[Analytical Perspectives]
[Federal Receipts and Collections]
[3. Federal Receipts]
[From the U.S. Government Publishing Office, www.gpo.gov]
========================================================================
FEDERAL RECEIPTS AND COLLECTIONS
========================================================================
[[Page 41]]
3. FEDERAL RECEIPTS
Receipts (budget and off-budget) are taxes and other collections from
the public that result from the exercise of the Government's sovereign
or governmental powers. The difference between receipts and outlays
determines the surplus or deficit.
Growth in receipts.--Total receipts in 1999 are estimated to be
$1,742.7 billion, an increase of $84.9 billion or 5.1 percent relative
to 1998. This increase is largely due to assumed increases in incomes
resulting from both real economic growth and inflation. Receipts are
projected to grow at an average annual rate of 3.9 percent between 1999
and 2003, rising to $2,028.2 billion.
As a share of GDP, receipts are projected to decline from 19.9 percent
in 1998 to 19.6 percent in 2003.
Table 3-1. RECEIPTS BY SOURCE--SUMMARY
(In billions of dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Estimate
Source 1997 actual -----------------------------------------------------------------------------------
1998 1999 2000 2001 2002 2003
--------------------------------------------------------------------------------------------------------------------------------------------------------
Individual income taxes............................... 737.5 767.8 791.5 804.6 833.4 877.1 915.5
Corporation income taxes.............................. 182.3 190.8 198.0 202.9 209.2 214.7 220.4
Social insurance and retirement receipts.............. 539.4 571.4 595.9 623.0 649.0 677.8 706.5
(On-budget)......................................... (147.4) (155.4) (161.8) (169.1) (176.3) (183.5) (189.9)
(Off-budget)........................................ (392.0) (416.0) (434.1) (453.9) (472.7) (494.3) (516.6)
Excise taxes.......................................... 56.9 55.5 72.0 69.6 71.6 74.0 74.6
Estate and gift taxes................................. 19.8 20.4 20.5 21.6 22.6 24.4 25.6
Customs duties........................................ 17.9 18.4 18.2 19.5 20.4 22.4 24.0
Miscellaneous receipts................................ 25.5 33.5 46.7 52.2 56.4 59.0 61.4
-------------------------------------------------------------------------------------------------
Total receipts...................................... 1,579.3 1,657.9 1,742.7 1,793.6 1,862.6 1,949.3 2,028.2
(On-budget)....................................... (1,187.3) (1,241.9) (1,308.6) (1,339.7) (1,389.9) (1,455.0) (1,511.5)
(Off-budget)...................................... (392.0) (416.0) ( 434.1) (453.9) (472.7) (494.3) (516.6)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table 3-2. CHANGES IN RECEIPTS
(In billions of dollars)
----------------------------------------------------------------------------------------------------------------
Estimate
-----------------------------------------------------------------
1998 1999 2000 2001 2002 2003
----------------------------------------------------------------------------------------------------------------
Receipts under tax rates and structure in
effect January 1, 1998 \1\................... 1,657.9 1,728.7 1,774.4 1,837.3 1,918.0 1,991.8
Social security (OASDI) taxable earnings base
increases:...................................
$68,400 to $70,800 on Jan. 1, 1999.......... ......... 1.1 3.0 3.3 3.6 3.9
$70,800 to $74,100 on Jan. 1, 2000.......... ......... ......... 1.6 4.1 4.5 4.9
$74,100 to $76,800 on Jan. 1, 2001.......... ......... ......... ......... 1.3 3.3 3.7
$76,800 to $79,800 on Jan. 1, 2002.......... ......... ......... ......... ......... 1.4 3.7
$79,800 to $82,800 on Jan. 1, 2003.......... ......... ......... ......... ......... ......... 1.4
Proposals \2\................................. -0.1 12.9 14.7 16.7 18.5 18.7
-----------------------------------------------------------------
Total, receipts under existing and proposed
legislation................................ 1,657.9 1,742.7 1,793.6 1,862.6 1,949.3 2,028.2
----------------------------------------------------------------------------------------------------------------
\1\ These estimates assume a social security taxable earnings base of $68,400 through 2003.
\2\ Net of income offsets.
[[Page 42]]
ENACTED LEGISLATION
Several laws were enacted in 1997 that have an effect on governmental
receipts. The major legislative changes affecting receipts are described
below.
Airport and Airway Trust Fund Tax Reinstatement Act of 1997.--This Act
reinstated, through September 30, 1997, aviation excise taxes that
expired on December 31, 1996. The reinstated taxes on commercial air
transportation included a 10-percent excise tax on domestic passenger
tickets, a $6-per-person international departure tax, and a 6.5-percent
domestic air freight excise tax. The reinstated taxes also included an
excise tax on fuels used in general aviation of 17.5 cents per gallon
for jet fuel and 15 cents per gallon for aviation gasoline. In addition,
the Act authorized the Treasury Department to transfer to the Airport
and Airway Trust Fund any aviation excise taxes collected during the
fourth quarter of calendar year 1996 but not remitted to the Federal
government during that period.
Taxpayer Relief Act of 1997. --This Act, together with the Balanced
Budget Act of 1997, implements the bipartisan budget agreement announced
on May 2, 1997. The legislation includes, with certain modifications,
the key features of the Administration's proposals to give middle-income
families the tax relief they need to help raise their children, save for
the future, and pay for postsecondary education. In addition, the
provisions of the Act promote a fairer tax system and encourage economic
growth, while being fiscally responsible. The major provisions of the
Act are described below.
Family Tax Relief
Provide tax credit for dependent children.--A credit is allowed for
each dependent child under the age of 17. The credit equals $400 for
1998 and rises to $500 for 1999 and subsequent years. The credit is
phased out for taxpayers with adjusted gross income (AGI) in excess of
the following thresholds: $110,000 for married taxpayers filing a joint
return, $75,000 for a single taxpayer or head of household, and $55,000
for married taxpayers filing a separate return. The amount of the credit
and the thresholds are not indexed for inflation. The phase-out rate is
$50 for each $1,000 of modified AGI (or fraction thereof) in excess of
the threshold. For low-income families with three or more children, a
refundable child credit is available to the extent that their income and
employee payroll taxes exceed their earned income tax credit.
Education Tax Incentives
Provide tax credits for higher education tuition expenses.--Taxpayers
are allowed to claim a per-student nonrefundable tax credit (Hope
Credit) for qualified tuition and fees for enrollment of the taxpayer,
the taxpayer's spouse or the taxpayer's dependent in a post-secondary
degree or certificate program. To be eligible for the credit, a student
must be enrolled on at least a half-time basis. The Hope Credit is equal
to 100 percent of the first $1,000 of qualified expenses and 50 percent
of the next $1,000 of qualified expenses, for a maximum credit of $1,500
per student. The maximum credit is indexed for inflation. The Hope
Credit is available for expenses paid after December 31, 1997, for
education furnished in academic periods beginning after that date, and
is available for only the first two years of a student's post-secondary
education. Alternatively, taxpayers are allowed a nonrefundable Lifetime
Learning Credit for all postsecondary education, including graduate
education. The credit is equal to 20 percent of qualified tuition and
fees paid during the taxable year on behalf of the taxpayer, the
taxpayer's spouse, or the taxpayer's dependent. A maximum credit of
$1,000 per family is provided for expenses paid after June 30, 1998 and
before January 1, 2003; the maximum credit increases to $2,000 per
family effective for expenses paid after December 31, 2002. There is no
limit on the number of years for which the Lifetime Learning Credit may
be claimed. With respect to an eligible student, a taxpayer may elect
either the Hope Credit, the Lifetime Learning Credit, or the exclusion
from gross income for withdrawals from an education savings account
(discussed below), but only one of these preferences may be used in a
taxable year. Both credits are phased out for married taxpayers filing a
joint return with modified AGI between $80,000 and $100,000 and for
single taxpayers and heads of households with modified AGI between
$40,000 and $50,000. The phase-out ranges will be indexed for inflation
beginning in 2002.
Provide deduction for student loan interest.--Interest paid on a
qualified education loan during the first 60 months that payment is
required is deductible for income tax purposes, effective for payments
due and paid after December 31, 1997. The maximum allowable deduction is
$1,000 in 1998, $1,500 in 1999, $2,000 in 2000 and $2,500 in 2001 and
subsequent years. The maximum amount is not indexed for inflation. In
addition, the deduction is phased out ratably for single taxpayers with
AGI between $40,000 and $55,000 and for married taxpayers filing a joint
return with AGI between $60,000 and $75,000. The phase-out ranges are
indexed for inflation beginning after 2002.
Expand tax preferences provided qualified State tuition programs.--
Qualified State tuition programs (programs eligible for tax-exempt
status and deferral of tax on earnings) are expanded to include State
programs where individuals prepay for room and board, in addition to
tuition, fees, books and supplies. This Act also expands the definition
of eligible institution, expands the definition of ``member of the
family'' with regard to tax-free rollovers of credits or account
balances, and clarifies the estate and gift tax treatment of
contributions to such programs. These modifications generally are
effective after December 31, 1997.
[[Page 43]]
Provide penalty-free withdrawals from Individual Retirement Accounts
(IRAs) for education expenses.--Penalty-free withdrawals are permitted
from IRAs for qualified higher education expenses of the taxpayer, the
taxpayer's spouse, and the children and grandchildren of the taxpayer
and the taxpayer's spouse. The provision applies to distributions made
after December 31, 1997 with respect to expenses paid after that date
for education furnished in academic periods beginning after that date.
Establish education savings accounts for children under 18.--Effective
for taxable years beginning after December 31, 1997, taxpayers may
contribute up to $500 per year, per beneficiary under age 18, to an
education savings account. Earnings on contributions accumulate tax-free
and distributions are excludable from gross income to the extent that
the distribution does not exceed qualified higher education expenses
incurred during the year the distribution is made. The earnings portion
of a distribution not used to cover qualified education expenses is
includable in the gross income of the beneficiary and is generally
subject to an additional 10-percent tax. However, prior to the
beneficiary reaching age 30, tax-free (and penalty-free) rollovers of
account balances may be made to an education IRA benefitting another
family member. The contribution limit is phased out ratably for married
couples filing a joint return with AGI between $150,000 and $160,000 and
for single taxpayers and heads of households with AGI between $95,000
and $110,000. If a taxpayer uses tax-free education savings account
withdrawals for a student's qualified education expenses in a taxable
year, neither the Hope Credit nor the Lifetime Learning Credit may be
claimed in that year for the same student's education expenses.
Extend exclusion for employer-provided educational assistance.--
Certain amounts paid by an employer for undergraduate educational
assistance expenses are excluded from the employee's gross income for
income and payroll tax purposes. This exclusion, which was scheduled to
expire with respect to undergraduate education beginning after June 30,
1997, is extended to apply to undergraduate education courses beginning
before June 1, 2000. The exclusion is limited to $5,250 of undergraduate
educational assistance with respect to an individual during a calendar
year.
Modify limit on qualified section 501(c)(3) private activity bonds.--
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 provided in
law. One such exception is for private activity bonds issued by certain
tax-exempt organizations (section 501(c)(3) organizations) to finance
activities that do not constitute an unrelated trade or business. The
$150 million limit on the amount of outstanding bonds issued by an
organization for other than hospital purposes is repealed, effective for
section 501(c)(3) bonds isued after August 5, 1997 that are used to
finance capital expenditures incurred after that date.
Enhance deduction for corporate contributions of computer technology
and equipment.--Under current law augmented deductions are provided for
certain corporate contributions of inventory property and scientific
equipment. The amount of augmented deduction available to a corporation
making these contributions 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 amount of augmented
deduction cannot exceed twice the basis of the donated property.
Effective for contributions made in taxable years beginning after 1997
and before January 1, 2000, the list of contributions that qualify for
the augmented deduction is expanded to include gifts of computer
technology and equipment to be used within the United States for
educational purposes in any of grades K-12.
Provide tax credit for holders of qualified zone academy bonds.--
Certain financial institutions that hold qualified zone academy bonds
are provided a nonrefundable tax credit in an amount equal to a credit
rate (set by the Department of Treasury) multiplied by the face amount
of the bond. The tax credit is includable in the gross income of the
holder as interest. A qualified zone academy bond is any bond issued by
a State or local government, provided that (1) 95 percent of the
proceeds are used for the purpose of renovating, providing equipment to,
developing course materials for use at, or training teachers and other
school personnel in a qualified zone academy and (2) private entities
have promised to contribute to the qualified zone academy certain
equipment, technical assistance or training, employee services, or other
property or services with a value equal to at least 10 percent of the
bond proceeds. A total of $400 million of qualified zone academy bonds
may be issued in each of 1998 and 1999. The bond cap is allocated each
year to the States according to their respective populations of
individuals below the poverty line; any unused allocation may be carried
into subsequent years.
Savings and Investment Incentives
Expand Individual Retirement Accounts (IRAs).--Under prior law,
eligibility for a deductible IRA was phased out for a single taxpayer
with AGI between $25,000 and $35,000 and a married taxpayer filing a
joint return with AGI between $40,000 and $50,000, if the individual (or
the individual's spouse) was an active participant in an employer-
sponsored retirement plan. Under this Act, the AGI thresholds and phase-
out ranges are doubled over time. For 1998, eligibility is phased out
for single taxpayers with AGI between $30,000 and $40,000, and for
couples filing a joint return with AGI between $50,000 and $60,000. For
1999 through 2002, the phase-out ranges are increased by $1,000 per
year. For 2003, eligibility is phased out for single taxpayers with AGI
between $40,000 and
[[Page 44]]
$50,000, and for couples filing a joint return with AGI between $60,000
and $70,000. For 2004 and later years, the phase-out ranges are
increased by $5,000 per year until the phase-out range is $50,000 to
$60,000 for single taxpayers (2005 and subsequent years) and $80,000 to
$100,000 for couples filing a joint return (2007 and subsequent years).
Spouses of individuals who are active participants in an employer-
sponsored retirement plan, but who are not themselves active
participants, are permitted to make deductible contributions to an IRA.
This spousal deduction is phased out for taxpayers with AGI between
$150,000 and $160,000.
A new, tax-free nondeductible IRA called the ``Roth IRA'' is created.
Eligibility for participation in these IRAs is phased out for single
taxpayers with AGI between $95,000 and $110,000 and for married couples
filing a joint return with AGI between $150,000 and $160,000. Taxpayers
with AGI of less than $100,000 are eligible to roll over or convert an
existing IRA to a Roth IRA. Distributions from the Roth IRA generally
are tax free if (i) made more than 5 years after an account has been
established, and (ii) made after age 59\1/2\, upon death or disability,
or for first-time homebuyer expenses (up to a $10,000 lifetime cap). The
same exceptions to the 10-percent early withdrawal tax apply to Roth
IRAs and deductible IRAs, and these prior law exceptions have been
expanded to include withdrawals for qualified first-time homebuyer
expenses and qualified education expenses. Annual contributions to all
IRAs for an individual may not exceed $2,000.
Reduce tax rate on capital gains.--The maximum capital gains tax rate
for individuals is reduced from 28 percent to 20 percent (10 percent for
individuals in the 15-percent tax bracket) effective May 7, 1997. The
prior law maximum tax rate of 28 percent is retained for collectibles
and, effective July 29, 1997, for assets held between 1 year and 18
months. Real estate depreciation recapture generally is taxed at a
maximum rate of 25 percent. Beginning in 2001, assets acquired after
December 31, 2000 and held for 5 years will be taxed at favorable rates
of 8 percent (those in the 15-percent bracket) and 18 percent (those in
other tax brackets). A taxpayer holding a capital asset or an asset used
in his/her trade or business on January 1, 2001, may elect to treat the
asset as having been sold on that date for its fair market value and as
having been reacquired at the market price. Taxes must be paid on any
gain realized as a result of the election; losses are disallowed.
Provide capital gains exclusion on sale of principal residence.--Under
prior law gains on the sale of a taxpayer's principal residence were
subject to the capital gains tax; however, taxes on the gain could be
deferred through the purchase of a new home of equal or greater value
within a specified period of time. Taxpayers over 55 could elect to take
a one-time exclusion of up to $125,000 of gain from the sale of their
home. Effective for sales on or after May 7, 1997, up to $500,000 of
gain from the sale of a taxpayer's principal residence ($250,000 for a
single taxpayer) is excluded from tax. 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. To be eligible for the exclusion, a taxpayer generally
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.
Alternative Minimum Tax (AMT) Provisions
Exempt small corporations from the AMT and conform AMT depreciation
lives to the regular tax.--For taxable years beginning after December
31, 1997, the corporate AMT is repealed for small businesses. A
corporation with average gross receipts of less than $5 million for
three taxable years, the last of which begins after December 31, 1996,
is a small business corporation for any taxable year beginning after
December 31, 1997. The exemption continues to apply as long as the
business has three-year average gross receipts of less than $7.5
million. In addition, for property placed in service after December 31,
1998, the recovery periods used for purposes of the AMT depreciation
adjustment are equal to the recovery periods used for purposes of the
regular tax under present law.
Estate, Gift, and Generation-Skipping Tax Provisions
Increase estate and gift tax unified credit.--Under prior law, a
unified estate and gift tax credit of $192,800 was provided, which
effectively exempted the first $600,000 of cumulative taxable transfers
from tax. Under this Act, a phased-in increase in the unified credit
increases the effective exemption to $1,000,000 in 2006. The effective
exemption is $625,000 for decedents dying and gifts made in 1998,
$650,000 in 1999, $675,000 in 2000 and 2001, $700,000 in 2002 and 2003,
$850,000 in 2004, $950,000 in 2005, and $1,000,000 in 2006 and
subsequent years.
Provide estate tax exclusion for qualified family-owned businesses,
including farms.--If ``family-owned business interests'' comprise more
than 50 percent of a decedent's estate and certain other requirements
are met, the first $1 million in qualified family-owned business
interests may be excluded from a decedent's taxable estate. This
exclusion, which is effective with respect to decedents dying after
December 31, 1997, is in addition to the unified credit; however, the
total amount excluded from tax is capped at $1.3 million.
Reduce estate tax for certain land subject to permanent conservation
easement.--A 40-percent estate tax exclusion is provided for the value
of any land subject to a qualified conservation easement that meets
specified requirements. The maximum allowable exclusion is $100,000 in
1998, $200,000 in 1999, $300,000 in 2000, $400,000 in 2001 and $500,000
in 2002 and subsequent years. The exclusion may be taken in addition to
the maximum exclusion for qualified family-owned business interests and
applies to decedents dying after December 31, 1997.
[[Page 45]]
Prohibit the revaluation of gifts for estate tax purposes after
expiration of 3-year statute of limitations.--Estate and gift taxes
generally must be assessed within 3 years after the filing of the
return. In the past, in order to determine the appropriate tax rate
bracket and unified credit for the estate tax, the Courts generally
permitted the revaluation of a gift for which the statute of limitation
period had expired. Effective for gifts made after August 5, 1997,
revaluation of a gift for which the limitations period has expired is no
longer permitted.
Expiring Provisions
Extend research and experimentation tax credit.--The 20-percent tax
credit for certain incremental research and experimentation expenditures
is extended to apply to expenditures paid or incurred during the period
June 1, 1997 through June 30, 1998.
Extend orphan drug tax credit.--The 50-percent nonrefundable tax
credit provided for qualified clinical testing expenses paid or incurred
in the testing of certain drugs for rare diseases or conditions
(generally known as ``orphan drugs'') is permanently extended, effective
for expenses paid or incurred after May 31, 1997.
Extend deduction for contributions of stock to private foundations.--
The deduction for a contribution of property to a private foundation is
limited to the adjusted basis of the contributed property. However,
prior law allowed a taxpayer who contributed qualified appreciated stock
to a private foundation before June 1, 1997 to deduct the full fair
market value of the stock, rather than the adjusted basis of the
contributed stock. This Act extends the rule for private foundations
through June 30, 1998.
Extend work opportunity tax credit, with modifications.--Under prior
law, an employer hiring individuals from one or more of seven targeted
groups was allowed a work opportunity tax credit equal to 35 percent of
the first $6,000 in qualified first-year wages paid to a qualified
individual beginning work after September 30, 1996 and before October 1,
1997. For wages paid to be eligible for the credit, the qualified
individual had to be 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). This Act
extends the credit to apply to wages paid to qualified individuals
beginning work after September 30, 1997 and before July 1, 1998. In
addition, a credit of 25 percent is provided for wages paid to a
qualified individual employed at least 120 and fewer than 400 hours, and
the credit is increased to 40 percent for wages paid to a qualified
individual employed for at least 400 hours. Eligibility is extended to
members of families receiving AFDC benefits (or its successor programs)
and to SSI beneficiaries.
Extend Generalized System of Preferences (GSP).--Under GSP, duty-free
access is provided to over 4,000 items from eligible developing
countries that meet certain worker rights, intellectual property
protection, and other criteria. This program, which had expired after
May 31, 1997, is temporarily extended through June 30, 1998. Refunds of
any duty paid between May 31, 1997 and August 5, 1997 are provided upon
request of the importer.
Extend unemployment surtax and increase the statutory limit on Federal
Unemployment Act (FUTA) trust fund balances.--The temporary unemployment
surtax of 0.2 percent imposed on employers, which was scheduled to
expire with respect to wages paid after December 31, 1998, is extended
through December 31, 2007. In addition, the statutory limit on balances
in the Federal Unemployment Account (FUA) of the FUTA trust fund is
increased from .25 percent to .50 percent of covered wages.
District of Columbia (D.C.) Tax Incentives
Designate D.C. Enterprise Zone.--Certain economically depressed census
tracts within D.C. are designated as the ``D.C. Enterprise Zone.'' The
following tax incentives are available to businesses and individual
residents within the zone: (1) a 20-percent wage credit for the first
$15,000 of wages paid to D.C. residents who work in the zone; (2) an
additional $20,000 of expensing under section 179 for qualified zone
property; and (3) special tax-exempt financing for certain zone
facilities. The D.C. Enterprise Zone designation will remain in effect
for the period from January 1, 1998 through December 31, 2002.
Provide zero-percent capital gains rate on certain Enterprise Zone
property.--A zero-percent capital gains rate is provided for capital
gains from the sale of certain qualified assets held for more than five
years. To qualify for the zero-percent rate, the asset must be within a
census tract within the D.C. Enterprise Zone where the poverty rate is
not less than 10 percent.
Provide tax credit to first-time homebuyers.--A tax credit of up to
$5,000 of the purchase price is provided first-time homebuyers of a
principal residence in the District of Columbia. The credit phases out
for single taxpayers with AGI between $70,000 and $90,000 and for
married couples filing a joint return with AGI between $110,000 and
$130,000. The credit is available with respect to property purchased
after August 4, 1997 and before January 1, 2001.
Welfare-to-Work Tax Credit
Provide welfare-to-work tax credit.--Employers are provided a tax
credit on the first $20,000 of eligible wages paid to qualified
recipients of long-term family assistance (AFDC or its successor
program) during the first two years of employment. The credit is 35
percent of the first $10,000 of eligible wages in the first year of
employment and 50 percent of the first $10,000 of eligible wages in the
second year of employment. The credit is effective for wages paid or
incurred by the employer for a qualified employee who begins work on or
after January 1, 1998 and before May 1, 1999.
[[Page 46]]
Excise Tax Provisions
Repeal excise tax on diesel fuel used in recreational motorboats.--The
24.3-cents-per-gallon excise tax on diesel fuel used in recreational
motorboats is repealed. Under prior law, imposition of this tax had been
suspended through December 31, 1997.
Transfer 4.3-cents-per-gallon General Fund highway fuels tax to the
Highway Trust Fund.--Under prior law 4.3-cents-per-gallon of the excise
tax on gasoline, diesel fuel, and special motor fuels used in highway
vehicles was transferred to the General Fund of the Treasury. Under this
Act, collections from these taxes are deposited in the Highway Trust
Fund, with 3.45-cents-per-gallon allocated to the Highway Account and
.85-cents-per-gallon allocated to the Mass Transit Account. Conforming
amendments ensure that no direct spending increases will occur as a
result of this transfer of funds.
Modify deposit rules for excise taxes on highway motor fuels.--The
excise taxes imposed on highway motor fuels that would otherwise be
required to be deposited with the Treasury after July 31, 1998 and
before September 30, 1998 are not required to be deposited until October
5, 1998, resulting in a shift of collections from 1998 to 1999.
Modify and expand excise tax on vaccines.--Under prior law an excise
tax was imposed on the following vaccines: DPT (diphtheria, pertussis,
tetanus) at $4.56 per dose; DT (diphtheria, tetanus) at $0.06 per dose;
MMR (measles, mumps, or rubella) at $4.44 per dose; and polio at $0.29
per dose. Effective for sales after August 5, 1997, a uniform rate of
$0.75 per dose on any listed vaccine component is imposed on all
previously taxed vaccines. In addition, the tax is expanded to apply to
HIB (haemophilus influenza type B), Hepatitis B, and varicella
(chickenpox) vaccines
Extend and modify excise taxes deposited in the Airport and Airway
Trust Fund.--Under prior law, the excise taxes deposited in the Airport
and Airway Trust Fund were scheduled to expire after September 30, 1997.
These taxes included a 10-percent excise tax on domestic passenger
tickets, a $6-per-person international departure tax, a 6.5-percent
domestic air freight excise tax, and an excise tax on fuels used in
general aviation of 17.5 cents per gallon for jet fuel and 15 cents per
gallon for aviation gasoline. This Act extends these taxes for 10 years,
through September 30, 2007, with the following modifications:
Tax on domestic passenger tickets.--The 10-percent ad
valorem tax on domestic passenger tickets is replaced with a
combination ad valorem and per-domestic-flight-segment tax.
Effective October 1, 1997 the tax is 9 percent of fare plus $1
per domestic flight segment. The tax changes to 8 percent of
fare and $2 per domestic flight segment effective October 1,
1998; and to 7.5 percent of fare and $2.25 per domestic flight
segment effective October 1, 1999. The ad valorem tax remains
at 7.5 percent, but the per-domestic-flight-segment tax
increases to $2.50 effective January 1, 2000, $2.75 effective
January 1, 2001 and $3 effective January 1, 2002. The $3 rate
is indexed annually for inflation effective January 1, 2003.
The per-domestic-flight-segment tax is not imposed on flight
segments to and from qualified rural airports; the ad valorem
tax on such flights is 7.5 percent of fare. The 7.5 percent ad
valorem tax also applies to payments to air carriers (and
related parties) for the right to award air travel benefits.
Tax on international departures and arrivals.--The $6-per-
passenger international departure tax is increased to $12 per
passenger and extended to apply to international arrivals
effective October 1, 1997. A $6-per-passenger rate is
applicable to the international airspace component of flights
between the 48 contiguous States and Alaska or Hawaii (or
flights between Alaska and Hawaii). Both the $6 and $12 taxes
are indexed annually for inflation effective January 1, 1999.
Deposit schedule for certain aviation taxes.--Deposits of
air passenger taxes otherwise due after August 14, 1997 and
before October 1, 1997 are due on October 10, 1997. In
addition, deposits of air passenger taxes otherwise required
after August 14, 1998 and before October 1, 1998 are due on
October 5, 1998. Deposits of commercial air cargo and aviation
fuels taxes otherwise required to be made after July 31, 1998
and before October 1, 1998 are due on October 5, 1998.
Transfer of General Fund taxes.--The 4.3-cents-per-gallon
excise tax on aviation fuels that was deposited in the General
Fund of the Treasury under prior law is deposited in the
Airport and Airway Trust Fund effective October 1, 1997.
Impose excise taxes on kerosene as diesel fuel.--A 24.3-cents-per-
gallon excise tax is imposed on diesel fuel upon removal from a
registered terminal storage facility unless the fuel is indelibly dyed
and is destined for a nontaxable use. Under prior law, undyed kerosene
was not subject to the diesel fuel excise tax when it was removed from a
terminal. Undyed kerosene was subject to tax, however, when it was
blended with previously taxed diesel fuel. Effective July 1, 1998,
kerosene is taxed as diesel fuel when it is removed from a terminal.
Exceptions are provided for aviation fuel and, to the extent provided in
regulations, for feedstock uses. In addition, special refund rules apply
in certain cases of kerosene used for heating purposes.
Reinstate excise taxes deposited in the Leaking Underground Storage
Tank (LUST) Trust Fund.--Before January 1, 1996, a 0.1-cent-per-gallon
excise tax was levied on gasoline, other motor fuels, methanol and
ethanol fuels, aviation fuels, and on fuels used in inland waterways and
deposited in the LUST Trust Fund. This Act reinstates those taxes
effective October 1, 1997 through March 31, 2005.
Apply communications excise tax to prepaid telephone cards.--A 3-
percent excise tax is imposed on amounts paid for local and toll
telephone service and teletypewriter exchange service. This Act extends
this tax to
[[Page 47]]
apply to amounts paid to communications service providers (in cash or in
kind) for the right to award or otherwise distribute free or reduced-
rate telephone service. The tax is effective for cards sold after
October 31, 1997.
Modify treatment of tires under the heavy highway vehicle retail
excise tax.--A 12-percent retail excise tax is imposed on certain heavy
highway trucks and trailers, and on highway tractors. A separate
manufacturer's excise tax is imposed on tires weighing more than 40
pounds. Under prior law, because tires were taxed separately, the value
of tires installed on highway vehicles was excluded from the 12-percent
retail excise tax on heavy highway vehicles. This Act repeals this
exclusion; instead, a credit for the amount of manufacturers' excise tax
paid on the tires is allowed. This change is effective after December
31, 1997.
Small Business Provisions
Clarify definition of principal place of business for home office
deduction.--The definition of ``principal place of business'' is
expanded to include a home office that is used by the taxpayer to
conduct administrative or management activities of the business,
provided that there is no other fixed location where the taxpayer
conducts substantial administrative or management activities of the
business, regardless of whether such activities are performed by others
at other locations. As under prior law, deductions are allowed only if
the office is exclusively used on a regular basis as a place of business
and, in the case of an employee, only if such exclusive use is for the
convenience of the employer. The expanded definition applies to taxable
years beginning after December 31, 1998.
Increase deduction of health insurance costs for self-employed
individuals.--Under prior law self-employed individuals were allowed a
deduction for the cost of health insurance for themselves and their
spouse and dependents as follows: 40 percent for 1997; 45 percent for
1998 through 2002; 50 percent for 2003; 60 percent for 2004; 70 percent
for 2005; and 80 percent for 2006 and subsequent years. This Act
increases the allowable deduction to 100 percent as follows: 45 percent
for 1998 and 1999; 50 percent for 2000 and 2001; 60 percent for 2002; 80
percent for 2003 through 2005; 90 percent for 2006; and 100 percent for
2007 and subsequent years.
Increase deduction for business meals for certain individuals.--
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. This Act increases the deduction for 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. Such individuals include certain air
transportation employees, interstate truck operators and bus drivers,
certain railroad employees and certain merchant mariners. The increase
in the deductible percentage is phased in as follows: 55 percent for
1998 and 1999, 60 percent for 2000 and 2001, 65 percent for 2002 and
2003, 70 percent for 2004 and 2005, 75 percent for 2006 and 2007, and 80
percent for 2008 and subsequent years.
Increase standard mileage rate for purposes of computing the
charitable deduction.--Effective for taxable years beginning after
December 31, 1997, for purposes of computing the charitable deduction,
the standard mileage rate for the use of a passenger vehicle is
increased from 12 cents per mile to 14 cents per mile.
Incentives for Distressed Areas
Provide tax incentive to clean up environmentally contaminated areas
known as brownfields.--A current deduction is allowed for certain costs
incurred by businesses to remediate environmentally contaminated land in
certain areas. Qualified sites generally are limited to those properties
located in or next to census tracts with a poverty rate of 20 percent or
more, Federal empowerment zones and enterprise communities, and areas
subject to certain Environmental Protection Agency (EPA) Brownfields
Pilots. To claim this incentive, taxpayers are required to obtain from
the appropriate State or local agency verification that the site
satisfies geographic and contamination requirements. The deduction is
available for qualified expenses incurred after August 5, 1997 and
before January 1, 2001.
Expand and modify Empowerment Zone and Enterprise Community program.--
Under the Omnibus Budget Reconciliation Act of 1993 (OBRA 93), certain
tax incentives were provided for nine empowerment zones (6 urban and 3
rural) and 95 enterprise communities. The tax incentives were a 20-
percent employer wage credit, an additional $20,000 of section 179
expensing, and a new category of tax-exempt financing. Qualifying
businesses in empowerment zones were eligible for all three incentives,
while businesses in enterprise communities were eligible only for the
tax-exempt financing. This Act authorizes the designation of two
additional urban empowerment zones within 180 days of enactment;
however, the designations, which generally will remain in effect for 10
years, will not take effect before January 1, 2000. These two additional
zones are subject to the same eligibility criteria as the original 6
urban empowerment zones, and, except for a modification of the wage
credit, generally enjoy the same tax incentives as the original zones.
For these two additional zones the wage credit is modified slightly to
provide that the percentage of wages taken into account for purposes of
determining the wage credit is 20 percent for 2000 through 2004, 15
percent for 2005, 10 percent for 2006, and 5 percent for 2007; the
credit is not available for subsequent years. The Act also authorizes
the designation of an additional 20 empowerment zones before 1999.
Businesses in these 20 additional zones are not eligible for the wage
credit, but are eligible to receive up to $20,000 of additional section
179 expensing, and special tax-exempt financing benefits. The
``brownfields
[[Page 48]]
tax incentive'' provided in this Act (see discussion above) is available
within all designated empowerment zones.
Financial Product Provisions
Require recognition of gain on certain appreciated positions in
personal property.--Gains and losses generally are taken into account
for tax purposes when realized. Gains or losses are usually realized
with respect to a capital asset at the time the asset is sold or
exchanged. However, because of special rules under prior law, many
transactions designed to reduce or eliminate risk of loss and
opportunity for gain on financial assets generally did not cause
realization. For example, taxpayers could lock in gain on securities
without recognizing gain for tax purposes by entering into a ``short
sale against the box,'' that is, the taxpayer could own securities the
same as or substantially identical to the securities borrowed and sold
short. This Act requires in some circumstances recognition of gain (but
not loss) upon entering into a constructive sale of any appreciated
financial position in stock, a debt instrument, or a partnership
interest. A constructive sale occurs when the taxpayer enters into one
of the following transactions with respect to the same or substantially
identical property: (1) a short sale, (2) an offsetting notional
principal contract, (3) a futures or forward contract, or (4) to the
extent provided in regulations, one or more transactions that have
substantially the same effect as one of the described transactions. This
provision generally is effective for constructive sales entered into
after June 8, 1997.
Permit dealers in commodities and traders in securities and
commodities to elect mark-to-market.--This Act permits securities
traders and commodities traders and dealers to elect mark-to-market
accounting similar to that currently required for securities dealers.
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.
Property not held in connection with an electing taxpayer's trading
activity is not subject to the election provided that it is identified
by the taxpayer, under rules similar to the present law rules for
securities dealers, and the electing taxpayer can demonstrate by clear
and convincing evidence that the property bears no relation to its
activities as a trader. Gain or loss recognized by an electing taxpayer
under the provision is ordinary gain or loss. This provision applies to
taxable years ending after August 5, 1997.
Change the treatment of gains and losses on extinguishment.--The tax
law distinguishes between the sale of a right or obligation to a third
party and the extinguishment or retirement of the right or obligation. A
sale to a third party can give rise to capital treatment while an
extinguishment produces ordinary income. Under prior law extinguishment
treatment was eliminated for all debt instruments except those issued by
natural persons and for most options and other positions in actively
traded property. This Act eliminates the remaining portions of the
extinguishment doctrine so that gain or loss attributable to the
cancellation, lapse, expiration, or other termination of any right or
obligation which is (or on acquisition would be) a capital asset in the
hands of the taxpayer is treated as gain or loss from the sale or
exchange of a capital asset. This change applies to property acquired or
positions established 30 days after the date of enactment. In addition,
redemptions of debt issued by natural persons and debt issued before
July 2, 1982 are treated as an exchange and, accordingly, any gain or
loss on that redemption is capital gain or loss effective for debt
issued or purchased after June 8, 1997.
Deny interest deduction on certain debt instruments.--If an instrument
qualifies as equity, the issuer generally does not receive a deduction
for dividends paid. If an instrument qualifies as debt, the issuer may
deduct accrued interest, including original issue discount (OID). The
Act eliminates the deduction for interest and OID on a debt instrument
that is issued by a corporation and that is payable in stock of the
issuer or a related party. The Act applies to debt instruments that are
mandatorily convertible or convertible at the issuer's option into stock
of the issuer or of a related party. The Act does not apply to debt
instruments that are convertible at the holder's option unless, at the
time the instrument is issued, it is substantially certain that the
holder's option will be exercised. This provision generally is effective
for instruments issued after June 8, 1997.
Require reasonable payment assumptions for interest accruals on
certain debt instruments.-- A taxpayer that holds a debt instrument
generally accrues interest income over the life of the instrument.
Certain debt instruments, such as credit card receivables, do not
require the debtors to pay interest if they pay their balances in full
by a specified date. The operation of the interest accrual rules of
prior law provided that, in such instances, the holder could assume that
each debtor would pay its balance by the specified date and, thereby,
avoid accruing interest over the life of the debt instrument. In these
cases, the holder would not accrue any interest income until the
specified date had passed. In the case of a large pool of such debt
instruments, the assumption that each debtor will prepay (and thereby
avoid a finance charge) is unrealistic and results in the mismeasurement
of income. Under the Act, taxpayers that hold large pools of prepayable
debt instruments must accrue interest on the pool by making a reasonable
assumption regarding the timing of payments on the instruments that make
up the pool. The provision is effective for taxable years beginning
after August 5, 1997.
Corporate Organizations and Reorganizations
Require gain recognition for certain extraordinary dividends.--A
corporate shareholder generally is allowed to deduct a percentage of
dividends received from
[[Page 49]]
another domestic corporation. A distribution in redemption of stock may
be treated as a dividend if the shareholder's proportionate interest in
the distributing corporation has not been meaningfully reduced. In
determining if a shareholder's interest has been meaningfully reduced,
the ownership of options to purchase stock may be treated as actual
stock ownership, rather than as a sale of the stock, if it is
essentially equivalent to a dividend. Certain dividends and dividend
equivalent transactions are treated as ``extraordinary'' dividends.
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. If a corporate shareholder
receives an extraordinary dividend, the corporate shareholder must
reduce the basis of the stock to which the distribution relates by the
amount of the nontaxed portion of the dividend (generally the amount of
the dividend that was deducted). Under prior law, if the nontaxed
portion of the dividend exceeded the basis of the stock, the excess was
deferred and not taxed as gain until the sale or disposition of the
stock. Under this Act a corporate shareholder generally is required to
recognize gain immediately with respect to any redemption treated as a
dividend 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. In addition, immediate gain
recognition is required whenever the basis of stock with respect to
which any extraordinary dividend is received is reduced below zero.
These changes generally are 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 May 3, 1995.
Require gain recognition on certain distributions of controlled
corporation stock.--A corporation generally is required to recognize
gain on a distribution of property (including stock of a controlled
corporation) unless the distribution meets certain requirements. Under
prior law, if various requirements were met, including restrictions
relating to acquisitions and dispositions of stock of the distributing
corporation or the controlled corporation, a distribution of the stock
of a controlled corporation generally was tax-free to the distributing
corporation. This Act adopts additional restrictions on acquisitions and
dispositions of the stock of a distributing corporation or controlled
corporation. Under this Act, the distributing corporation is required to
recognize gain on the distribution of the stock of the controlled
corporation if the shareholders of the distributing corporation do not
retain 50-percent or more of the stock interest in either the
distributing or controlled corporation during the four-year period
commencing two years prior to the distribution. In addition,
distributions within an affiliated group of corporations, in connection
with such a distribution or acquisition transaction, are no longer tax
free. These changes generally are effective for distributions after
April 16, 1997.
Reform the tax treatment of certain stock transfers.--Certain sales of
stock to a related corporation are treated as the payment of a dividend
by the purchaser. Such dividends may qualify for the dividends received
deduction; in addition, such dividends may bring with them foreign tax
credits. 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. This Act limits
the amount treated as a dividend (and the associated foreign tax
credits) from the purchaser to the amount of the purchaser's earnings
and profits attributable to stock owned by U.S. persons related to the
seller. The Act also clarifies that a deemed dividend from a purchaser
that is a domestic corporation generally should be treated as an
extraordinary dividend requiring a basis reduction and gain recognition
to the extent that the nontaxed portion exceeds the basis of the shares
transferred. These changes generally are effective for distributions or
acquisitions after June 8, 1997, but do not apply to such distributions
or acquisitions made pursuant to a written agreement that was binding on
that date.
Modify holding period for dividends-received deduction.--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. However,
under prior law, the holding period requirement did not have to be
proximate to the time the dividend distribution was made. This Act
requires that in order to qualify for the dividends-received deduction,
the holding period requirement must be satisfied with respect to that
dividend over a period immediately before or immediately after the
taxpayer becomes entitled to receive the dividend. This change generally
is effective for dividends paid or accrued more than 30 days after
August 5, 1997.
Pension and Employee Benefit Provisions
The Act makes a number of changes affecting pension plans and other
employee benefits, including the following:
Change rule relating to involuntary distributions from retirement
plans.--In the case of a participant who separates from service with the
employer, a qualified retirement plan may cash out the participant's
benefits without the participant's consent if the present value of the
benefits does not exceed a dollar limit. The Act increases this limit
from $3,500 to $5,000 effective for plan years beginning after August 5,
1997.
Repeal excess distribution and excess retirement accumulation taxes.--
Under prior law, an individual's distributions from qualified retirement
plans, tax-sheltered annuities and IRAs, that, in the aggregate,
exceeded
[[Page 50]]
$160,000 in a calendar year (or, if made as a lump sum distribution,
five times that amount) were subject to a 15-percent excise tax on
``excess'' distributions. This excise tax was suspended for
distributions received in 1997, 1998, or 1999. An individual's balance
in retirement plans was subject to an additional 15-percent estate tax
on excess distributions to the extent that the balance exceeded the
present value of a benefit that would not be subject to the 15-percent
excise tax on excess distributions. The Act repeals both the excise tax
on excess distributions (effective for distributions received after
1996) and the estate tax on excess retirement accumulations (effective
for decedents dying after 1996).
Treat matching contributions of self-employed individuals as not
constituting elective deferrals.--Employees may elect to make tax-
deferred elective contributions (``elective deferrals'') to a 401(k)
plan up to an indexed dollar limit ($10,000 for 1998). Employers may
make matching contributions based on the employees' elective deferrals.
Similarly, under a SIMPLE retirement plan, employees may make elective
deferrals (of up to $6,000 per year), and employers may make matching
contributions. Under prior law, matching contributions that were made
for a self-employed individual generally were treated as elective
deferrals and were counted against the dollar limit on elective
deferrals, as well as in the nondiscrimination test applicable to
elective deferrals under a 401(k) plan (the ADP test). The Act changes
this treatment of matching contributions for self-employed individuals.
Instead of subjecting those contributions to the limits on elective
deferrals and to the ADP test, the Act generally treats them like
matching contributions made for employees. This change is effective for
years beginning after 1997 in the case of 401(k) plans and for years
beginning after 1996 in the case of SIMPLE plans.
Change rules affecting State and local government and church plans.--
The Act makes a number of changes affecting retirement plans maintained
by State and local governments and churches, including permanently
exempting governmental plans from the nondiscrimination and minimum
participation rules that otherwise apply to qualified plans. Those rules
generally prohibit plans from discriminating in favor of highly
compensated employees with respect to contributions or benefits,
participation, coverage and compensation counted under the plan. The
exemption generally is effective for taxable years beginning on or after
August 5, 1997.
Increase pension plan full funding limit.--Contributions to a defined
benefit pension plan are subject to a maximum ``full funding'' limit.
Under prior law, the full funding limit generally was the lesser of the
plan's accrued liability (based on projected benefits) or 150 percent of
its current liability (based on benefits accrued to date). The Act
increases the 150-percent-of-current-liability component of the full
funding limit to 155 percent for plan years beginning in 1999 or 2000,
160 percent for plan years beginning in 2001 or 2002, 165 percent for
plan years beginning in 2003 or 2004, and 170 percent for plan years
beginning thereafter. The Act also extends the amortization period, from
ten to twenty years, for amounts that could not be contributed because
of the 150-percent-of-current-liability limit. This change is effective
for plan years beginning after December 31, 1998.
Require increased diversification of 401(k) investments.--The Employee
Retirement Income Security Act of 1974, as amended (ERISA), generally
permits only up to 10 percent of the fair market value of the assets of
a retirement plan to be invested in employer securities or real property
leased to the employer that sponsors the plan. Prior law contained an
exception to this rule permitting defined contribution plans, including
section 401(k) plans, to invest more than 10 percent of their assets in
employer securities or employer real property if the plan authorized
such investments. The Act generally provides that a plan is not
permitted to require that an employee's elective deferrals be invested
in employer securities or employer real property if the employee's
elective deferrals are in excess of one percent of the employee's
eligible compensation and if employer securities and employer real
property exceed 10 percent of the plan's assets. The provision does not
apply to employee stock ownership plans or if the value of assets of all
defined contribution plans of the employer does not exceed 10 percent of
the value of assets of all pension plans maintained by the employer. The
provision is effective for elective deferrals for plan years beginning
after December 31, 1998.
Tax Exempt Organization Provisions
Repeal grandfather rule with respect to pension business of certain
insurers.--Under prior law, that portion of the business of the Teachers
Insurance Annuity Association-College Retirement Equities Fund (TIAA-
CREF) or of Mutual of America that was attributable to pension business
was exempt from tax. Effective for taxable years beginning after
December 31, 1997, TIAA-CREF and Mutual of America are treated for
Federal tax purposes as life insurance companies; that portion of their
business attributable to pension business is no longer exempt from tax.
Foreign Provisions
Place further restrictions on like-kind exchanges involving personal
property.--An exchange of property, like a sale, is generally a taxable
transaction. 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 that is to be held for productive use in a trade
or business or for investment. In general, any kind of real estate is
treated as of a like kind with other real property; however, real
property located in the United States and real property located outside
the United States are not of a like kind. Under prior law, for personal
property, property of a ``like class'' was treated as being of a like
kind; no restrictions applied with regard to location
[[Page 51]]
in or outside the United States. To conform the limitations on exchanges
of personal property to the limitations on exchanges of real property,
this Act provides that personal property predominantly used within the
United States and personal property predominantly used outside the
United States are not ``like-kind'' properties. This change generally is
effective for exchanges after June 8, 1997, unless the exchange is
pursuant to a binding contract in effect on such date.
Impose holding period requirement for claiming foreign tax credits
with respect to dividends.--Under prior law, U.S. persons that received
dividends from a regulated investment company (RIC), generally were
entitled to an indirect credit for foreign taxes paid by the RIC,
regardless of the shareholder's holding period for the RIC stock. A U.S.
corporation that received a dividend from a foreign corporation in which
it had a 10-percent or greater voting interest generally was entitled to
an indirect credit for foreign taxes paid by the foreign corporation,
also regardless of the shareholder's holding period. This Act generally
disallows the foreign tax credits available with respect to a dividend
from a corporation or RIC if the shareholder holds the stock for less
than 16 days in the case of common stock and 46 days in the case of
preferred stock. This provision is effective for dividends paid or
accrued more than 30 days after August 5, 1997.
Allow Foreign Sales Corporation (FSC) benefits for computer software
licenses.--The FSC provisions provide a limited exemption from U.S. tax
for income arising in certain export transactions; under prior law, the
exemption was not available for most exports of intangible property,
including computer software copyrights. This Act extends FSC benefits to
licenses of computer software for reproduction abroad. The provision
applies to gross receipts from computer software licenses attributable
to periods after December 31, 1997. 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.
Increase dollar limitation on exclusion for foreign earned income.--
U.S. citizens generally are subject to U.S. income tax on all their
income, whether derived in the United States or elsewhere. U.S. citizens
living abroad may be eligible to exclude from their income for U.S. tax
purposes certain foreign earned income. In order to qualify for this
exclusion, 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. Under prior law, the maximum exclusion
for foreign earned income for a taxable year was $70,000. This Act
increases the maximum exclusion to $80,000 in increments of $2,000 each
year beginning in 1998. The limitation on the exclusion is indexed for
inflation beginning in 2008.
Other Corporate Provisions
Require registration of certain corporate tax shelters.--Under prior
law promoters of a corporate tax shelter were required to register such
shelters with the Internal Revenue Service (IRS). This Act generally
requires a promoter of a corporate tax shelter to register the shelter
with the Secretary of the Treasury no later than the next business day
after the day when the shelter is first offered to potential users. This
Act also increases the penalty for failing to register in a timely
manner a corporate tax shelter and modifies the substantial
understatement penalty. 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
August 5, 1997.
Treat certain preferred stock as ``boot.''--Under prior law, in
reorganization transactions, no gain or loss was recognized except to
the extent ``other property'' (boot) was received; that is, property
other than certain stock, including preferred stock. Upon the receipt of
``other property,'' gain but not loss was recognized. This Act requires
certain preferred stock that is received in otherwise tax-free
transactions to be treated as ``other property.'' This change generally
is effective for transactions after June 8, 1997 but does not apply to
such transactions made pursuant to a written agreement that was binding
on that date.
Administrative Provisions
Require tax reporting for payments to attorneys.--Treasury regulations
require a payor to report payments of attorney's fees if the payments
are made in the course of a trade or business. However, under prior law
a payor generally was not required to report payments made to
corporations. In addition, if a payment to an attorney was a gross
amount and it could not be determined what portion was the attorney's
fee (as in the case of lump-sum judgments or settlements made jointly
payable to a lawyer and a plaintiff), then no reporting was required.
This Act requires the reporting of gross proceeds on all payments made
to attorneys by a trade or business in the course of the trade or
business. In addition, the prior law exception for reporting payments to
corporations no longer applies to payments made to attorneys. The
provision is effective for payments made after December 31, 1997.
Require reporting of payments to corporations rendering services to
Federal agencies.--All persons engaged in a trade or business and making
payments of $600 or more to another person in remuneration for services
generally must report those payments to the IRS and to the recipient. No
reporting is required if the recipient is a corporation, unless the
payment is made to an attorney (see previous provision). To ensure that
corporations that do business with the Federal Government appropriately
report as income their payments from the Federal Government, this Act
requires execu
[[Page 52]]
tive agencies to report payments of $600 or more made to corporations
for services rendered. An exception is provided for certain classified
or confidential contracts. The provision is effective for returns the
due date of which is more than 90 days after August 5, 1997.
Establish IRS continuous levy and improve debt collection.--Under this
Act a continuous levy is applicable to non-means-tested recurring
Federal payments, such as Federal salaries and pensions, received by
individuals who owe delinquent tax debt. In addition, this Act provides
that the levy attach up to 15 percent of any specified payment due the
taxpayer. A continuous levy of up to 15 percent also applies to
unemployment benefits and means-tested public assistance. The Act 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 levies.
The provision is effective for levies issued after August 5, 1997.
Earned Income Tax Credit (EITC) Compliance Provisions
Deny EITC eligibility for prior acts of recklessness or fraud.--A
taxpayer who fraudulently claims the EITC is denied eligibility for the
subsequent 10 years. A taxpayer who erroneously claims the EITC due to
reckless or intentional disregard of rules or regulations is denied
eligibility for the subsequent 2 years. These sanctions are in
additional to any other penalties imposed by current law and are
effective for taxable years beginning after December 31, 1996.
Require recertification for eligibility if past eligibility was denied
as a result of deficiency procedures.--A taxpayer who has been denied
the EITC as a result of deficiency procedures is denied eligibility in
subsequent years unless evidence of eligibility for the credit is
provided. To demonstrate current eligibility the taxpayer is required to
meet evidentiary requirements established by the Secretary of the
Treasury. Failure to provide this information is treated as a
mathematical or clerical error. A taxpayer who has been recertified as
eligible for the EITC does not have to resubmit this information in the
future unless the IRS again denies the EITC as a result of a deficiency
procedure. The provision is effective for taxable years beginning after
December 31, 1996.
Require tax preparers to fulfill certain due diligence requirements.--
Effective for taxable years beginning after December 31, 1996, tax
return preparers are required to fulfill certain due diligence
requirements with respect to returns they prepare claiming the EITC. The
penalty for failure to meet these requirements, which is in addition to
any other penalties assessed under current law, is $100 for each
failure.
Modify the definition of AGI used to phaseout the EITC.--The EITC is
phased out for individuals with earned income (or AGI, if greater) in
excess of certain amounts. Under prior law, the definition of AGI used
for the phase out of the earned income credit disregarded the following
losses: (1) net capital losses (if greater than zero); (2) net losses
from trusts or 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. This Act modifies
the definition of AGI used for phasing out the credit by adding two
sources of nontaxable income: (1) tax-exempt interest and (2) nontaxable
distributions from pensions, annuities, and individual retirement
arrangements. The Act also increases to 75 percent the percentage of net
losses from business disregarded from the definition of AGI used for the
phase out of the EITC. These changes are effective for taxable years
beginning after December 31, 1997.
Use Federal case registry of child support orders for tax enforcement
purposes.--The Personal Responsibility and Work Opportunity
Reconciliation Act of 1997 mandated the creation of a Federal Case
Registry of Child Support Orders (the FCR) by October 1, 1998. The FCR
is required to include the names, and the State case identification
numbers of individuals who are owed or who owe child support or for whom
paternity is being established. It may also include the social security
numbers (SSNs) of these individuals. Under the Taxpayer Relief Act, the
Secretary of the Treasury is provided access to the FCR not later than
October 1, 1998. Also, by October 1, 1999, the data elements on the
State Case Registry will include the SSNs of children covered by cases
in the Registry, and the States will provide the SSNs of these children
to the FCR.
Expand Social Security Administration (SSA) records for tax
enforcement.--Effective February 1, 1998, SSA is required to obtain SSNs
of both parents on minor children's applications for SSNs. The SSA will
provide this information to the IRS as part of the Data Master File.
This information will enable the IRS to identify questionable claims for
the earned income credit, the dependent exemption, and other tax
benefits before tax refunds are paid.
Other Revenue-Increase Provisions
Phase out preferential tax deferral for certain large farm
corporations required to use accrual accounting.--Under the Revenue Act
of 1987, family farm corporations were required to change to the accrual
method of accounting if their gross receipts exceeded $25 million in any
taxable year beginning after 1985. However, in lieu of including in
gross income the entire amount of the adjustment attributable to the
change in accounting method, a family farm corporation could establish a
suspense account. The amount of the suspense account was to be included
in gross income if the corporation ceased to be a family corporation or
to the extent the gross receipts of the corporation from farming
declined. This Act repeals the ability of family farm corporations to
establish such a suspense account and also repeals the requirement to
include a portion of a suspense account in income based on a decrease in
the
[[Page 53]]
gross receipts of the corporation. Any taxpayer required to change to
the accrual method of accounting may take the adjustment attributable to
the change in accounting method into account ratably over a ten-year
period, beginning with the year of change. Any existing suspense
accounts are to be restored to income ratably over a twenty-year period,
subject to the existing law requirement to restore such accounts more
rapidly. This provision is effective for taxable years ending after June
8, 1997, except that the first year in the twenty-year period for
restoring existing suspense accounts to income is the first taxable year
beginning after June 8, 1997.
Modify loss carryback and carryforward rules.--Under prior law, net
operating losses (NOLs) generally could be used to offset taxable income
from the prior three taxable years (carrybacks) and the succeeding 15
taxable years (carryforwards). This Act generally limits carrybacks of
NOLs to 2 years and extends carryforwards to 20 years, effective for
NOLs arising in taxable years beginning after the date of enactment. The
3-year carryback for NOLs of farmers and small businesses attributable
to losses incurred in Presidentially declared disaster areas is
preserved.
Modify general business credit carryback and carryforward rules.--A
qualified taxpayer is allowed to claim a number of tax credits
(collectively, known as general business credits) provided under current
law (rehabilitation credit, energy credit, alcohol fuels credit, orphan
drug credit, etc.), subject to certain limitations based on tax
liability for the year. Under prior law, unused general business credits
generally could be carried back three years and carried forward 15 years
to offset tax liability of such years. This Act limits the carryback
period for general business credits to one year and extends the
carryforward period to 20 years. The change is effective for taxable
years beginning after December 31, 1997.
Expand the limitations on deductibility of premiums and interest with
respect to life insurance, endowment and annuity contracts.--The prior
law premium deduction limitation is expanded to provide that no
deduction is permitted for premiums paid on any life insurance,
endowment or annuity contract, if the taxpayer is directly or indirectly
a beneficiary under the contract. In addition, generally no deduction is
allowed for interest paid or accrued on any indebtedness with respect to
a life insurance policy or endowment or annuity contract covering the
life of any individual. 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. These limitations apply to contracts
issued after June 8, 1997. For this purpose, a material increase in the
death benefit or other material change in the contract generally causes
the contract to be treated as a new contract.
Expand requirement that involuntarily converted property be replaced
with property acquired from an unrelated party.--Gain realized by
taxpayers from certain involuntary conversions is deferred to the extent
the taxpayer purchases property similar or related in service or use to
the converted property within a specified period of time. C corporations
(and partnerships with one or more corporate partners that own more than
50 percent of the capital or profits interest in the partnership)
generally are not entitled to defer gain if the replacement property is
purchased from a related person. This Act extends the denial of deferral
to any other taxpayer, including an individual, that acquires
replacement property from a related person, unless the taxpayer has an
aggregate realized gain of $100,000 or less during the year as a result
of involuntary conversions. In the case of a partnership or S
corporation, the $100,000 annual limitation applies to the entity and
each partner or shareholder. The provision applies to involuntary
conversions occurring after June 8, 1997.
Miscellaneous Tax Provisions
Provide income-averaging for farmers.--Effective for taxable years
beginning after December 31, 1997 and before January 1, 2001, an
individual taxpayer generally is allowed to elect to compute his or her
current year regular tax liability by averaging, over the three-year
period, all or a portion of his or her taxable income from farming.
Allow carryback of existing net operating losses of the National
Railroad Passenger Corporation (Amtrak).--Amtrak is allowed to carryback
its net operating losses against the aggregate of the net tax liability
of Amtrak's railroad predecessors. The maximum allowable refund payable
to Amtrak, which is to be divided equally between the first two taxable
years ending after the date of enactment, is $2.323 billion. The
availability of the refund was conditioned on enactment of Federal
legislation authorizing reform; such legislation has been enacted.
Modify estimated tax requirements of individuals.--An individual
taxpayer generally is subject to an addition to tax for any underpayment
of estimated tax. An individual generally does not have an underpayment
of estimated tax if timely estimated tax payments are made at least
equal to: (1) 100 percent of the tax shown on the return of the
individual for the preceding tax 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. Under prior law the 100 percent of last
year's safe harbor was 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. This Act
modifies the safe harbor for individuals with AGI of more than $150,000
as follows: for taxable years beginning in 1998, the safe harbor is 100
percent; for taxable years beginning in 1999, 2000, and 2001 the safe
harbor is 105 percent; for taxable years beginning in 2002, the safe
harbor is 112 percent. In addition, for any
[[Page 54]]
period before January 1, 1998, for any estimated payment due before
January 16, 1998, no estimated tax penalties will be imposed on an
underpayment created or increased by a provision of the Taxpayer Relief
Act of 1997.
Balanced Budget Act of 1997. --This Act, together with the Taxpayer
Relief Act of 1997, implements the historic bipartisan budget agreement
that will benefit generations of Americans. While this Act is primarily
a balanced package of spending provisions that includes targeted program
cuts while it invests in America's future, it also includes several
revenue provisions. The major provisions of the Act affecting receipts
are described below.
Increase excise taxes on tobacco products.--The excise tax on small
cigarettes is increased from 24 cents per pack to 34 cents per pack
effective January 1, 2000 and to 39 cents per pack effective January 1,
2002. The taxes on other tobacco products (large cigarettes, cigars,
cigarette papers, cigarette tubes, chewing tobacco, snuff, and pipe
tobacco) are increased proportionately. In addition, the tax on roll-
your-own tobacco is imposed at the same rate as pipe tobacco.
Increase employee contributions to the Civil Service Retirement System
(CSRS) and the Federal Employees Retirement System (FERS).--Employee
contributions to CSRS and FERS are increased by 0.5 percent of base pay
in three steps. Contributions increase by 0.25 percent of base pay on
January 1, 1999, another 0.15 percent on January 1, 2000 and a final
0.10 percent on January 1, 2001. These higher contribution rates are
effective through 2002; on January 1, 2003, contribution rates return to
the levels in effect on December 31, 1998.
Authorize appropriation of funds for enforcement initiatives related
to the EITC--In addition to any other funds available for this purpose,
the following amounts are authorized to be appropriated to the Secretary
of the Treasury for improved application of the earned income tax
credit: not more than $138 million for 1998, $143 million for 1999, $144
million for 2000, $145 million for 2001 and $146 million for 2002.
Adjust payments to the Universal Service Fund--Payments to the
Universal Service Fund by telecommunications carriers and other
providers of interstate telecommunications are adjusted so that $3
million in payments otherwise due in fiscal year 2001 are deferred until
October 1, 2001. This shift in payments was subsequently repealed during
the FY 1998 appropriations process.
ADMINISTRATION PROPOSALS
PROVIDE TAX RELIEF AND EXTEND EXPIRING PROVISIONS
The President's plan targets tax relief to provide child-care
assistance to working families. It also includes new initiatives to
promote energy efficiency and environmental objectives and new
incentives to promote retirement savings, as well as education
incentives and extensions of certain expiring tax provisions. In
addition, the President's plan contains provisions to simplify the tax
laws and to enhance taxpayers' rights.
Make Child Care More Affordable
Increase and simplify child and dependent care tax credit.--Under
current law, taxpayers may receive a nonrefundable tax credit for a
percentage of certain child care expenses they pay in order to work. The
credit rate is phased down from 30 percent of expenses (for taxpayers
with adjusted gross incomes of $10,000 or less) to 20 percent (for
taxpayers with adjusted gross incomes above $28,000). The Administration
proposes to increase the maximum credit rate from 30 percent to 50
percent and to extend eligibility for the maximum credit rate to
taxpayers with adjusted gross incomes of $30,000 or less. The credit
rate would be phased down gradually for taxpayers with adjusted gross
incomes between $30,000 and $59,000. The credit rate would be 20 percent
for taxpayers with adjusted gross incomes over $59,000. Eligibility for
the credit would be simplified by elimination of a complicated household
maintenance test. Certain credit parameters would be indexed. The
proposal would be effective for taxable years beginning after December
31, 1998.
Establish tax credit for employer-provided child care.--The
Administration proposes to provide taxpayers a credit equal to 25
percent of expenses incurred to build or acquire a child care facility
for employee use, or to provide child care services to children of
employees directly or through a third party. Taxpayers also would be
entitled to a credit equal to 10 percent of expenses incurred to provide
employees with child care resource and referral services. A taxpayer's
credit could not exceed $150,000 in a single year. Any deduction the
taxpayer would otherwise be entitled to take for the expenses would be
reduced by the amount of the credit. Similarly, the taxpayer's basis in
a facility would be reduced to the extent that a credit is claimed for
expenses of constructing or acquiring the facility. The credit would be
effective for taxable years beginning after December 31, 1998.
Promote Energy Efficiency and Improve the Environment
Buildings
Provide tax credit for energy-efficient building equipment.--No income
tax credit is provided currently for investment in energy-efficient
building equipment. The Administration proposes to provide a new tax
credit for the purchase of certain highly efficient building equipment
technologies, including fuel cells, electric heat pump water heaters,
natural gas heat
[[Page 55]]
pumps, residential size electric heat pumps, natural gas water heaters,
and advanced central air conditioners. The credit would equal 20 percent
of the amount of qualified investment, subject to a cap. The credit
generally would be available for equipment purchased over the five-year
period beginning January 1, 1999 and ending December 31, 2003.
Provide tax credit for the purchase of new energy-efficient homes.--
No income tax credit is provided currently for investment in energy-
efficient homes. The Administration proposes to provide a tax credit to
taxpayers who purchase, as a principal residence, certain newly
constructed homes that are highly energy efficient. The credit would
equal one percent of the purchase price of the home, up to a maximum of
$2,000. The full credit would be available for homes purchased between
January 1, 1999 and December 31, 2003. A credit of up to $1,000 would be
available for homes purchased between January 1, 2004 and December 31,
2005.
Transportation
Provide tax credit for high-fuel-economy vehicles.--No income tax
credit is provided currently for purchases of highly fuel-efficient
vehicles. The Administration proposes to provide a credit of $4,000 for
each vehicle that gets three times the base fuel economy for its class.
The $4,000 credit would be available for purchases of qualifying
vehicles after December 31, 2002. This credit would phase down beginning
in 2007 and phase out in 2010. A $3,000 credit would also be provided
for purchases of vehicles achieving two times the base fuel economy for
their class. The $3,000 credit would be available for purchases of
qualifying vehicles after December 31, 1999. This credit would phase
down beginning in 2004 and phase out in 2006.
Equalize treatment of parking and transit benefits.--Under current
law, employer-provided transit and vanpool benefits are only excluded
from income if such benefits are in addition to, not in lieu of, other
compensation. Under the Taxpayer Relief Act of 1997, however, parking
benefits are excluded from income even if offered in lieu of other
compensation. The Administration proposes to allow employers to offer
their employees transit and vanpool benefits in lieu of compensation,
beginning January 1, 1999, thus granting transit and vanpool benefits
the same treatment as parking benefits. Also under current law, up to
$155 per month (in 1993 dollars) in employer-provided parking benefits
and $60 per month (in 1993 dollars) in employer-provided transit and
vanpool benefits are excludable from income. The Administration proposes
to raise the monthly limit on employer-provided transit and vanpool
benefits excludable from income to be the same as the limit on parking.
Industry
Provide investment tax credit for combined heat and power (CHP)
systems.-- Combined heat and power (CHP) assets are used in the
production of electricity and process heat and/or mechanical power from
the same primary energy source. No tax credits are currently available
for investment in CHP property. The Administration proposes to establish
a 10-percent investment credit for CHP systems in order to encourage and
accelerate investment in such equipment. The credit would apply to
property placed in service in the United States after December 31, 1998,
and before January 1, 2004.
Provide tax credit for replacement of certain circuitbreaker
equipment.--The chlorofluorocarbon substitute sulfur hexafluoride (SF6),
an extremely harmful greenhouse gas, is used in some large power circuit
breakers used in the transmission and distribution of electric power.
The Administration proposes to make a tax credit available for the
installation of new power circuit breaker equipment to replace certain
circuit breakers that are prone to leak SF6. The credit would be equal
to 10 percent of qualified investment. To be eligible for the credit,
the replaced power circuit breakers must be dual pressure circuit
breakers with a capacity of at least 115kV, contain SF6, and have been
installed prior to December 31, 1985. The replaced equipment must be
destroyed so as to prevent further use. The credit would apply only to
new equipment placed in service in the five-year period beginning
January 1, 1999 and ending December 31, 2003.
Provide tax credit for certain per- fluorocompound (PFC) and
hydrofluorocom- pound (HFC) recycling equipment.--Under current law,
semiconductor manufacturers who install equipment to recover or recycle
PFC and HFC gases used in the production of semiconductors may
depreciate the cost of that equipment, but no tax credit is provided for
the purchase of such equipment. PFCs and certain HFCs are among the most
potent greenhouse gases because of their extreme stability in the
atmosphere and strong absorption of radiation, and they are used
extensively in the semiconductor manufacturing industry. The
Administration proposes to provide a 10 percent tax credit for the
installation of qualified PFC/HFC recovery or recycling equipment to
recover gases used in the production of semiconductors. Equipment would
qualify for the credit only if it recovers at least 99 percent of the
PFCs and HFCs and the equipment is placed in service in the five-year
period beginning January 1, 1999 and ending December 31, 2003.
Renewables
Provide tax credit for rooftop solar equipment.--Current law provides
a 10 percent business energy investment tax credit for qualifying
equipment that uses
[[Page 56]]
solar energy to generate electricity, to heat or cool, to provide hot
water for use in a structure, or to provide solar process heat. The
Administration proposes to make a new tax credit available for
purchasers of rooftop photovoltaic systems and solar water heating
systems located on or adjacent to the building for uses other than
heating swimming pools. (Taxpayers would have to choose between the
proposed credit and the current-law tax credit for each investment.) The
proposed credit would be equal to 15 percent of qualified investment up
to a maximum of $1,000 for solar water heating systems and $2,000 for
rooftop photovoltaic systems. It would apply only to equipment placed in
service after December 31, 1998 and before January 1, 2004 for solar
water heating systems and after December 31, 1998 and before January 1,
2006 for rooftop photovoltaic systems.
Extend wind and biomass tax credit.--Current law provides taxpayers a
1.5-cent-per-kilowatt-hour tax credit, adjusted for inflation after
1992, for electricity produced from wind or ``closed-loop'' biomass. The
electricity must be sold to an unrelated third party and the credit
applies to the first 10 years of production. The current credit applies
only to facilities placed in service before July 1, 1999, after which it
expires. The Administration proposes to extend the current credit for
five years, to facilities placed in service before July 1, 2004.
Promote Expanded Retirement Savings
Building on recent legislation, the Administration proposes further
expansions of retirement savings incentives, including three new
initiatives that would expand the availability of retirement plans and
other workplace-based savings opportunities, particularly for moderate-
and lower-income workers not currently covered by employer-sponsored
plans. Two of the proposals are designed to expand pension coverage for
employees of small businesses, a group that currently has low pension
coverage. The Administration also seeks to improve existing retirement
plans for employers of all sizes by promoting portability, expanding
workers' and spouses' rights to know about their retirement benefits,
and simplifying the pension rules. These provisions generally are
effective beginning in 1999.
Promote Individual Retirement Account (IRA) contributions through
payroll deduction.--Employers could offer employees the opportunity to
make IRA contributions on a pre-tax basis through payroll deduction.
Providing employees an exclusion from income (in lieu of a deduction) is
designed to increase savings among workers in businesses that do not
offer a retirement plan. Signing up for payroll deduction is easy for an
employee. In addition, saving is facilitated because it becomes
automatic as salary reduction contributions continue each paycheck after
an employee's initial election. Peer-group participation may also
encourage employees to save more. Finally, the favorable tax treatment
of payroll deductions would encourage participation.
Provide tax credit for new plans.--Effective in the year of enactment,
the Administration proposes a new three-year tax credit for the
administrative and retirement-education expenses of any small business
that sets up a new qualified defined benefit or defined contribution
plan (including a 401(k) plan), savings incentive match plan for
employees (SIMPLE), simplified employee pension (SEP), or payroll
deduction IRA arrangement. The credit would cover 50 percent of the
first $2,000 in administrative and retirement-education expenses for the
plan or arrangement for the first year of the plan and 50 percent of the
first $1,000 of such expenses for each of the second and third years.
The tax credit would help promote new plan sponsorship by targeting a
tax benefit to employers adopting new plans or payroll deduction IRA
arrangements, providing a marketing tool to financial institutions and
advisors promoting new plan adoption, and increasing awareness of
retirement savings options.
Establish new small business pension plan.--The Administration is
proposing a new small business defined benefit-type plan that combines
certain key features of defined benefit plans and defined contribution
plans: guaranteed minimum retirement benefits, an option for payments
over the course of an employee's retirement years, and Pension Benefit
Guaranty Corporation insurance, together with individual account
balances that can benefit from favorable investment returns and have
enhanced portability.
Enhance portability and disclosure; simplify pensions.--The
Administration is also proposing accelerated vesting of employer
matching contributions under 401(k) plans (and other qualified plans).
This would increase pension portability, which is important given the
mobility of today's workforce, particularly of working women. Matching
contributions would be required to be fully vested after an employee has
completed three years of service (or would vest in annual 20 percent
increments beginning after two years of service). The Administration's
proposal also would enhance workers' and spouses' rights to know about
their pension benefits--among other things, requiring that the same
explanation of a pension plan's survivor benefits that is provided to a
participant be provided to the participant's spouse, and that
participants in 401(k) safe harbor plans receive timely notification of
plan rules governing contributions and employer matching. Improved
benefits for nonhighly compensated employees under the 401(k) safe
harbors, a simplified definition of highly compensated employee, and
simplification of rules for multiemployer plans are also being proposed.
Expand Education Incentives
Provide incentives for public school construction.--The Taxpayer
Relief Act of 1997 enacted a provi
[[Page 57]]
sion that allows certain public schools to issue ``qualified zone
academy bonds,'' the interest on which is effectively paid by the
Federal government in the form of an annual income tax credit. The
proceeds of the bonds can be used for a number of purposes, including
teacher training, purchases of equipment, curricular development, and
rehabilitation and repair of the school facilities. The Administration
proposes to institute a new program of Federal tax assistance for public
school construction. Under the proposal, State and local governments
would be able to issue up to $9.7 billion of ``qualified school
construction bonds'' in each of 1999 and 2000. Holders of these bonds
would receive annual federal income tax credits, set according to market
interest rates by the Treasury Department, in lieu of interest. At least
95 percent of the bond proceeds of a qualified school construction bond
must be used to finance public school construction or rehabilitation.
The Administration also proposes to expand the amount of qualified zone
academy bonds that can be issued in 1999 from $400 million to $1.4
billion and to authorize an additional $1.4 billion of qualified zone
academy bonds in 2000, and to allow the proceeds of these bonds to be
used for school construction.
Extend and expand exclusion for employer-provided educational
assistance.--Certain amounts paid by an employer for educational
assistance provided to an employee currently are excluded from the
employee's gross income for income and payroll tax purposes. The
exclusion is limited to $5,250 of educational assistance with respect to
an individual during a calendar year and applies whether or not the
education is job-related. The exclusion currently is limited to
undergraduate courses beginning before June 1, 2000. The Administration
proposes to extend the current law exclusion by one year to apply to
undergraduate courses beginning before June 1, 2001. In addition, the
exclusion would be expanded to cover graduate courses beginning after
June 30, 1998 and before June 1, 2001.
Eliminate tax when forgiving student loans subject to income
contingent repayment.--Students who borrow money to pay for
postsecondary education through the Federal government's Direct Loan
program may elect income contingent repayment of the loan. If they elect
this option, their loan repayments are adjusted in accordance with their
income. If after the borrower makes repayments for a twenty-five year
period any loan balance remains, it is forgiven. The Administration
proposes to eliminate any Federal income tax the borrower may otherwise
owe as a result of the forgiveness of the loan balance. The proposal
would be effective for loan cancellations after December 31, 1998.
Increase Low-Income Housing Tax Credit
Increase low-income housing tax credit per capita cap.--Low-income
housing tax credits provide an incentive to build and make available
rental housing units to households with incomes significantly below area
medians. The amount of first-year credits that can be awarded in each
State is currently limited by annual allocations of $1.25 per capita.
The $1.25 per capita limitation was established in 1986. The
Administration proposes to increase the annual State housing credit
limitation to $1.75 per capita effective for calendar years beginning
after 1998. The proposed increase in this cap will permit additional new
and rehabilitated low-income housing to be provided while still
encouraging State housing agencies to award the credits to projects that
meet specific needs.
Extend Expiring Provisions
Extend the work opportunity tax credit.--The work opportunity tax
credit provides an incentive for employers to hire individuals from
certain targeted groups. The credit equals a percentage of qualified
wages paid during the first year of the individual's employment with the
employer. The credit percentage is 25 percent for employment of at least
120 hours but less than 400 hours and 40 percent for employment of 400
or more hours. The credit expires with respect to employees who begin
work after June 30, 1998. The Administration proposes to extend the work
opportunity tax credit so that the credit would be effective for
individuals who begin work before May 1, 2000.
Extend the welfare-to-work tax credit.--The welfare-to-work tax credit
enables employers to claim a tax credit on the first $20,000 of eligible
wages paid to certain long-term family assistance recipients. The credit
is 35 percent of the first $10,000 of eligible wages in the first year
of employment and 50 percent of the first $10,000 of eligible wages in
the second year of employment. The credit is effective for individuals
who begin work before May 1, 1999. The Administration proposes to extend
the welfare-to-work tax credit for one year, so that the credit would be
effective for individuals who begin work before May 1, 2000.
Extend the R&E tax credit.--The Administration proposes to extend the
tax credit provided for certain research and experimentation
expenditures, which is scheduled to expire after June 30, 1998, for one
year through June 30, 1999.
Extend the deduction provided for contributions of appreciated stock
to private foundations.--The special rule that allows a taxpayer to
deduct the full fair market value of qualified stock donated to a
private foundation expires with respect to contributions made after June
30, 1998. The Administration proposes to extend the provision to apply
to contributions made during the period July 1, 1998 through June 30,
1999.
Make permanent the expensing of brownfields remediation costs.--Under
the Taxpayer Relief Act of 1997, taxpayers can elect to treat certain
environmental remediation expenditures that would otherwise be
chargeable to capital account as deductible in the year
[[Page 58]]
paid or incurred. The provision does not apply to expenditures paid or
incurred after December 31, 2000. The Administration proposes that the
provision be made permanent.
Modify International Trade Provisions
Extend the Generalized System of Preferences (GSP) and modify other
trade provisions.--Under GSP, duty-free access is provided to over 4,000
items from eligible developing countries that meet certain worker
rights, intellectual property protection, and other criteria. The
Administration proposes to extend the program, which expires after June
30, 1998, through September 30, 2001. The Administration is proposing
new enhanced trade benefits for Subsaharan African countries undertaking
strong economic reforms. The Administration also proposes to provide,
through September 30, 2001, expanded trade benefits mainly on textiles
and apparel to Caribbean Basin countries that meet new eligibility
criteria to prepare for a future free trade agreement with the United
States. The Administration also proposes to implement the OECD
Shipbuilding Agreement.
Extend and modify Puerto Rico economic-activity tax credit (section
30A).--Although the Puerto Rico and possessions tax credit generally was
repealed in 1996, both the income-based option and the economic-activity
option under the credit remain available for existing business
operations through 2005, subject to base-period caps. To provide a more
efficient and effective tax incentive for the economic development of
Puerto Rico and to continue the shift from an income-based credit to an
economic-activity credit that was begun in the Omnibus Budget
Reconciliation Act of 1993 (OBRA 93), the Administration proposes to
modify the economic-activity credit for Puerto Rico by (1) extending it
indefinitely, (2) making newly established business operations eligible
for the credit, effective for taxable years beginning after December 31,
1998, and (3) removing the base-period cap.
Levy tariff on certain textiles and apparel products produced in the
Commonwealth of the Northern Mariana Islands (CNMI).--The Administration
has proposed a tariff on textile and apparel products produced in the
CNMI without certain percentages of workers who are U.S. citizens,
nationals or permanent residents or citizens of the Pacific island
nations freely associated with the U.S.
Expand Virgin Island tariff credits.--The Administration proposes the
expansion of authorized but currently unused tariff credits for wages
paid in the production of watches in the Virgin Islands to be available
for the production of fine jewelry.
Provide Other Tax Incentives
Expand tax incentives for specialized small business investment
companies (SSBICs).--Current law provides certain tax incentives for
investment in SSBICs. The Administration proposes to enhance the tax
incentives for SSBICs. First, the existing provision allowing a tax-free
rollover of the proceeds of a sale of publicly-traded securities into an
investment in a SSBIC would be modified to extend the rollover period to
180 days, to allow investment in the preferred stock of a SSBIC, to
eliminate the annual caps on the SSBIC rollover gain exclusion, and to
increase the lifetime caps to $750,000 per individual and $2,000,000 per
corporation. Second, the proposal would allow a SSBIC to convert from a
corporation to a partnership within 180 days of enactment without giving
rise to tax at either the corporate or shareholder level, but the
partnership would remain subject to an entity-level tax at any time that
it later disposed of assets that it holds at the time of conversion on
the amount of ``built-in'' gains inherent in such assets at the time of
conversion. Finally, in the case of a direct or indirect sale of SSBIC
stock that qualifies for treatment under section 1202, the proposal
would raise the exclusion of gain from 50 percent to 60 percent. The
tax-free rollover and section 1202 provisions would be effective for
sales occurring after the date of enactment.
Accelerate and expand incentives available to two new Empowerment
Zones (EZs).--OBRA 93 authorized a Federal demonstration project in
which nine EZs and 95 empowerment communities would be designated in a
competitive application process. Among other benefits, businesses
located in the nine original EZs are eligible for three Federal tax
incentives: an employment and training credit; an additional $20,000 per
year of section 179 expensing; and a new category of tax-exempt private
activity bonds. The Taxpayer Relief Act of 1997 authorized the
designation of two additional EZs located in urban areas, which
generally are eligible for the same tax incentives as are available
within the EZs authorized by OBRA 93. The two additional EZs will be
designated in early 1998, but the tax incentives provided for them do
not take effect until January 1, 2000. The incentives generally remain
in effect for 10 years. The wage credit, however, is phased down
beginning in 2005 and expires after 2007. The Administration proposes to
accelerate the start-up date of the incentives for the two additional
EZs to January 1, 1999. In addition, the proposal would provide that the
wage credit would remain in effect for 10 years from that date and would
be phased down using the same percentages that apply to the original
empowerment zones designated under OBRA 93.
Make first $2,000 of severance pay exempt from income tax.--Under
current law, payments made to a terminated employee are taxable as
compensation. The Administration proposes to allow an individual to
exclude up to $2,000 of severance pay from income when certain
conditions are met. First, the severance must result from a reduction in
force by the employer. Second, the individual must not obtain a job
within six months of separation with compensation at least
[[Page 59]]
equal to 95 percent of his or her prior compensation. Third, the total
severance payments received by the employee must not exceed $125,000.
The exclusion would be effective for severance pay received in taxable
years beginning after December 31, 1998 and before January 1, 2004.
Simplify The Tax Laws
Provide for optional Self-employment Contributions Act (SECA)
computations.--Self-employed individuals currently may elect to increase
their self-employment income for purposes of obtaining social security
coverage. Current law provides more liberal treatment for farmers as
compared to other self-employed individuals. The Administration proposes
to extend the favorable treatment currently accorded to farmers to other
self-employed individuals. The proposal would be effective for taxable
years beginning after December 31, 1998.
Provide statutory hedging and other rules to ensure business property
is treated as ordinary property.--Under current law, there is a
significant issue of whether income from hedging transactions is capital
or ordinary. The rules under which assets are treated as ordinary assets
and under which hedging transactions are accounted for need to be
modernized. In addition, the current-law rules that allow taxpayers to
defer loss when a taxpayer holds a position or positions that reduce the
risk of loss on certain capital assets, the so-called straddle rules,
are punitive and sometimes result in a total disallowance of losses. The
proposal would generally codify the hedging rules previously promulgated
by Treasury Department and make some modifications to help clarify the
rules. The proposal would clarify that certain assets are ordinary
assets for Federal income tax purposes, provide more equitable timing of
losses under the straddle rules, and eliminate an exception to the
straddle rules for positions in corporate stock. The proposal generally
would be effective after the date of enactment, and would give the
Treasury Department authority to issue regulations similar to the
hedging provisions governing hedging transactions entered into prior to
the effective date.
Clarify rules relating to certain disclaimers.--Under current law, if
a person refuses to accept (i.e., disclaims) a gift or bequest prior to
accepting the transfer (or any of its benefits), the transfer to the
disclaiming person generally is ignored for Federal transfer tax
purposes. Current law is unclear as to whether certain transfer-type
disclaimers benefit from rules applicable to other disclaimers under the
estate and gift tax. Current law is also silent as to the income tax
consequences of a disclaimer. The Administration proposes to extend to
transfer-type disclaimers the rule permitting disclaimer of an undivided
interest in property as well as the rule permitting a spouse to disclaim
an interest that will pass to a trust for the spouse's benefit. The
proposal also clarifies that disclaimers are effective for income tax
purposes. The proposal would apply to disclaimers made after the date of
enactment.
Simplify the foreign tax credit limitation for dividends from 10/50
companies.--The Taxpayer Relief Act of 1997 modified the regime
applicable to indirect foreign tax credits generated by dividends from
so-called 10/50 companies. Specifically, the Act retained the prior law
``separate basket'' approach with respect to pre-2003 distributions by
such companies, adopted a ``single basket'' approach with respect to
post-2002 distributions by such companies of their pre-2003 earnings,
and adopted a ``look-through'' approach with respect to post-2002
distributions by such companies of their post-2002 earnings. The
application of the three approaches results in significant additional
complexity. The proposal would simplify significantly the application of
the foreign tax credit limitation by applying a look-through approach
immediately to dividends paid by 10/50 companies, regardless of the year
in which the earnings and profits out of which the dividends are paid
were accumulated (including pre-2003 years). The proposal would be
effective for taxable years beginning after December 31, 1997.
Provide interest treatment for certain payments from regulated
investment companies to foreign persons.--Under current law, foreign
investors in U.S. bond and money-market mutual funds are effectively
subject to withholding tax on interest income and short term capital
gains derived through such funds. Foreign investors that hold U.S. debt
obligations directly generally are not subject to U.S. taxation on such
interest income and gains. This proposal would eliminate the discrepancy
between these two classes of foreign investors by eliminating the U.S.
withholding tax on distributions from U.S. mutual funds that hold
substantially all of their assets in cash or U.S. debt securities (or
foreign debt securities that are not subject to withholding tax under
foreign law). The proposal is designed to enhance the ability of U.S.
mutual funds to attract foreign investors and to eliminate needless
complications now associated with the structuring of vehicles for
foreign investment in U.S. debt securities. The proposal would be
effective for mutual fund taxable years beginning after the date of
enactment.
Enhance Taxpayers' Rights
Collection
Suspend collection by levy during refund suit.--Generally, full
payment of the tax at issue is a prerequisite to a refund suit (Flora v.
United States), but this rule does not apply in the case of
``divisible'' taxes (such as employment taxes or the ``100 percent
penalty'' under section 6672). The Administration proposes to require
the IRS to suspend collection by levy of liabilities that are the
subject of a refund suit during the pendency of the litigation. This
would only apply where refund suits can be brought without the full
payment of the tax, i.e., divisible taxes. Collection by levy would
[[Page 60]]
be suspended unless jeopardy exists or the taxpayer waives the
suspension of collection in writing. This proposal would not affect the
IRS's ability to collect other assessments that are not the subject of
the refund suit, to offset refunds or to file a notice of federal tax
lien. The statute of limitations on collection would be stayed for the
period during which collection by levy is prohibited. The proposal would
be effective for refund suits brought with respect to taxable years
beginning after December 31, 1998.
Suspend collection by levy while offer in compromise is pending.--The
Administration proposes to bar the IRS from collecting a tax liability
by levy during any period that a taxpayer's offer in compromise of that
liability is being processed, during the 30 days following rejection of
an offer, and for any period during which an appeal of a rejected offer
is being considered. Levy would not be precluded if the IRS determines
that collection is in jeopardy or that the offer is submitted solely to
delay collection. This proposal would not affect liabilities or
assessments that are not the subject of the offer in compromise, the
IRS's ability to offset refund, or its ability to file a notice of
Federal tax lien. The proposal would not require the IRS to stop any
levy action that was initiated, or withdraw any lien that was filed,
prior to the taxpayer's making an offer in compromise. The statute of
limitations on collection would be stayed for the period during which
collection by levy is barred. The proposal would be effective with
respect to taxes assessed 60 days after the date of enactment.
Suspend collection to permit resolution of disputes as to liability.--
The Administration proposes to permit an individual taxpayer to request
that collection be suspended temporarily with regard to an income tax
liability that is assessed based upon a statutory notice of deficiency
that the taxpayer failed to receive or to which the taxpayer failed to
respond. The IRS would suspend collection for a 60-day period, during
which the taxpayer may dispute the merits of the underlying assessment.
The 60-day period would be extended in appropriate cases where progress
is being made in resolving the liability. Collection by refund offset
and jeopardy levies would be exempted. The proposal would not affect the
IRS's ability to file a notice of Federal tax lien. The statutory
collection period would be stayed while the taxpayer's claim is pending.
The proposal would be effective for taxes assessed with respect to
taxable years beginning after December 31, 1998.
Require District Counsel approval of certain third party collection
activities.--The Administration proposes to require IRS District Counsel
approval before a notice of Federal tax lien can be filed or levy is
made in connection with property held by a nominee, transferee, or alter
ego of the taxpayer. Counsel approval would also be required before the
IRS seizes property encumbered by a Federal tax lien if the property is
presently neither owned nor titled in the name of the taxpayer. The only
exception would be in jeopardy situations. If District Counsel's
approval was not obtained, the property-owner would be entitled to
obtain release of the lien or levy, and, if the IRS failed to make such
release, to appeal first to the Collections Appeals process and then to
the U.S. District Court. The proposal would be effective with respect to
taxes assessed after the date of enactment.
Require management approval of levies on certain assets.--The
Administration proposes to require the personal approval of an IRS
District Director or Assistant District Director of any levy made
against non-Federal pensions or the cash value of life insurance
policies. The proposal would thus place these assets in the same class
as principal residences pursuant to section 6334(e). The only exception
would be in jeopardy situations. If the District Director's approval was
not obtained, the taxpayer would be entitled to obtain release of the
levy, and, if the IRS failed to make such release, to appeal first to
the Collections Appeals process and then to the U.S. District Court. The
proposal would be effective with respect to taxes assessed after the
date of enactment.
Require District Counsel review and approval of jeopardy and
termination assessments and jeopardy levies.--Current law provides
special procedures allowing the IRS to make jeopardy assessments or
termination assessments in certain extraordinary circumstances, for
instance, if the taxpayer is leaving or removing property from the
United States or if assessment or collection would be jeopardized by
delay. In jeopardy situations, a levy may also be made without the 30-
day notice of intent to levy that is ordinarily required. Jeopardy and
termination assessments and jeopardy levies often involve difficult
legal issues, and the government bears the burden of proof with respect
to the reasonableness of a jeopardy or termination assessment or a
jeopardy levy. The Administration proposes to require IRS District
Counsel review and approval before the IRS could make a jeopardy
assessment, a termination assessment, or a jeopardy levy. If District
Counsel's approval was not obtained, the taxpayer would be entitled to
obtain abatement of the assessment or release of the levy, and, if the
IRS failed to offer such relief, to appeal first to the Collections
Appeals process and then to the U.S. District Court. The proposal would
be effective with respect to taxes assessed after the date of enactment.
Require management approval of sales of perishable goods.--Because of
the nature of the property at issue, special accelerated procedures
apply to the sale of perishable property that has been seized to satisfy
a tax liability. The Administration proposes to require approval by an
IRS District Director or Assistant District Director before perishable
goods are sold. The proposal would also clarify what a ``perishable''
item is for these purposes. The proposal would be effective
[[Page 61]]
with respect to taxes assessed after the date of enactment.
Codify certain Fair Debt Collection procedures.--Government agencies,
including the IRS, are generally exempt from the Fair Debt Collection
Practices Act (FDCPA). In the past, appropriations legislation funding
the IRS has required IRS officers and employees to comply with certain
provisions of the FDCPA. Placing these requirements in the Internal
Revenue Code would ensure that both taxpayers and employees of the IRS
are fully aware of these requirements. Therefore, the Administration
proposes to add to the Internal Revenue Code two provisions of the FDCPA
concerning communications in connection with debt collection and the
prohibition on harassment or abuse. The proposal would be effective on
the date of enactment.
Modify payment of taxes.--The Secretary of the Treasury is authorized
to accept payments by stamps, check, or money orders, as provided in
regulations. Checks or money orders currently are made payable to the
``Internal Revenue Service.'' The proposal would require amending the
rules, regulations, and procedures to allow payment of taxes by check or
money order to be made payable to the order of ``United States
Treasury.'' This would make it clearer to taxpayers that their tax
payments support the entire Federal Government, not just the IRS. The
proposal would be effective on the date of enactment.
Require disclosures relating to extension of statutes of limitation by
agreement.--Taxpayers and the IRS may agree in writing to extend the
statutory period of limitations on assessment or collection, either for
a specified period or for an indefinite period. The Administration
proposes to require that, on each occasion that the taxpayer is
requested by the IRS to extend the statute of limitations, the IRS must
notify the taxpayer of the taxpayer's right to refuse to extend the
statute of limitations or to limit the extension to particular issues.
The proposal would apply to requests to extend the statute of
limitations made after the date of enactment.
Publish living allowance schedules relating to offers in compromise.--
The IRS is authorized to compromise a taxpayer's tax liability for less
than the full amount due. In general, there are two grounds on which an
offer in compromise can be made: doubt as to the taxpayer's liability
for the full amount, or doubt as to the taxpayer's ability to pay in
full the amount owed. The proposal would require the IRS to develop and
publish schedules of national and local living allowances, taking into
account variations in the cost of living in different areas. The IRS
would use this information in evaluating the sufficiency of offers in
compromise. The schedules would be required to be published no later
than 180 days after the date of enactment.
Ensure availability of installment agreements.--The IRS is authorized
to enter agreements permitting taxpayers to pay taxes in installments if
such an agreement will ``facilitate collection'' of the liability. The
IRS has discretion to determine when an installment agreement is
appropriate. The Administration proposes to codify the IRS's current
practice of requiring an installment agreement (at the taxpayer's
option) for liabilities of $10,000 or less, provided certain conditions
are met. The proposal would be effective on the date of enactment.
Increase ``superpriority'' dollar limits.--Current law provides
protection to certain property interests even though a Notice of Federal
Tax Lien has been properly filed before the interests arise. Such
``superpriorities'' are subject to certain dollar limitations, however.
The proposal would increase the current dollar limit for purchasers at a
casual sale from $250 to $1,000, and it would increase the current
dollar limit from $1,000 to $5,000 for mechanics lienors who provide
home improvement work for residential real property. The proposal would
also clarify current law to reflect current banking practices, where a
``passbook''-type loan may be made even though an actual ``passbook'' is
not used. The proposal would be effective on the date of enactment.
Permit personal delivery of 100 percent penalty notices.--The proposal
would permit personal delivery, in addition to the Internal Revenue
Code's current requirement of mail delivery, of a preliminary notice
that the IRS intends to assess a 100 percent penalty under section 6672
against the taxpayer. The proposal would be effective on the date of
enactment.
Examination
Allow taxpayers to quash all third party summonses.--Summonses issued
to ``third party recordkeepers'' are subject to different procedures
than other summonses: notice of the summons must be given to the
taxpayer, and the taxpayer has an opportunity to bring a court
proceeding to quash the summons, during which time collection action is
stayed and the third party recordkeeper is prohibited from complying
with the summons. The Administration proposes generally to expand the
``third party recordkeeper'' procedures to apply to all summonses issued
to third parties other than the taxpayer. This would have the beneficial
effect of giving taxpayers notice and an opportunity to contest any
summons issued to a third party in connection with the determination of
their liability. The provision would be effective for summonses served
after the date of enactment.
Require disclosure of criteria for examination selection.--The IRS
examines Federal tax returns to determine the correct liability of
taxpayers. Returns are selected for examination in a number of ways,
such as through ``matching'' of returns and information returns or
through the use of a computerized classifica
[[Page 62]]
tion system (the discriminant function (DIF) system). Taxpayers should
better understand the reasons why they may be selected for examination.
Therefore, the Administration proposes to require that within 180 days
the IRS add to Publication 1 (Your Rights as a Taxpayer) a statement
setting forth, in simple and nontechnical terms, the criteria and
procedures for selecting taxpayers for examination. The statement would
not include any information that would be detrimental to law
enforcement, and drafts of the statement would be required to be
submitted to the congressional tax-writing committees prior to
publication.
Prohibit threat of audit to coerce tip reporting alternative
commitment agreements.--Restaurants may enter into Tip Reporting
Alternative Commitment (TRAC) agreements. A restaurant entering into a
TRAC agreement is obligated to educate its employees on their tip
reporting obligations, to institute formal tip reporting procedures, to
fulfill all filing and record keeping requirements, and to pay and
deposit taxes. In return, the IRS agrees to base the restaurant's
liability for employment taxes solely on reported tips and any
unreported tips discovered during an IRS audit of an employee. The
proposal would require the IRS to instruct its employees that they may
not threaten to audit any taxpayer in an attempt to coerce the taxpayer
to enter into a TRAC agreement. The provision would be effective on the
date of enactment.
Permit service of summonses by mail.--This proposal would permit the
IRS to serve summonses by mail, in addition to the present law
requirement that all summonses be personally served. Most summonses are
served on financial institutions, where personal service can disrupt the
working environment. Further, notice to the taxpayer that a summons has
been served on a third party recordkeeper can already be given by mail,
and the proposal would thus bring the service of the actual summons into
line with the notice requirements. The provision would be effective for
summonses served after the date of enactment.
New Remedies
Allow suits for damages if IRS violates certain bankruptcy
procedures.--No remedy exists under the Internal Revenue Code if the IRS
willfully violates the automatic stay or discharge provisions of the
Bankruptcy Code. The Administration proposes to provide for payment of
damages, plus attorneys fees' and costs, for willful violations by
officers or employees of the IRS of either the automatic stay provision
or the discharge injunction under the Bankruptcy Code. Jurisdiction over
such cases would lie with the Bankruptcy Court, but the claimant would
be required to exhaust administrative remedies to the same extent as for
other damage claims. The provision would be effective with respect to
violations occurring after the date of enactment.
Increase Tax Court's ``small case'' limit.--Taxpayers may choose to
contest many tax disputes in the Tax Court. Under current law, special
``small case procedures'' apply to disputes involving $10,000 or less,
if the taxpayer chooses to utilize these procedures (and the Tax Court
concurs). The Administration proposes to increase the cap for small case
treatment in the Tax Court from $10,000 to $25,000. The proposal would
apply to proceedings commenced after the date of enactment.
Provide equitable tolling.--A refund claim that is not filed within
certain specified time periods is rejected as untimely. The Supreme
Court recently held (United States v. Brockamp) that these limitations
periods cannot be extended, or ``tolled,'' for equitable reasons. This
may lead to harsh results for some taxpayers, particularly when they
fail to seek a refund because of a well-documented disability or similar
compelling circumstance that prevents them from doing so. Consequently,
the Administration proposes to permit ``equitable tolling'' of the
limitation period on claims for refund for the period of time during
which an individual taxpayer is under a sufficient medically determined
physical or mental disability as to be unable to manage his or her
financial affairs. Tolling would not apply during periods in which the
taxpayer's spouse or another person is authorized to act on the
taxpayer's behalf in financial matters. The proposal would apply with
respect to taxable years ending after the date of enactment.
Require notice of deficiency to specify Tax Court filing deadlines.--
Under current law, taxpayers must file a petition with the Tax Court
within 90 days after the notice of deficiency is mailed (150 days if the
person is outside the United States). Because timely filing in Tax Court
is a jurisdictional prerequisite, the IRS cannot extend the filing
period, nor can the Tax Court hear the case of a taxpayer who relies on
erroneous information from the IRS and files too late. The
Administration proposes to require the IRS to include on each notice of
deficiency the date it determines is the last day on which the taxpayer
may file a Tax Court petition (including the last day for a taxpayer who
is outside the United States). Any petition filed by the later of the
statutory date or the date shown on the notice would be timely. The
provision would apply to notices mailed after December 31, 1998.
Allow actions for refund with respect to certain estates that have
elected the installment method of payment.--Under the Internal Revenue
Code, a taxpayer may bring a refund suit only if full payment of the
assessed tax liability has been made. However, under certain conditions,
the executor of an estate may pay the estate tax attributable to certain
closely-held businesses over a 14-year period. These two rules can be in
conflict, preventing electing estates from obtaining full relief in a
refund jurisdiction. The Administration proposes to grant courts refund
jurisdiction to deter
[[Page 63]]
mine the correct liability of such an estate, so long as the estate had
properly elected to pay in installments and was current on all payments.
The proposal also would make a number of technical and conforming
amendments to implement this change. The proposal would be effective for
claims for refunds filed after the date of enactment.
Expand authority to award costs and fees.--Any person who
substantially prevails in a dispute related to taxes, interest, or
penalties may be awarded reasonable administrative costs incurred before
the IRS and reasonable litigation costs incurred in connection with any
court proceeding. Individuals can receive an award of litigation and
administrative costs only if their net worth does not exceed $2 million.
Awards cannot exceed amounts actually paid or incurred, and cannot
exceed a statutorily limited rate ($110 per hour, indexed for
inflation). Taxpayers who are represented pro bono, and thus bear no
actual attorney's fees and costs, cannot recover such amounts. The
Administration proposes to allow the award of attorney's fees (in
amounts up to the statutory limit) to persons who represent such
taxpayers for no more than a nominal fee. The proposal would be
effective with respect to costs incurred and services performed after
the date of enactment.
Expand authority to issue taxpayer assistance orders.--Under current
law, taxpayers can request that the Taxpayer Advocate issue a taxpayer
assistance order (TAO) to require the IRS to release property of the
taxpayer that has been levied upon, or to cease any action, take any
action as permitted by law, or refrain from taking any action with
respect to the taxpayer. A TAO may be issued if the taxpayer is
suffering or about to suffer a significant hardship as a result of the
manner in which the laws are being administered by IRS. The
Administration proposes to provide that, in determining whether to issue
a TAO, the Taxpayer Advocate will also be authorized to consider, among
other factors, the following: unreasonable delays in resolving the
taxpayer's account problems; immediate threats of substantial adverse
action (such as the seizure of a residence to pay overdue taxes); the
likelihood of irreparable harm if relief is not granted; whether the
taxpayer will have to pay significant professional fees if relief is not
granted; and the possibility of long-term adverse impact on the
taxpayer. The proposal would be effective on the date of enactment.
Provide new remedy for third parties who claim that the IRS has filed
an erroneous lien.--The Supreme Court held (Williams v. United States)
that a third party who paid another person's tax under protest to remove
a lien on the third party's property could bring a refund suit, because
she had no other adequate administrative or judicial remedy. However,
the Court left many important questions unresolved. The Administration
proposes to create administrative and judicial remedies for a third
party in that situation. Under this procedure, the owner of property
(other than the taxpayer) could obtain a certificate discharging
property from the Federal tax lien as a matter of right, provided
certain conditions were met. The certificate of discharge would enable
the property owner to sell the property free and clear of the Federal
tax lien in all circumstances. The proposal would also establish a
judicial cause of action for persons challenging a Federal tax lien that
is similar to the wrongful levy remedy already in the Internal Revenue
Code. The proposal would be effective on the date of enactment.
Allow damage suits by persons other than the taxpayer.--Under current
law, taxpayers have a right to sue for damages if, in connection with
any collection of Federal tax, any officer or employee of the IRS
recklessly or intentionally disregards any provision of the Internal
Revenue Code or any regulation thereunder. Recoverable damages are the
lesser of actual, direct economic damages sustained, plus attorneys'
fees, or $1 million. Actions under this provision may only be brought by
an injured taxpayer, however, and not by an injured third party. The
Administration proposes that persons other than the taxpayer from whom
collection is sought be granted a right to sue for damages. The current
law limitations on awards for damages would apply to third party
plaintiffs, as well. The proposal would be effective with respect to
collection actions taken after the date of enactment.
Joint Returns
Suspend collection in certain joint liability cases.--When a married
couple's joint return is the subject of a Tax Court proceeding, the
Administration proposes to require the IRS to withhold collection by
levy against a nonpetitioning spouse while a Tax Court proceeding
involving the other spouse is pending. This would treat the
nonpetitioning spouse the same as the petitioning spouse in most
situations. Certain exceptions would be provided, including in jeopardy
situations; when the taxpayer waives this protection (i.e., agrees to
the collection action); other, limited but automatic kinds of collection
activity, such as automatic refund offset; filing of protective notices
of Federal tax lien, etc.; or certain other situations. The statute of
limitations on assessment and collection would be stayed for the period
during which collection by levy is barred. If there is a final decision
that reduces the proposed assessment against the petitioning spouse, the
assessment against the nonpetitioning spouse would likewise be reduced.
The proposal would not affect the IRS's ability to collect other
liabilities or assessments that are not the subject of the Tax Court
proceeding. The proposal would be effective for taxes assessed with
respect to taxable years beginning after December 31, 1998.
Require explanation of joint and several liability.--In general,
spouses who file a joint tax return are jointly and severally liable for
the tax due. Thus each is fully responsible for the accuracy of the
return
[[Page 64]]
and the full amount of the liability, even if only one spouse earned the
wages or income that is shown on the return. Married taxpayers need to
better understand the legal implications of signing a joint return.
Therefore, the Administration proposes to require the IRS to establish
procedures to alert married taxpayers clearly of their joint and several
liability on appropriate tax publications and instructions. The proposal
would require that such procedures be established no later than 180 days
after the date of enactment.
Relieve innocent spouse of liability in certain cases.--Spouses who
file a joint tax return are each fully responsible for the accuracy of
the return and for the full tax liability, even if only one spouse
earned the wages or income shown on the return. Relief from liability is
available for ``innocent spouses'' in certain circumstances, but the
conditions are frequently hard to meet and the Tax Court may not have
jurisdiction to review all denials of innocent spouse relief. The
Administration proposes to generally make innocent spouse status easier
to obtain. It would first eliminate certain applicable dollar thresholds
for understatements of tax. Second, the proposal would specifically
provide the Tax Court with jurisdiction to review the IRS's denial of
innocent spouse relief and to order appropriate relief. Except in
limited cases, the IRS could not collect the tax until the Tax Court
case is final (although the statute of limitations would be extended
while the Tax Court case is pending). Finally, the proposal would
require the IRS to develop a separate form with instructions for
taxpayers to use in applying for innocent spouse relief within 180 days
from the date of enactment. The proposal would be effective for
understatements in years beginning after the date of enactment and for
overpayments assessed within the previous two years.
Miscellaneous
Allow ``global'' interest netting of under- and over-payments.--The
rate of interest charged taxpayers on their tax underpayments differs
from the rate paid to taxpayers on overpayments. Although the IRS
ameliorates the effect of this interest rate differential by ``netting''
offsetting underpayments and overpayments in some situations, there is
no authority to net when either the overpayment or the underpayment has
been satisfied already (``global'' netting). Global interest netting for
income taxes would be implemented under this proposal. The proposal
would be effective for calendar quarters with periods of overlapping
mutual indebtedness after the date of enactment.
Facilitate archiving of IRS records.--The IRS, like all other Federal
agencies, must create, maintain, and preserve agency records, and must
transfer significant and historical records to the National Archives and
Records Administration (NARA) for retention or disposal. However, tax
returns and return information are confidential and can be disclosed
only pursuant to limited exceptions. There is no exception authorizing
the disclosure of return information to NARA. The Administration
proposes to provide an exception to the disclosure rules, authorizing
the IRS to disclose tax returns and return information to officers or
employees of NARA, upon written request from the Archivist, for purposes
of the appraisal of such records for destruction or retention. The
prohibitions on, and penalties for, unauthorized re-disclosure of such
information would apply. The proposal would be effective for requests
made by the Archivist after the date of enactment.
Clarify authority to prescribe manner of making elections.--Except as
otherwise provided by statute, elections under the Internal Revenue Code
must be made in such manner as the Secretary of the Treasury ``shall by
regulations or forms prescribe.'' The question has arisen whether the
Secretary can prescribe the manner of required elections other than by
regulations or forms, for instance in revenue rulings or revenue
procedures. The proposal would clarify that, except as otherwise
provided, the Secretary may prescribe the manner of making any election
by any reasonable means. The proposal would be effective on the date of
enactment.
Grant IRS broad authority to enter into cooperative agreements with
State taxing agencies.--Taxpayers currently must file returns with both
their State taxing agency and the IRS, and frequently must resolve
issues with the agencies at different times. If appropriate statutory
authority were enacted, taxpayers could file only one return for both
State and Federal taxes. Then, pursuant to a cooperative agreement
between the IRS and the State, the information could be processed by one
tax administrator and shared between the two, substantially simplifying
filing requirements and reducing taxpayer burden. The Administration
proposes to allow the IRS to enter such agreements with the States to
provide for joint filing and processing of returns, joint collection of
taxes (other than Federal income taxes), and such other provisions as
may enhance joint tax administration. It would further amend the
Internal Revenue Code's confidentiality provisions to permit sharing of
common tax data, would address the effect of joint agreements in a
number of situations, and would include a thorough list of conforming
amendments. The provision would be effective on the date of enactment.
Provide clinics for low-income taxpayers.--Low-income individuals
frequently have difficulty complying with their tax obligations or
resolving disputes over their tax liabilities. Providing tax services to
such individuals through clinics that offer such services for a nominal
fee would improve compliance with the tax laws and should be encouraged.
The Administration proposes that the Legal Services Corporation be
authorized to make up to $3,000,000 in grants for the development,
expansion, or continuation of certain low-income
[[Page 65]]
taxpayer clinics. The provision would be effective on the date of
enactment.
Provide procedures for release of field service memoranda.--The
Administration proposes to clarify that Field Service Advice Memoranda
(FSAs) are return information that is protected under the Internal
Revenue Code and cannot be disclosed without authorization. It would
also, however, make the non-confidential information in such documents
public, subject to a redaction process in which the taxpayer whose
liability is the subject of the FSA would be allowed to participate. The
proposal would be effective on the date of enactment, but it would
include a schedule of time over which the IRS would make past FSAs
available under the redaction procedure.
ELIMINATE UNWARRANTED BENEFITS AND ADOPT OTHER REVENUE MEASURES
The President's plan curtails unwarranted corporate tax subsidies,
closes tax loopholes, improves tax compliance and adopts other revenue
measures.
Defer deduction for interest and original issue discount (OID) on
convertible debt.-- The accrued but unpaid interest and OID on a
convertible debt instrument generally is deductible, even if the
instrument is converted into the stock of the issuer or a related party
before the issuer pays any interest or OID. The Administration proposes
to defer the deduction for all interest, including OID, on convertible
debt until payment. The proposal would be effective for convertible debt
issued on or after the date of first committee action.
Eliminate dividends-received deduction for certain preferred stock.--A
corporate holder of stock generally is entitled to a deduction for
dividends received on stock in the following amounts: 70 percent if the
recipient owns less than 20 percent of the stock of the payor, 80
percent if the recipient owns 20 percent or more of the stock, and 100
percent of qualifying dividends received from members of the same
affiliated group. The Administration proposes to eliminate the 70- and
80-percent dividends-received deduction for dividends on certain
limited-term preferred stock, effective for stock issued after the date
of enactment.
Repeal percentage depletion for non-fuel minerals mined on Federal and
formerly Federal lands.--Taxpayers are allowed to deduct a reasonable
allowance for depletion relating to certain mineral deposits. The
depletion deduction for any taxable year is calculated under either the
cost depletion method or the percentage depletion method, whichever
results in the greater allowance for depletion for the year. The
percentage depletion method is viewed as an incentive for mineral
production rather than as a normative rule for recovering the taxpayer's
investment in the property. This incentive is excessive with respect to
minerals mined on Federal and formerly Federal lands under the 1872
mining act, in light of the minimal costs of acquiring the mining rights
($5.00 or less per acre). The Administration proposes to repeal
percentage depletion for non-fuel minerals mined on Federal lands where
the mining rights were originally acquired under the 1872 law, and on
private lands acquired under the 1872 law. The proposal would be
effective for taxable years beginning after the date of enactment.
Repeal tax-free conversions of large C corporations to S corporations
(section 1374).--A corporation can avoid the existing two-tier tax by
electing to be treated as an S corporation or by converting to a
partnership. Converting to a partnership is a taxable event that
generally requires the corporation to recognize any built-in gain on its
assets and requires the shareholders to recognize any built-in gain on
their stock. By contrast, the conversion to an S corporation is
generally tax-free, except that the S corporation generally must
recognize the built-in gain on assets held at the time of conversion if
the assets are sold within ten years. The Administration proposes that
the conversion of a C corporation with a value of more than $5 million
into an S corporation would be treated as a liquidation of the C
corporation, followed by a contribution of the assets to an S
corporation by the recipient shareholders. Thus, the proposal would
require immediate gain recognition by both the corporation (with respect
to its appreciated assets) and its shareholders (with respect to their
stock). This proposal would make the tax treatment of conversions to an
S corporation generally consistent with conversions to a partnership.
The proposal would apply to elections that are first effective for a
taxable year beginning after January 1, 1999 and to acquisitions of a C
corporation by an S corporation made after December 31, 1998.
Replace sales-source rules with activity-based rules.--The foreign tax
credit generally reduces U.S. tax on foreign source income, but does not
reduce U.S. tax on U.S. source income. When products are manufactured in
the United States and sold abroad, Treasury regulations provide that 50
percent of such income generally is treated as earned in production
activities, and sourced on the basis of the location of assets held or
used to produce income from the sale. The remaining 50 percent of the
income is treated as earned in sales activities and sourced based on
where title to the inventory transfers. Thus, if a U.S. manufacturer
sells inventory abroad, half of the income generally is treated as
derived from domestic sources, and half of the income generally is
treated as derived from foreign sources. However, the taxpayer may use a
more favorable method if it can establish to the satisfaction of the IRS
that more than half of its economic activity occurred in a foreign
country. This 50/50 rule provides a benefit to U.S. exporters that
operate in high-tax foreign countries. Thus, U.S. multinational
exporters have a competitive advantage over U.S. exporters that conduct
all their business activities in the U.S. Because export benefits should
be targeted equally to all export
[[Page 66]]
ers, the Administration proposes to reduce the amount of export sales
income that such corporations may treat as derived from foreign sources
by requiring that the allocation be based on actual economic activity.
The proposal would be effective for taxable years beginning after the
date of enactment.
Modify rules relating to foreign oil and gas extraction income.--To be
eligible for the U.S. foreign tax credit, a foreign levy must be the
substantial equivalent of an income tax in the U.S. sense, regardless of
the label the foreign government attaches to it. Under regulations, a
foreign levy is a tax if it is a compulsory payment under the authority
of a foreign government to levy taxes and is not compensation for a
specific economic benefit provided by the foreign country. Taxpayers
that are subject to a foreign levy and that also receive (directly or
indirectly) a specific economic benefit from the levying country are
referred to as ``dual capacity'' taxpayers and may not claim a credit
for that portion of the foreign levy paid as compensation for the
specific economic benefit received. The Administration proposes to treat
as taxes payments by a dual-capacity taxpayer to a foreign country that
would otherwise qualify as income taxes or ``in lieu of'' taxes, only if
there is a ``generally applicable income tax'' in that country. For this
purpose, a generally applicable income tax is an income tax (or a series
of income taxes) that applies to trade or business income from sources
in that country, so long as the levy has substantial application both to
non-dual-capacity taxpayers and to persons who are citizens or residents
of that country. Where the foreign country does generally impose an
income tax, as under present law, credits would be allowed up to the
level of taxation that would be imposed under that general tax, so long
as the tax satisfies the new statutory definition of a ``generally
applicable income tax.'' The proposal also would create a new foreign
tax credit basket within section 904 for foreign oil and gas income. The
proposal would be effective for taxable years beginning after the date
of enactment. The proposal would yield to U.S. treaty obligations that
allow a credit for taxes paid or accrued on certain oil or gas income.
Repeal lower-of-cost-or-market inventory accounting method.--Taxpayers
required to maintain inventories are permitted to use a variety of
methods to determine the cost of their ending inventories, including the
last-in, first-out (LIFO) method, the first-in, first-out (FIFO) method,
and the retail method. Taxpayers not using a LIFO method may determine
the carrying values of their inventories by applying the lower-of-cost-
or-market (LCM) method and by writing down the cost of goods that are
unsalable at normal prices or unusable in the normal way because of
damage, imperfection or other causes (subnormal goods method). The
allowance of write-downs under the LCM and subnormal goods methods is
essentially a one-way mark-to-market method that understates taxable
income. The Administration proposes to repeal the LCM and subnormal
goods methods effective for taxable years beginning after the date of
enactment.
Increase penalties for failure to file correct information returns.--
Any person who fails to file required information returns in a timely
manner or incorrectly reports such information is subject to penalties.
For taxpayers filing large volumes of information returns or reporting
significant payments, existing penalties ($15 per return, not to exceed
$75,000 if corrected within 30 days; $30 per return, not to exceed
$150,000 if corrected by August 1; and $50 per return, not to exceed
$250,000 if not corrected at all) may not be sufficient to encourage
timely and accurate reporting. The Administration proposes to increase
the general penalty amount, subject to the overall dollar limitations,
to the greater of $50 per return or 5 percent of the total amount
required to be reported. The increased penalty would not apply if the
aggregate amount actually reported by the taxpayer on all returns filed
for that calendar year was at least 97 percent of the amount required to
be reported. The increased penalty would be effective for returns the
due date for which is more than 90 days after the date of enactment.
Tighten the substantial understatement penalty for large
corporations.--Currently taxpayers may be penalized for erroneous, but
non-negligent, return positions if the amount of the understatement is
``substantial'' and the taxpayer did not disclose the position in a
statement with the return. ``Substantial'' is defined as 10 percent of
the taxpayer's total current tax liability, but this can be a very large
amount. This has led some large corporations to take aggressive
reporting positions where huge amounts of potential tax liability are at
stake--in effect playing the audit lottery--without any downside risk of
penalties if they are caught, because the potential tax still would not
exceed 10 percent of the company's total tax liability. To discourage
such aggressive tax planning, the Administration proposes that any
deficiency greater than $10 million be considered ``substantial'' for
purposes of the substantial understatement penalty, whether or not it
exceeds 10 percent of the taxpayer's liability. The proposal, which
would be effective for taxable years beginning after the date of
enactment, would affect only taxpayers that have tax liabilities greater
than or equal to $100 million.
Repeal exemption for withholding on gambling winnings from bingo and
keno in excess of $5,000.--Proceeds of most wagers with odds of less
than 300 to 1 are exempt from withholding, as are all bingo and keno
winnings. The Administration proposes to impose withholding on proceeds
of bingo or keno in excess of $5,000 at a rate of 28 percent, regardless
of the odds of the wager, effective for payments made after the start of
the first calendar quarter that is at least 30 days after the date of
enactment.
[[Page 67]]
Reinstate oil spill excise tax.--Before January 1, 1995, a five-cents-
per-barrel excise tax was imposed on domestic crude oil and imported oil
and petroleum products. The tax was dedicated to the Oil Spill Liability
Trust Fund to finance the cleanup of oil spills and was not imposed for
a calendar quarter if the unobligated balance in the Trust Fund exceeded
$1 billion at the close of the preceding quarter. The Administration
proposes to reinstate this tax for the period after the date of
enactment and before October 1, 2008. The tax would be suspended for a
given calendar quarter if the unobligated Trust Fund balance at the end
of the preceding quarter exceeded $5 billion.
Modify Federal Unemployment Act (FUTA) provisions.--Beginning in 2004,
the Administration proposes to require an employer to pay Federal and
State unemployment taxes monthly (instead of quarterly) in a given year,
if the employer's FUTA tax liability in the immediately preceding year
was $1,100 or more.
Extend pro rata disallowance of tax-exempt interest expense that
applies to banks to all financial intermediaries.--No income tax
deduction is allowed for interest on debt used directly or indirectly to
acquire or hold investments that produce tax-exempt income. The
determination of whether debt is used to acquire or hold tax-exempt
investments differs depending on the holder of the instrument. For banks
and a limited class of other financial institutions, debt generally is
treated as financing all of the taxpayer's assets proportionately.
Securities dealers are not included in the definition of ``financial
institution,'' and under a special rule are subject to a disallowance of
a much smaller portion of their interest deduction. For other financial
intermediaries, such as finance companies, that are also not included in
the narrow definition of ``financial institutions,'' deductions are
disallowed only when indebtedness is incurred or continued for the
purpose of purchasing or carrying tax-exempt investments. These
taxpayers are therefore able to reduce their tax liabilities
inappropriately through the double Federal tax benefits of interest
expense deductions and tax-exempt interest income, notwithstanding that
they operate similarly to banks. Effective for taxable years beginning
after the date of enactment, with respect to obligations acquired on or
after the date of first committee action, the Administration proposes
that all financial intermediaries, other than insurance companies (which
are subject to a separate regime), be treated the same as banks are
treated under current law with regard to deductions for interest on debt
used directly or indirectly to acquire or hold tax-exempt obligations.
Increase the proration percentage for property casualty (P&C)
insurance companies.--In computing their underwriting income, P&C
insurance companies deduct reserves for losses and loss expenses
incurred. These loss reserves are funded in part with the company's
investment income. In 1986, Congress reduced the reserve deductions of
P&C insurance companies by 15 percent of the tax-exempt interest or the
deductible portion of certain dividends received. In 1997, Congress
expanded the 15-percent proration rule to apply to the inside buildup on
certain insurance contracts. The existing 15-percent proration rule
still enables P&C insurance companies to fund a substantial portion of
their deductible reserves with tax-exempt or tax-deferred income. Other
financial intermediaries, such as life insurance companies and banks,
are subject to more stringent proration rules that substantially reduce
or eliminate their ability to use tax-exempt or tax-deferred investments
to fund currently deductible reserves or to deduct interest expense.
Effective for taxable years beginning after the date of enactment, with
respect to investments acquired on or after the date of first committee
action, the Administration proposes to increase the proration percentage
to 30 percent.
Preclude certain taxpayers from prematurely claiming losses from
receivables.--An accrual method taxpayer generally must recognize income
when all events have occurred that fix the right to its receipt and its
amount can be determined with reasonable accuracy. In the event that a
receivable arising in the ordinary course of the taxpayer's trade or
business becomes uncollectible, the accrual method taxpayer may deduct
the account receivable as a business bad debt in the year in which it
becomes wholly or partially worthless. Accrual method service providers,
however, are provided a special exception to these general rules. Under
the exception, a taxpayer using an accrual method with respect to
amounts to be received for the performance of services is not required
to accrue any portion of such amounts that (on the basis of experience)
will not be collected. This special exception permits an accrual method
service provider to reduce current taxable income by an estimate of its
future bad debt losses. This method of estimation results in a
mismeasurement of a taxpayer's economic income and, because this tax
benefit only applies to amounts to be received for the performance of
services, promotes controversy over whether a taxpayer's receivables
represent amounts to be received for the performance of services or for
the provision of goods. The Administration proposes to repeal the
special exception for accrual method service providers effective for
taxable years ending after the date of enactment.
In general, dealers in securities are required to use a mark-to-market
method of accounting. Under this method, securities that are inventory
in the hands of the dealer must be included in inventory at fair market
value. A taxpayer that is otherwise not a dealer in securities may elect
to be treated as such for this purpose if the taxpayer purchases and
sells debt instruments that, at the time of purchase or sale, are
customer paper with respect to either the taxpayer or a corporation that
is a member of the same consolidated group as the taxpayer (the
``customer paper election''). Significant numbers of taxpayers whose
principal activities are selling nonfinancial goods or providing
nonfinancial services are making the customer paper elec
[[Page 68]]
tion as a means of restoring bad debt reserves. The customer paper
election is also being used inappropriately to mark-to-market trade
receivables that bear little or no interest in order to recognize loss.
Under the proposal, certain customer receivables would not be allowed to
be marked to market. The proposal would be effective for taxable years
ending after the date of enactment.
Restrict special net operating loss carryback rules for specified
liability losses.--Under current law, the portion of a net operating
loss that qualifies as a specified liability loss may be carried back 10
years rather than being limited to the general two-year carryback
period. A specified liability loss includes amounts allowable as a
deduction with respect to product liability, and also certain
liabilities that arise under Federal or State law or out of any tort of
the taxpayer. The proper interpretation of the specified liability loss
provisions as they apply to liabilities arising under Federal or State
law or out of any tort of the taxpayer has been the subject of
manipulation and significant controversy. Accordingly, the
Administration proposes to modify the specified liability loss
provisions to provide that only a limited class of liabilities qualifies
as a specified liability loss. Under the proposal, specified liability
losses would include (in addition to product liability losses) any
amount allowable as a deduction that is attributable to a liability
under Federal or State law for reclamation of land, decommissioning of a
nuclear power plant (or any unit thereof), dismantlement of an offshore
oil drilling platform, remediation of environmental contamination, or
payments under a workers' compensation statute. The proposal would be
effective for taxable years beginning after the date of enactment.
Freeze grandfather status of stapled (or ``paired-share'') Real Estate
Investment Trusts (REITs).--REITs generally are limited to owning
passive investments in real estate and certain securities. Prior to
1984, certain ``stapled'' REITs were paired with subchapter C
corporations and traded in tandem as a single unit. This effectively
allowed these stapled REITs to circumvent the restrictions on operating
active businesses. In the Deficit Reduction Act of 1984, Congress
restricted REITs' ability to avoid these investment limitations by
providing that stapled entities must be treated as one entity for
purposes of determining qualification under the REIT rules. However,
Congress grandfathered the existing stapled REITs indefinitely. The
Administration proposes to limit the grandfather status of the existing
stapled REITs. Under the proposal, for purposes of determining whether
any grandfathered entity is a REIT, the stapled entities would be
treated as one entity with respect to properties acquired on or after
the date of the first committee action and with respect to activities or
services relating to such properties (i.e., properties acquired after
the effective date) that are undertaken or performed by one of the
stapled entities on or after such date.
Restrict impermissible business indirectly conducted by REITs.--REITs
generally are restricted to owning passive investments in real estate
and certain securities. To prevent indirect ownership of impermissible
businesses, current law restricts a REIT from owning more than 10
percent of the outstanding voting securities of any issuer. Nonetheless,
a REIT can essentially conduct an impermissible business through a
subsidiary by holding a significant amount of non-voting stock in a
corporation. Through the retention of non-voting stock and debt, the
REIT is able to retain most, if not all, of the income generated by the
impermissible business and to circumvent the restrictions on operating
active businesses. The Administration proposes to restrict this ability
by prohibiting REITs from holding stock possessing more than 10 percent
of the vote or value of all classes of stock of a corporation. In
general, the proposal would be effective with respect to stock acquired
on or after the date of first committee action.
Modify treatment of closely held REITs.--When originally enacted, the
REIT legislation was intended to provide a tax-favored vehicle through
which small investors could invest in a professionally managed real
estate portfolio. REITs are intended to be widely held entities, and
certain requirements of the REIT rules are designed to ensure this
result. Among other requirements, in order for an entity to qualify for
REIT status, the beneficial ownership of the entity must be held by 100
or more persons. In addition, a REIT cannot be closely held, which
generally means that no more than 50 percent of the value of the REIT's
stock can be owned by five or fewer individuals during the last half of
the taxable year. Certain attribution rules apply in making this
determination. The Administration has become aware of a number of tax
avoidance transactions involving the use of closely held REITs. In order
to meet the 100 or more shareholder requirement, the REIT generally
issues common stock, which is held by one shareholder, and a separate
class of non-voting preferred stock with a relatively nominal value,
which is held by 99 ``friendly'' shareholders. The closely held
limitation does not disqualify the REITs that are utilizing this
ownership structure because the majority shareholders of these REITs are
not individuals. The Administration proposes to impose as an additional
requirement for REIT qualification that no person can own stock of a
REIT possessing more than 50 percent of the total combined voting power
of all classes of voting stock or more than 50 percent of the total
value of shares of all classes of stock. For purposes of determining a
person's stock ownership, rules similar to the attribution rules
contained in section 856(d)(5) would apply. The proposal would be
effective for entities electing REIT status for taxable years beginning
on or after the date of first committee action.
Modify depreciation method for tax-exempt use property.--Current law
requires tax-exempt use property (property owned by a U.S. person but
leased to a foreign or tax-exempt person) to be depreciated using
[[Page 69]]
the straight-line method over a period equal to the greater of (1) the
property's class life; or (2) 125 percent of the lease term. This rule
has led to manipulations designed to create a shortened recovery period.
The Administration proposes to lengthen the recovery period for ``tax-
exempt use property'' to 150 percent of its class life. This will
prevent the U.S. tax system from providing tax benefits in the form of
accelerated depreciation for the use of property that is not connected
with U.S. business activities. The proposal generally would be effective
for property placed in service after December 31, 1998.
Impose excise tax on purchase of structured settlements.--Current law
facilitates the use of structured personal injury settlements because
recipients of annuities under these settlements are less likely than
recipients of lump sum awards to consume their awards too quickly and
require public assistance. Consistent with that policy, this favorable
treatment is conditional upon a requirement that the periodic payments
cannot be accelerated, deferred, increased or decreased by the injured
person. Nonetheless, certain factoring companies are able to purchase a
portion of the annuities from the recipients for heavily discounted lump
sums. These purchases are inconsistent with the policy underlying
favorable tax treatment of structured settlements. Accordingly, the
Administration proposes to impose on any person who purchases (or
otherwise acquires for consideration) a structured settlement payment
stream, a 20-percent excise tax on the purchase price unless such
purchase is pursuant to a court order finding that the extraordinary and
unanticipated needs of the original intended recipient render such a
transaction desirable. The proposal would apply to purchases occurring
after the date of enactment. No inference is intended as to the
contractual validity of the purchase or the effect of the purchase
transaction on the tax treatment of any party other than the purchaser.
Clarify and expand math error procedures.--If the IRS determines that
a taxpayer has failed to provide a correct taxpayer identification
number (TIN) that is required by statute, the IRS may, in certain cases,
use the streamlined procedures for mathematical and clerical errors
(``math error procedures'') to expedite the assessment of tax. The
Administration proposes the following clarifications to the math error
procedures applicable to the child tax credit, the child and dependent
care tax credit, the personal exemption for dependents, the Hope and
Lifetime Learning tax credits, and the earned income tax credit. First,
the term ``correct taxpayer identification number'' used on a tax return
would be defined as the TIN assigned to such individual by the Social
Security Administration (SSA), or in certain limited cases, the IRS.
Second, the IRS would be authorized to use data obtained from SSA to
verify that the TIN provided on the return corresponds to the individual
for whom the TIN was assigned. Such data would include the individual's
name, age or date of birth, and Social Security number. Third, the IRS
would be authorized to use math error procedures to deny eligibility for
those tax benefits subject to the math error procedures that impose a
statutory age restriction (i.e., the child tax credit, the child and
dependent care tax credit and the earned income tax credit) if the
taxpayer provides a TIN for either the taxpayer or qualifying child that
the IRS determines, using data from SSA, does not meet the statutory age
restrictions. The proposal would be effective for taxable years ending
after the date of enactment.
Clarify the meaning of ``subject to'' liabilities under section
357(c).--A transferor generally is required to recognize gain on a
transfer of property in an otherwise tax-free section 351 exchange to
the extent the sum of the liabilities assumed, plus those to which the
transferred property is subject, exceeds the basis in the property. If a
recourse liability is secured by multiple assets, it is unclear under
present law whether a transfer of one asset where the transferor remains
liable is a transfer of property ``subject to the liability.'' Similar
issues exist with respect to nonrecourse liabilities. Under the
Administration's proposal, the distinction between the assumption of a
liability and the acquisition of an asset subject to a liability would
be eliminated. Instead, the extent to which a liability (including a
nonrecourse liability) is treated as assumed for Federal income tax
purposes in connection with a transfer of property would be determined
on the basis of all the facts and circumstances. In general, if
nonrecourse indebtedness is secured by more than one asset, and any
assets securing the indebtedness are transferred subject to the
indebtedness without any indemnity agreements, then for all Federal
income tax purposes the transferee would be treated as assuming an
allocable portion of the liability based upon the relative fair market
values (determined without regard to section 7701(g)) of the assets
securing the liability. The proposal would be effective for transfers
after the date of first committee action. No inference regarding the tax
treatment under current law is intended.
Simplify foster child definition under EITC.--In order to simplify the
EITC rules, the Administration proposes to clarify the definition of
foster child for purposes of claiming the EITC. Under the proposal, the
foster child must be the taxpayer's sibling (or a descendant of the
taxpayer's sibling), or be placed in the taxpayer's home by an agency of
a State or one of its political subdivisions or a tax-exempt child
placement agency licensed by a State. The proposal would be effective
for taxable years beginning after December 31, 1998.
Clarify tie-breaker rule under EITC.--The earned income tax credit
tie-breaker rule prevents a lower-income individual from claiming the
credit with respect to a particular child who could also be a qualifying
child with respect to a higher-income individual. The Administration
proposes to clarify that the requirement that a taxpayer identify on his
or her tax return any
[[Page 70]]
child with respect to whom the taxpayer is claiming the EITC is a
requirement for claiming the credit, rather than an element of the
definition of ``qualifying child.'' Thus, under the EITC tie-breaker
rule, the child would be a qualifying child with respect to the higher-
income individual, regardless of whether the higher-income individual
actually identifies the child on his or her return. A similar change
would be made to the definition of ``eligible individual.'' The proposal
is effective with respect to taxable years ending after the date of
enactment. No inference is intended as to the operation of the tie-
breaker rule under current law.
Eliminate non-business valuation discounts.--Under current law,
taxpayers are claiming large discounts on the valuation of gifts and
bequests of interests in entities holding marketable assets. Because
these discounts are inappropriate, the Administration proposes to
eliminate valuation discounts except as they apply to active businesses.
Interests in entities generally would be required to be valued for gift
and estate tax purposes at a proportional share of the net asset value
of the entity to the extent that the entity holds readily marketable
assets. The proposal would be effective for gifts made after, and
decedents dying after, the date of enactment.
Eliminate ``Crummey'' rule.--Currently, gifts of present interests of
up to $10,000 (in 1998) per donor per donee each year are excepted from
the gift tax. The decision in Crummey v. Commissioner held that a
transfer in trust is a transfer of a present interest if the beneficiary
has a right to withdraw the property from the trust for a limited period
of time. The Administration proposes to overrule this decision so that
only outright gifts of present interests would be counted for purposes
of the $10,000 gift exception. The proposal would be effective for gifts
completed after December 31, 1998.
Eliminate gift tax exemption for personal residence trusts.-- Current
law excepts transfers of personal residences in trust from the special
valuation rules applicable when a grantor retains an interest in a
trust. The Administration proposes to repeal this personal residence
exception. Thereafter, if a residence is to be used to fund a grantor
retained interest trust, the trust would be required to pay out the
required annuity or unitrust amount or else the grantor's retained
interest would be valued at zero for gift tax purposes. This proposal
would be effective for transfers in trust after the date of enactment.
Include qualified terminable interest property (QTIP) trust assets in
surviving spouse's estate.--A marital deduction is allowed for qualified
terminable interest property (QTIP) passing to a qualifying trust for a
spouse either by gift or by bequest. The value of the recipient spouse's
estate includes the value of any such property in which the decedent had
a qualifying income interest for life and a deduction was allowed under
the gift or estate tax. In some cases, taxpayers have attempted to
whipsaw the government by claiming the deduction in the first estate and
then arguing against inclusion in the second estate due to some
technical flaw in the QTIP election. The Administration proposes that,
if a deduction is allowed under the QTIP provisions, inclusion is
required in the beneficiary spouse's estate. The proposal would be
effective for decedents dying after the date of enactment.
Apply 7.7 percent capitalization rate to credit life insurance
premiums.--Under current law, a company that issues group credit life
insurance contracts is required to capitalize 2.05 percent of its net
premiums for such contracts. However, commissions and other policy
acquisition expenses on credit life insurance contracts generally are
higher than policy acquisition expenses for individual life insurance
contracts, to which a 7.7 percent capitalization rate applies. Thus, the
statutory proxy rate for policy acquisition costs on credit life
insurance contracts does not accurately reflect the level of commissions
and other policy acquisition expenses for credit life insurance. Under
the Administration's proposal, insurance companies would be required to
capitalize 7.7 percent of their net premiums for a taxable year with
respect to all credit life insurance contracts. The proposal would be
effective for taxable years beginning after the date of enactment.
Modify corporate-owned life insurance (COLI) rules.--In general,
interest on policy loans or other indebtedness with respect to life
insurance, endowment or annuity contracts is not deductible unless the
insurance contract insures the life of a ``key person'' of a business.
In addition, the interest deductions of a business generally are reduced
under a proration rule if the business owns or is a direct or indirect
beneficiary with respect to certain insurance contracts. The COLI
proration rules generally do not apply if the contract covers an
individual who is a 20 percent owner of the business or is an officer,
director, or employee of such business. These exceptions under current
law still permit leveraged businesses to fund significant amounts of
deductible interest and other expenses with tax-exempt or tax-deferred
inside buildup. The Administration proposes to repeal the exception
under the COLI proration rules for contracts insuring employees,
officers or directors (other than 20 percent owners) of the business.
The proposal also would conform the key person exception for disallowed
interest deductions attributable to policy loans and other indebtedness
with respect to insurance contracts to the 20 percent owner exception in
the COLI proration rules. The proposal would be effective for taxable
years beginning after date of enactment.
Modify reserve rules for annuity contracts.--Under current law, a life
insurance company that issues an annuity contract claims a reserve
deduction equal to the greater of the net surrender value of the
contract and an amount that is based on the Commissioner's
[[Page 71]]
Annuities Reserve Valuation Method (CARVM) in effect on the date that
the annuity contract is issued, subject to a cap equal to the annual
statement reserve for the contract. In 1997, the National Association of
Insurance Commissioners adopted new actuarial guidelines interpreting
CARVM. The guidelines generally require life insurance companies to
compute CARVM reserves by determining the greatest possible present
value of all guaranteed benefits, using a number of worst case or
``conservative'' assumptions. The guidelines are effective on December
31, 1998, and apply to all contracts issued on or after January 1, 1981.
Because these new guidelines would be inappropriate for calculating tax
reserves, the Administration proposes that tax reserves for all annuity
contracts with cash surrender values would be set at the contract's net
cash surrender value plus a specified percentage of the contract's net
cash surrender value that would be phased out over a portion of the
contract period. The proposal would be effective for taxable years
ending on or after the date of enactment.
Tax certain exchanges of insurance contracts and reallocations of
assets within variable insurance contracts.--Generally, investors are
taxed upon the sale or exchange of assets. However, certain exchanges of
life insurance, endowment and annuity contracts are not taxed. Also, the
holder of a variable contract who liquidates part or all of his
investment in one fund, and reallocates the proceeds to a different fund
within a variable contract, is not taxed. The Adminstration proposes
that all exchanges of an insurance contract for a variable contract
would be taxable. Exchanges of variable contracts for any type of life
insurance, endowment or annuity contract would be taxable. Each variable
contract investment in a separate account mutual fund or in the
insurance company's general account would be treated as a separate
contract. In addition, the investment in the contract would be net of
mortality and expense charges. These rules would apply to contracts
issued after the date of first committee action. A material change in an
existing contract would be treated as the issuance of a new contract.
Reduce ``investment in the contract'' for mortality and expense
charges on certain insurance contracts.--For purposes of computing the
amount of taxable investment income under section 72 of the Internal
Revenue Code from distributions under cash value life insurance,
endowment, or annuity contracts, the holder's tax basis includes
premiums used to pay mortality and expense charges. These charges are
used to pay for annual term life insurance coverage, other types of
insurance coverage, and options to buy life annuities at specified rates
guaranteed in a deferred annuity contract. As a result, these rules
overstate basis and thus understate the amount of tax-deferred income
under these contracts when they are surrendered for cash or the holder
receives other distributions under the contract. The Administration
proposes to modify the computation of basis under section 72 by
subtracting mortality and expense charges. This proposal would apply to
contracts issued after the date of first committee action.
Amend 80/20 company rules.--Dividends paid by a so-called ``80/20
company'' generally are partially or fully exempt from U.S. withholding
tax. A U.S. corporation is treated as an 80/20 company if at least 80
percent of the gross income of the corporation for the three-year period
preceding the year of a dividend is foreign source income attributable
to the active conduct of a foreign trade or business (or the foreign
business of a subsidiary). Certain foreign multinationals improperly
seek to exploit the rules applicable to 80/20 companies in order to
avoid U.S. withholding tax liability on earnings of U.S. subsidiaries
that are distributed abroad. The proposal would prevent taxpayers from
avoiding withholding tax through manipulations of these rules. The
proposal would apply to interest or dividends paid or accrued after the
date of enactment.
Prescribe regulatory directive to address tax avoidance involving
foreign built-in losses.--Certain taxpayers are engaging in tax
avoidance transactions that inappropriately use losses generated outside
the United States to offset income that otherwise would be subject to
U.S. tax. The provision would direct the Secretary of Treasury to
prescribe regulations, as may be necessary or appropriate to prevent the
avoidance of tax, to determine (1) the basis of assets held directly or
indirectly by a person other than a United States person, and (2) the
amount of built-in deductions of a person other than a U.S. person, or
an entity held directly or indirectly by such a person. The proposal
would be effective on the date of enactment.
Prescribe regulatory directive to address tax avoidance through use of
hybrids.--Certain persons are entering into tax avoidance transactions
that utilize hybrid entities, securities and transactions to achieve tax
results that are inconsistent with the purposes of the provisions of
U.S. law (including treaties) that are relied on for such results. Other
transactions involving hybrids do not achieve tax results that are
inconsistent with the purposes of U.S. law. The consequences of these
transactions should be described in the form of promptly issued
administrative guidance both to prevent inappropriate results and to
provide taxpayers with greater certainty. The proposal would direct the
Secretary of Treasury to prescribe regulations to prevent the avoidance
of tax through the use of hybrid entities, securities and transactions
that achieve results inconsistent with the purposes of U.S. law
(including treaties). The proposal would be effective on the date of
enactment.
Modify foreign office material participation exception applicable to
inventory sales attributable to nonresident's U.S. office.--In the case
of a sale of inventory property that is attributable to a non
[[Page 72]]
resident's office or other fixed place of business within the United
States, the sales income is generally U.S. source. The income is foreign
source, however, if the inventory is sold for use, disposition, or
consumption outside the United States and the nonresident's foreign
office or other fixed place of business materially participates in the
sale. The proposal would provide that the foreign source exception shall
apply only if an income tax equal to at least 10 percent of the income
from the sale is actually paid to a foreign country with respect to such
income. The proposal thereby ensures that the United States does not
cede its jurisdiction to tax such sales unless the income from the sale
is actually taxed by a foreign country at some minimal level. The
proposal would be effective for transactions occurring on or after the
date of enactment.
Stop abuse of controlled foreign corporation (CFC) exception to
ownership requirements.--Under section 887 of the Internal Revenue Code,
a foreign corporation is subject to a four-percent tax on its United
States source gross transportation income. The tax does not apply,
however, if the corporation is organized in a country (an ``exemption
country'') that grants an equivalent tax exemption to U.S. shipping
companies. The exemption from the four-percent tax is subject to an
anti-abuse rule that requires at least 50 percent of the stock of the
corporation be owned by individual residents of an exemption country.
Thus residents of a non-exemption country cannot secure the exemption
simply by forming their shipping corporation in an exemption country.
The anti-abuse rule requiring exemption country ownership does not
apply, however, if the corporation is a controlled foreign corporation
(the ``CFC exception''). The premise for the CFC exception is that the
U.S. shareholders of a CFC will be subject under U.S. tax law to current
income taxation on their share of the foreign corporation's shipping
income and thus the four-percent tax should not apply if the corporation
is organized in an exemption country. However, residents of non-
exemption countries can achieve CFC status for their shipping companies
simply by owning the corporations through U.S. partnerships. Non-
exemption country individuals can thereby avoid the anti-abuse rule
requiring exemption country ownership and illegitimately secure the
exemption from the U.S. four-percent tax. The proposal would stop that
abuse. It would be effective for taxable years beginning after the date
of enactment.
OTHER PROVISIONS THAT AFFECT RECEIPTS
Reinstate environmental tax imposed on corporate taxable income and
deposited in the Hazardous Substance Superfund Trust Fund.--Under prior
law a tax equal to 0.12 percent of alternative minimum taxable income
(with certain modifications) in excess of $2 million was levied on all
corporations and deposited in the Hazardous Substance Superfund Trust
Fund. The Administration proposes to reinstate this tax, which expired
on December 31, 1995, for taxable years beginning after December 31,
1997 and before January 1, 2009.
Reinstate excise taxes deposited in the Hazardous Substance Superfund
Trust Fund.--The excise taxes that were levied on petroleum, chemicals,
and imported substances and deposited in the Hazardous Substance
Superfund Trust Fund, are proposed to be reinstated for the period after
the date of enactment and before October 1, 2008. These taxes expired on
December 31, 1995.
Extend excise taxes on gasoline, diesel fuel, and special motor
fuels.--Excise taxes are imposed on gasoline (other than aviation
gasoline) at a rate of 18.4 cents per gallon, diesel fuel at a rate of
24.4 cents per gallon, and special motor fuels at varying rates. The tax
rates are scheduled to fall to 4.4 cents per gallon (or comparable rates
in the case of special motor fuels) on September 30, 1999. The
Administration proposes to extend the current rates of tax on
nonaviation gasoline, diesel fuel and special motor fuels (with a 0.1-
cent-per-gallon reduction, reflecting the expiration of the LUST Trust
Fund tax on April 1, 2005).
Convert excise taxes deposited in the Airport and Airway Trust Fund to
cost-based user fees assessed for Federal Aviation Administration (FAA)
services.--Beginning in 2000, the excise taxes that are levied on
domestic air passenger tickets and flight segments, international
departures and arrivals, domestic air cargo, and aviation fuels are
proposed to be phased out over a five-year period, and replaced with
more efficient, cost-based user fees charged for FAA services. As part
of a continuing effort to create a more business-like FAA, the
Administration will propose legislation by which the FAA would be
entirely funded by cost-based user fees by 2003.
Receipts from tobacco legislation.--The Administration includes
receipts from tobacco legislation in the 1999 budget. These receipts,
which total approximately $65 billion for the five years 1999 through
2003, would support tobacco-related public health and other activities
at the State and Federal level.
Assess fees for examination of bank holding companies and State-
chartered member banks (receipt effect).--The Administration proposes to
require the Federal Reserve and the Federal Deposit Insurance
Corporation (FDIC) to assess fees for the examination of bank holding
companies and State-chartered banks. The Federal Reserve currently funds
the costs of such examinations from earnings; therefore, deposits of
earnings by the Federal Reserve, which are classified as governmental
receipts, will increase by the amount of the fees.
Transfer retirees and certain active employees of the FDIC and the
Board of Governors of the Federal Reserve to the Federal Employee Health
[[Page 73]]
Benefits Program (FEHBP) (receipt effect).--The Administration supports
the transfer of health coverage for retirees and certain active
employees of the FDIC and the Board of Governors of the Federal Reserve,
who are now covered by in-house health care plans, to the FEHBP
administered by the Office of Personnel Management (OPM). The current
plans are becoming more expensive because of the small size and age of
the insured group. FEHBP coverage would be more cost effective. This
proposal will reduce the administrative costs of the Federal Reserve,
thereby increasing deposits of earnings by the Federal Reserve, which
are classified as governmental receipts.
Repeal Federal Employees Retirement System (FERS) open season (receipt
effect).--The Administration proposes, in a supplemental, to repeal
section 642 of the Treasury and General Government Appropriation Act,
1998. That section provides an ``open season'' from July 1, 1998 through
December 31, 1998 during which time Federal and Postal Service employees
covered by the Civil Service Retirement System (CSRS) could switch to
FERS. Repealing section 642 would increase employee payments to the
Civil Service Retirement and Disability Fund.
Create solvency incentive for State Unemployment Trust Fund
accounts.--The Administration proposes to create an incentive for States
to improve the solvency of their State accounts in the Federal
Unemployment Trust Fund. This is intended to improve the ability of
States to continue paying benefits in the event of a recession. The
incentive consists of tying a portion of the projected distributions to
the States under the Reed Act to demonstrated improvements in solvency.
Table 3-3. EFFECT OF PROPOSALS ON RECEIPTS
(In billions of dollars)
----------------------------------------------------------------------------------------------------------------
Estimate
----------------------------------------------------------------------
1998 1999 2000 2001 2002 2003 1999-2003
----------------------------------------------------------------------------------------------------------------
Provide tax relief and extend expiring
provisions:
Make child care more affordable:
Increase and simplify child and
dependent care tax credit........... ........ -0.3 -1.3 -1.1 -1.2 -1.2 -5.1
Establish tax credit for employer-
provided child care................. ........ -* -0.1 -0.1 -0.1 -0.1 -0.5
----------------------------------------------------------------------
Subtotal, make child care more
affordable........................ ........ -0.3 -1.3 -1.3 -1.3 -1.4 -5.6
Promote energy efficiency and improve
the environment:
Provide tax credit for energy-
efficient building equipment........ ........ -0.1 -0.2 -0.3 -0.3 -0.4 -1.4
Provide tax credit for purchase of
new energy-efficient homes.......... ........ -* -* -* -0.1 -0.1 -0.2
Provide tax credit for high-fuel-
economy vehicles.................... ........ ........ ........ -0.1 -0.2 -0.4 -0.7
Equalize treatment of parking and
transit benefits.................... ........ -* -* -* -* -* -0.1
Provide investment tax credit for CHP
systems............................. * -0.3 -0.3 -0.1 -0.1 -0.2 -0.9
Provide tax credit for replacement of
certain circuitbreaker equipment.... ........ -* -* -* -* -* -*
Provide tax credit for certain PFC
and HFC recycling equipment......... ........ -* -* -* -* -* -*
Provide tax credit for rooftop solar
equipment........................... ........ -* -* -* -* -* -0.1
Extend wind and biomass tax credit... ........ -* -* -* -0.1 -0.1 -0.2
----------------------------------------------------------------------
Subtotal, promote energy efficiency
and improve the environment....... * -0.4 -0.6 -0.6 -0.8 -1.2 -3.6
Promote expanded retirement savings.... -* -0.1 -0.2 -0.2 -0.2 -0.2 -0.9
Expand education incentives:
Provide incentives for public school
construction........................ ........ -0.2 -0.9 -1.3 -1.3 -1.3 -5.0
Extend and expand exclusion for
employer-provided educational
assistance.......................... -* -0.2 -0.3 -0.4 -0.1 ........ -1.0
Eliminate tax when forgiving student
loans subject to income contingent
repayment........................... ........ ........ ........ ........ ........ ........ .........
----------------------------------------------------------------------
Subtotal, expand education
incentives........................ -* -0.4 -1.2 -1.7 -1.4 -1.3 -6.0
Increase low-income housing tax credit
per capita cap........................ ........ -* -0.2 -0.3 -0.4 -0.6 -1.6
Extend expiring provisions:
Extend work opportunity tax credit... -* -0.2 -0.3 -0.2 -0.1 -* -0.8
Extend welfare-to-work tax credit.... ........ -* -0.1 -0.1 -* -* -0.2
Extend R&E tax credit................ -0.4 -0.8 -0.6 -0.3 -0.1 -* -1.8
Extend deduction provided for
contributions of appreciated stock
to private foundations.............. ........ -* -* ........ ........ ........ -0.1
Make permanent the expensing of
brownfields remediation costs....... ........ ........ ........ -0.1 -0.2 -0.2 -0.5
----------------------------------------------------------------------
Subtotal, extend expiring
provisions........................ -0.4 -1.1 -1.0 -0.6 -0.4 -0.3 -3.4
Modify international trade provisions:
Extend GSP and modify other trade
provisions \1\...................... ........ -0.5 -0.5 -0.5 -* -* -1.5
Extend and modify Puerto Rico
economic-activity tax credit........ ........ -* -0.1 -0.1 -0.2 -0.2 -0.6
Levy tariff on certain textiles and
apparel products produced in the
CNMI \1\............................ ........ ........ 0.2 0.2 0.2 0.2 0.7
Expand Virgin Island tariff credits
\1\................................. ........ ........ -* -* -* -* -*
----------------------------------------------------------------------
Subtotal, modify international
trade provisions \1\.............. ........ -0.6 -0.4 -0.4 * -* -1.4
[[Page 74]]
Provide other tax incentives:
Expand tax incentives for SSBICs..... -* -* -* -* -* -* -*
Accelerate and expand incentives
available to two new empowerment
zones............................... ........ -* -* ........ ........ ........ -0.1
Make first $2,000 of severance pay
exempt from income tax.............. ........ -* -0.2 -0.2 -0.2 -0.2 -0.8
----------------------------------------------------------------------
Subtotal, provide other tax
incentives........................ -* -0.1 -0.2 -0.2 -0.2 -0.2 -0.8
Simplify the tax laws.................. -* -0.1 -0.1 -0.1 -0.1 -0.1 -0.6
Enhance taxpayers' rights.............. ........ -* -* -* -0.1 -0.1 -0.2
----------------------------------------------------------------------
Subtotal, provide tax relief and
extend expiring provisions \1\...... -0.5 -3.2 -5.1 -5.5 -5.0 -5.4 -24.2
Eliminate unwarranted benefits and adopt
other revenue measures:
Defer deduction for interest and OID on
convertible debt...................... * * * * * 0.1 0.2
Eliminate dividends-received deduction
for certain preferred stock........... * * * * * 0.1 0.2
Repeal percentage depletion for non-
fuel minerals mined on Federal and
formerly Federal lands................ ........ 0.1 0.1 0.1 0.1 0.1 0.5
Repeal tax-free conversions of large C
corporations to S corporations........ ........ * * * * 0.1 0.1
Replace sales-source rules with
activity-based rules.................. ........ 0.6 1.4 1.5 1.5 1.6 6.6
Modify rules relating to foreign oil
and gas extraction income............. ........ * 0.1 0.1 0.1 0.1 0.4
Repeal lower-of-cost-or-market
inventory accounting method........... * 0.4 0.5 0.4 0.2 0.1 1.6
Increase penalties for failure to file
correct information returns........... ........ * * * * * 0.1
Tighten the substantial understatement
penalty for large corporations........ ........ ........ * * * * 0.1
Repeal exemption for withholding on
gambling winnings from bingo and keno
in excess of $5,000................... ........ * * * * * *
Reinstate oil spill excise tax \1\..... * 0.2 0.2 0.2 0.2 0.3 1.2
Modify Federal Unemployment Act
provisions............................ ........ ........ ........ ........ ........ ........ .........
Extend pro-rata disallowance of tax-
exempt interest expense that applies
to banks to all financial
intermediaries........................ * * * * * * 0.1
Increase proration percentage for P&C
insurance companies................... -* * 0.1 0.1 0.1 0.1 0.4
Preclude certain taxpayers from
prematurely claiming losses from
receivables........................... ........ 0.4 0.1 0.1 0.1 0.1 0.7
Restrict special net operating loss
carryback rules for specified
liability losses...................... ........ * * * * * 0.1
Freeze grandfather status of stapled
(or ``paired-share'') REITs........... * * * * * * 0.1
Restrict impermissible business
indirectly conducted by REITs......... ........ * * * * * *
Modify treatment of closely held REITs. ........ * * * * * 0.1
Modify depreciation method for tax-
exempt use property................... ........ * * * * * 0.1
Impose excise tax on purchase of
structured settlements \1\............ ........ * * * * * 0.1
Clarify and expand math-error
procedures............................ ........ * 0.1 0.1 0.1 0.1 0.3
Clarify the meaning of ``subject to''
liabilities under section 357(c)...... * * * * * * 0.1
Simplify foster child definition under
EITC.................................. ........ ........ * * * * *
Clarify tie-breaker rule under EITC.... ........ * * * * * *
Eliminate non-business valuation
discounts............................. ........ ........ 0.2 0.2 0.3 0.3 1.0
Eliminate ``Crummey'' rule............. ........ ........ * * * * 0.1
Eliminate gift tax exemption for
personal residence trusts............. ........ -* -* * * * *
Include QTIP trust assets in surviving
spouse's estate....................... ........ ........ * * * * *
Apply 7.7% capitalization rate to
credit life insurance premiums........ * * * * * * 0.1
Modify corporate-owned life insurance
(COLI) rules.......................... 0.3 0.4 0.4 0.4 0.5 0.5 2.2
Modify reserve rules for annuity
contracts............................. ........ 1.8 0.7 0.8 0.6 0.7 4.6
Tax certain exchanges of insurance
contracts and reallocations of assets
within variable insurance contracts... * * 0.1 0.2 0.3 0.4 0.9
Reduce ``investment in the contract''
for mortality and expense charges on
certain insurance contracts........... ........ * * * * 0.1 0.1
Amend 80/20 company rules.............. * * * * 0.1 0.1 0.2
Prescribe regulatory directive to
address tax avoidance involving
foreign built-in losses............... ........ * 0.1 0.1 0.1 0.1 0.2
Prescribe regulatory directive to
address tax avoidance through use of
hybrids............................... ........ * 0.1 0.1 * * 0.2
Modify foreign office material
participation exception applicable to
inventory sales attributable to
nonresident's U.S. office............. * * * * * * *
Stop abuse of CFC exception to
ownership requirements................ ........ * * * * * *
----------------------------------------------------------------------
Subtotal, eliminate unwarranted
benefits and adopt other revenue
measures \1\...................... 0.3 4.3 4.3 4.7 4.7 5.0 23.0
Other provisions that affect receipts:
Reinstate environmental tax imposed on
corporate taxable income \2\.......... ........ 1.1 0.7 0.7 0.7 0.7 3.8
Reinstate Superfund excise taxes \1\... 0.1 0.7 0.7 0.7 0.7 0.7 3.6
Extend excise taxes on gasoline, diesel
fuel and special motor fuels \1\...... ........ ........ 0.4 0.4 0.4 0.4 1.5
Convert airport and airway trust fund
taxes to a cost-based user fee system
\1\................................... ........ ........ 1.7 1.7 1.7 0.8 6.0
Receipts from tobacco legislation...... ........ 9.8 11.8 13.3 14.5 16.1 65.5
Assess fees for examination of bank
holding companies and State-chartered
member banks (receipt effect) \1\..... ........ 0.1 0.1 0.1 0.1 0.1 0.4
Transfer retirees and certain active
employees of the FDIC and Board of
Governors of the Federal Reserve to
FEHBP (receipt effect)................ ........ * * * * * *
[[Page 75]]
Repeal FERS open season (receipt
effect)............................... * 0.2 0.2 0.2 0.2 0.2 1.0
Create solvency incentive for State
unemployment trust fund accounts \1\.. ........ ........ ........ 0.4 0.4 ........ 0.8
----------------------------------------------------------------------
Subtotal, other provisions that
affect receipts \1\............... 0.1 11.8 15.5 17.4 18.8 19.1 82.6
----------------------------------------------------------------------
Total effect of proposals \1\............ -0.1 12.9 14.7 16.7 18.5 18.7 81.5
----------------------------------------------------------------------------------------------------------------
* $50 million or less.
\1\ Net of income offsets.
\2\ Net of deductibility for income tax purposes.
[[Page 76]]
Table 3-4. RECEIPTS BY SOURCE
(In millions of dollars)
----------------------------------------------------------------------------------------------------------------
1997 1998 1999 2000 2001 2002 2003
Source actual estimate estimate estimate estimate estimate estimate
----------------------------------------------------------------------------------------------------------------
Individual income taxes
(Federal funds):
Existing law.............. 737,466 767,874 792,739 808,471 837,867 881,538 919,874
Proposed Legislation
(PAYGO).................. .......... -106 -1,285 -3,907 -4,503 -4,485 -4,341
-----------------------------------------------------------------------------------
Total individual income
taxes...................... 737,466 767,768 791,454 804,564 833,364 877,053 915,533
===================================================================================
Corporation income taxes:
Federal funds:
Existing law............ 182,289 190,944 194,412 200,388 206,033 211,741 217,427
Proposed Legislation
(PAYGO)................ .......... -102 2,210 1,671 2,255 2,080 2,145
-----------------------------------------------------------------------------------
Total Federal funds
corporation income taxes. 182,289 190,842 196,622 202,059 208,288 213,821 219,572
-----------------------------------------------------------------------------------
Trust funds:
Hazardous substance
superfund.............. 4 .......... .......... .......... .......... .......... ..........
Proposed Legislation
(PAYGO)................ .......... .......... 1,343 870 863 863 864
-----------------------------------------------------------------------------------
Total corporation income
taxes...................... 182,293 190,842 197,965 202,929 209,151 214,684 220,436
===================================================================================
Social insurance and
retirement receipts (trust
funds):
Employment and general
retirement:
Old-age and survivors
insurance (Off-budget). 336,729 358,949 374,612 388,988 404,101 422,586 441,648
Disability insurance
(Off-budget)........... 55,261 57,042 59,516 64,915 68,630 71,756 74,995
Hospital insurance...... 110,710 118,029 122,626 128,479 134,081 140,430 146,899
Railroad retirement:
Social Security
equivalent account... 1,611 1,611 1,619 1,624 1,636 1,648 1,651
Rail pension and
supplemental annuity. 2,440 2,493 2,495 2,507 2,521 2,536 2,548
-----------------------------------------------------------------------------------
Total employment and
general retirement....... 506,751 538,124 560,868 586,513 610,969 638,956 667,741
-----------------------------------------------------------------------------------
On-budget............... 114,761 122,133 126,740 132,610 138,238 144,614 151,098
Off-budget.............. 391,990 415,991 434,128 453,903 472,731 494,342 516,643
-----------------------------------------------------------------------------------
Unemployment insurance:
Deposits by States \1\ . 22,071 22,658 24,175 25,456 26,319 27,175 28,075
Proposed Legislation
(PAYGO).............. .......... .......... .......... .......... 450 490 ..........
Federal unemployment
receipts \1\ .......... 6,103 6,196 6,254 6,345 6,359 6,449 6,495
Railroad unemployment
receipts \1\ .......... 28 68 104 97 78 78 95
-----------------------------------------------------------------------------------
Total unemployment
insurance................ 28,202 28,922 30,533 31,898 33,206 34,192 34,665
-----------------------------------------------------------------------------------
Other retirement:
Federal employees'
retirement--employee
share.................. 4,344 4,245 4,247 4,361 4,601 4,382 3,838
Proposed Legislation
(non-PAYGO).......... .......... 6 167 201 212 224 232
Non-Federal employees
retirement \2\ ........ 74 77 71 65 60 54 44
-----------------------------------------------------------------------------------
Total other retirement.... 4,418 4,328 4,485 4,627 4,873 4,660 4,114
-----------------------------------------------------------------------------------
Total social insurance and
retirement receipts........ 539,371 571,374 595,886 623,038 649,048 677,808 706,520
===================================================================================
On-budget................. 147,381 155,383 161,758 169,135 176,317 183,466 189,877
Off-budget................ 391,990 415,991 434,128 453,903 472,731 494,342 516,643
===================================================================================
Excise taxes:
Federal funds:
Alcohol taxes........... 7,257 7,251 7,254 7,250 7,236 7,223 7,211
Tobacco taxes........... 5,873 5,926 5,900 7,495 8,083 8,686 8,895
Transportation fuels tax 7,107 442 682 88 89 90 92
Telephone and teletype
services............... 4,543 4,864 5,129 5,394 5,691 6,015 6,356
Ozone depleting
chemicals and products. 130 55 30 10 .......... .......... ..........
Other Federal fund
excise taxes........... 2,921 1,529 1,613 1,430 1,373 1,338 1,263
Proposed Legislation
(PAYGO).............. .......... .......... 12 515 531 550 568
-----------------------------------------------------------------------------------
Total Federal fund excise
taxes.................... 27,831 20,067 20,620 22,182 23,003 23,902 24,385
-----------------------------------------------------------------------------------
Trust funds:
Highway................. 23,867 26,063 38,614 33,201 33,812 34,448 35,107
Airport and airway...... 4,007 7,975 10,038 9,273 9,793 10,525 11,095
[[Page 77]]
Proposed Legislation
(PAYGO).............. .......... .......... .......... 2,267 2,267 2,267 1,133
Aquatic resources....... 316 281 379 339 345 353 359
Black lung disability
insurance.............. 614 640 662 684 703 718 733
Inland waterway......... 96 116 120 123 126 131 135
Hazardous substance
superfund.............. 71 .......... .......... .......... .......... .......... ..........
Proposed Legislation
(PAYGO).............. .......... 101 934 949 960 976 990
Oil spill liability..... 1 .......... .......... .......... .......... .......... ..........
Proposed Legislation
(PAYGO).............. .......... 46 317 321 325 330 336
Vaccine injury
compensation........... 123 111 111 111 111 111 111
Leaking underground
storage tank........... -2 140 214 182 186 189 193
-----------------------------------------------------------------------------------
Total trust funds excise
taxes.................... 29,093 35,473 51,389 47,450 48,628 50,048 50,192
-----------------------------------------------------------------------------------
Total excise taxes.......... 56,924 55,540 72,009 69,632 71,631 73,950 74,577
===================================================================================
Estate and gift taxes:
Existing law.............. 19,845 20,436 20,542 21,389 22,353 24,156 25,300
Proposed Legislation
(PAYGO).................. .......... .......... -1 253 266 291 319
-----------------------------------------------------------------------------------
Total estate and gift taxes. 19,845 20,436 20,541 21,642 22,619 24,447 25,619
===================================================================================
Customs duties:
Federal funds............. 17,131 17,515 17,928 18,890 19,691 21,053 22,655
Proposed Legislation
(PAYGO)................ .......... .......... -658 -323 -333 225 224
Trust funds............... 797 848 905 964 1,029 1,097 1,171
-----------------------------------------------------------------------------------
Total customs duties........ 17,928 18,363 18,175 19,531 20,387 22,375 24,050
===================================================================================
MISCELLANEOUS RECEIPTS: \3\
Miscellaneous taxes....... 107 113 115 118 120 123 126
Receipts from tobacco
legislation (PAYGO)...... .......... .......... 9,795 11,787 13,283 14,544 16,085
United Mine Workers of
America combined benefit
fund..................... 339 323 282 273 266 258 251
Deposit of earnings,
Federal Reserve System... 19,636 24,991 24,544 24,950 25,501 26,121 26,786
Proposed Legislation
(PAYGO)................ .......... .......... 98 102 106 111 116
Defense cooperation....... .......... 12 6 .......... .......... .......... ..........
Fees for permits and
regulatory and judicial
services................. 3,222 5,778 9,605 12,888 15,097 15,843 16,074
Fines, penalties, and
forfeitures.............. 1,994 2,140 2,100 1,991 1,899 1,877 1,877
Gifts and contributions... 184 194 177 147 126 121 123
Refunds and recoveries.... -17 -16 -16 -16 -16 -16 -16
-----------------------------------------------------------------------------------
Total miscellaneous receipts 25,465 33,535 46,706 52,240 56,382 58,982 61,422
===================================================================================
Total budget receipts....... 1,579,292 1,657,858 1,742,736 1,793,576 1,862,582 1,949,299 2,028,157
On-budget................. 1,187,302 1,241,867 1,308,608 1,339,673 1,389,851 1,454,957 1,511,514
Off-budget................ 391,990 415,991 434,128 453,903 472,731 494,342 516,643
-----------------------------------------------------------------------------------
MEMORANDUM
Federal funds............. 1,010,315 1,050,472 1,093,576 1,121,674 1,163,467 1,219,949 1,269,885
Trust funds............... 365,248 383,120 412,247 423,654 441,874 461,621 480,193
Interfund transactions.... -188,261 -191,725 -197,215 -205,655 -215,490 -226,613 -238,564
-----------------------------------------------------------------------------------
Total on-budget............. 1,187,302 1,241,867 1,308,608 1,339,673 1,389,851 1,454,957 1,511,514
-----------------------------------------------------------------------------------
Off-budget (trust funds).... 391,990 415,991 434,128 453,903 472,731 494,342 516,643
===================================================================================
Total....................... 1,579,292 1,657,858 1,742,736 1,793,576 1,862,582 1,949,299 2,028,157
----------------------------------------------------------------------------------------------------------------
\1\ Deposits by States cover the benefit part of the program. Federal unemployment receipts cover administrative
costs at both the Federal and State levels. Railroad unemployment receipts cover both the benefits and
administrative costs of the program for the railroads.
\2\ Represents employer and employee contributions to the civil service retirement and disability fund for
covered employees of Government-sponsored, privately owned enterprises and the District of Columbia municipal
government.
\3\ Includes both Federal and trust funds. Trust fund amounts in miscellaneous receipts are 1997: $746 million;
1998: $740 million; 1999: $683 million; 2000: $649 million; 2001: $639 million; 2002: $647 million; and 2003:
$662 million.