[Analytical Perspectives]
[Federal Receipts and Collections]
[3. Federal Receipts]
[From the U.S. Government Publishing Office, www.gpo.gov]



[[Page 45]]




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                    FEDERAL RECEIPTS AND COLLECTIONS

========================================================================



[[Page 47]]


 
                          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)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                           Estimate
                        Source                           1998 actual -----------------------------------------------------------------------------------
                                                                          1999          2000          2001          2002          2003          2004
--------------------------------------------------------------------------------------------------------------------------------------------------------
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
                                                       -------------------------------------------------------------------------------------------------
    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)
--------------------------------------------------------------------------------------------------------------------------------------------------------

                                     

                                         Table 3-2.  CHANGES IN RECEIPTS
                                            (In billions of dollars)
----------------------------------------------------------------------------------------------------------------
                                                                            Estimate
                                               -----------------------------------------------------------------
                                                   1999       2000       2001       2002       2003       2004
----------------------------------------------------------------------------------------------------------------
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
                                               -----------------------------------------------------------------
    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
----------------------------------------------------------------------------------------------------------------
\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.


[[Page 49]]

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

[[Page 50]]

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

[[Page 73]]

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.

[[Page 74]]

  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

[[Page 75]]

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

[[Page 79]]

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

[[Page 80]]

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

[[Page 81]]

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

[[Page 82]]

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

[[Page 83]]

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.