operation of ships or aircraft by foreign
persons;
Limitation on treaty benefits for payments to hybrid entities;
Interest on underpayment reduced by foreign tax credit carryback;
Determination of period of limitations relating to foreign tax credits;
Optional methods for computing SECA combined;
Simplified reporting for partners of partnerships;
Simplified audit procedure for large partnerships;
Treatment of funeral trusts;
Replace truck excise tax deduction for tire value with tax credit
for excise tax paid on tires;
Reinstate LUST excise tax and extend through 9/30/02;
Modify vaccine excise tax;
Impose telephone excise tax on prepaid telephone cards; and
Earned income credit compliance provisions.
The costs required to comply with each Federal private sector mandate
generally are no greater than the estimated budget effects of the
provision. Benefits from the provisions include improved administration
of the Federal income tax laws and a more accurate measurement of income
for Federal income tax purposes. In addition, the extension and
modification of the Airport and Airway Trust Fund excise taxes are
designed to fund Federal administration of the airways and other
important air services. The Committee believes the benefits of the bill
are greater than the costs required to comply with the Federal private
sector mandates contained in the bill.
The revenue-raising provisions of the bill are used to offset
partially the costs of a child credit for certain low- and middle-income
taxpayers, tax incentives for higher education (including the
Administration's HOPE credit), capital gains tax relief, reduced estate
and gift taxes, alternative minimum tax relief, and other important tax
incentives. These provisions are generally designed to ease the burdens
of Federal income and estate taxation on individuals and small business
and the revenue-raising provisions of the bill are critical to achieving
these goals.
The provision to extend the Airport and Airway Trust Fund taxes, the
provision relating to State and local tax refund offsets, and the
modifications to the vaccine excise tax impose Federal intergovernmental
mandates. The staff of the Joint Committee on Taxation estimates that
the direct costs of complying with these Federal intergovernmental
mandates will not exceed $50,000,000 in either the first fiscal year or
in any one of the 4 fiscal years following the first fiscal year. The
Committee intends that the Federal intergovernmental mandates be
unfunded because, in the case of the Airport and Airway Trust Fund
taxes, the mandates fund the maintenance of U.S. airports and airways
and the Committee believes that it is appropriate for State, local, and
tribal governments to bear their allocable share of the responsibility
for such funding. In the case of the vaccine excise tax, the Committee
believes it appropriate for all purchasers of vaccines to pay the excise
tax, which is used to compensate victims for injuries suffered from
vaccines. In the case of the other Federal intergovernmental mandates,
the Committee believes that these provisions are necessary to assure the
effective administration of the Federal tax laws.
The revenue provisions of the bill generally affect activities that
are only engaged in by the private sector. The provision extending the
Airport and Airway Trust Fund excise taxes and the modifications to the
vaccine excise tax are imposed both on the private sector and on State,
local, and tribal governments and, thus, do not affect the competitive
balance between such governments and the private sector.
e. applicability of house rule xx15(c)
Rule XXI5(c) of the Rules of the House of Representatives provides
that no bill or joint resolution, amendment, or conference report
carrying a Federal income tax rate increase shall be considered as
passed or agreed to unless so determined by a vote of not less than
three-fifths of the Members voting. Rule XXI5(d) of the Rules of the
House of Representatives prohibits retroactive Federal income tax rate
increases. These rules apply only to existing specific statutory Federal
income tax rates in section 1 (a) (e), section 11(b) or section 55(b) of
the Internal Revenue Code of 1986, or adding new income tax rates to the
highest of such specific income tax rates. The Committee has carefully
reviewed the provisions of the bill to determine whether any of these
provisions constitute a Federal income tax rate increase within the
meaning of the House rules. It is the opinion of the Committee that
there is no provision in the bill that constitutes a Federal income tax
rate increase within the meaning of House rule XXI5 (c) or (d).
MISCELLANEOUS HOUSE REPORT REQUIREMENTS
CONGRESSIONAL BUDGET OFFICE ESTIMATE
Section 403 of the Congressional Budget Act and clause 2(l)(3)(B) of
rule XI require reports to include a timely submitted cost estimate by
the Congressional Budget Office (CBO). CBO provided an estimate of the
legislation submitted by the Committee on Ways and Means which is
included under the appropriate title.
CONSTITUTIONAL AUTHORITY STATEMENT
Clause 2(l)(4) of rule XI, as amended by section 13 of H. Res. 5,
requires each committee report on a bill or joint resolution of a public
character to include a statement citing the specific powers granted to
the Congress by the Constitution to enact the proposed law. The
Committee on the Budget states that its action in reporting this bill is
derived from Article I of the Constitution, Section 5 (``Each House may
determine the Rules of its Proceedings'') and Section 8 (``The Congress
shall have the power to make all Laws which shall be necessary and
proper . . .'').
BUDGET COMMITTEE OVERSIGHT FINDINGS
Clause 2(l)(3)(A) of rule XI requires each committee report to
contain oversight findings and recommendations required pursuant to
clause (2)(b)(1) of rule X. The Committee on the Budget has examined its
activities over the past year and has determined that there are no
specific oversight findings on the text of the reported bill.
OVERSIGHT FINDINGS AND RECOMMENDATIONS OF THE COMMITTEE ON GOVERNMENT
REFORM AND OVERSIGHT
Clause 2(l)(3)(D) of rule XI requires each committee report to
contain a summary of oversight findings and recommendations made by the
Government Reform and Oversight Committee pursuant to clause 4(c)(2) of
rule X, whenever such findings have been timely submitted. The Committee
on the Budget has received no such findings or recommendations from the
Committee on Government Reform and Oversight on the text of the reported
bill.
COMMITTEE VOTES
Clause 2(l)(2)(B) of rule XI requires each committee report to
accompany any bill or resolution of a public character, ordered to
include the total number of votes cast for and against on each rollcall
vote on a motion to report and any amendment offered to the measure or
matter, together with the names of those voting for and against.
On June 20, 1997, the committee met in open session, a quorum being
present. The committee ordered reported the text of the Revenue
Reconciliation Act of 1997 pursuant to the reconciliation instructions
contained in the conference report on H.Con.Res. 84, the Concurrent
Resolution on the Budget for Fiscal Year 1998.
The following votes were taken by the committee:
1. Mr. Hobson moved that the committee order reported with a
favorable recommendation the text of the Revenue Reconciliation Act of
1997, pursuant to clause 1 of rule XX and authorize the chairman to
offer a motion to go to conference. The motion was agreed to by a
rollcall vote of 20 ayes and 12 noes.
Aye No Pres Aye No Pres
Mr. Kasich, Chairman X Mr. Spratt, Ranking X
Mr. Hobson X Mr. McDermott X
Mr. Shays X Mr. Mollohan
Mr. Herger X Mr. Costello X
Mr. Bunning Mrs. Mink X
Mr. Smith of Texas Mr. Pomeroy
Mr. Miller X Ms. Woolsey X
Mr. Franks X Ms. Roybal-Allard
Mr. Smith of Michigan X Ms. Rivers X
Mr. Inglis Mr. Doggett X
Ms. Molinari X Mr. Thompson
Mr. Nussle X Mr. Cardin X
Mr. Hoekstra X Mr. Minge X
Mr. Shadegg X Mr. Baesler
Mr. Radanovich X Mr. Bentsen X
Mr. Bass X Mr. Davis X
Mr. Neumann X Mr. Sherman
Mr. Parker X Mr. Weygand
Mr. Ehrlich X Mrs. Clayton
Mr. Gutknecht X
Mr. Hilleary X
Ms. Granger X
Mr. Sununu X
Mr. Pitts X
2. Mr. McDermott moved that the Committee on the Budget direct its
Chairman to request, on behalf of the committee, that the rule for the
floor consideration of the second (revenue) reconciliation bill make in
order an amendment to insert correction of the marriage penalty and to
strike tax provisions that explode in cost and to strike certain
corporate tax cuts. The motion failed by a rollcall vote of 11 ayes and
21 noes.
Aye No Pres Aye No Pres
Mr. Kasich, Chairman X Mr. Spratt, Ranking X
Mr. Hobson X Mr. McDermott X
Mr. Shays X Mr. Mollohan
Mr. Herger X Mr. Costello X
Mr. Bunning Mrs. Mink X
Mr. Smith of Texas Mr. Pomeroy
Mr. Miller X Ms. Woolsey X
Mr. Franks X Ms. Roybal-Allard
Mr. Smith of Michigan X Ms. Rivers X
Mr. Inglis Mr. Doggett X
Ms. Molinari X Mr. Thompson
Mr. Nussle X Mr. Cardin X
Mr. Hoekstra X Mr. Minge X
Mr. Shadegg X Mr. Baesler
Mr. Radanovich X Mr. Bentsen X
Mr. Bass X Mr. Davis X
Mr. Neumann X Mr. Sherman
Mr. Parker X Mr. Weygand
Mr. Ehrlich X Mrs. Clayton
Mr. Gutknecht X
Mr. Hilleary X
Ms. Granger X
Mr. Sununu X
Mr. Pitts X
3. Mr. Cardin moved that the Committee on the Budget direct its
Chairman request, on behalf of the committee, that the rule for floor
consideration of the second (revenue) reconciliation bill shall make in
order an amendment to provide that the children's tax credit be
available to families before any benefit for which the family is
eligible under the Earned Income Tax Credit is calculated, and to
provide that the dependent tax credit shall not cause any reduction in
the children's tax credit. The motion failed by a rollcall vote of 11
ayes and 21 noes.
Aye No Pres Aye No Pres
Mr. Kasich, Chairman X Mr. Spratt, Ranking X
Mr. Hobson X Mr. McDermott X
Mr. Shays X Mr. Mollohan
Mr. Herger X Mr. Costello X
Mr. Bunning Mrs. Mink X
Mr. Smith of Texas Mr. Pomeroy
Mr. Miller X Ms. Woolsey X
Mr. Franks X Ms. Roybal-Allard
Mr. Smith of Michigan X Ms. Rivers X
Mr. Inglis Mr. Doggett X
Ms. Molinari X Mr. Thompson
Mr. Nussle X Mr. Cardin X
Mr. Hoekstra X Mr. Minge X
Mr. Shadegg X Mr. Baesler
Mr. Radanovich X Mr. Bentsen X
Mr. Bass X Mr. Davis X
Mr. Neumann X Mr. Sherman
Mr. Parker X Mr. Weygand
Mr. Ehrlich X Mrs. Clayton
Mr. Gutknecht X
Mr. Hilleary X
Ms. Granger X
Mr. Sununu X
Mr. Pitts X
4. Mr. Minge moved that the Committee on the Budget direct its
Chairman to request, on behalf of the committee, that the rule for the
floor consideration of the second (revenue) reconciliation bill permit a
floor amendment offered by Mr. Minge, or his designee, regarding
balanced budget enforcement procedures which apply to spending revenues.
The motion failed by voice vote.
5. Mr. Minge moved that the Committee on the Budget direct its
Chairman to request, on behalf of the committee, that the rule for the
floor consideration of the second (revenue) reconciliation bill permit a
floor amendment offered by Mr. Minge, or his designee, to strike Section
1043 reducing the ethanol tax credit and replace lost revenues through a
one-year delay in the phase out of the alternative minimum tax
applicable to business activities. The motion was withdrawn.
6. Mr. Davis moved that the Committee on the Budget direct its
Chairman to request, on behalf of the committee, that the rule for the
floor consideration of the second (revenue) reconciliation bill should
make in order an amendment to replace the provisions in the bill
providing tax relief for higher education expenses with the proposals
initiated by President Clinton, as included in the Ways and Means
Democrats' alternative. The motion failed by voice vote.
7. Mr. Spratt moved that the Committee on the Budget direct its
Chairman to request, on behalf of the committee, that the rule for the
floor consideration of the second (revenue) reconciliation bill strike
the proposal providing special tariff and quota protection for products
such as textiles, apparels, footwear, tuna, petroleum and petroleum
products coming from the Caribbean Basin Initiative beneficiary nations.
The motion failed by voice vote.
CHANGES IN EXISTING LAW
Clause 3 of rule XIII provides that reports include the text of
statutes that are proposed to be repealed and a comparative print of
that part of the bill proposed to be amended whenever the bill repeals
or amends any statute. The required matter is included in the report
language for the legislative recommendations submitted by the Committee
on Ways and Means and reported to the House by the Committee on the
Budget.
UNFUNDED MANDATE STATEMENT
Section 423 of the Congressional Budget and Impoundment Control Act
of 1974 requires a statement of whether the provisions of the reported
bill include unfunded mandates. The committee received a letter
regarding unfunded mandates from the Director of the Congressional
Budget Office. [See the Congressional Budget Office Cost Estimate.]
VIEWS OF THE MEMBERS OF COMMITTEES SUBMITTING RECONCILIATION
RECOMMENDATIONS
The views following are from members of committees that have
submitted reconciliation recommendations pursuant to H. Con. Res. 84.
Although not technically required under rule XI, these views include
those submitted by the authorizing committees that submitted the
reconciliation recommendations that comprise the text of the bill.
Offset Folios 07 to 042 Insert Here
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