[Analytical Perspectives]
[Federal Receipts and Collections]
[3. Federal Receipts]
[From the U.S. Government Publishing Office, www.gpo.gov]
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FEDERAL RECEIPTS AND COLLECTIONS
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3. FEDERAL RECEIPTS
Receipts (budget and off-budget) are taxes and other collections from
the public that result from the exercise of the Federal Government's
sovereign or governmental powers. The difference between receipts and
outlays determines the surplus or deficit.
The Federal Government also collects income from the public from
market-oriented activities. Collections from these activities, which are
subtracted from gross outlays, rather than added to taxes and other
governmental receipts, are discussed in the following chapter.
Growth in receipts.--Total receipts in 2001 are estimated to be
$2,019.0 billion, an increase of $62.8 billion or 3.2 percent relative
to 2000. 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 3.8 percent between 2001
and 2005, rising to $2,340.9 billion.
As a share of GDP, receipts are projected to decline from 20.4 percent
in 2000 to 19.4 percent in 2005.
Table 3-1. RECEIPTS BY SOURCE--SUMMARY
(In billions of dollars)
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Estimate
Source 1999 actual -----------------------------------------------------------------------------------
2000 2001 2002 2003 2004 2005
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Individual income taxes............................... 879.5 951.6 972.4 995.2 1,025.6 1,066.1 1,116.8
Corporation income taxes.............................. 184.7 192.4 194.8 195.4 195.7 200.0 205.9
Social insurance and retirement receipts.............. 611.8 650.0 682.1 712.2 741.7 771.3 815.3
(On-budget)......................................... (167.4) (173.3) (182.2) (189.9) (197.4) (204.7) (216.7)
(Off-budget)........................................ (444.5) (476.8) (499.9) (522.2) (544.2) (566.7) (598.6)
Excise taxes.......................................... 70.4 68.4 76.7 79.8 80.8 81.8 83.4
Estate and gift taxes................................. 27.8 30.5 32.3 34.9 36.3 38.7 37.0
Customs duties........................................ 18.3 20.9 20.9 22.6 24.3 25.7 27.9
Miscellaneous receipts................................ 34.9 42.5 39.9 41.2 43.2 52.6 54.5
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Total receipts.................................... 1,827.5 1,956.3 2,019.0 2,081.2 2,147.5 2,236.1 2,340.9
(On-budget)..................................... (1,383.0) (1,479.5) (1,519.1) (1,559.0) (1,603.2) (1,669.4) (1,742.3)
(Off-budget).................................... (444.5) (476.8) (499.9) (522.2) (544.2) (566.7) (598.6)
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Table 3-2. EFFECT ON RECEIPTS OF CHANGES IN THE SOCIAL SECURITY TAXABLE EARNINGS BASE
(In billions of dollars)
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Estimate
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2001 2002 2003 2004 2005
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Social security (OASDI) taxable earnings base increases:.
$76,200 to $80,100 on Jan. 1, 2001..................... 1.8 4.8 5.2 5.7 6.3
$80,100 to $83,700 on Jan. 1, 2002..................... ......... 1.6 4.3 4.7 5.2
$83,700 to $87,300 on Jan. 1, 2003..................... ......... ......... 1.6 4.3 4.7
$87,300 to $90,600 on Jan. 1, 2004..................... ......... ......... ......... 1.5 4.0
$90,600 to $93,900 on Jan. 1, 2005..................... ......... ......... ......... ......... 1.5
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[[Page 48]]
ENACTED LEGISLATION
Several laws were enacted in 1999 that have an effect on governmental
receipts. The major legislative changes affecting receipts are described
below.
To Extend the Tax Benefits Available With Respect to Services
Performed in a Combat Zone to Services Performed in the Federal Republic
of Yugoslavia (Serbia/Montenegro) and Certain Other Areas, and for Other
Purposes.--This Act, which was signed by President Clinton on April 19,
1999, provides the same tax relief to military personnel participating
in Operation Allied Force as that provided as a consequence of the
Executive Order that designates the Kosovo area of operations as a
combat zone. In addition, this Act extends the tax filing and payment
deadlines provided as a consequence of the Executive Order to military
personnel outside the United States who are deployed outside their duty
station as part of Operation Allied Force.
Under the Executive Order, which was issued by President Clinton on
April 13, 1999, the Kosovo area of operations, including the above
airspace, encompasses The Federal Republic of Yugoslavia (Serbia/
Montenegro), Albania, the Adriatic Sea, and the Ionian Sea above the
39th parallel. The tax benefits provided military personnel serving in
those areas include extension of deadlines for filing and paying taxes;
exemption of military pay earned while serving in the combat zone
(subject to a dollar limit for commissioned officers) from withholding
and income tax; and, exemption of toll telephone calls originating in
the combat zone from the telephone excise tax.
Miscellaneous Trade and Technical Corrections Act of 1999--This Act
makes miscellaneous technical and clerical corrections to U.S. trade
laws, corrects obsolete references, and authorizes the temporary
suspension or refund of tariffs on over 120 categories of imported
items. These items include 13 inch televisions, chemicals (some of which
are used to develop cancer and AIDS-fighting drugs), textile printing
machines, weaving machines, manufacturing equipment, certain rocket
engines, and a number of pigments and dyes. The Act also extends tariff
credits for wages paid in the production of watches in the Virgin
Islands to the production of fine jewelry. The receipt losses associated
with the tariff refunds and suspensions are offset by a provision that
clarifies the tax treatment of certain corporate restructuring
transactions, which is described below.
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 transferor's basis in the property. This gain recognition to
the transferor generally increases the basis of the transferred property
in the hands of the transferee. However, if a recourse liability is
secured by multiple assets, prior law was unclear as to 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 this provision, the
distinction between the assumption of a liability and the acquisition of
an asset subject to a liability generally is eliminated. Except as
provided in regulations, a recourse liability is 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). Except as provided in regulations, a nonrecourse liability
is treated as assumed by the transferee of any asset subject to the
liability. However, the amount of nonrecourse liability treated as
assumed is reduced by the amount of the liability that an owner of other
assets not transferred to the transferee and also subject to the
liability has agreed with the transferee to satisfy, 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
shall 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 is 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 value of all assets subject
to such nonrecourse liability. The Treasury Department has authority to
prescribe regulations necessary to carry out the purposes of the
provision, and to apply the treatment set forth in this provision where
appropriate elsewhere in the Internal Revenue Code. This provision
applies to transfers made after October 18, 1998.
Consolidated Appropriations Act for FY 2000.--This Act, which was
signed by President Clinton on November 30, 1999, makes progress on
several important fronts: it puts education first, makes America a safer
place, strengthens our effort to preserve natural areas and protect our
environment, and strengthens America's leadership role in the world.
Although most of the provisions in this Act affect Federal spending
programs, a transfer from the surplus funds of the Federal Reserve
System to the Treasury of $3.752 billion in FY 2000 affects governmental
receipts.
Ticket to Work and Work Incentives Improvement Act of 1999.--This Act,
which was signed by President Clinton on December 17, 1999, ensures that
individuals with disabilities have a greater opportunity to participate
in the workforce and in the American Dream and extends important tax
provisions. Despite these accomplishments, the President is disappointed
that this Act includes a provision for a special allowance adjustment
for student loans, that it delays the implementation of a proposed
Department of Health
[[Page 49]]
and Human Services final rule on the distribution of human organs for
transplantation, and that the revenue losses are not fully offset. The
major provisions of this Act affecting governmental receipts are
described below.
Expired and Expiring Provisions
Extend minimum tax relief for individuals.--Certain nonrefundable
personal tax credits (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, prior law allowed nonrefundable personal tax credits to
offset regular income tax liability in full (as opposed to only the
amount by which the regular tax liability exceeded the tentative minimum
tax). In addition, for taxable year 1998, the additional child credit
provided to families with three or more qualifying children was not
reduced by the amount of the individual's minimum tax liability. This
Act extends the provision that allows the nonrefundable personal tax
credits to offset regular income tax liability in full to taxable years
beginning in 1999. For taxable years beginning in 2000 and 2001 the
nonrefundable personal credits may offset both the regular tax and the
minimum tax. In addition, for taxable years beginning in 1999, 2000, and
2001, the additional child credit provided to families with three or
more qualifying children will not be reduced by the amount of the
individual's minimum tax liability.
Extend and modify research and experimentation tax credit.--The 20-
percent tax credit for certain research and experimentation expenditures
is extended to apply to qualifying expenditures paid or incurred during
the period July 1, 1999 through June 30, 2004. In addition, effective
for taxable years beginning after June 30, 1999, the credit rate
applicable under the alternative incremental research credit is
increased by one percentage point per step, and the definition of
qualified research is expanded to include research undertaken in Puerto
Rico and possessions of the United States. Under this Act, credits
attributable to the period beginning on July 1, 1999 and ending on
September 30, 2000 may not be taken into account in determining any
amount required to be paid for any purpose under the Internal Revenue
Code prior to October 1, 2000. On or after October 1, 2000, such credits
may be taken into account through the filing of an amended return, an
application for expedited refund, an adjustment of estimated taxes, or
other means that are allowed by the Internal Revenue Code. Similarly,
research credits that are attributable to the period beginning on
October 1, 2000 and ending on September 30, 2001 may not be taken into
account in determining any amount required to be paid for any purpose
under the Internal Revenue Code prior to October 1, 2001.
Extend 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). For taxable years beginning in 1998 and
1999, certain income derived in the active conduct of a banking,
financing, insurance, or similar business is 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 two years, with very minor modifications, to apply to taxable years
beginning in 2000 and 2001.
Extend suspension of net income limitation on percentage depletion
from marginal oil and gas wells.--Taxpayers are allowed to recover their
investment in oil and gas wells through depletion deductions. For
certain properties, deductions may be determined using the percentage
depletion method; however, in any year, the amount deducted generally
may not exceed 100 percent of the net income from the property. For
taxable years beginning after December 31, 1997 and before January 1,
2000, domestic oil and gas production from ``marginal'' properties is
exempt from the 100-percent of net income limitation. This Act extends
the exemption to apply to taxable years beginning after December 1, 1999
and before January 1, 2002.
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. This Act extends the credit to apply to individuals who
begin work on or after July 1, 1999 and before January 1, 2002.
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
[[Page 50]]
in the first year of employment and 50 percent of the first $10,000 of
eligible wages in the second year of employment. Under this Act the
credit is extended to apply to individuals who begin work on or after
July 1, 1999 and before January 1, 2002.
Extend exclusion for employer-provided educational assistance.--
Certain amounts paid by an employer for educational assistance provided
to an employee 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, which is limited to undergraduate courses, is extended to
apply to courses beginning after May 31, 2000 and before January 1,
2002.
Extend and modify wind and biomass tax credit and expand eligible
biomass sources.--Taxpayers are provided a 1.5-cent-per-kilowatt-hour
tax credit, adjusted for inflation after 1992, for electricity produced
from wind or ``closed-loop'' biomass. Under prior law, the credit
applies to electricity produced by a facility placed in service before
July 1, 1999, and is allowable for production during the 10-year period
after a facility is originally placed in service. This Act extends the
credit to apply to facilities placed in service after June 30, 1999 and
before January 1, 2002. Electricity produced at a wind facility placed
in service during this period does not qualify for the credit, however,
if it is sold pursuant to a pre-1987 contract that has not been modified
to limit the purchaser's obligation to acquire electricity at above-
market prices. The Act also expands the credit to apply to poultry waste
facilities placed in service after December 31, 1999 and before January
1, 2002.
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, 1999, is extended through September 30, 2001. Refunds of any
duty paid between June 30, 1999 and December 17, 1999 are provided upon
request of the importer.
Extend authority to issue Qualified Zone Academy Bonds.--The Taxpayer
Relief Act of 1997 (TRA97) included a provision that allows State and
local governments 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 must be
used for teacher training, purchases of equipment, curricular
development, and rehabilitation and repairs at certain public school
facilities. Under TRA97, a nationwide total of $400 million of qualified
zone academy bonds was authorized to be issued in each of calendar years
1998 and 1999. Effective December 17, 1999, an additional $400 million
of qualified zone academy bonds is authorized to be issued in each of
calendar years 2000 and 2001. In addition, unused authority arising in
1998 and 1999 may be carried forward for up to three years and unused
authority arising in 2000 and 2001 may be carried forward for up to two
years.
Extend tax credit for first-time D.C. homebuyers.--The tax credit (up
to $5,000) provided for the first-time purchase of a principal residence
in the District of Columbia, which was scheduled to expire after
December 31, 2000, is extended to apply to residences purchased on or
before December 31, 2001.
Extend expensing of brownfields remediation costs.--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 ability to deduct such expenditures is extended
for one year, to apply to expenditures paid or incurred before January
1, 2002.
Time-Sensitive Provisions
Prohibit disclosure of advanced pricing agreements (APAs) and APA
background files.--Returns and return information, as defined by the
Internal Revenue Service (IRS), are confidential and cannot be disclosed
unless authorized by the Internal Revenue Code. In contrast, written
determinations issued by the IRS generally are available for public
inspection. The APA program is an alternative dispute resolution program
conducted by the IRS, which resolves international transfer pricing
issues prior to the filing of the corporate tax return. To resolve such
issues, the taxpayer submits detailed and confidential financial
information, business plans and projections to the IRS for
consideration. This Act confirms that APAs and related background
information are confidential return information and not written
determinations available for public inspection. Effective December 17,
1999, APAs or related background files are prohibited from being
released to the public, regardless of whether the APA was executed
before or after that date. The Treasury Department also is required to
produce an annual report that contains general and statistical
information about the APA program, and general descriptions of the APAs
concluded during the year.
Provide authority to postpone certain tax-related deadlines by reason
of year 2000 (Y2K) failures.--The Secretary of the Treasury is permitted
to postpone, on a taxpayer-by-taxpayer basis, certain tax-related
deadlines for a period of up to 90 days, if he determines that the
taxpayer has been affected by an actual Y2K related failure. In order to
be eligible for relief, the taxpayer must have made a good faith,
reasonable effort to avoid any Y2K related failures.
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, rotavirus gastroenteritis, and varicella
(chickenpox). This Act adds any conjugate vaccine against streptococcus
pneumoniae to the list of taxable vaccines, effective for vaccines sold
by a manufacturer or importer after December 17, 1999.
[[Page 51]]
Delay requirement that registered motor fuels terminals offer dyed
fuel as a condition of registration.--With limited exceptions, excise
taxes are imposed on all highway motor fuels when they are removed from
a registered terminal facility, unless the fuel is indelibly dyed and is
destined for a nontaxable use. Terminal facilities are not permitted to
receive and store nontaxed motor fuels unless they are registered with
the IRS. Prior law requires that effective July 1, 2000, in order to be
registered, a terminal must offer for sale both dyed and undyed fuel
(the ``dyed-fuel mandate''). Under this Act the effective date of the
dyed-fuel mandate is postponed until January 1, 2002.
Provide that Federal production payments to farmers are taxable in
the year received. --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 (FAIR Act), 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. The Omnibus
Consolidated and Emergency Supplemental Appropriations Act, 1999,
provided that 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.
Effective December 17, 1999, this Act provides that any unexercised
option to accelerate the receipt of any payment under a production
flexibility contract that is payable under the FAIR Act is to be
disregarded in determining the taxable year in which such payment is
properly included in gross income. Options to accelerate payments that
are enacted in the future are covered by this rule, providing the
payment to which they relate is mandated by the Fair Act as in effect on
the date of enactment of this Act.
Revenue Offset Provisions
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 adjusted gross
income (AGI) of more than $150,000 as shown on the return for the
preceding taxable year, the 100 percent of last year's liability 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 the safe harbor is 105
percent; for taxable years beginning in 2000 and 2001 the safe harbor is
106 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 the safe harbor is 108.6 percent and for
taxable years beginning in 2001 the safe harbor is 110.0 percent.
Clarify the tax treatment of income and losses on derivatives.--
Capital gain treatment applies to gain on the sale or exchange of a
capital asset. Gain or loss on other assets (stock in trade or other
types of inventory, property used in a trade or business that is real
property or subject to depreciation, accounts or notes receivable
acquired in the ordinary course of a trade or business, certain
copyrights, and U.S. government publications) generally is considered
ordinary. This Act adds three categories to the list of assets the gain
or loss on which is considered ordinary for Federal income tax purposes:
commodities derivatives held by commodities derivatives dealers, hedging
transactions, and supplies of a type regularly consumed by the taxpayer
in the ordinary course of a taxpayer's trade or business. In defining a
hedging transaction, the Act replaces the ``risk reduction'' standard
with a ``risk management'' standard with respect to ordinary property
held or certain liabilities incurred, and provides that the definition
of a hedging transaction includes a transaction entered into primarily
to mange such other risks as the Secretary of the Treasury may prescribe
in regulations. These changes are effective for any instrument held,
acquired or entered into; any transaction entered into; and any supplies
held or acquired on or after December 17, 1999.
Expand reporting of cancellation of indebtedness income.--Gross income
generally includes income from the discharge of indebtedness. If a bank,
thrift institu
[[Page 52]]
tion, 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. This Act extends these reporting requirements to additional
entities involved in the trade or business of lending (such as finance
companies and credit card companies, whether or not they are affiliated
with a financial institution), effective for discharges of indebtedness
occurring after December 31, 1999.
Limit conversion of character of income from constructive ownership
transactions with respect to partnership interests.--A pass-thru entity,
such as a partnership, generally is not subject to Federal income tax.
Instead, each owner includes his/her share of a pass-thru entity's
income, gain, deduction or credit in his/her own taxable income. The
character of the income generally is determined at the entity level and
flows through to the owners. 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. This Act treats 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,
an interest charge is imposed on the amount of gain that is treated as
ordinary income. These changes are effective with respect to
transactions entered into on or after July 12, 1999. Generally any
contract, option or any other arrangement that is entered into or
exercised on or after that date, which extends or otherwise modifies the
terms of a transaction entered into prior to such date, will be treated
as a transaction entered into on or after July 12, 1999.
Extend and modify qualified transfers of excess pension assets used
for retiree health benefits.--A pension plan may provide medical
benefits to retired employees through a section 401(h) account that is a
part of the pension plan. Qualified transfers of excess assets of a
defined benefit pension plan (other than a multiemployer plan) to a
section 401(h) account are permitted, subject to amount and frequency
limitations, use requirements, deduction limitations, and vesting and
minimum benefit requirements. This Act extends the ability of employers
to transfer excess defined benefit pension plan assets to 401(h)
accounts through December 31, 2005. In addition, effective with respect
to qualified transfers made after December 17, 1999, the minimum benefit
requirement is replaced with a minimum cost requirement.
Modify 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. This Act generally prohibits the use of the installment method
of accounting for dispositions of property that would otherwise be
reported for Federal income tax purposes using an accrual method of
accounting. The present-law exceptions regarding the availability of the
installment method for use by cash method taxpayers, for dispositions of
property used or produced in the trade or business of farming, and for
dispositions of timeshares or residential lots are not affected by this
change. This Act also modifies the pledge rule to provide that entering
into any arrangement that gives the taxpayer the right to satisfy an
obligation with an installment note will be treated in the same manner
as the direct pledge of the installment note. These changes are
effective with respect to sales or other dispositions entered into on or
after December 17, 1999.
Deny charitable contribution deduction for transfers associated with
split-dollar insurance arrangements.--A taxpayer who itemizes deductions
generally is allowed to deduct charitable contributions paid during the
taxable year. The amount of the deduction allowable for a taxable year
with respect to any charitable contribution depends on the type of
property contributed, the type of organization to which the property is
contributed, and the income of the taxpayer. In general, to be
deductible as a charitable contribution, a payment to charity must be a
gift made without receipt of adequate consideration and with donative
intent. Under a charitable split-dollar insurance arrangement, a
taxpayer typically transfers funds to a charity with the understanding
that the charity will use the funds to pay premiums on a cash value life
insurance policy that benefits both the charity and members of the
transferor's family, either directly or indirectly through a family
trust or partnership. This Act eliminates such abuses of the charitable
contributions deduction by denying a charitable contribution deduction
for any transfer to a charity in connection with a charitable split-
dollar insurance transaction. Specifically, the denial of the deduction
applies if, in connection with the transfer, the charity directly or
indirectly pays, or has previously paid, any premium on any ``personal
benefit contract'' with respect to the transferor, or there is an
understanding or expectation that any person will directly or indirectly
pay any premium on any ``personal benefit contract'' with respect to the
transferor. A personal benefit contract with respect to the transferor
is any life insurance, annuity, or endowment contract for whom the
direct or indirect beneficiary under the contract is the transferor, any
member of the transferor's family
[[Page 53]]
or any other person (other than a charitable organization) designated by
the transferor. The Act also imposes an excise tax on any participating
charity equal to the amount of any premiums paid by the charity on such
a ``personal benefit contract'' in connection with a charitable split-
dollar insurance transaction. The deduction is denied for any transfers
after February 8, 1999 and the excise tax applies to premiums paid after
December 17, 1999.
Require basis adjustments when a partnership distributes certain stock
to a corporate partner.--Under prior law, generally no gain or loss was
recognized on the receipt by a corporation of property distributed in
complete liquidation of a subsidiary corporation in which it owned 80-
percent of the stock. The basis of property received by the distributee
in such a liquidation was the same as it was in the hands of the
subsidiary. This Act provides for a reduction in basis of the assets of
a corporation if stock in that corporation is distributed by the
partnership 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. The amount of the reduction generally equals the amount of
the excess of the partnership's adjusted basis in the stock of the
distributed corporation immediately before the distribution, over the
corporate partner's basis in that stock immediately after the
distribution, subject to certain limitations. The corporate partner must
recognize long-term capital gain to the extent the amount of the basis
reduction exceeds the basis of the property of the distributed
corporation. This change generally is effective for distributions made
after July 14, 1999, except that in the case of a corporation that is a
partner in a partnership on July 14, 1999, the provision is effective
for distributions by that partnership to the corporation after December
17, 1999 (or, for a corporation that so elects, distributions after June
30, 2001).
Modify rules relating to real estate investment trusts (REITs).--REITs
generally are restricted to owning passive investments in real estate
and certain securities. Under prior law, no single corporation could
account for more than five percent of the total value of a REIT's
assets, and a REIT could not 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 could consist of subsidiaries that conduct otherwise
impermissible activities. Under this Act, the 10-percent vote test is
changed to a 10-percent ``vote or value'' test, meaning that a REIT
cannot own more than 10 percent of the outstanding voting securities or
more than 10 percent of the total value of securities of a single
issuer. In addition, taxable REIT subsidiaries owned by a REIT cannot
represent more than 20 percent of the value of a REIT's assets. For
purposes of the 10-percent value test, securities are generally defined
to exclude safe harbor debt owned by a REIT. In addition, an exception
to the limitation on ownership of securities of a single issuer applies
in the case of a ``taxable REIT subsidiary'' that meets certain
requirements. The Act also provides rules for the operation of hotels
and health care facilities; defines ``independent contractor'' for
certain purposes; modifies REIT distribution requirements to conform to
the rules for regulated investment companies (RICs); modifies earnings
and profits rules for RICs and REITs; and replaces the prior law
adjusted basis comparison with a fair market comparison, in determining
whether certain rents from personal property exceed a 15-percent limit.
These provisions generally are effective for taxable years beginning
after December 31, 2000, with transition for certain REIT holdings and
leases in effect on July 12, 1999.
Modify estimated tax rules for closely held REITs.--If a person has a
direct interest or a partnership interest in income-producing assets
that produce income throughout the year, that person's estimated tax
payments generally must reflect the quarterly amounts expected from the
asset. However, a dividend distribution of earnings from a REIT is
considered for estimated tax purposes when the dividend is paid. To take
advantage of this deferral of estimated taxes, some corporations have
established closely held REITS that may make a single distribution for
the year, timed such that it need not be taken into account under the
estimated tax rules as early as would be the case if the assets were
directly held by the controlling entity. Effective for estimated tax
payments due on or after November 15, 1999, with respect to a closely
held REIT, this Act provides that any person owning at least 10 percent
of the vote or value of the REIT is required to accelerate the
recognition of year-end dividends attributable to the closely held REIT.
Other Provisions
Simplify foster child definition under the earned income tax credit
(EITC).--This Act clarifies the definition of foster child for purposes
of claiming the EITC. Effective for taxable years beginning after
December 31, 1999, 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.
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 IRS before
the tax filing date for their second year of work in the ministry. This
Act provides an opportunity for members of the clergy to revoke their
exemptions from Social Security and Medicare coverage during a 2-year
period beginning January 1, 2000.
[[Page 54]]
ADMINISTRATION PROPOSALS
The President's plan targets tax relief to provide assistance in
obtaining higher education for working families, to relieve poverty and
revitalize lower-income communities, and to make health care more
affordable. The President's plan also provides relief from the marriage
penalty and provides child-care assistance, promotes retirement savings,
provides relief from the alternative minimum tax and other
simplifications of the tax laws, encourages philanthropy, and offers
assistance in bridging the digital divide. The President's plan also
contains measures that will curtail the proliferation of corporate tax
shelters, restrict the use of overseas tax havens, and close other
loopholes and tax subsidies.
PROVIDE TAX RELIEF
Expand Educational Opportunities
Provide College Opportunity tax cut--Under current law, individuals
may claim a Lifetime Learning credit equal to 20 percent of qualified
tuition and related expenses up to $5,000 (increasing to $10,000 in
2003) incurred during the year for post-secondary education for the
taxpayer, the taxpayer's spouse, or one or more dependents. The credit
phases out for taxpayers filing joint returns with modified AGI from
$80,000 to $100,000, and $40,000 to $50,000 for single taxpayers. The
phase-out ranges will be adjusted for inflation occurring after 2000. To
further assist taxpayers in obtaining post-secondary education
throughout their lifetimes, the Administration proposes that the
Lifetime Learning credit rate be increased to 28 percent. In addition,
the phase-out range for the credit would be increased to $100,000 to
$120,000 of modified AGI for joint returns and $50,000 to $60,000 of
modified AGI for single taxpayers. To guarantee that all eligible
taxpayers receive the full value of this education assistance, taxpayers
may elect to deduct qualified tuition and related expenses instead of
claiming the credit.
Provide incentives for public school construction and modernization.--
The Administration proposes to institute a new program of Federal tax
assistance for public elementary and secondary school construction or
rehabilitation. 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 2001
and 2002. In addition, $200 million of qualified school modernization
bonds in each of 2001 and 2002 would be allocated for the construction
and renovation of Bureau of Indian Affairs funded schools. Holders of
these bonds would receive annual Federal income tax credits, set
according to market interest rates by the Treasury Department, in lieu
of interest. Issuers would be responsible for repayment of principal.
These qualified school modernization bonds would be similar to qualified
zone academy bonds (QZABs), created by TRA97 and extended by the Ticket
to Work and Work Incentives Improvement Act of 1999. QZABs allow bonds
to be issued for certain public schools with the interest on the bonds
effectively paid by the Federal government in the form of an annual
income tax credit. The proceeds of these bonds can be used for teacher
training, purchases of equipment, curricular development, and
rehabilitation and repair of the school facilities. The Administration
proposes to authorize the issuance of additional QZABs of $1.0 billion
in 2001 and $1.4 billion in 2002, and to allow the proceeds of these
bonds also to be used for school construction.
Expand exclusion for employer-provided educational assistance to
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 January 1, 2002. The exclusion
previously applied to graduate courses that began before July 1, 1996.
The Administration proposes to reinstate the exclusion for graduate
education for courses beginning on or after July 1, 2000 and before
January 1, 2002.
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 AGI 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,
2000.
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 pe
[[Page 55]]
riod 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, 2000.
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 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 proposal would be
effective for awards received after December 31, 2000.
Provide Poverty Relief and Revitalize Communities
Increase and simplify the Earned Income Tax Credit (EITC).--Low- and
moderate-income workers may be eligible for the EITC. For every dollar a
low-income worker earns up to a limit, between 7 and 40 cents are
provided as a tax credit. The applicable credit rate depends on the
presence and number of children in the worker's family. Above $13,030
($5,930 if the taxpayer does not reside with children), the size of the
tax credit is gradually phased out. Although the EITC lifts millions out
of poverty each year, poverty among children living in larger families
remains at unacceptably high levels. Because the credit initially
increases as income rises, the EITC rewards marriage for very low-income
workers. But the EITC also causes marriage penalties among two-earner
couples whose income falls in or above the credit's phase-out range.
Further, while the EITC has been shown, on net, to increase work effort,
phasing out the credit results in high marginal tax rates for recipients
in the phase-out range. To address these problems, the Administration
proposes that the credit rate be increased from 40 percent to 45 percent
for families with three or more children. If both spouses work and earn
at least $725, the credit would begin to phase out at $14,480 ($7,380 if
the couple does not reside with children). For taxpayers with two or
more children, the phase-out rate would be reduced from 21.06 percent to
19.06 percent.
Under current law, nontaxable earned income, such as 401(k)
contributions, is included in earned income for purposes of calculating
the EITC. To encourage retirement savings, simplify the calculation of
earned income, and improve compliance, the Administration is proposing
that these nontaxable forms of income would no longer count toward
eligibility for the EITC. The proposal would be effective for taxable
years beginning after December 31, 1999.
A proposed technical correction would clarify that taxpayers are
eligible to receive the small credit for workers without qualifying
children, if they cannot claim the credit for workers with children
because their child does not have a social security number. The proposed
change will also clarify that taxpayers may not receive any credit (even
the small credit for workers without qualifying children), if their
child is not taken into account because another taxpayer who may claim
the child has higher modified AGI.
Increase and index low-income housing tax credit per-capita cap.--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 the first-year credits that can be awarded in
each State is currently limited to $1.25 per capita. That limit has not
been changed since it was established in 1986. The Administration
proposes to increase the annual State limitation to $1.75 per capita
effective for calendar year 2001 and to index that amount for inflation,
beginning with calendar year 2002. The proposed increases 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 best meet specific needs.
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 would be required to use the investment
proceeds to provide capital to businesses located in low-income
communities. During the period 2001-2005, the Treasury Department would
authorize selected community development investment entities to issue
$15 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
[[Page 56]]
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, 2000.
Expand Empowerment Zone (EZ) tax incentives and authorize additional
EZs.--The Omnibus Budget Reconciliation Act of 1993 (OBRA93) authorized
a Federal demonstration project in which nine EZs and 95 empowerment
communities were designated in a competitive application process. Among
other benefits, businesses located in the nine original EZs are eligible
for four Federal tax incentives: an employment wage credit; an
additional $20,000 per year of section 179 expensing; a new category of
tax-exempt private activity bonds; and ``brownfields'' expensing for
certain environmental remediation expenses. The Taxpayer Relief Act of
1997 (TRA97) authorized the designation of two additional EZs, which
generally are eligible for the same tax incentives that are available
within the EZs authorized by OBRA93. In addition, TRA97 authorized the
designation of another 20 EZs (so-called ``Round II EZs'') that are
eligible for the same tax incentives (other than the employment wage
credit) available in the 11 other EZs. To date, the EZ program has
promoted significant economic development, but these communities still
do not fully share in the nation's general prosperity. Therefore, the
Administration proposes that the EZ program be extended and strengthened
by making the employment wage credit available in all existing 31 EZs
through 2009. Furthermore, the Administration proposes that, beginning
in 2001, an additional $35,000 (rather than $20,000) per year of section
179 expensing be allowed in all EZs, and that enhanced tax-exempt
financing benefits for private business activities be available in all
EZs. (As described below, the Administration's budget proposes a
permanent extension of the ``brownfields'' expensing for EZs and other
targeted areas.) Finally, the Administration proposes that an additional
10 EZs be designated as of January 1, 2002. Businesses located within
these 10 new EZs will be eligible for the full range of tax incentives
available in the other EZs.
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 governments (including U.S. possessions and Indian
tribal governments) to issue tax credit bonds (similar to existing
Qualified Zone Academy Bonds) to finance projects to protect open spaces
or otherwise to 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; improving parks; and reestablishing
wetlands. A total of $2.15 billion of bond authority would be authorized
for each of the five years beginning in 2001. The Environmental
Protection Agency, in consultation with other agencies, would allocate
the bond authority 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 would receive Federal income tax credits in
lieu of interest.
Permanently extend the expensing of brownfields remediation costs.--
Under TRA97, taxpayers can elect to treat certain environmental
remediation expenditures that would otherwise be chargeable to capital
accounts as deductible in the year paid or incurred. The provision does
not apply to expenditures paid or incurred after December 31, 2001. The
Administration proposes that the provision be made permanent.
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.
[[Page 57]]
Bridge the Digital Divide
Encourage sponsorship of qualified zone academies and technology
centers.--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 and
technology centers, a tax credit would be provided equal to 50 percent
of the amount of corporate sponsorship payments made to a qualified zone
academy, or a public library or community technology center, located in
(or adjacent to) a designated empowerment zone or enterprise community.
The credit would be available for corporate cash contributions, but only
if a credit allocation has been made with respect to the contribution by
the local governmental agency with responsibility for implementing the
strategic plan of the empowerment zone or enterprise community. Up to $8
million of credits could be allocated with respect to each of the
existing 31 empowerment zones (and each of the 10 additional empowerment
zones proposed to be designated under the Administration's budget); and
up to $2 million of credits could be allocated with respect to each of
the designated enterprise communities. The credit would be subject to
the current-law general business credit rules, and would be effective
for sponsorship payments made after December 31, 2000.
Extend and expand enhanced deduction for corporate donations of
computers.--The current-law enhanced deduction for contributions of
computer technology and equipment for elementary or secondary school
purposes is scheduled to expire for taxable years beginning after
December 31, 2000. The Administration proposes extending this provision
through June 30, 2004. In addition, to promote access of all persons to
computer technology and training, the enhanced deduction would be
expanded to apply to contributions of computer equipment to a public
library or community technology center located in a designated
empowerment zone or enterprise community, or in a census tract with a
poverty rate of 20 percent or more.
Provide tax credit for workplace literacy, basic education, and basic
computer skills training.--Under current law, employers may deduct the
costs of providing workplace literacy, basic education, and basic
computer skill programs to employees, but no tax credits are allowed for
any employer-provided education. As a result, employers lack sufficient
incentive to provide basic education 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, basic education, or basic computer training for their eligible
employees to claim a credit against Federal income taxes equal to 20
percent of the employer's qualified expenses, up to a maximum credit of
$1,050 per participating employee. Qualified education would be limited
to basic instruction at or below the level of a high school degree,
English literacy instruction, or basic computer skills. Eligible
employees in basic education or computer training 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, 2000.
Make Health Care More Affordable
Assist taxpayers with 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 $3,000. 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 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 credit would be phased in at $1,000 in
2001, $1,500 in 2002, $2,000 in 2003, $2,500 in 2004, and $3,000 in 2005
and subsequent years.
Encourage COBRA continuation coverage.--Current law provides a tax
preference for employer-provided group health plans, but not for
individually purchased health insurance coverage except to the extent
that medical expenses exceed 7.5 percent of AGI or the individual has
self-employment income. The Administration proposes to make health
insurance more affordable for workers in transition and for retiring
workers by providing a nonrefundable tax credit for the purchase of
COBRA coverage. Individuals would receive a 25-percent tax credit for
their own contributions towards COBRA coverage. The proposal would be
effec
[[Page 58]]
tive for taxable years beginning after December 31, 2001.
Provide tax credit for Medicare buy-in program.--The Administration
proposes to make health insurance more affordable for older workers,
retirees and displaced workers by providing a 25-percent nonrefundable
tax credit for individuals purchasing health insurance through a newly
created Medicare buy-in program. Under a separate proposal, all
individuals at least sixty-two years of age and under sixty-five years
of age, and workers displaced from their jobs who are at least fifty-
five years of age and under sixty-two years of age, would be eligible to
buy into Medicare. Taxpayers would be eligible for a credit of 25
percent of premiums paid under the Medicare buy-in program prior to age
sixty-five. The proposal would be effective for taxable years beginning
after December 31, 2001.
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 proposed long-term care and disabled worker tax credits. The
credit would be phased out in combination with the child credit and the
proposed long-term care credit for taxpayers with 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, 2000.
Provide tax relief to encourage small business health plans.--Small
businesses generally face higher costs in establishing and operating
health plans than do larger employers. Health benefit purchasing
coalitions provide an opportunity for small businesses to offer a
greater choice of health plans to their workers and to purchase health
insurance at a reduced cost. The formation of these coalitions, however,
has been hindered by limited access to capital. The Administration
proposes to establish a temporary, special tax rule in order to
facilitate the formation of health benefit purchasing coalitions. The
special rule would facilitate private foundation grants and loans to
fund initial operating expenses of qualified coalitions by treating such
grants and loans as being made for exclusively charitable purposes. The
special foundation rule would apply to grants and loans made prior to
January 1, 2009 for initial operating expenses incurred prior to January
1, 2011. In addition, in order to encourage the use of qualified
coalitions by small businesses, the Administration proposes a temporary
tax credit for small employers that currently do not provide health
insurance to their workforces. The credit would equal 20 percent of
small employer contributions to employee health plans purchased through
a qualified coalition. The credit would be available to employers with
at least two, but not more than 50 employees, counting only employees
with annual compensation of at least $10,000 in the prior calendar year.
The maximum per policy credit amount would be $400 per year for
individual coverage and $1,000 per year for family coverage. The credit
would be allowed with respect to employer 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 proposed credit would be effective for
taxable years beginning after December 31, 2000 for health plans
established before January 1, 2009.
Encourage development of vaccines for targeted diseases.---The
proposed tax credit would encourage development of new vaccines for
diseases that occur primarily in developing countries by providing a
market for successful vaccines. The proposal would provide a credit
against Federal income taxes for sales of a qualifying vaccine to a
qualifying organization. The credit would equal 100 percent of the
amount paid by the qualifying organization. A qualifying organization
would be a nonprofit organization that purchases and distributes
vaccines for developing countries. A qualifying vaccine would be a
vaccine for targeted diseases that receives FDA approval as a new drug
after the date of enactment. The targeted diseases would include
malaria, tuberculosis, HIV/AIDS, and certain other infectious diseases.
The credit would be available only if a credit allocation has been made
with respect to the sale of a qualifying vaccine to a qualifying
organization by the U.S. Agency for International Development (AID). For
the period 2002 - 2010, AID would be allowed to designate up to $1
billion of sales as eligible for the credit ($100 million per year for
2002 through 2006 and $125 million per year for 2007 through 2010).
Unallocated amounts for any year would be carried over and available for
allocation in the ten following years.
Strengthen Families and Improve Work Incentives
Provide marriage penalty relief and increase standard deduction.--
Under current law, the standard deduction for single filers is estimated
to be $4,500 in 2001. For married couples who file joint individual
returns, the standard deduction will be $7,550, which is less than the
combined amount for two single individuals. To reduce marriage
penalties, the Administration proposes to increase the standard
deduction for two-earner couples to double the amount of the standard
[[Page 59]]
deduction for single filers. The increase would be phased in evenly over
five years. When fully phased in, the increase (at 2001 levels) would be
$1,450. In addition, beginning in 2005, the Administration proposes to
increase the standard deduction by $250 for single filers, $350 for
heads of household, and $500 for joint filers.
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 AGI of $10,000 or less) to 20 percent (for taxpayers with
AGI above $28,000). The Administration believes that the maximum credit
rate is too low. Moreover, because it is nonrefundable, 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 make the credit
refundable. Under the proposal, the maximum credit rate would be
increased from 30 percent to 40 percent in 2003, and to 50 percent in
2005 and subsequent years. The credit would become refundable in 2003.
Eligibility for the maximum credit rate would be extended to taxpayers
with AGI of $30,000 or less. The credit rate would be reduced by one
percentage point for every $1,000 of AGI above $30,000 but would not be
less than 20 percent.
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 with an additional,
nonrefundable 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, 2000.
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, 2000.
Promote Expanded Retirement Savings, Security, and Portability
The Administration proposes further expansions of retirement savings
incentives, including initiatives that would expand retirement plan
coverage and other workplace-based savings opportunities, particularly
for moderate- and lower-income workers not currently covered by
employer-sponsored plans. Many of the new provisions are focused on
employees of small businesses, a group that currently has low pension
coverage. Other proposals enhance the fairness of plans by improving
existing retirement plans for employers of all sizes, increase
retirement security for women, promote portability, expand workers' and
spouses' rights to know about their retirement benefits, and simplify
pension rules. These provisions generally are effective for taxable
years beginning after 2000.
Encourage Retirement Savings
The Administration proposes two major initiatives designed to
encourage retirement savings for moderate- and lower-income workers.
Establish Retirement Savings Accounts.--Current law tax incentives to
save through Individual Retirement Accounts (IRAs) and pensions provide
little impetus to saving by moderate- and lower-income workers. The
Administration's proposal would create Retirement Savings Accounts, in
which participants' voluntary contributions are matched by employers or
financial institutions. The match will be provided in the form of a tax
credit. Participation by financial institutions and taxpayers would be
voluntary. Financial institutions could also claim a $10 tax credit to
defray the administrative costs of establishing each new account.
Under the proposal, eligible taxpayers would qualify for a match.
Participants would make voluntary contributions to an account at a
participating financial institution or employer-sponsored qualified
retirement plan. Workers would receive a basic match of as much as 100
percent for up to $1,000 in contributions ($500 from 2002 to 2004). They
would also qualify for a supplemental match of up to $100 for the first
$100 contributed to the account.
The basic match phases down to 20 percent for taxpayers with AGI in
the following ranges: between $25,000 and $50,000 ($20,000 and $40,000
from 2002 to 2004) for married taxpayers filing a joint return, $18,750
to $37,500 ($15,000 to $30,000 from 2002 to 2004) for taxpayers filing a
head-of-household return, and $12,500 to $25,000 ($10,000 to $20,000
from 2002 to 2004) for single taxpayers. The supplemental match phases
out over the same income ranges. The 20 per
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cent basic match is available for taxpayers with AGI up to $80,000
($40,000 from 2002 to 2004) on joint returns, $60,000 ($30,000 from 2002
to 2004) on head-of-household returns and $40,000 ($20,000 from 2002 to
2004) on single returns.
Taxpayers with at least $5,000 in earnings (which could be joint
earnings for married taxpayers filing a joint return) and aged 25 to 60
would be eligible for the match. Withdrawals for certain special
purposes would be permitted after five years; withdrawals for other
purposes would not be permitted until retirement. The tax treatment
would be similar to that afforded deductible IRAs or contributions to
employer pensions: contributions would be excludable from income,
earnings would not be taxed, but withdrawals would be included in
taxable income.
The credits would be effective for tax years beginning after December
31, 2001.
Provide small business tax credit for automatic contributions for non-
highly compensated employees.--Small employers could claim a
nonrefundable tax credit equal to 50 percent of qualifying contributions
made on behalf of non-highly compensated employees. Qualifying
contributions are nonelective contributions to defined contribution
plans of at least one percent of pay and nonelective or matching
contributions of up to an additional two percent of pay (for a total of
three percent of pay). Alternatively, qualifying contributions could be
benefits accrued under a non-integrated defined benefit plan if
equivalent to a three-percent non-elective contribution (in accordance
with regulations that could provide simplified methods for defined
benefit plans to qualify for the credit). Contributions must be vested
at least as fast as either a three-year cliff or five-year graded
schedule, must be subject to withdrawal restrictions, and must be
allocated in proportion to pay. Credits claimed for subsequently
forfeited contributions would be subject to recapture at a rate of 35
percent. An employer could claim the credit for three years. The credit
would be effective for tax years beginning after December 31, 2001 and
ending on or before December 31, 2009.
Expand Pension Coverage for Employees of Small Business
The Administration proposes a number of other incentives to encourage
the adoption of retirement plans by small employers, generally those
that have 100 or fewer employees with $5,000 or more of compensation in
the preceding year.
Provide tax credit for plan start up and administrative expenses.--The
Administration proposes a three-year tax credit for the administrative
and retirement education expenses of any small business that sets up a
new qualified defined benefit or defined contribution plan (including a
401(k) plan), savings incentive match plan for employees (SIMPLE),
simplified employee pension (SEP), or payroll deduction IRA arrangement.
The credit would cover 50 percent of the first $2,000 in administrative
and retirement education expenses for the plan or arrangement for the
first year of the plan and 50 percent of the first $1,000 of such
expenses for each of the second and third years. The tax credit would
help promote new plan sponsorship by targeting a tax benefit to
employers adopting new plans or payroll deduction IRA arrangements,
providing a marketing tool to financial institutions and advisors
promoting new plan adoption, and increasing awareness of retirement
savings options. The credit would be available for plans established
after 1998 and before 2010.
Provide for payroll deduction IRAs.--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 saving among workers in
businesses that do not offer a retirement plan. Signing up for payroll
deduction is easy for an employee. In addition, saving is facilitated
because it becomes automatic as salary reduction contributions continue
each paycheck after an employee's initial election. Peer group
participation may also encourage employees to save more. Finally, the
favorable tax treatment of salary reductions would encourage
participation.
Provide for the SMART plan.--In addition to tax credits for qualified
retirement plans, the Administration is proposing a new small business
defined benefit type plan (the ``SMART'' plan) for calendar years
beginning after 2000. The SMART plan combines certain key features of
defined benefit plans and defined contribution plans: guaranteed minimum
retirement benefits, an option for payments over the course of an
employee's retirement years, and Pension Benefit Guaranty Corporation
insurance, together with individual account balances that can benefit
from favorable investment returns and have enhanced portability.
Enhance the 401(k) SIMPLE plan.--The Administration proposes expanding
the small business 401(k) SIMPLE plan and making it significantly more
flexible without sacrificing fairness in the allocation of contributions
to moderate- and lower-wage employees. The proposal would make three
major changes to the existing 401(k) SIMPLE plan nonelective
contribution alternative. First, non-highly compensated employees would
be permitted to contribute up to $10,500 a year. Second, the employer's
options under a 401(k) SIMPLE plan would be expanded: instead of being
required to make a two-percent nonelective employer contribution (with a
$6,000 employee contribution limit), employers could opt to make a one-
percent, two-percent, three-percent or higher nonelective employer
contribution (subject to the requirement that all eligible employees
receive the same rate of nonelective contribution). The one-percent
401(k) SIMPLE plan would allow highly compensated employees to
contribute up to $3,000 to the plan if the employer made a non-
integrated, fully vested, with
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drawal-restricted one-percent automatic contribution on behalf of all
employees. The proposal would not change the current-law two-percent
401(k) SIMPLE plan, with its $6,000 contribution limit, except to
restrict application of the $6,000 limit to highly compensated
employees, allowing others to contribute up to $10,500. In addition, as
is the case under current law with the 401(k) nonelective safe harbor,
an employer could make a three-percent (or greater) nonelective
contribution, permitting all employees, including highly compensated
ones, to contribute up to $10,500. Third, employers would have the
flexibility to wait until as late as December 1 of the year for which
the contribution is made to assess their financial situation for the
year and decide on the level of their nonelective contribution.
Eliminate IRS user fees for small business plan determination
letters.--The Administration proposes the elimination of user fees for
requests made after the date of enactment for an initial determination
letter from the IRS for a qualified retirement plan maintained by a
small business. To obtain the relief, the request must be made during
the first five plan years.
Permit certain S corporation shareholders and partners to borrow from
plans.--S corporation shareholders and partners owning less than 20
percent of the business would be able to borrow from the employer's
qualified retirement plan in which they participate under the same rules
that apply to all qualified plan participants for loans first made or
refinanced after 2000.
Enhance Fairness in Pension Plans
The Administration proposes modifications to the vesting rules, the
contribution and deduction limits, and the 401(k) safe harbor plan rules
to enhance the fairness of pensions to moderate- and lower-income
workers.
Accelerate vesting for qualified plans.--The Administration proposes
accelerating the current-law five-year (or seven-year graded) allowable
vesting schedule for qualified retirement plans. Given the mobile nature
of today's workforce, particularly of working women, there is a
significant risk that many participants will leave employment before
fully vesting in their retirement benefits. Under the proposal, plans
would be required to provide that an employee would be fully vested
after completing three years of service or would vest in annual 20
percent increments beginning after one year of service. In addition,
time off under the Family and Medical Leave Act (FMLA) of 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 would be included in service for determining retirement
plan vesting and eligibility to participate in the plan.
Modify contribution and annual addition limitations.--The deduction
limits for profit sharing plans and the percentage-of-pay limitations of
defined contribution plans would be liberalized to ensure that non-
highly compensated employees' benefits are not inappropriately limited.
The general 15-percent deduction limit for stock bonus and profit
sharing plans would be increased by the amount of elective contributions
on behalf of non-highly compensated employees participating in the plan
that exceed, in the aggregate, 15 percent of compensation otherwise paid
or accrued on behalf of such non-highly compensated employees. For
purposes of determining the employer's deduction under the combined plan
limit that applies when an employer has both a pension plan and a stock
bonus or profit sharing plan in which the same employee participates,
elective contributions on behalf of non-highly compensated employees
would be disregarded. In addition, the 15-percent-of-compensation
deduction limit would be further liberalized by treating certain salary
reduction amounts as compensation in determining the deduction limits.
The proposal also would increase the maximum allowable annual addition
for defined contribution plans from 25 percent to 35 percent of
compensation.
Expand coverage of non-highly compensated employees under 401(k) safe
harbor plans.--The Administration would modify the section 401(k)
matching formula safe harbor by requiring that, in addition to the
matching contribution, either (1) the employer make a contribution of
one percent of compensation for each eligible non-highly compensated
employee, regardless of whether the employee makes elective
contributions, or (2) the plan provide for current and newly hired
employees to be automatically enrolled in the 401(k) plan at a three-
percent contribution rate (where employees can elect other rates,
including zero contribution). The proposal would also permit nonelective
contributions to replace matching contributions in the 401(k) matching
formula safe harbor.
Simplify the definition of highly compensated employee.--The
Administration proposes to simplify the definition of highly compensated
employee by eliminating the top-paid group election. Under the
simplified definition, an employee would be treated as highly
compensated if the employee (1) was a five-percent owner at any time
during the year or the preceding year, or (2) had compensation in excess
of $80,000 (as adjusted) for the preceding year.
Clarify the division of Section 457 assets upon divorce.--To make
consistent the treatment of retirement benefits upon divorce, the
Administration proposes to extend to section 457(b) plans the qualified
domestic relations order (QDRO) regime that applies to distributions
from a qualified plan made to a spouse, former spouse or alternate
payee. Accordingly, the proposal would not tax the employee on
distributions from a section 457(b) plan made to an alternate payee
pursuant to a QDRO and also clarifies that a section 457(b)
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plan will not be treated as violating the restrictions on distributions
when it honors the terms of a QDRO.
Offer joint and 75-percent survivor annuity option.--Current law
requires certain pension plans to offer to pay pension benefits as a
joint and survivor annuity; frequently, the benefit for the 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.
Promote Retirement Savings Portability
The Administration proposes significant changes to promote the
portability and encourage the preservation of retirement savings.
Encourage pension asset preservation by default rollover to IRA.--The
direct rollover rules would be modified to encourage preservation of
retirement assets by making a direct rollover the default option for
eligible rollover distributions from a qualified retirement plan,
section 403(b) annuity or governmental section 457(b) plan. The new rule
would apply where a participant is entitled to an eligible rollover
distribution from a qualified retirement plan, 403(b) annuity or
governmental section 457(b) plan, the distribution is greater than
$1,000, and the distribution is subject to non-consensual cashout under
the plan (i.e, does not exceed $5,000 or is made after normal retirement
age). In these circumstances, the distribution would be required to be
directly rolled over to an eligible retirement plan (including an IRA),
unless the participant affirmatively elects to receive the distribution
in cash. For convenience, the rollover IRA could be designated when the
employee becomes a participant in the plan; alternatively, it could be
designated at termination of employment. If the participant fails to
designate a rollover plan or IRA and does not affirmatively elect to
receive the distribution in cash, then involuntary cashout amounts could
be transferred to an IRA designated by the payor (for the benefit of the
participant) or, at the election of the plan sponsor, retained in the
plan.
Expand permitted rollovers of employer-provided retirement savings.--
Under current law, rollovers are not allowed between qualified
retirement plans, section 403(b) tax-sheltered annuities and
governmental section 457(b) plans. The Administration proposes that an
eligible rollover distribution from a qualified retirement plan, a
section 403(b) tax-sheltered annuity, or a governmental section 457(b)
plan could be rolled over to a traditional IRA, a qualified retirement
plan, a section 403(b) annuity, or a governmental section 457(b) plan.
Amounts distributed from a governmental section 457(b) plan would be
subject to the early withdrawal tax to the extent the distribution
consists of amounts attributable to rollovers from another type of plan.
A governmental section 457(b) plan would be required to separately
account for such amounts. To facilitate the preservation of the
retirement savings of participants in governmental section 457(b) plans
and to rationalize the treatment of different types of broad-based
retirement plans, the Administration also proposes to extend the direct
rollover and withholding rules to governmental section 457(b) plans.
These plans, like qualified plans, would be required to provide written
notification to participants regarding eligible rollover distributions
(but would not be required to accept rollovers). Finally, the proposal
would allow eligible rollover distributions to be rolled over from a
qualified trust sponsored by a previous employer to a Federal employee's
Thrift Savings Plan (TSP) account.
Permit consolidation of retirement savings.--The Administration's
proposal would allow individuals to consolidate their IRA funds and
their workplace retirement savings in a single fund. Individuals who
have IRAs with deductible IRA contributions would be permitted to
transfer funds from their IRAs to their qualified defined contribution
retirement plan, 403(b) tax-sheltered annuity or governmental section
457(b) plan, provided that the retirement plan trustee could qualify as
an IRA trustee. In addition, the proposal would allow individuals to
roll over after-tax IRA or employer plan 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. Finally, surviving spouses would be
permitted to roll over distributions to a qualified plan, 403(b) annuity
or governmental section 457(b) plan.
Allow 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 457(b) plan
to purchase these credits and often lack other resources to use for this
purpose. Under the proposal, State and local government employees would
be able to use funds from these retirement savings plans to purchase
service credits through a direct transfer without first having to take a
taxable distribution of these amounts.
Allow immediate participation in Federal Thrift Savings Plan (TSP).--
Under the Administration's proposal, all waiting periods for Federal
employees' participation in TSP (including matching and nonelective
[[Page 63]]
contributions) would be eliminated for new hires and rehires.
Improve Pension Security
The Administration proposes a number of changes to improve pension
security in defined benefit plans.
Modify pension plan deduction rules.--For defined benefit plans, the
change in the full funding limitation based on current liability would
be phased in more quickly, so that this limitation would be 170 percent
of current liability for years beginning after December 31, 2003. In
addition, the ten-percent excise tax on nondeductible contributions
would not apply to the extent a contribution is nondeductible solely as
a result of the current liability full funding limit. The special
deduction rule for terminating plans would be modified so that, at plan
termination, all contributions needed to satisfy the plan's liabilities
would be immediately deductible. In the case of a plan with fewer than
100 participants, liabilities attributable to recent benefit increases
for highly compensated employees would be disregarded for this purpose.
Simplify full funding limitation for multiemployer plans.--The limit
on deductible contributions based on a specified percentage of current
liability would be eliminated for multiemployer defined benefit plans.
Therefore, the annual deduction for contributions to such a plan would
be limited to the amount by which the plan's accrued liability exceeds
the value of the plan's assets.
Modify defined benefit limit rules for multiemployer plans.--Defined
benefit limits applicable to multiemployer defined benefit plans would
be modified to eliminate the 100-percent-of-compensation limit (but not
the $135,000 limit) for such plans. In addition, the special early
retirement provisions for determining the defined benefit limit that
currently apply to defined benefit plans sponsored by governments, tax-
exempt organizations and merchant marine would be expanded to include
multiemployer plans. Finally, the rule requiring aggregation of benefits
provided from a single employer for purposes of the defined benefit
limit would be modified so as not to require aggregation of a
multiemployer defined benefit plan and a single employer defined benefit
plan for purposes of the 100-percent-of-compensation limit.
Increase Disclosure and Right to Know
The Administration proposes to improve disclosure to workers and their
spouses.
Improve disclosure for plan amendments that significantly reduce
future benefit accruals.--The Administration's proposal would strengthen
the existing disclosure requirements that apply when a pension plan is
amended to significantly reduce the rate of future benefit accrual. The
proposal would require that the notice summarize the important terms of
the amendment, including identification of the effective date of the
amendment, a statement that the amendment is expected to significantly
reduce the rate of future benefit accrual, a general description of how
the amendment significantly reduces the rate of future benefit accrual,
and a description of the class or classes of participants to whom the
amendment applies. Participants must receive the notice at least 45 days
before the effective date of the plan amendment. If the plan has at
least 100 active participants, the plan administrator would also be
required to provide affected participants an enhanced advance notice of
the amendment that describes, and illustrates using specific examples,
the impact of the amendment on representative affected participants; to
make available the formulas and factors used in those examples in order
to permit similar calculations to be made; and to make available a
follow-up individualized benefit statement estimating the participant's
projected retirement benefits. Regulations could exempt certain
amendments, such as amendments that do not make a fundamental change in
a plan's formula.
Pension ``right-to-know'' proposals.--The Administration's proposal
would 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.
Provide AMT Relief for Families and Simplify the Tax Laws
Provide adjustments for personal exemptions and the standard deduction
in the individual alternative minimum tax (AMT).--The Administration is
concerned that the AMT imposes financial and compliance burdens upon
taxpayers that have few preference items and were not the originally
intended targets. In particular, the Administration is concerned that
the individual AMT may act to erode the benefits of dependent personal
exemptions and standard deductions that are intended to provide relief
for middle-income taxpayers--especially those with larger families. For
example, under current law, a couple with five children and $70,000 of
income that claims the standard deduction would be subject to the AMT in
2000. In response, the Administration proposes to phase out the tax
preference status of dependent exemptions under the AMT; that is, when
fully phased in, claiming children as personal exemptions on a tax
return would not cause a taxpayer to be subject to the AMT. For tax
years 2000 through 2007, only the first two dependent exemptions would
be AMT preference items; in 2008 and 2009, only the first exemption
would be a preference; in 2010 and thereafter, dependent exemptions
would no longer be treated as an AMT preference. The Administration also
proposes to allow taxpayers who claim the standard deduction for regular
income tax purposes to claim the same standard deduction for AMT
purposes for tax years 2000 and 2001. That provi
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sion would complement the provision enacted in 1999 that allows the use
of personal credits against the AMT through 2001.
Simplify and increase standard deduction for dependent filers.--
Currently, the standard deduction for tax filers who can be claimed as
dependents by another taxpayer is the smaller of the standard deduction
for single taxpayers ($4,400 for tax year 2000) or the special standard
deduction for dependent filers. The special standard deduction is the
larger of (1) $700 (for tax year 2000) or (2) the individual's earned
income plus $250 (for tax year 2000). The current provision requires
dependents to file a tax return if they have at least $250 of interest
and dividends from their savings and their earnings plus income from
savings is at least $700. To simplify the standard deduction and
increase it for dependent filers, the Administration proposes that,
beginning in 2000, the standard deduction for dependent filers would be
the individual's earned income plus $700 (indexed after 2000), but not
more than the regular standard deduction. This proposal would reduce the
number of dependent filers required to file a tax return by 400,000 and
simplify filing for other dependents with earned income.
Replace support test with residency test (limited to children).--Under
current law, taxpayers must provide over half the support of individuals
claimed as dependents on their tax return. Under the proposal, taxpayers
would be allowed to claim their children as dependents by meeting a
residency test instead of a support test. If the child is 18 or younger
(23 or younger if a full-time student) and is the taxpayer's son,
daughter, stepchild, or grandchild, then the support test may be waived
if the taxpayer lives with the child for over half the year. A twelve-
month test would apply to foster children. If more than one taxpayer
could claim the child as a dependent under the proposed rule, the
taxpayer with the highest AGI would be entitled to the dependency
exemption. The proposal would be effective for taxable years beginning
after December 31, 2000.
Index maximum exclusion for capital gains on sale of principal
residence.--Under current law, taxpayers can generally exclude up to
$250,000 ($500,000 for married taxpayers filing joint returns) of gain
on the sale of a principal residence. To be eligible for the full
exclusion, the taxpayer must have owned the residence and occupied it as
a principal residence for at least two of the five years preceding the
sale. A taxpayer may claim the deduction only once in any two-year
period. Under the proposal, the maximum exclusion amounts would be
indexed for inflation effective January 1, 2001. The proposal will
prevent inflation from subjecting more taxpayers to tax when they sell
their homes, and will prevent more taxpayers from having to maintain
complex records regarding the cost of their homes.
Provide tax credit to encourage electronic filing of individual income
tax returns.--Under current law, tax return preparation costs of
individuals, including any costs of electronic filing, may be deducted
only by taxpayers who itemize deductions and then only to the extent
that such costs, in combination with most other miscellaneous itemized
deductions, exceed two percent of AGI. The proposal would provide a
temporary, refundable tax credit for the electronic filing of individual
income tax returns. The credit would be for tax years 2001 through 2006
and would be $10 for each electronically filed return, and $5 for each
TeleFile return (which are filed by entering information through the
keypads of telephones). The credit would encourage taxpayers to try
electronic return or Telefile submission, which reduces taxpayer errors
and the need for subsequent contacts between the taxpayer and the IRS
and which permits taxpayers to receive their tax refunds faster. The
credit would help the IRS achieve the goal set in the 1998 IRS
Restructuring and Reform Act of having 80 percent of 2006 returns filed
electronically. No later than tax year 2002, the IRS would be required
to offer one or more options to the public, through contract
arrangements with the private sector, for preparing and filing
individual income tax returns over the Internet at no cost to the
taxpayer.
Clarify the tax treatment of disabled workers in a sheltered
workshop.--The Administration's proposal would provide a limited
exclusion from the definition of ``employment'' for certain services
rendered by disabled individuals in a sheltered workshop program
effective the date of enactment. The exclusion would be limited to
service (1) performed for a period of no more than 18 months under a
minimum wage exemption certificate issued by the Department of Labor and
(2) provided in a sheltered workshop operated by a section 501(c)(3)
organization or a State or local government. However, organizations
could voluntarily agree to provide coverage, pursuant to an agreement
with the Social Security Administration. Corresponding changes would be
made to the Social Security Act.
Simplify, retarget and expand expensing for small business.--In place
of depreciation, a taxpayer with a sufficiently small amount of annual
investment may elect to deduct up to $20,000 of the cost of qualifying
property (generally depreciable tangible property) placed in service in
taxable year 2000. The deductible amount rises to $24,000 in 2001 and
2002, and to $25,000 in 2003 and subsequent taxable years. The
Administration proposes to increase the amount of investment that can be
expensed to $25,000 in taxable year 2001; thereafter, this amount would
be increased for inflation in increments of $1,000. In addition, the
Administration proposes certain modifications to better target the
applicability of expensing, to allow the deduction to be claimed at the
entity level for flow-through businesses, and to make certain computer
software eligible for expensing.
[[Page 65]]
Provide optional Self-employment Contributions Act (SECA)
computations.--Self-employed individuals currently may elect to increase
their self-employment income for purposes of obtaining social security
coverage. Current law provides more liberal treatment for farmers as
compared to other self-employed individuals. The Administration proposes
to extend the favorable treatment currently accorded to farmers to other
self-employed individuals. The proposal would be effective for taxable
years beginning after December 31, 2000.
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.--TRA97 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, 1999.
Provide interest treatment for dividends paid by certain 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 complications
now associated with the structuring of vehicles for foreign investment
in U.S. debt securities. The proposal would be effective for mutual fund
taxable years beginning after the date of enactment.
Expand declaratory judgment remedy for noncharitable organizations
seeking determinations of tax-exempt status. --Under current law,
organizations seeking tax-exempt status as charities 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, 2000.
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.
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Modify translation of foreign withholding taxes by accrual basis
taxpayers.--Under current law, taxpayers who take foreign income taxes
into account when accrued generally are required to translate such taxes
into dollars by using the average exchange rate for the taxable year to
which such taxes relate. This rule was intended to be a simplification
measure that would reduce the need for accrual basis taxpayers to
redetermine the amount of foreign tax credits claimed with respect to
foreign taxes accrued prior to the date of payment. This rule may not
clearly reflect income, however, in the case of foreign withholding
taxes paid by an accrual basis taxpayer, because such taxes are never
accrued prior to the date the tax is paid (regardless of the taxpayer's
method of accounting). Moreover, certain taxpayers that receive income
subject to withholding taxes (such as regulated investment companies
with a taxable year that differs from the calendar year) may find it
impossible to comply with current law. The proposal would provide that
foreign withholding taxes are to be translated at the spot rate on the
date of payment, regardless of the method of accounting of the taxpayer.
The proposal would be effective for taxable years beginning after the
date of enactment.
Eliminate duplicate penalties for failure to file annual reports.--
Employer penalties for failure to file an annual report would be
simplified by eliminating the Internal Revenue Code penalties for a plan
to which ERISA applies. Certain other ERISA reporting penalties would be
modified or eliminated.
Clarify foreign tax credit rules to provide the circumstances under
which a domestic corporation that owns a foreign corporation through a
partnership will be eligible for the deemed-paid credit.--A domestic
corporation that is a U.S. shareholder of a controlled foreign
corporation (CFC) can claim deemed-paid foreign tax credits with respect
to foreign taxes paid by the CFC on the subpart F income that the U.S.
shareholder currently includes in income to the same extent that it
would be so allowed if the subpart F inclusion were treated as an actual
dividend distribution. To be eligible for the deemed-paid credit on an
actual dividend distribution, a domestic corporation must own 10% or
more of the voting stock of the foreign corporation from which it
receives the dividend. Under current law, it is not clear how to apply
the deemed-paid foreign tax credit rules when a foreign corporation is
owned through a partnership. The proposal would provide that the deemed-
paid credit is available to a domestic corporation that, through a
partnership, owns 10% or more of the voting stock of a foreign
corporation from which it receives its proportionate share of dividend
income. This rule would apply to both foreign and U.S. partnerships. For
purposes of this provision, a foreign partnership would be treated as a
tier under the rule that allows the deemed-paid credit only with respect
to taxes paid by foreign corporations that are not below the sixth tier.
Encourage Philanthropy
Allow deduction for charitable contributions by non-itemizing
taxpayers.--To provide an incentive for taxpayers who use the standard
deduction to make large charitable contributions, the Administration
proposes a deduction for substantial charitable contributions made by
taxpayers who do not itemize their deductions. Under current law,
individual taxpayers who itemize their deductions generally may claim a
deduction (subject to certain percentage limitations) for contributions
made to qualified charitable organizations. However, individual
taxpayers who elect the standard deduction (so-called ``non-itemizers'')
may not claim a deduction for charitable contributions, although the
standard deduction theoretically includes an allowance for moderate
amounts of charitable giving. The proposal would allow taxpayers who are
non-itemizers to deduct 50 percent of their charitable contributions in
excess of $1,000 ($2,000 for married taxpayers filing jointly) for
taxable years beginning after December 31, 2000 and before January 1,
2006. For taxable years beginning after December 31, 2005, non-itemizers
would be allowed to deduct 50 percent of their charitable contributions
in excess of $500 ($1,000 for married taxpayers filing jointly).
Simplify and reduce the excise tax on foundation investment income.--
Under current law, private foundations generally are subject to a two-
percent excise tax on their net investment income. In some cases, the
excise tax rate is reduced to one percent, provided that current-year
grantmaking by the foundation is determined under a complex formula to
not fall below the average level of the foundation's grantmaking in the
five preceding taxable years (with certain adjustments). This complex
formula creates a perverse incentive for foundations not to
significantly increase their grantmaking for charitable purposes in any
particular year, because if a foundation does so, it becomes more
difficult for the foundation to qualify for the reduced one-percent
excise tax rate in subsequent years. Accordingly, the Administration
proposes that the excise tax on private foundation investment income be
simplified by reducing the general two-percent excise tax rate to a
1.25-percent excise tax rate that would apply in all cases. The complex
formula for determining whether a foundation is maintaining its historic
level of charitable grantmaking, and the special excise tax rate
available to only some foundations, would be repealed. Thus, private
foundations would not suffer adverse excise tax consequences if they
respond to charitable needs by significantly increasing their
grantmaking in a particular year. The proposal would be effective for
taxable years beginning after December 31, 2000.
Increase limit on charitable donations of appreciated property.--Under
current law, charitable contributions made by individuals who do not
claim the standard deduction are deductible for income tax purposes, up
to certain limits depending on the type of
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property donated and whether the donee organization qualifies as a
public charity or private foundation. Contributions made by an
individual to a public charity generally are deductible in an amount not
exceeding 50 percent of the individual's AGI for the current year (with
any remaining amount carried over for up to five taxable years). In the
case of contributions made by an individual to a private foundation, a
30-percent AGI limitation generally applies. However, in the case of
donated stock and other non-cash contributions, a 30-percent AGI
limitation applies to gifts to public charities, and a 20-percent AGI
limitation applies to gifts to private foundations. These special
contribution limits for non-cash gifts create unnecessary complexity and
could discourage gifts of valuable or unique property to charitable
organizations. Therefore, the Administration proposes that the special
contribution limits for non-cash gifts be repealed, effective for
contributions made after December 31, 2000.
Clarify public charity status of donor advised funds.---In recent
years, there has been an explosive growth in so-called ``donor advised
funds'' maintained by charitable corporations. These funds generally
permit a donor to claim a current charitable contribution deduction for
amounts contributed to a charity and to provide ongoing advice regarding
the investment or distribution of such amounts, which are maintained by
the charity in a separate fund or account. In the absence of clear
guidelines, donor advised funds potentially may be used to provide
donors with the benefits normally associated with private foundations
(such as control over grantmaking), without the regulatory safeguards
that apply to private foundations. Therefore, the Administration
proposes that current-law rules be clarified so that a charitable
corporation which, as its primary activity, operates donor advised funds
may qualify as a publicly supported organization only if: (1) there is
no material restriction or condition that prevents the corporation from
freely and effectively employing the contributed assets in furtherance
of its exempt purposes; (2) distributions from donor advised funds are
made only to public charities (or private operating foundations); and
(3) the corporation distributes annually for charitable purposes an
amount equal to at least five percent of the fair market value of the
corporation's aggregate investment assets. The proposal also would
clarify that, for purposes of the section 4958 excise tax on certain
excess benefit transactions, a person who provides advice with respect
to a particular donor advised fund maintained by a public charity is
treated as having substantial influence with respect to that particular
fund.
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,
and natural gas heat pumps. The credit would equal 20 percent of the
amount of qualified investment, subject to caps of $500 per kilowatt for
fuel cells, $500 per unit for electric heat pump water heaters, and
$1,000 per unit for natural gas heat pumps. The credit would be
available for the four-year period beginning January 1, 2001 and ending
December 31, 2004.
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 or $2,000
depending upon the home's energy efficiency. The $1,000 credit would be
available for homes purchased between January 1, 2001 and December 31,
2003 that reduce energy usage by at least 30 percent relative to the
standard under the 1998 International Energy Conservation Code (IECC).
The $2,000 credit would be available for homes purchased between January
1, 2001 and December 31, 2005 that reduce energy usage by at least 50
percent relative to the IECC standard.
Transportation
Extend electric vehicle tax credit and provide tax credit for hybrid
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 of up to $3,000 for purchases of a qualified hybrid
vehicle after December 31, 2002 and before January 1, 2007. A qualified
hybrid vehicle is a road vehicle that can draw propulsion energy from
both of the following on-board sources of stored energy: a consumable
fuel and a rechargeable battery. The amount of the credit would depend
upon the vehicle's design performance. The credit would be available for
all qualifying light vehicles including cars, minivans, sport utility
vehicles, and light trucks.
Industry
Provide 15-year depreciable life for distributed power property.--
Distributed power technologies can be more energy efficient and generate
fewer greenhouse gases than conventional generation methods. To promote
the use of these technologies, the Administration proposes to simplify
and rationalize the current system for assigning cost recovery periods
to certain depre
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ciable property by assigning a single 15-year recovery period to
qualifying distributed power property. Distributed power property would
include depreciable assets used by a taxpayer to produce electricity for
use in a nonresidential or residential building that is used in the
taxpayer's trade or business. Such property also would include
depreciable assets used to generate electricity for primary use in an
industrial manufacturer's process or plant activity, provided such
assets had a rated total capacity in excess of 500 kilowatts. Qualifying
property could be used to produce thermal energy or mechanical power for
use in a heating or cooling application. However, at least 40 percent of
the total useful energy produced in a commercial or residential setting
must consist of electrical power. When used in an industrial setting, at
least 40 percent of produced energy must be used in the taxpayer's
manufacturing process or plant activity. In addition, a taxpayer would
be required to have a reasonable expectation that no more than 50
percent of the produced electricity would be sold to, or used by,
unrelated persons. The proposal would apply to assets placed in service
after the date of enactment.
Clean Energy Sources
Extend and modify the tax credit for producing electricity from
certain 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 January 1, 2002, after which
it expires. The Administration proposes to extend the current credit for
wind and closed-loop biomass for two and one-half years, to facilities
placed in service before July 1, 2004, and to expand eligible biomass to
include certain biomass from forest-related resources, agricultural
sources and other sources for facilities placed in service after
December 31, 2000 and before January 1, 2006. Biomass facilities that
were placed in service before July 1, 1999 would be eligible for a
credit of 1.0 cent per kilowatt hour for electricity produced from the
newly eligible sources from January 1, 2001 through December 31, 2003. A
0.5-cent-per-kilowatt-hour tax credit would also be allowed for cofiring
biomass in coal plants from January 1, 2001 through December 31, 2005.
In addition, electricity produced from methane from certain facilities
would be eligible for the following credits: (1) 1.5 cent per kilowatt
hour for methane produced from landfills not subject to EPA's 1996 New
Source Performance Standards/Emissions Guidelines (NSPS/EG), or (2) 1.0
cent per kilowatt hour for methane produced from landfills subject to
NSPS/EG. The credit would apply to facilities placed in service after
December 31, 2000 and before January 1, 2006.
Provide tax credit for solar energy 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. 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. The credit
would apply only to equipment placed in service after December 31, 2000
and before January 1, 2006 for solar water heating systems, and after
December 31, 2000 and before January 1, 2008 for rooftop photovoltaic
systems. (Taxpayers would choose between the proposed tax credit and the
current-law tax credit for each investment.)
Electricity Restructuring
Revise tax-exempt bond rules for electric power facilities.--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 if private use resulted from allowing
nondiscriminatory open access to those facilities. Outstanding bonds
issued to finance generation or distribution facilities would continue
their tax-exempt status if the issuer implements retail competition. To
support fair competition within the restructured industry, interest on
newly issued bonds to finance electric generation or transmission
facilities 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, 2000. As
under current law, deductible contributions would not be permitted to
exceed the amount the IRS determines to be necessary to provide for
level funding of an amount equal to the taxpayer's decommissioning
costs.
Modify International Trade Provisions
Extend and modify Puerto Rico economic-activity tax credit.--The
Puerto Rico and possessions tax credit was repealed in 1996. However,
both the income-based credit and the economic-activity-based credit
remain available for certain business operations con
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ducted 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 1993, the proposal would modify the phase-out of the economic-
activity-based credit for Puerto Rico by (1) opening it to newly
established business operations during the phase-out period, effective
for taxable years beginning after December 31, 1999, 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
September 30, 2001, through June 30, 2004. The Administration also is
proposing to: (1) enhance trade benefits, through December 31, 2010, for
subsaharan African countries undertaking strong economic reforms; (2)
grant, through September 30, 2004, duty-free treatment to certain
imports from the Southeast Europe countries and territories of Albania,
Bosnia and Herzegovina, Bulgaria, Croatia, the Former Yugoslav Republic
of Macedonia, Romania, Slovenia, Kosovo and Montenegro; and (3) provide,
through December 31, 2004, expanded trade benefits mainly on textiles
and apparel to Caribbean Basin countries that meet new eligibility
criteria. These proposals 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, and will help the countries
of Southeast Europe rebuild and reintegrate their economies and work
toward achieving lasting political stability in the region.
Levy tariff on certain textiles and apparel products produced in the
Commonwealth of the Northern Mariana Islands (CNMI).--The Administration
is proposing a tariff on textile and apparel products that are 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.
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, 2000 and before January 1, 2004.
Exempt Holocaust reparations from Federal income tax.--The Internal
Revenue Code defines gross income as ``gross income from whatever source
derived,'' except for certain items specifically exempt or excluded by
statute. Although the United States - Federal Republic of Germany Income
Tax Convention and a series of rulings issued by the IRS provide that
certain Holocaust-related reparations are exempt from Federal income
tax, there is no explicit statutory exception from gross income for
amounts received by Holocaust victims or their heirs. In recent years,
several countries and companies within those countries have acknowledged
that they have not made adequate compensation or restitution to victims
or their heirs for the deprivations inflicted upon them during the Nazi
Holocaust, and have agreed to establish funds or to make direct payments
of cash or property to such individuals. To provide clarity and relief
for Holocaust victims and their families, the Administration proposes a
statutory exemption from gross income for any amount received by an
individual or heir of an individual from Holocaust-related funds and
settlements, including in compensation for or recovery of property
confiscated in connection with the Holocaust. The proposal would be
effective for amounts received on or after January 1, 2000. No inference
is intended as to the tax treatment of amounts received prior to that
date.
ELIMINATE UNWARRANTED BENEFITS AND ADOPT OTHER REVENUE MEASURES
The President's plan closes tax shelters and other loopholes, curtails
unwarranted corporate tax subsidies, improves tax compliance and adopts
other revenue measures.
Limit Benefits of Corporate Tax Shelter Transactions
The Administration continues to be concerned about the use and
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.
The growing use of corporate tax shelters was further described by the
Treasury Department in its White Paper entitled, The Problem of
Corporate Tax Shelters: Discussion, Analysis and Legislative Proposals,
issued in July 1999. The paper concludes that corporate tax shelters are
best addressed by increasing disclosure of corporate tax shelter
activities, increasing and strengthening the substantial understatement
penalty, codifying the judicially-created economic substance doctrine,
and providing consequences to all parties to the transaction
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(e.g., promoters, advisors, and tax-indifferent, accommodating parties.)
The Administration proposes several general remedies to curb the
growth of corporate tax shelters that focus on these four themes. 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 transactions under current
law.
Increase disclosure of certain transactions.--Greater disclosure of
corporate tax shelter transactions will discourage some corporations
from engaging in such activity and would aid the IRS in identifying
questionable transactions and enforcing current law. The Administration
proposes to require disclosure of certain reportable transactions.
Disclosure would be required if a transaction possesses certain
objective characteristics common to corporate tax shelter transactions.
Disclosure would be made on a short form or statement that provides the
essence of the transaction, is filed with the IRS National Office and
with the tax return by the due date of the return, and is signed by a
corporate officer with the appropriate knowledge of the transaction.
Significant monetary and procedural remedies would be imposed upon
failure to provide the required disclosure. The proposal would be
effective for transactions entered into after the date of first
committee action.
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
acted in good faith. In order to change the cost-benefit analysis of
entering a corporate tax shelter, the Administration proposes to
increase the substantial understatement penalty on corporate tax shelter
items to 40 percent. In order to encourage disclosure, the penalty will
be reduced to 20 percent if the corporate taxpayer provides the
requisite disclosure of the transaction. The 20-percent penalty for
disclosed transactions could be avoided by a showing that the taxpayer
reasonably believed that it had a strong chance of sustaining its tax
position and acted in good faith. The proposal would be effective for
transactions entered into after the date of first committee action.
Codify the economic substance doctrine.--The ``economic substance''
doctrine is a longstanding, judicially-created standard providing that
in order for a transaction to be respected for tax purposes, it must be
imbued with economic substance. The economic substance doctrine requires
an analysis and balancing of the claimed tax benefits from a transaction
with the pre-tax profit of the transaction. The Administration proposes
codifying the economic substance standard. Under the proposal, a
transaction will not be respected for tax purposes if the present value
of the expected economic profit from the transaction is insignificant
compared to the present value of the expected tax benefits. Similar
rules would apply to financing transactions. The proposal would apply to
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 rely on 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 to the extent the
person is trading on its special tax status. The proposal would be
effective for transactions entered into on or after the date of first
committee action.
Impose a penalty excise tax on certain fees received by promoters and
advisors..--Users of corporate tax shelters often pay large fees to
promoters and advisors with respect to the shelter transactions. The
proposal would impose a 25-percent penalty 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.
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 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 after the
date of first committee action.
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 not subject to tax until distributed
to the plan beneficiaries. The Administration proposes to require ESOPs
that are not broad based 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 apply only to the extent
distributions exceed all prior undistributed amounts
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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.
Limit dividend treatment for payments on certain self-amortizing
stock.--Under current law, distributions of property by a corporation to
its shareholders are treated as dividends to the extent of the current
or accumulated earnings and profits of the corporation. The Treasury
Department previously became aware of certain abusive transactions
involving so-called ``fast-pay'' stock. Under a typical fast-pay
arrangement, a corporation that is subject to tax only at the
shareholder level (a conduit entity) issues preferred stock to one class
of investors and common stock to a second class of investors. The
preferred stock is economically self-amortizing because the
distributions made with respect to the stock (although treated entirely
as dividends under current law) represent in part a return of the
investors' investment and in part a return on their investment. While
The Treasury Department has issued regulations that recharacterize a
fast-pay arrangement involving certain domestic conduit entities,
legislation limiting the dividend characterization on self-amortizing
stock (including self-amortizing stock issued by foreign conduit
entities) may be a more comprehensive solution. The proposal would
provide that, in the case of a distribution with respect to self-
amortizing stock issued by a conduit entity (including a foreign conduit
entity), the amount treated as a dividend shall not exceed the amount of
the distribution that would have been characterized as interest had the
self-amortizing stock been a debt instrument. The proposal would be
effective for distributions with respect to self-amortizing stock made
after the date of enactment.
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 have used holding companies to avoid the withholding tax.
They 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 5 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 enactment.
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 would be effective for distributions on or after the date
of first committee action.
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 Department
corporation (CFC), or passive foreign investment company (PFIC). The
Treasury Department 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
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person. The proposal would contain an exception for certain short term
transactions entered into in the ordinary course of business. The
Secretary of Treasury 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.
Prevent duplication or acceleration of loss through assumption of
certain liabilities.--Generally, if as part of a transaction in which
one or more persons contribute property in exchange for the stock of a
corporation that they control immediately thereafter, the corporation
also assumes a liability of a transferor, the transferor's basis in the
stock of the controlled corporation is reduced by the amount of the
liability assumed. To facilitate the incorporation of certain businesses
that have liabilities that have not yet given rise to a deduction,
special rules apply to provide that the assumption of such liabilities
does not reduce the transferor's basis in the stock of the controlled
corporation. Relying on these special rules and other authority, some
taxpayers have attempted to accelerate or duplicate deductions for
certain losses by separating liabilities from the associated business or
assets, contributing them to a corporation, and selling stock in that
corporation at a purported loss. The Administration proposes that if the
basis of stock received by a transferor as part of a tax-free exchange
with a controlled corporation exceeds its fair market value, then the
basis of the stock received would be reduced (but not below the fair
market value) by the amount of a fixed or contingent liability that is
assumed by the controlled corporation and that did not otherwise reduce
the transferor's basis in the corporation's stock. Except as provided by
the Secretary of Treasury , the proposal would not apply where the trade
or business or substantially all the assets associated with the
liability are also transferred to the controlled corporation.
Regulations would be issued to prevent the acceleration or duplication
of losses through the assumption of liabilities in transactions
involving partnerships, and may also be issued to modify the rules of
this proposal as applied to S corporations. The proposal and the
regulations addressing transactions involving partnerships would be
effective for assumptions of liability on or after October 19, 1999.
Regulations addressing transactions involving S corporations would be
effective on or after October 19, 1999, or such later date as may be
prescribed by such rules.
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 the payment 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 limit the amount of interest and dividends
exempt from withholding to the amount of foreign active business income
received by the U.S. corporation during the 3-year testing period. The
proposal would apply to interest or dividends paid or accrued more than
30 days after the date of enactment.
Modify corporate-owned life insurance (COLI) rules.--In general,
interest on 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,
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 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 employees, officers, directors, and shareholders. The
Administration proposes to repeal the exception under the COLI proration
rules for contracts insuring employees, officers or directors (other
than certain contracts insuring 20-percent owners) of the business. The
proposal also would conform the key person exception for disallowed
interest deductions attributable to indebtedness with respect to life
insurance contracts to the modified 20-percent owner exception in the
COLI proration rules. The proposal would be effective for taxable years
beginning after date of enactment.
Require lessors of tax-exempt-use property to include service contract
options in lease term.--Under current law, a lessor of tax-exempt-use
property is allowed depreciation deductions computed on a straight-line
basis over a period of not less than 125 percent of the term of the
lease. The existing depreciation rules do not consider service
contracts, which can be structured to resemble leases. In recent years,
lessors have attempted to accelerate depreciation deductions by
structuring transactions that have a relatively short lease followed by
a service contract. The proposal would require lessors to include the
term of service contracts in the lease term for purposes of determining
the depreciation period. The proposal would be effective for leases
entered into after the date of enactment.
Financial Products
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
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short-term obligations. Some 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 would also cap the amount of market discount on
distressed debt instruments. The proposal would be effective for debt
instruments 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. 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 modify and clarify a number of provisions under the straddle
rules. In particular, to match the timing of straddle losses with
related gains, the proposal would provide that loss realized on one leg
of a straddle would be capitalized into the other leg of the straddle.
This capitalization would operate as an ordering rule eliminating the
need for an identification rule when the legs are of different sizes. In
addition, to ensure that the loss on a straddle leg is properly
measured, the proposal would require taxpayers that physically settle
certain derivatives contracts to determine the amount of the loss
subject to deferral under the straddle rules immediately before the
physical settlement. The proposal would also repeal the current-law
exception from the straddle rules for certain offsetting positions in
stock. Finally, the proposal would clarify that a debt instrument issued
by a taxpayer may itself be a leg in a straddle and would clarify the
situations in which interest and carrying charges are considered
properly allocable to a straddle and, therefore, must be capitalized.
The proposal would be effective for certain losses incurred and certain
straddles entered into on or after the date of first committee action.
Provide generalized rules for all stripping transactions.--Under
current law, it may be possible to separate the right to receive income
from the ownership of underlying income-producing property (other than
debt). In many cases, the tax treatment of income-stripping transactions
does not clearly reflect the parties' economic income from the
transactions. As a result, it is possible for taxpayers to structure
income-stripping transactions that exploit deficiencies of current law.
The proposal would eliminate these planning opportunities by treating
income-stripping transactions as loans. Under this approach, the owner
of the property would be required to account for income from the
property in the period in which it was earned. The proposal would be
effective for income-stripping transactions entered into after the date
of first committee action.
Require ordinary treatment for certain dealers of commodities and
equity options.--Under current law, certain dealers of commodities and
equity options treat the income from their day-to-day trading or dealing
activities as giving rise to capital gain. Dealers of other property
typically treat the income from their day-to-day dealing activities as
giving rise to ordinary income. The proposal would require commodities
and equity-option dealers to treat the income from their day-to-day
activities as giving rise to ordinary income, not capital gain. The
proposal would be effective for tax years beginning after the date of
enactment.
Prohibit tax deferral on contributions of appreciated property to swap
funds.--A swap fund is an investment partnership that is designed to
allow taxpayers holding large blocks of appreciated stock to diversify
their stock investments without recognizing gain and paying tax.
Typically, a fund is established into which wealthy individuals transfer
their stock. In exchange for the transferred stock, these individuals
receive an interest in the fund. Under current law, these individuals do
not have to recognize gain if more than 20 percent of the fund's assets
are comprised of non-
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marketable securities. The proposal would prohibit the deferral of gain
where the fund is a passive investment vehicle. The proposal would be
effective for transfers occurring on or after the date of enactment.
Corporate Provisions
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.
Treat receipt of tracking stock in certain distributions and exchanges
as the receipt of property.--``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. Tracking stock issued by a corporation
represents an economic interest different than non-tracking stock of the
issuer. Under the proposal, the receipt of tracking stock in a
distribution made by a corporation with respect to its stock and
tracking stock received in exchange for other stock in the issuing
corporation would be treated as the receipt of property by the
shareholders. Under this proposal, the Secretary of Treasury would have
authority to treat tracking stock as nonstock (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 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 a
transfer of an interest in intangible property constituting less than
all of the substantial rights of the transferor will not fail to qualify
for tax-free treatment solely because the transferor does not transfer
all rights, title and interest in an intangible asset, 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 after the
date of enactment.
Modify tax treatment of certain reorganizations involving portfolio
stock.--If a target corporation owns stock in the acquiring corporation
and wants to combine with the acquiring corporation in a downstream
reorganization, 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. Alternatively, if the acquiring corporation owns
stock in the target corporation, the target corporation can merge
upstream, transfer its assets upstream, or merge sideways into a
subsidiary of the acquiring corporation with the other shareholders of
target receiving acquiring corporation stock. Under current law, all of
these reorganizations qualify for tax-free treatment. Under the
proposal, where a target corporation holds less than 20 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.
Alternatively, where an acquiring corporation owns less than 20 percent
of a target corporation and the target corporation combines with the
acquiring corporation or a subsidiary of the acquiring corporation, the
acquiring corporation must recognize gain, but not loss, as if it had
sold its target corporation stock immediately before the reorganization.
Nonrecognition treatment would continue to apply to other assets
transferred by the target corporation and to the target corporation
shareholders. This proposal is effective for transactions on or after
the date of enactment.
Modify definition of nonqualified preferred stock.--Subject to certain
exceptions, in otherwise tax-free transactions, the receipt of
nonqualified preferred stock is treated as money or other property and,
thus, gain may be recognized. Under current law, nonqualified preferred
stock is defined as stock which is ``limited and preferred as to
dividends and does not participate in corporate growth to any
significant extent.'' Taxpayers may be taking positions that are in
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consistent with the policy of the nonqualified preferred stock
provisions (i.e., nonrecognition treatment is inappropriate where
taxpayers receive relatively secure instruments in exchange for
relatively risky instruments), by including illusory participation
rights or including terms that taxpayers argue create an ``unlimited''
dividend. The proposal would clarify the definition of preferred stock
to eliminate taxpayer arguments that stock issued is nominally
participating or unlimited as to dividends. The proposal would apply to
transactions that occur after the date of first committee action.
Modify estimated tax provision for deemed asset sales--Taxpayers can
make an election to treat certain sales of stock as sales of assets.
This election may be made up to 8 1/2 months after the stock sale.
Taxpayers may be taking the position that they do not have to pay any
estimated taxes until after the 8 1/2 month period has expired and rely
on current law as providing that there will be no penalty for
nonpayment. The proposal would clarify the estimated tax provisions to
require that estimated taxes be paid based upon gain from either the
stock sale or the deemed asset sale. The proposal would apply to
transactions that occur after the date of first committee action.
Modify treatment of transfers to creditors in divisive
reorganizations.--In order to separate businesses in a tax-free spin-
off, a corporation (distributing) will not recognize gain or loss on the
contribution of property to a controlled corporation solely in exchange
for stock or securities of the controlled corporation. Under current
law, if the distributing corporation also receives other property or
money, it will not recognize gain as long as it distributes the property
or money to its creditors in connection with the reorganization. The
amount of property or money that may be distributed to creditors without
gain to the distributing corporation is unlimited. Thus, taxpayers may
avoid gain that otherwise would be recognized if liabilities are assumed
by the controlled corporation that exceed the basis of assets
contributed. The proposal would limit the amount of property or money
that the distributing corporation can distribute to creditors without
gain to the amount of basis of the assets contributed to the controlled
corporation in the reorganization. In addition, the proposal would
provide that acquisitive reorganizations would no longer be subject to
gain recognition where liabilities are assumed in excess of the basis of
assets transferred. The proposal would be effective for transactions on
or after the date of enactment.
Passthroughs
Provide mandatory basis adjustments for partners that have a
significant net built-in loss in partnership property.--Currently, a
partner's share of basis in partnership property is adjusted in the case
of a distribution of partnership property or a sale of a partnership
interest only if the partnership has a special election in effect. The
electivity of these provisions has created numerous opportunities for
abuse by taxpayers. Accordingly, the Administration proposes that the
basis adjustment rules would be made mandatory with respect to any
partner (treating related persons as one person), whose share of net
built-in loss in partnership property is equal to the greater of
$250,000 or ten percent of the partner's total share of partnership
assets (measured by reference to fair market value). In calculating the
ten-percent threshold, property acquired by the partnership with a
principal purpose of allowing a partner or partners to avoid the
limitation would be disregarded. The proposal would be effective for
distributions and transfers of partnership interest after the date of
enactment.
Modify treatment of closely held REITs.--When originally enacted, the
real estate investment trust (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 is aware of a
number of tax avoidance transactions involving the use of closely held
REITs. In order to meet the 100 or more shareholder requirement, the
REIT generally issues common stock, which is held by one shareholder,
and a separate class of non-voting preferred stock with a relatively
nominal value, which is held by 99 ``friendly'' shareholders. The
closely held limitation does not disqualify the REITs that are utilizing
this ownership structure because the majority shareholders of these
REITs are not individuals. The Administration proposes to impose as an
additional requirement for REIT qualification that no person can own
stock of a REIT possessing 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 current-law
rules would apply and stapled entities would be treated as one person.
The proposal would be effective for entities electing REIT status for
taxable years beginning on or after the date of first committee action.
Apply regulated investment company (RIC) excise tax to undistributed
profits of REITs.--As a result of legislation passed in 1999, a REIT,
like a RIC, is only required to distribute 90 percent of its REIT
taxable income in order to maintain REIT status. A RIC is subject to a
four-percent excise tax on the excess of the required distribution for a
calendar year over the distributed amount for such calendar year.
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The required distribution is equal to the sum of 98 percent of the RIC's
ordinary income for the calendar year and 98 percent of the RIC's
capital gain net income for the one-year period ending on October 31 of
such calendar year. REITs are subject to a similar rule, except that the
required distribution is equal to the sum of 85 percent of the REIT's
ordinary income for the calendar year and 95 percent of the REIT's
capital gain net income for such calendar year. In order to conform the
treatment of REITs and RICs, the Administration proposes to modify the
definition of required distribution for REITs, requiring a distribution
of 98 percent of ordinary and capital gain income in order to avoid the
four-percent excise tax. The proposal would be effective for calendar
years beginning after December 31, 2000.
Allow RICs a dividends paid deduction for redemptions only in cases
where the redemption represents a contraction in the RIC.--Under current
law, a RIC is allowed a dividends paid deduction for dividends paid to
shareholders. If a RIC redeems a shareholder's stock, the RIC can
generally treat a portion of the redemption payment as a dividend for
purpose of computing the dividends paid deduction. In situations where
the redemption represents a contraction in the size of the RIC, this
treatment ensures that the remaining shareholders of the RIC are taxed
on no more than their pro rata share of the RIC's income. In situations
where the redemption is accompanied by near simultaneous investments in
the RIC by other investors, the RIC is in essentially the same position
it would be in had the redeeming shareholder sold its shares in the RIC
directly to the new investors. In this case, it is inappropriate to give
the RIC a dividends paid deduction for the redemption. The proposal,
therefore, allows a RIC to claim a dividends paid deduction with respect
to a redemption only if the redemption represents a net contraction in
the size of the RIC. The proposal would be effective for taxable years
beginning after the date of enactment.
Require Real Estate Mortgage Investment Conduits (REMICs) to be
secondarily liable for the tax liability of REMIC residual interest
holders.--A REMIC is a statutory pass-through vehicle designed to
facilitate the securitization of mortgages. A REMIC holds mortgages and
issues one or more classes of debt instruments, called REMIC regular
interests, that are entitled to the cash flows from the underlying
mortgages. A REMIC also issues a REMIC residual interest. The holder of
the REMIC residual interest must include in income the taxable income of
the REMIC. In many cases, when it is issued the REMIC residual interest
has a negative value because the reasonably anticipated net tax
liability associated with holding the residual is greater than the value
of the cash flows on the residual. Many holders of REMIC residual
interests do not pay their tax liabilities when due. To ensure that the
tax on REMIC residuals is paid when due, the proposal would require a
REMIC to be secondarily liable for the tax liability of its residual
interest. Under the proposal, if the tax on the residual was not paid
when due, the REMIC would be required to pay the tax. Similar rules
would apply with respect to Financial Asset Securitization Investment
Trusts (FASITs). The proposal would be effective for REMICs and FASITs
created after the date of enactment.
Tax Accounting
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 IRS Commissioner. In addition, in certain reorganization
transactions 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, this carryover rule 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 such transactions may avail themselves of a new method of
accounting without obtaining the consent of the IRS Commissioner. The
Administration proposes to expand the transactions to which the
carryover of method of accounting rules and the regulations thereunder
apply to include tax-free contributions to corporations or partnerships,
effective for transfers 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. 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
IRS. The proposal would apply to damages paid or incurred on or after
the date of enactment.
Repeal lower-of-cost-or-market inventory accounting method.--Taxpayers
required to maintain inventories are permitted to use a variety of
methods to determine the cost of their ending inventories, including the
last-in, first-out (LIFO) method, the first-in, first-out (FIFO) method,
and the retail method. Taxpayers not using a LIFO method may determine
the carrying values of their inventories by applying the lower-of-cost-
or-market (LCM) method 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
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LCM and subnormal goods methods effective for taxable years beginning
after the date of enactment.
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.
Require capitalization of mutual fund commissions.--An expenditure
that results in significant future benefits generally must be
capitalized in order to match the expenditure with the revenues of the
taxable period to which it is properly attributable. Under current
securities law, a distributor of mutual fund shares may be compensated
by the fund over a period of years or by the investors on redemption
with respect to ``Class B'' shares it distributes. However, the
distributor typically will pay an up-front commission to a broker to
sell Class B shares to an investor. In order to more accurately match
the income and expenses of mutual fund distributors, the Administration
proposes that commissions paid to a broker by a distributor would be
capitalized and recovered over six years (the period investors would
have to hold shares without incurring a fee on redemption). The proposal
would be effective for commissions paid or incurred in taxable years
ending after the date of enactment. No inference is intended with
respect to the treatment of distributor's commissions under current law.
Cost Recovery
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 five 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 applying the default rule to electric and
gas utility clearing and grading costs is inappropriate. 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.
Apply rules generally applicable to acquisitions of intangible assets
to acquisitions of professional sports franchises.--In general, the
purchase price allocated to most intangible assets (including franchise
rights) acquired in connection with the acquisition of a trade or
business must be capitalized and amortized over a 15-year period. These
rules were enacted in 1993 to minimize disputes regarding the proper
treatment
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of acquired intangible assets. Special rules apply to intangible assets
acquired in connection with a professional sports franchise. The 15-year
amortization rules do not apply and special allocation rules apply to
the purchase price. In order to provide consistent treatment among
different trades or businesses and to minimize disputes regarding
intangible assets acquired in connection with a professional sports
franchise, the Administration proposes to repeal the special rules
applicable to professional sports franchise acquisitions and apply the
rules generally applicable to most intangible assets. The proposal would
be effective for acquisitions after the date of enactment.
Insurance
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 five years their PSA balances as of
the beginning of the first taxable year starting 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 (5 years
for small companies). These capitalized amounts are intended to serve as
proxies for each company's commissions and other policy acquisition
expenses. However, data reported by insurance companies to State
insurance regulators each year indicate that the insurance industry is
capitalizing substantially less than its actual 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. This change would be treated as a change in the insurance
company's method of accounting. The modified percentages would more
accurately reflect the ratio of actual policy acquisition expenses to
premiums and the typical useful lives of the contracts. To ensure that
companies never are 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.
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 to
deduct interest expense. Effective for taxable years beginning after the
date of enactment, with respect to investments acquired on or after the
date of first committee action, the Administration proposes to increase
the proration percentage to 25 percent.
Modify rules that apply to sales of life insurance contracts.--The
sale of a life insurance contract insuring a person who is neither
terminally nor chronically ill results in taxable income to the seller
equal to the difference between the sales price and the seller's basis
in the contract. Buyers generally are not required to report information
to the IRS on these transactions. The buyer, who receives the death
benefit when the insured dies, generally is liable for tax on his profit
from the transaction under the ``transfer for value'' rules. However,
the life insurance company generally is not required to report the death
benefit payment. Moreover, the rule that the buyer's profits are taxable
can be circumvented. The proposal would modify the transfer for value
rules so they could no longer be circumvented. The proposal also would
modify the reporting rules to require the buyer of a life insurance
contract with a large death benefit to report information on the sale to
the IRS, to the issuer of the life insurance contract, and to the seller
of the life insurance contract. In addition, the proposal would modify
the reporting rules to require that payment of death benefits under such
previously-sold contracts be reported to the IRS and to the payee. The
proposal would be effective for sales of life insurance contracts and
payments of death benefits after the date of enactment.
Modify rules that apply to tax-exempt property casualty insurance
companies.--Under current law, an insurance company with up to $350,000
of premium income is tax-exempt, regardless of the amount of investment
income it has. Another provision allows cer
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tain small insurance companies to elect to be taxed only on their net
investment income. Premiums of companies in the same controlled group
are combined for purposes of determining whether an entity is eligible
for tax exemption. An excise tax is imposed on premiums paid to foreign
companies with respect to policies insuring U.S. risks. Current law
allows foreign insurance companies to elect to be taxed as domestic
companies if they meet certain requirements. These rules have been used
by U.S. persons to shift assets into tax-free or tax-preferred
affiliated insurance companies, which often are located in tax havens
and issue ``insurance'' that is generated directly or indirectly by the
U.S. person. The proposal would modify current law, beginning the first
taxable year after date of enactment, so that all items of gross income
of all affiliated companies would be aggregated in determining whether
an insurance company qualifies for tax-exempt status. Also, tax-exempt
status would not be available to foreign insurance companies beginning
the first taxable year after the date of enactment. Conforming
amendments would be made to the current-law election to be taxed on
investment income. The proposal also would modify current law so that
the election to be taxed as a U.S. corporation would not be available to
a foreign company formed after the date of first Committee action, and
would not be available beginning in the second year after the date of
enactment for any other foreign company that would otherwise qualify for
a tax exemption under current law.
Exempt Organizations
Subject investment income of trade associations to tax.--Trade
associations described in section 501(c)(6) are generally exempt from
Federal income tax, but are subject to tax on their unrelated business
income. To eliminate the current-law bias in favor of trade association
members' making and deducting advance payments to fund future collective
activities of the trade association, the proposal would subject trade
associations to unrelated business income tax on their net investment
income in excess of $10,000 for any taxable year. As under current-law
rules for certain other tax-exempt organizations, investment income
would not be subject to tax under the proposal to the extent that it is
set aside for a specified charitable purpose. 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 after December 31, 2000.
Impose penalty for failure to file an annual information return.--To
encourage voluntary compliance and assist the IRS in its enforcement
efforts, the proposal would impose a penalty on split-interest trusts
(such as charitable remainder trusts, charitable lead trusts, and pooled
income funds) that fail to file an annual information return on Form
5227. Form 5227 contains information regarding the trust's financial
activities and whether the trust is subject to certain excise taxes.
Under the proposal, any failure to file Form 5227 would be subject to a
penalty of $20 per day (up to a maximum of $10,000 per return) or, in
the case of any trust with income in excess of $250,000, $100 per day
(up to a maximum of $50,000 per return). In addition, any trustee who
knowingly fails to file Form 5227, unless such failure is not willful
and is due to reasonable cause, would be jointly and severally liable
for the amount of the penalty. The proposal would be effective for any
return the due date for which is after the date of enactment.
Estate and Gift
Restore phaseout of unified credit for large estates.--Prior to TRA97,
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 TRA97
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
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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.
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.
Modify requirements for annual exclusion for gifts.--Currently, annual
gifts of present interests of up to $10,000 (in 2000) per donor per
donee are excepted from the gift tax. The decision in Crummey v.
Commissioner held that a transfer in trust is a transfer of a present
interest if the beneficiary has a right to withdraw the property from
the trust for a limited period of time. Two recent cases expanded on the
Crummey rule by holding that the annual exclusion is available, even
where the person holding the withdrawal power is not a primary
beneficiary of the trust. The Administration proposes to modify the
annual exclusion rule as it applies to gifts and trusts so that a
transfer to a trust would qualify only if: (1) during the life of the
individual who is the beneficiary of the trust, no portion of the corpus
or income of the trust may be distributed to or for the benefit of any
person other than the beneficiary, and (2) the trust does not terminate
before the beneficiary dies, the assets of the trust will be includible
in the gross estate of the beneficiary. A withdrawal right would not be
sufficient to create a present interest. This proposal would be
effective for gifts completed after December 31, 2000. A grandfather
rule would allow continued use of Crummey powers in existing irrevocable
trusts, but only to the extent that the Crummey powers are held by
primary noncontingent beneficiaries.
Pensions
Increase elective withholding rate for nonperiodic distributions from
deferred compensation plans. --The Administration proposes increasing
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 2001. The withholding would not apply to eligible rollover
distributions.
Increase excise tax for excess IRA contributions.--Excess IRA
contributions are currently subject to an annual 6-percent tax rate.
With high investment returns, this annual 6-percent rate may be
insufficient to discourage contributions in excess of the current limits
for IRAs. The Administration proposes increasing from 6 percent to 10
percent the excise tax on excess contributions to IRAs for taxable years
after the year the excess contribution is made. Thus, the 6-percent rate
would continue to apply for the year of the excess contribution and the
higher annual rate would only
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apply if the excess amounts are not withdrawn from the IRA. This
increase would be effective for taxable years beginning after 2000.
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
limiting 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 after the date of first committee
action, the existing deduction rules of the Internal Revenue Code 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 date of enactment. No
inference is intended with respect to the application of prior law
withholding rules to signing bonuses.
Clarify employment tax treatment of choreworkers.--Choreworkers,
individuals paid by State agencies to provide domestic services for
disabled and elderly individuals, often provide services for more than
one disabled or elderly individual. The Administration's proposal would
clarify that State agencies, and not the disabled or elderly individual
receiving the services, are responsible for withholding and employment
taxes for choreworkers effective for wages paid after 2000. For this
purpose, all wages paid by the State agency to a choreworker are treated
as paid by a single employer.
Prohibit IRAs from investing in foreign sales corporations.--Foreign
sales corporations (FSCs) are foreign corporations whose income is
partially subject to US tax. IRAs were never intended to be able to
invest in FSCs. The proposal would prohibit an IRA from investing in a
FSC effective after the date of first committee action.
Compliance
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.
Require information reporting for private separate accounts.--Direct
investments generally result in taxable income each year of dividends
and interest, plus taxable gain or loss for changes in the value of the
securities in the year that such securities are sold. In contrast,
investments held through insurance contracts--called separate accounts--
generally give rise to tax-free or tax-deferred income unless the
policyholder has too much control over the contract's investments.
Insurance companies sometimes create private separate accounts through
which only one or a small group of policyholders may invest their funds.
These policyholders generally exercise investor control, and thus are
liable for income tax each year on the investment income earned.
However, the IRS has no efficient way to identify which insurance
contracts' funds are invested through private separate accounts. The
Administration proposal would require insurance companies to report each
insurance contract with funds invested through private separate
accounts, and the policyholder taxpayer identification number and
earnings for such contract. The proposal would be effective for taxable
years beginning after the date of enactment.
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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 five 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.
Miscellaneous
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
September 30, 2001 and before October 1, 2010. 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.
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.
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.
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,
2000.
Eliminate installment payment of heavy vehicle use tax.--An annual tax
is imposed on the use of heavy (at least 55,000 pounds) highway
vehicles. The tax year is July 1 through June 30 and the tax return is
generally due on August 31 of the year to which it relates. A taxpayer
may, however, elect to pay the tax in installments. The installment
option generally permits payment of one quarter of the tax on each of
the following dates: August 31, December 31, March 31, and
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June 30. States are required to obtain evidence, before issuing tags for
a vehicle, that the use tax return has been filed and any tax due with
the return (generally only the first installment) has been paid. To
foster compliance, the Administration proposes to eliminate the
installment option for taxable years beginning after June 30, 2002.
Thus, heavy vehicle owners would be required to pay the entire tax with
their returns and would be unable to obtain State tags without providing
proof of full payment.
Require recognition of gain on sale of principal residence if
acquired in a tax-free exchange within five years of sale.--Gain of up
to $250,000 ($500,000 in the case of a joint return) from the sale or
exchange of property is excluded from income if, during the five-year
period ending on the date of the sale or exchange, the property has been
owned and used by the taxpayer as the taxpayer's principal residence for
periods aggregating two years or more. No gain or loss is recognized if
property held for use in a trade or business or for investment is
exchanged solely for other like-kind property held for use in a trade or
business or for investment. The current-law exclusion for principal
residences, in combination with the tax-free like-kind exchange
provision, allows planning opportunities for taxpayers who wish to
liquidate real property held for use in a trade or business or for
investment. Such planning opportunities are beyond the intended scope of
the principal residence exclusion. The Administration proposes to
require recognition of gain on the sale of property that has been owned
and used by the taxpayer as the taxpayer's principal residence for
periods aggregating two years or more if the property was acquired in a
tax-free like-kind exchange within five years of the sale. The proposal
would be effective for sales after the date of enactment.
International
Identified Tax Havens
The Administration is concerned about the use of tax havens. Tax
havens facilitate tax avoidance and evasion and many of them, through
strict confidentiality rules, substandard regulatory regimes, and
uncooperative information exchange practices, inhibit our law
enforcement capabilities. The Administration proposes several remedies
to reduce the attractiveness of, and increase access to information
about activity in, certain tax havens identified by the Secretary of the
Treasury (``Identified Tax Havens''). To identify tax havens that will
be subject to these rules, the Secretary of the Treasury will use
criteria including, but not limited to, whether a jurisdiction imposes
no or nominal taxation, either generally or on specific classes of
capital income, has strict confidentiality rules and practices, and has
ineffective information exchange practices.
Require reporting of all payments to identified tax havens--The
proposal would provide that all payments to entities, including
corporations, partnerships and disregarded entities, branches, trusts,
accounts or individuals resident or located in Identified Tax Havens
must be reported on the taxpayer's annual return unless: (1) information
regarding the payment would be available to the IRS upon request or
otherwise, or (2) the payment is less than $10,000. Failure to report a
covered payment would result in the imposition of a penalty equal to 20
percent of the amount of the payment. Special rules would apply to
certain financial services businesses that would permit reporting
certain payments on an aggregate basis. An anti-abuse rule would require
aggregation of related payments for purposes of determining whether a
payment is under $10,000. The proposal would be effective for payments
made after the date of enactment.
Impose limitations on certain tax attributes and income flowing
through Identified Tax Havens.--Current rules deny foreign tax credits
for taxes paid to (1) countries whose governments the U.S. does not
recognize, (2) countries with respect to which the U.S. has severed
diplomatic relations, or (3) countries that the State Department cites
as supporting international terrorism. In addition, the foreign tax
credit limitation and other rules are applied separately to income
attributable to such countries. The proposal would apply similar rules
to Identified Tax Havens. In addition, the proposal would reduce by a
factor (similar to the international boycott factor) a taxpayer's (1)
otherwise allowable foreign tax credit or FSC benefit attributable to
income from an Identified Tax Haven, and (2) the income, attributable to
an Identified Tax Haven, that is otherwise eligible for deferral. This
reduction of tax benefits would be based on a fraction the numerator of
which is the sum of the taxpayer's income and gains from an Identified
Tax Haven and the denominator of which is the taxpayer's total non-U.S.
income and gains. The proposal would be effective for taxable years
beginning after the date of enactment.
Mark-to-Market Proposals
Modify treatment of built-in losses and other attributes
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 to offset income or
gain that would otherwise be subject to U.S. tax. To prevent this
ability to import ``built-in'' losses or other favorable attributes, the
proposal would eliminate tax attributes (including built-in items) and
mark-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.
[[Page 84]]
Simplify taxation of property that no longer produces income
effectively connected with a U.S. trade or business.--Under current law,
a foreign person is subject to tax in the United States on net income
that is effectively connected with a U.S. trade or business (``ECI'').
If a foreign person transfers property from a U.S. trade or business to
its foreign office, the United States retains the right to tax all of
the gain realized from a subsequent disposition of the property if the
disposition occurs within ten years of the time the property ceased to
be used in the U.S. trade or business. The United States also retains,
for ten years, the right to tax deferred income from an asset
attributable to a U.S. trade or business. These rules are difficult to
administer and may in some cases result in the United States taxing gain
that economically accrued after the property was removed from U.S.
taxing jurisdiction. The proposal would mark to market property
(including rights to deferred income) at the time that the property
ceases to be used in, or attributable to, a U.S. trade or business. The
proposal would be effective for property that ceases to be used in, or
attributable to, a U.S. trade or business after the date of enactment.
Prevent avoidance of tax on U.S.-accrued gains (expatriation).---Under
current rules, persons renouncing U.S. citizenship for tax-avoidance
purposes are subject to U.S. taxation for ten years after renunciation.
Although these rules were modified in 1996, they are still easily
avoided and impose significant administrative burdens on both taxpayers
and the Government. The proposal would simplify and toughen the taxation
of expatriates by repealing the current regime and imposing a one-time
tax on accrued gains at the time of expatriation. Also, if an expatriate
subsequently makes a gift or bequest to a U.S. person, the proposal
would treat the gift as gross income to the U.S. recipient, taxable at
the highest marginal rate applicable to gifts and bequests. In addition,
the proposal would amend a 1996 law (the ``Reed Amendment''), which
requires the Attorney General to deny re-entry to a tax-motivated
expatriate, to coordinate it with the tax proposal, and improve the
enforceability of both the tax proposal and the Reed Amendment. The
proposal would apply for individuals expatriating on or after the date
of first committee action.
Other International Provisions
Expand ECI rules to include certain foreign source income.---Under
current rules, only certain enumerated types of foreign source income of
a nonresident (rents, royalties, interest, dividends and sales of
inventory property) can be treated as effectively connected with a U.S.
trade or business (``ECI'') and thus subject to net basis taxation.
Economic equivalents of such enumerated types of foreign source income,
such as interest equivalents (including letter of credit fees) and
dividend equivalents, cannot constitute ECI under any circumstances.
Moreover, some excluded foreign source income can in large part be
attributable to business activities that take place in the United
States. For example, a foreign satellite corporation with an office,
satellite ground station or other fixed place of business in the United
States may earn income with respect to the leasing of a satellite. Under
current rules, such foreign source income would not be subject to U.S.
tax as ECI even if it is attributable to the foreign corporation's U.S.
office. The proposal would expand the categories of foreign source
income that could constitute ECI to include interest equivalents and
dividend equivalents and to include other income that is attributable to
an office or other fixed place of business in the U.S. The proposal
would be effective for taxable years beginning after date of enactment.
Limit basis step-up for imported pensions.--Under current law, a
nonresident alien individual who anticipates receiving a distribution
from a foreign pension plan may, under certain circumstances, establish
U.S. residency, receive the distribution, claim a high basis in the plan
distribution, and pay little or no U.S. tax on the distribution.
Moreover, as a result of certain existing U.S. tax treaties, the
individual may pay no foreign tax on the distribution. The proposal
would prevent individuals from utilizing internal law and U.S. tax
treaties to produce double non-taxation on foreign pension plan
distributions. The proposal would modify the Internal Revenue Code to
give an individual basis in a foreign pension plan distribution only to
the extent the individual previously has been subject to tax (either in
the United States or the foreign jurisdiction) on the amounts being
distributed. The proposal would be effective for distributions occurring
on or after the date of enactment.
Replace sales-source 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 in production
activities and 50 percent in 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 activities
(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. This
generally increases the U.S. exporters' foreign tax credit limitation
and allows U.S. exporters that operate in high-tax foreign countries to
credit against their U.S. tax liability foreign income taxes levied in
excess of the U.S. income tax rate. The proposal would require that the
allocation between production and sales be based on actual economic
activity. The proposal would be effective for taxable years beginning
after the date of enactment.
Modify rules relating to foreign oil and gas extraction income.--To be
eligible for the U.S. foreign
[[Page 85]]
tax credit, a foreign levy must be the substantial equivalent of an
income tax in the U.S. sense, regardless of the label the foreign
government attaches to it. Under regulations, a foreign levy is a tax if
it is a compulsory payment under the authority of a foreign government
to levy taxes and is not compensation for a specific economic benefit
provided by the foreign country. Taxpayers that are subject to a foreign
levy and that also receive (directly or indirectly) a specific economic
benefit from the levying country are referred to as ``dual capacity''
taxpayers and may not claim a credit for that portion of the foreign
levy paid as compensation for the specific economic benefit received.
The Administration proposes to treat as taxes payments by a dual-
capacity taxpayer to a foreign country that would otherwise qualify as
income taxes or ``in lieu of'' taxes, only if there is a ``generally
applicable income tax'' in that country. For this purpose, a generally
applicable income tax is an income tax (or a series of income taxes)
that applies to trade or business income from sources in that country,
so long as the levy has substantial application both to non-dual-
capacity taxpayers and to persons who are citizens or residents of that
country. Where the foreign country does generally impose an income tax,
as under present law, credits would be allowed up to the level of
taxation that would be imposed under that general tax, so long as the
tax satisfies the new statutory definition of a ``generally applicable
income tax.'' The proposal also would create a new foreign tax credit
basket within section 904 for foreign oil and gas income. The proposal
would be effective for taxable years beginning after the date of
enactment. The proposal would yield to U.S. tax treaty obligations that
allow a credit for taxes paid or accrued on certain oil or gas income.
Recapture overall foreign losses when controlled foreign corporation
(CFC) stock is disposed.--Under the interest allocation rules of section
864(e), the value of stock in a 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 applied
against U.S. income, section 904(f) recapture rules require subsequent
foreign income or gain to be recharacterized as domestic. Recapture can
take place when a taxpayer disposes of directly-owned foreign assets,
for example. However, there may be no recapture when a shareholder
disposes of stock in a CFC. 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. The proposal would
be effective 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.
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,
1999 and before January 1, 2011.
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, 2010. 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 2001. The
Administration proposes to phase in implementation of the new fees over
two years and raise sufficient revenue (excise taxes plus new fees) to
support expected FAA operational and capital needs in the subsequent
year.
Increase excise tax on tobacco products and levy a youth smoking
assessment on tobacco manufacturers. --Under current law, the 34-cents-
per-pack excise tax on cigarettes is scheduled to increase by 5-cents-
per-pack effective January 1, 2002. The Adminis
[[Page 86]]
tration proposes to accelerate the scheduled 5-cents-per-pack increase
in the excise tax on cigarettes and to increase the tax by an additional
25-cents-per-pack effective October 1, 2000. Tax rates on other taxable
tobacco products will increase proportionately. In addition, beginning
after 2003, the Administration proposes to levy an assessment on tobacco
manufacturers if the youth smoking rate is not reduced by 50 percent.
Recover State bank supervision and regulation expenses (receipt
effect).--The Administration proposes to require the Federal Deposit
Insurance Corporation (FDIC) and the Federal Reserve to recover their
respective costs for supervision and regulation of State-chartered banks
and bank holding companies. The Federal Reserve currently funds the
costs of such examinations from earnings; therefore, deposits of
earnings by the Federal Reserve, which are classified as governmental
receipts, will increase by the amount of the recoveries.
Maintain Federal Reserve surplus transfer to the Treasury.--In FY
2000, the Federal Reserve System transferred $3.752 billion from its
capital account surplus funds to the Treasury. The Administration
proposes in FY 2001 that the Federal Reserve System maintain the capital
account surplus fund at the post-transfer level.
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.
Extend abandoned mine reclamation fees.--The abandoned mine
reclamation fees, which are scheduled to expire on September 30, 2004,
are proposed to be extended through September 30, 2014. These fees,
which are levied on coal operators, generally are the lesser of 15 cents
per ton for coal produced by underground mining and 35 cents per ton for
coal produced by surface mining, or 10 percent of the value of the coal
at the mine. Amounts collected will be used to continue abandoned coal
mine reclamation. The coal mining states and Indian Tribes have
identified over $4.2 billion in remaining restoration needs. Each year,
states, Indian Tribes and Federal agencies identify additional needs.
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 construction and operation and
maintenance of harbor 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. Through appropriation
acts, the fee will raise an average of $980 million annually through FY
2005, 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.
Revise Army Corps of Engineers regulatory program fees.--The Army
Corps of Engineers has not changed the fee structure of its regulatory
program since 1977. The Administration proposes to pursue reasonable
changes that would reduce the fees paid from many applicants and
increase recovery from commercial applicants.
Roll back Federal employee retirement contributions.--The
Administration proposes to roll back to pre-1999 levels the higher
retirement contributions required of Federal employees by the Balanced
Budget Act of 1997. The rollback is proposed to take effect in January
2001.
Provide government-wide buyout authority (receipt effect).--The
Administration proposes to provide government-wide buyout authority,
which will lower employee contributions to the civil service retirement
fund.
[[Page 87]]
Table 3-3. EFFECT OF PROPOSALS ON RECEIPTS
(In millions of dollars)
----------------------------------------------------------------------------------------------------------------
Estimate
-------------------------------------------------------------------------
2000 2001 2002 2003 2004 2005 2001-2005
----------------------------------------------------------------------------------------------------------------
Provide tax relief:
Expand educational opportunities:
Provide College Opportunity tax ........ -395 -2,009 -2,323 -3,103 -3,262 -11,092
cut..............................
Provide incentives for public ........ -36 -174 -419 -739 -1,020 -2,388
school construction and
modernization....................
Expand exclusion for employer- -66 -275 -90 ......... ......... ......... -365
provided educational assistance
to include graduate education....
Eliminate 60-month limit on ........ -23 -80 -87 -89 -93 -372
student loan interest deduction..
Eliminate tax when forgiving ........ ........ ........ ......... ......... ......... .........
student loans subject to income
contingent repayment.............
Provide tax relief for ........ -3 -7 -7 -7 -6 -30
participants in certain Federal
education programs...............
-------------------------------------------------------------------------
Subtotal, expand educational -66 -732 -2,360 -2,836 -3,938 -4,381 -14,247
opportunities..................
Provide poverty relief and
revitalize communities:
Increase and simplify the Earned ........ -2,293 -1,936 -1,967 -1,992 -2,001 -10,189
Income Tax Credit (EITC) \1\.....
Increase and index low-income ........ -6 -55 -168 -306 -448 -983
housing tax credit per-capita cap
Provide New Markets Tax Credit.... ........ -30 -222 -515 -743 -940 -2,450
Extend Empowerment Zone (EZ) tax ........ -36 -167 -333 -452 -568 -1,556
incentives and authorize
additional EZs...................
Provide Better America Bonds to ........ -8 -41 -112 -214 -315 -690
improve the environment..........
Permanently extend the expensing ........ ........ -98 -152 -146 -140 -536
of brownfields remediation costs.
Expand tax incentives for -* -* -* -* -* -* -*
specialized small business
investment companies (SSBICs)....
Bridge the Digital Divide......... ........ -107 -272 -344 -289 -207 -1,219
-------------------------------------------------------------------------
Subtotal, provide poverty relief ........ -2,480 -2,791 -3,591 -4,142 -4,619 -17,623
and revitalize communities.....
Make health care more affordable:
Assist taxpayers with long-term ........ -109 -1,150 -1,681 -2,427 -3,028 -8,395
care needs \2\...................
Encourage COBRA continuation ........ ........ -41 -858 -1,149 -1,286 -3,334
coverage.........................
Provide tax credit for Medicare ........ ........ -5 -105 -140 -164 -414
buy-in program...................
Provide tax relief for workers ........ -18 -128 -143 -158 -165 -612
with disabilities \2\............
Provide tax relief to encourage ........ -1 -9 -22 -35 -38 -105
small business health plans......
Encourage development of vaccines ........ ........ ........ ......... ......... ......... .........
for targeted diseases............
-------------------------------------------------------------------------
Subtotal, make health care more ........ -128 -1,333 -2,809 -3,909 -4,681 -12,860
affordable \2\.................
Strengthen families and improve work
incentives:
Provide marriage penalty relief ........ -248 -843 -1,536 -2,130 -4,637 -9,394
and increase standard deduction..
Increase, expand, and simplify ........ -121 -589 -922 -1,288 -1,643 -4,563
child and dependent care tax
credit \2\.......................
Provide tax incentives for ........ -42 -88 -121 -140 -148 -539
employer-provided child-care
facilities.......................
-------------------------------------------------------------------------
Subtotal, strengthen families ........ -411 -1,520 -2,579 -3,558 -6,428 -14,496
and improve work incentives \2\
Promote expanded retirement savings,
security, and portability:
Establish Retirement Savings ........ ........ -657 -2,185 -2,290 -4,034 -9,166
Accounts.........................
Provide small business tax credit ........ ........ -157 -648 -1,878 -3,074 -5,757
for automatic contributions for
non-highly compensated employees.
Provide tax credit for plan start -1 -18 -35 -61 -92 -135 -341
up and administrative expenses;
provide for payroll deduction
IRAs.............................
Provide for the SMART plan........ ........ -44 -65 -66 -68 -70 -313
Enhance the 401(k) SIMPLE plan.... ........ -25 -61 -108 -161 -236 -591
Accelerate vesting for qualified ........ 214 137 104 66 29 550
plans............................
Other changes affecting retirement ........ -53 -207 -288 -377 -450 -1,375
savings, security and portability
-------------------------------------------------------------------------
Subtotal, promote expanded -1 74 -1,045 -3,252 -4,800 -7,970 -16,993
retirement savings, security
and portability................
Provide AMT relief for families and
simplify the tax laws:
Provide adjustments for personal -72 -377 -544 -996 -1,312 -1,650 -4,879
exemptions and the standard
deduction in the individual
alternative minimum tax (AMT)....
Simplify and increase standard -7 -42 -29 -33 -51 -37 -192
deduction for dependent filers...
Replace support test with ........ -66 -97 -102 -107 -112 -484
residency test (limited to
children)........................
Provide tax credit to encourage ........ ........ -192 -207 -208 -209 -816
electronic filing of individual
income tax returns \2\...........
Simplify, retarget and expand ........ -217 -206 -19 -86 -135 -663
expensing for small business.....
Simplify the foreign tax credit -80 -168 -102 -46 10 27 -279
limitation for dividends from 10/
50 companies.....................
Other simplification.............. -1 -17 -23 -27 -30 -35 -132
-------------------------------------------------------------------------
Subtotal, provide AMT relief for -160 -887 -1,193 -1,430 -1,784 -2,151 -7,445
families and simplify the tax
laws \2\.......................
Encourage philanthropy:
Allow deduction for charitable ........ -516 -1,062 -733 -765 -817 -3,893
contributions by non-itemizing
taxpayers........................
Simplify and reduce the excise tax ........ -49 -70 -71 -73 -75 -338
on foundation investment income..
Increase limit on charitable ........ -7 -47 -29 -20 -12 -115
donations of appreciated property
[[Page 88]]
Clarify public charity status of * * * * * * *
donor advised funds..............
-------------------------------------------------------------------------
Subtotal, encourage philanthropy ........ -572 -1,179 -833 -858 -904 -4,346
Promote energy efficiency and
improve the environment:
Provide tax credit for energy- ........ -18 -35 -49 -71 -28 -201
efficient building equipment.....
Provide tax credit for new energy- ........ -82 -150 -194 -134 -73 -633
efficient homes..................
Extend electric vehicle tax credit ........ ........ -4 -182 -700 -1,192 -2,078
and provide tax credit for hybrid
vehicles.........................
Provide 15-year depreciable life ........ -1 -1 -2 -3 -3 -10
for distributed power property...
Extend and modify the tax credit ........ -91 -173 -220 -231 -261 -976
for producing electricity from
certain sources..................
Provide tax credit for solar ........ -9 -19 -25 -34 -45 -132
energy systems...................
-------------------------------------------------------------------------
Subtotal, promote energy ........ -201 -382 -672 -1,173 -1,602 -4,030
efficiency and improve the
environment....................
Electricity restructuring........... ........ 3 11 20 30 41 105
Modify international trade
provisions:
Extend and modify Puerto Rico ........ -35 -67 -101 -134 -166 -503
economic-activity tax credit.....
Extend GSP and modify other trade -10 -454 -858 -940 -884 -248 -3,384
provisions \3\...................
Levy tariff on certain textiles/ ........ ........ 169 169 169 169 676
apparel produced in the CNMI \3\.
-------------------------------------------------------------------------
Subtotal, modify international -10 -489 -756 -872 -849 -245 -3,211
trade provisions \3\...........
Miscellaneous provisions:
Make first $2,000 of severance pay ........ -43 -174 -180 -138 ......... -535
exempt from income tax...........
Exempt Holocaust reparations from -4 -17 -18 -19 -15 ......... -69
Federal income tax...............
-------------------------------------------------------------------------
Subtotal, miscellaneous -4 -60 -192 -199 -153 ......... -604
provisions.....................
-------------------------------------------------------------------------
Subtotal, provide tax relief \2\ -241 -5,883 -12,740 -19,053 -25,134 -32,940 -95,750
\3\............................
Refundable credits.............. ........ -23 -679 -736 -2,218 -2,343 -5,999
-------------------------------------------------------------------------
Total gross tax relief including -241 -5,906 -13,419 -19,789 -27,352 -35,283 -101,749
refundable credits \3\.........
Eliminate unwarranted benefits and
adopt other revenue measures:
Limit benefits of corporate tax
shelter transactions:
Increase disclosure of certain ........ 1,872 1,392 1,357 1,351 1,374 7,346
transactions, modify substantial
understatement penalty for
corporate tax shelters, codify
the economic substance doctrine,
tax income from shelters
involving tax-indifferent parties
and impose a penalty excise tax
on certain fees received by
promotors and advisors...........
Require accrual of income on 1 5 10 15 21 26 77
forward sale of corporate stock..
Modify treatment of ESOP as S ........ 15 47 67 88 104 321
corporation shareholder..........
Limit dividend treatment for ........ 22 37 39 40 42 180
payments on certain self-
amortizing stock.................
Prevent serial liquidation of U.S. 12 20 19 19 19 18 95
subsidiaries of foreign
corporations.....................
Prevent capital gains avoidance 71 328 121 65 45 26 585
through basis shift transactions
involving foreign shareholders...
Prevent mismatching of deductions ........ 62 108 112 117 122 521
and income in transactions with
related foreign persons..........
Prevent duplication or 4 34 36 37 38 40 185
acceleration of loss through
assumption of certain liabilities
Amend 80/20 company rules......... ........ 21 46 53 54 56 230
Modify corporate-owned life ........ 176 340 417 489 548 1,970
insurance (COLI) rules...........
Require lessors of tax-exempt-use ........ 6 11 17 24 30 88
property to include service
contract options in lease term...
Interaction....................... -42 -239 -175 -157 -157 -160 -888
-------------------------------------------------------------------------
Subtotal, limit benefits of 46 2,322 1,992 2,041 2,129 2,226 10,710
corporate tax shelter
transactions...................
Other proposals:
Require banks to accrue interest 6 63 21 4 5 5 98
on short-term obligations........
Require current accrual of market 1 7 13 19 25 31 95
discount by accrual method
taxpayers........................
Modify and clarify certain rules 9 73 74 71 70 70 358
relating to debt-for-debt
exchanges........................
Modify and clarify the straddle 14 30 34 33 34 35 166
rules............................
Provide generalized rules for all 7 18 22 21 19 18 98
stripping transactions...........
Require ordinary treatment for 16 29 31 31 31 31 153
certain dealers of commodities
and equity options...............
Prohibit tax deferral on ........ 2 5 8 10 11 36
contributions of appreciated
property to swap funds...........
Conform control test for tax-free 13 34 41 39 38 39 191
incorporations, distributions,
and reorganizations..............
Treat receipt of tracking stock in 28 108 158 153 149 151 719
certain distributions and
exchanges as the receipt of
property.........................
Require consistent treatment and 1 41 51 53 55 57 257
provide basis allocation rules
for transfers of intangibles in
certain nonrecognition
transactions.....................
Modify tax treatment of certain 17 49 66 71 77 83 346
reorganizations involving
portfolio stock..................
Modify definition of nonqualified 11 53 61 64 67 54 299
preferred stock..................
[[Page 89]]
Modify estimated tax provision for ........ 314 90 -23 -15 -8 358
deemed asset sales...............
Modify treatment of transfers to 3 15 18 19 20 21 93
creditors in divisive
reorganizations..................
Provide mandatory basis -41 50 52 55 60 58 275
adjustments for partners that
have a significant net built-in
loss in partnership property.....
Modify treatment of closely held ........ 1 4 8 12 17 42
REITs............................
Apply RIC excise tax to ........ ........ 1 1 1 1 4
undistributed profits of REITs...
Allow RICs a dividends paid ........ 99 489 457 429 405 1,879
deduction for redemptions only in
cases where the redemption
represents a contraction in the
RIC..............................
Require REMICs to be secondarily ........ 5 17 29 42 55 148
liable for the tax liability of
REMIC residual interest holders..
Deny change in method treatment to 3 59 59 59 61 63 301
tax-free formations..............
Deny deduction for punitive 16 92 130 137 144 151 654
damages..........................
Repeal lower-of-cost-or-market ........ 459 447 371 372 154 1,803
inventory accounting method......
Disallow interest on debt 4 11 18 24 30 35 118
allocable to tax-exempt
obligations......................
Require capitalization of mutual ........ 23 111 98 83 64 379
fund commissions.................
Provide consistent amortization ........ -216 -220 34 259 445 302
periods for intangibles..........
Clarify recovery period of utility 12 40 65 82 91 99 377
grading costs....................
Apply rules generally applicable 2 43 73 113 141 139 509
to acquisitions of tangible
assets to acquisitions of
professional sports franchises...
Require recapture of policyholder ........ 65 174 285 522 782 1,828
surplus accounts.................
Modify rules for capitalizing ........ 536 1,820 2,191 2,413 1,328 8,288
policy acquisition costs of life
insurance companies..............
Increase the proration percentage ........ 48 82 98 115 133 476
for P&C insurance companies......
Modify rules that apply to sales ........ 13 35 39 43 48 178
of life insurance contracts......
Modify rules that apply to tax- ........ 12 22 23 24 25 106
exempt property casualty
insurance companies..............
Subject investment income of trade ........ 180 309 325 341 358 1,513
associations to tax..............
Impose penalty for failure to file ........ ........ 24 23 22 21 90
an annual information return.....
Restore phaseout of unified credit ........ 33 70 78 83 106 370
for large estates................
Require consistent valuation for 1 5 10 14 18 21 68
estate and income tax purposes...
Require basis allocation for part ........ 2 3 4 5 5 19
sale, part gift transactions.....
Conform treatment of surviving 3 19 42 59 75 92 287
spouses in community property
States...........................
Include QTIP trust assets in ........ ........ 2 2 2 2 8
surviving spouse's estate........
Eliminate non-business valuation ........ 271 575 600 636 618 2,700
discounts........................
Eliminate gift tax exemption for ........ -1 -1 ......... 5 14 17
personal residence trusts........
Modify requirements for annual ........ ........ 20 20 22 20 82
exclusion for gifts..............
Increase elective withholding rate ........ ........ 47 3 3 3 56
for nonperiodic distributions
from deferred compensation plans.
Increase excise tax for excess IRA ........ 1 12 13 14 14 54
contributions....................
Limit pre-funding of welfare ........ 92 156 159 151 150 708
benefits for 10 or more employer
plans............................
Subject signing bonuses to ........ 5 3 3 3 2 16
employment taxes.................
Clarify employment tax treatment ........ 48 64 64 63 63 302
of choreworkers..................
Prohibit IRAs from investing in 3 16 29 30 32 33 140
foreign sales corporations.......
Tighten the substantial ........ 26 44 45 41 37 193
understatement penalty for large
corporations.....................
Require withholding on certain ........ 20 1 1 1 1 24
gambling winnings................
Require information reporting for ........ 5 10 14 18 21 68
private separate accounts........
Increase penalties for failure to ........ 6 15 15 9 10 55
file correct information returns.
Modify deposit requirement for ........ ........ ........ ......... ......... 1,583 1,583
FUTA.............................
Reinstate Oil Spill Liability ........ ........ 253 261 264 266 1,044
Trust Fund tax \3\...............
Repeal percentage depletion for ........ 94 96 97 99 101 487
non-fuel minerals mined on
Federal and formerly Federal
lands............................
Impose excise tax on purchase of 6 7 5 2 ......... -2 12
structured settlements...........
Require taxpayers to include ........ 4 11 12 12 13 52
rental income of residence in
income without regard to the
period of rental.................
Eliminate installment payment of ........ ........ 378 27 30 32 467
heavy vehicle use tax \3\........
Require recognition of gain on ........ 10 13 11 11 11 56
sale of principal residence if
acquired in a tax-free exchange
within five years of the sale....
Limit benefits of transactions ........ 36 52 40 36 35 199
with ``Identified Tax Havens''...
Modify treatment of built-in 1 78 136 143 151 161 669
losses and other attributes
trafficking......................
Simplify taxation of property that * * * * * * *
no longer produces income
effectively connected with a U.S.
trade or business................
Prevent avoidance of tax on U.S.- 3 28 58 107 155 212 560
accrued gains (expatriation).....
Expand ECI rules to include ........ 22 38 39 41 42 182
certain foreign source income....
Limit basis step-up for imported 2 26 33 34 36 38 167
pensions.........................
Replace sales-source rules........ ........ 320 570 600 630 660 2,780
Modify rules relating to foreign ........ 5 69 112 118 124 428
oil and gas extraction income....
Recapture overall foreign losses 1 1 * * * * 1
when CFC stock is disposed.......
Modify foreign office material 1 7 10 11 11 11 50
participation exception
applicable to inventory sales
attributable to nonresident's
U.S. office......................
-------------------------------------------------------------------------
[[Page 90]]
Subtotal, other proposals \3\... 143 3,542 7,221 7,635 8,565 9,478 36,441
-------------------------------------------------------------------------
Subtotal, eliminate unwarranted 189 5,864 9,213 9,676 10,694 11,704 47,151
benefits and adopt other revenue
measures \3\.....................
Net tax relief including -52 -42 -4,206 -10,113 -16,658 -23,579 -54,598
refundable credits \3\...........
-------------------------------------------------------------------------
Other provisions that affect receipts:
Reinstate environmental tax on ........ 725 432 438 434 437 2,466
corporate taxable income \4\.......
Reinstate Superfund excise taxes \3\ 152 707 762 772 785 797 3,823
Convert Airport and Airway Trust ........ 724 1,399 1,500 1,522 1,522 6,667
Fund taxes to a cost-based user fee
system \3\.........................
Increase excise tax on tobacco 446 4,084 3,738 3,532 10,140 9,700 31,194
products and levy a youth smoking
assessment on tobacco manufacturers
\3\................................
Recover State bank supervision and ........ 78 82 86 90 95 431
regulation expenses (receipt
effect) \3\........................
Maintain Federal Reserve surplus ........ 3,752 ........ ......... ......... ......... 3,752
transfer to the Treasury...........
Restore premiums for United Mine ........ 11 10 10 9 9 49
Workers of America Combined Benefit
Fund...............................
Extend abandoned mine reclamation ........ ........ ........ ......... ......... 218 218
fees \3\...........................
Replace Harbor Maintenance tax with ........ -549 -602 -647 -681 -718 -3,197
the Harbor Services User Fee
(receipt effect) \3\...............
Revise Army Corps of Engineers ........ 5 5 5 5 5 25
regulatory program fees \3\........
Roll back Federal employee ........ -427 -619 -160 ......... ......... -1,206
retirement contributions...........
Provide Government-wide buyout ........ -9 -18 -9 ......... ......... -36
authority (receipt effect).........
-------------------------------------------------------------------------
Total, other provisions \3\ \4\... 598 9,101 5,189 5,527 12,304 12,065 44,186
----------------------------------------------------------------------------------------------------------------
* $500,000 or less
\1\ The proposal to increase and simplify the Earned Income Tax Credit has both receipts and outlay effects. The
receipts effect for the proposal is -$305 million, -$304 million, -$314 million, -$326 million and -$339
million for fiscal years 2001-2005, respectively. The outlay effect is $2,003 million, $1,936 million, $1,967
million, $1,992 million and $2,001 million for fiscal years 2001-2005, respectively.
\2\ Amounts shown are the effect on receipts.
\3\ Net of income offsets
\4\ Net of deductibility for income tax purposes
[[Page 91]]
Table 3-4. RECEIPTS BY SOURCE
(In millions of dollars)
----------------------------------------------------------------------------------------------------------------
Estimate
Source 1999 -----------------------------------------------------------------------
Actual 2000 2001 2002 2003 2004 2005
----------------------------------------------------------------------------------------------------------------
Individual income taxes
(federal funds):
Existing law.............. 879,480 951,945 978,249 1,005,714 1,040,248 1,086,039 1,143,081
Proposed Legislation .......... -359 -5,634 -10,125 -14,215 -19,554 -25,821
(PAYGO)................
Legislative proposal, .......... .......... -205 -397 -424 -432 -432
discretionary offset...
-----------------------------------------------------------------------------------
Total individual income 879,480 951,586 972,410 995,192 1,025,609 1,066,053 1,116,828
taxes......................
===================================================================================
Corporation income taxes:
Federal funds:
Existing law............ 184,670 192,285 189,594 190,189 191,800 196,090 205,076
Proposed Legislation .......... 110 3,942 4,405 3,105 3,150 ..........
(PAYGO)..............
Legislative proposal, .......... .......... 119 102 110 119 131
discretionary offset.
-----------------------------------------------------------------------------------
Total Federal funds 184,670 192,395 193,655 194,696 195,015 199,359 205,207
corporation income taxes.
-----------------------------------------------------------------------------------
Trust funds:
Hazardous substance 10 .......... .......... .......... .......... .......... ..........
superfund..............
Proposed Legislation .......... .......... 1,115 664 674 668 673
(PAYGO)..............
-----------------------------------------------------------------------------------
Total corporation income 184,680 192,395 194,770 195,360 195,689 200,027 205,880
taxes......................
===================================================================================
Social insurance and
retirement receipts (trust
funds):
Employment and general
retirement:
Old age and survivors 383,559 408,583 427,322 446,421 465,244 484,401 511,676
insurance (Off-budget).
Disability insurance 60,909 68,180 72,573 75,805 79,003 82,259 86,890
(Off-budget)...........
Hospital insurance...... 132,268 136,515 143,695 150,290 156,694 163,258 172,612
Railroad retirement:
Social Security 1,515 1,639 1,674 1,697 1,719 1,740 1,762
equivalent account...
Rail pension and 2,629 2,621 2,661 2,699 2,736 2,773 2,803
supplemental annuity.
-----------------------------------------------------------------------------------
Total employment and 580,880 617,538 647,925 676,912 705,396 734,431 775,743
general retirement.......
-----------------------------------------------------------------------------------
On-budget............... 136,412 140,775 148,030 154,686 161,149 167,771 177,177
Off-budget.............. 444,468 476,763 499,895 522,226 544,247 566,660 598,566
-----------------------------------------------------------------------------------
Unemployment insurance:
Deposits by States \1\ . 19,894 21,453 23,327 24,529 25,594 26,273 27,411
Proposed Legislation .......... .......... .......... .......... .......... .......... 1,297
(PAYGO)..............
Federal unemployment 6,475 6,668 6,873 7,010 7,127 7,260 7,405
receipts \1\ ..........
Proposed Legislation .......... .......... .......... .......... .......... .......... 286
(PAYGO)..............
Railroad unemployment 111 67 54 97 123 124 102
receipts \1\ ..........
-----------------------------------------------------------------------------------
Total unemployment 26,480 28,188 30,254 31,636 32,844 33,657 36,501
insurance................
-----------------------------------------------------------------------------------
Other retirement:
Federal employees' 4,400 4,221 4,269 4,194 3,547 3,197 3,028
retirement--employee
share..................
Proposed Legislation .......... .......... -9 -18 -9 .......... ..........
(non-PAYGO)..........
Proposed Legislation .......... .......... -427 -619 -160 .......... ..........
(PAYGO)..............
Non-Federal employees 73 74 68 63 51 46 43
retirement \2\ ........
-----------------------------------------------------------------------------------
Total other retirement.... 4,473 4,295 3,901 3,620 3,429 3,243 3,071
-----------------------------------------------------------------------------------
Total social insurance and 611,833 650,021 682,080 712,168 741,669 771,331 815,315
retirement receipts........
===================================================================================
On-budget................. 167,365 173,258 182,185 189,942 197,422 204,671 216,749
Off-budget................ 444,468 476,763 499,895 522,226 544,247 566,660 598,566
===================================================================================
Excise taxes:
Federal funds:
Alcohol taxes........... 7,386 7,267 7,150 7,158 7,120 7,091 7,080
Proposed Legislation .......... -32 32 .......... .......... .......... ..........
(PAYGO)..............
Tobacco taxes........... 5,400 6,742 7,158 7,844 8,013 7,938 7,869
Proposed Legislation .......... 594 5,446 4,985 4,709 4,018 3,756
(PAYGO)..............
Transportation fuels tax 849 787 808 793 811 817 836
Telephone and teletype 5,185 5,500 5,821 6,142 6,471 6,833 7,231
services...............
Ozone depleting 105 73 73 22 9 .......... ..........
chemicals and products.
Other Federal fund 368 2,174 2,200 2,114 1,997 1,987 2,030
excise taxes...........
[[Page 92]]
Proposed Legislation .......... 38 -74 -65 -69 -73 -77
(PAYGO)..............
-----------------------------------------------------------------------------------
Total Federal fund excise 19,293 23,143 28,614 28,993 29,061 28,611 28,725
taxes....................
-----------------------------------------------------------------------------------
Trust funds:
Highway................. 39,299 34,311 35,148 35,597 36,229 36,870 37,622
Proposed Legislation .......... .......... .......... 383 32 35 37
(PAYGO)..............
Airport and airway...... 10,391 9,222 9,645 10,173 10,630 11,333 12,115
Legislative proposal, .......... .......... 965 1,866 1,999 2,030 2,030
discretionary offset.
Aquatic resources....... 374 336 341 376 380 395 401
Black lung disability 596 577 591 606 619 628 636
insurance..............
Inland waterway......... 104 104 107 109 111 114 116
Hazardous substance 11 .......... .......... .......... .......... .......... ..........
superfund..............
Proposed Legislation .......... 204 942 1,016 1,031 1,046 1,063
(PAYGO)..............
Oil spill liability..... .......... 173 .......... .......... .......... .......... ..........
Proposed Legislation .......... .......... .......... 338 348 351 355
(PAYGO)..............
Vaccine injury 130 131 134 137 139 141 110
compensation...........
Leaking underground 216 183 189 191 195 198 202
storage tank...........
-----------------------------------------------------------------------------------
Total trust funds excise 51,121 45,241 48,062 50,792 51,713 53,141 54,687
taxes....................
-----------------------------------------------------------------------------------
Total excise taxes.......... 70,414 68,384 76,676 79,785 80,774 81,752 83,412
===================================================================================
Estate and gift taxes:
Federal funds............. 27,782 30,482 31,975 34,172 35,494 37,831 36,151
Proposed Legislation .......... 4 329 721 777 846 878
(PAYGO)................
-----------------------------------------------------------------------------------
Total estate and gift taxes. 27,782 30,486 32,304 34,893 36,271 38,677 37,029
===================================================================================
Customs duties:
Federal funds............. 17,727 20,149 21,405 23,430 25,262 26,554 27,921
Proposed Legislation .......... -13 -569 -880 -990 -917 -71
(PAYGO)................
Trust funds............... 609 739 797 870 932 978 1,030
Proposed Legislation .......... .......... -30 -30 -30 -30 -30
(PAYGO)................
Legislative proposal, .......... .......... -732 -803 -863 -908 -958
discretionary offset...
-----------------------------------------------------------------------------------
Total customs duties........ 18,336 20,875 20,871 22,587 24,311 25,677 27,892
===================================================================================
MISCELLANEOUS RECEIPTS: \3\
Miscellaneous taxes....... 101 119 121 124 126 129 132
Proposed youth smoking .......... .......... .......... .......... .......... 7,379 7,280
assessment (PAYGO).......
United Mine Workers of 148 142 138 132 127 122 118
America combined benefit
fund.....................
Proposed Legislation .......... .......... 11 10 10 9 9
(PAYGO)................
Deposit of earnings, 25,917 32,452 25,664 30,196 31,296 32,489 33,662
Federal Reserve System...
Legislative proposal, .......... .......... 3,856 109 115 120 126
discretionary offset...
Defense cooperation....... .......... 6 6 6 6 6 6
Fees for permits and 6,572 7,509 7,965 8,726 9,549 10,378 10,972
regulatory and judicial
services.................
Proposed Legislation .......... .......... -2 -7 -7 .......... 290
(PAYGO)................
Legislative proposal, .......... .......... 7 7 7 7 7
discretionary offset...
Fines, penalties, and 2,738 2,188 2,157 1,966 1,977 1,977 1,979
forfeitures..............
Gifts and contributions... 186 281 188 156 150 148 149
Refunds and recoveries.... -733 -192 -191 -190 -190 -190 -190
-----------------------------------------------------------------------------------
Total miscellaneous receipts 34,929 42,505 39,920 41,235 43,166 52,574 54,540
===================================================================================
Total budget receipts....... 1,827,454 1,956,252 2,019,031 2,081,220 2,147,489 2,236,091 2,340,896
On-budget................. 1,382,986 1,479,489 1,519,136 1,558,994 1,603,242 1,669,431 1,742,330
Off-budget................ 444,468 476,763 499,895 522,226 544,247 566,660 598,566
----------------------------------------------------------------------------------------------------------------
\1\ Deposits by States cover the benefit part of the program. Federal unemployment receipts cover administrative
costs at both the Federal and State levels. Railroad unemployment receipts cover both the benefits and
administrative costs of the program for the railroads.
\2\ Represents employer and employee contributions to the civil service retirement and disability fund for
covered employees of Government-sponsored, privately owned enterprises and the District of Columbia municipal
government.
\3\ Includes both Federal and trust funds.