[Analytical Perspectives]
[Federal Receipts and Collections]
[3. Federal Receipts]
[From the U.S. Government Publishing Office, www.gpo.gov]
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FEDERAL RECEIPTS AND COLLECTIONS
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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 2000 are estimated to be
$1,883.0 billion, an increase of $76.7 billion or 4.2 percent relative
to 1999. 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 3.6 percent between 2000
and 2004, rising to $2,165.5 billion.
As a share of GDP, receipts are projected to decline from 20.6 percent
in 1999 to 20.0 percent in 2004.
Table 3-1. RECEIPTS BY SOURCE--SUMMARY
(In billions of dollars)
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Estimate
Source 1998 actual -----------------------------------------------------------------------------------
1999 2000 2001 2002 2003 2004
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Individual income taxes............................... 828.6 868.9 899.7 912.5 942.8 970.7 1,017.7
Corporation income taxes.............................. 188.7 182.2 189.4 196.6 203.4 212.3 221.5
Social insurance and retirement receipts.............. 571.8 608.8 636.5 660.3 686.3 712.0 739.2
(On-budget)......................................... (156.0) (164.8) (171.2) (177.7) (184.6) (189.8) (196.3)
(Off-budget)........................................ (415.8) (444.0) (465.3) (482.6) (501.8) (522.2) (542.9)
Excise taxes.......................................... 57.7 68.1 69.9 70.8 72.3 73.8 75.4
Estate and gift taxes................................. 24.1 25.9 27.0 28.4 30.5 31.6 33.9
Customs duties........................................ 18.3 17.7 18.4 20.0 21.4 23.0 24.9
Miscellaneous receipts................................ 32.7 34.7 42.1 44.9 50.3 51.7 53.0
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Total receipts.................................... 1,721.8 1,806.3 1,883.0 1,933.3 2,007.1 2,075.0 2,165.5
(On-budget)..................................... (1,306.0) (1,362.3) (1,417.7) (1,450.7) (1,505.3) (1,552.8) (1,622.6)
(Off-budget).................................... (415.8) (444.0) ( 465.3) (482.6) (501.8) (522.2) (542.9)
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Table 3-2. CHANGES IN RECEIPTS
(In billions of dollars)
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Estimate
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1999 2000 2001 2002 2003 2004
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Receipts under tax rates and structure in
effect January 1, 1999 \1\................... 1,806.6 1,870.1 1,918.8 1,988.3 2,052.8 2,139.5
Social security (OASDI) taxable earnings base
increases:...................................
$72,600 to $76,200 on Jan. 1, 2000.......... ......... 1.7 4.4 4.8 5.2 5.7
$76,200 to $79,200 on Jan. 1, 2001.......... ......... ......... 1.4 3.6 3.9 4.3
$79,200 to $81,900 on Jan. 1, 2002.......... ......... ......... ......... 1.3 3.2 3.5
$81,900 to $84,600 on Jan. 1, 2003.......... ......... ......... ......... ......... 1.3 3.2
$84,600 to $87,000 on Jan. 1, 2004.......... ......... ......... ......... ......... ......... 1.1
Proposals \2\................................. -0.3 11.2 8.7 9.1 8.7 8.2
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Total, receipts under existing and
proposed legislation .................... 1,806.3 1,883.0 1,933.3 2,007.1 2,075.0 2,165.5
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\1\ These estimates assume a social security taxable earnings base of $72,600 through 2004.
\2\ Net of income offsets.
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ENACTED LEGISLATION
Several laws were enacted in 1998 that have an effect on governmental
receipts. The major legislative changes affecting receipts are described
below.
Transportation Equity Act for the 21st Century.--This Act, which was
signed by President Clinton on June 9, 1998, represents a significant
achievement in the Administration's efforts to meet our country's
transportation needs in the next century. By building on the initiatives
established in the Intermodal Surface Transportation Efficiency Act of
1991, this Act combines the continuation and improvement of current
programs with new initiatives to meet the challenges of improving safety
as traffic continues to increase, protecting and enhancing communities
and the natural environment as we provide transportation, and advancing
America's economic growth and competitiveness domestically and
internationally through efficient and flexible transportation. The major
provisions of the Act affecting receipts are described below:
Extend highway-related taxes.--The excise taxes levied on gasoline
(other than aviation gasoline), diesel fuel, and special motor fuels,
which were scheduled to fall to 4.4 cents per gallon (or comparable
rates in the case of special motor fuels) after September 30, 1999, are
extended at their prior law rates (with a 0.1-cent-per-gallon reduction,
reflecting the expiration of the LUST Trust Fund tax, on April 1, 2005)
through September 30, 2005. Highway Trust Fund excise taxes on heavy
truck tires and the sale and the use of heavy trucks, which were
scheduled to expire on September 30, 1999, are extended at their prior
law rates through September 30, 2005.
Extend and modify ethanol tax benefit.--Under prior law, ethanol fuels
were eligible for a tax benefit equal to 54 cents per gallon, which
could be claimed through reduced excise taxes paid on motor fuels, as
well as through income tax credits. The authority to claim the credit
against income taxes was scheduled to expire after December 31, 2000 and
the authority to claim the benefit through reduced excise taxes was
scheduled to expire after September 30, 2000. This Act extends the
authority to claim the credit against income taxes through December 31,
2007; the authority to claim the benefit through reduced excise taxes is
extended through September 30, 2007. In addition, the tax benefit is
reduced to 53 cents per gallon effective January 1, 2001, 52 cents per
gallon effective January 1, 2003, and 51 cents per gallon effective
January 1, 2005.
Repeal excise tax on railroad diesel fuel.--The 1.25 cents-per-gallon
tax on railroad diesel fuel, which was scheduled to expire after
September 30, 1999, is repealed effective November 1, 1998.
Extend and increase transfers of motorboat and small engine fuels
taxes to the Aquatic Resources Trust Fund.--Under prior law, 11.5 cents
per gallon of the 18.4-cents-per-gallon tax on gasoline and special
motor fuels used in motorboats and small engines was transferred to the
Aquatic Resources Trust Fund. This Act extends the transfer, which was
scheduled to expire after September 30, 1998, through September 30,
2005. In addition, the amount transferred is increased to 13.0 cents per
gallon effective October 1, 2001 and to 13.5 cents per gallon effective
October 1, 2003.
Modify tax treatment of transportation benefits.--Under prior law, up
to $175 per month (for 1998) of employer-provided parking benefits were
excludable from an employee's gross income, regardless of whether the
benefits were offered in addition to, or in lieu of, any compensation
otherwise payable to the employee. In contrast, up to $65 per month (for
1998) of employer-provided transit and vanpool benefits were excludable
from an employee's gross income, but only if the benefits were provided
in addition to, and not in lieu of, any compensation otherwise payable
to the employee. The dollar limits for both benefits were indexed
annually for inflation. Under this Act, effective for taxable years
beginning after December 31, 1997, employers are allowed to offer
employees the option of electing cash compensation in lieu of any
qualified transportation benefit, or a combination of any of these
benefits. In addition, effective for taxable years beginning after
December 31, 2001, the exclusion for transit and vanpool benefits is
increased to $100 per month, with annual indexing thereafter. The Act
also eliminates the 1999 inflation adjustment to the dollar limit on
transportation benefits.
Simplify motor fuels tax refund procedures.--Under prior law, gasoline
and diesel fuel excise tax refunds were administered separately, subject
to separate quarterly minimum filing thresholds. Effective for claims
filed after September 30, 1998, refunds of gasoline and diesel fuel
excise taxes may be aggregated, and a claim may be filed once a single
$750 minimum is reached (determined on a year-to-date basis).
Internal Revenue Service Restructuring and Reform Act of 1998.--This
Act, which was signed by President Clinton on July 22, 1998, sets in
motion the most comprehensive overhaul of IRS's internal operations in
more than four decades, puts new emphasis on electronic filing, and puts
in place new rights and protections for taxpayers when dealing with the
IRS. The major provisions of the Act are described below.
Reorganization of Structure and Management of the IRS
Reorganize and revise the mission of the IRS.--The IRS Commissioner is
required to replace the existing three-tier geographic structure of the
IRS (national, regional, district) with organizational units serving
particular groups of taxpayers. The IRS is also required to review and
restate its mission to place greater emphasis on serving the public and
meeting taxpayer's needs. An independent Appeals function must also be
established within the IRS.
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Establish IRS Oversight Board.--A nine-member IRS Oversight Board is
established within the Treasury Department. The responsibilities of the
Board include the following: (1) Review and approval of IRS strategic
plans. (2) Review operational functions of the IRS. (3) Recommend
candidates for IRS Commissioner and review the selection, evaluation,
and compensation of senior managers. (4) Review and approve plans for
any major future reorganization of the IRS. (5) Review and approve the
Commissioner's IRS budget request to be submitted to the Department of
the Treasury. This budget request also will be submitted to Congress
concurrent with the President's annual budget request for the IRS. (6)
Ensure the proper treatment of taxpayers by IRS employees.
Modify appointment and duties of IRS Commissioner.--The IRS
Commissioner is nominated by the President and confirmed by the Senate,
as under prior law. However, under this Act the Commissioner is
appointed to a five-year term and is required to have a demonstrated
ability in management.
Rename and expand the authority of the Taxpayer Advocate.--The
Taxpayer Advocate position is renamed the National Taxpayer Advocate.
The individual appointed to this position cannot have been an officer or
employee of the IRS during the two-year period ending with the
individual's appointment, and must agree not to accept employment with
the IRS (outside of the Taxpayer Advocate organization) during the five-
year period beginning with the date the individual ceases to be the
National Taxpayer Advocate. The person in this position is responsible
for appointing at least one local taxpayer advocate for each State and
has expanded authority to issue taxpayer assistance orders (orders that
may be issued when a taxpayer is suffering or is about to suffer from a
significant hardship as a result of the manner in which the laws are
being administered by IRS). In determining whether to issue a taxpayer
assistance order, the National Taxpayer Advocate is 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.
Establish position of Treasury Inspector General for Tax
Administration.--The Office of the IRS Chief Inspector is to be
terminated and the powers of the IRS Chief Inspector are to be
transferred to the new position of Treasury Inspector General (IG) for
Tax Administration. The new IG for Tax is given all the powers under the
Inspector General Act for matters relating to the IRS, may conduct an
audit or investigation of the IRS upon the written request of the
Commissioner or the Board, and is required to establish a toll-free
telephone number for taxpayers to confidentially register complaints of
misconduct by IRS employees.
Prohibit Executive Branch influence over taxpayer audits.--The
President, Vice President, and most Cabinet officers, other than the
Attorney General, are prohibited from requesting, directly or
indirectly, an officer or employee of the IRS to either conduct or
terminate an audit or investigation of any particular taxpayer with
respect to the tax liability of the taxpayer.
Improve personnel flexibilities.--The modification of employee
personnel rules applicable to the IRS will help the IRS recruit and
retain the private sector expertise it needs to fill critical technical
and senior management positions and will provide important tools that
will enable the IRS to accomplish its restructuring efforts.
Electronic Filing
The Act states that it is the policy of the Congress to promote
paperless filing, with the long-range goal of having at least 80 percent
of all tax returns filed electronically by 2007. Toward that end, the
IRS is required to develop a strategic plan concerning electronic filing
within 180 days after July 22, 1998, to establish an ``electronic
commerce advisory group,'' and to report periodically to Congress on
progress toward meeting the 80 percent goal. The Act also requires that
the IRS develop procedures to: (1) accept digital or other electronic
signatures, (2) accept all forms electronically for periods beginning
after December 31, 1999, to the extent practicable, (3) acknowledge
electronic filing in a manner similar to certified or registered mail,
(4) provide forms and other IRS documents on the Internet, (5)
electronically authorize disclosure of return information to the return
preparer, (6) allow taxpayers on-line access to account information,
subject to suitable safeguards, and (7) implement a fully return-free
tax system for certain taxpayers for taxable years beginning after 2007.
In addition, the deadline for filing information returns with the IRS is
extended from February 28 until March 31 of the year following the tax
year to which the return relates, for returns filed electronically. The
Secretary of the Treasury is required to study and report to Congress by
June 30, 1999, the effect of similarly extending the deadline for
providing taxpayers with copies of information returns from January 31
to February 15 of the year following the tax year to which the return
relates.
Congressional Accountability for the IRS
The Act consolidates Congressional oversight of the IRS by: (1)
expanding the duties of the Joint Committee on Taxation (JCT) to include
review and approval of all requests for General Accounting Office (GAO)
investigations of the IRS (other than those from a committee chairperson
or ranking member, those required by law, and those self-initiated by
GAO); (2) requiring one annual joint review of the annual filing season
and the progress of the IRS in meeting its objectives under the
strategic and business plans, in improving taxpayer service and
compliance, and on technology modernization; (3) stating that it is the
sense of the Congress that IRS should place a high priority on resolving
the
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century date change; (4) stating that it is the sense of the Congress
that the IRS provide the Congress with an independent view of tax
administration and that the tax-writing committees should hear from
front-line technical experts at the IRS during the legislative process
with respect to the administrability of pending amendments to the
Internal Revenue Code; and (4) requiring that the IRS report to the
House Committee on Ways and Means and the Senate Committee on Finance by
March 1 of each year regarding sources of complexity in the
administration of the Federal tax laws.
Taxpayer Protection and Rights
Burden of Proof
Shift the burden of proof to the IRS in certain circumstances.--In any
court proceeding with respect to a factual issue (applicable to income,
estate, gift and generation-skipping transfer taxes), the burden of
proof is shifted to the IRS if the taxpayer introduces credible evidence
relevant to ascertaining his/her tax liability. The taxpayer has the
burden of proving that the following conditions, which are necessary
prerequisites to establishing that the burden of proof is on the IRS,
have been met: (1) All items at issue must be substantiated by the
taxpayer in accordance with the Internal Revenue Code and relevant
regulations. (2) All records required by the Internal Revenue Code and
regulations must be maintained by the taxpayer. (3) The taxpayer must
cooperate with the IRS regarding reasonable requests for witnesses,
information, documents, meetings and interviews. (4) Taxpayers other
than individuals or estates must meet the net worth limitations (no more
than $7 million) that apply to awarding attorney's fees. This provision
applies to court proceedings arising in connection with examinations
commencing after July 22, 1998, or if there is no examination, to court
proceedings arising in connection with taxable periods or events
beginning or occurring after July 22, 1998.
Proceedings by Taxpayers
Expand authority to award costs and certain 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 attorney's
fees awarded cannot exceed a statutorily limited rate. Under prior law,
taxpayers who were represented pro bono, and thus bore no actual
attorney's fees and costs, could not recover such amounts. This Act
allows the awarding 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 statutorily limited rate is increased from $110 per
hour (indexed for inflation) to $125 per hour (indexed for inflation).
The Act also clarifies that an award of attorney's fees from the United
States is permitted in actions for civil damages for unauthorized
inspection or disclosure of taxpayer returns and return information only
when the defendant is the United States and the plaintiff is a
prevailing party. Other defendants (such as State employees or
contractors) may be liable for attorney's fees and costs in cases where
the United States is not a party, whenever they are found to have made a
wrongful disclosure. Finally, the Act provides that attorney's fees and
costs may be recovered if the taxpayer makes a ``qualified offer'' to
the IRS, the IRS rejects the offer, and the ultimate resolution of the
case is less favorable to the IRS than the rejected ``qualified offer.''
These provisions are effective for costs incurred and services performed
after January 18, 1999.
Expand civil damages for collection actions.--Taxpayers have the 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. Under
prior law, actions could only be brought by the injured taxpayer (not by
an injured third party) and could not be brought against any officer or
employee of the IRS who negligently disregarded any provision of the
Internal Revenue Code or any regulation thereunder. In addition, suit
could not be brought against any officer or employee of the IRS who
willfully violated the automatic stay or discharge provisions of the
Bankruptcy Code. Effective for actions occurring after July 22, 1998,
this Act expands the ability to sue for civil damages as follows: (1) A
taxpayer may sue for up to $100,000 in civil damages caused by an
officer or employee of the IRS who negligently disregards provisions of
the Internal Revenue Code or any regulation thereunder in connection
with the collection of Federal tax from the taxpayer. (2) A taxpayer may
sue for up to $1 million in civil damages caused by an officer or
employee of the IRS who willfully violates provisions of the Bankruptcy
Code relating to automatic stays or discharges. (3) Injured third
parties are permitted to sue for civil damages for unauthorized
collection actions.
Increase Tax Court's ``small case'' limit.--Taxpayers may choose to
contest many tax disputes in the Tax Court. Under prior law, special
``small case procedures'' applied to disputes involving $10,000 or less,
if the taxpayer chose to utilize these procedures (and the Tax Court
concurred). This Act increases the cap for small case treatment in the
Tax Court from $10,000 to $50,000, effective for proceedings commencing
after July 22, 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
[[Page 51]]
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. Effective for
claims filed after July 22, 1998, this Act grants the courts refund
jurisdiction to determine the correct liability of such an estate, so
long as the estate has properly elected to pay in installments, all
payments are current, the payments due have not been accelerated, there
are no suits for declaratory judgment pending, and there are no
outstanding deficiency notices against the estate. The Act also includes
a number of technical and conforming amendments to implement this
change.
Modify appeals process with regard to adverse determinations regarding
the tax-exempt status of certain bond issues.--Interest on debt incurred
by States or local governments generally is excluded from gross income
if the proceeds of the borrowing are used to carry out governmental
functions of those entities and the debt is repaid with governmental
funds. A jurisdiction that seeks to issue bonds can request a ruling
from the IRS regarding the eligibility of such bonds for tax-exemption.
The prospective issuer can challenge the IRS's determination (or failure
to make a timely determination) in a declaratory judgment proceeding in
the Tax Court. Under prior law there was no mechanism that explicitly
allowed tax-exempt bond issuers examined by the IRS to appeal adverse
examination determinations to the Appeals Division of the IRS as a
matter of right. This Act directs the IRS to modify its administrative
procedures to allow tax-exempt bond issuers examined by the IRS to
appeal adverse examination determinations to the Appeals Division as a
matter of right, effective July 22, 1998. These appeals must be heard by
senior appeals officers having experience in resolving complex cases.
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. This Act creates
administrative and judicial remedies for a third party subject to an
erroneous tax lien, effective July 22, 1998. Under this procedure, the
owner of property (other than the taxpayer) can obtain a certificate
discharging property from the Federal tax lien as a matter of right,
provided certain conditions are met. The certificate of discharge
enables the property owner to sell the property free and clear of the
Federal tax lien in all circumstances. The Act also establishes a
judicial cause of action for persons challenging a Federal tax lien.
Relief for Innocent Spouses and Persons with Disabilities
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. Under prior law, relief
from liability was available for ``innocent spouses'' in certain
circumstances, but the conditions were frequently hard to meet and the
Tax Court did not have jurisdiction to review all denials of innocent
spouse relief. This Act generally makes innocent spouse status easier to
obtain by eliminating certain applicable dollar thresholds for
understatements of tax; requiring that the understatement of tax be
attributable to an erroneous item of the other spouse, rather than a
grossly erroneous item as required under prior law; giving the IRS the
discretion to provide equitable relief; and providing the Tax Court with
jurisdiction to review the IRS's denial of innocent spouse relief and to
order appropriate relief. The Act also modifies the innocent spouse
provision to permit a spouse who is divorced, legally separated, or
living apart for 12 months, to elect to limit his/her liability for
unpaid taxes on a joint return to his/her separate liability amount.
Unless the electing taxpayer had knowledge, when the return was signed,
that an item on the return was incorrect, such an electing taxpayer
essentially is responsible for any deficiency only to the extent his/her
own items contributed to the deficiency. The separate liability election
must be made no later than two years after the date on which collection
activities have begun with respect to the individual seeking the relief.
Except in limited cases, the IRS is not permitted to collect the tax
until the Tax Court case is final (although the running of the statute
of limitations will be suspended while the Tax Court case is pending).
Finally, the Act requires the IRS to develop a separate form with
instructions for taxpayers to use in applying for innocent spouse relief
by January 18, 1999. These changes apply to liability for tax arising
after July 22, 1998, as well as to any liability arising on or before
that date that remains unpaid on that date.
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,
this Act permits ``equitable tolling'' of the limitation period on
claims for refund for the period of time during which an individual
taxpayer is unable to manage his/her financial affairs because of a
medically determined physical or mental disability that can be expected
to result in death or to last for a continuous period of not less than
12 months. Tolling does 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 provision applies to periods of disability
before, on, or after July 22, 1998, but does not apply to any claim for
refund or credit that (without regard to the provision) is barred by the
[[Page 52]]
operation of any law, including the statute of limitation, as of July
22, 1998.
Provisions Relating to Interest and Penalties
Allow ``global'' interest netting of underpayments and overpayments of
tax.--The rate of interest charged taxpayers on their tax underpayments
differs from the rate paid to taxpayers on overpayments. Under prior
law, the IRS ameliorated the effect of this interest rate differential
by ``netting'' offsetting underpayments and overpayments in some
situations (that is, applying a net interest rate of zero on equivalent
amounts of overpayment and underpayment); however, there was no
authority to net when either the overpayment or the underpayment had
been satisfied already (``global'' netting). This Act permits global
interest netting for all taxes (not just income taxes), effective for
interest applicable to periods beginning after July 22, 1998. It also
applies to interest for periods beginning before that date if: (1) as of
July 22, 1998, the statute of limitations has not expired with respect
to either the underpayment or overpayment; (2) the taxpayer identifies
the periods of underpayment and overpayment for which the zero rate
applies; and (3) on or before December 31, 1999, the taxpayer asks the
Secretary of the Treasury to apply the zero rate.
Increase interest rate applicable to overpayments of tax by
noncorporate taxpayers.--Under prior law, interest on overpayments of
tax was payable at a rate equal to the Federal short term interest rate
(AFR) plus two percentage points. Effective for interest payable on
overpayments by noncorporate taxpayers after December 31, 1998, the rate
is increased to the AFR plus three percentage points (the same rate
applicable to underpayments of tax). The rate remains at AFR plus two
percentage points for corporations.
Mitigate failure to pay penalty during installment agreements.--
Taxpayers who fail to pay their taxes are subject to a penalty of 0.5
percent per month on the unpaid amount, up to a maximum of 25 percent.
Under prior law, taxpayers who made installment payments pursuant to an
agreement with the IRS could also be subject to the penalty. Effective
for installment agreement payments made after December 31, 1999, the
penalty for failure to pay taxes applicable to the unpaid amount is
reduced to 0.25 percent per month.
Mitigate failure to deposit penalty.--Under prior law, deposits of
payroll taxes were allocated to the earliest period for which such
deposit was due. If a taxpayer missed or made an insufficient deposit
for a given period, later deposits were first applied to satisfy the
shortfall for the earlier period. Cascading penalties often resulted, as
payments that would otherwise be sufficient to satisfy current
liabilities were applied to satisfy earlier shortfalls. For deposits
required to be made after January 18, 1999, this Act allows the taxpayer
to designate the period to which each deposit is to be applied. The
designation must be made no later than 90 days after the related IRS
penalty notice is sent. For deposits required to be made after December
31, 2001, any deposit is to be applied to the most recent period to
which the deposit relates, unless the taxpayer explicitly designates
otherwise.
Suspend interest and certain penalties if the IRS fails to contact the
taxpayer.--In general, interest and penalties accrue during the period
for which taxes are unpaid, without regard to whether the taxpayer is
aware that tax is due. Effective for taxable years ending after July 22,
1998 and beginning before January 1, 2004, for taxpayers who file a
timely return, the accrual of penalties and interest are suspended if
the IRS has not sent the taxpayer a notice of deficiency within 18
months following the date which is the later of: (1) the due date of the
return (without regard to extensions) or (2) the date on which the
individual taxpayer timely filed the return. The provision applies only
to individuals and does not apply to the failure to pay penalty, in the
case of fraud, or with respect to criminal penalties. The suspension of
interest and penalties continues until 21 days after the IRS sends a
notice to the taxpayer specifically stating the taxpayer's liability and
the basis for the liability. Effective for taxable years beginning after
December 31, 2003, the 18-month period is reduced to one year.
Modify procedural requirements for imposition of penalties.--Under
prior law the IRS was not required to show how penalties were computed
on the notice of penalty and in some cases, penalties could be imposed
without supervisory approval. Effective for notices issued and penalties
assessed after December 31, 2000, this Act requires that each notice
imposing a penalty include the name of the penalty, the code section
imposing the penalty, and a computation of the penalty. In addition,
unless excepted, all non-computer-generated penalties require the
specific approval of IRS management. The provision does not apply to
failure-to-file penalties, failure-to-pay penalties, or to penalties for
failure to pay estimated tax.
Permit personal delivery of 100-percent penalty notices.--Any person
who willfully fails to collect, truthfully account for, and pay over any
tax imposed by the Internal Revenue Code is liable for a penalty equal
to the amount of the tax. Before the IRS may assess any such ``100-
percent penalty'' it must mail a written preliminary notice informing
the person of the proposed penalty. The mailing of such notice must
precede any notice and demand for payment of the penalty by at least 60
days. Effective July 22, 1998, this Act permits personal delivery of
such preliminary notices, as an alternative to delivery by mail.
Modify procedural requirements for interest charges.--Effective for
all notices issued by the IRS after December 31, 2000 that include an
amount of interest required to be paid by the taxpayer, a detailed
computation of the interest charges and a citation of the Code section
under which such interest is imposed are required.
Abate interest on underpayments of tax by taxpayers in Presidentially
declared disaster areas.--Effective for disasters declared after
December 31, 1997, with re-
[[Page 53]]
spect to taxable years beginning after December 31, 1997 (a provision of
the Taxpayer Relief Act of 1997 had provided the same benefit to
disasters declared during 1997), taxpayers located in a Presidentially
declared disaster area do not have to pay interest on taxes due for the
length of any extension for filing their tax returns granted by the
Secretary of the Treasury.
Protections for Taxpayers Subject to Audit or Collection Activities
Establish formal procedures to insure due process in IRS collection
actions.--The IRS is entitled to seize a taxpayer's property by levy to
pay the taxpayer's tax liability. Effective for collections initiated
after January 18, 1999, this Act establishes formal procedures designed
to insure due process where the IRS seeks to collect taxes by levy.
Under these procedures, the IRS is required to provide the taxpayer with
a ``Notice of intent to Levy'' by personal delivery, by leaving it at
the taxpayer's dwelling or usual place of business, or by registered or
certified mail, return receipt requested, at least 30 days before the
taxpayer's property is seized. During the 30-day period following
issuance of the intent to levy, the taxpayer may demand a hearing before
an appeals officer who has had no prior involvement with the taxpayer's
case. If such a hearing is requested, no levy may occur until a
determination by the appeals officer is rendered. The determination of
the appeals officer may be appealed to the Tax Court or, where
appropriate, the Federal district court. No seizure of a dwelling that
is the principal residence of the taxpayer, the taxpayer's spouse, the
taxpayer's former spouse, or minor child is allowed without prior
judicial approval.
Extend confidentiality privilege to taxpayer communications with
federally authorized practitioners.--The attorney-client privilege of
confidentiality is extended to communications between taxpayers and
individuals (in noncriminal proceedings) who are authorized under
Federal law to practice before the IRS. The provision, which is
effective with regard to communications made on or after July 22, 1998,
does not apply to a written communication between federally authorized
tax practitioners and any director, shareholder, officer, employee,
agent, or representative of a corporation in connection with the
promotion of any tax shelter.
Limit financial status audit techniques.--Effective July 22, 1998, the
IRS is prohibited from using financial status or economic reality
examination techniques to determine the existence of unreported income
of any taxpayer unless the IRS has a reasonable indication that there is
a likelihood of unreported income.
Establish protections against the disclosure and improper use of
computer software and source codes.--In a civil action, the IRS is
prohibited from issuing a summons for any portion of any third-party
tax-related computer source code unless certain requirements are
satisfied. The Act also establishes a number of protections against the
disclosure and improper use of trade secrets and computer software and
source code that come into possession of the IRS in the course of the
examination of a taxpayer's return. These protections generally are
effective for summonses issued and computer software and source code
acquired after July 22, 1998.
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.
Effective July 22, 1998, the IRS is required 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.
Allow taxpayers to quash all third-party summonses.--Under prior law,
summonses issued to ``third-party recordkeepers'' were subject to
different procedures than other summonses: notice of the summons was
required to be given to the taxpayer, and the taxpayer had an
opportunity to bring a court proceeding to quash the summons, during
which time the third-party recordkeeper was prohibited from complying
with the summons. This Act expands the ``third-party recordkeeper''
procedures to apply to all summonses issued to persons other than the
taxpayer. The provision is effective for summonses served after July 22,
1998.
Permit service of summonses by mail.--This Act permits the IRS to
serve summonses by certified or registered mail, as an alternative to
the prior law requirement that all summonses be personally served. The
provision is effective for summonses served after July 22, 1998.
Provide notice of IRS contact with third party.--Third parties may be
contacted by the IRS in connection with the examination of a taxpayer or
the collection of the tax liability of the taxpayer. In general, under
prior law, the IRS was required to notify the taxpayer of the service of
summons on a third party within three days of the date of service. This
Act provides that the IRS may not contact any person other than the
taxpayer with respect to the determination or collection of the tax
liability of the taxpayer without providing reasonable notice in advance
to the taxpayer that the IRS may contact persons other than the
taxpayer. This provision, which is effective with respect to contacts
made after January 18, 1999, does not apply to criminal tax matters, if
the collection of the tax liability is in jeopardy, if the Secretary
determines that disclosure may involve reprisal against any person, or
if the taxpayer authorized the contact.
Require supervisory approval for certain liens, levies, and
seizures.--Under prior law, supervisory approval of liens, levies or
seizures was only required under cer-
[[Page 54]]
tain circumstances. This Act requires the IRS to implement an approval
process under which any lien, levy or seizure would, when appropriate,
be approved by a supervisor, who would review the taxpayer's
information, verify that a balance is due, and affirm that a lien, levy
or seizure is appropriate under the circumstances. Circumstances to be
taken into account include the amount due and the value of the asset.
The provision applies to automated collection system actions initiated
after December 31, 2000 and to all other collections actions initiated
after July 22, 1998.
Modify levy exemption amounts.--IRS may levy on all non-exempt
property of the taxpayer. Under prior law, property exempt from levy
included up to $2,500 in value of fuel, provisions, furniture, and
personal effects in the taxpayer's household and up to $1,250 in value
of books and tools necessary for the trade, business or profession of
the taxpayer. This Act increases the value of personal effects exempt
from levy to $6,250 and the value of books and tools exempt from levy to
$3,125. These amounts are indexed annually for inflation and apply to
levys issued after July 22, 1998.
Require release of levy upon agreement that amount is uncollectible.--
Effective for levys imposed after December 31, 1999, the IRS is required
to release a wage levy as soon as practicable upon agreement with the
taxpayer that the tax is not collectible.
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). Effective for refund suits brought with
respect to taxable years beginning after December 31, 1998, this Act
requires the IRS to suspend collection by levy of liabilities that are
the subject of a refund suit during the pendency of the litigation. This
only applies where refund suits can be brought without the full payment
of the tax, i.e., divisible taxes. Collection by levy is suspended
unless jeopardy exists or the taxpayer waives the suspension of
collection in writing. The statute of limitations on collection is
stayed for the period during which collection by levy is prohibited.
Require review of jeopardy and termination assessments and jeopardy
levies.--Special procedures allow 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 or termination 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. This Act requires IRS Counsel review and
approval before the IRS can make a jeopardy assessment, a termination
assessment, or a jeopardy levy. If the Counsel's approval is not
obtained, the taxpayer is entitled to obtain abatement of the assessment
or release of the levy, and, if the IRS fails to offer such relief, to
appeal first to the collections appeals process and then to the U.S.
District Court. This provision is effective with respect to taxes
assessed and levies made after July 22, 1998.
Increase ``superpriority'' dollar limits.--A Federal tax lien attaches
to all property and rights in property of the taxpayer, if the taxpayer
fails to pay the assessed tax liability after notice and demand.
However, the Federal tax lien is not valid as to certain
``superpriority'' interests. Two of these ``superpriorities'' are
subject to dollar limitations. For example, under prior law, purchasers
of personal property at a casual sale were protected against a Federal
tax lien attached to such property to the extent the sale was for less
than $250; protection for mechanics lienors who provide home improvement
work for residential real property was $1,000. Effective July 22, 1998,
this Act increases these dollar limits, which are indexed for inflation,
to $1,000 and $5,000, respectively. Under prior law, superpriorities
were granted to banks and building and loan associations that made
passbook loans to their customers, provided that those institutions
retained the passbooks in their possession until the loan was completely
paid off. This Act clarifies the superpriorities law to reflect current
banking practices, where a passbook-type loan may be made even though an
actual passbook is not used.
Waive early withdrawal penalty for IRS levies on retirement plans.--
Early withdrawals from qualified retirement plans and Individual
Retirement Accounts (IRAs) that are includible in the gross income of
the taxpayer generally are subject to a 10-percent early withdrawal tax,
unless an exception to the tax applies. Effective for distributions
after December 31, 1999, this Act provides an exception from the 10-
percent early withdrawal tax for amounts withdrawn from an employer-
sponsored retirement plan or an IRA that are subject to a levy by the
IRS. The exception applies only if the plan or IRA is levied; it does
not apply if the taxpayer withdraws funds to pay taxes in the absence of
a levy, or if the taxpayer withdraws funds in order to release a levy on
other interests.
Prohibit sales of seized property at less than minimum bid.--A minimum
bid price must be established for seized property offered for sale.
Effective for sales after July 22, 1998, the IRS is prohibited from
selling seized property for less than the minimum bid price.
Require a written accounting of all sales of seized property.--The IRS
is required to provide a written accounting of all sales of seized
property to the taxpayer, effective for seizures occurring after July
22, 1998. The accounting must include a receipt for the amount credited
to the taxpayer's account.
Implement a uniform asset disposal mechanism.--The IRS must sell
property seized by levy either by public auction or by public sale under
sealed bids. These sales are often conducted by the revenue officer
charged with collecting the tax liability. By July 22, 2000, this Act
requires the IRS to implement a uniform asset disposal mechanism for
sales of seized property. The disposal mechanism should be designed to
remove any participa-
[[Page 55]]
tion in the sale by revenue officers and outsourcing of the disposal
mechanism may be considered.
Codify administrative procedures for seizures.--The IRS Manual
provides general guidelines for seizure actions, requiring that if it is
determined that the taxpayer's equity in the seized property is
insufficient to yield net proceeds from sale to apply to the unpaid tax,
the revenue officer must immediately release the seized property. This
Act codifies these administrative procedures effective July 22, 1998.
Establish procedures for seizure of residences and businesses.--
Effective July 22, 1998, the following procedures apply with respect to
the seizure of residences and businesses: (1) Seizure of any nonrental
residential real property to satisfy an unpaid liability of $5,000 or
less (including interest and penalties) generally is prohibited. (2) All
other payment options must be exhausted before the taxpayer's business
assets or principal residence may be seized. (3) Seizure of a principal
residence is permitted only if approved in writing by a U.S. District
Court. (4) Future income derived from the sale of fish or wildlife under
specified State permits or licenses must be taken into account in
evaluating other payment options before seizing the taxpayer's business
assets.
Require disclosures relating to extension of statute of limitations by
agreement.-- Under prior law, taxpayers and the IRS could agree in
writing to extend statute of limitations on assessment or collection,
either for a specified period or for an indefinite period. Under this
Act, the statute of limitations on collections may no longer be extended
by agreement between the taxpayer and the IRS, except in connection with
an installment agreement, but the extension is only for the period for
which the installment agreement by its terms extends beyond the end of
the otherwise applicable 10-year period plus 90 days. The Act also
requires that on each occasion that the taxpayer is requested by the IRS
to extend the statue of limitations on assessment, 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 or to a
particular time period. These requirements generally apply to requests
to extend the statute of limitations made after December 31, 1999.
Expand authority of the IRS to accept 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 owed, or doubt as to the taxpayer's ability to pay the full
amount owed. This Act requires 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. This information is to be used
to ensure that taxpayers entering into an offer-in-compromise will have
adequate means to provide for basic living expenses. The IRS is
prohibited from rejecting an offer-in-compromise from a low-income
taxpayer solely on the basis of the amount of the offer. The Act also
prohibits the IRS from collecting a tax liability by levy during any
period that a taxpayer's offer-in-compromise for that liability is being
processed, during the 30 days following rejection of an offer, during
any period in which an appeal of the rejection of an offer is being
considered, and while an installment agreement is pending. The Act also
provides that the IRS must implement procedures to review all proposed
rejections of taxpayer offers-in-compromise and requests for installment
agreements prior to the rejection being communicated to the taxpayer.
These changes generally are effective for offers-in-compromise and
installment agreements submitted after July 22, 1998. The provision
suspending levy is effective with respect to offers-in-compromise
pending on or made after December 31, 1999.
Require notice of deficiency to specify Tax Court filing deadlines.--
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. This Act requires
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 is treated as timely filed. The provision
applies to notices mailed after December 31, 1998.
Refund or credit of overpayments before final determination.--The IRS
may not take action to collect a deficiency during the period a taxpayer
may petition the Tax Court, or, if the taxpayer petitions the Tax court,
until the decision of the Tax Court becomes final. Actions to collect a
deficiency attempted during this period may be enjoined, but under prior
law, there was no authority for ordering the refund of any amount
collected by the IRS during the prohibited period. If a taxpayer
contested a deficiency in the Tax Court, no credit or refund of income
tax for the contested taxable year generally could be made, except in
accordance with a final decision of the Tax Court. Where the Tax Court
determined that an overpayment had been made and a refund was due, and a
portion of the decision was appealed, there was no provision for the
refund of any portion of any overpayment that was not contested in the
appeal. Effective July 22, 1998, this Act provides that a proper court
may order a refund of any amount that was collected within the period
during which collection of the deficiency by levy or other proceeding is
prohibited. This Act also allows the refund of any overpayment
determined by the Tax Court, to the extent the overpayment is not
contested on appeal.
Modify IRS procedures related to appeal of examinations and
collections.--Effective July 22, 1998, this Act
[[Page 56]]
codifies existing IRS procedures with respect to early referrals to
Appeals and the Collections Appeals Process. This Act also codifies the
existing Alternative Dispute Resolution procedures, as modified by
eliminating the prior law dollar threshold of more than $10 million in
dispute.
Codify certain Fair Debt Collection procedures.--Government agencies,
including the IRS, are generally exempt from the Fair Debt Collection
Practices Act (FDCPA). Effective July 22, 1998, this Act applies to the
IRS the FDCPA restrictions relating to communication with the taxpayer/
debtor (prohibition on telephone calls outside the hours of 8:00 a.m. to
9:00 p.m. local time) and prohibitions on harassing or abusing a debtor.
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. This Act requires the IRS to enter into an installment
agreement (at the taxpayer's option) for liabilities of $10,000 or less,
provided certain conditions are met. The provision is effective July 22,
1998.
Prohibit requests to waive rights to bring actions.--Effective July
22, 1998, the government cannot ask a taxpayer to waive the right to sue
the United States or one of its employees for actions taken concerning a
tax matter, in order to settle another tax matter unless the taxpayer
knowingly and voluntarily waives the right or the request is made to an
authorized taxpayer representative (such as an attorney).
Disclosures to Taxpayers
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 and the full amount of the liability, even if only one spouse
earned the wages or income that is shown on the return. This Act
requires the IRS to establish procedures no later than January 18, 1999,
to alert married taxpayers clearly of their joint and several liability
on all appropriate publications and instructions.
Provide explanation of taxpayer rights in interviews with the IRS.--
The IRS is required to rewrite Publication 1 (Your Rights as a Taxpayer)
no later than January 18, 1999. The revision must inform taxpayers more
clearly of their rights to be represented by a representative, and, if
the taxpayer is so represented, that interviews with the IRS may not
proceed without the presence of the representative unless the taxpayer
consents.
Require disclosure of criteria for examination selection.--This Act
requires that 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
must not include any information that would be detrimental to law
enforcement, and must specify the general procedures used by the IRS,
including whether taxpayers are selected for examination on the basis of
information in the media or from informants. These additions to
Publication 1 must be made no later than January 18, 1999.
Provide explanation of appeals and collection process.--The IRS is
required to provide to taxpayers a description of the entire appeals and
collection process, from examination through collection, including the
assistance available to taxpayers from the Taxpayer Advocate at various
points in the process. This information must be provided with the first
letter of proposed deficiency that allows the taxpayer an opportunity
for administrative review in the IRS Office of Appeals, beginnng no
later than January 18, 1999.
Provide explanation of reason for refund disallowance.--Effective
January 18, 1999, the IRS is required to notify the taxpayer of the
specific reasons for the disallowance (or partial disallowance) of a
refund claim.
Provide statements regarding installment agreements.--Effective July
1, 2000, the IRS is required to send every taxpayer in an installment
agreement an annual statement of the initial balance owed, the payments
made during the year, and the remaining balance.
Provide notification of change in tax matters partner.--In general,
the tax treatment of items of partnership income, loss, deductions and
credits are determined at the partnership level in a unified partnership
proceeding rather than in separate proceedings with each partner. In
providing notice to taxpayers with respect to partnership proceedings,
the IRS relies on information furnished by a party designated as the tax
matters partner (TMP) of the partnership. The TMP is required to keep
each partner informed of all administrative and judicial proceedings
with respect to the partnership. Under certain circumstances, the IRS
may require the resignation of the incumbent TMP and designate another
partner as the TMP of the partnership. Effective for selections of TMPs
made by the IRS after July 22, 1998, this Act requires the IRS to notify
all partners of any resignation of the TMP that is required by the IRS,
and to notify the partners of any successor TMP.
Provide description of conditions under which taxpayer returns may be
disclosed.--Effective July 22, 1998, this Act requires that instruction
booklets for general tax forms include a description of conditions under
which tax return information may be disclosed outside the IRS (including
to States).
Provide procedure for disclosure of Chief Counsel advice.--This Act
establishes a structured process by which the IRS will make certain work
products, designated as ``Chief Counsel Advice,'' open to public
inspection on an ongoing basis. The provision, which applies to Chief
Counsel Advice issued after October 20, 1998, is designed to protect
taxpayer privacy while allowing the public inspection of public
documents in a manner generally consistent with the mechanism for the
public inspection of written determinations.
[[Page 57]]
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 Secretary of the Treasury is authorized to provide up to $6 million
per year in matching grants (no more than $100,000 per year per eligible
clinic) to certain low-income taxpayer clinics, effective July 22, 1998.
To be eligible, a clinic may charge no more than a nominal fee to either
represent low-income taxpayers in controversies with the IRS or to
provide tax information to individuals for whom English is a second
language.
Require cataloging of complaints.--Beginning in 1997, the IRS is
required to make an annual report to Congress regarding allegations of
misconduct by IRS employees. Effective January 1, 2000, the IRS is
required to maintain records of taxpayer complaints of misconduct by IRS
employees, on an individual employee basis, although individual records
are not to be listed in the report to Congress.
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. Under prior law, there was no
exception authorizing the disclosure of return information to NARA. This
Act provides 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 U.S. 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 apply to NARA. The provision is effective for requests made
by the Archivist after July 22, 1998.
Modify payment of taxes.--The Secretary of the Treasury is authorized
to accept payments by checks or money orders, as provided in
regulations. Under prior law, checks or money orders were made payable
to the ``Internal Revenue Service.'' Under this Act the Secretary of the
Treasury or his delegate is required to amend the rules, regulations,
and procedures to allow payment of taxes by check or money order to be
made payable to the ``United States Treasury,'' effective July 22, 1998.
Clarify authority to prescribe manner of making elections.--Except as
otherwise provided by statute, prior law provided that elections under
the Internal Revenue Code must be made in such manner as the Secretary
of the Treasury ``shall by regulations or forms prescribe.'' This Act
clarifies that, except as otherwise provided, the Secretary may
prescribe the manner of making any election by any reasonable means.
This change is effective July 22, 1998.
Additional Provisions
Eliminate 18-month holding period for capital gains.--Under the
Taxpayer Relief Act of 1997 (TRA97), the maximum capital gains tax rate
for individuals generally was 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 was retained for
collectibles and, effective July 29, 1997, for assets held between 1
year and 18 months. In addition, TRA97 provided a maximum rate of 25
percent for the long-term capital gain attributable to depreciation from
real estate held more than 18 months. Under this Act, effective January
1, 1998, property held by an individual for more than one year (rather
than 18 months) is eligible for the lower maximum capital gains tax
rates (10, 20, and 25 percent) provided in TRA97.
Modify tax treatment of meals provided for the convenience of the
employer.--Under prior law, meals provided on the business premises to
employees were excluded from the employees' income and fully deductible
to the employer if substantially all of the employees (interpreted to be
approximately 90 percent) were provided such meals for the convenience
of the employer. Effective for taxable years beginning before, on, or
after July 22, 1998, all meals furnished to employees at a place of
business are excluded from the employees' income and fully deductible to
the employer if more than one-half of the employees are provided such
meals for the convenience of the employer.
Revenue Offsets
Overrule Schmidt Baking with respect to vacation and severance pay.--
Any method or arrangement that has the effect of deferring the receipt
of compensation or other benefits for employees is treated as a deferred
compensation plan. In general, contributions under a deferred
compensation plan (other than certain pension, profit-sharing and
similar plans) are deductible to the employer in the taxable year in
which an amount attributable to the contribution is includible in the
income of the employee. Temporary Treasury regulations provide that a
plan, method, or arrangement that defers the receipt of compensation or
benefits by the employee more than 2\1/2\ months after the end of the
employer's taxable year in which the services creating the right to such
compensation or benefits are performed, is to be treated as a deferred
compensation plan. The Tax Court recently addressed the issue of when
vacation pay and severance pay are considered deferred compensation in
Schmidt Baking Co., Inc.,. In that case the taxpayer, who was an accrual
basis taxpayer with a fiscal year that ended December 28, 1991, funded
its accrued vacation and severance pay liabilities for 1991 by
purchasing an irrevocable letter of credit on March 13, 1992. The
parties stipulated that the letter of credit represented a transfer of
substantially vested interest in property to employees and that the fair
market value of such interest was includible in the employees' gross
incomes for 1992 as a result of the transfer.
[[Page 58]]
The Tax Court held that the purchase of the letter of credit, and the
resulting income inclusion, constituted payment of the vacation and
severance pay within the 2\1/2\ month period, thus the vacation and
severance pay were not treated as deferred compensation. This ruling
allowed the employer to deduct the cost in 1991, and the employees to
pay the taxes on the benefits in 1992. This Act overrules Schmidt Baking
Co., Inc., by providing that for purposes of determining whether an item
of compensation (including vacation pay and severance pay), is deferred
compensation, the compensation is not considered to be paid or received
until actually received by the employee. Actual receipt does not include
an amount transferred as a loan, refundable deposit, or contingent
payment. Also, amounts set aside in a trust for employees are not
considered to be actually received by the employee. This change is
effective for taxable years ending after July 22, 1998.
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. This Act
limits the ability of grandfathered stapled REITs to grow and actively
manage certain types of properties within the stapled structure.
Specifically, for purposes of determining whether any grandfathered
entity is a REIT, the stapled entities (and certain subsidiary entities)
are treated as one entity with respect to properties acquired on or
after March 26, 1998 and with respect to activities or services relating
to such properties that are undertaken or performed by one of the
entities on or after such date.
Preclude certain taxpayers from prematurely claiming losses from
receivables.--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''). Under prior law, significant
numbers of taxpayers whose principal activities are selling nonfinancial
goods or providing nonfinancial services (such as retailers and
utilities) were making the customer paper election as a means of
restoring bad debt reserves. The customer paper election was also being
used inappropriately to mark-to-market trade receivables that bear
little or no interest in order to recognize loss. Under this Act,
certain trade receivables are no longer eligible for mark-to-market
treatment. Specifically, generally effective for taxable years ending
after July 22, 1998, sellers of nonfinancial goods and services may not
mark-to-market receivables generated on the sale of goods or services
sold on credit when such receivables are retained by the seller or a
related person.
Disregard minimum distributions in determining adjusted gross income
(AGI) for conversions to a Roth Individual Retirement Account (IRA)--
Under current law, uniform minimum distribution rules generally apply to
all types of tax-favored retirement vehicles, including qualified
retirement plans and annuities, IRAs (other than Roth IRAs), and tax-
sheltered annuities. Distributions are required to begin no later than
the individual's required beginning date. In the case of an IRA, the
required beginning date is April 1 of the calendar year following the
calendar year in which the IRA owner attains age 70\1/2\. Extensive
regulations have been issued for purposes of calculating minimum
distributions, which generally are includible in the taxpayer's gross
income in the year of distribution. A 50-percent excise tax applies to
the extent a minimum distribution is not made. Under current law,
taxpayers with AGI of less than $100,000 are eligible to roll over or
convert an existing IRA to a Roth IRA. Effective for taxable years
beginning after December 31, 2004, minimum required distributions from
IRAs will be excluded from the definition of AGI, solely for purposes of
determining eligibility to convert from an IRA to a Roth IRA. As under
present law, the required minimum distribution will not be eligible for
conversion and will be includible in gross income.
The Omnibus Consolidated and Emergency Supplemental Appropriations
Act, 1999.--This Act, which was signed by President Clinton on October
21, 1998, represents a significant step forward for America, helping to
protect the surplus until Social Security is reformed, forging a
bipartisan agreement on funding the International Monetary Fund and
putting in place critical investments in education and training. This
Act also extends several business and trade tax provisions that had
expired or were about to expire, provides tax breaks for farmers and
ranchers, and includes several other tax changes. The major provisions
of the Act affecting receipts are described below.
Emergency Tax Relief for Farmers
Extend permanently income-averaging for farmers.--Under prior law,
effective for taxable years beginning after December 31, 1997 and before
January 1, 2001, an electing individual taxpayer generally was 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. This Act permanently extends this
provision, effec
[[Page 59]]
tive for taxable years beginning after December 31, 2000.
Modify taxation of farm production flexibility contract payments.--A
taxpayer generally is required to include an item in income no later
than the time of its actual or constructive receipt, unless such amount
properly is accounted for in a different period under the taxpayer's
method of accounting. If a taxpayer has an unrestricted right to demand
the payment of an amount, the taxpayer is in constructive receipt of
that amount whether or not the taxpayer makes the demand and actually
receives the payment. Under production flexibility contracts entered
into between certain eligible owners and producers and the Secretary of
Agriculture (as provided in the Federal Agriculture Improvement and
Reform Act of 1996), annual payments are made at specific times during
the Federal government's fiscal year. One-half of each annual payment is
to be made on either December 15 or January 15 of the fiscal year, at
the option of the recipient; the remaining one-half is to be paid no
later than September 30 of the fiscal year. The option to receive the
payment on December 15 potentially results in the constructive receipt
(and thus potential inclusion in income) of one-half of the annual
payment at that time, even if the option to receive the amount on
January 15 is elected. For fiscal year 1999, as provided under The
Emergency Farm Financial Relief Act of 1998, all payments are to be paid
at such time or times during the fiscal year as the recipient may
specify. This option to receive all of the 1999 payment in calendar year
1998 potentially results in constructive receipt (and thus potential
inclusion in income) in that year, whether or not the amounts are
actually received. Under this Act, effective for production flexibility
contract payments made in taxable years ending after December 31, 1995,
the time a production flexibility contract payment is to be included in
income is to be determined without regard to the options granted for
payment.
Extend the net operating loss carryback period for farmers.--A net
operating loss (NOL) is, generally, the amount by which business
deductions of a taxpayer exceed business gross income. Generally, an NOL
may be carried back two years and carried forward 20 years to offset
taxable income in those years. One exception provides that, in the case
of an NOL attributable to Presidentially declared disasters for
taxpayers engaged in a farming business or a small business, the NOL can
be carried back three years, as provided under prior law. Under this
provision, a special five-year carryback period is provided for a
farming loss, regardless of whether the loss is incurred in a
Presidentially declared disaster area; the carryforward period remains
at 20 years. The provision is effective for such NOLs arising in taxable
years beginning after December 31, 1997.
Extension of Expiring Tax and Trade Provisions
Extend research and experimentation tax credit.--The 20-percent tax
credit for certain incremental research and experimentation expenditures
is extended to apply to qualifying expenditures paid or incurred during
the period July 1, 1998 through June 30, 1999.
Extend the work opportunity tax credit.--The work opportunity tax
credit, which provides an incentive for employers to hire individuals
from certain targeted groups, is extended to apply to individuals who
begin work on or after July 1, 1998 and before July 1, 1999.
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. This
credit is extended to apply to individuals who begin work after April
30, 1999 and before July 1, 1999.
Extend permanently the 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 July 1, 1998 to deduct
the full fair market value of the stock, rather than the adjusted basis
of the contributed stock. This Act permanently extends the rule for
private foundations effective for contributions of qualified appreciated
stock made on or after July 1, 1998.
Extend and modify exceptions provided under subpart F for certain
active financing income.--Under the Subpart F rules, certain U.S.
shareholders of a controlled foreign corporation (CFC) are subject to
U.S. tax currently on certain income earned by the CFC, whether or not
such income is distributed to the shareholders. The income subject to
current inclusion under the subpart F rules includes ``foreign personal
holding company income'' and insurance income. The U.S. 10-percent
shareholders of a CFC also are subject to current inclusion with respect
to their shares of the CFC's foreign base company services income
(income derived from services performed for a related person outside the
country in which the CFC is organized). Under prior law, certain income
derived in the active conduct of a banking, financing, insurance, or
similar business (only for taxable years beginning in 1998) was excepted
from the Subpart F rules regarding the taxation of foreign personal
holding company income and foreign base company services income. This
Act extends the exception for one year, with modifications, to apply to
such income derived in taxable year 1999.
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
June 30, 1998, is temporarily extended through June 30, 1999. Refunds of
any duty paid between June 30, 1998 and October 21, 1998 are provided
upon request of the importer.
Other Provisions
Allow personal tax credits fully against regular tax liability.--
Certain nonrefundable personal tax credits
[[Page 60]]
(dependent care credit, credit for the elderly and disabled, adoption
credit, child tax credit, credit for interest on certain home mortgages,
HOPE Scholarship and Lifetime Learning credit, and the D.C. homebuyer's
credit) are provided under current law. Generally, these credits are
allowed only to the extent that the individual's regular income tax
liability exceeds the individual's tentative minimum tax. An additional
child tax credit is provided under current law to families with three or
more qualifying children. This credit, which may be offset against
social security payroll tax liability (provided that liability exceeds
the amount of the earned income credit), is reduced by the amount of the
individual's minimum tax liability (that is, the amount by which the
individual's tentative minimum tax exceeds the individual's regular tax
liability). For taxable year 1998, this Act allows nonrefundable
personal tax credits to offset regular income tax liability in full (as
opposed to only the amount by which the regular tax liability exceeds
the tentative minimum tax). In addition, for taxable year 1998, the
additional child credit provided to families with three or more
qualifying children is not reduced by the amount of the individual's
minimum tax liability.
Accelerate 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: 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. This Act increases the allowable deduction to 100
percent as follows: 60 percent for 1999 through 2001; 70 percent for
2002; and 100 percent for 2003 and subsequent years.
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. For any individual with an AGI of more than
$150,000 as shown on the return for the preceding taxable year, the 100
percent of last year's safe harbor generally is modified to be a 110
percent of last year's liability safe harbor. However, under prior law,
the 110 percent of last year's liability safe harbor for individuals
with AGI of more than $150,000 was modified for taxable years beginning
in 1999 through 2002, as follows: for taxable years beginning in 1999,
2000, and 2001 the safe harbor is 105 percent; and for taxable years
beginning in 2002, the safe harbor is 112 percent. Under this Act the
estimated tax safe harbor for individuals with AGI of more than $150,000
is modified as follows: for taxable years beginning in 2000 and 2001 the
safe harbor is 106 percent.
Increase State volume limits on private activity tax-exempt bonds.--
Interest on bonds issued by States and local governments to finance
activities carried out and paid for by private persons (private activity
bonds) is taxable unless the activities are specified in the Internal
Revenue Code. The volume of tax-exempt private activity bonds that State
and local governments may issue in each calendar year is limited by
State-wide volume limits. Under prior law, the annual volume limit for
any State was equal to the greater of $50 per resident of the State or
$150 million. Under this Act the annual private activity bond volume
limit is increased to the greater of $75 per resident or $225 million
for 2007 and subsequent years. The increase is phased-in annually,
beginning in 2003, as follows: for 2003, the greater of $55 per resident
or $165 million; for 2004, the greater of $60 per resident or $180
million; for 2005, the greater of $65 per resident or $195 million; and
for 2006, the greater of $70 per resident or $210 million.
Allow States a limited period of time to exempt student employees from
social security.--The Social Security Amendments of 1972 provided an
opportunity for States to obtain exemptions from social security
coverage for student employees of public schools, colleges, and
universities. Three States chose not to seek an exemption from social
security coverage for these employees. Under this Act States are allowed
a limited window of time (January 1 through March 31, 1999), to modify
existing State agreements to exempt such students from social security
coverage effective with respect to wages earned after June 30, 2000.
Revenue Offset Provisions
Modify treatment of certain deductible liquidating distributions of
real estate investment trusts (REITs) and regulated investment companies
(RICs).--REITs and RICs are allowed a deduction for dividends paid to
their shareholders. The deduction for dividends paid includes amounts
distributed in liquidation that are properly chargeable to earnings and
profits. In addition, in the case of a complete liquidation occurring
within 24 months after the adoption of a plan of complete liquidation,
any distribution made pursuant to such plan is deductible to the extent
of earnings and profits. Rules that govern the receipt of dividends from
REITs and RICs generally provide for including the amount of the
dividend in the income of the shareholder receiving the dividend that
was deducted by the REIT or RIC. However, in the case of a liquidating
distribution by a REIT or RIC to a corporation owning at least 80
percent of its stock, a separate rule under prior law generally provided
that the distribution was tax-free to the parent corporation. As a
result, a liquidating REIT or RIC was able to deduct amounts paid to its
parent corporation without the parent corporation including
corresponding amounts in its income. Effective for distributions on or
after May 22, 1998 (regardless of when the plan of liquidation was
adopted), any amount that a liquidating REIT or RIC takes as a deduction
for
[[Page 61]]
dividends paid with respect to an 80-percent corporate owner is
includible in the income of the recipient corporation. As under prior
law, the liquidating corporation may designate the amount distributed as
a capital gain dividend or, in the case of a RIC, a dividend eligible
for the 70-percent dividends-received deduction or an exempt interest
dividend.
Expand list of taxable vaccines.--Under prior law an excise tax of
$.75 per dose is levied on the following vaccines: diphtheria,
pertussis, tetanus, measles, mumps, rubella, polio, HIB (haemophilus
influenza type B), hepatitis B, and varicella (chickenpox). This Act
adds any vaccine against rotavirus gastroenteritis to the list of
taxable vaccines, effective for vaccines sold by a manufacturer or
importer after October 21, 1998.
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. This Act
provides 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 TIN'' used on a tax return is defined as the TIN assigned to
such individual by the Social Security Administration (SSA), or in
certain limited cases, the IRS. Second, the IRS is 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
include the individual's name, age or date of birth, and Social Security
number. Third, the IRS is authorized to use math error procedures to
deny eligibility for those tax benefits 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 that the IRS determines, using data from SSA, does not meet the
statutory age restrictions. These changes are effective for taxable
years ending after October 21, 1998.
Restrict special net operating loss carryback rules for specified
liability losses.-- 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. This Act modifies the specified liability loss provisions
to provide that only a limited class of liabilities qualifies as a
specified liability loss. Effective for liability losses arising in
taxable years ending after October 21, 1998, specified liability losses
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.
Modify taxation of prizes and awards.--A taxpayer generally is
required to include an item in income no later than the time of its
actual or constructive receipt, unless the item properly is accounted
for in a different period under the taxpayer's method of accounting. If
a taxpayer has an unrestricted right to demand the payment of an amount,
the taxpayer is in constructive receipt of that amount whether or not
the taxpayer makes the demand and actually receives the payment. Under
prior law, the winner of a contest who was given the option of receiving
either a lump-sum distribution or an annuity was considered to be in
constructive receipt of the award on becoming entitled to the award, and
was required to include the value of the award in gross income, even if
the annuity option was exercised. Under this Act the existence of a
``qualified prize option'' is disregarded in determining the taxable
year for which any portion of a qualified prize is to be included in
income. A qualified prize option is an option that entitles a person to
receive a single cash payment in lieu of a qualified prize (or portion
thereof), provided such option is exercisable not later than 60 days
after the prize winner becomes entitled to the prize. Thus, a qualified
prize winner who is provided the option to choose either cash or an
annuity is not required to include amounts in gross income immediately
if the annuity option is exercised. This change applies to any qualified
prize to which a person first becomes entitled after October 21, 1998.
In order to give previous prize winners a one-time option to alter
previous payment arrangements, the change also applies to any qualifed
prize to which a person became entitled on or before October 21, 1998 if
the person has an option to receive a lump-sum cash payment only during
some portion of the 18-month period beginning on July 1, 1999.
ADMINISTRATION PROPOSALS
The President's plan targets tax relief to provide child-care
assistance to working families and support to Americans with long-term
care needs. The President's plan also provides several incentives to
promote education, including a school construction and modernization
proposal. In addition, the President's plan includes initiatives to
promote energy efficiency and environmental objectives and incentives to
promote retirement savings, as well as extensions of certain expiring
tax provisions.
[[Page 62]]
Make Health Care More Affordable
Provide tax relief for long-term care needs.--Current law provides a
tax deduction for certain long-term care expenses. However, the
deduction does not assist with all long-term care expenses, especially
the costs of informal family caregiving. The Administration proposes to
provide a new long-term care tax credit of $1,000. The credit could be
claimed by a taxpayer for himself or herself or for a spouse or
dependent with long-term care needs. To qualify for the credit, an
individual with long-term care needs must be certified by a licensed
physician as being unable for at least six months to perform at least
three activities of daily living without substantial assistance from
another individual due to loss of functional capacity. An individual may
also qualify if he or she requires substantial supervision to be
protected from threats to his or her own health and safety due to severe
cognitive impairment and has difficulty with one or more activities of
daily living or certain other age-appropriate activities. For purposes
of the proposed credit, the current-law dependency tests would be
liberalized, raising the gross income limit and allowing taxpayers to
use a residency test rather than a support test. The credit would be
phased out--in combination with the child credit and the disabled worker
credit--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 proposal would be
effective for taxable years beginning after December 31, 1999.
Provide tax relief for workers with disabilities.--Under current law,
disabled taxpayers may claim an itemized deduction for impairment-
related work expenses. The Administration proposes to allow disabled
workers to claim a $1,000 credit. This credit would help compensate
people with disabilities for both formal and informal costs associated
with work (e.g., personal assistance to get ready for work or special
transportation). In order to be considered a worker with disabilities, a
taxpayer must submit a licensed physician's certification that the
taxpayer has been unable for at least 12 months to perform at least one
activity of daily living without substantial assistance from another
individual. A severely disabled worker could potentially qualify for
both the long-term care and disabled workers tax credits. The credit
would be phased out--in combination with the child credit and the
disabled worker credit--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 proposal would be effective for taxable years beginning after
December 31, 1999.
Provide tax relief to encourage small business health plans.--Small
businesses generally face higher costs than do larger employers in
setting up and operating health plans in the current insurance market.
Health benefit purchasing coalitions provide an opportunity for small
businesses to purchase health insurance for their workers at reduced
cost and to offer a greater choice of health plans. However, the
formation of health benefit purchasing coalitions has been hindered by
their limited access to capital. To facilitate the formation of these
coalitions, the Administration proposes to establish a temporary,
special rule that would facilitate private foundation grants and loans
to fund the initial operating expenses of qualified health benefit
purchasing coalitions (i.e., those certified by a Federal or State
agency as meeting specified criteria) by treating such grants and loans
as made for exclusively charitable purposes. In addition, to encourage
use of qualified health benefit purchasing coalitions by small
businesses, the Administration proposes a temporary tax credit for
qualifying small employers that currently do not provide health
insurance to their workforces. The credit would be equal to 10 percent
of employer contributions to employee health plans purchased through a
qualified coalition. The maximum credit amount would be $200 per year
for individual coverage and $500 per year for family coverage (to be
reduced proportionately if coverage is provided for less than 12 months
during the employer's taxable year). The credit would be allowed to a
qualifying small employer only with respect to contributions made during
the first 24 months that the employer purchases health insurance through
a qualified coalition, and would be subject to the overall limitations
of the general business credit. The proposal would be effective for
taxable years beginning after December 31, 1999, for health plans
established before January 1, 2004. The special foundation rule would
apply to grants and loans made prior to January 1, 2004 for initial
operating expenses incurred prior to January 1, 2006.
Expand Education Initiatives
Provide incentives for public school construction and modernization.--
The Taxpayer Relief Act of 1997 enacted a provision 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 elementary and secondary school
construction and modernization. Under the proposal, State and local
governments (including U.S. possessions) would be able to issue up to
$22 billion of ``qualified school modernization bonds'' ($11 billion in
each of 2000 and 2001). In addition, $400 million of bonds ($200 million
in each of 2000 and 2001) would be allocated for the construction and
renovation of Bureau of Indian Affairs funded schools. Holders of these
bonds would
[[Page 63]]
receive annual Federal income tax credits, set according to market
interest rates by the Treasury Department, in lieu of interest. Issuers
would be responsible for repayment of principal. At least 95 percent of
the bond proceeds of a qualified school modernization bond must be used
to finance public school construction or rehabilitation. The
Administration also proposes to authorize the issuance of additional
qualified zone academy bonds in 2000 and 2001 of $1.0 billion and $1.4
billion, respectively, and to allow the proceeds of these bonds to be
used for school construction.
Extend employer-provided educational assistance and include graduate
education.--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 for eighteen months to
apply to undergraduate courses beginning before January 1, 2002. In
addition, the exclusion would be expanded to cover graduate expenses
beginning after June 30, 1999 and before January 1, 2002.
Provide tax credit for workplace literacy and basic education
programs.--Given the increased reliance on technology in the workplace,
workers with low levels of education face greater risk of unemployment
than their more educated coworkers. Although the costs of providing
workplace literacy and basic education programs to employees are
generally deductible to employers under current law, no tax credits are
allowed for any employer-provided education. As a result, employers lack
sufficient incentive to provide basic education and literacy programs,
the benefits of which are more difficult for employers to capture
through increased productivity than the benefits of job-specific
education. The Administration proposes to allow employers who provide
certain workplace literacy, English literacy, or basic education
programs for their eligible employees to claim a credit against Federal
income taxes equal to 10 percent of the employer's qualified expenses,
up to a maximum credit of $525 per participating employee. Qualified
education would be limited to basic instruction at or below the level of
a high school degree and to English literacy instruction. Eligible
employees in basic education programs generally would not have received
a high school degree or its equivalent. Instruction would be provided
either by the employer, with curriculum approved by the State adult
education authority, or by local education agencies or other providers
certified by the Department of Education. The credit would be available
for taxable years beginning after December 31, 1999.
Encourage sponsorship of qualified zone academies.--Under current law,
State and local governments can issue qualified zone academy bonds to
fund improvements in certain ``qualified zone academies'' which provide
elementary or secondary education. To encourage corporations to become
sponsors of such academies, a credit against Federal income tax would be
provided equal to 50 percent of the amount of corporate sponsorship
payments made to a qualified zone academy located in (or adjacent to) a
designated empowerment zone or enterprise community. The credit would be
available only if a credit allocation has been made with respect to the
corporate sponsorship payment by the local governmental agency with
responsibility for implementing the strategic plan of the empowerment
zone or enterprise community. Up to $4 million of credits could be
allocated with respect to each of the 31 designed empowerment zones; and
up to $1 million of credits could be allocated with respect to each of
the 95 designated enterprise communities. The credit would be subject to
present law general business credit rules, and would be effective for
sponsorship payments made after December 31, 1999.
Eliminate 60-month limit on student loan interest deduction.--Current
law provides an income tax deduction for certain interest paid on a
qualified education loan during the first 60 months that interest
payments are required, effective for interest due and paid after
December 31, 1997. The maximum deduction available is $2,500 for years
after 2000 (for years 1998, 1999 and 2000, the limits are $1,000, $1,500
and $2,000, respectively) and the deduction is phased-out for taxpayers
with adjusted gross income between $40,000 and $55,000 (between $60,000
and $75,000 for joint filers). The 60-month limitation under current law
adds significant complexity and administrative burdens for taxpayers,
lenders, loan servicing agencies, and the IRS. Thus, to simplify the
calculation of deductible interest payments, reduce administrative
burdens, and provide longer-term relief to low-and middle-income
taxpayers with large educational debt, the Administration proposes to
eliminate the 60-month limitation. This proposal would be effective for
interest due and paid on qualified education loans after December 31,
1999.
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, 1999.
[[Page 64]]
Provide tax relief for participants in certain Federal education
programs.--Present law provides tax-free treatment for certain
scholarship and fellowship grants used to pay qualified tuition and
related expenses, but not to the extent that any grant represents
compensation for services. In addition, tax-free treatment is provided
for certain discharges of student loans on condition that the individual
works for a certain period of time in certain professions for any of a
broad class of employers. To extend tax-free treatment to education
awards under certain Federal programs, the Administration proposes to
amend current law to provide that any amounts received by an individual
under the National Health Service Corps (NHSC) Scholarship Program or
the Armed Forces Health Professions Scholarship and Financial Assistance
Program are ``qualified scholarships'' excludable from income, without
regard to the recipient's future service obligation. In addition, the
proposal also would provide an exclusion from income for any repayment
or cancellation of a student loan under the NHSC Scholarship Program,
the Americorps Education Award Program, or the Armed Forces Health
Professions Loan Repayment Program. The exclusion would apply only to
the extent that the student incurred qualified tuition and related
expenses for which no education credit was claimed during academic
periods when the student loans were incurred. The proposals would be
effective for awards received after December 31, 1999.
Make Child Care More Affordable
Increase, expand, 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 believes that the maximum credit rate is too low.
Moreover, because it phases down at a very low threshold of adjusted
gross income, many families who have significant child care costs and
relatively low incomes are not eligible for the maximum credit. To
alleviate the burden of child care costs for these families, 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.
Under current law, no additional tax assistance under the child and
dependent care tax credit is provided to families with infants, who
require intense and sustained care. Furthermore, parents who themselves
care for their infants, instead of incurring out-of-pocket child care
expenses, receive no benefit under the child and dependent care tax
credit. In order to provide assistance to these families, the
Administration proposes to supplement the credit for all taxpayers with
children under the age of one, whether or not they incur out-of-pocket
child care expenses. The amount of additional credit would be the
applicable credit rate multiplied by $500 for a child under the age of
one ($1,000 for two or more children under the age of one).
The Administration also proposes to simplify eligibility for the
credit by eliminating a complicated household maintenance test. Certain
credit parameters would be indexed. The proposal would be effective for
taxable years beginning after December 31, 1999.
Provide tax incentives for employer-provided child-care facilities.--
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, 1999.
Provide Incentives to Revitalize Communities
Increase low-income housing tax credit per capita cap to $1.75.--Low-
income housing tax credits provide an incentive to build and make
available affordable rental housing units to households with low
incomes. The amount of first-year credits that can be awarded in each
State is currently limited to $1.25 per capita. That limit has been
unchanged since it 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 1999. 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.
Provide Better America Bonds to improve the environment.--Under
current law, State and local governments may issue tax-exempt bonds to
finance purely public environmental projects. Certain other
environmental projects may also be financed with tax-exempt bonds, but
are subject to an overall cap on private-purpose tax-exempt bonds. The
subsidy provided with tax-exempt bonds may not provide a deep enough
subsidy to induce State and local governments to undertake beneficial
environmental infrastructure projects. The Administration proposes to
allow State and local
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governments (including U.S. possessions and Native American tribal
governments) to issue tax credit bonds (similar to existing Qualified
Zone Academy Bonds) to finance projects to protect open spaces or to
otherwise improve the environment. Significant public benefits would be
provided by creating more livable urban and rural environments; creating
forest preserves near urban areas; protecting water quality;
rehabilitating land that has been degraded by toxic or other wastes or
destruction of its ground cover; and improving parks and reestablishing
wetlands. The Environmental Protection Agency will allocate $1.9 billion
in annual bond authority for five years starting in 2000 based on
competitive applications. The bonds would have a maximum maturity of 15
years and the bond issuer effectively would receive an interest-free
loan for the term of the bonds. During that interval, bond holders
receive Federal income tax credits in lieu of interest.
Provide New Markets Tax Credit.--Businesses located in low-income
urban and rural communities often lack access to sufficient equity
capital. To help attract new capital to these businesses, taxpayers
would be allowed a credit against Federal income taxes for certain
investments made to acquire stock or other equity interests in a
community development investment entity selected by the Treasury
Department to receive a credit allocation. Selected community
development investment entities generally would be required to use the
investment proceeds to provide capital to businesses located in low-
income communities. During the period 2000-2004, the Treasury Department
would authorize selected community development investment entities to
issue $6 billion of new stock or equity interests with respect to which
credits could be claimed. The credit would be allowed for each year
during the five-year period after the stock or equity interest is
acquired from the selected community development investment entity, and
the credit amount that could be claimed for each of the five years would
equal six percent of the amount paid to acquire the stock or equity
interest from the community development investment entity. The credit
would be subject to current-law general business credit rules, and would
be available for qualified investments made after December 31, 1999.
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 upon ceasing
activity as a SSBIC or at any time that it disposes 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. Third, the proposal
would make it easier for a SSBIC to meet the qualifying income,
distribution of income, and diversification of assets tests to qualify
as a tax-favored regulated investment company. 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. The regulated investment company provisions would be
effective for taxable years beginning on or after the date of enactment.
Extend wage credit for 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 were 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 that the wage credit for the two additional EZs
would remain in effect until January 1, 2010, and would be phased down
using the same percentages that apply to the original empowerment zones
designated under OBRA 93.
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 pumps, residential size electric heat pumps, natural
gas water heaters, and advanced central air conditioners. The credit
would equal 10 or 20 percent of the amount of qualified investment
depending upon the energy efficiency of the qualified item, subject to a
cap. The 10-percent credit generally would be available for equip
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ment purchased during the two-year period beginning January 1, 2000 and
ending December 31, 2001. The 20-percent credit would be available for
equipment purchased during the four-year period beginning January 1,
2000 and ending December 31, 2003.
Provide tax credit for 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 $1,000, $1,500 or
$2,000 depending upon the home's energy efficiency. The $1,000 credit
would be available for homes purchased between January 1, 2000 and
December 31, 2001 that are at least 30 percent more energy efficient
than the standard under the 1998 International Energy Conservation Code
(IECC). The $1,500 credit would be available for homes purchased between
January 1, 2000 and December 31, 2002 that are at least 40 percent more
energy efficient than the IECC standard. The $2,000 credit would be
available for homes purchased between January 1, 2000 and December 31,
2004 that are at least 50 percent more energy efficient than the IECC
standard.
Transportation
Extend the electric vehicle tax credit; provide tax credit for fuel-
efficient vehicles.--Under current law, a 10-percent tax credit up to
$4,000 is provided for the cost of a qualified electric vehicle. The
full amount of the credit is available for purchases prior to 2002. The
credit begins to phase down in 2002 and is not available after 2004. The
Administration proposes to extend the present $4,000 credit through 2006
and to allow the full amount of the credit to be available for qualified
electric vehicles through 2006. The Administration also proposes to
provide a tax credit for the purchase of certain fuel-efficient hybrid
vehicles. The credit would be: (a) $1,000 for each vehicle that is one-
third more fuel efficient than a comparable vehicle in its class,
effective for purchases of qualifying vehicles after December 31, 2002
and before January 1, 2005; (b) $2,000 for each vehicle that is two-
thirds more fuel efficient than a comparable vehicle in its class,
effective for purchases of qualifying vehicles after December 31, 2002
and before January 1, 2007; (c) $3,000 for each vehicle that is twice as
fuel efficient as a comparable vehicle in its class, effective for
purchases of qualifying vehicles after December 31, 2003 and before
January 1, 2007; and (d) $4,000 for each vehicle that is three times as
fuel efficient as a comparable vehicle in its class, effective for
purchases of qualifying vehicles after December 31, 2003 and before
January 1, 2007.
Industry
Provide investment tax credit for combined heat and power (CHP)
systems.--Combined heat and power (CHP) assets are used to produce
electricity (and/or mechanical power) and usable heat from the same
primary energy source. No tax credits are currently available for
investment in CHP property. The Administration proposes to establish an
eight-percent investment credit for qualifying CHP systems in order to
encourage more efficient energy usage. The credit would apply to
property placed in service in the United States after December 31, 1999
and before January 1, 2003.
Renewables
Provide tax credit for rooftop solar systems.--Current law provides a
10-percent business energy investment tax credit for qualifying
equipment that uses 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 a new tax credit for
purchasers of roof-top 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, 1999 and before January 1, 2005 for solar
water heating systems and after December 31, 1999 and before January 1,
2007 for rooftop photovoltaic systems.
Extend wind and biomass tax credit and expand eligible biomass
sources.--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 and to expand eligible biomass to
include certain biomass from forest-related resources, and agricultural
and other sources. A 1.0 cent-per-kilowatt-hour tax credit would also be
allowed for cofiring biomass in coal plants.
Promote Expanded Retirement Savings, Security, and Portability
Building on recent legislation, the Administration proposes further
expansions of retirement savings incentives, including 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. Other
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 in
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creasing retirement security for women, expanding workers' and spouses'
rights to know about their retirement benefits, and simplifying the
pension rules. Finally, the Administration proposes to increase the
portability of pension coverage, which will enhance retirement savings
opportunities when employees change jobs. These provisions generally are
effective beginning in 2000, except as provided below.
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 for 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 small business 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. 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 IRAs.
Create simplified pension plan for small business.--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 at a reduced premium,
together with individual account balances that can benefit from
favorable investment returns and have enhanced portability.
Provide faster vesting of employer matching contributions.--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).
Count Family and Medical Leave Act leave for vesting and eligibility
purposes.--Under the Family and Medical Leave Act (FMLA), eligible
workers are entitled to up to 12 weeks of unpaid leave to care for a new
child, to care for a family member who has a serious health condition,
or because the worker has a serious health condition. Under the
Administration's proposal, workers who take time off under the FMLA
could count that time toward retirement plan vesting and eligibility to
participate. This would ensure that workers do not lose retirement
benefits they have earned because they take time off under FMLA.
Require joint and 75-percent annuity option for pension plans.--
Current law requires certain pension plans to offer to pay pension
benefits as a joint and survivor annuity; frequently, the benefit for
the employee's surviving spouse is reduced to 50 percent of the monthly
benefit paid when both spouses were alive. Under the proposal, plans
that are subject to the joint and survivor annuity rules would be
required to offer an option that pays a survivor benefit equal to at
least 75 percent of the benefit the couple received while both were
alive. This option would be especially helpful to women because they
tend to live longer than men and because many aged widows have incomes
below the poverty level.
Improve disclosure; simplify pensions.--The Administration proposes to
enhance workers' and spouses' rights to know about their pension
benefits by, 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 adequate notification and have timely election
periods 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.
Allow immediate participation in the Thrift Savings Plan (TSP) by new
Federal employees.--Current law requires a newly-hired Federal employee
to wait six to twelve months after being hired before contributing to
the TSP. Rehired employees wait up to six months. Under the
Administration's proposal, all waiting periods for employee elective
contributions to the TSP would be eliminated for new hires and rehires.
Allow rollovers from private plans to TSP.--Current law limits
employee contributions to a TSP account to salary reduction amounts, as
opposed to rollover contributions from a qualified trust. The
Administration
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proposes to allow an employee to roll over an ``eligible rollover
distribution'' from a qualified trust sponsored by a previous employer
to the employee's TSP account.
Allow rollovers between qualified retirement plans and 403(b) tax-
sheltered annuities.--Under current law, rollovers are not allowed
between qualified retirement plans and section 403(b) tax-sheltered
annuities. The Administration proposes that eligible rollover
distributions from a qualified retirement plan could be rolled over to a
section 403(b) tax-sheltered annuity and vice versa.
Allow rollovers from regular IRAs to qualified plans or 403(b) tax-
sheltered annuities.--The Administration's proposal would allow
individuals to consolidate their IRA funds and their workplace
retirement savings in a single place. Under current law, individuals may
roll over only amounts in ``conduit'' IRAs (IRAs containing only amounts
rolled over from workplace retirement plans) to their qualified
retirement plans or section 403(b) tax-sheltered annuities. Under the
Administration's proposal, individuals who have IRAs with deductible IRA
contributions will be offered the opportunity to transfer funds from
their IRAs into their qualified defined contribution retirement plan or
403(b) tax-sheltered annuity--provided that the retirement plan trustee
meets the same standards as an IRA trustee.
Allow rollovers of after-tax contributions.--While pre-tax
contributions to retirement plans are perhaps the most common form of
employee contribution, some plans also allow participants to make after-
tax contributions. Under current law, these after-tax contributions
cannot be rolled over when employees switch jobs. The proposal would
allow individuals to roll over their after-tax contributions to their
new employer's defined contribution plan or to an IRA if the plan or IRA
provider agrees to track and report the after-tax portion of the
rollover for the individual.
Allow rollovers of contributions from governmental 457 plans to an
IRA.--Generally, amounts held under qualified retirement plans or
section 403(b) tax-sheltered annuities plans may be rolled over to an
IRA. However, under current law, amounts held under nonqualified
deferred compensation plans of State or local governments (governmental
section 457 plans) may not be rolled over into an IRA and are taxable
upon distribution. The Administration's proposal would allow individuals
to roll over the money they have saved in a governmental section 457
plan to an IRA.
Facilitate the purchase of service credits in governmental defined
benefit plans.--Employees of State and local governments, particularly
teachers, often move between States and school districts in the course
of their careers. Under State law, they often can purchase service
credits in their State defined benefit pension plans for time spent in
another State or district and earn a pension reflecting a full career of
employment in the State in which they conclude their career. Under
current law, these employees cannot make a tax-free transfer of the
money they have saved in their 403(b) plan or governmental section 457
plan to purchase these credits and often lack other resources to use for
this purpose. Under the proposal, State and local government employees
will be able to use funds from these retirement savings plans to
purchase service credits on a tax-free basis, i.e., through a direct
transfer without first having to take a taxable distribution of these
amounts.
Extend Expiring Provisions
Allow personal tax credits against the alternative minimum tax
(AMT).--The Administration is concerned that the individual alternative
minimum tax (AMT) may impose financial and compliance burdens upon
taxpayers that have few tax preference items and were not the originally
intended targets of the AMT. In particular, the Administration is
concerned that the individual AMT may act to erode the benefits of
nonrefundable tax credits (such as the education credits, the child
credit, adoption credit, and the child and dependent care credit) that
are intended to provide tax relief for middle-income taxpayers. In
response, the Administration proposes to extend, for two years, the
provision enacted in 1998 that allows an individual to offset his or her
regular tax liability by nonrefundable tax credits regardless of the
amount of the individual's tentative minimum tax. The Administration
hopes to work with Congress to develop a longer-term solution to the
individual AMT problem.
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, 1999. The Administration proposes to extend the work
opportunity tax credit so that the credit would be effective for
individuals who begin work before July 1, 2000. The proposal also
clarifies the interaction of the work opportunity tax credit and the
welfare-to-work tax credit. This proposed clarification would be
effective for taxable years beginning on or after the date of first
committee action.
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
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employment. The credit is effective for individuals who begin work
before July 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 July 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, 1999, for one
year through June 30, 2000.
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 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.
Extend tax credit for first-time D.C. homebuyers.--The Administration
proposes to extend the tax credit provided for the first-time purchase
of a principal residence in the District of Columbia, which is scheduled
to expire after December 31, 2000, for one year through December 31,
2001.
Simplify The Tax Laws
Provide optional Self-employment Contributions Act (SECA)
computations.--Self-employed individuals currently may elect to increase
their self-employment income for puposes 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, 1999.
Provide statutory hedging and other rules to ensure business property
is treated as ordinary property.--Under current law, there is an 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 the
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 and provide more equitable timing
of losses under the straddle rules. 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 (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 the application of the foreign
tax credit limitation significantly 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, 1998.
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
complica
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tions 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.
Expand declaratory judgment remedy for noncharitable organizations
seeking determinations of tax-exempt status. --Under current law,
organizations seeking tax-exempt status as charities under section
501(c)(3) are allowed to seek a declaratory judgment as to their tax
status if their application is denied or delayed by the IRS. A
noncharity (an organization not described in section 501(c)(3)) that
applies to the IRS for recognition of its tax-exempt status faces
potential tax liability if its application ultimately is denied by the
IRS. This creates uncertainty for the noncharity, particularly when the
IRS determination is delayed for a significant period of time. To reduce
this uncertainty, the declaratory judgment procedure available to
charities under current-law section 7428 would be expanded, so that if
the application of any organization seeking tax-exempt status under
section 501(c) is pending with the IRS for more than 270 days, and the
organization has exhausted all administrative remedies available within
the IRS, then the organization could seek a declaratory judgment as to
its tax-exempt status from the United States Tax Court. The proposal
would be effective for applications for recognition of tax-exempt status
filed after December 31, 1999.
Simplify the active trade or business requirement for tax-free spin-
offs.--In order to satisfy the active trade or business requirement for
tax-free spin-offs, split-offs, and split-ups, the distributing
corporation and the controlled corporation both must be engaged in the
active conduct of a trade or business. If a corporation is not itself
active, it may satisfy the active trade or business test indirectly, but
only if substantially all of its assets consist of stock and securities
of a controlled corporation that is engaged in an active trade or
business. Because the substantially all standard is much higher than
that required if the corporation is active itself, a taxpayer often must
engage in pre-distribution restructurings that it otherwise would not
have undertaken. There is no clear policy reason that the standards for
meeting the active trade or business requirement should differ depending
upon whether a corporation is considered to be active on a direct or
indirect basis. Therefore, the Administration proposes to simplify the
requirement by removing the substantially all test and generally
allowing an affiliated group to satisfy the active trade or business
requirement as long as the affiliated group, taken as a whole, is
considered active. This proposal would be effective for transactions
after the date of enactment.
Miscellaneous Provisions
Make first $2,000 of severance pay exempt from income tax.--Under
current law, payments received by 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 equal to 95
percent of his or her prior compensation. Third, the total severance
payments received by the employee must not exceed $75,000. The exclusion
would be effective for severance pay received in taxable years beginning
after December 31, 1999 and before January 1, 2003.
Allow steel companies to carryback net operating losses (NOLs) up to
five years.--Under current law, a net operating loss of a taxpayer
generally may be carried back two years and forward 20 years. The
Administration proposes to provide an immediate cash flow benefit to
troubled companies in the steel industry by extending the carryback
period for the NOLs of a steel company to five years. The proposal would
be effective for taxable years ending after the date of enactment,
regardless of when the NOL arose, and would sunset after five years.
Electricity Restructuring
Revise tax-exempt bond rules for electric power facilities.--As part
of Federal legislation to encourage restructuring the nation's electric
power industry so that consumers benefit from competition, rules
relating to the use of tax-exempt bonds to finance electric power
facilities would be modified. To encourage public power systems to
implement retail competition, outstanding bonds issued to finance
transmission facilities would continue their tax-exempt status even if
private use resulted from allowing nondiscriminatory open access to
those facilities. Similarly, outstanding bonds issued to finance
generation or distribution facilities would continue their tax-exempt
status even if the issuer implements retail competition. To support fair
competition within the restructured industry, interest on bonds to
finance electric generation or transmission facilities issued after
enactment of such legislation would not be exempt. Distribution
facilities could continue to be financed with tax-exempt bonds. These
changes would be effective upon enactment.
Modify taxation of contributions to nuclear decommissioning funds.--
Under current law, deductible contributions to nuclear decommissioning
funds are limited to the amount included in the taxpayer's cost of
service for ratemaking purposes. For deregulated utilities, this
limitation may result in the denial of any deduction for contributions
to a nuclear decommissioning fund. The Administration proposes to repeal
the limitation for taxable years beginning after December 31, 1999. As
under current law, deductible contributions would not be permitted to
exceed the amount the IRS determines to be necessary to provide for
level
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funding of an amount equal to the taxpayer's decommissioning costs.
Modify International Trade Provisions
Extend and modify Puerto Rico economic-activity tax credit.--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
conducted in taxable years beginning before January 1, 2006, subject to
base-period caps. To provide a more efficient tax incentive for the
economic development of Puerto Rico and to continue the shift from an
income-based credit to an economic-activity-based credit that was begun
in the 1993 Act, the budget would modify the phase-out of the economic-
activity-based credit for Puerto Rico (under section 30A of the Code) by
(1) opening it to newly established business operations during the
phase-out period, effective for taxable years beginning after December
31, 1998, and (2) extending the phase-out period through taxable years
beginning before January 1, 2009.
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, 1999, through June 30, 2000. The Administration is proposing
permanent enhanced trade benefits for subsaharan African countries
undertaking strong economic reforms. The Administration also proposes to
provide, through June 30, 2001, expanded trade benefits mainly on
textiles and apparel to Caribbean Basin countries that meet new
eligibility criteria. These benefits will help Caribbean Basin countries
prepare for a future free trade agreement with the United States and
respond to the effects of Hurricanes George and Mitch. The
Administration also proposes to implement the OECD Shipbuilding
Agreement.
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.
ELIMINATE UNWARRANTED BENEFITS AND ADOPT OTHER REVENUE MEASURES
The President's plan curtails unwarranted corporate tax subsidies,
closes tax shelters and other loopholes, improves tax compliance and
adopts other revenue measures.
Limit Benefits of Corporate Tax Shelter Transactions
The Administration is concerned about the proliferation of corporate
tax shelters and their effect upon both the corporate tax base and the
integrity of the tax system as a whole. The primary goals of corporate
tax shelters are to manufacture tax benefits that can be used to offset
unrelated income of the taxpayer or to create tax-favored or tax-exempt
economic income.
Corporate tax shelters may take several forms but often share certain
common characteristics. Corporate tax shelter schemes are often marketed
by their designers or promoters to multiple corporate taxpayers. The
transactions typically involve arrangements among corporate taxpayers
and persons not subject to U.S. tax. Shelters are also often associated
with high transactions costs, contingent or refundable fees, unwind
clauses, financial accounting treatment that is significantly more
favorable than the corresponding tax treatment, and property or
transactions unrelated to the corporate participant's core business.
The Administration proposes several general remedies to curb the
growth of corporate tax shelters. In addition, the Administration
proposes to modify the treatment of certain specific transactions that
provide sheltering potential. No inference is intended as to the
treatment of any of these trnsactions under current law.
Modify substantial understatement penalty for corporate tax
shelters.--The current 20-percent substantial understatement penalty
imposed on corporate tax shelter items can be avoided if the corporate
taxpayer had reasonable cause for the tax treatment of the item and good
faith. The Administration proposes to increase the substantial
understatement penalty on corporate tax shelter items to 40 percent. The
penalty will be reduced to 20 percent if the corporate taxpayer
discloses to the National Office of the Internal Revenue Service within
30 days of the closing of the transaction appropriate documents
describing the corporate tax shelter and files a statement with, and
provides adequate disclosure on, its tax return. The penalty could not
be avoided by a showing of reasonable cause and good faith. The proposal
is effective for transactions entered into after the date of first
committee action.
Deny certain tax benefits in corporate tax shelters.--Under curent
law, if a person acquires control of a corporation or a corporation
acquires carryover basis property of a corporation not controlled by the
acquiring corporation or its shareholders, and the prin
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cipal purpose for such acquisition is evasion or avoidance of Federal
income tax by securing certain tax benefits, the Secretary may disallow
such benefits to the extent necessary to eliminate such evasion or
avoidance of tax. However, this current rule has been interpreted
narrowly. The Administration proposes to expand the current rules to
authorize the Secretary to disallow a deduction, credit, exclusion, or
other allowance obtained in a corporate tax shelter. The proposal would
apply to transactions entered into on or after the date of first
committee action.
Deny deductions for certain tax advice and impose an excise tax on
certain fees received.--Buyers of corporate tax shelter advice may
deduct the fees paid for such advice. The proposal would deny a
deduction for fees paid or accrued in connection with the promotion of
corporate tax shelters and the rendering of certain tax advice related
to corporate tax shelters. The proposal would also impose a 25-percent
excise tax on fees received in connection with the promotion of
corporate tax shelters and the rendering of certain tax advice related
to corporate tax shelters. The proposal would be effective for payments
made on or after the date of first committee action.
Impose excise tax on certain rescission provisions and provisions
guaranteeing tax benefits.--Because taxpayers entering into corporate
tax shelter transactions know that such transactions are risky,
particularly because the expected tax benefits are not justified
economically, purchasers of corporate tax shelters often require the
seller or a counterparty to enter into a tax benefit protection
arrangement. The Administration proposes to impose on the purchaser of a
corporate tax shelter an excise tax of 25 percent on the maximum payment
to be made under the arrangement. For this purpose, a tax benefit
protection arrangement would include certain rescission clauses,
guarantee of tax benefits arrangement or any other arrangement that has
the same economic effect (e.g., insurance purchased with respect to the
transaction). The proposal would apply to arrangements entered into on
or after the date of first committee action.
Preclude taxpayers from taking tax positions inconsistent with the
form of their transactions.--Under current law, if a taxpayer enters
into a transaction in which the economic substance and the legal form
are different, the taxpayer may take the position that, notwithstanding
the form of the transaction, the substance is controlling for Federal
income tax purposes. Many taxpayers enter into such transactions in
order to arbitrage tax and regulatory laws. Under the proposal, except
to the extent the taxpayer discloses the inconsistent position on its
tax return, a corporate taxpayer, but not the Internal Revenue Service,
would be precluded from taking any position (on a tax return or
otherwise) that the Federal income tax treatment of a transaction is
different from that dictated by its form, if a tax indifferent person
has a direct or indirect interest in such transaction. No inference is
intended regarding the tax treatment of transactions not covered by the
proposal. The proposal would be effective for transactions entered into
on or after the date of first committee action.
Tax income from corporate tax shelters involving tax-indifferent
parties.--The Federal income tax system has many participants who are
indifferent to tax consequences (e.g., foreign persons, tax-exempt
organizations, and Native American tribal organizations). Many corporate
tax shelters have tax-indifferent participants who absorb taxable income
generated by the shelters so that corresponding losses or deductions can
be allocated to taxable participants. The proposal would provide that
any income received by a tax-indifferent person with respect to a
corporate tax shelter would be taxable. The proposal would be effective
for transactions entered into on or after the date of first committee
action.
Require accrual of income on forward sale of corporate stock.--There
is little substantive difference between a corporate issuer's current
sale of its stock for a deferred payment and an issuer's forward sale of
the same stock. In both cases, a portion of the deferred payment
compensates the issuer for the time-value of money during the term of
the contract. Under current law, the issuer must recognize the time-
value element of the deferred payment as interest if the transaction is
a current sale for deferred payment but not if the transaction is a
forward contract. Under the proposal, the issuer would be required to
recognize the time-value element of the forward contract as well. The
proposal would be effective for forward contracts entered into on or
after the date of first committee action.
Modify treatment of built-in losses and other attribute trafficking.--
Under current law, a taxpayer that becomes subject to U.S. taxation may
take the position that it determines its beginning bases in its assets
under U.S. tax principles as if the taxpayer had historically been
subject to U.S. tax. Other tax attributes are computed similarly. A
taxpayer may thus ``import'' built-in losses or other favorable tax
attributes incurred outside U.S. taxing jurisdiction (e.g., from foreign
or tax-exempt parties) to offset income or gain that would otherwise be
subject to U.S. tax. The proposal would prevent the importation of
attributes by eliminating tax attributes (including built-in items) and
marking to market bases when an entity or an asset becomes relevant for
U.S. tax purposes. The proposal would be effective for transactions in
which assets or entities become relevant for U.S. tax purposes on or
after the date of enactment.
Modify treatment of ESOP as S corporation shareholder.--Pursuant to
provisions enacted in 1996 and 1997, an employee stock ownership plan
(ESOP) may be a shareholder of an S corporation and the ESOP's share of
the income of the S corporation is
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not subject to tax until distributed to the plan beneficiaries. The
Administration proposes to require an ESOP to pay tax on S corporation
income (including capital gains on the sale of stock) as the income is
earned and to allow the ESOP a deduction for distributions of such
income to plan beneficiaries. The deduction would only apply to the
extent distributions exceed all prior undistributed amounts that were
previously not subject to unrelated business income tax. The proposal
would be effective for taxable years beginning on or after the date of
first committee action. In addition, the proposal would be effective for
acquisitions of S corporation stock by an ESOP after such date and for S
corporation elections made on or after such date.
Prevent serial liquidation of U.S. subsidiaries of foreign
corporations.--When a domestic corporation distributes a dividend to a
foreign corporation, it is subject to U.S. withholding tax. In contrast,
if a domestic corporation distributes earnings in a subsidiary
liquidation under section 332, the foreign shareholder generally is not
subject to any withholding tax. Relying on section 332, some foreign
corporations establish U.S. holding companies to receive tax-free
dividends from operating subsidiaries, and then liquidate the holding
companies, thereby avoiding the withholding tax. Subsequently, they re-
establish the holding companies to receive future dividends. The
proposal would impose withholding tax on any distribution made to a
foreign corporation in complete liquidation of a U.S. holding company if
the holding company was in existence for less than five years. The
proposal would also achieve a similar result with respect to serial
terminations of U.S. branches. The proposal would be effective for
liquidations and terminations occurring on or after the date of first
committee action.
Prevent capital gains avoidance through basis shift transactions
involving foreign shareholders.--A distribution in redemption of stock
generally is treated as a dividend if it does not result in a meaningful
reduction in the shareholder's proportionate interest in the
distributing corporation, measured with reference to certain
constructive ownership rules, including option attribution. If an amount
received in redemption of stock is treated as a distribution of a
dividend, the basis of the remaining stock generally is increased to
reflect the basis of the redeemed stock. The basis of the remaining
stock is not increased, however, to the extent that the basis of the
redeemed stock was reduced or eliminated pursuant to the extraordinary
dividend rules. In certain circumstances, these rules require a
corporate shareholder to reduce the basis of stock with respect to which
a dividend is received by the nontaxed portion of the dividend, which
generally equals the amount of the dividend that is offset by the
dividends received deduction. To prevent taxpayers from attempting to
offset capital gains by generating artificial capital losses through
basis shift transactions involving foreign shareholders, the
Administration proposes to treat the portion of a dividend that is not
subject to current U.S. tax as a nontaxed portion. Similar rules would
apply in the event that the foreign shareholder is not a corporation.
The proposal is effective for distributions on or after the date of
first committee action.
Limit inappropriate tax benefits for lessors of tax-exempt use
property.--Under current law, certain property leased to governments,
tax-exempt organizations, or foreign persons is considered to be ``tax-
exempt use property.'' There are a number of restrictions on the ability
of lessors of tax-exempt use property to claim tax benefits from
transactions related to the tax-exempt use property. The Administration
is concerned that certain structures involving tax-exempt use property
are being used to generate inappropriate tax benefits for lessors. The
proposal would deny a lessor the ability to recognize a net loss from a
leasing transaction involving tax-exempt use property during the lease
term. A lessor would be able to carry forward a net loss from a leasing
transaction and use it to offset net gains from the transaction in
subsequent years. The proposal would be effective for leasing
transactions entered into on or after the date of enactment.
Prevent mismatching of deductions and income inclusions in
transactions with related foreign persons.--Current law provides that if
any debt instrument having original issue discount (OID) is held by a
related foreign person, any portion of such OID shall not be allowable
as a deduction to the issuer until paid. Section 267 and the regulations
thereunder apply similar rules to other expenses and interest owed to
related foreign persons. These general rules are modified, however, so
that a deduction is allowed when the OID is includible in the income of
a foreign personal holding company (FPHC), controlled foreign
corporation (CFC) or passive foreign investment company (PFIC). The
Treasury has learned of certain structured transactions (involving both
U.S. payors and U.S.-owned foreign payors) designed to allow taxpayers
inappropriately to take advantage of the current rules by accruing
deductions to related FPHCs, CFCs or PFICs, without the U.S. owners of
such related entities taking into account for U.S. tax purposes an
amount of income appropriate to the accrual. This results in an improper
mismatch of deductions and income. The proposal would provide that
deductions for amounts accrued but unpaid to related foreign CFCs, PFICs
or FPHCs would be allowable only to the extent the amounts accrued by
the payor are, for U.S. tax purposes, reflected in the income of the
direct or indirect U.S. owners of the related foreign person. The
proposal would contain an exception for certain short term transactions
entered into in the ordinary course of business. The Secretary would be
granted regulatory authority to provide exceptions from these rules. The
proposal would be effective for amounts accrued on or after the date of
first committee action.
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Restrict basis creation through section 357(c).-- A transferor
generally is required to recognize gain on a transfer of property in
certain tax-free exchanges to the extent that the sum of the liabilities
assumed, plus those to which the transferred property is subject,
exceeds the basis in the property. This gain recognition to the
transferor generally increases the basis of the transferred property in
the hands of the transferee. If a recourse liability is secured by
multiple assets, it is unclear under current 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 generally would be eliminated.
Generally, a recourse liability would be treated as assumed to the
extent that the transferee has agreed and is expected to satisfy the
liability (whether or not the transferor has been relieved of the
liability). A nonrecourse liability would be treated as assumed by the
transferee of any asset subject to the liability, but the amount of
nonrecourse liability treated as assumed would be reduced by the amount
of the liability which an owner of other assets not transferred to the
transferee and also subject to the liability has agreed with the
transferee and is expected to satisfy, up to the fair market value of
such other assets. The transferor's recognition of gain as a result of
assumption of liability would not increase the transferee's basis in the
transferred asset to an amount in excess of its fair market value.
Moreover, if no person is subject to U.S. tax on gain recognized as the
result of the assumption of a nonrecourse liability, then the
transferee's basis in the transferred assets would be increased only to
the extent such basis would be increased if the transferee had assumed
only a ratable portion of the liability, based on the relative fair
market values of all assets subject to such nonrecourse liability. The
Treasury Department would have the authority to prescribe regulations
necessary to carry out the purposes of the proposal, and to apply the
treatment set forth in this proposal where appropriate elsewhere in the
Code.
Modify anti-abuse rule related to assumption of liabilities.--The
assumption of a liability in an otherwise tax-free transaction is
treated as boot to the transferor if the principal purpose of having the
transferee assume the liability was the avoidance of tax on the
exchange. The current language is inadequate to address the avoidance
concerns that underlie the provision. The Administration proposes to
modify the anti-abuse rule by deleting the limitation that it only
applies to tax avoidance on the exchange itself, and changing ``the
principal purpose'' standard to ``a principal purpose.'' Additional
conforming changes would be made. This proposal would be effective for
assumptions of liabilities on or after the date of first committee
action.
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 on contracts insuring certain classes of individuals. 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 life insurance
contracts to the 20-percent owner exception in the COLI proration rules.
The proposal would be effective for taxable years beginning after the
date of enactment.
Other Proposals
Require banks to accrue interest on short-term obligations.--Under
current law, a bank (regardless of its accounting method) must accrue as
ordinary income interest, including original issue discount, on short-
term obligations. Recent court cases have held that banks that use the
cash receipts and disbursements method of accounting do not have to
accrue stated interest and original issue discount on short-term loans
made in the ordinary course of the bank's business. The Administration
believes it is inappropriate to treat these short-term loans differently
than other short-term obligations held by the bank. The Administration's
proposal would clarify that banks must accrue interest and original
issue discount on all short-term obligations, including loans made in
the ordinary course of the bank's business, regardless of the banks'
overall accounting method. The proposal would be effective for
obligations acquired (including originated) on or after the date of
enactment. No inference is intended regarding the current-law treatment
of these transactions.
Require current accrual of market discount by accrual method
taxpayers.--Under current law, a taxpayer that holds a debt instrument
with market discount is not required to include the discount in income
as it accrues, even if the taxpayer uses an accrual method of
accounting. Under the proposal, a taxpayer that uses an accrual method
of accounting would be required to include market discount in income as
it accrues. The proposal also would cap the amount of market discount on
distressed debt instruments, be
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cause a portion of such discount, if realized, may be more in the nature
of capital gain than interest. The proposal would be effective for debt
instruments acquired on or after the date of enactment.
Limit conversion of character of income from constructive ownership
transactions with respect to partnership interests.--Under current law,
a taxpayer can enter into a derivatives transaction that is designed to
give the taxpayer the economic equivalent of an ownership interest in a
partnership but that is not itself a current ownership interest in the
partnership. These so-called ``constructive ownership'' transactions
purportedly allow taxpayers to defer income and to convert ordinary
income and short-term capital gain into long-term capital gain. The
proposal would treat long-term capital gain recognized from a
constructive ownership transaction as ordinary income to the extent the
long-term capital gain recognized from the transaction exceeds the long-
term capital gain that could have been recognized had the taxpayer
invested in the partnership interest directly. In addition, the proposal
would impose an interest charge on these transactions to compensate for
their inherent deferral and would allow taxpayers to elect mark-to-
market treatment in lieu of applying the gain recharacterization and
interest charge rule. The proposal would be effective for gains
recognized on or after the date of first committee action.
Modify rules for debt-financed portfolio stock.--Under current law, a
corporation must reduce its dividends-received deduction with respect to
dividends paid on portfolio stock to the extent the portfolio stock is
debt financed. For the portfolio stock to be debt financed, the
indebtedness must be ``directly attributable to investment in the
portfolio stock.'' This ``directly attributable'' standard is too easily
avoided. Under the proposal, the percentage of portfolio stock
considered to be debt financed would be equal to the sum of (1) the
percentage of stock that is directly financed, and (2) the percentage of
remaining stock that is indirectly financed. The proposal would be
effective for portfolio stock acquired on or after the date of
enactment.
Modify and clarify certain rules relating to debt-for-debt
exchanges.--Under current law, an issuer can inappropriately accelerate
interest deductions by refinancing a debt instrument in a debt-for-debt
exchange at a time when the issuer's cost of borrowing has declined. The
proposal would spread the issuer's net deduction for bond repurchase
premium in a debt-for-debt exchange over the term of the new debt
instrument using constant yield principles. In addition, the proposal
would modify the measurement of the net income or deduction in debt-for-
debt exchanges involving contingent payment debt instruments. Finally,
the proposal would modify the measurement of taxable boot to the holder
in debt-for-debt exchanges that are part of corporate reorganizations.
The proposal would apply to debt-for-debt exchanges occurring on or
after the date of enactment.
Modify and clarify the straddle rules.--A ``straddle'' is the holding
of two or more offsetting positions with respect to actively-traded
personal property. An exception from the definition is provided for
certain offsetting positions with respect to actively-traded stock. If a
taxpayer enters into a straddle, the taxpayer must defer the recognition
of loss from the ``loss leg'' of the straddle until the taxpayer
recognizes the offsetting gain from the ``gain leg'' of the straddle.
Further, the taxpayer must capitalize the net interest and carrying
charges properly attributable to the straddle. The proposal would
clarify that net interest expense and carrying charges arising from
structured financial products that contain a leg of a straddle must be
capitalized. In addition, the proposal would repeal the current-law
exception for certain straddles of actively-traded stock. The proposal
would be effective for straddles entered into on or after the date of
enactment.
Conform control test for tax-free incorporations, distributions, and
reorganizations.--For tax-free incorporations, tax-free distributions,
and reorganizations, ``control'' is defined as the ownership of 80
percent of the voting stock and 80 percent of the number of shares of
all other classes of stock of the corporation. This test is easily
manipulated by allocating voting power among the shares of a
corporation, allowing corporations to retain control of a corporation
but sell a significant amount of the value of the corporation. In
contrast, the necessary ``ownership'' for tax-free liquidations,
qualified stock purchases, and affiliation is at least 80 percent of the
total voting power of the corporation's stock and at least 80 percent of
the total value of the corporation's stock. The Administration proposes
to conform the control requirement for tax-free incorporations,
distributions, and reorganizations with that used for determining
affiliation. This proposal is effective for transactions on or after the
date of enactment.
Tax issuance of tracking stock.--``Tracking stock'' is an economic
interest that is intended to relate to and track the economic
performance of one or more separate assets of the issuer, and gives its
holder a right to share in the earnings or value of less than all of the
corporate issuer's earnings or assets. The use of tracking stock is
clearly outside the contemplation of subchapter C and other sections of
the Code. As a result, a principal consequence of treating such a stock
interest as stock of the issuer is the potential avoidance of these
provisions. The Administration proposes to define ``tracking stock'' as
stock that is linked to the performance of assets of the issuing
corporation with one or more identified characteristics and provide that
gain will be recognized on the issuance of tracking stock. Under this
proposal, the Secretary would have authority to treat tracking stock as
nonstock (e.g., debt, a notional principal contract, etc.) or as stock
of another entity as appropriate to prevent avoidance. No inference is
intended regarding the tax treatment of tracking
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stock under current law. This proposal is effective for tracking stock
issued on or after the date of enactment.
Require consistent treatment and provide basis allocation rules for
transfers of intangibles in certain nonrecognition transactions.--No
gain or loss will be recognized if one or more persons transfer property
to a controlled corporation (or partnership) solely in exchange for
stock in the corporation (or a partnership interest). Where there is a
transfer of less than ``all substantial rights'' to use property, the
Internal Revenue Service's position is that such transfer will not
qualify as a tax-free exchange. However, the Claims Court rejected the
Service's position in E.I. Du Pont de Nemours and Co. v. U.S., holding
that any transfer of something of value could be a ``transfer'' of
``property.'' The inconsistency between the positions has resulted in
whipsaw of the government. The Administration proposes to provide that
the transfer of an interest in intangible property constituting less
than all of the substantial rights of the transferor in the property is
a transfer of property entitled to tax-free treatment, and the
transferor must allocate the basis of the intangible between the
retained rights and the transferred rights based upon respective fair
market values. Consistent reporting by the transferor and the transferee
would be required. This proposal is effective for transfers on or after
the date of enactment.
Modify tax treatment of downstream mergers.--If a target corporation
owns stock in an acquiring corporation and wants to combine with the
acquiring corporation in a downstream transaction, the target
corporation transfers its assets to the acquiring corporation, and the
shareholders of the target corporation receive stock of the acquiring
corporation in exchange for their target corporation stock. Downstream
transactions have been held to qualify as tax-free reorganizations. In
substance, however, this transaction is a distribution by the target
corporation of its acquiring corporation stock to its shareholders,
which otherwise would result in gain recognized by the target
corporation. Under the proposal, where a target corporation holds less
than 80 percent of the stock of an acquiring corporation, and the target
corporation combines with the acquiring corporation in a reorganization
in which the acquiring corporation is the survivor, the target
corporation must recognize gain, but not loss, as if it distributed the
acquiring corporation stock that it held immediately prior to the
reorganization. Nonrecognition treatment would continue to apply to
other assets transferred by the target corporation and to the target
corporation shareholders. The proposal would apply to similar
transactions: for example, where stock of the target corporation is
acquired by the acquiring corporation in a transaction qualifying as a
reorganization, and the target corporation is liquidated pursuant to a
plan of liquidation adopted not more than two years after the
acquisition date. This proposal applies to transactions that occur on or
after the date of enactment.
Provide mandatory basis adjustments with respect to partnership
distributions.--The basis of partnership property is not adjusted upon a
distribution of property to a partner unless a special election is in
effect. If such an election is in effect, a partnership must increase
the basis of partnership property in certain circumstances and decrease
its basis in partnership property in other situations. The electivity of
these adjustments provides substantial opportunities for taxpayer abuse.
Accordingly, the Administration proposes that basis adjustments in
connection with partnership distributions be made mandatory. In
addition, unlike current law, the basis adjustment would be measured by
reference to the difference between the basis of the distributed
property and the amount by which the distributee partner's proportionate
share of the adjusted basis of partnership property is reduced by the
distribution. This proposal would apply to partnership distributions
made on or after the date of enactment.
Modify rules for allocation of basis adjustments for partnership
distributions.--Under current law, a partner's basis in distributed
property is allocated first to unrealized receivables and inventory
items in an amount equal to the adjusted basis of each such property to
the partnership, with any remaining basis being allocated among the
other distributed property. This basis allocation scheme is intended to
prevent partners from shifting basis from capital assets to ordinary
income assets. While generally accomplishing this goal, the allocation
scheme still allows for a shifting of basis from non-depreciable assets
to depreciable assets. The proposal would modify the rule for basis
allocations in the event of a liquidation of a partner's interest to
include three asset classes: (1) inventory, unrealized receivables and
other inventory assets, (2) depreciable assets, and (3) non-depreciable
assets. Basis would be allocated in the first two categories up to the
partnership's basis in such assets. Residual basis would be allocated to
the third category of assets. The partnership's inside asset basis
adjustments made in connection with partnership distributions would be
determined in the same manner. Basis adjustments relating to transfers
of partnership interests would not be affected by this proposal. This
proposal would apply to partnership distributions made on or after the
date of enactment.
Modify rules for partial liquidations of a partnership.--A partner
recognizes gain or loss upon a distribution from a partnership in
certain limited circumstances. The basis of property distributed to a
partner other than in liquidation of the partner's interest generally is
its adjusted basis to the partnership, while the basis of property
distributed to a partner in liquidation of the partner's interest is
equal to the adjusted basis of such partner's interest in the
partnership reduced by any money distributed in the same transaction.
These rules provide for an inappropriate deferral of gain with respect
to certain partnership distributions and also allow for a misallocation
of basis in many
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instances. The Administration proposes to treat a partial liquidation of
a partner's interest in a partnership as a complete liquidation of that
portion of the partner's interest. A partial liquidation would be a
reduction in a partner's percentage share of capital, and the percentage
that is reduced would be treated as a separate interest that was
completely liquidated in the distribution. This proposal would apply to
partnership distributions made on or after the date of enactment.
Repeal rules relating to distributions treated as sales or exchanges
with respect to unrealized receivables and inventory items.--Under
current law, to the extent that a partner receives (1) unrealized
receivables or substantially appreciated inventory in exchange for all
or part of its interest in other partnership property, or (2)
partnership property other than unrealized receivables or substantially
appreciated inventory in exchange for all or part of its interest in
partnership property that is unrealized receivables or substantially
appreciated inventory, such transactions are, under regulations, treated
as a sale or exchange of such property between the distributee and the
partnership. This rule, which often has been criticized as being overly
complex, was designed to prevent taxpayers from converting ordinary
income to capital gains through partnership distributions where the
distributee partner essentially transferred his share of ordinary income
assets to the partnership in exchange for capital gain assets or vice
versa. The proposals discussed above would prevent positive basis
adjustments from being made to ordinary income assets, which would
greatly reduce the ability to carry out such abuses. Accordingly, the
Administration proposes that this rule be repealed. This proposal would
apply to partnership distributions made on or after the date of
enactment.
Require basis adjustments when a partnership distributes certain stock
to a corporate partner.--The basis of property distributed to a partner
in liquidation of the partner's interest is equal to the adjusted basis
of such partner's interest in the partnership reduced by any money
distributed in the same transaction. Generally, no gain or loss is
recognized on the receipt by a corporation of property distributed in
complete liquidation of an 80-percent-owned subsidiary corporation. The
basis of property received by the distributee in such a corporate
liquidation is the same as it was in the hands of the transferor. These
corporate liquidation rules provide taxpayers with the ability to negate
the effect of downward basis adjustments by having a partnership
contribute property to a corporation prior to a liquidating distribution
to a corporate partner. The proposal would require that if stock of a
corporation is distributed to a corporate partner that, as a result of
the distribution and related transactions, owns 80 percent or more of
the stock of such corporation, then the distributed corporation must
reduce the basis of its assets by an amount equal to the amount by which
the stock basis is reduced as a result of the distribution. The basis
must be reduced using the same methodology as is used in the partnership
liquidation rules, determined as if the corporation's assets were being
distributed. This proposal would apply to partnership distributions made
on or after the date of enactment.
Deny change in method treatment to tax-free formations.--Generally, a
taxpayer that desires to change its method of accounting must obtain the
consent of the Commissioner. In addition, in a transaction to which
section 381 applies, a corporation acquiring assets generally is
required to use the method of accounting used for those assets by the
distributor or transferor corporation. Under current law, section 381
does not apply to tax-free contributions to a corporation or to a
partnership. Consequently, taxpayers who transfer assets to a subsidiary
or a partnership in a transaction to which section 351 or section 721
applies may avail themselves of a new method of accounting without
obtaining the consent of the Commissioner. The Administration proposes
to expand the transactions to which the carryover of method of
accounting rules in section 381 and the regulations thereunder apply to
include tax-free contributions to corporations or partnerships effective
for transfers on or after the date of enactment.
Repeal installment method for accrual basis taxpayers.--Generally, an
accrual method requires a taxpayer to recognize income when all events
have occurred that fix the right to its receipt and its amount can be
determined with reasonable accuracy. The installment method of
accounting provides an exception to these general recognition principles
by allowing a taxpayer to defer recognition of income from the
disposition of certain property until payment is received. To the extent
that an installment obligation is pledged as security for any
indebtedness, the net proceeds of the secured indebtedness are treated
as a payment on such obligation, thereby triggering the recognition of
income. The installment method is inconsistent with an accrual method of
accounting and effectively allows an accrual method taxpayer to
recognize income from certain property using the cash receipts and
disbursements method. Consequently, the method fails to reflect the
economic results of a taxpayer's business during the taxable year. In
addition, the pledging rules, which are designed to require the
recognition of income when the taxpayer receives cash related to an
installment obligation, are inadequate. The Administration proposes to
repeal the installment method of accounting for accrual method taxpayers
and to eliminate the inadequacies in the pledging rules for installment
sales entered into on or after the date of enactment.
Deny deduction for punitive damages.--The current deductibility of
most punitive damage payments undermines the role of such damages in
discouraging and penalizing certain undesirable actions or activities.
The Administration proposes to disallow any deduction for punitive
damages paid or incurred by the taxpayer, whether upon a judgment or in
settlement of a claim.
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Where the liability for punitive damages is covered by insurance, such
damages paid or incurred by the insurer would be included in the gross
income of the insured person. The insurer would be required to report
such payments to the insured person and to the Internal Revenue Service.
The proposal would apply to damages paid or incurred on or after the
date of enactment.
Apply uniform capitalization rules to tollers.--The uniform
capitalization rules require the capitalization of the direct costs, and
an allocable portion of the indirect costs, of real or tangible personal
property produced by a taxpayer or of real or personal property that is
acquired by a taxpayer for resale. Costs attributable to producing or
acquiring property generally must be capitalized by charging such costs
to basis or, in the case of property which is inventory in the hands of
the taxpayer, by including such costs in inventory. In general, a toller
charges a fee (known as a toll) to perform certain manufacturing or
processing operations on property which is provided by its customers.
Since the toller does not take title to the property, it contends that
it does not produce property or acquire property for resale. As a
result, a toller does not capitalize certain direct and indirect costs
attributable to its tolling activities. The Administration believes that
the disparate treatment between tollers and manufacturers based on
ownership of the raw materials leads to inequitable results. Thus, the
uniform capitalization rules would be modified to require tollers to
capitalize both their direct costs, and a portion of their indirect
costs, allocable to property tolled. An exception would be provided for
small businesses. The proposal would be effective for taxable years
beginning on or after the date of enactment.
Provide consistent amortization periods for intangibles.--Under
current law, start-up and organizational expenditures are amortized at
the election of the taxpayer over a period of not less than 5 years.
Current law requires certain acquired intangible assets (goodwill,
trademarks, franchises, patents, etc.) to be amortized over 15 years.
The Administration believes that, to encourage the formation of new
businesses, a fixed amount of start-up and organizational expenditures
should be currently deductible. Thus, the proposal would allow a
taxpayer to elect to deduct up to $5,000 each of start-up or
organizational expenditures. However, for each taxpayer, the $5,000
amount is reduced (but not below zero) by the amount by which the
cumulative cost of start-up or organizational expenditures exceeds
$50,000. Start-up and organizational expenditures not currently
deductible would be amortized over a 15-year period consistent with the
amortization period for acquired intangible assets. The proposal
generally would be effective for start-up and organizational
expenditures incurred in taxable years beginning on or after the date of
enactment.
Clarify recovery period of utility grading costs. --A taxpayer is
allowed as a depreciation deduction a reasonable allowance for the
exhaustion, wear and tear, and obsolescence of property that is used in
a trade or business or held for the production of income. For most
tangible property placed in service after 1986, the amount of the
depreciation deduction is determined under the modified accelerated cost
recovery system (MACRS) using a statutorily prescribed depreciation
method, recovery period, and placed in service convention. The recovery
period may be determined by reference to the statutory recovery period
or to the list of class lives provided by the Treasury Department.
Electric and gas utility clearing and grading costs incurred to extend
distribution lines and pipelines have not been assigned a class life. By
default, such assets have a seven-year recovery period under MACRS. The
Administration believes that the recovery period used for electric and
gas utility clearing and grading costs does not reflect the economic
useful life of such costs. For example, the electric utility
transmission and distribution lines and the gas utility trunk pipelines
benefitted by the clearing and grading costs have MACRS recovery periods
of 20 years and 15 years, respectively. The proposal would assign
depreciable electric and gas utility clearing and grading costs incurred
to locate transmission and distribution lines and pipelines to the class
life assigned to the benefitted assets, giving these costs a recovery
period of 20 years and 15 years, respectively. The proposal would be
effective for electric and gas utility clearing and grading costs
incurred on or after the date of enactment.
Require recapture of policyholder surplus accounts.--Between 1959 and
1984, stock life insurance companies deferred tax on a portion of their
profits. These untaxed profits were added to a policyholders surplus
account (PSA). In 1984, Congress precluded life insurance companies from
continuing to defer tax on future profits through PSAs. However,
companies were permitted to continue to defer tax on their existing
PSAs, and to pay tax on the previously untaxed profits in the PSAs only
in certain circumstances. There is no remaining justification for
allowing these companies to continue to defer tax on profits they earned
between 1959 and 1984. Most pre-1984 policies have terminated, because
pre-1984 policyholders have surrendered their pre-1984 contracts for
cash, ceased paying premiums on those contracts, or died. The
Administration proposes that companies generally would be required to
include in their gross income over ten years their PSA balances as of
the beginning of the first taxable year starting on or after the date of
enactment.
Modify rules for capitalizing policy acquisition costs of life
insurance companies.--Under current law, insurance companies capitalize
varying percentages of their net premiums for certain types of insurance
contracts, and generally amortize these amounts over 10 years (five
years for small companies). These capitalized amounts are intended to
serve as proxies for each company's actual commissions and other policy
acquisition expenses. However, data reported by insur
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ance companies to State insurance regulators each year indicates that
the insurance industry is capitalizing less than half of its policy
acquisition costs, which results in a mismatch of income and deductions.
The Administration proposes that insurance companies be required to
capitalize modified percentages of their net premiums for certain lines
of business. The percentages would be modified once in the first taxable
year beginning after the date of enactment, and a second time in the
sixth taxable year beginning after the date of enactment. The final
modified percentages would more accurately reflect the ratio of actual
policy acquisition expenses to net premiums and the typical useful lives
of the contracts. To ensure that companies are not required to
capitalize more under this proxy approach than they would capitalize
under normal tax accounting rules, companies that have low policy
acquisition costs generally would be permitted to capitalize their
actual policy acquisition costs.
Subject investment income of trade associations to tax.--Trade
associations described in section 501(c)(6) generally are exempt from
Federal income tax, but are subject to tax on their unrelated business
income. Under the proposal, trade associations that have net investment
income in excess of $10,000 for any taxable year would be subject to the
unrelated business income tax on their excess net investment income. As
under current-law section 512(a)(3), investment income would not be
subject to tax under the proposal to the extent that it is set aside for
a charitable purpose specified in section 170(c)(4). In addition, any
gain from the sale of property used directly in the performance of the
trade association's exempt function would not be subject to tax under
the proposal to the extent that the sale proceeds are used to purchase
replacement exempt-function property. The proposal would be effective
for taxable years beginning on or after the date of enactment.
Restore phaseout of unified credit for large estates.--Prior to the
Taxpayer Relief Act of 1997, the benefit of both the estate tax
graduated rate brackets below fifty-five percent and the unified credit
were phased out by imposing a five-percent surtax on estates with a
value above $10 million. When the Taxpayer Relief Act of 1997 increased
the unified credit amount, the phase out of the unified credit was
inadvertently omitted. The Administration proposes to restore the surtax
in order to phase out the benefits of the unified credit as well as the
graduated estate tax brackets. The proposal would be effective for
decedents dying after the date of enactment.
Require consistent valuation for estate and income tax purposes.--The
basis of property acquired from a decedent generally is its fair market
value on the date of death. Property included in the gross estate of a
decedent is valued also at its fair market value on the date of death.
Recipients of lifetime gifts generally take a carryover basis in the
property received. The Administration proposes to impose a duty of
consistency on heirs receiving property from a decedent, requiring such
heirs to use the value as reported on the estate tax return as the basis
for the property for income tax purposes. Estates would be required to
notify heirs (and the IRS) of such values. In addition, donors making
lifetime gifts would be required to notify the recipients of such gifts
(and the IRS) of the donor's basis in the property at the time of the
gift, as well as any gift tax paid with respect to the gift. This
proposal would be effective for gifts made after, and decedents dying
after, the date of enactment.
Require basis allocation for part sale/part gift transactions.--In a
part gift, part sale transaction, the donee/purchaser takes a basis
equal to the greater of the amount paid by the donee or the donor's
adjusted basis at the time of the transfer. The donor/seller uses
adjusted cost basis in computing the gain or loss on the sale portion of
the transaction. The Administration proposes to rationalize basis
allocation in a part gift, part sale transaction by requiring the basis
of the property to be allocated ratably between the gift portion and the
sale portion based on the fair market value of the property on the date
of transfer and the consideration paid. This proposal would be effective
for transactions entered into on or after the date of enactment.
Conform treatment of surviving spouses in community property
States.--If joint property is owned by spouses in a non-community
property state, a surviving spouse receives a stepped-up basis only in
the half of the property owned by the deceased spouse. In contrast, when
a spouse dies owning community property, the surviving spouse is
entitled to a stepped-up basis not only in the half of the property
owned by the deceased spouse, but also in the half of the property
already owned by the surviving spouse prior to the decedent's death. The
Administration proposes to eliminate the stepped-up basis in the part of
the community property owned by the surviving spouse prior to the
deceased spouse's death. The half of the community property owned by the
deceased spouse would continue to be entitled to a stepped-up basis upon
death. This treatment will be consistent with the treatment of joint
property owned by spouses in a non-community property State. This
proposal would be effective for decedents dying after the date of
enactment.
Expand section 864(c)(4)(B) to interest and dividend equivalents.--
Under U.S. domestic law, a foreign person is subject to taxation in the
United States on a net income basis with respect to income that is
effectively connected with a U.S. trade or business (ECI). The test for
determining whether income is effectively connected to a U.S. trade or
business differs depending on whether the income at issue is U.S. source
or foreign source. Only enumerated types of foreign source income--
rents, royalties, dividends, interest, gains from the sale of inventory
property, and insurance income--constitute ECI, and only in certain cir
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cumstances. The proposal would expand the categories of foreign-source
income that could constitute ECI to include interest equivalents
(including letter of credit fees) and dividend equivalents in order to
eliminate arbitrary distinctions between economically equivalent
transactions.
Recapture overall foreign losses when CFC stock is disposed.--Under
the interest allocation rules of section 864(e), the value of stock in a
controlled foreign corporation (CFC) is added to the value of directly-
owned foreign assets, and then compared to the value of domestic assets
of a corporation (or a group of affiliated U.S. corporations) for
purposes of determining how much of the corporation's interest
deductions should be allocated against foreign income and how much
against domestic income. If these deductions against foreign income
result in (or increase) an overall foreign loss which is then set
against U.S. income, section 904(f) has recapture rules that require
subsequent foreign income or gain to be recharacterized as domestic.
Recapture can take place when directly-owned foreign assets, for
example, are disposed of. However, there may be no recapture when stock
in a CFC is disposed of. The proposal would correct that asymmetry by
providing that property subject to the recapture rules upon disposition
under section 904(f)(3) would include stock in a CFC.
Increase elective withholding rate for nonperiodic distributions from
deferred compensation plans.--The Administration proposes to increase
the current 10-percent elective withholding rate for nonperiodic
distributions (such as certain lump sums) from pensions, IRAs and
annuities to 15 percent, which more closely approximates the taxpayer's
income tax liability for the distribution effective for distributions
after 1999. The withholding would not apply to eligible rollover
distributions.
Increase section 4973 excise tax for excess IRA contributons.--Excess
IRA contributions are currently subject to an annual six-percent excise
tax. With high investment returns, this annual six-percent rate may be
insufficient to discourage contributions in excess of the current limits
for IRAs. The Administration proposes to increase from six percent to 10
percent the excise tax on excess contributions to traditional and Roth
IRAs for taxable years after the year the excess contribution is made.
Thus, the six-percent rate would continue to apply for the year of the
excess contribution and a higher annual rate would apply if excess
amounts remain in the IRA. This increase would be effective for taxable
years beginning after 1999.
Limit pre-funding of welfare benefits for 10 or more employer plans.--
Current law generally limits the ability of employers to claim a
deduction for amounts used to prefund welfare benefits. An exception is
provided for certain arrangements where 10 or more employers participate
because it is believed that such relationships involve risk-sharing
similar to insurance which will effectively eliminate any incentive for
participating employers to prefund benefits. However, as a practical
matter, it has proven difficult to enforce the risk-sharing requirements
in the context of certain arrangements. The Administration proposes to
limit the 10 or more employer plan funding exception to medical,
disability, and group-term life insurance benefits because these
benefits do not present the same risk of prefunding abuse. Thus,
effective for contributions paid on or after the date of enactment, the
existing deduction rules would apply to prevent an employer who
contributes to a 10 or more employer plan from claiming a current
deduction for supplemental unemployment benefits, severance pay or life
insurance (other than group-term life insurance) benefits to be paid in
future years.
Subject signing bonuses to employment taxes.--Bonuses paid to
individuals for signing a first contract of employment are ordinary
income in the year received. The Administration proposes to clarify that
these amounts are treated as wages for purposes of income tax
withholding and FICA taxes effective after the date of enactment. No
inference is intended with respect to the application of prior law
withholding rules to signing bonuses.
Expand reporting of cancellation of indebtedness income.--Under
current law, gross income generally includes income from the discharge
of indebtedness. If a bank, thrift institution, or credit union
discharges $600 or more of any indebtedness of a debtor, the institution
must report such discharge to the debtor and the IRS. The proposal would
extend these reporting requirements to additional entities involved in
the trade or business of lending for discharges of indebtedness
occurring on or after the date of enactment.
Require taxpayers to include rental income of residence in income
without regard to the period of rental.--Under current law, rental
income is generally includable in income and the deductibility of
expenses attributable to the rental property is subject to certain
limitations. An exception to this general treatment applies if a
dwelling is used by the taxpayer as a residence and is rented for less
than 15 days during the taxable year. The income from such a rental is
not included in gross income and no expenses arising from the rental are
deductible. The Administration proposes to repeal this 15-day exception.
The proposal would apply to taxable years beginning after December 31,
1999.
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
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carrying values of their inventories by applying the lower-of-cost-or-
market (LCM) method or 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 similar 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.
Defer interest deduction and original issue discount (OID) on certain
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.
Modify deposit requirement for Federal Unemployment Act (FUTA).--
Beginning in 2005, 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.
Reinstate Oil Spill Liability Trust Fund 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, 2009. 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.
Deny 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
dividends-received deduction for dividends on nonqualified preferred
stock (as defined in section 351(g)), except in the case of ``qualifying
dividends.'' This proposal is effective for nonqualified preferred stock
issued after the date of first committee action.
Disallow interest on debt allocable to tax-exempt obligations.--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.
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.
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
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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.
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.
Require withholding on certain gambling winnings --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.
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, 1999.
Replace sales-source rules with activity-based rules.--If inventory is
manufactured in the United States and sold abroad, Treasury regulations
provide that 50 percent of the income from such sales is treated as
earned by production activities and 50 percent by sales activities. The
income from the production activities is sourced on the basis of the
location of assets held or used to produce the income. The income from
the sales activity (the remaining 50 percent) is sourced based on where
title to the inventory transfers. If inventory is purchased in the
United States and sold abroad, 100 percent of the sales income generally
is deemed to be foreign source. These rules generally produce more
foreign source income for United States tax purposes than is subject to
foreign tax. Thus, the rules generally increase the U.S exporters'
foreign tax credit limitation and thereby allow U.S. exporters that
operate in high-tax foreign countries to credit tax in excess of the
U.S. rate against their U.S. tax liability. The proposal would require
that the allocation between production activities and sales activities
be based on actual economic activity. The proposal would be effec
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tive for taxable years beginning after the date of enactment.
Repeal tax-free conversions of large C corporations to S
corporations.--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, 2000 and to acquisitions of a C
corporation by an S corporation made after December 31, 1999.
Eliminate the income recognition exception for accrual method service
providers.--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 beginning after the date of enactment.
Modify structure of businesses indirectly conducted by REITs.--REITs
generally are restricted to owning passive investments in real estate
and certain securities. No single corporation can account for more than
five percent of the total value of a REIT's assets, and a REIT cannot
own more than 10 percent of the outstanding voting securities of any
issuer. Through the use of non-voting preferred stock and multiple
subsidiaries, up to 25 percent of the value of a REIT's assets can
consist of subsidiaries that conduct otherwise impermissible activities.
Under the proposal, the 10-percent vote test would be changed to a
``vote or value'' test. This would prevent REITs from undertaking
impermissible activities through preferred stock subsidiaries. However,
the proposal also would provide an exception to the five- and 10-percent
asset tests so that REITs could have ``taxable REIT subsidiaries'' that
would be allowed to perform non-customary and other currently prohibited
services with respect to REIT tenants and other customers. Under the
proposal, there would be two types of taxable REIT subsidiaries, a
``qualified independent contractor subsidiary'' and a ``qualified
business subsidiary.'' A qualified business subsidiary would be allowed
to undertake non-tenant related activities that currently generate bad
income for a REIT. A qualified independent contractor subsidiary would
be allowed to perform non-customary and other currently prohibited
services with respect to REIT tenants as well as activities that could
be performed by a qualified business subsidiary. All taxable REIT
subsidiaries owned by a REIT could not represent more than 15 percent of
the value of the REIT's total assets, and within that 15-percent
limitation, no more than five percent of the total value of a REIT's
assets could consist of qualified independent contractor subsidiaries. A
number of additional constraints would be imposed on a taxable REIT
subsidiary to ensure that the taxable REIT subsidiary pays a corporate
level tax on its earnings. This proposal would be effective after the
date of enactment. REITs would be allowed to combine and convert
preferred stock subsidiaries into taxable REIT subsidiaries tax-free
prior to a certain date.
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
[[Page 84]]
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 50 percent or more of the total combined
voting power of all classes of voting stock or 50 percent or more of the
total value of all 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.
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 40-percent excise tax on the difference between the amount
paid by the purchaser to the injured person and the undiscounted value
of the purchased payment stream 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 on or 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.
Amend 80/20 company rules.--Interest or 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
on or after 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 nonresident'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 of section 883.--Under section 887, a foreign
corporation is subject to a four-percent tax on its United States source
gross transportation income. Under section 883, however, the tax will
not apply 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 to current U.S. 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. Residents of non-exemption countries,
however, 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 four-
percent U.S. tax. The proposal would stop that abuse. It would be
effective for taxable years beginning on or after the date of enactment.
[[Page 85]]
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.
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 non-business assets.
The proposal would be effective for gifts made after, and decedents
dying after, the date of enactment.
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
trust 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.
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, banks and
brokerage firms, 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
deductible 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 25 percent.
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,
1998 and before January 1, 2010.
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, 2009. These taxes expired on
December 31, 1995.
Convert a portion of the excise taxes deposited in the Airport and
Airway Trust Fund to cost-based user fees assessed for Federal Aviation
Administration (FAA) services.--The excise taxes that are levied on
domestic air passenger tickets and flight segments, international
departures and arrivals, and domestic air cargo are proposed to be
reduced over time as more efficient, cost-based user fees for air
traffic services are phased in beginning in fiscal year 2000. The excise
taxes are proposed to be reduced as necessary to ensure that the amount
collected each year from the new user fees and the excise taxes together
is equal to the total budget resources requested for the FAA in each
succeeding year.
Receipts from tobacco legislation.--The Administration includes
receipts from tobacco legislation in the 2000 budget. These receipts,
which total approximately $34 billion for the five years 2000 through
2004, would provide reimbursements for tobacco-related health care
costs.
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
[[Page 86]]
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.
Restore premiums for the United Mine Workers of America Combined
Benefit Fund.--The Administration proposes legislation to restore the
previous calculation of premiums charged to coal companies that employed
the retired miners that have been assigned to them. By reversing the
court decision of National Coal v. Chater, this legislation will restore
a premium calculation that supports medical cost containment.
Assess mortgage transaction fees for flood hazard determination.--The
Administration proposes to establish a $15 fee on mortgage originations
and refinancings to support a multi-year program to update and modernize
FEMA's inventory of floodplain maps (100,000 maps). Accurate and easy to
use flood hazard maps are essential in determining if a property is
located in a floodplain. The maps allow lenders to meet their statutory
obligation of requiring risk-prone homes with a mortgage to carry flood
insurance, and allow homeowners to assess their risk of flood damage.
These maps are the basis for developing appropriate risk-based flood
insurance premium charges, and improved maps will result in a more
actuarially sound insurance program.
Replace Harbor Maintenance Tax with the Harbor Services User Fee
(receipt effect).--The Administration proposes to replace the ad valorem
Harbor Maintenance Tax with a cost-based user fee, the Harbor Services
User Fee. The user fee will finance harbor construction, operation, and
maintenance activities performed by the Army Corps of Engineers, the
costs of operating and maintaining the Saint Lawrence Seaway, and the
costs of administering the fee. The fee will raise an average of $980
million annually through FY 2004, which is less than would have been
raised by the Harbor Maintenance Tax before the Supreme Court decision
that the ad valorem tax on exports was unconstitutional.
Allow members of the clergy to revoke exemption from Social Security
and Medicare coverage.--Under current law, ministers of a church who are
opposed to participating in the Social Security and Medicare programs on
religious principles may reject coverage by filing with the Internal
Revenue Service before the tax filing date for their second year of work
in the ministry. This proposal would provide an opportunity for members
of the clergy to revoke their exemptions from Social Security and
Medicare coverage.
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 millions of dollars)
----------------------------------------------------------------------------------------------------------------
Estimate
----------------------------------------------------------------------
1999 2000 2001 2002 2003 2004 2000-2004
----------------------------------------------------------------------------------------------------------------
Provide tax relief and extend expiring
provisions:
Make health care more affordable:
Provide tax relief for long-term care
needs............................... ........ -52 -1,107 -1,144 -1,312 -1,408 -5,023
Provide tax relief for workers with
disabilities........................ ........ -21 -151 -169 -187 -196 -724
Provide tax relief to encourage small
business health plans............... ........ -1 -5 -10 -15 -13 -44
----------------------------------------------------------------------
Subtotal, make health care more
affordable........................ ........ -74 -1,263 -1,323 -1,514 -1,617 -5,791
Expand education initiatives:
Provide incentives for public school
construction and modernization...... ........ -146 -570 -939 -1,035 -1,045 -3,735
Extend employer-provided educational
assistance and include graduate
education........................... -72 -267 -719 -236 ........ ........ -1,222
Provide tax credit for workplace
literacy and basic education
programs............................ ........ -3 -18 -25 -38 -55 -139
Encourage sponsorship of qualified
zone academies...................... ........ -22 -43 -55 -24 ........ -144
Eliminate 60-month limit on student
loan interest deduction............. ........ -18 -61 -62 -67 -73 -281
Eliminate tax when forgiving student
loans subject to income contingent
repayment........................... ........ ........ ........ ........ ........ ........ .........
Provide tax relief for participants
in certain Federal education
programs............................ ........ -3 -7 -7 -7 -6 -30
----------------------------------------------------------------------
Subtotal, expand education
initiatives....................... -72 -459 -1,418 -1,324 -1,171 -1,179 -5,551
Make child care more affordable:
Increase, expand, and simplify child
and dependent care tax credit....... ........ -338 -1,585 -1,426 -1,471 -1,503 -6,323
Provide tax incentives for employer-
provided child-care facilities...... ........ -40 -84 -114 -131 -140 -509
----------------------------------------------------------------------
Subtotal, make child care more
affordable........................ ........ -378 -1,669 -1,540 -1,602 -1,643 -6,832
[[Page 87]]
Provide incentives to revitalize
communities:
Increase low-income housing tax
credit per capita cap............... ........ -46 -186 -330 -474 -620 -1,656
Provide Better America Bonds to
improve the environment............. ........ -8 -49 -127 -205 -284 -673
Provide New Markets Tax Credit....... ........ -12 -88 -207 -297 -376 -980
Expand tax incentives for SSBICs..... -* -* -* -* -* -* -*
Extend wage credit for two new EZs... ........ ........ ........ ........ ........ ........ .........
----------------------------------------------------------------------
Subtotal, provide incentives to
revitalize communities............ ........ -66 -323 -664 -976 -1,280 -3,309
Promote energy efficiency and improve
the environment:
Provide tax credit for energy-
efficient building equipment........ ........ -230 -407 -376 -393 -127 -1,533
Provide tax credit for new energy-
efficient homes..................... ........ -60 -109 -92 -72 -96 -429
Extend electric vehicle tax credit;
provide tax credit for fuel-
efficient vehicles.................. ........ ........ ........ -4 -178 -712 -894
Provide investment tax credit for CHP
systems............................. -1 -64 -99 -110 -52 -7 -332
Provide tax credit for rooftop solar
systems............................. ........ -9 -19 -25 -34 -45 -132
Extend wind and biomass tax credit
and expand eligible biomass sources. ........ -20 -48 -73 -88 -94 -323
----------------------------------------------------------------------
Subtotal, promote energy efficiency
and improve the environment....... -1 -383 -682 -680 -817 -1,081 -3,643
Promote expanded retirement savings,
security and portability.............. -27 -144 -204 -218 -213 -218 -997
Extend expiring provisions:
Allow personal tax credits against
the AMT............................. -67 -679 -707 ........ ........ ........ -1,386
Extend work opportunity tax credit... -23 -116 -164 -81 -38 -16 -415
Extend welfare-to-work tax credit.... -3 -19 -36 -21 -9 -2 -87
Extend R&E tax credit................ -311 -933 -656 -281 -133 -53 -2,056
Make permanent the expensing of
brownfields remediation costs....... ........ ........ -106 -170 -168 -167 -611
Extend tax credit for first-time DC
homebuyers.......................... 1 -1 -10 -1 ........ ........ -12
----------------------------------------------------------------------
Subtotal, extend expiring
provisions........................ -403 -1,748 -1,679 -554 -348 -238 -4,567
Simplify the tax laws.................. -64 -141 -159 -154 -104 -41 -599
Miscellaneous provisions:
Make first $2,000 of severance pay
exempt from income tax.............. ........ -42 -168 -173 -133 ........ -516
Allow steel companies to carryback
NOLs up to five years............... -19 -190 -28 -30 -24 -20 -292
----------------------------------------------------------------------
Subtotal, miscellaneous provisions. -19 -232 -196 -203 -157 -20 -808
Electricity restructuring:
Deny tax-exempt status for new
electric utility bonds except for
distribution related expenses;
repeal cost of service limitation
for determining deductible
contributions to nuclear
decommissioning funds............... ........ 4 11 20 30 41 106
----------------------------------------------------------------------
Subtotal, electricity restructuring ........ 4 11 20 30 41 106
Modify international trade provisions:
Extend and modify Puerto Rico
economic-activity tax credit........ ........ -24 -46 -71 -106 -141 -388
Extend GSP and modify other trade
provisions \1\...................... -84 -484 -223 -93 -96 -99 -995
Levy tariff on certain textiles/
apparel produced in the CNMI \1\.... ........ ........ 187 187 187 187 748
Expand Virgin Island tariff credits
\1\................................. ........ ........ -* -* -2 -1 -3
----------------------------------------------------------------------
Subtotal, modify international
trade provisions.................. -84 -508 -82 23 -17 -54 -638
----------------------------------------------------------------------
Subtotal, provide tax relief and
extend expiring provisions.......... -670 -4,129 -7,664 -6,617 -6,889 -7,330 -32,629
Eliminate unwarranted benefits and adopt
other revenue measures:
Limit benefits of corporate tax shelter
transactions:
Deny tax benefits resulting from non-
economic transactions; modify
substantial understatement penalty
for corporate tax shelters; deny
deductions for certain tax advice
and impose excise taxes on certain
fees, rescission provisions and
provisions guaranteeing tax benefits ........ 11 76 162 194 214 657
Preclude taxpayers from taking tax
positions inconsistent with the form
of their transactions............... 5 50 52 55 58 62 277
Tax income from corporate tax
shelters involving tax-indifferent
parties............................. 15 150 155 165 175 185 830
Require accrual of income on forward
sale of corporate stock............. 1 4 9 13 21 31 78
Modify treatment of built-in losses
and other attribute trafficking..... 9 113 185 192 200 208 898
Modify treatment of ESOP as S
corporation shareholder............. 17 64 102 145 183 202 696
Prevent serial liquidation of U.S.
subsidiaries of foreign corporations ........ 12 20 19 19 19 89
Prevent capital gains avoidance
through basis shift transactions
involving foreign shareholders...... 65 301 114 64 45 27 551
Limit inappropriate tax benefits for
lessors of tax-exempt use property.. 1 35 79 119 147 163 543
Prevent mismatching of deductions and
income exclusions in transactions
with related foreign persons........ ........ 60 104 108 112 117 501
[[Page 88]]
Restrict basis creation through
Section 357(c)...................... 3 9 19 28 39 50 145
Modify anti-abuse rule related to
assumption of liabilities........... 1 2 4 5 7 9 27
Modify COLI rules.................... ........ 240 366 398 427 451 1,882
----------------------------------------------------------------------
Subtotal, limit benefits of
corporate tax shelter transactions 117 1,051 1,285 1,473 1,627 1,738 7,174
Other proposals:
Require banks to accrue interest on
short-term obligations.............. ........ 72 2 3 4 4 85
Require current accrual of market
discount by accrual method taxpayers 3 7 11 15 20 25 78
Limit conversion of character of
income from constructive ownership
transactions with respect to
partnership interests............... 19 30 37 32 32 35 166
Modify rules for debt-financed
portfolio stock..................... 1 5 9 14 20 26 74
Modify and clarify certain rules
relating to debt-for-debt exchanges. 15 76 109 108 107 106 506
Modify and clarify straddle rules.... 16 40 50 48 47 49 234
Conform control test for tax-free
incorporations, distributions, and
reorganizations..................... 7 18 22 22 21 21 104
Tax issuance of tracking stock....... 40 105 128 127 127 127 614
Require consistent treatment and
provide basis allocation rules for
transfers of intangibles in certain
nonrecognition transactions......... 2 66 83 86 90 95 420
Modify tax treatment of downstream
mergers............................. 14 42 55 59 63 67 286
Modify partnership distribution rules -28 131 162 173 162 147 775
Deny change in method treatment to
tax-free formations................. 6 94 64 65 67 70 360
Repeal installment method for accrual
basis taxpayers..................... ........ 685 757 438 114 16 2,010
Deny deduction for punitive damages.. 16 88 124 130 137 143 622
Apply uniform capitalization rules to
tollers............................. ........ 25 39 40 42 21 167
Provide consistent amortization
periods for intangibles............. ........ -219 -189 48 255 435 330
Clarify recovery period of utility
grading costs....................... 9 30 49 61 69 75 284
Require recapture of policyholder
surplus accounts.................... ........ 134 222 219 217 215 1,007
Modify rules for capitalizing policy
acquisition costs of life insurance
companies........................... ........ 379 977 946 914 880 4,096
Subject investment income of trade
associations to tax................. ........ 172 294 309 325 341 1,441
Restore phaseout of unified credit
for large estates................... ........ 27 61 66 72 76 302
Require consistent valuation for
estate and income tax purposes...... ........ 3 8 13 17 22 63
Require basis allocation for part
sale/part gift transactions......... ........ 2 3 4 5 6 20
Conform treatment of surviving
spouses in community property States 3 15 33 46 59 72 225
Expand section 864(c)(4)(B) to
interest and dividend equivalents... ........ 9 15 16 16 17 73
Recapture overall foreign losses when
CFC stock is disposed............... ........ 6 6 6 6 7 31
Increase elective withholding rate
for nonperiodic distributions from
deferred compensation plans......... ........ 42 2 2 2 2 50
Increase section 4973 excise tax for
excess IRA contributions............ ........ 1 12 12 13 14 52
Limit pre-funding of welfare benefits
for 10 or more employer plans....... ........ 92 156 159 150 149 706
Subject signing bonuses to employment
taxes............................... ........ 5 3 3 3 3 17
Expand reporting of cancellation of
indebtedness income................. ........ 7 7 7 7 7 35
Require taxpayers to include rental
income of residence in income
without regard to the period of
rental.............................. ........ 4 11 11 12 12 50
Repeal lower-of-cost-or-market
inventory accounting method......... 18 422 525 431 433 201 2,012
Defer interest deduction and OID on
certain convertible debt............ 2 9 20 32 44 55 160
Modify deposit requirement for FUTA.. ........ ........ ........ ........ ........ ........ .........
Reinstate Oil Spill Liability Trust
Fund tax \1\........................ 26 254 256 257 261 264 1,292
Deny DRD for certain preferred stock. 4 13 26 38 52 66 195
Disallow interest on debt allocable
to tax-exempt obligations........... 4 11 17 23 28 33 112
Repeal percentage depletion for non-
fuel minerals mined on Federal and
formerly Federal lands.............. ........ 92 94 96 97 99 478
Modify rules relating to foreign oil
and gas extraction income........... ........ 5 65 107 112 118 407
Increase penalties for failure to
file correct information returns.... ........ 6 12 15 19 13 65
Tighten the substantial
understatement penalty for large
corporations........................ ........ ........ 25 42 43 37 147
Require withholding on certain
gambling winnings................... ........ 17 4 1 1 1 24
Simplify foster child definition
under EITC.......................... ........ ........ 6 7 7 7 27
Replace sales-source rules with
activity-based rules................ ........ 310 540 570 600 630 2,650
Repeal tax-free conversions of large
C corporations into S corporations.. ........ 10 32 46 56 68 212
Eliminate the income recognition
exception for accrual method service
providers........................... 1 32 44 46 48 50 220
Modify structure of businesses
indirectly conducted by REITs....... 4 27 27 27 28 28 137
Modify treatment of closely held
REITs............................... ........ 24 10 12 14 15 75
Impose excise tax on purchase of
structured settlements.............. 6 8 6 3 1 -2 16
Amend 80/20 company rules............ 28 48 49 51 52 53 253
Modify foreign office material
participation exception applicable
to inventory sales attributable to
nonresident's U.S. office........... 1 7 10 10 11 11 49
Stop abuse of CFC exception to
ownership requirements of section
883................................. ........ 4 9 7 5 5 30
Include QTIP trust assets in
surviving spouse's estate........... ........ ........ 2 2 2 2 8
Eliminate non-business valuation
discounts........................... ........ 206 425 443 477 494 2,045
[[Page 89]]
Eliminate gift tax exemption for
personal residence trusts........... ........ -1 -1 -1 3 12 12
Increase proration percentage for P&C
insurance companies................. ........ -4 49 64 87 107 303
----------------------------------------------------------------------
Subtotal, other proposals.......... 217 3,693 5,574 5,617 5,676 5,652 26,212
----------------------------------------------------------------------
Subtotal, eliminate unwarranted
benefits and adopt other revenue
measures \1\........................ 334 4,744 6,859 7,090 7,303 7,390 33,386
Other provisions that affect receipts:
Reinstate environmental tax on
corporate taxable income \2\.......... ........ 794 460 463 476 481 2,674
Reinstate Superfund excise taxes \1\... 109 738 747 756 766 778 3,785
Convert Airport and Airway Trust Fund
taxes to a cost-based user fee system
\1\................................... ........ 1,122 1,184 1,091 1,007 910 5,314
Receipts from tobacco legislation \1\.. -77 7,987 7,105 6,589 6,418 6,400 34,499
Assess fees for examination of bank
holding companies and State-chartered
member banks (receipt effect) \1\..... ........ 82 86 90 94 98 450
Restore premiums for United Mine
Workers of America Combined Benefit
Fund.................................. 8 15 14 13 12 12 66
Assess mortgage transaction fees for
flood hazard determination \1\........ ........ 58 59 62 65 68 312
Replace Harbor Maintenance tax with the
Harbor Services User Fee (receipt
effect) \1\........................... ........ -472 -505 -541 -578 -619 -2,715
Allow members of the clergy to revoke
exemption from Social Security and
Medicare coverage..................... ........ 5 8 10 10 11 44
Create solvency incentive for State
unemployment trust fund accounts \1\.. ........ 224 312 96 ........ ........ 632
----------------------------------------------------------------------
Subtotal, other provisions that
affect receipts \1\................. 40 10,553 9,470 8,629 8,270 8,139 45,061
----------------------------------------------------------------------
Total effect of proposals \1\............ -296 11,168 8,665 9,102 8,684 8,199 45,818
----------------------------------------------------------------------------------------------------------------
* $500,000 or less.
\1\ Net of income offsets.
\2\ Net of deductibility for income tax purposes.
[[Page 90]]
Table 3-4. RECEIPTS BY SOURCE
(In millions of dollars)
----------------------------------------------------------------------------------------------------------------
Estimate
Source 1998 -----------------------------------------------------------------------
Actual 1999 2000 2001 2002 2003 2004
----------------------------------------------------------------------------------------------------------------
Individual income taxes
(federal funds):
Existing law.............. 828,586 869,160 902,059 918,399 947,596 975,721 1,022,940
Proposed Legislation
(PAYGO)................ .......... -144 -1,484 -5,181 -4,277 -4,516 -4,727
Legislative proposal,
discretionary offset... .......... -71 -834 -741 -569 -502 -478
-----------------------------------------------------------------------------------
Total individual income
taxes...................... 828,586 868,945 899,741 912,477 942,750 970,703 1,017,735
===================================================================================
Corporation income taxes:
Federal funds:
Existing law............ 188,598 182,346 186,496 192,604 199,217 207,884 217,189
Proposed Legislation
(PAYGO).............. .......... -123 2,056 3,452 3,679 3,837 3,662
Legislative proposal,
discretionary offset. .......... -13 -418 -208 -171 -151 -138
-----------------------------------------------------------------------------------
Total Federal funds
corporation income taxes. 188,598 182,210 188,134 195,848 202,725 211,570 220,713
-----------------------------------------------------------------------------------
Trust funds:
Hazardous substance
superfund.............. 79 .......... .......... .......... .......... .......... ..........
Legislative proposal,
discretionary offset. .......... .......... 1,222 707 713 732 740
-----------------------------------------------------------------------------------
Total corporation income
taxes...................... 188,677 182,210 189,356 196,555 203,438 212,302 221,453
===================================================================================
Social insurance and
retirement receipts (trust
funds):
Employment and general
retirement:
Old-age and survivors
insurance (Off-budget). 358,784 383,176 398,777 412,564 428,922 446,411 464,104
Proposed Legislation
(non-PAYGO).......... .......... .......... 3 6 8 8 9
Disability insurance
(Off-budget)........... 57,015 60,860 66,534 70,065 72,833 75,804 78,813
Proposed Legislation
(non-PAYGO).......... .......... .......... .......... 1 1 1 1
Hospital insurance...... 119,863 127,363 131,982 136,933 142,483 148,429 154,624
Proposed Legislation
(PAYGO).............. .......... .......... 2 2 2 2 2
Railroad retirement:
Social Security
equivalent account... 1,769 1,685 1,720 1,749 1,769 1,792 1,813
Rail pension and
supplemental annuity. 2,583 2,656 2,693 2,750 2,789 2,824 2,848
-----------------------------------------------------------------------------------
Total employment and
general retirement....... 540,014 575,740 601,711 624,070 648,807 675,271 702,214
-----------------------------------------------------------------------------------
On-budget............... 124,215 131,704 136,397 141,434 147,043 153,047 159,287
Off-budget.............. 415,799 444,036 465,314 482,636 501,764 522,224 542,927
-----------------------------------------------------------------------------------
Unemployment insurance:
Deposits by States \1\ . 21,047 22,208 23,464 24,689 26,165 25,934 26,371
Proposed Legislation
(PAYGO).............. .......... .......... 280 390 120 .......... ..........
Federal unemployment
receipts \1\ .......... 6,369 6,446 6,536 6,557 6,650 6,699 6,773
Proposed Legislation
(PAYGO).............. .......... .......... .......... .......... .......... .......... ..........
Railroad unemployment
receipts \1\ .......... 68 111 77 37 70 124 130
-----------------------------------------------------------------------------------
Total unemployment
insurance................ 27,484 28,765 30,357 31,673 33,005 32,757 33,274
-----------------------------------------------------------------------------------
Other retirement:
Federal employees'
retirement--employee
share.................. 4,259 4,248 4,396 4,493 4,482 3,912 3,659
Non-Federal employees
retirement \2\ ........ 74 71 65 60 54 44 39
-----------------------------------------------------------------------------------
Total other retirement.... 4,333 4,319 4,461 4,553 4,536 3,956 3,698
-----------------------------------------------------------------------------------
Total social insurance and
retirement receipts........ 571,831 608,824 636,529 660,296 686,348 711,984 739,186
===================================================================================
On-budget................. 156,032 164,788 171,215 177,660 184,584 189,760 196,259
Off-budget................ 415,799 444,036 465,314 482,636 501,764 522,224 542,927
===================================================================================
Excise taxes:
Federal funds:
Alcohol taxes........... 7,215 7,240 7,249 7,251 7,235 7,220 7,207
Tobacco taxes........... 5,657 5,028 6,264 6,705 7,370 7,575 7,553
Legislative proposal,
discretionary offset. .......... 185 1,441 906 217 .......... ..........
Transportation fuels tax 589 811 717 735 720 739 746
Telephone and teletype
services............... 4,910 5,213 5,489 5,780 6,097 6,439 6,801
Ozone depleting
chemicals and products. 98 52 26 13 3 .......... ..........
Other Federal fund
excise taxes........... 3,196 -564 1,766 1,721 1,686 1,606 1,607
[[Page 91]]
Proposed Legislation
(PAYGO).............. .......... 8 13 15 16 18 19
Legislative proposal,
discretionary offset. .......... -381 381 .......... .......... .......... ..........
-----------------------------------------------------------------------------------
Total Federal fund excise
taxes.................... 21,665 17,592 23,346 23,126 23,344 23,597 23,933
-----------------------------------------------------------------------------------
Trust funds:
Highway................. 26,628 38,464 33,097 33,642 34,252 34,890 35,539
Airport and airway...... 8,111 10,397 9,251 9,693 10,441 11,060 11,736
Legislative proposal,
discretionary offset. .......... .......... 1,496 1,579 1,455 1,341 1,214
Aquatic resources....... 290 376 334 340 377 381 398
Black lung disability
insurance.............. 636 638 656 674 690 705 720
Inland waterway......... 91 102 105 107 109 111 113
Hazardous substance
superfund.............. .......... .......... .......... .......... .......... .......... ..........
Legislative proposal,
discretionary offset. .......... 147 985 996 1,008 1,022 1,037
Oil spill liability..... .......... .......... .......... .......... .......... .......... ..........
Proposed Legislation
(PAYGO).............. .......... 35 339 341 344 348 351
Vaccine injury
compensation........... 116 112 113 114 116 116 117
Leaking underground
storage tank........... 136 212 180 183 187 190 194
-----------------------------------------------------------------------------------
Total trust funds excise
taxes.................... 36,008 50,483 46,556 47,669 48,979 50,164 51,419
-----------------------------------------------------------------------------------
Total excise taxes.......... 57,673 68,075 69,902 70,795 72,323 73,761 75,352
===================================================================================
Estate and gift taxes:
Federal funds............. 24,076 25,932 26,740 27,880 29,979 31,046 33,318
Proposed Legislation
(PAYGO)................ .......... .......... 232 487 510 554 584
-----------------------------------------------------------------------------------
Total estate and gift taxes. 24,076 25,932 26,972 28,367 30,489 31,600 33,902
===================================================================================
Customs duties:
Federal funds............. 17,585 17,110 18,941 19,953 21,219 22,767 24,663
Proposed Legislation
(PAYGO)................ .......... -112 -645 -48 125 119 115
Trust funds............... 712 656 697 744 792 844 901
Legislative proposal,
discretionary offset... .......... .......... -629 -674 -721 -771 -825
-----------------------------------------------------------------------------------
Total customs duties........ 18,297 17,654 18,364 19,975 21,415 22,959 24,854
===================================================================================
MISCELLANEOUS RECEIPTS: \3\
Miscellaneous taxes....... 112 120 123 126 128 131 134
Receipts from tobacco
legislation
(discretionary offset)... .......... 165 6,525 6,426 6,426 6,418 6,400
United Mine Workers of
America combined benefit
fund..................... 340 281 291 282 275 270 263
Proposed Legislation
(PAYGO)................ .......... 8 15 14 13 12 12
Deposit of earnings,
Federal Reserve System... 24,540 26,354 25,121 26,008 26,941 27,973 28,896
Proposed Legislation
(PAYGO)................ .......... .......... 110 115 120 125 130
Defense cooperation....... .......... 6 6 6 6 6 6
Fees for permits and
regulatory and judicial
services................. 5,560 5,629 7,752 9,713 14,244 14,620 15,033
Proposed Legislation
(PAYGO)................ .......... .......... 78 80 83 87 91
Fines, penalties, and
forfeitures.............. 1,925 1,962 1,963 1,984 1,968 1,977 1,988
Gifts and contributions... 222 206 181 134 128 131 129
Refunds and recoveries.... -41 -37 -37 -37 -37 -37 -37
-----------------------------------------------------------------------------------
Total miscellaneous receipts 32,658 34,694 42,128 44,851 50,295 51,713 53,045
===================================================================================
Total budget receipts....... 1,721,798 1,806,334 1,882,992 1,933,316 2,007,058 2,075,022 2,165,527
On-budget................. 1,305,999 1,362,298 1,417,678 1,450,680 1,505,294 1,552,798 1,622,600
Off-budget................ 415,799 444,036 465,314 482,636 501,764 522,224 542,927
-----------------------------------------------------------------------------------
MEMORANDUM
Federal funds............. 1,113,467 1,146,637 1,200,714 1,224,894 1,271,291 1,312,435 1,374,499
Trust funds............... 385,631 413,274 426,370 443,257 461,895 479,001 496,908
Interfund transactions.... -193,099 -197,613 -209,406 -217,471 -227,892 -238,638 -248,807
-----------------------------------------------------------------------------------
Total on-budget............. 1,305,999 1,362,298 1,417,678 1,450,680 1,505,294 1,552,798 1,622,600
-----------------------------------------------------------------------------------
Off-budget (trust funds).... 415,799 444,036 465,314 482,636 501,764 522,224 542,927
[[Page 92]]
===================================================================================
Total....................... 1,721,798 1,806,334 1,882,992 1,933,316 2,007,058 2,075,022 2,165,527
----------------------------------------------------------------------------------------------------------------
\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
adminstrative 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.