[JPRT 105-6-98]
[From the U.S. Government Publishing Office]
[JOINT COMMITTEE PRINT]
GENERAL EXPLANATION OF
TAX LEGISLATION ENACTED IN 1998
__________
Prepared by the Staff
of the
JOINT COMMITTEE ON TAXATION
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13
NOVEMBER 24, 1998
_____
U.S. GOVERNMENT PRINTING OFFICE
52-240 WASHINGTON : 1998 JCS-6-98
_______________________________________________________________________
For sale by the U.S. Government Printing Office,
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
JOINT COMMITTEE ON TAXATION
105th Congress, 2nd Session
------
SENATE HOUSE
WILLIAM V. ROTH, Jr., Delaware, BILL ARCHER, Texas,
Chairman Vice Chairman
JOHN H. CHAFEE, Rhode Island PHILIP M. CRANE, Illinois
CHARLES GRASSLEY, Iowa WILLIAM M. THOMAS, California
DANIEL PATRICK MOYNIHAN, New York CHARLES B. RANGEL, New York
MAX BAUCUS, Montana FORTNEY PETE STARK, California
Lindy L. Paull, Chief of Staff
Mary M. Schmitt, Deputy Chief of Staff (Law)
Bernard A. Schmitt, Deputy Chief of Staff (Revenue Analysis)
SUMMARY CONTENTS
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Page
Introduction..................................................... 1
Part One: Surface Transportation Revenue Act of 1998 (Title IX of
H.R. 2400)..................................................... 2
Part Two: Internal Revenue Service Restructuring and Reform Act
of 1998 (H.R. 2676)............................................ 16
Part Three: Tax and Trade Relief Extension Act of 1998 (Division
J of H.R. 4328, The Omnibus Consolidated and Emergency
Supplemental Appropriations Act, 1999)......................... 235
Part Four: Ricky Ray Hemophilia Relief Fund Act of 1998 (Sec.
103(h) of H.R. 1023)........................................... 303
Appendix: Estimated Budget Effects of Tax Legislation Enacted in
1998........................................................... 305
C O N T E N T S
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Page
Introduction..................................................... 1
Part One: Surface Transportation Revenue Act of 1998 (Title IX of
H.R. 2400)..................................................... 2
A. Extension of Highway Trust Fund, Aquatic Resources Trust
Fund, and National Recreational Trails Trust Fund Excise
Taxes and Expenditure Authority (secs. 9002-9005, 9008,
9009, and 9011)............................................ 2
B. Repeal of 1.25-Cents-Per-Gallon Tax Rate on Rail Fuel
(sec. 9006)................................................ 11
C. Purposes for Which Amtrak NOL Monies May Be Used In Non-
Amtrak States (sec. 9007).................................. 12
D. Exclusion from Income for Employer-Provided Transportation
Benefits (sec. 9010)....................................... 13
E. Identification of Limited Tax Benefits (sec. 9012)........ 15
Part Two: Internal Revenue Service Restructuring and Reform Act
of 1998 (H.R. 2676)............................................ 16
Title I. Reorganization of Structure and Management of the IRS... 16
A. IRS Restructuring and Creation of IRS Oversight Board..... 16
1. IRS mission and restructuring (secs. 1001 and 1002)... 16
2. Establishment and duties of IRS Oversight Board (sec.
1101).................................................. 18
B. Appointment and Duties of IRS Commissioner and Chief
Counsel and Other Personnel................................ 26
1. IRS Commissioner and other personnel (secs. 1102(a)
and 1104).............................................. 26
2. IRS Chief Counsel (sec. 1102(b))...................... 27
C. Structure and Funding of the Employee Plans and Exempt
Organizations Division (``EP/EO'') (sec. 1101)............. 29
D. Taxpayer Advocate (sec. 1102(a), (c), and (d))............ 31
E. Treasury Office of Inspector General; IRS Office of the
Chief Inspector (secs. 1102 and 1103)...................... 35
F. Prohibition on Executive Branch Influence Over Taxpayer
Audits (sec. 1105)......................................... 44
G. IRS Personnel Flexibilities (secs. 1201-1205)............. 45
Title II. Electronic Filing...................................... 51
A. Electronic Filing of Tax and Information Returns (sec.
2001)...................................................... 51
B. Due Date for Certain Information Returns (sec. 2002)...... 52
C. Paperless Electronic Filing (sec. 2003)................... 53
D. Return-Free Tax System (sec. 2004)........................ 54
E. Access to Account Information (sec. 2005)................. 55
Title III. Taxpayer Protection and Rights........................ 56
A. Burden of Proof (sec. 3001)............................... 56
B. Proceedings by Taxpayers.................................. 59
1. Expansion of authority to award costs and certain fees
(sec. 3101)............................................ 59
2. Civil damages for collection actions (sec. 3102)...... 61
3. Increase in size of cases permitted on small case
calendar (sec. 3103)................................... 62
4. Actions for refund with respect to certain estates
which have elected the installment method of payment
(sec. 3104)............................................ 63
5. Administrative appeal of adverse IRS determination of
a bond issue's tax-exempt status (sec. 3105)........... 64
6. Civil action for release of erroneous lien (sec. 3106) 65
C. Relief for Innocent Spouses and for Taxpayers Unable to
Manage Their Financial Affairs Due to Disabilities......... 66
1. Relief for innocent spouses (sec. 3201)............... 66
2. Suspension of statute of limitations on filing refund
claims during periods of disability (sec. 3202)........ 72
D. Provisions Relating to Interest and Penalties............. 73
1. Elimination of interest differential on overlapping
periods of interest on income tax overpayments and
underpayments (sec. 3301).............................. 73
2. Increase in overpayment rate payable to taxpayers
other than corporations (sec. 3302).................... 75
3. Mitigation of penalty for individual's failure to pay
during period of installment agreement (sec. 3303)..... 75
4. Mitigation of failure to deposit penalty (sec. 3304).. 76
5. Suspension of interest and certain penalties if
Secretary fails to contact individual taxpayer (sec.
3305).................................................. 77
6. Procedural requirements for imposition of penalties
and additions to tax (sec. 3306)....................... 78
7. Personal delivery of notice of penalty under section
6672 (sec. 3307)....................................... 79
8. Notice of interest charges (sec. 3308)................ 79
9. Abatement of interest on underpayments by taxpayers in
Presidentially declared disaster areas (sec. 3309)..... 80
E. Protections for Taxpayers Subject to Audit or Collection
Activities................................................. 81
1. Due process in IRS collection actions (sec. 3401)..... 81
2. Examination activities................................ 86
a. Uniform application of confidentiality privilege
to taxpayer communications with federally
authorized practitioners (sec. 3411)............... 86
b. Limitation on financial status audit techniques
(sec. 3412)........................................ 88
c. Software trade secrets protection (sec. 3413)..... 89
d. Threat of audit prohibited to coerce tip reporting
alternative commitment agreements (sec. 3414)...... 92
e. Taxpayers allowed motion to quash all third-party
summonses (sec. 3415).............................. 93
f. Service of summonses to third-party recordkeepers
permitted by mail (sec. 3416)...................... 94
g. Notice of IRS contact of third parties (sec. 3417) 95
3. Collection activities................................. 96
a. Approval process for liens, levies, and seizures
(sec. 3421)........................................ 96
b. Modifications to certain levy exemption amounts
(sec. 3431)........................................ 96
c. Release of levy upon agreement that amount is
uncollectible (sec. 3432).......................... 97
d. Levy prohibited during pendency of refund
proceedings (sec. 3433)............................ 98
e. Approval required for jeopardy and termination
assessments and jeopardy levies (sec. 3434)........ 99
f. Increase in amount of certain property on which
lien not valid (sec. 3435)......................... 99
g. Waiver of early withdrawal tax for IRS levies on
employer-sponsored retirement plans or IRAs (sec.
3436).............................................. 100
h. Prohibition of sales of seized property at less
than minimum bid (sec. 3441)....................... 102
i. Accounting of sales of seized property (sec. 3442) 102
j. Uniform asset disposal mechanism (sec. 3443)...... 103
k. Codification of IRS administrative procedures for
seizure of taxpayer's property (sec. 3444)......... 104
l. Procedures for seizure of residences and
businesses (sec. 3445)............................. 104
4. Provisions relating to examination and collection
activities............................................. 105
a. Procedures relating to extensions of statute of
limitations by agreement (sec. 3461)............... 105
b. Offers-in-compromise (sec. 3462).................. 107
c. Notice of deficiency to specify deadlines for
filing Tax Court petition (sec. 3463).............. 109
d. Refund or credit of overpayments before final
determination (sec. 3464).......................... 110
e. IRS procedures relating to appeal of examinations
and collections (sec. 3465)........................ 110
f. Application of certain fair debt collection
practices (sec. 3466).............................. 112
g. Guaranteed availability of installment agreements
(sec. 3467)........................................ 113
h. Prohibition on requests to taxpayers to waive
rights to bring actions (sec. 3468)................ 114
F. Disclosures to Taxpayers.................................. 114
1. Explanation of joint and several liability (sec. 3501) 114
2. Explanation of taxpayers' rights in interviews with
the IRS (sec. 3502).................................... 115
3. Disclosure of criteria for examination selection (sec.
3503).................................................. 116
4. Explanation of the appeals and collection process
(sec. 3504)............................................ 116
5. Explanation of reason for refund disallowance (sec.
3505).................................................. 117
6. Statements to taxpayers with installment agreements
(sec. 3506)............................................ 118
7. Notification of change in tax matters partner (sec.
3507).................................................. 118
8. Conditions under which taxpayers' returns may be
disclosed (sec. 3508).................................. 119
9. Disclosure of Chief Counsel advice (sec. 3509)........ 120
G. Low-Income Taxpayer Clinics (sec. 3601)................... 124
H. Other Provisions.......................................... 125
1. Cataloging complaints (sec. 3701).................... 125
2. Archive of records of Internal Revenue Service (sec.
3702).................................................. 126
3. Payment of taxes (sec. 3703)......................... 127
4. Clarification of authority of Secretary relating to
the making of elections (sec. 3704).................... 127
5. IRS employee contacts (sec. 3705).................... 128
6. Use of pseudonyms by IRS employees (sec. 3706)....... 129
7. Illegal tax protestor designations (sec. 3707)....... 129
8. Provision of confidential information to Congress by
whistleblowers (sec. 3708)............................. 130
9. Listing of local IRS telephone numbers and addresses
(sec. 3709)............................................ 131
10. Identification of return preparers (sec. 3710)....... 131
11. Offset of past-due, legally enforceable State income
tax obligations against overpayments (sec. 3711)....... 132
12. Reporting requirements relating to education tax
credits (sec. 3712).................................... 133
I. Studies................................................... 136
1. Administration of penalties and interest (sec. 3801).. 136
2. Confidentiality of tax return information (sec. 3802). 136
3. Noncompliance with revenue laws by taxpayers (sec.
3803).................................................. 137
4. Payments for detection of underpayments and fraud
(sec. 3804)............................................ 138
Title IV. Congressional Accountability for the IRS............... 139
A. Review of Requests for GAO Investigations of the IRS (sec.
4001)...................................................... 139
B. Joint Congressional Reviews and Coordinated Oversight
Reports (secs. 4001 and 4002).............................. 140
C. Funding for Century Date Change (sec. 4011)............... 141
D. Tax Law Complexity Analysis (secs. 4021 and 4022)......... 142
Title V. Additional Provisions................................... 144
A. Elimination of 18-Month Holding Period for Capital Gains
(sec. 5001)................................................ 144
B. Deductibility of Meals Provided for the Convenience of the
Employer (sec. 5002)....................................... 145
Title VI. Tax Technical Corrections.............................. 147
technical corrections to the taxpayer relief act of 1997 147
A. Amendments to Title I of the 1997 Act Relating to the
Child Credit............................................... 147
1. Stacking rules for the child credit under the
limitations based on tax liability (sec. 6003(a))...... 148
2. Treatment of a portion of the child credit as a
supplemental child credit (sec. 6003(b))............... 148
B. Amendments to Title II of the 1997 Act Relating to
Education Incentives....................................... 149
1. Clarifications to HOPE and Lifetime Learning tax
credits (sec. 6004(a))................................. 149
2. Deduction for student loan interest (sec. 6004(b)).... 150
3. Qualified State tuition programs (sec. 6004(c))....... 151
4. Education IRAs (sec. 6004(d))......................... 152
5. Enhanced deduction for corporate contributions of
computer technology and equipment (sec. 6004(e))....... 155
6. Treatment of cancellation of certain student loans
(sec. 6004(f))......................................... 156
7. Qualified zone academy bonds (sec. 6004(g))........... 156
C. Amendments to Title III of the 1997 Act Relating to
Savings Incentives......................................... 157
1. Conversions of IRAs into Roth IRAs (sec. 6005(b))..... 157
2. Penalty-free distributions from IRAs for education
expenses and purchase of first homes (sec. 6005(c)).... 160
3. Limits based on modified adjusted gross income (sec.
6005(b))............................................... 161
4. Contribution limit to Roth IRAs (sec. 6005(b))........ 162
5. Contribution limitations for active participants in an
IRA (sec. 6005(a))..................................... 162
D. Amendments to Title III of the 1997 Act Relating to
Capital Gains.............................................. 163
1. Individual capital gains rate reductions (sec.
6005(d))............................................... 163
2. Exclusion of gain on the sale of a principal residence
owned and used less than two years (sec. 6005(e) (1)
and (2)................................................ 165
3. Effective date of the exclusion of gain on the sale of
a principal residence (sec. 6005(e)(3))................ 166
4. Rollover of gain from sale of qualified stock (sec.
6005(f))............................................... 167
E. Amendments to Title IV of the 1997 Act Relating to
Alternative Minimum Tax.................................... 167
1. Clarification of small business exemption (sec.
6006(a))............................................... 167
2. Election to use AMT depreciation for regular tax
purposes (sec. 6006(b))................................ 168
F. Amendments to Title V of the 1997 Act Relating to Estate
and Gift Taxes............................................. 169
1. Clarification of effective date for indexing of
generation-skipping exemption (sec. 6007(a))........... 169
2. Conversion of qualified family-owned business
exclusion into a deduction (sec. 6007(b)(1)(A))........ 170
3. Coordination between unified credit and family-owned
business provision (secs. 6007(b)(1)(B) and 6007(b)(4)) 170
4. Clarification of businesses eligible for family-owned
business provision (sec. 6007(b)(2))................... 172
5. Clarification of ``trade or business'' requirement
for family-owned business provision (sec. 6007(b)(5)).. 172
6. Clarification that interests eligible for family-
owned business provision must be passed to a qualified
heir (sec. 6007(b)(1)(B)).............................. 173
7. Other modifications to the qualified family-owned
business provision (secs. 6007(b)(3), 6007(b)(6), and
6007(b)(7))............................................ 173
8. Clarification of interest on installment payment of
estate tax on holding companies (sec. 6007(c))......... 174
9. Clarification on declaratory judgment jurisdiction of
U.S. Tax Court regarding installment payment of estate
(sec. 6007(d))......................................... 175
10. Clarification of rules governing revaluation of gifts
(sec. 6007(e))......................................... 175
11. Clarification with respect to post-mortem
conservation easements (sec. 6007(g)).................. 176
G. Amendments to Title VII of the 1997 Act Relating to
Incentives for the District of Columbia (sec. 6008)........ 176
H. Amendments to Title IX of the 1997 Act Relating to
Miscellaneous Provisions................................... 180
1. Clarification of qualification for reduced rate of
excise tax on certain hard ciders (sec. 6009(a))....... 180
2. Election for 1987 partnerships to continue exception
from treatment of publicly traded partnerships as
corporations (sec. 6009(b))............................ 181
3. Depreciation limitations for electric vehicles (sec.
6009(c))............................................... 182
4. Combined employment tax reporting demonstration
project (sec. 6009(d))................................. 182
5. Modification of operation of elective carryback of
existing net operating losses of the National Railroad
Passenger Corporation (``Amtrak'') (sec. 6009(e))...... 183
I. Amendments to Title X of the 1997 Act Relating to Revenue-
Raising Provisions......................................... 184
1. Exception from constructive sales rules for certain
debt positions (sec. 6010(a)(1))....................... 184
2. Definition of forward contract under constructive
sales rules (sec. 6010(a)(2)).......................... 184
3. Treatment of mark-to-market gains of electing traders
(sec. 6010(a)(3))...................................... 185
4. Special effective date for constructive sale rules
(sec. 6010(a)(4))...................................... 186
5. Gain recognition for certain extraordinary dividends
(sec. 6010(b))......................................... 186
6. Treatment of certain corporate distributions (sec.
6010(c))............................................... 187
7. Application of section 304 to certain international
transactions (sec. 6010(d))............................ 191
8. Certain preferred stock treated as ``boot''--
treatment of transferor (sec. 6010(e)(1)).............. 193
9. Certain preferred stock treated as ``boot''--statute
of limitations (sec. 6010(e)(2))....................... 193
10. Establish IRS continuous levy and improve debt
collection (sec. 6010(f)).............................. 194
11. Clarification regarding aviation gasoline excise tax
(sec. 6010(g))......................................... 194
12. Clarification of requirement that registered fuel
terminals offer dyed fuel (sec. 6010(h))............... 195
13. Clarification of treatment of prepaid telephone cards
(sec. 6010(i))......................................... 195
14. Modify UBIT rules applicable to second-tier
subsidiaries (sec. 6010(j))............................ 196
15. Application of foreign tax credit holding period rule
to RICs and clarification of exception from such rule
for securities dealers (sec. 6010(k)).................. 197
16. Clarification of provision expanding the limitations
on deductibility of premiums and interest with respect
to life insurance, endowment, and annuity contracts
(sec. 6010(o))......................................... 198
17. Clarification of allocation of basis of properties
distributed by a partnership (sec. 6010(m))............ 200
18. Clarification to the definition of modified adjusted
gross income for purposes of the earned income credit
phaseout (sec. 6010(p))................................ 201
J. Amendments to Title XI of the 1997 Act Relating to Foreign
Provisions................................................. 202
1. Application of attribution rules under PFIC provisions
(sec. 6011(b)(2))...................................... 202
2. Treatment of PFIC option holders (sec. 6011(b)(1)).... 203
3. Application of PFIC mark-to-market rules to RICs (sec.
6011(c)(3))............................................ 205
4. Interaction between the PFIC provisions and other
mark-to-market rules (sec. 6011(c)(2))................. 206
5. Information reporting with respect to certain foreign
corporations and partnerships (sec. 6011(f))........... 207
K. Amendments to Title XII of the 1997 Act Relating to
Simplification Provisions.................................. 207
1. Travel expenses of Federal employees participating in
a Federal criminal investigation (sec. 6012(a))........ 207
2. Magnetic media returns for partnerships having more
than 100 partners (sec. 6012(d))....................... 208
3. Effective date for provisions relating to electing
large partnerships, partnership returns required on
magnetic media, and treatment of partnership items of
individual retirement arrangements (sec. 6012(e))...... 208
4. Modification of distribution rule for REITS (sec.
6012(g))............................................... 209
L. Amendments to Title XIII of the 1997 Act Relating to
Estate, Gift and Trust Simplification...................... 209
1. Clarification of treatment of revocable trusts for
purposes of the generation-skipping transfer tax (sec.
6013(a))............................................... 209
2. Provision of regulatory authority for simplified
reporting of funeral trusts terminated during taxable
year (sec. 6013(b)).................................... 210
M. Amendment to Title XIV of the 1997 Act Relating to Excise
Tax Simplification......................................... 211
1. Transfers of bulk imports of wine to wineries or beer
to breweries (secs. 6014(a)(1) and (b)(1))............. 211
2. Refunds when wine returned to wineries or beer
returned to breweries (secs. 6014(a)(2) and (b)(2)).... 211
3. Clarification of the provision allowing wine imported
in bulk to be transferred to a U.S. winery without
payment of tax (sec. 6014(b)(3))....................... 212
N. Amendments to Title XV of the 1997 Act Relating to
Pensions and Employee Benefits............................. 212
1. Treatment of certain disability payments to public
safety employees (sec. 6015(c))........................ 212
O. Amendments to Title XVI of the 1997 Act Relating to
Technical Corrections...................................... 213
1. Application of requirements for SIMPLE IRAs in the
case of mergers and acquisitions (sec. 6016(a)(1))..... 213
2. Treatment of Indian tribal governments under section
403(b) (sec. 6016(a)(2))............................... 214
technical corrections to other tax legislation............... 214
A. Amendment Related to the Transportation Equity Act for the
21st Century............................................... 214
1. Simplified refund provisions for tax on gasoline,
diesel fuel and kerosene (sec. 6017)................... 214
2. Conforming changes to the Highway Trust Fund
expenditure authority (sec. 9015)...................... 215
B. Amendment to the Small Business Job Protection Act of 1996 215
1. Treatment of adoption tax credit carryovers (sec.
6018).................................................. 215
C. Amendments Related to Taxpayer Bill of Rights 2........... 216
1. Disclosure requirements for apostolic organizations
(sec. 6019(a) and (b))................................. 216
2. Disclosure of returns and return information (sec.
6019(c))............................................... 217
D. Amendment Related to the Omnibus Budget Reconciliation Act
of 1993.................................................... 217
1. Allow deduction for unused employer social security
credit (sec. 6020)..................................... 217
E. Amendment Related to the Revenue Reconciliation Act of
1990....................................................... 218
1. Earned income credit qualification rules (sec. 6021).. 218
Title VII. Revenue Offsets....................................... 220
A. Employer Deductions for Vacation and Severance Pay (sec.
7001)...................................................... 220
B. Freeze Grandfather Status of Stapled REITs (sec. 7002).... 222
C. Make Certain Trade Receivables Ineligible for Mark-to-
Market Treatment (sec. 7003)............................... 231
D. Exclusion of Minimum Required Distributions from AGI for
Roth IRA Conversions (sec. 7004)........................... 233
Title VIII. Identification of Limited Tax Benefits Under the Line
Item Veto Act (sec. 8001)...................................... 234
Part Three: Tax and Trade Relief Extension Act of 1998 (Division
J of H.R. 4328, the Omnibus Consolidated and Emergency
Supplemental Appropriations Act, 1999)......................... 235
Title I. Extension of Expiring Provisions........................ 235
A. Extension of Research Tax Credit (sec. 1001).............. 235
B. Extension of the Work Opportunity Tax Credit (sec. 1002).. 237
C. Extension of the Welfare-to-Work Tax Credit (sec. 1003)... 238
D. Make Permanent the Deduction Provided for Contributions of
Appreciated Stock to Private Foundations; Public Inspection
of Private Foundation Annual Returns....................... 239
1. Make permanent the deduction provided for
contributions of appreciated stock to private
foundations (sec. 1004(a))............................. 239
2. Public inspection of private foundation public returns
(sec. 1004(b))......................................... 240
E. Exceptions under Subpart F for Certain Active Financing
Income (sec. 1005)......................................... 243
F. Disclosure of Return Information to Department of
Education in Connection With Income Contingent Loans (sec.
1006)...................................................... 264
Title II. Other Provisions....................................... 266
Subtitle A.--Provisions Relating to Individuals.............. 266
A. Personal Credits Fully Allowed Against Regular Tax
Liability During 1998 (sec. 2001).......................... 266
B. Increase Deduction for Health Insurance Expenses of Self-
Employed Individuals (sec. 2002)........................... 271
C. Modification of Individual Estimated Tax Safe Harbors
(sec. 2003)................................................ 272
Subtitle B.--Provisions Relating to Farmers.................. 273
A. Permanent Extension of Income Averaging for Farmers (sec.
2011)...................................................... 273
B. Farm Production Flexibility Payments (sec. 2012).......... 274
C. Extend the Net Operating Loss Carryback Period for Farmers
(sec. 2013)................................................ 276
Subtitle C.-Miscellaneous Provisions......................... 277
A. Increase State Volume Limits on Private Activity Tax-
Exempt Bonds (sec. 2021)................................... 277
B. Comprehensive Study of Recovery Periods and Depreciation
Methods Under Section 168 (sec. 2022)...................... 278
C. State Election to Exempt Student Employees From Social
Security (sec. 2023)....................................... 279
Title III. Revenue Offset Provisions............................. 281
A. Treatment of Certain Deductible Liquidating Distributions
of Regulated Investment Companies and Real Estate
Investment Trusts (sec. 3001).............................. 281
B. Add Vaccines Against Rotavirus Gastroenteritis to the List
of Taxable Vaccines (sec. 3002)............................ 282
C. Clarify and Expand Mathematical Error Procedures (sec.
3003)...................................................... 284
D. Restrict 10-Year Net Operating Loss Carryback Rules for
Specified Liability Losses (sec. 3004)..................... 285
E. Tax Treatment of Prizes and Awards (sec. 5301)............ 286
Title IV. Technical Corrections.................................. 289
A. Technical Corrections to the 1998 IRS Restructuring Act... 289
1. Burden of proof (sec. 4002(b))........................ 289
2. Relief for innocent spouses (sec. 4002(c))............ 289
3. Interest netting (sec. 4002(d))....................... 290
4. Effective date for elimination of 18-month holding
period for capital gains (sec. 4002(i))................ 291
B. Technical Corrections to the 1997 Act..................... 292
1. Treatment of interest on qualified education loans
(sec. 4003(a))......................................... 292
2. Capital gains distributions of charitable remainder
trusts (secs. 4002(i)(3) and 4003(b)).................. 293
3. Gifts may not be revalued for estate tax purposes
after expiration of limitations (sec. 4003(c))......... 294
4. Coordinate Vaccine Injury Compensation Trust Fund
expenditure purposes with list of taxable vaccines
(sec. 4003(d))......................................... 295
5. Abatement of interest by reason of Presidentially
declared disasters (sec. 4003(e))...................... 296
6. Treatment of certain corporate distributions (sec.
4003(f))............................................... 296
7. Treatment of affiliated group including formerly tax-
exempt organization (sec. 4003(g))..................... 297
8. Treatment of net operating losses arising from
certain eligible losses (sec. 4003(h))................. 298
9. Determination of unborrowed cash value under COLI pro
rata interest disallowance rules (sec. 4003(i))........ 299
10. Payment of taxes by commercially acceptable means
(sec. 4003(k))......................................... 300
C. Technical Corrections to the 1984 Act..................... 300
1. Casualty loss deduction (sec. 4004)................... 300
D. Perfecting Amendments Related to Withholding From Social
Security Benefits and Other Federal Payments (sec. 4005)... 301
E. Disclosure of Tax Return Information to Department of
Agriculture (sec. 4006(a))................................. 301
F. Technical Corrections to the Transportation Equity Act for
the 21st Century (sec. 4006(b))............................ 302
Part Four: Ricky Ray Hemophilia Relief Fund Act of 1998 (Sec.
103(h) of H.R. 1023)........................................... 303
Appendix: Estimated Budget Effects of Tax Legislation Enacted in
1998........................................................... 305
INTRODUCTION
This pamphlet,1 prepared by the staff of the
Joint Committee on Taxation in consultation with the staffs of
the House Committee on Ways and Means and Senate Committee on
Finance, provides an explanation of tax legislation enacted in
1998.
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\1\ This pamphlet may be cited as follows: Joint Committee on
Taxation, General Explanation of Tax Legislation Enacted in 1998 (JCS-
6-98), November 24, 1998.
---------------------------------------------------------------------------
A committee report on legislation issued by a Congressional
committee sets forth the committee's explanation of the bill as
it was reported by that committee. In some instances, a
committee report does not serve as an explanation of the final
provisions of the legislation as enacted. This is because the
version of the bill adopted by the conference committee may
differ significantly from the versions of the bill reported by
committee or passed by the House and the Senate. The material
contained in this pamphlet is prepared so that Members of
Congress, tax practitioners, and other interested parties can
have a detailed explanation of the final tax legislation
enacted in 1998 in one publication.
Part One of the pamphlet is an explanation of the
provisions of the Surface Transportation Revenue Act of 1998
(Title IX of H.R. 2400, P.L. 105-178) relating to the extension
and revision of the Highway Trust Fund excise taxes. Part Two
is an explanation of the Internal Revenue Service Restructuring
and Reform Act of 1998 (H.R. 2676, P.L. 105-206). Part Three is
an explanation of the revenue provisions of the Tax and Trade
Relief Act of 1998 (Division J of the Omnibus Consolidated and
Emergency Supplemental Appropriations Act, 1999, H.R. 4328,
P.L. 105-277). Part Four is an explanation of the revenue
provision in the Ricky Ray Hemophilia Relief Fund Act of 1998
(sec. 103(h) of H.R. 1023, P.L. 105-369). The Appendix provides
estimates of the budget effects of revenue legislation enacted
in 1998 for the fiscal year period, 1999-2007.
The first footnote in each part gives the legislative
history of each of the 1998 Acts.
PART ONE: SURFACE TRANSPORTATION REVENUE ACT OF 1998 (TITLE IX OF H.R.
2400) 2
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\2\ Title IX of H.R. 2400 (``Surface Transportation Revenue Act of
1998''); P.L. 105-178. The revenue provisions (Title IX) of H.R. 2400
were reported by the House Committee on Ways and Means on March 27,
1998 (H. Rept. 105-467, Part II). H.R. 2400 was passed by the House on
April 1, 1998.
The Senate passed H.R. 2400, as amended with the provisions of S.
1173, on April 2, 1998. The conference report was filed on the bill on
May 22, 1998 (H. Rept. 105-550), and was passed by the House and the
Senate on May 22, 1998. H.R. 2400 was signed by the President on June
9, 1998.
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A. Extension of Highway Trust Fund, Aquatic Resources Trust Fund, and
National Recreational Trails Trust Fund Excise Taxes and Expenditure
Authority (secs. 9002-9005, 9008, 9009, and 9011 of the Act and secs.
4041-4042, 4051-4053, 4071-4073, 4081-4084, 4101, 4481-4484, 9503,
9504, and 9511 of the Code)
Present and Prior Law
Highway and related transportation excise taxes
Overview
The present and prior law highway transportation excise
taxes consist of:
(1) taxes on gasoline, diesel fuel, kerosene, and special
motor fuels;
(2) a retail sales tax imposed on tractors, trucks, and
trailers having gross vehicle weights in excess of prescribed
thresholds;
(3) a tax on manufacturers of tires designed for use on
heavy highway vehicles; and
(4) an annual use tax imposed on trucks and tractors having
taxable gross weights in excess of prescribed thresholds.
Special motor fuels include liquefied natural gas
(``LNG''), benzol, naphtha, liquefied petroleum gas (e.g.,
propane), natural gasoline, and any other liquid (e.g., ethanol
and methanol) other than gasoline or diesel fuel. Compressed
natural gas (``CNG'') also is subject to tax as a special motor
fuel, but at a lower rate than other special motor fuels.
With the exception of 4.3 cents per gallon of the motor
fuels excise tax rates, these taxes were scheduled to expire
after September 30, 1999.
Highway motor fuels taxes
Tax rates.--The present and prior law highway motor fules
excise tax rates are shown in Table 1.
Table 1. --Federal Highway Trust Fund Motor Fuels Excise Tax Rates,
as of October 1, 1998 \1\
[Rates shown in cents per gallon]
------------------------------------------------------------------------
Tax rate
Highway fuel \2\
------------------------------------------------------------------------
Gasoline \3\............................................... 18.3
Diesel Fuel \4\............................................ 24.3
Special Motor Fuels Generally.............................. \5\ 18.3
CNG........................................................ \6\ 4.3
------------------------------------------------------------------------
\1\ The rates shown include the 4.3-cents-per-gallon tax rate which was
transferred to the Highway Trust Fund beginning on October 1, 1997,
pursuant to the Taxpayer Relief Act of 1997.
\2\ Excludes an additional 0.1-cent-per-gallon rate imposed on these
motor fuels to finance the Leaking Underground Storage Tank Trust
Fund.
\3\ Gasoline used in motorboats and in certain off-highway recreational
vehicles and small engines is subject to tax in the same manner and at
the same rates as gasoline used in highway vehicles. 6.8 cents per
gallon of the revenues from the tax on gasoline used in these uses was
retained in the General Fund under prior law; the remaining 11.5 cents
per gallon was deposited in the Aquatic Resources Trust Fund
(motorboat and small engine gasoline), the Land and Water Conservation
Fund ($1 million of motorboat gasoline tax revenues), and the National
Recreational Trails Trust Fund (off-highway recreational vehicles).
\4\ Kerosene is taxed at the same rate as diesel fuel.
\5\ The rate is 13.6 cents per gallon for propane, 11.9 cents per gallon
for liquefied natural gas, and 11.3 cents per gallon for methanol fuel
from natural gas. In each case the tax rate is based on the relative
energy equivalence of the fuel to gasoline.
\6\ The statutory rate is 48.54 cents per thousand cubic feet (``MCF'').
Administration of highway motor fuels excise taxes.--The
gasoline, diesel fuel, and kerosene excise taxes are imposed on
removal of the fuel from a refinery or on importation, unless
the fuel is transferred by pipeline or barge to a registered
terminal facility. In such a case, tax is imposed on removal of
the fuel from the terminal facility (i.e., at the ``terminal
rack'').3 A large majority of these taxes is imposed
at the terminal rack. The special motor fuels tax, which
accounts for a relatively small portion of motor fuels tax
revenues, is imposed at the retail level. Present law imposes
tax on all gasoline, diesel fuel, and kerosene that is removed
from a terminal facility, except diesel fuel and kerosene that
is destined for nontaxable use (including a partially taxable
use in an intercity bus or a train) and that is indelibly dyed
in accordance with Treasury Department regulations.4
Effective after June 30, 1998, prior law provided that as a
condition of holding untaxed fuel, terminals that sold diesel
fuel were required to offer both dyed and undyed fuel to their
customers and terminals that sold kerosene were required to
offer both dyed and undyed kerosene. The person holding an
inventory position in the terminal at the time the fuel is
removed from that facility (the ``position holder'') is liable
for payment of the tax.
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\3\ Gasoline, diesel fuel, and kerosene may be removed from a
refinery without payment of tax only if the party removing the fuel and
all subsequent parties before its removal from a terminal facility are
registered with the Internal Revenue Service. If fuel is sold to an
unregistered party before leaving the terminal facility, tax
immediately is imposed. This tax does not preclude imposition of a
second tax at the terminal rack; however, the second tax may be
refunded upon request. This dual tax regime was enacted in 1990 in
response to reports that gasoline was being removed without payment of
tax from terminals upon a claim that tax had already been paid, when in
fact it had not been paid.
\4\ Undyed kerosene also may be removed from terminals without
payment of tax if the fuel is destined for use as aviation fuel or for
certain nonfuel industrial purposes.
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Under prior law, gasoline, diesel fuel, and kerosene excise
tax refunds were administered separately, subject to separate
quarterly minimum filing thresholds. For gasoline, the minimum
refund claim was $1,000 in the calendar quarter to which the
claim relates. Certain diesel fuel claims were subject to this
same standard; certain other diesel and aviation fuel claims
could be filed in any of the first three calendar quarters in
which the aggregate year-to-date refund equals $750. Fourth
quarter refunds were required to be claimed as income tax
credits regardless of amount.
Highway fuels tax exemptions.--Prior law and present law
include numerous exemptions (including partial exemptions for
specified uses of taxable fuels or for specified fuels),
typically for governments or for uses not involving use of (and
thereby damage to) the highway system. Because the gasoline,
diesel fuel, and kerosene taxes generally are imposed before
the end use of the fuel is known, many of these exemptions are
realized through refunds to end users of tax paid by a party
that processed the fuel earlier in the distribution chain.
These exempt uses and fuels include:
(1) use in State and local government and nonprofit
educational organization vehicles;
(2) use in buses engaged in transporting students and
employees of schools;
(3) use in private local mass transit buses having a
seating capacity of at least 20 adults (not including
the driver) when the buses operate under contract with
(or are subsidized by) a State or local governmental
unit;
(4) use in private intercity buses serving the
general public along scheduled routes (totally exempt
from the gasoline tax and exempt from 17 cents per
gallon of the diesel tax); and
(5) use in off-highway uses such as farming.
LNG, propane, CNG, and methanol derived from natural gas
are subject to reduced tax rates based on the energy
equivalence of these fuels to gasoline.
Ethanol and methanol derived from renewable sources (e.g.,
biomass) are eligible for income tax benefits (the ``alcohol
fuels credit'') equal, under prior law, to 54 cents per gallon
(ethanol) and 60 cents per gallon (methanol).5 In
addition, small ethanol producers are eligible for a separate
10-cents-per-gallon production credit.6 The 54-
cents-per-gallon ethanol and 60-cents-per-gallon renewable
source methanol tax credits may be claimed through reduced
excise taxes paid on gasoline and special motor fuels as well
as through credits against income tax.7
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\5\ Under prior law, the alcohol fuels credit was scheduled to
expire after December 31, 2000, or earlier, if the Highway Fund excise
taxes actually expired before that date.
\6\ The small ethanol producer credit is available on up to 15
million gallons of ethanol produced by persons whose annual production
capacity does not exceed 30 million gallons.
\7\ Authority to claim the ethanol and renewable source methanol
tax benefits through excise tax reductions was scheduled to expire
after September 30, 2000 (or earlier, if the underlying excise taxes
actually expire before September 30, 2000) under prior law.
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Non-fuel Highway Trust Fund excise taxes
In addition to the highway motor fuels excise tax revenues,
the Highway Trust Fund receives revenues produced by three
excise taxes imposed exclusively on heavy highway vehicles or
tires. Under prior law and present law, these taxes are:
(1) A 12-percent excise tax imposed on the first retail
sale of highway vehicles, tractors, and trailers (generally,
trucks having a gross vehicle weight in excess of 33,000 pounds
and trailers having such a weight in excess of 26,000 pounds);
(2) An excise tax imposed at graduated rates on highway
tires weighing more than 40 pounds; and
(3) An annual use tax imposed on highway vehicles having a
taxable gross weight of 55,000 pounds or more. (The maximum
rate for this tax is $550 per year, imposed on vehicles having
a taxable gross weight over 75,000 pounds.)
Aquatic Resources Trust Fund and National Recreational Trails Trust
Fund taxes
Gasoline and special motor fuels used in motorboats and in
certain off-highway recreational vehicles and in small engines
are subject to tax in the same manner and the same rates as
gasoline and special motor fuels used in highway vehicles. Of
the tax revenues from these uses, 6.8 cents per gallon was
retained in the General Fund under prior law; the remaining
11.5 cents per gallon was deposited in the Aquatic Resources
Trust Fund (``Aquatic Fund'') (motorboat gasoline and special
motor fuels and small-engine gasoline), the Land and Water
Conservation Fund (``Land and Water Fund'') (limited to $1
million of motorboat fuels tax revenues), and the National
Recreational Trails Trust Fund (the ``Trails Fund'') (fuels
used in off-highway recreational vehicles). Transfers to these
Funds were scheduled to terminate after September 30, 1998
under prior law. Transfers to the Trails Fund were contingent
on appropriations from that Fund; no appropriations from the
Trails Fund were enacted under prior law.
Highway Trust Fund expenditure authority provisions
In general
Dedication of excise tax revenues to the Highway Trust
Fund and expenditures from the Highway Trust Fund are governed
by provisions of the Code (sec. 9503).8 Under prior
law, revenues from the highway excise taxes, as imposed through
September 30, 1999, were dedicated to the Highway Trust Fund.
Also, the Highway Trust Fund earned interest on its cash
balances each year from investments in Treasury securities
under prior law (sec. 9602). Further, the Code authorized
expenditures (subject to appropriations) from the Highway Trust
Fund through September 30, 1998, for the purposes provided in
authorizing legislation, as in effect on the date of enactment
of Public Law 105-130.
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\8\ The Highway Trust Fund statutory provisions were placed in the
Internal Revenue Code in 1982.
---------------------------------------------------------------------------
Highway Trust Fund provisions also governed transfer of
11.5 cents per gallon of the revenues from the tax imposed on
gasoline used in motorboats, small engines, and off-highway
recreational vehicles. Those revenues were transferred from the
Highway Trust Fund to the Aquatic Fund, the Land and Water
Fund, and the Trails Fund, respectively, through September 30,
1998.
Prior-law Highway Trust Fund expenditure purposes
The Highway Trust Fund is divided into two accounts: a
Highway Account and a Mass Transit Account, each of which is
the funding source for specific programs.
Highway and Mass Transit Account expenditure purposes have
been revised with passage of each authorization Act enacted
since establishment of the Highway Trust Fund in 1956. In
general, expenditures authorized under those Acts (as the Acts
were in effect on the date of enactment of the most recent of
such authorizing Acts) are approved Highway Trust Fund
expenditure purposes.9 Authority to make
expenditures from the Highway Trust Fund was scheduled to
expire after September 30, 1998. Thus, no Highway Trust Fund
monies could be spent for a purpose not already approved by the
tax-writing committees of Congress. Further, no Highway Trust
Fund expenditures could occur after September 30, 1998, without
such approval.
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\9\ The authorizing Acts which were referenced in the Highway Trust
Fund (for the Highway Account) under prior law were the Highway Revenue
Act of 1956, Titles I and II of the Surface Transportation Assistance
Act of 1982, the Surface Transportation and Uniform Relocation Act of
1987, the Intermodal Surface Transportation Efficiency Act of 1991, and
Public Law 105-130.
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Under prior law and present law, Highway Trust Fund
spending further is limited by two anti-deficit provisions
which are internal to the Highway Fund. The first of these
provisions limits the unfunded Highway Account authorizations
at the end of any fiscal year to amounts not exceeding the
unobligated balance plus revenues projected to be collected for
that Account by the dedicated excise taxes during the two
following fiscal years. Under prior law, the second anti-
deficit provision similarly limited unfunded Mass Transit
Account authorizations to the dedicated excise taxes expected
to be collected during the next fiscal year. Because of these
two provisions, the highway transportation excise taxes
typically have been scheduled to expire at least two years
after current authorizing Acts. If either of these provisions
is violated, spending for specified programs funded by the
relevant Trust Fund Account is reduced proportionately, in much
the same manner as would occur under a general Budget Act
sequester.
Highway Account.--The Highway Trust Fund's Highway Account
receives revenues from all non-fuel highway transportation
excise taxes and under prior law, revenues from all but 2.85
cents per gallon (2.0 cents before October 1, 1997) of the
highway motor fuels excise taxes. Programs financed from the
Highway Account included expenditures for the following general
purposes:
(1) Federal-aid highways, including the Interstate
System, National Highway System, forest and public
lands highways, scenic highways, and certain overseas
highways (includes construction and planning and
traffic control projects);
(2) Interstate highway resurfacing and repair;
(3) Bridge replacement and repair;
(4) Surface transportation programs;
(5) Congestion mitigation and air quality
improvement;
(6) Highway safety programs and research and
development, including a share of the cost of National
Highway Traffic Safety Administration (``NHTSA'')
programs and university research centers;
(7) Transportation research, technology, and
training;
(8) Intermodal urban projects and mass transit
(including carpool and vanpool) grants;
(9) Intelligent transportation systems;
(10) Transportation enhancements (including
transportation-related historic restoration, scenic
beautification, removal of billboards);
(11) Construction of ferry boats and ferry terminal
facilities;
(12) Certain administrative costs of the Federal
Highway Administration and NHTSA;
(13) Grants to the Internal Revenue Service for motor
fuels tax and highway use tax enforcement activities;
and
(14) Certain other highway and transit-related
programs (including bicycle pathways and pedestrian
walkways).
Mass Transit Account.--Under prior law, the Highway Fund's
Mass Transit Account received revenues equivalent to 2.85 cents
per gallon (2.0 cents before October 1, 1997) of the highway
motor fuels excise taxes. Mass Transit Account monies were
available through September 30, 1998, for capital and capital-
related expenditures under sections 5338(a)(1) and (b)(1) of
Title 49, United States Code, or the Intermodal Surface
Transportation Efficiency Act of 1991.
The capital and capital-related mass transit programs
included new rail or busway facilities, rail rolling stock,
buses, improvement and maintenance of existing rail and other
fixed guideway systems, and upgrading of bus systems.
Aquatic Fund and Land and Water Fund provisions
Under prior law, transfers of recreational motorboat
gasoline and special fuels tax revenues from the Highway Trust
Fund to the Boat Safety Account of the Aquatic Fund were
limited to a maximum of $70 million per fiscal year. Any excess
motorboat fuels tax revenues were transferred to the Land and
Water Fund (limited to $1 million per year) and to the Sport
Fish Restoration Account of the Aquatic Fund.10 The
authority to transfer revenues to the Aquatic Fund was
scheduled to expire after September 30, 1998.
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\10\ Under prior law, the maximum balance that could accumulate in
the Boat Safety Account was $70 million.
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Expenditures from the Boat Safety Account and Land and
Water Fund were subject to appropriation Acts. The Sport Fish
Restoration Account has a permanent appropriation, and all
moneys transferred to that Account are automatically
appropriated in the fiscal year following the fiscal year of
receipt.
Under prior law, expenditures were authorized from the Boat
Safety Account, as follows:
(1) One-half of the amount allocated to the Account
for State boating safety programs; and
(2) One-half of the amount allocated to the Account
for operating expenses of the Coast Guard to defray the
cost of services provided for recreational boating
safety.
Recreational Trails Trust Fund provisions
The Trails Fund was established in the Intermodal Surface
Transportation Act of 1991 (``1991 Act''). Amounts are
authorized to be transferred from the Highway Trust Fund into
the Trails Fund equivalent to revenues received from
``nonhighway recreational fuel taxes'' (not to exceed $30
million per year under an obligational ceiling set in the 1991
Act), subject to amounts actually being appropriated from the
Trails Fund. No monies were ever transferred because no amounts
were appropriated from the Trails Fund. The authority to
transfer revenues to the Trails Fund was scheduled to expire
after September 30, 1998 under prior law.
Nonhighway recreational fuels taxes included the taxes
imposed on (1) fuel used in vehicles and equipment on
recreational trails or back country terrain, or (2) fuel used
in camp stoves and other outdoor recreational equipment. Such
revenues did not include small-engine gasoline tax revenues
which are transferred to the Aquatic Fund.
Expenditures were authorized from the Trails Fund, subject
to appropriations, for allocations to States for use on trails
and trail-related projects as set forth in the 1991 Act.
Authorized uses included (1) acquisition of new trails and
access areas, (2) maintenance and restoration of existing
trails, (3) State environmental protection education programs,
and (4) program administrative costs.
Reasons for Change
The Transportation Equity Act for the 21st Century (the
``Act'') authorized expenditures (through contract authority
and discretionary spending subject to appropriations) for
Highway Trust Fund and Aquatic Fund programs during fiscal
years 1998 through 2003. The Act further provided that Highway
Trust Fund spending and revenues would not be considered for
certain budget calculations. The excise taxes which constitute
a dedicated revenue source for these programs under prior law
were scheduled to expire after September 30, 1999. Thus, absent
an extension of these taxes, contemplated highway, mass
transit, and boat safety programs would not have been funded.
The Congress concluded that a separate Trails Fund was not
necessary, because no revenues had been deposited in the Trust
Fund since its inception and because similar expenditure
programs are financed from the Highway Trust Fund under the
Act.
Explanation of Provisions
Highway tax and trust fund provisions
Extension of existing Highway Trust Fund excise taxes
The scheduled expiration date of the Highway Trust Fund
excise taxes on motor fuels and on heavy highway vehicles and
tires was extended, from September 30, 1999 through September
30, 2005.
Extension and modification of renewable source alcohol tax
provisions
The prior-law tax benefits for ethanol and renewable
source methanol were extended for seven years from their
previously scheduled expiration dates; the ethanol benefits
were modified to reduce the benefit levels during the extension
period. The modified ethanol benefit levels are as follows:
2001 and 2002, 53 cents per gallon; 2003 and 2004, 52 cents per
gallon; and, 2005 through 2007, 51 cents per gallon. The
extension and the modifications apply to both the alcohol fuels
credit and to the associated excise tax provisions.
Motor fuels tax refund procedure
The Act combined the quarterly excise tax refund procedures
for all taxable motor fuels, allowing aggregation of quarterly
amounts and filing of refund claims once a single $750 minimum
amount is reached (determined on a year-to-date basis rather
than an individual quarter basis). Fourth quarter refund claims
are allowed under the same rules as applicable to the first
three quarters.
Requirement that motor fuels terminals offer dyed fuel
As described under prior law, diesel fuel and kerosene
(after June 30, 1998) are taxed on removal from a registered
terminal facility unless the fuel is destined for a nontaxable
use and is indelibly dyed. After June 30, 1998, prior law
required terminals to offer dyed fuel as a condition of being
allowed to store untaxed fuel. The Act delayed the effective
date of the requirement that terminals offer dyed fuel for two
years, to July 1, 2000.
Extension and modification of Highway Trust Fund provisions
The prior-law September 30, 1998 expiration date of
authority to spend monies from the Highway Trust Fund was
extended, from September 30, 1998 through September 30, 2003.
The Code provisions governing purposes for which monies in
the Highway Trust Fund may be spent were updated to include the
purposes provided in the Act, as of the date of enactment.
The anti-deficit provisions of the Mass Transit Account
were conformed to those of the Highway Account so that
permitted obligations will be determined by reference to two
years of projected revenues.
Provisions were incorporated into the Highway Trust Fund
clarifying that expenditures from the Highway Trust Fund may
occur only as provided in the Code. Clarification was further
provided that the expiration date for expenditures allowed from
the Highway Trust Fund does not preclude disbursements to
liquidate contracts which were validly entered into before the
last date permitted under those provisions. Expenditures for
contracts entered into or for amounts otherwise obligated after
that date (or for other non-contract authority purposes
permitted by non-Code provisions) are not permitted,
notwithstanding the provisions of any subsequently enacted
authorization or appropriations legislation. If any such
subsequent non-tax legislation provided for expenditures not
provided for in the Code, or if any executive agency authorized
such expenditures in contravention of the Code restrictions,
excise tax revenues otherwise to be deposited in the Highway
Fund would be retained in the General Fund beginning on the
date of any unauthorized expenditure (including an obligation
of funds under contract authority) pursuant to such legislation
or the date of such an action by an executive
agency.11
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\11\ The Congress did not intend that tax deposits terminate as a
result of inadvertent administrative errors provided those errors are
corrected within a reasonable period and do not evidence a pattern of
disregard of this provision.
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A technical amendment to the Taxpayer Relief Act of 1997
was included clarifying that excise tax revenues attributable
to LNG, CNG, propane, and methanol from natural gas (all of
which are subject to reduced, energy equivalent rates, as
indicated in Table 1) are divided between the Highway and Mass
Transit Accounts of the Highway Trust Fund in the same
proportions as gasoline tax revenues are divided between those
two accounts.
A technical correction to the Taxpayer Relief Act of 1997
was included providing that the amount of gasoline and diesel
fuel tax revenues deposited into the Mass Transit Account is
2.86 cents per gallon (rather than 2.85 cents per gallon as
provided in that 1997 Act).
The Act provided that the Highway Trust Fund (including the
Mass Transit Account) will no longer earn interest on unspent
balances, effective after September 30, 1998. Further, the
balance in excess of $8 billion in the Highway Account of the
Highway Trust Fund was canceled on October 1, 1998.
Aquatic Fund provisions
The Act extends transfers of motorboat fuels tax revenues
to the Boat Safety Account and Wetlands sub-Account of the
Aquatic Fund through September 30, 2003. The Act further
provided that an additional 1.5 cents per gallon of taxes
imposed during fiscal years 2002 and 2003 (for a total of 13
cents), and an additional 2 cents per gallon thereafter (for a
total of 13.5), will be transferred to the Aquatic Fund.
The Act extends the expenditure authority for the Boat
Safety Account through September 30, 2003. The expenditure
purposes of the Aquatic Fund (including those of the Sport Fish
Restoration Account) are conformed to those purposes in effect
in the authorizing provisions of the Act as of the date of
enactment.
The Act further incorporated provisions into the Aquatic
Fund clarifying that expenditures from the Fund may occur only
as provided in the Code Trust Fund provisions.
Repeal of Trails Fund
The Act repealed the Trails Fund and the transfers of
nonhighway recreational fuels taxes to that Trust Fund,
effective on the date of the Act's enactment. (Under
authorizing provisions of the Act, Highway Trust Fund
expenditures are authorized for purposes similar to those of
the prior-law Trails Fund.)
Revenue Effect
The highway tax and trust fund provisions (other than the
provisions relating to dyed fuel and refund procedures) are
estimated to increase Federal fiscal year budget receipts by $9
million in 2001, $12 million in 2002, $23 million in 2003, $27
million in 2004, $39 million in 2005, $44 million in 2006, and
$44 million in 2007 above amounts already included in the
baseline. (Excise taxes dedicated to trust funds are assumed to
be imposed permanently notwithstanding statutory expiration
dates.) The provision delaying the requirement that registered
terminals offerdyed fuel is estimated to have a negligible
effect on Federal fiscal year budget receipts. The provision modifying
the refund procedures for fuels excise taxes is estimated to decrease
Federal fiscal year budget receipts by $5 million in 1999 and by less
than $500,000 in each of the years 2000-2007. The provisions
transferring additional revenues to the Aquatic Resources Trust Fund
and repealing the National Recreational Trails Trust Fund are estimated
to have no revenue effect.
B. Repeal of 1.25-Cents-Per-Gallon Tax Rate on Rail Fuel (sec. 9006)
Prior Law
Under prior law, diesel fuel used in trains was subject to
a 5.65-cents-per-gallon excise tax. (Of this amount, 0.1 cent
per gallon is dedicated to the Leaking Underground Storage Tank
Trust Fund; this rate is scheduled to expire after March 31,
2005.) The remaining 5.55 cents per gallon was a General Fund
tax, with 4.3 cents per gallon being permanently imposed and
1.25 cents per gallon being scheduled to expire after September
30, 1999.
Reasons for Change
The 1.25-cents-per-gallon rail fuel tax rate was repealed
because the Congress believed it is inappropriate for railroads
to pay a fuel tax for deficit reduction when most other
transportation modes pay taxes only to support trust fund
programs that benefit those industries.
Explanation of Provision
The Act repeals the 1.25-cents-per-gallon rate on rail
diesel fuel that was scheduled to expire after September 30,
1999, effective on November 1, 1998.
Revenue Effect
The provision is estimated to reduce Federal fiscal year
budget receipts by $24 million in 1999 and less than $500,000
in 2000.
C. Purposes for Which Amtrak NOL Monies May be Used in Non-Amtrak
States (sec. 9007 of the Act, modifying sec. 977(e)(1)(B) of the
Taxpayer Relief Act of 1997)
Present and Prior Law
The Taxpayer Relief Act of 1997 provided elective
procedures that allow Amtrak to consider the tax attributes of
its predecessors in the use of its net operating losses. The
election was conditioned on Amtrak agreeing to make payments
equal to one percent of the amount it receives as a result of
the election to the States that do not receive Amtrak service.
The non-Amtrak States are required to spend these monies for
qualified purposes. Qualified purposes were limited to the
capital costs connected with the provision of intercity
passenger rail and bus service, or the purchase of intercity
rail service from Amtrak. Any amounts not spent by the non-
Amtrak States for qualified purposes by 2010 must be returned
to the Treasury.
Reasons for Change
The Congress believed that all States, whether or not
served by Amtrak, should share in the Federal income tax
benefits provided Amtrak in the Taxpayer Relief Act of 1997.
The Congress believed that each non-Amtrak State's share should
be available for appropriate transportation projects within
that State. Since enactment of the Taxpayer Relief Act of 1997,
the Congress has become aware of additional appropriate
transportation projects within the non-Amtrak States.
Explanation of Provision
The provision expands the list of qualified purposes to
include (a) capital expenditures related to State owned rail
operations, (b) projects eligible to receive funding under
section 5309, 5310, or 5311 of Title 49, (c) projects that are
eligible to receive funding under section 130 or 152 of Title
23, (d) upgrading and maintenance of intercity primary and
rural air service facilities, including the purchase of air
service between primary and rural airports and regional hubs,
(e) the provision of passenger ferryboat service and (f)
certain harbor and highway improvements that are eligible to
receive funding under section 103, 133, 144, and 149 of Title
23.
Effective Date
The provision is effective on August 5, 1997, as if it had
been included in the Taxpayer Relief Act of 1997.
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
D. Exclusion from Income for Employer-Provided Transportation Benefits
(sec. 9010 of the Act and sec. 132 of the Code)
Present and Prior Law
Qualified transportation fringe benefits provided by an
employer are excluded from an employee's gross income.
Qualified transportation fringe benefits include parking,
transit passes, and vanpool benefits. In addition, in the case
of employer-provided parking, no amount is includible in income
of an employee merely because the employer offers the employee
a choice between cash and employer-provided parking. Under
prior law, transit passes and vanpool benefits were only
excludable if provided in addition to, and not in lieu of, any
compensation otherwise payable to an employee. Up to $175 per
month of employer-provided parking is excludable from income.
Under prior law, up to $65 per month of employer-provided
transit and vanpool benefits were excludable from gross income.
Under prior law, these dollar amounts were indexed annually for
inflation, rounded to the nearest multiple of $5.
Under present and prior law, qualified transportation
fringe benefits include a cash reimbursement by an employer to
an employee. However, in the case of transit passes, a cash
reimbursement is considered a qualified transportation fringe
benefit only if a voucher or similar item which may be
exchanged only for a transit pass is not readily available for
direct distribution by the employer to the employee. The
position of the Treasury Department is that a voucher or
similar item is ``readily available'' if an employer can obtain
it on terms no less favorable than those available to an
individual employee and without incurring a significant
administrative cost.12
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\12\ I.R.S. Notice 94-3, 1994 C.B. 327.
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Present and prior law impose limits on the amount of annual
additions that can be made to a tax-qualified pension plan. In
the case of defined contribution plans, the limit is the lesser
of $30,000 or 25 percent of compensation. For this purpose,
under section 415(c)(3), compensation is generally taxable
compensation, plus salary reduction contributions under a
qualified cash or deferred arrangement (a ``section 401(k)
plan''), a tax-sheltered annuity (a ``section 403(b)
annuity''), a SIMPLE plan, certain plans of deferred
compensation for State and local government employees and
employees of tax-exempt organizations (a ``sec. 457 plan''),
and a cafeteria plan. Tax-qualified pension plans are also
subject to nondiscrimination rules designed to ensure that an
employer's pension plans benefit a broad cross section of
employees. For purposes of applying these rules, compensation
is generally defined as under Code section 415(c)(3). However,
an employer can elect not to include as compensation salary
reduction contributions under a section 401(k) plan, 403(b)
annuity, or cafeteria plan. In addition, as provided by the
Secretary, an employer can use an alternative definition of
compensation for nondiscrimination testing purposes. Any such
alternative definitions must not discriminate in favor of
highly compensated employees.
Explanation of Provision
The Act permits employers to offer employees a choice
between cash compensation or any qualified transportation
benefit or a combination of any of such benefits. Thus, under
the Act, no amount is includible in gross income or wages
merely because the employee is offered the choice of cash in
lieu of one or more qualified transportation benefits (up to
the applicable dollar limit). Also, no amount is includible in
income or wages merely because the employee is offered a choice
among qualified transportation benefits. The amount of cash
offered is includible in income and wages only to the extent
the employee elects cash.
It is intended that salary reduction amounts used to
provide qualified transportation benefits under the provision
be treated for pension plan purposes the same as other salary
reduction contributions. Thus, it is intended that such amounts
be included for purposes of applying the limits on
contributions and benefits, and that an employer may elect
whether or not to include such amounts in compensation for
nondiscrimination testing.13 It is expected that the
Secretary, in prescribing rules regarding the alternative
definition of compensation, will treat salary reduction amounts
under this provision the same as other salary reduction
contributions.
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\13\ A technical correction may be necessary so that the statute
reflects this intent.
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The provision does not change the rules regarding when a
cash reimbursement for transit passes is treated as a qualified
transportation fringe benefit.
In addition, beginning in 2002, the Act increases the
exclusion for transit passes and vanpooling to $100 per month.
Beginning in 2003, the $100 amount is indexed as under prior
law.
Further, the Act provides that there is no indexing of any
qualified transportation benefit in 1999.
Effective Date
The provision permitting a cash option for any
transportation benefit is effective for taxable years beginning
after December 31, 1997; the increase in the exclusion for
transit passes and vanpooling to $100 per month is effective
for taxable years beginning after December 31, 2001; and
indexing on the $100 amount for transit passes and vanpooling
is effective for taxable years beginning after December 31,
2002.
Revenue Effect
The provision is estimated to increase Federal fiscal year
budget receipts by $3 million in 1999, $3 million in 2000, $4
million in 2001, and to decrease Federal fiscal year budget
receipts by $1 million in 2002, $3 million in 2003, $10 million
in 2004, $7 million in 2005, $12 million in 2006, and $8
million in 2007.
E. Identification of Limited Tax Benefits
(sec. 9012 of the Act)
Present and Prior Law
The Line Item Veto Act amended the Congressional Budget and
Impoundment Act of 1974 to grant the President the limited
authority to cancel specific dollar amounts of discretionary
budget authority, certain new direct spending, and limited tax
benefits. The Line Item Veto Act provides that the Joint
Committee on Taxation is required to examine any revenue or
reconciliation bill or joint resolution that amends the
Internal Revenue Code of 1986 prior to its filing by a
conference committee in order to determine whether or not the
bill or joint resolution contains any limited tax benefits and
to provide a statement to the conference committee that either
(1) identifies each limited tax benefit contained in the bill
or resolution, or (2) states that the bill or resolution
contains no limited tax benefits. The Line Item Veto Act
provides that the conferees determine whether or not to include
the Joint Committee's statement in the conference report. If
the conference report includes the information from the Joint
Committee on Taxation identifying provisions that are limited
tax benefits, then the President can cancel one or more of
those, but only those, provisions that have been identified. If
such a conference report contains a statement from the Joint
Committee on Taxation that none of the provisions in the
conference report are limited tax benefits, then the President
has no authority to cancel any of the specific tax provisions,
because there are no tax provisions that are eligible for
cancellation under the Line Item Veto Act.
On June 25, 1998, the U.S. Supreme Court held that the
cancellation procedures set forth in the Line Item Veto Act are
unconstitutional. Clinton v. City of New York, 118 S. Ct. 2091
(June 25, 1998).
Explanation of Provision
Pursuant to the provisions of the Line Item Veto Act as in
effect at the time the Surface Transportation Revenue Act of
1998 was passed by the Congress, that Act included a provision
stating that the Joint Committee on Taxation determined that
the Act contains no provision involving limited tax benefits
within the meaning of the Line Item Veto Act.
PART TWO: INTERNAL REVENUE SERVICE RESTRUCTURING AND REFORM ACT OF 1998
(H.R. 2676)14
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\14\ P.L. 105-206. H.R. 2676 was reported by the House Committee on
Ways and Means on October 31, 1997 (H. Rept. 105-364, Part I). The
House passed the bill on November 5, 1997, and added (as new Title VI)
the provisions of H.R. 2645 (``Tax Technical Corrections Act of 1997'')
as previously reported by the Committee on Ways and Means (H. Rept.
105-356, October 29, 1997).
H.R. 2676 was reported, as amended, by the Senate Committee on
Finance on April 22, 1998 (S. Rept. 105-174), and was passed by the
Senate, as amended, on May 7, 1998. The conference report on H.R. 2676
was filed on June 24, 1998 (H. Rept. 105-599). The House passed the
conference report on June 25, 1998, and the Senate passed it on July 9,
1998.
H.R. 2676 was signed by the President on July 22, 1998.
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TITLE I. REORGANIZATION OF STRUCTURE AND MANAGEMENT OF THE IRS
A. IRS Restructuring and Creation of IRS Oversight Board
1. IRS mission and restructuring (secs. 1001 and 1002 of the Act)
Prior Law
IRS mission statement
Under prior law, the Internal Revenue Service (``IRS'')
mission statement provided that:
The purpose of the Internal Revenue Service is to
collect the proper amount of tax revenue at the least
cost; serve the public by continually improving the
quality of our products and services; and perform in a
manner warranting the highest degree of public
confidence in our integrity and fairness.
IRS organizational plan
Under Reorganization Plan No. 1 of 1952, the IRS is
organized into a 3-tier geographic structure with a multi-
functional National Office, Regional Offices, and District
Offices. A number of IRS reorganizations have occurred since
then, but no major changes have been made to the basic 3-tier
structure. A 1995 reorganization provided for a Regional
Commissioner, a Regional Counsel and a Regional Director of
Appeals for each of the following 4 regions: (1) the Northeast
Region (headquartered in New York); (2) the Southeast Region
(Atlanta); (3) the Midstates Region (Dallas); and (4) the
Western Region (San Francisco). There were 33 District Offices,
10 service centers, and 3 computing centers.
Reasons for Change
The Congress believed that a key reason for taxpayer
frustration with the IRS is the lack of appropriate attention
to taxpayer needs. Taxpayers should be able to receive from the
IRS the same level of service expected from the private sector.
For example, taxpayer inquiries should be answered promptly and
accurately; taxpayers should be able to obtain timely
resolutions of problems and information regarding activity on
their accounts; and taxpayers should be treated fairly and
courteously at all times. The Commissioner of Internal Revenue
has indicated his interest in improving customer service. The
Congress believed that taxpayer service is of such importance
that the Congress should not only support the Commissioner's
efforts, but also mandate that a key part of the IRS mission
must be taxpayer service.
The Commissioner announced a broad outline of a plan to
reorganize the structure of the IRS in order to help make the
IRS more oriented toward assisting taxpayers and providing
better taxpayer service. Under this plan, the present regional
structure would be replaced with a structure based on units
that serve particular groups of taxpayers with similar needs.
The Commissioner preliminarily identified four different groups
of taxpayers with similar needs: individual taxpayers, small
businesses, large businesses, and the tax-exempt sector
(including employee plans, exempt organizations and State and
local governments). Under this structure, each unit would be
charged with end-to-end responsibility for serving a particular
group of taxpayers. The Commissioner believed that this type of
structure will solve many of the problems taxpayers encounter
now with the IRS. For example, each of the 33 district offices
and 10 service centers were required to deal with every kind of
taxpayer and every type of issue. The proposed plan would
enable IRS personnel to understand the needs and problems
affecting particular groups of taxpayers, and better address
those issues. The prior-law structure also impeded continuity
and accountability. For example, if a taxpayer moved, the
responsibility for the taxpayer's account moved to another
geographical area. Further, every taxpayer was serviced by both
a service center and at least one district. Thus, many
taxpayers had to deal with different IRS offices on the same
issues. The proposed structure would eliminate many of these
problems.
The Congress believed that the former IRS organizational
structure was one of the factors contributing to the inability
of the IRS to properly serve taxpayers and the proposed
structure would help enable the IRS to better serve taxpayers
and provide the necessary level of services and accountability
to taxpayers. The Congress supported the Commissioner in his
efforts to modernize and update the IRS and believed it
appropriate to provide statutory direction for the
reorganization of the IRS.
Explanation of Provision
The IRS is directed to revise its mission statement to
provide greater emphasis on serving the public and meeting the
needs of taxpayers.
The IRS Commissioner is directed to restructure the IRS by
eliminating or substantially modifying the three-tier
geographic structure and replacing it with an organizational
structure that features operating units serving particular
groups of taxpayers with similar needs. The plan is also
required to ensure an independent appeals function within the
IRS. As part of ensuring an independent appeals function, the
reorganization plan is to prohibit ex parte communications
between appeals officers and other IRS employees to the extent
such communications appear to compromise the independence of
the appeals officers. The legality of IRS actions is not
affected pending further appropriate statutory changes relating
to such a reorganization (e.g., eliminating statutory
references to obsolete positions).
Effective Date
The provision is effective on the date of enactment.
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
2. Establishment and duties of IRS Oversight Board (sec. 1101 of the
Act and sec. 7802 of the Code)
Present and Prior Law
The administration and enforcement of the internal revenue
laws are performed by or under the supervision of the Secretary
of the Treasury.15 The Secretary has delegated the
responsibility to administer and enforce the Internal Revenue
laws to the Commissioner. The Commissioner has the final
authority of the IRS concerning the substantive interpretation
of the tax laws as reflected in legislative and regulatory
proposals, revenue rulings, letter rulings, and technical
advice memoranda. The duties of the Chief Counsel of the IRS
are prescribed by the Secretary. Under prior law, the Secretary
delegated authority over the Chief Counsel to General Counsel
of the Treasury, and the General Counsel delegated authority to
serve as the legal adviser to the Commissioner to the Chief
Counsel.
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\15\ Code section 7801(a).
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Federal employees are subject to rules designed to prevent
conflicts of interest or the appearance of conflicts of
interest. The rules applicable to any particular employee
depend in part on whether the employee is a regular, full-time
Federal Government employee or a special government employee,
the length of service of the employee and the pay grade of the
employee. A ``special government employee'' is, in general, an
officer or employee of the executive or legislative branch of
the U.S. government who is appointed or employed to perform
(with or without compensation) for not to exceed 130 days
during any period of 365 days, temporary duties either on a
full-time or intermittent basis. Violations of the ethical
conduct rules aregenerally punishable by imprisonment for up to
1 year (5 years in the case of wilful conduct), a civil fine, or both.
The amount of the fine with respect to each violation cannot exceed the
greater of $50,000 or the compensation received by the employee in
connection with the prohibited conduct.
Under the ethical conduct rules, all Federal Government
employees (including special government employees) are
precluded from participating in a matter in which the employee
(or a related party) has a financial interest. In addition,
special government employees cannot represent a party (whether
or not for compensation) or receive compensation for
representation of a party 16 in relation to a matter
(1) in which the employee has at any time participated
personally and substantially, or (2) which is pending in the
department or agency of the Government in which the special
government employee is serving. In the case of a special
government employee who has served in a department no more than
60 days during the immediately preceding 365 days, item (2)
does not apply. Thus, for example, such an individual can
receive compensation for representational services with respect
to matters pending in the department in which the employee
serves, as long as it is not a matter involving parties in
which the employee personally and substantially
participated.17
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\16\ The prohibition on receipt of compensation applies regardless
of whether the services are performed by the Federal employee or
someone else. For example, it would preclude a Federal employee from
sharing in the compensation received by a partner of the Federal
employee with respect to covered matters.
\17\ More stringent rules apply to regular Federal Government
employees. Such employees generally cannot receive compensation for
representational services (whether rendered by the individual or
another) in matters in which the United States is a party or has a
direct and substantial interest before any department, agency or court.
In addition, a Federal Government employee generally cannot act as
agent or attorney (whether or not for compensation) for prosecuting any
claim against the United States or act as agent or attorney for anyone
before any department, agency, or court in which the United States is a
party or has a direct and substantial interest.
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The conflict of interest rules also impose restrictions on
what a Federal Government employee can do after leaving the
Government. Under these rules, senior level officers and
employees (including special government employees) who served
at least 60 days cannot represent anyone other than the United
States before the individual's former department or agency for
1 year after terminating employment. Whether an employee is a
senior level officer or employee is determined by pay grade.
The one-year post employment restriction does not apply to
special government employees who serve less than 60 days during
the 365-day period before termination of
employment.18
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\18\ All Federal Government employees generally are permanently
prohibited from representing a party other than the government in
connection with a particular matter (1) in which the government is a
party or has an interest, (2) in which the individual participated
personally and substantially, and (3) which involved a specific party
or parties at the time of their participation. In addition, Federal
employees generally cannot, within 2 years after terminating
employment, represent any person other than the United States in
connection with any matter (1) in which the government is a party or
has a direct and substantial interest, (2) which the person knows or
reasonably should know was actually pending under his or her official
responsibility within one year before termination of employment, and
(3) which involved a specific party or parties at the time it was
pending.
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Federal employees with pay grades above certain levels (and
who have at least 60 days of service) are required to file
annually public financial disclosures.
Reasons for Change
The Congress believed that a well-run IRS is critical to
the operation of our tax system. Public confidence in the IRS
must be restored so that our system of voluntary compliance
will not be compromised. The Congress believed that most
Americans are willing to pay their fair share of taxes, and
that public confidence in the IRS is key to maintaining that
willingness.
The National Commission on Restructuring the IRS (the
``Restructuring Commission'') conducted a year-long study of
the IRS and found that a number of factors contribute to
current IRS management problems. The Restructuring Commission
found that, while the Treasury is responsible for IRS
oversight, it has generally provided little consistent
strategic oversight or guidance to the IRS. The Secretary and
Deputy Secretary have many other broad responsibilities and
generally leave the IRS largely independent. The average tenure
of an IRS Commissioner is under 3 years, as is the average
tenure of senior Treasury officials responsible for IRS
oversight. Many of the issues that need to be addressed by the
IRS require expertise in various areas, particularly management
and technology.
The Restructuring Commission concluded the following:
``problems throughout the IRS cannot be solved
without focus, consistency and direction from the top.
The current structure, which includes Congress, the
President, the Department of the Treasury, and the IRS
itself, does not allow the IRS to set and maintain
consistent long-term strategy and priorities, nor to
develop and execute focused plans for improvement.
Additionally, the structure does not ensure that the
IRS budget, staffing and technology are targeted toward
achieving organizational success.''
The Congress shared the concerns of the Commission, and
believed that fundamental change in IRS management and
oversight is essential. The Congress believed that a new
management structure that will bring greater expertise in
needed areas, and more focus and continuity will help the IRS
to become an efficient, responsive, and respected agency that
acts appropriately in carrying out its functions.
The Congress believed that private sector input is a
necessary part of any new management structure. The Congress
believed that appropriate ethics rules should be applied to the
private sector members of the new IRS management in order to
enhance the ability of such members to demonstrate impartiality
in the performance of their duties, while not unduly
restricting the available pool of potential candidates.
The Congress was aware that the taxpaying public does not
relish contacts with the agency responsible for collecting
taxes. Nevertheless, by establishing a new management structure
that will better enable the IRS to develop and fulfill long-
term goals, the Congress believed the IRS would provide better
service and reduce IRS contact with taxpayers. The Congress was
also aware that changes being made to IRS management structure
are not the final step, and that continued oversight of the
IRS, by Congress as well as the Administration, is necessary in
order to ensure long-term progress.
Explanation of Provision
Duties, responsibilities, and powers of the IRS Oversight Board
General responsibilities of the Board
The provision provides for the establishment within the
Treasury Department of the Internal Revenue Service Oversight
Board (referred to as the ``Board''). The general
responsibilities of the Board are to oversee the IRS in the
administration, management, conduct, direction, and supervision
of the execution and application of the internal revenue laws.
As part of its oversight responsibilities, the Board has the
responsibility to ensure that the organization and operation of
the IRS allow it to carry out its mission.
Specific responsibilities of the Board
The Board has the following specific responsibilities: (1)
to review and approve strategic plans of the IRS, including the
establishment of mission and objectives (and standards of
performance) and annual and long-range strategic plans; (2) to
review the operational functions of the IRS, including plans
for modernization of the tax administration system, outsourcing
or managed competition, and training and education; (3) to
review and approve the Commissioner's plans for major
reorganization of the IRS; and (4) to review operations of the
IRS in order to ensure the proper treatment of taxpayers. The
Board also has the following specific responsibilities relating
to management: (1) to recommend to the President candidates for
Commissioner (and to recommend the removal of the
Commissioner); and (2) to review the Commissioner's selection,
evaluation, and compensation of IRS senior executives who have
program management responsibility over significant functions of
the IRS. The Congress expected that the Chair of the Board will
consider establishing a financial management subcommittee to
advise the Commissioner on financial management issues.
Consistent with the Board's responsibility to review and
approve plans for major reorganizations, Congress intended for
the Board to have the authority to review and approve the
reorganization plan that is contained in Title I of the Act.
However, to the extent that the Commissioner has already taken
measures to develop and implement such a plan, Congress did not
want to impede such efforts. Thus, Congress did not intend in
any way that the Commissioner should be precluded from moving
ahead with such planning and implementation prior to the
appointment of the Board.
In addition, the Board's specific responsibilities include
the responsibility to review and approve the budget request of
the IRS prepared by the Commissioner, submit such budget
request to the Secretary, and ensure that the budget request
supports the annual and long-range strategic plans of the IRS.
The Secretary is required to submit the budget request approved
by the Board to the President, who is required to submit such
request, without revision, to the Congress together with the
President's annual budget request for the IRS. The provision
does not affect the ability of the President to include, in
addition, his own budget request relating to the IRS.
It is intended that the Board will reach a formal decision
on all matters subject to its review. With respect to those
matters over which the Board has approval authority, the
Board's decisions will be determinative.
The Board has no responsibilities or authority with respect
to the development and formulation of Federal tax policy
relating to existing or proposed internal revenue laws. In
addition, the Board has no authority (1) to intervene in
specific taxpayer cases, including compliance activities
involving specific taxpayers such as criminal investigations,
examinations, and collection activities, (2) to engage in
specific procurement activities of the IRS (e.g., selecting
vendors or awarding contracts), or (3) to intervene in specific
individual personnel matters.
In exercising its duties, it is expected that the members
of the Board shall maintain appropriate confidentiality (e.g.,
regarding enforcement matters).
It is expected that the Treasury Department will no longer
utilize the IRS Management Board once the new Board created by
the provision is in place, as the functions of the IRS
Management Board would be taken over by the new Board.
Composition of the Board
The Board is composed of 9 members. Six of the members are
so-called ``private-life'' members who are not otherwise
Federal officers or employees. These private-life members are
appointed by the President, with the advice and consent of the
Senate. The other members are: (1) the Secretary (or, if the
Secretary so designates, the Deputy Secretary); (2) the
Commissioner; and (3) an individual who is a full-time Federal
employee or a representative of employees (``employee
representative'') and who is appointed by the President, with
the advice and consent of the Senate.
Section 6103 authority
Board members have limited access to confidential tax
return and return information under section 6103. This limited
access permits the Board to receive such information (i.e.,
information that has not been redacted to remove confidential
tax return and return information) from the Treasury IG for Tax
Administration or the Commissioner in connection with reports
made to the Board. This access to section 6103 information does
not include the taxpayer's name, address, or taxpayer or
employer identification number. The Board members are subject
to the anti-browsing rules applicable to IRS employees under
present law.19
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\19\ The provision does not affect the Secretary's (or Deputy
Secretary's) or the Commissioner's access to section 6103 information
or the application of the anti-browsing rules to the Secretary (or
Deputy Secretary) or the Commissioner.
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Qualifications of Board members
The private-life members of the Board are appointed without
regard to political affiliation and based solely on their
expertise in the following areas: (1) management of large
service organizations; (2) customer service; (3) the Federal
tax laws, including administration and compliance; (4)
information technology; (5) organization development; (6) the
needs and concerns of taxpayers; and (7) the needs and concerns
of small businesses. In the aggregate, the private-life members
of the Board should collectively bring to bear expertise in
these enumerated areas.
A private-life Board member and the employee representative
Board member may be removed at the will of the President. In
addition, the Secretary (or Deputy Secretary) and the IRS
Commissioner are automatically removed from the Board upon his
or her termination of employment as such.
Ethical standards for private-life members
Representational activities and compensation matters
The ethical conduct rules applicable to private-life Board
members depend on whether or not such members are determined to
be ``special government employees'' under Federal law. It is
expected that they generally will be.20 In that
case, they will be subject, at a minimum, to the ethical
conduct rules applicable to special government employees. In
addition, during their term as a Board member, a private-life
Board member cannot represent any party (whether or not for
compensation) with respect to (1) any matter before the Board
or the IRS, (2) any tax-related matter before the Treasury
Department or (3) any court proceeding with respect to a matter
described in (1) or (2). Thus, for example, the day after
appointment to the Board, a private-life Board member could not
meet with representatives of the IRS or Treasury on behalf of a
client or the Board member's corporate employer with respect to
proposed tax regulations. On the other hand, the Board member
could, for example, represent clients before the U.S. Customs
Service. The special rules applicable to private-life Board
members generally do not preclude the Board member from sharing
in compensation from representation of clients by another
person (e.g., a partner of the Board member) before the IRS or
Treasury.21
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\20\ If the Board members are determined not to be special
government employees, then they will be subject to the ethical conduct
rules relating to regular Federal Government employees.
\21\ Certain limitations to this exception to the otherwise
applicable ethical rules apply. For example, this exception does not
apply if the matter was one in which the Board member personally and
substantially participated.
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Post-employment restrictions
Private-life Board members are subject to the 1-year post
employment restriction applicable to individuals above certain
pay grades and who have served at least 60 days (whether or not
the members are special government employees).
Financial disclosure reports
The private-life Board members are subject to the public
financial disclosure rules applicable to Federal government
employees above certain pay grades and who have at least 60
days of service. Thus, the private-life Board members are
required to file a public financial disclosure report for
purposes of confirmation, annually during their tenure on the
Board, and upon termination of appointment.
Ethical standards for employee representative
The same ethics rules applicable to the private-life
members regarding the representational activities and
compensation matters apply to the employee representative if
the individual is a special government employee (i.e., the
individual is not already an officer or employee of the Federal
Government). In addition, the same post-employment restrictions
and the financial disclosure requirements applicable to the
private-life members apply to the employee representative.
The provision grants the President the authority to waive,
at the time the President nominates the employee representative
to the Board, for the term of the member, any appropriate
provisions of chapter 11 of title 18 of the United States Code,
to the extent such waiver is necessary to allow such member to
participate in the decisions of the Board while continuing
toserve as an employee representative. Any such waiver is not effective
unless a written intent of waiver to exempt the member (and the actual
waiver language) is submitted to the Senate with the nomination of the
member. It is not intended that waiver of the restrictions on post-
employment provided under the provision be necessary to allow such
member to participate in the decisions of the Board while continuing to
serve as an employee representative.
Administrative matters
Term of appointments
The 6 private-life Board members and the employee
representative are appointed for 5-year terms. The private-life
members and the employee representative may serve no more than
two 5-year terms. Board member terms are staggered, as a result
of a special rule providing that some private-life members
first appointed to the Board serve terms of less than 5 years.
Under this rule, 2 private-life members first appointed have a
term of 3 years, 2 private-life members have a term of 4 years,
and 2 private-life members have a term of 5 years. The terms of
the initial Board members run from the date of appointment.
Subsequent terms will run from expiration of the previous term.
A Board member appointed to fill a vacancy before the
expiration of a term will be appointed to the remainder of the
term. Such a member could be appointed to subsequent 5-year
term.
Chair of the Board
The members of the Board are to elect a Chair from the
private-life members for a 2-year term. Except as otherwise
provided by a majority of the Board, the authority of the Chair
includes the authority to hire appropriate staff, call
meetings, establish committees, establish the agenda for
meetings, and develop rules for the conduct of business.
Meetings and quorum
The Board is required to meet on a regular basis (as
determined necessary by the Chair), but no less frequently than
quarterly. The Board can meet privately, and is not subject to
public disclosure laws.
A quorum of 5 members is required in order for the Board to
conduct business. Actions of the Board can be taken by a
majority vote of those members present and voting.
Staffing
The Chair is authorized to hire (and terminate) such
personnel as the Chair finds necessary to enable the Board to
carry out its duties. In addition, the Board will have such
staff as detailed by the Commissioner or from another Federal
agency at the request of the Chair of the Board. The Chair can
procure temporary and intermittent services under section
3109(b) of title 5 of the U.S. Code. The Congress intended that
the size of the staff be limited to a small number, and the
Board is encouraged to use outside consultants whenever
necessary.
Claims against Board members
The private-life Board members and the employee
representative have no personal liability under Federal law
with respect to any claim arising out of or resulting from an
act or omission by the Board member within the scope of service
as a Board member. The provision does not affect any other
immunities and protections that may be available under
applicable law or any other right or remedy against the United
States under applicable law, or limit or alter the immunities
that are available under applicable law for Federal officers
and employees.
Compensation of Board members
The private-life members of the Board are compensated at a
rate of $30,000 per year, except that the Chair is compensated
at a rate of $50,000 a year. The employee representative member
of the Board is compensated at a rate of $30,000 per year
unless the individual is already an officer or employee of the
Federal Government. The other Board members will receive no
compensation for their services as a Board member. The members
of the Board are entitled to travel expenses for purposes of
attending meetings of the Board. Travel expenses other than
those incurred to attend Board meetings are allowed if approved
in advance by the Chair, and the Board is to report annually to
Congress the amount of travel expenditures incurred by the
Board.
Reports
The Board is required to report each year regarding the
conduct of its responsibilities, and information on travel
expenditures incurred. The annual report is to be provided to
the President and the House Committees on Ways and Means,
Government Reform and Oversight, and Appropriations and the
Senate Committees on Finance, Governmental Affairs, and
Appropriations. In addition, the Board is required to report to
the Ways and Means and Finance Committees if the IRS does not
address problems identified by the Board.
Effective Date
The provisions relating to the Board are effective on the
date of enactment (July 22, 1998). The President is directed to
submit nominations for Board members to the Senate within 6
months of the date of enactment. Provisions relating to the
Board are not to be construed to invalidate the actions and
authority of the IRS prior to the appointment of members of the
Board.
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
B. Appointment and Duties of IRS Commissioner and Chief Counsel and
Other Personnel
1. IRS Commissioner and other personnel (secs. 1102(a) and 1104 of the
Act and secs. 7803 and 7804 of the Code)
Present and Prior Law
Within the Department of the Treasury is a Commissioner of
Internal Revenue, who is appointed by the President, with the
advice and consent of the Senate. Under prior law, the
Commissioner had such duties and powers as were prescribed by
the Secretary.22 The Secretary has delegated to the
Commissioner the administration and enforcement of the internal
revenue laws.23 The Commissioner generally does not
have authority with respect to tax policy matters.24
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\22\ Code section 7802(a).
\23\ Treasury Order 150-10 (April 22, 1982).
\24\ See, e.g., Treasury Order 111-2 (March 16, 1981), which
delegates to the Assistant Secretary (Tax Policy) the exclusive
authority to make the final determination of the Treasury Department's
position with respect to issues of tax policy arising in connection
with regulations, published Revenue Rulings and Revenue Procedures, and
tax return forms and to determine the time, form and manner for the
public communication of such position.
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The Secretary is authorized to employ such persons as the
Secretary deems appropriate for the administration and
enforcement of the internal revenue laws and to assign posts of
duty.
Reasons for Change
The Congress believed that the duties and responsibilities
of the Commissioner are of such significance that the
Commissioner should continue to be appointed by the
President.25 However, the frequency with which the
Commissioner changes--the average tenure in office is under 3
years--is one of the factors contributing to lack of IRS
management continuity. The Congress believed (as did the
National Commission on Restructuring the IRS) that providing a
statutory term for the Commissioner to serve would help ensure
greater continuity of IRS management.
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\25\ Retaining prior law also eliminates any constitutional issues
that may arise if the Commissioner is appointed by someone other than
the President, such as by the Board, as suggested by the National
Commission on Restructuring the IRS.
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Explanation of Provision
As under prior law, the Commissioner is appointed by the
President, with the advice and consent of the Senate, and may
be removed at will by the President. Under the provision, one
of the qualifications of the Commissioner is demonstrated
ability in management. The Commissioner is appointed to a 5-
year term, beginning with the date of appointment. The
Commissioner may be reappointed for more than one 5-year term.
The Board recommends candidates to the President for the
position of Commissioner; however, the President is not
required to nominate for Commissioner a candidate recommended
by the Board. The Board has the authority to recommend the
removal of the Commissioner.
The Commissioner has such duties and powers as prescribed
by the Secretary. Unless otherwise specified by the Secretary,
such duties and powers include the power to administer, manage,
conduct, direct, and supervise the execution and application of
the internal revenue laws or related statutes and tax
conventions to which the United States is a party, to exercise
the IRS' final authority concerning the substantive
interpretation of the tax laws, and to recommend to the
President a candidate for Chief Counsel (and recommend the
removal of the Chief Counsel). If the Secretary determines not
to delegate such specified duties to the Commissioner, such
determination will not take effect until 30 days after the
Secretary notifies the House Committees on Ways and Means,
Government Reform and Oversight, and Appropriations, and the
Senate Committees on Finance, Governmental Affairs, and
Appropriations. The Commissioner is to consult with the Board
on all matters within the Board's authority (other than the
recommendation of candidates for Commissioner and the
recommendation to remove the Commissioner).
Unless otherwise specified by the Secretary, the
Commissioner is authorized to employ such persons as the
Commissioner deems proper for the administration and
enforcement of the internal revenue laws and is required to
issue all necessary directions, instructions, orders, and rules
applicable to such persons. Unless otherwise provided by the
Secretary, the Commissioner will determine and designate the
posts of duty.
Effective Date
The provisions relating to the Commissioner are effective
on the date of enactment (July 22, 1998). The provision
relating to the 5-year term of office applies to the
Commissioner in office on the date of enactment. The 5-year
term runs from the date of appointment.
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
2. IRS Chief Counsel (sec. 1102(b) of the Act and sec. 7803 of the
Code)
Present and Prior Law
The President is authorized to appoint, by and with the
consent of the Senate, an Assistant General Counsel of the
Treasury, who is the Chief Counsel of the IRS. The Chief
Counsel is the chief law officer for the IRS and has had such
duties as may be prescribed by the Secretary. The Secretary has
delegated authority over the Chief Counsel to the Treasury
General Counsel. Under prior law, the Chief Counsel did not
report to the Commissioner, but to the Treasury General
Counsel. As delegated by the Treasury General Counsel, the
duties of the Chief Counsel included: (1) to be the legal
advisor to the Commissioner and his or her officers and
employees; (2) to furnish such legal opinions as may be
required in the preparation and review of rulings and memoranda
of technical advice and the performance of other duties
delegated to the Chief Counsel; (3) to prepare, review, or
assist in the preparation of proposed legislation, treaties,
regulations and Executive Orders relating to laws affecting the
IRS; (4) to represent the Commissioner in cases before the Tax
Court; (5) to determine what civil actions should be brought in
the courts under the laws affecting the IRS and to prepare
recommendations to the Department of Justice for the
commencement of such actions and to authorize or sanction
commencement of such actions.
Explanation of Provision
As under prior law, the Chief Counsel is appointed by the
President, with the advice and consent of the Senate.
The Chief Counsel is to report directly to the
Commissioner, with two exceptions. First, the Chief Counsel is
to report to both the Commissioner and the General Counsel of
the Treasury Department with respect to (1) legal advice or
interpretation of the tax law not relating solely to tax
policy, and (2) tax litigation. Under this rule, the Congress
intended that the Chief Counsel's dual reporting to the
Commissioner and to the General Counsel include reporting with
respect to legal advice or interpretation of the tax law set
forth in regulations, revenue rulings and revenue procedures,
technical advice and other similar memoranda, private letter
rulings, and published guidance not described in the foregoing.
Second, the Chief Counsel is to report to the General
Counsel with respect to legal advice or interpretation of the
tax law relating solely to tax policy. Under this rule, the
Congress intended that the Chief Counsel's reporting to the
General Counsel include proposed legislation and international
tax treaties.
The provision provides that if there is any disagreement
between the Commissioner and the General Counsel with respect
to any matter on which the Chief Counsel has dual reporting to
both the Commissioner and the General Counsel, the matter is to
be submitted to the Secretary or the Deputy Secretary of the
Treasury for resolution.
The Congress intended that under the general rule, the
Chief Counsel's reporting directly to the Commissioner include
reporting with respect to budget, organizational structure and
reorganizations, mission and strategic plans. In addition, the
Congress intended that the Chief Counsel's reporting directly
to the Commissioner include reporting with respect to all
matters relating to the day-to-day operations of the IRS, such
as management of the IRS and procurement.
The provision provides that all personnel in the Office of
the Chief Counsel are to report to the Chief Counsel (and not
to any person at the IRS or elsewhere within the Treasury
Department).
The Chief Counsel has such duties and powers as prescribed
by the Secretary. Unless otherwise specified by the Secretary,
these duties include the duties delegated under prior law to
the Chief Counsel as described above. If the Secretary
determines not to delegate such specified duties to the Chief
Counsel, such determination is subject to the same notice
requirement applicable to changes in the delegation of
authority with respect to the Commissioner.
Effective Date
The provision is generally effective on the date of
enactment (July 22, 1998). The provision providing that the
Chief Counsel reports directly to the Commissioner is effective
90 days after the date of enactment (October 20, 1998).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
C. Structure and Funding of the Employee Plans and Exempt Organizations
Division (``EP/EO'') (sec. 1101 of the Act and former sec. 7802(b) of
the Code)
Prior Law
Prior to 1974, no one specific office in the IRS had
primary responsibility for employee plans and tax-exempt
organizations. As part of the reforms contained in the Employee
Retirement Income Security Act of 1974 (``ERISA''), Congress
statutorily created the Office of Employee Plans and Exempt
Organizations (``EP/EO'') under the direction of an Assistant
Commissioner.26 EP/EO was created to oversee
deferred compensation plans governed by sections 401-414 of the
Code and organizations exempt from tax under Code section
501(a).
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\26\ Former Code section 7802(b).
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In general, EP/EO was established in response to concern
about the level of IRS resources devoted to oversight of
employee plans and exempt organizations. The legislative
history of Code section 7802(b) states that, with respect to
administration of laws relating to employee plans and exempt
organizations, ``the natural tendency is for the Service to
emphasize those areas that produce revenue rather than those
areas primarily concerned with maintaining the integrity and
carrying out the purposes of exemption provisions.''
27
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\27\ S. Rept. 93-383, 108 (1973). See also H. Rept. 93-807, 104
(1974).
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To provide funding for the new EP/EO office, ERISA
authorized the appropriation of an amount equal to the sum of
the section 4940 excise tax on investment income of private
foundations (assuming a rate of 2 percent) as would have been
collected during the second preceding year plus the greater of
the same amount or $30 million.28 However, amounts
raised by the section 4940 excise were never dedicated to the
administration of EP/EO, but were transferred instead to
general revenues. Thus, the level of EP/EO funding, like that
of the rest of the IRS, has always been dependent on annual
Congressional appropriations to the Treasury Department.
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\28\ Former Code section 7802(b)(2).
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Reasons for Change
To facilitate the reorganization of the IRS along
functional lines, the Congress believed that the statutory
provision requiring the establishment of the Office of Employee
Plans and Exempt Organizations under the direction of an
Assistant Commissioner should be eliminated. In addition,
because the funding formula for EP/EO set forth in section
7802(b)(2) would, if utilized, result in an unstable level of
funding that may bear little or no relation to the amount of
financial resources actually required by the EP/EO division,
the Congress believed that it was appropriate to repeal the
funding mechanism.
Explanation of Provision
The Act eliminates the statutory requirement contained in
section 7802(b) that there be an ``Office of Employee Plans and
Exempt Organizations'' under the supervision and direction of
an Assistant Commissioner. However, the Congress intended that
a comparable structure be created administratively to ensure
that adequate resources within the IRS are devoted to oversight
of the tax-exempt sector.
In addition, the Act repeals the funding mechanism set
forth in section 7802(b)(2). Thus, the appropriate level of
funding for EP/EO is, consistent with current practice, subject
to annual Congressional appropriations, as are other functions
within the IRS. In this regard, however, the Congress noted
that, given the magnitude of the sectors EP/EO is charged with
regulating, as well as the unique nature of its mandate, an
adequately funded EP/EO is extremely important to the efficient
and fair administration of the Federal tax system. Accordingly,
the Congress intended that financial resources for EP/EO should
not be constrained on the basis that EP/EO isa ``non-core'' IRS
function; rather, EP/EO, like all functions of the IRS, should be
funded so as to promote the efficient and fair administration of the
Federal tax system.
For example, the Congress noted that it is important to
allocate sufficient funds for EP/EO staffing adequately to
monitor and assist businesses in establishing and maintaining
retirement plans. In Revenue Procedure 98-22, the IRS announced
the expansion of the self-correction programs it offers
employers to encourage companies to identify and correct errors
without incurring significant penalties. The Congress welcomed
these changes, and did not intend that the elimination of the
statutory requirement contained in section 7802(b)(1) or the
self-funding mechanism described in section 7802(b)(2) impede
the implementation of these and EP/EO's other programs and
activities. Rather, the Congress intended that there be
adequate funding for EP/EO, including these self-correction
programs that will encourage the establishment and continuation
of retirement plans to increase coverage of American workers
while protecting the rights of employees to benefits under
these plans and maintaining the integrity and purposes of the
exemption provisions.
Effective Date
The provision is effective on the date of enactment (July
22, 1998).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
D. Taxpayer Advocate (secs. 1102 (a), (c), and (d) of the Act and sec.
7803(c) of the Code)
Present and Prior Law
Taxpayer Advocate
In 1996, the Taxpayer Bill of Rights 2 (``TBOR 2'')
established the position of Taxpayer Advocate, which replaced
the position of Taxpayer Ombudsman, created in 1979 by the IRS.
The Taxpayer Advocate is appointed by and reports directly to
the IRS Commissioner.
TBOR 2 also created the Office of the Taxpayer Advocate.
The functions of the office are (1) to assist taxpayers in
resolving problems with the IRS, (2) to identify areas in which
taxpayers have problems in dealings with the IRS, (3) to
propose changes (to the extent possible) in the administrative
practices of the IRS that will mitigate those problems, and (4)
to identify potential legislative changes that may mitigate
those problems.
Taxpayer assistance orders
Under the rules enacted in TBOR 2, taxpayers could request
that the Taxpayer Advocate issue a taxpayer assistance order
(``TAO'') if the taxpayer is suffering or about to suffer a
significant hardship as a result of the manner in which the
internal revenue laws are being administered. A TAO may require
the IRS to release property of the taxpayer that has been
levied upon, or to cease any action, take any action as
permitted by law, or refrain from taking any action with
respect to the taxpayer.
Under prior law, the direct point of contact for taxpayers
seeking taxpayer assistance orders was a problem resolution
officer appointed by a District Director or a Regional Director
of Appeals. The Taxpayer Advocate designated the authority to
issue taxpayer assistance orders to the local and regional
problem resolution officers.
Reports of the Taxpayer Advocate
The Taxpayer Advocate is required to report annually to the
House Committee on Ways and Means and the Senate Finance
Committee on the objectives of the Taxpayer Advocate for the
upcoming fiscal year. This report is required to be provided no
later than June 30 of each calendar year and is to contain full
and substantive analysis, in addition to statistical
information.
The Taxpayer Advocate is also required to report annually
to the House Committee on Ways and Means and the Senate Finance
Committee on the activities of the Taxpayer Advocate during the
most recently ended fiscal year. This report is required to be
provided no later than December 31 of each calendar year, and
is to contain full and substantive analysis, in addition to
statistical information. This report is also required to: (1)
identify the initiatives the Taxpayer Advocate has taken on
improving taxpayer services and IRS responsiveness; (2) contain
recommendations received from individuals with the authority to
issue TAOs; (3) contain a summary of at least 20 of the most
serious problems encountered by taxpayers, including a
description of the nature of such problems; (4) contain an
inventory of the items described in (1), (2), and (3) for which
action has been taken and the result of such action; (5)
contain an inventory of the items described in (1), (2), and
(3) for which action remains to be completed and the period
during which each item has remained on such inventory; (6)
contain an inventory of the items described in (1), (2) and (3)
for which no action has been taken, the period during which the
item has remained on the inventory, the reasons for the
inaction, and identify any IRS official who is responsible for
the inaction; (7) identify any TAO that was not honored by the
IRS in a timely manner; (8) contain recommendations for such
administrative and legislative action as may be appropriate to
resolve problems encountered by taxpayers; (9) describe the
extent to which regional problem resolution officers
participate in the selection and evaluation of local problem
resolution officers, and (10) include such other information as
the Taxpayer Advocate deems advisable.
The reports of the Taxpayer Advocate are to be submitted
directly to the Congressional Committees without prior review
or comment from the Commissioner, Secretary, any other officer
or employee of the Treasury, or the Office of Management and
Budget.
Reasons for Change
The Congress believed that the Taxpayer Advocate serves an
important role within the IRS in terms of preserving taxpayer
rights and solving problems that taxpayers encounter in their
dealings with the IRS. To that end, it was believed appropriate
that the IRS Oversight Board have input in the selection of the
Taxpayer Advocate. Due to the enhanced powers of the Taxpayer
Advocate in TBOR2 and this legislation, the Congress was
advised that the Taxpayer Advocate should be appointed by the
Secretary to avoid constitutional problems. In addition, the
Congress believed that the Taxpayer Advocate should have
experience appropriate to the position and that the Taxpayer
Advocate's objectivity would be best preserved by limiting
prior and future employment with the IRS. The Congress also
believed that the reporting requirements of the Taxpayer
Advocate should be targeted not only towards solving problems
with the IRS but also towards preventing problems before they
arise.
In determining whether a taxpayer assistance order should
be issued, the Taxpayer Advocate should consider certain
factors as constituting a ``significant hardship'' for the
taxpayer. In addition to providing relief if the taxpayer is
about to suffer a significant hardship, the Taxpayer Assistance
Order should be issued in other appropriate situations, such as
if there is an immediate threat of adverse action, if there has
been a delay of more than 30 days in resolving the taxpayer's
account problems, the taxpayer will have to pay significant
costs if relief is not granted, or the taxpayer will suffer
irreparable injury, or long-term adverse impact, if relief is
not granted.
Explanation of Provision
National Taxpayer Advocate
The provision renames the Taxpayer Advocate the ``National
Taxpayer Advocate.'' The National Taxpayer Advocate is
appointed by the Secretary after consultation with the
Commissioner and the Board (without regard to the provisions of
Title 5 of the U.S. Code, relating to appointments in the
competitive service or the Senior Executive Service). An
individual may be appointed as the National Taxpayer Advocate
only if the individual was not an officer or employee of the
IRS during the 2-year period ending with such appointment and
the individual agrees not to accept employment with the IRS for
at least 5 years after ceasing to be the National Taxpayer
Advocate. Service as an officer or employee of the Office of
the Taxpayer Advocate is not taken into account, for purposes
of these 2-year and 5-year rules. The National Taxpayer
Advocate's compensation is to be at the highest rate of basic
pay established for the Senior Executive Service, or, if the
Treasury Secretary so determines, at a rate fixed under 5 U.S.
Code section 9503.
The provision replaces the prior-law problem resolution
system with a system of localTaxpayer Advocates who report
directly to the National Taxpayer Advocate and who will be employees of
the Taxpayer Advocate's Office, independent from the IRS examination,
collection, and appeals functions.
Each local taxpayer advocate reports to the National
Taxpayer Advocate or his delegate. The Congress intended that a
delegate mean the Taxpayer Advocate for the appropriate
organizational unit. It is not intended that a local Taxpayer
Advocate report to a District Director of the IRS, for example.
Providing reporting to a delegate of the National Taxpayer
Advocate under the provision was intended to provide reporting
flexibility sufficient to take into account the necessities of
any reorganization of the IRS.
The National Taxpayer Advocate has the responsibility to
evaluate and take personnel actions (including dismissal) with
respect to any local Taxpayer Advocate or any employee in the
Office of the National Taxpayer Advocate. In conjunction with
the Commissioner, the National Taxpayer Advocate is required to
develop career paths for local Taxpayer Advocates. The Congress
intended that the National Taxpayer Advocate's responsibility
to appoint local Taxpayer Advocates and make available at least
one local Taxpayer Advocate for each State means that a local
Taxpayer Advocate will be available to taxpayers in each State.
The Congress intended that the National Taxpayer Advocate be
able to hire and consult counsel as appropriate.
The National Taxpayer Advocate is required to monitor the
coverage and geographical allocation of the local Taxpayer
Advocates, develop guidance to be distributed to all IRS
officers and employees outlining the criteria for referral of
taxpayer inquires to local taxpayer advocates, ensure that the
local telephone number for the local taxpayer advocate is
published and available to taxpayers.
Each local Taxpayer Advocate may consult with the
appropriate supervisory personnel of the IRS regarding the
daily operation of the office of the Taxpayer Advocate. At the
initial meeting with any taxpayer seeking the assistance of the
Office of the Taxpayer Advocate, the local taxpayer advocate is
required to notify the taxpayer that the Office operates
independently of any other IRS office and reports directly to
Congress through the National Taxpayer Advocate. At the
discretion of the local taxpayer advocate, the advocate shall
not disclose to the IRS any contact with or information
provided by the taxpayer. Each local office of the Taxpayer
Advocate is to maintain a separate phone, facsimile, and other
electronic communication access, and a separate post office
address.
The IRS is required to publish the taxpayer's right to
contact the local Taxpayer Advocate on the statutory notice of
deficiency.
Taxpayer assistance orders
The provision expands the circumstances under which a TAO
may be issued. The provision provides that a ``significant
hardship'' is deemed to occur if one of the following four
factors exists: (1) there is an immediate threat of adverse
action; (2) there has been a delay of more than 30 days in
resolving the taxpayer's account problems; (3) the taxpayer
will have to pay significant costs (including fees for
professional services) if relief is not granted; or (4) the
taxpayer will suffer irreparable injury, or a long-term adverse
impact, if relief is not granted. The National Taxpayer
Advocate may also issue a TAO if the taxpayer meets
requirements set forth in regulations. It was intended that the
circumstances set forth in regulations be based on
considerations of equity.
In determining whether to issue a TAO in cases in which the
IRS failed to follow applicable published guidance (including
procedures set forth in the Internal Revenue Manual), the
Taxpayer Advocate is to construe the matter in a manner most
favorable to the taxpayer.
Reports of the National Taxpayer Advocate
The provision requires the annual report regarding the
activities of the National Taxpayer Advocate for the most
recently ended fiscal year to (in addition to the information
required under present law): (1) identify areas of the tax law
that impose significant compliance burdens on taxpayers or the
IRS, including specific recommendations for remedying such
problems; and (2) identify the 10 most litigated issues for
each category of taxpayers, including recommendations for
mitigating such disputes.
Effective Date
The provision is generally effective on the date of
enactment (July 22, 1998), except that in appointing the first
National Taxpayer Advocate after date of enactment, the
Treasury Secretary may not appoint anyone who was an officer or
employee of the IRS at any time during the 2-year period ending
on the date of appointment, and the Treasury Secretary need not
consult with the Board if the Board has not been appointed.
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
E. Treasury Office of Inspector General; IRS Office of the Chief
Inspector (secs. 1102 and 1103 of the Act, sec. 7803(d) of the Code,
and secs. 2, 8D, and 9 of the Inspector General Act of 1978)
Present and Prior Law
Treasury Inspector General
In general
The Treasury Office of Inspector General (``Treasury IG'')
was established in 1988 and charged with conducting independent
audits, investigations and review to help the Department of
Treasury accomplish its mission, improve its programs and
operations, promote economy, efficiency and effectiveness, and
prevent and detect fraud and abuse. The Treasury IG derives its
statutory authority under the Inspector General Act of 1978, as
amended (``IG Act of 1978'').
Appointment and qualifications
The IG Act of 1978 provides that the Treasury IG is
selected by the President, with the advice and consent of the
Senate, without regard to political affiliation and solely on
the basis of integrity and demonstrated ability in accounting,
auditing, financial analysis, law, management analysis, public
administration, or investigations. The Treasury IG can be
removed from office by the President. The President must
communicate the reasons for such removal to both Houses of
Congress.
Duties and responsibilities
The Treasury IG generally is authorized to conduct,
supervise and coordinate internal audits and investigations
relating to the programs and operations of the Treasury,
including all of its bureaus and offices.29 Special
rules apply, however, with respect to the Treasury IG's
jurisdiction over ATF, Customs, the Secret Service and the
IRS--the four so-called ``law enforcement bureaus.'' Upon its
establishment, the Treasury IG assumed the internal audit
functions previously performed by the offices of internal
affairs of ATF, Customs and the Secret Service. Although the
Treasury IG was granted oversight responsibility for the
internal investigations performed by the Office of Internal
Affairs of ATF, the Office of Internal Affairs of Customs, and
the Office of Inspections of the Secret Service, the internal
investigation or inspection functions of these offices remained
with the respective bureaus. The Treasury IG did not assume
responsibility for either the internal audit or inspection
functions of the IRS Office of the Chief Inspector. However, it
was directed to oversee the internal audits and internal
investigations performed by the IRS Office of the Chief
Inspector.
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\29\ The Treasury Department organization includes the Departmental
offices as well as the Bureau of Alcohol, Tobacco and Firearms
(``ATF''), the Office of the Comptroller of the Currency (``OCC''), the
U.S. Customs Service (``Customs''), the Bureau of Engraving and
Printing, the Federal Law Enforcement Training Center, the Financial
Management Service, the U.S. Mint, the Bureau of the Public Debt, the
U.S. Secret Service (``Secret Service''), the Office of Thrift
Supervision, and the IRS.
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The Commissioner and the Treasury IG have entered into two
Memorandums of Understanding (``MOUs'') 30 to
clarify the respective roles of the IRS Office of the Chief
Inspector and the Treasury IG in two primary areas: (1) the
investigation of allegations of wrongdoing by IRS executives
and employees in situations where the independence of the
Office of the Chief Inspector could be questioned, and (2)
oversight by the Treasury IG of the IRS Office of the Chief
Inspector.31 Pursuant to the 1990 MOU, the
Commissioner agreed to transfer 21 FTEs and $1.9 million from
the IRS appropriation to the Treasury IG appropriation to be
used for the following purposes: (1) oversight of the
operations of the Office of the Chief Inspector; (2) conduct of
special reviews of IRS operations; (3) investigation of
allegations of misconduct concerning the Commissioner, the
Senior Deputy Commissioner, and employees of the IRS Office of
the Chief Inspector; and (4) investigation of allegations of
misconduct where the independence of the IRS Office of the
Chief Inspector might be questioned. With respect to item (4),
the Commissioner and Treasury IG agreed that all allegations of
misconduct involving IRS executives and managers (Grade 15 and
above), as well as any other allegation involving ``significant
or notorious'' matters were to be referred to the Treasury IG,
and that investigations arising out of such referrals generally
would be conducted by the Treasury IG.
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\30\ The first MOU was entered into in 1990 and the second in 1994.
\31\ Treasury Directive 40-01 (September 21, 1992) reiterates that
the Treasury IG is responsible for investigating alleged misconduct on
the part of IRS employees at the grade 15 level and above, all
employees of the Office of the Chief Inspector. In addition, Treasury
Directive 40-01 states that the Treasury IG is responsible for
investigating alleged misconduct on the part of Office of Chief Counsel
employees (excluding employees of the National Director, Office of
Appeals).
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In general, under the IG Act of 1978, Inspectors General
are instructed to report expeditiously to the Attorney General
whenever the Inspector General has reasonable grounds to
believe there has been a violation of Federal criminal law.
However, in matters involving criminal violations of the
Internal Revenue Code, the Treasury IG may report to the
Attorney General only those offenses under section 7214 of the
Code (unlawful acts of revenue officers or agents, including
extortion, bribery and fraud) without the consent of the
Commissioner.
Authority
The Treasury IG reports to and is under the general
supervision of the Secretary of Treasury, acting through the
Deputy Secretary. In general, the Secretary cannot prevent or
prohibit the Treasury IG from initiating, carrying out, or
completing any audit or investigation orfrom issuing any
subpoena during the course of any audit or investigation.
However, section 8D of the IG Act of 1978 grants the
Secretary authority to prohibit audits or investigations by the
Treasury IG under certain circumstances. In particular, the
Treasury IG is under the authority, direction, and control of
the Secretary with respect to audits or investigations, or the
issuance of subpoenas, which require access to sensitive
information concerning: (1) ongoing criminal investigations or
proceedings; (2) undercover operations; (3) the identity of
confidential sources, including protected witnesses; (4)
deliberations and decisions on policy matters, including
documented information used as a basis for making policy
decisions, the disclosure of which could reasonably be expected
to have a significant influence on the economy or market
behavior; (5) intelligence or counterintelligence matters; (6)
other matters the disclosure of which would constitute a
serious threat to national security or to the protection of
certain persons. With respect to audits, investigations or
subpoenas that require access to the above-listed information,
the Secretary may prohibit the Treasury IG from carrying out
such audit, investigation or subpoena if the Secretary
determines that such prohibition is necessary to prevent the
disclosure of such information or to prevent significant
impairment to the national interests of the United States. The
Secretary must provide written notice of such a prohibition to
the Treasury IG, who must, in turn, transmit a copy of such
notice to the Committees on Government Reform and Oversight and
Ways and Means of the House and the Committees on Governmental
Affairs and Finance of the Senate.
Access to taxpayer returns and return information
The Treasury IG has access to taxpayer returns and return
information under section 6103(h)(1) of the Code. However, such
access is subject to certain special requirements, including
the requirement that the Treasury IG notify the IRS Office of
the Chief Inspector (or the Deputy Commissioner in certain
circumstances) of its intent to access returns and return
information.
Reporting requirements
Under the IG Act of 1978, the Treasury IG reports to the
Congress semiannually on its activities. Reports from the
Treasury IG are transmitted to the Committees on Government
Reform and Oversight and Ways and Means of the House and the
Committees on Governmental Affairs and Finance of the Senate.
Resources
For fiscal year 1997, the Treasury IG had 296 FTEs and
total funding of $29.7 million. 174 FTEs were assigned to the
Treasury IG's audit function and 61 were assigned to the
investigative function. The remaining FTEs were divided among
the following functions: evaluations, legal, program,
technology and administrative support. Of the total Treasury IG
FTEs, approximately 23 were used for IRS oversight activities
in fiscal year 1997.
IRS Office of Chief Inspector
The IRS Office of the Chief Inspector (also known as the
``Inspection Service'') was established on October 1, 1951, in
response to publicity revealing widespread corruption in the
IRS. At the time of its creation, President Harry S. Truman
stated, ``A strong, vigorous inspection service will be
established and will be made completely independent of the rest
of the Internal Revenue Service.''
Appointment of the Chief Inspector
In 1952, the Office of the Assistant Commissioner
(Inspection) was established. The office was redesignated as
the Office of the Chief Inspector on March 25, 1990. The Chief
Inspector is appointed by the Commissioner. In this regard,
pursuant to Treasury Directive 40-01, the Commissioner must
consult with the Treasury IG before selecting candidates for
the position of Chief Inspector (and all other senior executive
service (``SES'') positions in the Office of the Chief
Inspector). The Commissioner must also consult with the
Treasury IG regarding annual performance appraisals for the
Chief Inspector and other SES officials.
The Office of the Chief Inspector consists of a National
Office and the offices of the Regional Inspectors. The offices
of the Regional Inspectors are located in the same cities and
have the same geographic boundaries as the offices of the four
IRS Regional Commissioners. The Regional Inspectors report
directly to the Chief Inspector.
Duties and responsibilities
The Office of the Chief Inspector generally is responsible
for carrying out internal audits and investigations that: (1)
promote the economic, efficient, and effective administration
of the nation's tax laws; (2) detect and deter fraud and abuse
in IRS programs and operations; and (3) protect the IRS against
external attempts to corrupt or threaten its employees. The
Chief Inspector reports directly to the Commissioner and Deputy
Commissioner of the IRS.
The IRS Inspection Service is divided into three functions:
Internal Security, Internal Audit, and Integrity Investigations
and Activities. Internal Security's responsibilities include
criminal investigations (employee conduct, bribery, assault and
threat and investigations of non-IRS employees for acts such as
impersonation, theft, enrolled agent misconduct, disclosure,
and anti-domestic terrorism) investigative support activities
(including forensic lab, computer investigative support, and
maintenance of law enforcement equipment), protection, and
background investigations.
Internal Audit is responsible for providing IRS management
with independent reviews and appraisals of all IRS activities
and operations. In addition, Internal Audit makes
recommendations to improve the efficiency and effectiveness of
programs and to assist IRS officials in carrying out their
program and operational responsibilities. In this regard,
Internal Audit generally conducts performance reviews (program
audits, system development audits, internal control audits) and
financial reviews (financial statement audits and financial
related reviews).
Integrity Investigations and Activities are joint internal
audit and internal security operations undertaken as a
proactive effort to detect and deter fraud and abuse within the
IRS. Integrity Investigations and Activities also includes the
UNAX Central Case Development Center. The Center was developed
in October, 1997, in response to the Taxpayer Browsing
Protection Act of 1997. Its purpose is to detect unauthorized
accesses to IRS computer systems by IRS employees and to refer
such instances to Internal Security investigators for further
investigation.
Authority
The Chief Inspector derives specific and general authority
from delegation by the Commissioner and Deputy Commissioner. In
addition, under section 7608(b) of the Code, the Chief
Inspector is authorized to perform certain functions in
connection with the duty of enforcing any of the criminal
provisions of the Code, including executing and serving search
and arrest warrants, serving subpoenas and summonses, making
arrests without warrant, carrying firearms, and seizing
property subject to forfeiture under the Code.
Access to taxpayer returns and return information
The Office of the Chief Inspector has full access to
taxpayer returns and return information.
Reporting requirements
The Office of the Chief Inspector reports facts developed
through its internal audit and internal security activities to
IRS management officials, who are charged with the
responsibility of reviewing IRS activities. The results of the
Chief Inspector's internal audit and internal security
activities also are reported to the Treasury IG and are
included in the Treasury IG's semiannual reports to Congress.
Internal audit reports prepared by the Office of the Chief
Inspector are provided monthly to the Government Accounting
Office, as well as to the House and Senate Appropriations
Committees. In addition, a monthly list of Internal Audit
reports is provided to Treasury and the Office of Management
and Budget. Reports of Investigation regarding criminal conduct
are referred to the Department of Justice for prosecution.
Resources
The IRS Office of the Chief Inspector had 1,202 FTEs for
1997 and total funding of$100.1 million. Of these FTEs,
approximately 442 performed Internal Audit functions, 511 performed
Internal Security functions, and 94 performed Integrity Investigations
and Activities. Of the remaining FTEs, approximately 95 were dedicated
to information technology functions and 60 staffed the offices of the
Chief Inspector and the Regional Inspectors.
Reasons for Change
The Congress believed that the current IRS Office of the
Chief Inspector lacks sufficient structural and actual autonomy
from the agency it is charged with monitoring and overseeing.
Further, the current relationship between the Treasury IG and
the IRS Office of the Chief Inspector does not foster
appropriate oversight over the IRS. The Congress believed that
the establishment of an independent Inspector General within
the Department of Treasury whose primary focus and
responsibility will be to audit, investigate, and evaluate IRS
programs will improve the quality as well as the credibility of
IRS oversight.
Explanation of Provision
In general
The Act establishes a new, independent, Treasury Inspector
General for Tax Administration (``Treasury IG for Tax
Administration'') within the Department of Treasury. The IRS
Office of the Chief Inspector is eliminated, and all of its
powers and responsibilities are transferred to the Treasury IG
for Tax Administration. The Treasury IG for Tax Administration
has the powers and responsibilities generally granted to
Inspectors General under the IG Act of 1978, without the
limitations that currently apply to the Treasury IG under
section D of the Act. The role of the existing Treasury IG is
redefined to exclude responsibility for the IRS. The Treasury
IG for Tax Administration is under the supervision of the
Secretary of Treasury, with certain additional reporting to the
Oversight Board and the Congress.
Appointment and qualifications of Treasury IG for Tax Administration
The Treasury IG for Tax Administration is selected by the
President, with the advice and consent of the Senate. The
Treasury IG for Tax Administration can be removed from office
by the President. The President must communicate the reasons
for such removal to both Houses of Congress.
The Treasury IG for Tax Administration must be selected
without regard to political affiliation and solely on the basis
of integrity and demonstrated ability in accounting, auditing,
financial analysis, law, management analysis, public
administration, or investigations. In addition, the Treasury IG
for Tax Administration should have demonstrated ability to lead
a large and complex organization. The Treasury IG for Tax
Administration may not be employed by the IRS within the two
years preceding and the five years following his or her
appointment.
The Treasury IG for Tax Administration is required to
appoint an Assistant Inspector General for Auditing and an
Assistant Inspector for Inspections. Under the Act, such
appointees, as well as any Deputy Inspector General(s)
appointed by the Treasury IG for Tax Administration, may not be
employed by the IRS within the two years preceding and the five
years following their appointments.
Duties and responsibilities of Treasury IG for Tax Administration
The Treasury IG for Tax Administration has the present-law
duties and responsibilities currently delegated to the Treasury
IG with respect to the IRS. In addition, the Treasury IG for
Tax Administration assumes all of the duties and
responsibilities currently delegated to the IRS Office of the
Chief Inspector. The Treasury IG for Tax Administration has
jurisdiction over IRS matters, as well as matters involving the
Board.
Accordingly, the Treasury IG for Tax Administration is
charged with conducting audits, investigations, and evaluations
of IRS programs and operations (including the Board) to promote
the economic, efficient and effective administration of the
nation's tax laws and to detect and deter fraud and abuse in
IRS programs and operations. In this regard, the Treasury IG
for Tax Administration specifically is directed to evaluate the
adequacy and security of IRS technology on an ongoing basis.
The Treasury IG for Tax Administration is charged with
investigating allegations of criminal misconduct (e.g., Code
sections 7212, 7213, 7214, 7216 and new section 7217), as well
as administrative misconduct (e.g., violations of the Taxpayer
Bill of Rights and the Taxpayer Bill of Rights 2, the Office of
Government Ethics Standards of Ethical Conduct and the IRS
Supplemental Standards of Ethical Conduct). The Act provides,
however, that the responsibility for (1) protecting IRS
employees and (2) investigating the backgrounds of prospective
IRS employees shall not be transferred to the Treasury IG for
Tax Administration, but shall remain with the IRS.
In addition, the Act directs the Treasury IG for Tax
Administration to implement a program periodically to audit at
least one percent of all determinations (identified through a
random selection process) where the IRS has asserted either
section 6103 (directly or in connection with the Freedom of
Information Act or the Privacy Act) or law enforcement
considerations (i.e., executive privilege) as a rationale for
refusing to disclose requested information. The program must be
implemented within 6 months after establishment of the Treasury
IG for Tax Administration. The Treasury IG for Tax
Administration is directed to report any findings of improper
assertion of section 6103 or law enforcement considerations to
the Board.
Further, the Treasury IG for Tax Administration is directed
to establish a toll-free confidential telephone number for
taxpayers to register complaints of misconduct by IRS employees
and to publish the telephone number in IRS Publication 1.
There are no restrictions on the Treasury IG for Tax
Administration's ability to refer matters to the Department of
Justice. Thus, the Treasury IG for Tax Administration is
required to report to the Attorney General whenever the
Treasury IG for Tax Administration has reasonable grounds to
believe that there has been a violation of Federal criminal
law.
Authority of Treasury IG for Tax Administration
The Treasury IG for Tax Administration reports to and is
under the general supervision of the Secretary of Treasury.
Under the Act, the Secretary cannot prevent or prohibit the
Treasury IG for Tax Administration from initiating, carrying
out, or completing any audit or investigation or from issuing
any subpoena during the course of any audit or investigation.
Under the Act, the Treasury IG for Tax Administration must
provide to the Board all reports regarding IRS matters on a
timely basis and conduct audits or investigations requested by
the Board. The Treasury IG for Tax Administration also must, in
a timely manner, conduct such audits or investigations and
provide such reports as may be requested by the Commissioner.
In addition, the Act provides that the Commissioner or the
Board may request the Treasury IG for Tax Administration to
conduct an audit or investigation relating to the IRS. If the
Treasury IG for Tax Administration determines not to conduct an
audit or investigation requested by the Commissioner or the
Board, the Treasury IG for Tax Administration shall timely
provide the requesting party with a written explanation of its
determination. In this regard, it is intended that the Treasury
IG for Tax Administration shall make all reasonable efforts to
be responsive to the requests of the Commissioner and the
Board.
In carrying out the duties and responsibilities described
above, the Treasury IG for Tax Administration has the present-
law authority generally granted to Inspectors General under the
IG Act of 1978. The limitations on the authority of the
Treasury IG under such Act do not apply to the Treasury IG for
Tax Administration. In addition, the Treasury IG for Tax
Administration has the authority granted to the IRS Office of
the Chief Inspector under present-law Code section 7608,
including the right to execute and serve search and arrest
warrants, to serve subpoenas and summonses, to make arrests
without warrant, to carry firearms, and to seize property
subject to forfeiture under the Code.
Resources
To ensure that the Treasury IG for Tax Administration has
sufficient resources to carry out his or her duties and
responsibilities under the Act, all but 300 FTEs from the IRS
Office of the Chief Inspector are transferred to the Treasury
IG for Tax Administration. Such FTEs include all of the FTEs
performing investigative functions in the Office of the Chief
Inspector Internal Security and Integrity Investigations and
Activities. In addition, the 21 FTEs previously transferred
from Inspection to Treasury IG pursuant to the 1990 MOU to
perform oversight of the IRS are transferred to the Treasury IG
for Tax Administration.
The Commissioner will retain approximately 300 FTEs from
the IRS Office of the Chief Inspector to staff an audit
function (including support staff) for internal IRS management
purposes. Like other IRS functions, however, this audit
function is subject to oversight and review by the Treasury IG
for Tax Administration.
Access to taxpayer returns and return information
Taxpayer returns and return information are available for
inspection by the Treasury IG for Tax Administration pursuant
to section 6103(h)(1). Thus, the Treasury IG for Tax
Administration has the same access to taxpayer returns and
return information as does the Chief Inspector under prior law.
Reporting requirements
The Treasury IG for Tax Administration is subject to the
semiannual reporting requirements set forth in section 5 of the
IG Act of 1978. As under prior law, reports are made to the
Committees on Government Reform and Oversight and Ways and
Means of the House and the Committees on Governmental Affairs
and Finance of the Senate. The reports must contain the
information that is required to be reported by the Treasury IG
with respect to the IRS under present law, as well as
information regarding the source, nature and status of taxpayer
complaints and allegations of serious misconduct by IRS
employees received by the IRS or by the Treasury IG for Tax
Administration. In addition, the Treasury IG for Tax
Administration is required to report annually on certain
additional information (e.g., regarding the use of enforcement
statistics in evaluating IRS employees, the implementation of
various taxpayer rights protections, and IRS employee
terminations and mitigations) required by the Act.
Treasury IG
The Treasury IG generally continues to have its prior-law
responsibilities and authority with respect to all Treasury
functions other than the IRS and the Board. However, the
Treasury IG generally does not have access to taxpayer returns
and return information under section 6103 (unless the Secretary
specifically authorizes such access).
The Treasury IG for Tax Administration operates
independently of the Treasury IG. The Secretary of Treasury is
directed to establish procedures pursuant to which the Treasury
IG for Tax Administration and the Treasury IG shall coordinate
audits and investigations in cases involving overlapping
jurisdiction.
The Treasury IG continues to have responsibility for
providing an opinion on the Department of Treasury's
consolidated financial statement as required under the Chief
Financial Officer Act. The Treasury IG for Tax Administration
is responsible for rendering an opinion on the IRS custodial
and administrative accounts (to the extent the Government
Accounting Office does not exercise its option to preempt under
the CFO Act).
Effective Date
The provision is effective 180 days after the date of
enactment (January 18, 1999). 32
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\32\ Division C, Title 1, sec. 101 of H.R. 4328, the Omnibus
Consolidated and Emergency Supplemental Appropriations Act, 1999,
provides for appointment by the President of an acting Treasury IG for
Tax Administration to serve during the period beginning on the date of
enactment of the provision (October 21, 1998) and ending on the earlier
of April 30, 1999, or the date on which the first Treasury IG for Tax
Administration takes office. The acting Treasury IG for Tax
Administration is to, before January 18, 1999 (the date that is 180
days after the date of enactment of the Internal Revenue Service
Restructuring and Reform Act of 1988), take only such actions as are
necessary to begin operation of the office of Treasury IG for Tax
Administration, including: (1) making interim arrangements for
administrative support for the office; (2) establishing interim
positions in the office into which personnel will be transferred upon
the transfer of functions and duties to the office on January 18, 1999;
(3) appointing such acting personnel on an interim basis as may be
necessary upon the transfer of functions and duties to the office on
January 18, 1999; and (4) providing guidance and input for the fiscal
year 2000 budget process for the office. No person appointed as acting
Treasury IG for Tax Administration may serve on or after January 19,
1999, unless on or before such date the President has submitted to the
Senate his nomination of an individual to serve as the first Treasury
IG for Tax Administration. A person who is appointed to the position of
acting Treasury IG for Tax Administration may not serve concurrently as
the Treasury IG or the acting Treasury IG. In addition, the acting
Treasury IG for Tax Administration may not be employed by the IRS
within the two years preceding and the five years following such
individual's appointment.
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Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
F. Prohibition on Executive Branch Influence Over Taxpayer Audits (sec.
1105 of the Act and new sec. 7217 of the Code)
Present and Prior Law
There was no prior-law explicit prohibition in the Code
against high-level Executive Branch influence over taxpayer
audits and collection activity.
The Internal Revenue Code prohibits disclosure of tax
returns and return information, except to the extent
specifically authorized by the Internal Revenue Code (sec.
6103). Unauthorized disclosure is a felony punishable by a fine
not exceeding $5,000 or imprisonment of not more than five
years, or both (sec. 7213). An action for civil damages also
may be brought for unauthorized disclosure (sec. 7431).
Reasons for Change
The Congress believed that the perception that it is
possible that high-level Executive Branch influence over
taxpayer audits and collection activity could occur has a
negative influence on taxpayers' views of the tax system.
Accordingly, the Congress believed that it is appropriate to
prohibit such influence.
Explanation of Provision
The provision makes it unlawful for a specified person to
request that any officer or employee of the IRS conduct or
terminate an audit or otherwise investigate or terminate the
investigation of any particular taxpayer with respect to the
tax liability of that taxpayer. The prohibition applies to the
President, the Vice President, and employees of the executive
offices of either the President or Vice President, as well as
any individual (except the Attorney General) serving in a
position specified in section 5312 of Title 5 of the United
States Code (these are generally Cabinet-level positions). The
prohibition applies to both direct requests and requests made
through an intermediary. In the case of a law enforcement
action authorized by the Attorney General, discussions
involving specified persons with respect to that law
enforcement action shall not be considered to be requests made
through an intermediary.
Any request made in violation of this rule must be reported
by the IRS employee to whom the request was made to the Chief
Inspector of the IRS. The Chief Inspector has the authority to
investigate such violations and to refer any violations to the
Department of Justice for possible prosecution, as appropriate.
Anyone convicted of violating this provision will be punished
by imprisonment of not more than 5 years or a fine not
exceeding $5,000 (or both).
Three exceptions to the general prohibition apply. First,
the prohibition does not apply to a request made to a specified
person by or on behalf of a taxpayer that is forwarded by the
specified person to the IRS. This exception is intended to
cover two types of situations. The first situation is where a
taxpayer (or a taxpayer's representative) writes to a specified
person seeking assistance in resolving a difficulty with the
IRS. This exception permits the specified person who receives
such a request to forward it to the IRS for resolution without
violating the general prohibition. The second situation that
this first exception is intended to cover is an audit or
investigation by the IRS of a Presidential nominee. Under
present law (sec. 6103(c)), nominees for Presidentially
appointed positions consent to disclosure of their tax returns
and return information so that background checks may be
conducted. Sometimes an audit or other investigation is
initiated as part of that background check. The Committee
anticipates that any such audit or investigation that is part
of such a background check will be encompassed within this
first exception.
The second exception to the general prohibition applies to
requests for disclosure of returns or return information under
section 6103 if the request is made in accordance with the
requirements of section 6103.
The third exception to the general prohibition applies to
requests made by the Secretary of the Treasury as a consequence
of the implementation of a change in tax policy.
Effective Date
The provision applies to violations occurring after the
date of enactment (after July 22, 1998).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
G. IRS Personnel Flexibilities (secs. 1201-1205 of the Act and new
chapter 95 of Title 5, U.S.C.)
Present and Prior Law
Under present and prior law, the IRS is subject to the
personnel rules and procedures set forth in title 5, United
States Code, which regulate hiring, evaluating, promoting, and
firing employees. Under these rules, IRS employees generally
are classified under the General Schedule or the Senior
Executive Service.
Reasons for Change
The Congress believed that as part of restructuring the
IRS, the Commissioner should have the ability to bring in
experts and the flexibility to revitalize the current IRS
workforce. The current hiring practices often inhibit the
ability of the Commissioner to change the IRS' institutional
culture. Commissioner Rossotti has indicated that, in order to
maximize efforts to transform the IRS into an efficient, modern
and responsive agency, the ability to recruit and retain a top-
notch leadership and technical team is critical.
The Congress believed the IRS needs the flexibility to
recruit employees from the private sector, to redesign its
salary and incentive structures to reward employees who meet
their objectives, and to hold non-performers accountable.
Personnel and pay flexibilities are necessary prerequisites for
larger fundamental changes in the IRS.
The Congress wanted to support the Commissioner's
initiatives to reposition the current IRS workforce as part of
implementing a new organization designed around the needs of
taxpayers.
Explanation of Provision
In general
The Act amends title 5 of the United States Code to provide
certain personnel flexibilities to the IRS. The Act provides
that the IRS exercise the personnel flexibilities consistently
with pre-existing rules relating to merit system principles,
prohibited personnel practices, and preference eligibles. In
those cases where the exercise of personnel flexibilities would
affect members of the employees' union, such employees will not
be subject to the exercise of any flexibility unless there is a
written agreement between the IRS and the employees' union.
Negotiation impasses between the IRS and the employees' union
may be appealed to the Federal Services Impasse Panel. This
provision (in particular the written agreement requirement) is
not intended to expand the jurisdiction of the Federal Services
Impasse Panel.
Senior management and technical positions
Streamlined critical pay authority
The Act provides a streamlined process for the Secretary of
the Treasury, or his delegate, to fix the compensation of and
appoint up to 40 individuals to designated critical technical
and professional positions, provided that: (1) the positions
require expertise of an extremely high level in a technical,
administrative or professional field and are critical to the
IRS; (2) exercise of the authority is necessary to recruit or
retain an individual exceptionally well qualified for the
position; (3) designation of such positions is approved by the
Secretary; (4) the terms of such appointments are limited to no
more than four years; (5) appointees to such positions were not
IRS employees prior to June 1, 1998; and (6) the total annual
compensation for any position (including performance bonuses)
does not exceed the rate of pay of the Vice President
(currently, $175,400).
These appointments are not subject to the otherwise
applicable requirements under title 5. All such appointments
are excluded from the collective bargaining unit and the
appointments will not be subject to approval of the Office of
Management and Budget (``OMB'') or the Office of Personnel
Management (``OPM'').
The streamlined authority is limited to a period of 10
years after the date of enactment.
Critical pay authority
The Act provides OMB with authority to set the pay for
certain critical pay positions requested by the Secretary under
section 5377 of title 5 of the United States Code at levels
higher than authorized under prior law. These critical pay
positions are critical, technical, administrative and
professional positions other than those designated under the
streamlined authority. Under the Act, OMB is authorized to
approve requests for critical position pay up to the rate of
pay of the Vice President (currently, $175,400).
Recruitment, retention and relocation incentives
The Act authorizes the Secretary to vary from the pre-
existing provisions governing recruitment, retention and
relocation incentives. The authority is for a period of 10
years after the date of enactment and is be subject to OPM
approval.
In addition, for a period of 10 years after the date of
enactment, the provision authorizes the IRS to pay certain
relocation expenses for individuals appointed to critical pay
positions after June 1, 1998.
Career-reserve Senior Executive Service (``SES'') positions
The Act broadens the definition of a ``career reserved
position'' in the SES to include a limited emergency appointee
or a limited term appointee who, immediately upon entering the
career-reserved position, was serving under a career or a
career-conditional appointment outside the SES or whose limited
emergency or limited term appointment is approved in advance by
OPM. The number of appointments to these SES positions is
limited to up to 10 percent of the total number of SES
positions available to the IRS. These positions are limited to
a 3-year term, with the option of extending the term for 2
additional 3-year terms.
Performance awards for senior executives
The Act provides the Secretary with the authority to
provide performance bonus awards to IRS senior executives of up
to one-third of the individual's annual compensation. The bonus
award is based on meeting preset performance goals established
by the IRS. An individual's total annual compensation,
including the bonus, cannot exceed the rate of pay of the Vice
President. The authority is not subject to OPM approval. It is
anticipated that the bonuses will not be available to more than
25 IRS senior executives annually.
General workforce
Performance management system
The Act requires the IRS to establish a new performance
management system within one year from the date of enactment.
The performance management system is to maintain individual
accountability by: (1) establishing one or more retention
standards for each employee related to the work of the employee
and expressed in terms of performance; (2) providing for
periodic performance evaluations to determine whether employees
are meeting the applicable retention standard; and (3) taking
appropriate action, in accordance with applicable laws, with
respect to any employee whose performance does not meet
established retention standards.
In addition, the performance management system is to
provide for: (1) establishing goals or objectives for
individual, group or organizational performance and taxpayer
service surveys; (2) communicating such goals or objectives to
employees; and (3) using such goals or objectives to make
performance distinctions among employees or groups of
employees. The Congressintends that in no event will
performance measures be used which rank employees or groups of
employees based solely on enforcement results, establish dollar goals
for assessments or collections, or otherwise undermine fair treatment
of taxpayers.
The Congress intends to give the IRS flexibility to
establish a new performance management system. The Congress
expects that this will refocus the IRS' personnel system on the
overall mission of the IRS and how each employee's performance
relates to that mission. Although the new performance standards
are premised on the notion of retention, such standards should
go beyond simply establishing a retention/non-retention or
pass-fail performance system. At a minimum, the Congress
believes that there should be at least one standard above the
retention standard. This will enable managers to make
meaningful distinctions among employees based on performance,
to encourage employees to perform at a higher level and to
reward superior performance.
Awards
The Act provides the Secretary the authority to establish
an awards program for IRS employees. The program is designed to
provide incentives for and recognition of individual, group and
organizational achievements. The Secretary has the authority to
provide awards between $10,000 and $25,000 without OPM
approval.
These awards are to be based on performance under the new
performance management system, and in no case are awards to be
made (or performance measured) based on tax enforcement
results.
Workforce classification and pay banding
The Act provides the Secretary with authority to establish
one or more broad band pay systems covering all or any portion
of the IRS workforce, subject to OPM criteria. At a minimum,
the OPM criteria must: (1) ensure that the pay band system
maintain the concept of equal pay for substantially equal work;
(2) establish the minimum and maximum number of grades that may
be combined into pay bands; (3) establish requirements for
setting minimum and maximum rates of pay in a pay band; (4)
establish requirements for adjusting the pay of an employee
within a pay band; (5) establish requirements for setting the
pay of a supervisory employee in a pay band; and (6) establish
requirements and methodologies for setting the pay of an
employee upon conversion to a broad-banded system, initial
appointment, change of position or type of appointment and
movement between a broad-banded system and another pay system.
Workforce staffing
The Act provides the IRS with flexibility in filling
certain permanent appointments with qualified temporary
employees. A qualified temporary employee is defined as a
temporary employee of the IRS with at least two years of
continuous service, who has met all applicable retention
standards and who meets the minimum qualifications for the
vacant position.
The Act authorizes the IRS to establish category rating
systems for evaluating job applicants, under which qualified
candidates are divided into two or more quality categories on
the basis of relative degrees of merit, rather than assigned
individual numerical ratings. Managers are authorized to select
any candidate from the highest quality category, and are not
limited to the three highest ranked candidates. In
administering these category rating systems, the IRS generally
is required to list preference eligibles ahead of other
individuals within each quality category. The appointing
authority, however, can select any candidate from the highest
quality category, as long as pre-existing requirements relating
to passing over preference eligibles are satisfied.
The Act authorizes the IRS to establish probation periods
for IRS employees of up to 3 years, when it is determined that
a shorter period will not be sufficient for an employee to
demonstrate proficiency in a position.
Voluntary separation incentives
The Act provides authority to the IRS to use Voluntary
Separation Incentive Pay (``buyouts'') through December 31,
2002. The use of voluntary separation incentive is not intended
to necessarily reduce the total number of Full Time Equivalents
(``FTE'') positions in the IRS.
Demonstration projects
The Act provides the IRS with authority to conduct one or
more demonstration projects through a streamlined process. The
authority will enable the IRS to test new approaches to Human
Resource Management. The Act provides authority to the
Secretary and OPM to waive the termination of a demonstration
project, thereby making it permanent. At least 90 days prior to
waiving the termination date, OPM is required to publish a
notice of such intent in the Federal Register and inform the
appropriate Committees (including the House Ways and Means
Committee, the House Government Reform and Oversight Committee,
the Senate Finance Committee and the Senate Governmental
Affairs Committee) of both Houses of Congress in writing.
Violations for which IRS employees may be terminated
The Act requires the IRS to terminate an employee for
certain proven violations committed by the employee in
connection with the performance of official duties. The
violations include: (1) willful failure to obtain the required
approval signatures on documents authorizing the seizure of a
taxpayer's home, personal belongings, or business assets; (2)
providing a false statement under oath material to a matter
involving a taxpayer; (3) with respect to a taxpayer, taxpayer
representative, or other IRS employee, the violation of any
right under the U.S. Constitution, or any civil right
established under titles VI or VII of the Civil Rights Act of
1964, title IX of the Educational Amendments of 1972, the Age
Discrimination in Employment Act of 1967, the Age
Discrimination Act of 1975, sections 501 or 504 of the
Rehabilitation Act of 1973 and title I of the Americans with
Disabilities Act of 1990; (4) falsifying or destroying
documents to conceal mistakes made by any employee with respect
to a matter involving a taxpayer or a taxpayer representative;
(5) assault or battery on a taxpayer or other IRS employee, but
only if there is a criminal conviction or a final judgment by a
court in a civil case, with respect to the assault or battery;
(6) violations of the Internal Revenue Code, Treasury
Regulations, or policies of the IRS (including the Internal
Revenue Manual) for the purpose of retaliating or harassing a
taxpayer or other IRS employee; (7) willful misuse of section
6103 for the purpose of concealing data from a Congressional
inquiry; (8) willful failure to file any tax return required
under the Code on or before the due date (including extensions)
unless failure is due to reasonable cause; (9) willful
understatement of Federal tax liability, unless such
understatement is due to reasonable cause; and (10) threatening
to audit a taxpayer for the purpose of extracting personal gain
or benefit.
The Act provides non-delegable authority to the
Commissioner to determine that mitigating factors exist, that,
in the Commissioner's sole discretion, mitigate against
terminating the employee. The Act also provides that the
Commissioner, in his sole discretion, may establish a procedure
to determine whether an individual should be referred for such
a determination by the Commissioner. The Treasury IG is
required to track employee terminations and terminations that
would have occurred had the Commissioner not determined that
there were mitigation factors and include such information in
the IG's annual report.
Performance measures
The IRS is directed to develop employee performance
measures that favor taxpayer service and prohibit awarding
merit pay or bonuses that are based on enforcement quotas,
goals, or statistics.
IRS employee training program
The Act requires the IRS to implement an employee training
program no later than 180 days after enactment. The Act also
requires the IRS to submit to Congressional tax writing
committees within 180 days of the date of enactment an employee
training plan which will: (1) detail a comprehensive employee
training program to ensure adequate customer service training;
(2) detail a schedule for training and the fiscal years during
which the training will occur; (3) detail the funding of the
program and relevant information to demonstrate the priority
and commitment of resources to the plan; (4) review the
organizational design of customer service; (5) provide for the
implementation of a performance development system; and (6)
provide for at least 16 hours of conflict management training
in fiscal year 1999 for collection employees.
Effective Date
The provision is effective on the date of enactment (July
22, 1998).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
TITLE II. ELECTRONIC FILING
A. Electronic Filing of Tax and Information Returns (sec. 2001 of the
Act)
Present and Prior Law
Treasury Regulations section 1.6012-5 provides that the
Commissioner may authorize a taxpayer to elect to file a
composite return in lieu of a paper return. An electronically
filed return is a composite return consisting of electronically
transmitted data and certain paper documents that cannot be
electronically transmitted.
The IRS periodically publishes a list of the forms and
schedules that may be electronically transmitted, as well as a
list of forms, schedules, and other information that cannot be
electronically filed.
During the 1997 tax filing season, the IRS received
approximately 20 million individual income tax returns
electronically.
Reasons for Change
The Congress believed that the implementation of a
comprehensive strategy to encourage electronic filing of tax
and information returns holds significant potential to benefit
taxpayers and make the IRS returns processing function more
efficient. For example, the error rate associated with
processing paper tax returns is approximately 20 percent, half
of which is attributable to the IRS and half to errors in
taxpayer data. Because electronically-filed returns usually are
prepared using computer software programs with built-in
accuracy checks, undergo pre-screening by the IRS, and
experience no key punch errors, electronic returns have an
error rate of less than one percent. Thus, the Congress
believed that an expansion of electronic filing would
significantly reduce errors (and the resulting notices that are
triggered by such errors). In addition, taxpayers who file
their returns electronically receive confirmation from the IRS
that their return was received.
Explanation of Provision
The Act states that the policy of Congress is to promote
paperless filing, with a long-range goal of providing for the
filing of at least 80 percent of all tax returns in electronic
form by the year 2007. The provision requires the Secretary of
the Treasury to establish a strategic plan to eliminate
barriers, provide incentives, and use competitive market forces
to increase taxpayer use of electronic filing. The provision
requires all returns prepared in electronic form but filed in
paper form to be filed electronically, to the extent
practicable, for taxable years beginning after 2001.
The provision requires the Secretary to promote electronic
filing and to create an electronic commerce advisory group and
to report annually to the Congress on electronic filing
implementation issues. The Act also requires that the annual
report discuss the effects on small businesses and the self-
employed of electronically filing tax and information returns.
In addition, the Act states that the policy of Congress is
that the IRS should cooperate with and encourage the private
sector by encouraging competition to increase electronic filing
of returns. The intent of the Congress with respect to this
provision is for the IRS and Treasury to press for robust
private sector competition. When disputes arise between the IRS
and the private sector on the question of whether services
offered by the IRS inhibit competition or are appropriate
services not reasonably available to taxpayers or tax
preparers, the Electronic Commerce Advisory Group shall
recommend to the IRS Commissioner an appropriate course of
action. Those recommendations shall also be made available to
the Congress. Notwithstanding the previous sentence, the
Congress also intends that the IRS should continue to offer and
improve its Telefile program and make available a comparable
program on the Internet.
Effective Date
The provision is effective on the date of enactment (July
22, 1998).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
B. Due Date for Certain Information Returns (sec. 2002 of the Act)
Present and Prior Law
Information such as the amount of dividends, partnership
distributions, and interest paid during the calendar year must
be supplied to taxpayers by the payors by January 31 of the
following calendar year. The payors must file an information
return with the IRS with the information by February 28 of the
year following the calendar year for which the return must be
filed. Under prior law, the due date for filing information
returns with the IRS was the same whether such returns are
filed on paper, on magnetic media, or electronically. Most
information returns are filed on magnetic media (such as
computer tapes), which are physically shipped to the IRS.
Reasons for Change
The Congress believed that encouraging information return
filers to file electronically would substantially increase the
efficiency of the tax system by avoiding the need to convert
the information from magnetic media or paper to electronic form
before return matching.
Explanation of Provision
The Act provides an incentive to filers of information
returns to use electronic filing by extending the due date for
filing such returns with the IRS from February 28 (under prior
law) to March 31 of the year following the calendar year to
which the return relates.
The Act also requires the Treasury to issue a study
evaluating the merits and disadvantages, if any, of extending
the deadline for providing taxpayers with copies of information
returns (other than Forms W-2) from January 31 to February 15.
Effective Date
The provision is effective for information returns required
to be filed after December 31, 1999. The Treasury study is due
by June 30, 1999.
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
C. Paperless Electronic Filing (sec. 2003 of the Act and sec. 6061 of
the Code)
Present and Prior Law
Code section 6061 requires that tax forms be signed as
required by the Secretary. Under prior law, the IRS would not
accept an electronically filed return unless it had also
received a Form 8453, which is a paper form that contains
signature information of the filer.
A return generally is considered timely filed when it is
received by the IRS on or before the due date of the return. If
the requirements of Code section 7502 are met, timely mailing
is treated as timely filing. If the return is mailed by
registered mail, the dated registration statement is prima
facie evidence of delivery.
The IRS periodically publishes a list of the forms and
schedules that may be electronically transmitted, as well as a
list of forms, schedules, and other information that cannot be
electronically filed.
Reasons for Change
Electronically filed returns cannot provide the maximum
efficiency for taxpayers and the IRS under current rules that
require signature information to be filed on paper. Also,
taxpayers need to know how the IRS will determine the filing
date of a return filed electronically. The Congress believed
that more types of returns could be filed electronically if
revised procedures were in place. Also, as the IRS shifts to a
paperless tax return system, the Congress intended for the IRS
to assist taxpayers in shifting to paperless record retention.
Explanation of Provision
The Act requires the Secretary to develop procedures that
would eliminate the need to file a paper form relating to
signature information. The Secretary is permitted to waive the
signature requirement, but only returns signed or subscribed
under alternative methods prescribed by the Secretary (not
including waiver) are entitled to be treated as though signed
or subscribed.
The provision also authorizes the Secretary to provide
rules for determining when electronic returns are deemed filed
and requires the Secretary to provide rules to authorize return
preparers to communicate with the IRS on matters included on
electronically filed returns.
The provision requires the Secretary to establish
procedures, to the extent practicable, to receive all forms
electronically for taxable periods beginning after December 31,
1999.
The Secretary of the Treasury must establish procedures for
all tax forms, instructions, and publications created in the
most recent 5-year period to be made available electronically
on the Internet in a searchable database at approximately the
same time such records are available to the public in printed
form. The Secretary of the Treasury must, to the extent
practicable, establish procedures for other taxpayer guidance
to be made available electronically on the Internet in a
searchable database at approximately the same time such
guidance is available to the public in printed form.
Effective Date
The provision is generally effective on the date of
enactment (July 22, 1998). The provision which relates to
Internet access to IRS forms, instructions, publications, and
guidance is effective for taxable periods beginning after
December 31, 1998. The provision that requires the Secretary,
to the extent practicable, to receive all forms electronically
applies to taxable periods after December 31, 1999.
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
D. Return-Free Tax System (sec. 2004 of the Act)
Present and Prior Law
Taxpayers generally are required to calculate their own tax
liabilities and submit returns showing their calculations.
Under prior law, there was no statutory requirement that
Treasury study the implementation of a return-free tax system.
Reasons for Change
The Congress believed that it could benefit taxpayers to be
relieved, to the extent feasible, from the burden of
determining tax liability and filing returns. Accordingly, the
Congress believed that further study of those issues would be
valuable.
Explanation of Provision
The provision requires the Secretary or his delegate to
study the feasibility of, and develop procedures for, the
implementation of a return-free tax system for appropriate
individuals for taxable years beginning after 2007. The
Secretary is required to report annually to the tax-writing
committees on the progress in the development of such system.
The Secretary is required to make the first report on the
development of the return-free tax system to the tax-writing
committees by June 30, 2000.
Effective Date
The provision is effective on the date of enactment (July
22, 1998).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
E. Access to Account Information (sec. 2005 of the Act)
Prior Law
Taxpayers who filed their returns electronically could not
review their accounts electronically.
Reasons for Change
The Congress believed that it would be desirable for a
taxpayer (or the taxpayer's designee) to be able to review that
taxpayer's account electronically, but only if all necessary
privacy safeguards are in place.
Explanation of Provision
The Act requires the Secretary to develop procedures not
later than December 31, 2006, under which a taxpayer filing
returns electronically (or the taxpayer's designee under
section 6103(c)) can review the taxpayer's own account
electronically, but only if all necessary privacy safeguards
are in place by that date. The Secretary is also required to
issue an interim progress report to the tax-writing committees
by December 31, 2003.
Effective Date
The provision is effective on the date of enactment (July
22, 1998).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
TITLE III. TAXPAYER PROTECTION AND RIGHTS
A. Burden of Proof (sec. 3001 of the Act and new sec. 7491 of the Code)
Present and Prior Law
Under present law, a rebuttable presumption exists that the
Commissioner's determination of tax liability is
correct.33 ``This presumption in favor of the
Commissioner is a procedural device that requires the plaintiff
to go forward with prima facie evidence to support a finding
contrary to the Commissioner's determination. Once this
procedural burden is satisfied, the taxpayer must still carry
the ultimate burden of proof or persuasion on the merits. Thus,
the plaintiff not only has the burden of proof of establishing
that the Commissioner's determination was incorrect, but also
of establishing the merit of its claims by a preponderance of
the evidence.'' 34
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\33\ Welch v. Helvering, 290 U.S. 111, 115 (l933).
\34\ Danville Plywood Corp. v. U.S., U.S. Cl. Ct., 63 AFTR 2d 89-
1036, 1043 (1989).
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The general rebuttable presumption that the Commissioner's
determination of tax liability is correct is a fundamental
element of the structure of the Internal Revenue Code. Although
this presumption is judicially based, rather than legislatively
based, there is considerable evidence that the presumption has
been repeatedly considered and approved by the Congress. This
is the case because the Internal Revenue Code contains a number
of civil provisions that explicitly place the burden of proof
on the Commissioner in specifically designated circumstances.
Under prior law, there was no statutory provision that
generally provided burden of proof rules.
Reasons for Change
The Congress was concerned that individual and small
business taxpayers frequently are at a disadvantage when forced
to litigate with the Internal Revenue Service. The Congress
believed that the prior-law burden of proof rules contributed
to that disadvantage. The Congress believed that, all other
things being equal, facts asserted by individual and small
business taxpayers who cooperate with the IRS and satisfy
relevant recordkeeping and substantiation requirements should
be accepted. The Congress believed that shifting the burden of
proof to the Secretary in such circumstances would create a
better balance between the IRS and such taxpayers, without
encouraging tax avoidance.
The Congress believed that it is inappropriate for the IRS
to rely solely on statistical information on unrelated
taxpayers to reconstruct unreported income of an individual
taxpayer. The Congress also believed that, in a court
proceeding, the IRS should not be able to rest on its
presumption of correctness if it does not provide any evidence
whatsoever relating to penalties.
Explanation of Provision
The Act provides that the Secretary has the burden of proof
in any court proceeding with respect to a factual issue if the
taxpayer introduces credible evidence with respect to the
factual issue relevant to ascertaining the taxpayer's specified
tax liability. The provision applies to income,35
estate, gift, and generation-skipping transfer taxes. Four
conditions apply. First, the taxpayer must comply with the
requirements of the Internal Revenue Code and the regulations
issued thereunder to substantiate any item (as under prior
law). Second, the taxpayer must maintain records required by
the Code and regulations (as under prior law). Third, the
taxpayer must cooperate with reasonable requests by the
Secretary for meetings, interviews, witnesses, information, and
documents (including providing, within a reasonable period of
time, access to and inspection of witnesses, information, and
documents within the control of the taxpayer, as reasonably
requested by the Secretary). Cooperation also includes
providing reasonable assistance to the Secretary in obtaining
access to and inspection of witnesses, information, or
documents not within the control of the taxpayer (including any
witnesses, information, or documents located in foreign
countries 36). A necessary element of cooperating
with the Secretary is that the taxpayer must exhaust his or her
administrative remedies (including any appeal rights provided
by the IRS). The taxpayer is not required to agree to extend
the statute of limitations to be considered to have cooperated
with the Secretary. Cooperation also means that the taxpayer
must establish the applicability of any asserted privilege.
Fourth, taxpayers other than individuals or estates must meet
the net worth limitations that apply for awarding attorney's
fees (accordingly, no net worth limitation would be applicable
to individuals). Corporations, trusts,37 and
partnerships whose net worth exceeds $7 million are not
eligible for the benefits of the provision. The taxpayer has
the burden of proving that it meets each of these conditions,
because they are necessary prerequisites to establishing that
the burden of proof is on the Secretary.
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\35\ For this purpose, self-employment taxes are treated as income
taxes.
\36\ Cooperation also includes providing English translations, as
reasonably requested by the Secretary.
\37\ An exception to this rule removes the net worth limitation
from certain revocable trusts for the same period of time that the
trust would have been treated as part of the estate had the trust made
the election under section 645 to be treated as part of the estate.
This reflects the technical correction enacted in section 4002(b) of
the Tax and Trade Relief Extension Act of 1998, described in Part Three
of this publication.
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The burden will shift to the Secretary under this provision
only if the taxpayer first introduces credible evidence with
respect to a factual issue relevant to ascertaining the
taxpayer's income tax liability. Credible evidence is the
quality of evidence which, after critical analysis, the court
would find sufficient upon which to base a decision on the
issue if no contrary evidence were submitted (without regard to
the judicial presumption of IRS correctness). A taxpayer has
not produced credible evidence for these purposes if the
taxpayer merely makes implausible factual assertions, frivolous
claims, or tax protestor-type arguments. The introduction of
evidence will not meet this standard if the court is not
convinced that it is worthy of belief. If after evidence from
both sides, the court believes that the evidence is equally
balanced, the court shall find that the Secretary has not
sustained his burden of proof.
Nothing in the provision shall be construed to override any
requirement under the Code or regulations to substantiate any
item. Accordingly, taxpayers must meet applicable
substantiation requirements, whether generally imposed
38 or imposed with respect to specific items, such
as charitable contributions 39 or meals,
entertainment, travel, and certain other expenses.40
Substantiation requirements include any requirement of the Code
or regulations that the taxpayer establish an item to the
satisfaction of the Secretary.41 Taxpayers who fail
to substantiate any item in accordance with the legal
requirement of substantiation will not have satisfied the legal
conditions that are prerequisite to claiming the item on the
taxpayer's tax return and will accordingly be unable to avail
themselves of this provision regarding the burden of proof.
Thus, if a taxpayer required to substantiate an item fails to
do so in the manner required (or destroys the substantiation),
this burden of proof provision is inapplicable.42
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\38\ See e.g., sec. 6001 and Treas. Reg. sec. 1.6001-1 requiring
every person liable for any tax imposed by this Title to keep such
records as the Secretary may from time to time prescribe, and secs.
6038 and 6038A requiring United States persons to furnish certain
information the Secretary may prescribe with respect to foreign
businesses controlled by the U.S. person.
\39\ Sec. 170(a)(1) and (f)(8) and Treas. Reg. sec. 1.170A-13.
\40\ See e.g., Sec. 274(d) and Treas. Reg. sec. 1.274(d)-1, 1.274-
5T, and 1.274-5A.
\41\ For example, sec. 905(b) of the Code provides that foreign tax
credits shall be allowed only if the taxpayer establishes to the
satisfaction of the Secretary all information necessary for the
verification and computation of the credit. Instructions for meeting
that requirement are set forth in Treas. Reg. sec. 1.905-2.
\42\ If, however, the taxpayer can demonstrate that he had
maintained the required substantiation but that it was destroyed or
lost through no fault of the taxpayer, such as by fire or flood,
existing tax rules regarding reconstruction of those records would
continue to apply.
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In the case of an individual taxpayer, the Secretary has
the burden of proof in any court proceeding with respect to any
item of income which was reconstructed by the Secretary solely
through the use of statistical information on unrelated
taxpayers.
Further, the provision provides that, in any court
proceeding, the Secretary must initiallycome forward with
evidence that it is appropriate to apply a particular penalty to the
taxpayer before the court can impose the penalty. This provision is not
intended to require the Secretary to introduce evidence of elements
such as reasonable cause or substantial authority. Rather, the
Secretary must come forward initially with evidence regarding the
appropriateness of applying a particular penalty to the taxpayer; if
the taxpayer believes that, because of reasonable cause, substantial
authority, or a similar provision, it is inappropriate to impose the
penalty, it is the taxpayer's responsibility (and not the Secretary's
obligation) to raise those issues.
Effective Date
The provision applies to court proceedings arising in
connection with examinations commencing after the date of
enactment (after July 22, 1998). In any case in which there is
no examination, the provision applies to court proceedings
arising in connection with taxable periods or events beginning
or occurring after the date of enactment. An audit is not the
only event that would be considered an examination for purposes
of this provision. For example, the matching of an information
return against amounts reported on a tax return is intended to
be an examination for purposes of this provision. Similarly,
the review of a claim for refund prior to issuing that refund
is also intended to be an examination for purposes of this
provision.
Revenue Effect
The provision is estimated to reduce Federal fiscal year
budget receipts by less than $1 million in 1998, $231 million
in 1999, $256 million in 2000, $269 million in 2001, $278
million in 2002, $297 million in 2003, $311 million in 2004,
$327 million in 2005, $344 million in 2006, and $360 million in
2007.
B. Proceedings by Taxpayers
1. Expansion of authority to award costs and certain fees (sec. 3101 of
the Act and sec. 7430 of the Code)
Present and Prior Law
Any person who substantially prevails in any action by or
against the United States in connection with the determination,
collection, or refund of any tax, interest, or penalty may be
awarded reasonable administrative costs incurred before the IRS
and reasonable litigation costs incurred in connection with any
court proceeding. Reasonable administrative costs are defined
as (1) any administrative fees or similar charges imposed by
the IRS and (2) expenses, costs and fees related to attorneys,
expert witnesses, and studies or analyses necessary for
preparation of the case, to the extent that such costs are
incurred after the earlier of the date of the notice of
decision by IRS Appeals or the notice of deficiency. Net worth
limitations apply.
Reasonable litigation costs include reasonable fees paid or
incurred for the services of attorneys, except that, under
prior law, the attorney's fees were not reimbursed at a rate in
excess of $110 per hour (indexed for inflation) unless the
court determined that a special factor, such as the limited
availability of qualified attorneys for the proceeding,
justified a higher rate.
Rule 68 of the Federal Rules of Civil Procedure (FRCP)
provides a procedure under which a party may recover costs if
the party's offer for judgment was rejected and the subsequent
court judgment was less favorable to the opposing party than
the offer. The offering party's recoverable costs are limited
to the costs (excluding attorney's fees) incurred after the
offer was made. The FRCP generally apply to tax litigation in
the district courts and the United States Court of Federal
Claims.
Code section 7431 permits the award of civil damages for
unauthorized inspection or disclosure of return information.
The Federal appellate courts were, under prior law, split over
whether a party who substantially prevails over the United
States in an action under Code section 7431 is eligible for an
award of fees and reasonable costs.
Reasons for Change
The Congress believed that taxpayers should be allowed to
recover the reasonable administrative costs they incur where
the IRS takes a position against the taxpayer that is not
substantially justified, beginning at the time that the IRS
establishes its initial position by issuing a letter of
proposed deficiency which allows the taxpayer an opportunity
for administrative review by the IRS Office of Appeals.
The Congress believed that the pro bono publicum
representation of taxpayers should be encouraged and the value
of the legal services rendered in these situations should be
recognized. Where the IRS takes positions that are not
substantially justified, it should not be relieved of its
obligation to bear reasonable administrative and litigation
costs because representation was provided the taxpayer on a pro
bono basis.
The Congress was concerned that the IRS may continue to
litigate issues that have previously been decided in favor of
taxpayers in other circuits. The Congress believed that this
places an undue burden on taxpayers that are required to
litigate such issues. Accordingly, the Congress believed it is
important that the court take into account whether the IRS has
lost in the courts of appeals of other circuits on similar
issues in determining whether the IRS has taken a position that
is not substantially justified and thus liable for reasonable
administrative and litigation costs.
The Congress believed that settlement of tax cases should
be encouraged whenever possible. Accordingly, the Congress
believed that the application of a rule similar to FRCP 68 is
appropriate to provide an incentive for the IRS to settle
taxpayers' cases for appropriate amounts, by requiring
reimbursement of taxpayer's costs when the IRS fails to do so.
The Congress believed that when the IRS violates taxpayer's
right to privacy by engaging in unauthorized inspection or
disclosure activities, it is appropriate to reimburse taxpayers
for the costs of their damages.
Explanation of Provision
The Act:
(1) Moves the point in time after which reasonable
administrative costs can be awarded to the date on which the
first letter of proposed deficiency that allows the taxpayer an
opportunity for administrative review in the IRS Office of
Appeals is sent;
(2) Raises the hourly rate to $125 per hour, which
parallels the rate utilized under the Equal Access to Justice
Act (the statute that authorizes the awarding of attorney's
fees in non-tax Federal cases). This new cap will continue to
be indexed for inflation (as under prior law). Provides that
the difficulty of the issues presented or the unavailability of
local tax expertise can be used to justify an award of
attorney's fees of more than the statutory limit of $125 per
hour;
(3) Permits the award of reasonable attorney's fees to
specified persons who represent for no more than a nominal fee
a taxpayer who is a prevailing party;
(4) Provides that in determining whether the position of
the United States was substantially justified, the court shall
take into account whether the United States has lost in other
courts of appeal on substantially similar issues;
(5) Provides that if a taxpayer makes an offer after the
taxpayer has a right to administrative review in the IRS Office
of Appeals, the IRS rejects the offer, and later the IRS
obtains a judgment against the taxpayer in an amount that is
equal to or less than the taxpayer's offer for the amount of
the tax liability (excluding interest), reasonable costs and
attorney's fees from the date of the offer would be awarded;
and
(6) Clarifies that the award of attorney's fees is
permitted in actions for civil damages for unauthorized
inspection or disclosure of taxpayer returns and return
information. Fees are payable by the United States only when
the United States is the defendant and the plaintiff is a
prevailing party. Also, individual defendants (such as State
employees or contractors) may be liable for attorneys' fees and
costs in cases where the United States is not a party, whenever
they are found to have made a wrongful disclosure.
Effective Date
The provision is effective with respect to costs incurred
and services performed more than 180 days after the date of
enactment (after January 18, 1999).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts in 1998, and to reduce Federal
fiscal year budget receipts by $11 million in 1999, $12 million
in 2000, $13 million in 2001, $14 million in 2002, $16 million
in 2003, $18 million in 2004, $19 million in 2005, $20 million
in 2006, and $22 million in 2007.
2. Civil damages for collection actions (sec. 3102 of the Act and secs.
7426 and 7433 of the Code)
Prior Law
A taxpayer could sue the United States for up to $1 million
of civil damages caused by an officer or employee of the IRS
who recklessly or intentionally disregards provisions of the
Internal Revenue Code or Treasury regulations in connection
with the collection of Federal tax with respect to the
taxpayer.
Reasons for Change
The Congress believed that taxpayers should also be able to
recover economic damages they incur as a result of the
negligent disregard of the Code or regulations by an officer or
employee of the IRS in connection with a collection matter. The
Congress also believed that taxpayers should be able to recover
civil damages they incur as a result of a willful violation of
the Bankruptcy Code by an officer or employee of the IRS. As
third parties may also be subject to IRS collection actions,
the Congress believed it appropriate to afford them the
opportunity to recover damages for unauthorized collection
actions.
Explanation of Provision
The Act permits recovery of up to $100,000 in civil damages
caused by an officer or employee of the IRS who negligently
disregards provisions of the Internal Revenue Code or Treasury
regulations in connection with the collection of Federal tax
with respect to the taxpayer. The provision also permits
recovery of up to $1 million in civil damages caused by an
officer or employee of the IRS who willfully violates
provisions of the Bankruptcy Code relating to automatic stays
or discharges. The provision also provides that persons other
than the taxpayer may sue for civil damages for unauthorized
collection actions.
Effective Date
The provision is effective with respect to actions of
officers or employees of the IRS occurring after the date of
enactment (after July 22, 1998).
Revenue Effect
The provision is estimated to reduce Federal fiscal year
budget receipts by $2 million in 1998, $15 million in 1999, $25
million in 2000, $50 million in 2001, $30 million in 2002, and
$25 million in each of the years 2003 through 2007.
3. Increase in size of cases permitted on small case calendar (sec.
3103 of the Act and sec. 7463 of the Code)
Present and Prior Law
Taxpayers may choose to contest many tax disputes in the
Tax Court. Special small case procedures apply to disputes
involving up to a specified maximum, if the taxpayer chooses to
utilize these procedures (and the Tax Court concurs). The IRS
cannot require the taxpayer to use the small case procedures.
The Tax Court generally concurs with the taxpayer's request to
use the small case procedures, unless it decides that the case
involves an issue that should be heard under the normal
procedures. After the case has commenced, the Tax Court may
order that the small case procedures should be discontinued
only if (1) there is reason to believe that the amount in
controversy will exceed the specified maximum, or (2) justice
would require the change in procedure. Under prior law, the
specified maximum for small case treatment was $10,000.
Reasons for Change
The Congress believed that use of the small case procedures
should be expanded.
Explanation of Provision
The Act increases the specified maximum for small case
treatment from $10,000 to $50,000. An increase of this size may
encompass a small number of cases of significant precedential
value. Accordingly, it is anticipated that the Tax Court will
carefully consider (1) IRS objections to small case treatment,
such as objections based upon the potential precedential value
of the case, as well as (2) the financial impact on the
taxpayer, including additional legal fees and costs, of not
utilizing small case treatment.
Effective Date
The provision is effective with respect to proceedings
commenced after the date of enactment (after July 22, 1998).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
4. Actions for refund with respect to certain estates which have
elected the installment method of payment (sec. 3104 of the Act
and sec. 7422 of the Code)
Present and Prior Law
In general, the U.S. Court of Federal Claims and the U.S.
district courts have jurisdiction over suits for the refund of
taxes, as long as full payment of the assessed tax liability
has been made. Under Code section 6166, if certain conditions
are met, the executor of a decedent's estate may elect to pay
the estate tax attributable to certain closely-held businesses
over a 14-year period. Under prior law, courts had held that
U.S. district courts and the U.S. Court of Federal Claims do
not have jurisdiction over claims for refunds by taxpayers
deferring estate tax payments pursuant to section 6166 unless
the entire estate tax liability has been paid. Under section
7479 of prior law, the U.S. Tax Court had limited authority to
provide declaratory judgments regarding initial or continuing
eligibility for deferral under section 6166.
Reasons for Change
The Congress believed that the refund jurisdiction of the
U.S. Court of Federal Claims and the U.S. district courts
should apply without regard to whether the taxpayer has
elected, and the Secretary accepted, the payment of that tax in
installments.
Explanation of Provision
The Act grants the U.S. Court of Federal Claims and the
U.S. district courts jurisdiction to determine the correct
amount of estate tax liability (or refund) in actions brought
by taxpayers deferring estate tax payments under section 6166,
as long as certain conditions are met. In order to qualify for
the provision: (1) the estate must have made an election
pursuant to section 6166; (2) the estate must have fully paid
each installment of principal and/or interest due (and all non-
6166-related estate taxes due) before the date the suit is
filed; (3) no portion of the payments due may have been
accelerated; (4) there must be no suits for declaratory
judgment pursuant to section 7479 pending; and (5) there must
be no outstanding deficiency notices against the estate. In
general, to the extent that a taxpayer has previously litigated
its estate tax liability, the taxpayer would not be able to
take advantage of this procedure under principles of res
judicata. Taxpayers are not relieved of the liability to make
any installment payments that become due during the pendency of
the suit (i.e., failure to make such payments would subject the
taxpayer to the existing provisions of section 6166(g)(3)).
The Act further provides that once a final judgment has
been entered by a district court or the U.S. Court of Federal
Claims, the IRS is not permitted to collect any amount
disallowed by the court, and any amounts paid by the taxpayer
in excess of the amount the court finds to be currently due and
payable are refunded to the taxpayer, with interest. Lastly,
the provision provides that the two-year statute of limitations
for filing a refund action is suspended during the pendency of
any action brought by a taxpayer pursuant to section 7479 for a
declaratoryjudgment as to an estate's eligibility for section
6166.
Effective Date
The provision is effective for claims for refunds filed
after the date of enactment (after July 22, 1998).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
5. Administrative appeal of adverse IRS determination of a bond issue's
tax-exempt status (sec. 3105 of the Act)
Present and Prior Law
Interest on debt incurred by States or local governments
generally is excluded from gross income if the proceeds of the
borrowing are used to carry out governmental functions of those
entities and the debt is repaid with governmental funds.
A State or local government that seeks to issue bonds, the
interest on which is intended to be excludable from gross
income, can request a ruling from the IRS regarding the
eligibility of such bonds for tax-exemption. The prospective
issuer can challenge the IRS's determination (or failure to
make a timely determination) in a declaratory judgment
proceeding in the Tax Court. Under prior law, there was no
mechanism that explicitly allowed tax-exempt bond issuers
examined by the IRS to appeal adverse examination
determinations to the Appeals Division of the IRS as a matter
of right.
Reasons for Change
The Congress believed that issuers of governmental bonds,
as parties with a strong incentive to ensure the continued tax-
exemption of outstanding bonds, should have the opportunity to
appeal IRS revocations of the tax-exempt status of the bonds,
in order better to protect the holders of those bonds and the
market.
Explanation of Provision
The Act directs the Internal Revenue Service to modify its
administrative procedures to allow tax-exempt bond issuers
examined by the IRS to appeal adverse examination
determinations to the Appeals Division of the IRS as a matter
of right. Because of the complexity of the issues involved, the
IRS is directed to provide that these appeals will be heard by
senior appeals officers having experience in resolving complex
cases.
It is intended that Congress will evaluate judicial
remedies in future legislation once the IRS's tax-exempt bond
examination program has developed more fully and the Congress
is better able to ensure that any such future measure protects
all parties in interest to these determinations (i.e., issuers,
bondholders, conduit borrowers, and the Federal Government).
Effective Date
The direction to the IRS is effective on the date of
enactment (July 22, 1998).
Revenue Effect
The provision is estimated to reduce Federal fiscal year
budget receipts by less than $1 million in 1998, and $5 million
in 1999, and $2 million in each of the years 2000 through 2007.
6. Civil action for release of erroneous lien (sec. 3106 of the Act and
sec. 6325 of the Code)
Prior Law
Prior to 1995, the provisions governing jurisdiction over
refund suits had generally been interpreted to apply only if an
action was brought by the taxpayer against whom tax was
assessed. Remedies for third parties from whom tax was
collected (rather than assessed) were found in other provisions
of the Internal Revenue Code. The Supreme Court has held
43 that a third party who paid another person's tax
under protest to remove a lien on the third party's property
could bring a refund suit, because she had no other adequate
administrative or judicial remedy. In that case, the IRS had
filed a nominee lien against property that was owned by the
taxpayer's former spouse and that was under a contract for
sale. In order to complete the sale, the former spouse paid the
amount of the lien under protest, and then sued in district
court to recover the amount paid. The Supreme Court held that
parties who are forced to pay another's tax under duress could
bring a refund suit, because no other judicial remedy was
adequate.
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\43\ Williams v. United States, 514 U.S. 527 (1995).
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Reasons for Change
The Congress believed that third parties should have a
mechanism to release an erroneous tax lien. Accordingly, the
Congress believed it appropriate to provide relief similar to
that provided to third parties who are subject to wrongful levy
of property.
Explanation of Provision
The Act creates an administrative procedure permitting a
record owner of property against which a Federal tax lien has
been filed to obtain a certificate of discharge of property
from the lien as a matter of right. The third party is required
to apply to the Secretary of the Treasury for such a
certificate and either to deposit cash or to furnish a bond
sufficient to protect the lien interest of the United States.
The Act also establishes a judicial cause of action for
third parties challenging a lien. The period within which such
an action must be commenced is 120 days after the date the
certificate of discharge is issued to ensure an early
resolution of the parties' interests.
Effective Date
The provision is effective on the date of enactment (July
22, 1998).
Revenue Effect
The provision is estimated to have a negligible effect on
Federal fiscal year budget receipts.
C. Relief for Innocent Spouses and for Taxpayers Unable to Manage Their
Financial Affairs Due to Disabilities
1. Relief for innocent spouses (sec. 3201 of the Act and new sec. 6015
of the Code)
Prior Law
Under prior law, relief from liability for tax, interest
and penalties was available for ``innocent spouses'' only in
certain limited circumstances. To qualify for such relief, the
innocent spouse was required to establish: (1) that a joint
return was made; (2) that an understatement of tax, which
exceeds the greater of $500 or a specified percentage
44 of the innocent spouse's adjusted gross income
for the preadjustment (most recent) year, was attributable to a
grossly erroneous item of the other spouse; (3) that in signing
the return, the innocent spouse did not know, and had no reason
to know, that there was an understatement of tax; and (4) that
taking into account all the facts and circumstances, it was
inequitable to hold the innocent spouse liable for the
deficiency in tax.
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\44\ The specified percentage was 10 percent if adjusted gross
income was $20,000 or less. Otherwise, the specified percentage was 25
percent.
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The proper forum for contesting the Secretary's denial of
innocent spouse relief under prior law was determined by
whether an underpayment was asserted or the taxpayer was
seeking a refund of overpaid taxes. Accordingly, the Tax Court
did not have jurisdiction to review all denials of innocent
spouse relief.
Reasons for Change
The Congress was concerned that the innocent spouse
provisions of prior law were inadequate. The Congress believed
it was inappropriate to limit innocent spouse relief only to
the most egregious cases, those cases where the understatement
was large and the tax position taken grossly erroneous. The
Congress believed that partial innocent spouse relief should be
considered in appropriate circumstances, and that all taxpayers
should have access to the Tax Court in resolving disputes
concerning their status as an innocent spouse.
The Congress believed that an elective system based on
separate liabilities would provide more appropriate protection
for taxpayers that are no longer married, are separated, or are
living apart than does the current system. The Congress
intended that this election only be available for tax
deficiencies attributable to items of which the electing spouse
had no knowledge. The Congress was concerned that taxpayers not
be allowed to abuse these rules by knowingly signing false
returns, or by transferring assets for the purpose of avoiding
the payment of tax by the use of this election. The Congress
believed that rules restricting the ability of taxpayers to
limit their liability in such situations are appropriate.
The Congress believed that taxpayers need to be informed of
their right to make this election and that the IRS is the best
source of that information. The Congress believed that the
failure of spouses to receive timely notice of their joint tax
liabilities has contributed to the difficulties they face.
Accordingly, the Congress believed that the IRS should take
appropriate steps to insure that both spouses are made aware of
their tax situation, and not rely on a single notice sent to a
single address to inform both spouses.
Explanation of Provision 45
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\45\ This reflects the technical correction enacted in section
4002(c) of the Tax and Trade Relief Extension Act of 1998, described in
Part Three of this publication.
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In general
The provision establishes three procedures for limiting the
portion of a joint and several liability that is a spouse's (or
former spouse's) responsibility. First, the provision
establishes a separate liability election for a taxpayer who is
no longer married to, is legally separated from, or has been
living apart at all times for at least 12 months from the
person with whom the taxpayer originally filed the joint
return. Second, the provision expands the circumstances in
which innocent spouse relief similar to that available under
prior law is available. Third, the provision authorizes the
Secretary to provide equitable relief in appropriate
situations. The provision also establishes jurisdiction in the
Tax Court over disputes arising in this area.
Deficiencies of taxpayers who are no longer married, are separated, or
are living apart
The provision establishes a separate liability election
applicable to the deficiencies of a taxpayer who, at the time
of election, is no longer married 46 to, is legally
separated from, or has been living apart at all times for at
least 12 months from the person with whom the taxpayer
originally filed the joint return. Such taxpayers may elect to
limit their liability for any deficiency to the portion of the
deficiency that is attributable to items allocable to the
taxpayer. Items are generally allocated between spouses in the
same manner as they would have been allocated had the spouses
filed separate returns. However, if any item of credit or
deduction would be disallowed solely because a separate return
is filed, the item of credit or deduction will be computed for
this purpose without regard to such prohibition. The Secretary
may prescribe other methods of allocation by regulation. The
allocation of items is to be accomplished without regard to
community property laws. An electing spouse has the burden of
proof with respect to establishing the portion of any
deficiency that is allocable to him or her under this
provision.
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\46\ For the purpose of this rule, a taxpayer is no longer married
if he or she is widowed.
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The election applies to all unpaid taxes under subtitle A
of the Internal Revenue Code, including the income tax and the
self-employment tax. The election may be made at any time not
later than 2 years after collection activities begin with
respect to the electing spouse. It is intended that the 2 year
period not begin until collection activities have been
undertaken against the electing spouse that have the effect of
giving the spouse notice of the IRS' intention to collect the
joint liability from such spouse. For example, garnishment of
wages or a notice of intent to levy against the property of the
electing spouse would constitute collection activity against
the electing spouse. The mailing of a notice of deficiency and
demand for payment to the last known address of the electing
spouse, addressed to both spouses, would not.
If the deficiency relates entirely to an item attributable
to one spouse, the other spouse is responsible for none of the
deficiency if he or she elects limited liability under this
provision. For example, a deficiency is assessed after IRS
audit of a joint return. The deficiency relates to income
earned by the husband that was not reported on the return. If
the spouses who joined in the return are no longer married, are
legally separated, or have lived apart for at least 12 months,
either may elect limited liability under this provision. If the
wife elects, she would owe none of the deficiency. The
deficiency would be the sole responsibility of the husband
whose income gave rise to the deficiency.
If the deficiency relates to the items of both spouses, the
separate liability for the deficiency is allocated between the
spouses in the same proportion as the net items taken into
account in determining the deficiency. For example, a
deficiency is assessed that is attributable to $70,000 of
unreported income allocable to the husband and the disallowance
of a $30,000 miscellaneous itemized deduction allocable to the
wife. If the spouses who joined in the return are no longer
married, are legally separated, or have lived apart for at
least 12 months, either may elect limited liability under this
provision. If the husband and wife both elect, the husband's
liability would be limited to 70 percent of the deficiency and
the wife's liability limited to 30 percent. This would be the
case even if a portion of the miscellaneous itemized deductions
had been disallowed under section 67(a). Each spouse is
required to make the election in order to limit his or her
liability. If either spouse fails to elect, the non-electing
spouse would be liable for the full amount of the deficiency,
unless reduced by innocent spouse relief or pursuant to the
grant of authority to the Secretary to provide equitable
relief.
If the deficiency arises as a result of the denial of an
item of deduction or credit, the amount of the deficiency
attributable to the spouse to whom the item of deduction or
credit is allocated is limited to the amount of income or tax
allocated to such spouse that was offset by the deduction or
credit. The remainder of the liability is allocated to the
other spouse to reflect the fact that income or tax allocated
to that spouse was originally offset by a portion of the
disallowed deduction or credit.
For example, a married couple files a joint return with
wage income of $100,000 allocable to the wife and $30,000 of
self-employment income allocable to the husband. On
examination, a $20,000 deduction allocated to the husband is
disallowed, resulting in a deficiency of $5,600. Under the
provision, the liability is allocated in proportion to the
items giving rise to the deficiency. Since the only item giving
rise to the deficiency is allocable to the husband, and because
he reported sufficient income to offset the item of deduction,
the entire deficiency is allocated to the husband and the wife
has no liability with regard to the deficiency, regardless of
the ability of the IRS to collect the deficiency from the
husband.
If the joint return had shown only $15,000 (instead of
$30,000) of self-employment income for the husband, the income
offset limitation rule discussed above would apply. In this
case, the disallowed $20,000 deduction entirely offsets the
$15,000 of income of the husband, and $5,000 remains. This
remaining $5,000 of the disallowed deduction offsets income of
the wife. The liability for the deficiency is therefore divided
in proportion to the amount of income offset for each spouse.
In this example, the husband is liable for \3/4\ of the
deficiency ($4,200), and the wife is liable for the remaining
\1/4\ ($1,400).
Where a deficiency is attributable to the disallowance of a
credit, or to any tax other than regular or alternative minimum
income tax, the portion of the deficiency attributable to such
credit or other tax is considered first. For example, on
examination a deficiency of $10,000 ($2,800 of self-employment
tax and $7,200 of income tax) is determined to be attributable
to $20,000 of unreported self-employment income of the husband
and a disallowed itemized deduction of $5,000 allocable to the
wife. The $2,800 of deficient self-employment taxes is first
allocated to the husband, and the remaining $7,200 of income
tax deficiency is allocated 80 percent to the husband and 20
percent to the wife.
Special rules to prevent the inappropriate use of the
election are included.
First, if the IRS demonstrates that assets were transferred
between the spouses in a fraudulent scheme joined in by both
spouses, neither spouse is eligible to make the election under
the provision (and consequently joint and several liability
applies to both spouses).
Second, if the IRS proves that the electing spouse had
actual knowledge that an item on a return is incorrect, the
election will not apply to the extent any deficiency is
attributable to such item. Such actual knowledge must be
established by the evidence and shall not be inferred based on
indications that the electing spouse had a reason to know.
The rule that the election will not apply to the extent any
deficiency is attributable to an item the electing spouse had
actual knowledge of is expected to be applied by treating the
item as fully allocable to both spouses. For example a divorced
couple filed a joint return during their marriage with wage
income of $150,000 allocable to the wife and $30,000 of self-
employment income allocable to the husband. On examination, an
additional $20,000 of the husband's self-employment income is
discovered, resulting in a deficiency of $9,000. The IRS proves
that the wife had actual knowledge of $5,000 of this additional
self-employment income, but had no knowledge of the remaining
$15,000. In this case, the husband would be liable for the full
amount of the deficiency, since the item giving rise to the
deficiency is fully allocable to him. In addition, the wife
would be liable for the amount that would have been calculated
as the deficiency based on the $5,000 of unreported income of
which she had actual knowledge. Even if the wife elects to
limit the liability for the deficiency under this provision,
the IRS would be allowed to collect that amount from either
spouse, while the remainder of the deficiency could be
collected only from the husband.
Third, the portion of the deficiency for which the electing
spouse is liable is increased by the value of any disqualified
assets received from the other spouse. Disqualified assets
include any property or right to property that was transferred
to an electing spouse if the principal purpose of the transfer
is the avoidance of tax (including the avoidance of payment of
tax). A rebuttable presumption exists that a transfer is made
for tax avoidance purposes if the transfer was made less than
one year before the earlier of the payment due date or the date
of the notice of proposed deficiency. The rebuttable
presumption does not apply to transfers pursuant to a decree of
divorce or separate maintenance. The presumption may be
rebutted by a showing that the principal purpose of the
transfer was not the avoidance of tax or the avoidance of the
payment of tax.
Innocent spouse relief
The provision also expands the circumstances under which
innocent spouse relief is available. For example, a taxpayer
may be ineligible to make the separate liability election for a
deficiency because he or she is not widowed, divorced, legally
separated, or living apart (for at least 12 months) from the
person with whom the taxpayer originally filed the joint
return. Such a taxpayer may apply for relief of any deficiency
that is attributable to an erroneous item of the other spouse,
provided he or she did not know and had no reason to know of
the understatement of tax, and it would be inequitable to hold
the taxpayer responsible for the deficiency. The requirements
of prior law that the understatement of tax be substantial, and
that the item or items to which the understatement is
attributable be grossly erroneous, are repealed.
The innocent spouse election is required to be made no
later than the date that is two years after the Secretary has
begun collection actions with respect to the individual.
Innocent spouse relief may be provided on an apportioned basis.
A spouse may be relieved of liability for the portion of an
understatement of tax even if the spouse knew or had reason to
know of other understatements of tax on the same return.
Equitable relief in other circumstances
The provision authorizes the Secretary to provide equitable
relief in appropriate situations to avoid the inequitable
treatment of spouses in such situations. For example, the
Congress intends that equitable relief be available to a spouse
that did not know, and had no reason to know, that funds
intended for the payment of tax were taken by the other spouse
for such other spouse's benefit. The Secretary is also
authorized to provide relief at his discretion in other
situations.
Jurisdiction of Tax Court
The Act specifically provides that the Tax Court has
jurisdiction to review any denial of innocent spouse relief.
Except for termination and jeopardy assessments, the Secretary
may not levy or proceed in court to collect any tax from a
taxpayer claiming innocent spouse status with regard to such
tax until the expiration of the 90-day period in which such
taxpayer may petition the Tax Court or, if such a petition is
filed in Tax Court, before the decision of the Tax Court has
become final. The running of the statute of limitations is
suspended in such situations with respect to the spouse
claiming innocent spouse status.
The Tax Court also has jurisdiction of disputes arising
from the separate liability election. For example, a spouse who
makes the separate liability election may petition the Tax
Court to determine the limits on liability applicable under
this provision. The Tax Court is authorized to establish rules
that would allow the Secretary of the Treasury and the electing
spouse to require, with adequate notice, the other spouse to
become a party to any proceeding before the Tax Court.
Separate notice requirement
The Secretary is expected, wherever practicable, to send
any notice relating to a joint return separately to each
spouse.
Effective Date
The separate liability election, expanded innocent spouse
relief and authority to provide equitable relief all apply to
liabilities for tax arising after the date of enactment (after
July 22, 1998), as well as any liability for tax arising on or
before the date of enactment that remains unpaid on the date of
enactment. The applicable 2-year election periods do not expire
before the date that is two years after the first collection
activity taken by the IRS after the date of enactment. An
individual may be eligible for relief under the provision
without regard to whether such individual has previously been
denied innocent spouse relief under prior law. The Secretary is
required to develop a separate form for electing innocent
spouse relief within 180 days after the date of enactment.
Revenue Effect
The provision is estimated to reduce Federal fiscal year
budget receipts by $10 million in 1998, $131 million in 1999,
$92 million in 2000, $74 million in 2001, $86 million in 2002,
$121 million in 2003, $157 million in 2004, $204 million in
2005, $243 million in 2006, and $288 million in 2007.
2. Suspension of statute of limitations on filing refund claims during
periods of disability (sec. 3202 of the Act and sec. 6511 of
the Code)
Present and Prior Law
In general, a taxpayer must file a refund claim within
three years of the filing of the return or within two years of
the payment of the tax, whichever period expires later (if no
return is filed, the two-year limit applies) (sec. 6511(a)). A
refund claim that is not filed within these time periods is
rejected as untimely.
Under prior law, there was no explicit statutory rule
providing for equitable tolling of the statute of limitations.
The U.S. Supreme Court had held 47 that Congress did
not intend the equitable tolling doctrine to apply to the
statutory limitations of section 6511 on the filing of tax
refund claims.
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\47\ U.S. v. Brockamp, 519 U.S. 347 (1997).
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Reasons for Change
The Congress believed that, in cases of severe disability,
equitable tolling should be considered in the application of
the statutory limitations on the filing of tax refund claims.
Explanation of Provision
The Act permits equitable tolling of the statute of
limitations for refund claims of an individual taxpayer during
any period of the individual's life in which he or she is
unable to manage his or her financial affairs by reason of a
medically determinable physical or mental impairment that can
be expected to result in death or to last for a continuous
period of not less than 12 months. Tolling does not apply
during periods in which the taxpayer's spouse or another person
is authorized to act on the taxpayer's behalf in financial
matters.
Effective Date
The provision applies to periods of disability before, on,
or after the date of enactment (July 22, 1998) but does not
apply to any claim for refund or credit that (without regard to
the provision) is barred by the operation of any law, including
the statute of limitations, as of the date of enactment.
Revenue Effect
The provision is estimated to reduce Federal budget
receipts by $10 million in 1998, $70 million in 1999, $35
million in 2000, $15 million in 2001, $16 million in 2002, $17
million in 2003, $18 million in 2004, $19 million in 2005, $20
million in 2006, and $21 million in 2007.
D. Provisions Relating to Interest and Penalties
1. Elimination of interest differential on overlapping periods of
interest on income tax overpayments and underpayments (sec.
3301 of the Act and sec. 6621 of the Code)
Present and Prior Law
A taxpayer that underpays its taxes is required to pay
interest on the underpayment at a rate equal to the Federal
short term interest rate plus three percentage
points.48 A special ``hot interest'' rate equal to
the Federal short term interest rate plus five percentage
points applies in the case of certain large corporate
underpayments.
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\48\ This provision was modified with respect to non-corporate
taxpayers (see sec. 3302 of the Act).
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A taxpayer that overpays its taxes receives interest on the
overpayment at a rate equal to the Federal short term interest
rate plus two percentage points. In the case of corporate
overpayments in excess of $10,000, this is reduced to the
Federal short term interest rate plus one-half of a percentage
point.
If a taxpayer has an underpayment of tax from one year and
an overpayment of tax from a different year that are
outstanding at the same time, the IRS will typically offset the
overpayment against the underpayment and apply the appropriate
interest to the resulting net underpayment or overpayment.
However, under prior law, if either the underpayment or
overpayment has been satisfied, the IRS did not typically
offset the two amounts, but rather assessed or credited
interest on the full underpayment or overpayment at the
underpayment or overpayment rate. This had the effect of
assessing the underpayment at the higher underpayment rate and
crediting the overpayment at the lower overpayment rate. This
resulted in the taxpayer being assessed a net interest charge,
even if the amounts of the overpayment and underpayment were
the same.
The Secretary has the authority to credit the amount of any
overpayment against any liability under the Code. Congress has
previously directed the Internal Revenue Service to implement
procedures for ``netting'' overpayments and underpayments to
the extent a portion of tax due is satisfied by a credit of an
overpayment.
Reasons for Change
The Congress did not believe that the Federal Government
should charge taxpayers a higher interest rate than the Federal
Government pays to the extent interest is owed both by and to
the Federal Government for the same period on equivalent
amounts.
The Congress was also concerned that prior practices
provided an incentive to taxpayers to delay the payment of
underpayments they do not contest, so that the underpayments
will be available to offset any overpayments that are later
determined. The Congress believed this contrary to sound tax
administrative practice and that taxpayers should not be
disadvantaged solely because they promptly pay their tax bills.
Explanation of Provision
The provision 49 establishes a net interest rate
of zero where interest is payable and allowable on equivalent
amounts of overpayment and underpayment for a period of any tax
that is imposed by the Internal Revenue Code. Each overpayment
and underpayment is considered only once in determining whether
equivalent amounts of overpayment and underpayment exist. The
special rules that increase the interest rate paid on large
corporate underpayments and decrease the interest rate received
on corporate overpayments in excess of $10,000 do not prevent
the application of the net zero rate. It is anticipated that
the Secretary will take into account interest paid on
previously determined deficiencies or refunds for the purpose
of determining the rate of interest in periods for which this
provision is effective without regard to whether the
underpayments or overpayments are currently outstanding. It is
also anticipated that where interest is both payable from and
allowable to an individual taxpayer for the same period, the
Secretary will take all reasonable efforts to offset the
liabilities, rather than process them separately using the net
interest rate of zero. Where interest is payable and allowable
on an equivalent amount of underpayment and overpayment that is
attributable to a taxpayer's interest in a pass-thru entity
(e.g., a partnership), it is intended that the benefits of the
provision apply.
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\49\ This reflects the technical correction enacted in section
4002(d) of the Tax and Trade Relief Extension Act of 1998, described in
Part Three of this publication.
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The Congress expects the Secretary to implement the
procedures necessary to allow for the automatic application of
this provision when practicable. Until such procedures are
implemented, the Congress expects that the Secretary will
promptly and carefully consider any taxpayer's request to have
interest charges recalculated in accordance with this
provision.
Effective Date
The provision affects the determination of interest for
periods beginning after the date of enactment (after July 22,
1998). In addition, the provision applies to the determination
of interest for periods beginning before the date of enactment
if: (1) as of the date of enactment, a statute of limitations
has not expired with respect to the underpayment or
overpayment; (2) the taxpayer identifies the periods of
underpayment and overpayment for which the zero rate applies;
and (3) on or before December 31, 1999, the taxpayer asks the
Secretary to apply the zero rate. A statute of limitations must
not have expired as of the date of enactment with respect to
both the underpayment and overpayment for the provision to
apply.
Revenue Effect
The provision is estimated to reduce Federal fiscal year
budget receipts by $26 million in 1998, $68 million in 1999,
$58 million in 2000, $61 million in 2001, $56 million in 2002,
$59 million in 2003, $62 million in 2004, $65 million in 2005,
$68 million in 2006, and $72 million in 2007.
2. Increase in overpayment rate payable to taxpayers other than
corporations (sec. 3302 of the Act and sec. 6621 of the Code)
Present and Prior Law
A taxpayer that underpays its taxes is required to pay
interest on the underpayment at a rate equal to the Federal
short-term interest rate (``AFR'') plus three percentage
points. A taxpayer that overpays its taxes receives interest on
the overpayment at a rate equal to the Federal short-term
interest rate (``AFR'') plus two percentage points; under prior
law, this rule applied to all taxpayers.
Reasons for Change
The Congress believed that the interest differential for
noncorporate taxpayers should be eliminated.
Explanation of Provision
The Act provides that the overpayment interest rate is AFR
plus three percentage points, except that for corporations, the
rate remains at AFR plus two percentage points.
Effective Date
The provision is effective for interest for the second and
succeeding calendar quarters beginning after the date of
enactment (after July 22, 1998).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts in 1998, and to reduce such
receipts by $36 million in 1999, $54 million in 2000, $56
million in 2001, $59 million in 2002, $62 million in 2003, $65
million in 2004, $69 million in 2005, $72 million in 2006, and
$76 million in 2007.
3. Mitigation of penalty for individual's failure to pay during period
of installment agreement (sec. 3303 of the Act and sec. 6651 of
the Code)
Present and Prior Law
Taxpayers who fail to pay their taxes are subject to a
penalty of one-half percent per month on the unpaid amount, up
to a maximum of 25 percent. If the liability is shown on the
return, the penalty begins to accrue on the date prescribed for
payment of the tax (with regard to extensions). If the
liability should have been shown on the return but was not, the
penalty generally begins to accrue after the date that is 21
days from the date of the IRS notice and demand for payment
with respect to such liability. Under prior law, taxpayers who
made installment payments pursuant to an agreement with the IRS
could also be subject to the full amount of this penalty.
Reasons for Change
The Congress believed it inappropriate to apply the full
amount of the penalty for failure to pay taxes to taxpayers who
are in fact paying their taxes through an installment
agreement.
Explanation of Provision
The Act provides that the rate of the penalty for failure
to pay taxes is half the usual rate (0.25 percent instead of
0.5 percent) for any month in which an installment payment
agreement with the IRS is in effect, provided that the
individual filed the tax return in a timely manner (including
extensions).
Effective Date
The provision is effective for installment agreement
payments made after December 31, 1999.
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts in 1998 and 1999, and to reduce
such receipts by $108 million in 2000, $136 million in 2001,
$143 million in 2002, $152 million in 2003, $159 million in
2004, $167 million in 2005, $175 million in 2006, and $185
million in 2007.
4. Mitigation of failure to deposit penalty (sec. 3304 of the Act and
sec. 6656 of the Code)
Present and Prior Law
Deposits of payroll taxes are allocated to the earliest
period for which such a deposit is due. If a taxpayer misses or
makes an insufficient deposit, later deposits will first be
applied to satisfy the shortfall for the earlier period, the
remainder is then applied to satisfy the obligation for the
current period. Cascading penalties may result as payments that
would otherwise be sufficient to satisfy current liabilities
are applied to satisfy earlier shortfalls. The Secretary may
waive the failure to make deposit penalty for inadvertent
failures by first-time depositors of employment taxes. Under
prior law, there may have been impediments to the ability of
taxpayers to designate the period to which each deposit is
applied.
Reasons for Change
The Congress believed that the cascading penalty effect is
unfair and that depositors should be able to designate payments
to minimize its effect.
Explanation of Provision
The Act allows the taxpayer to designate the period to
which each deposit is applied. The designation must be made
during the 90 days immediately following the sending of the
related IRS penalty notice. The provision also extends the
authorization to waive the failure to deposit penalty to the
first deposit a taxpayer is required to make after the taxpayer
is required to change the frequency of the taxpayer's deposits.
For deposits required to be made after December 31, 2001, any
deposit is to be applied to the most recent period to which the
deposit relates, unless the taxpayer explicitly designates
otherwise.
Effective Date
The provision is effective for deposits made more than 180
days after the date of enactment (after January 18, 1999).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts in 1998, and to reduce such
receipts by $47 million in 1999, $64 million in each of the
years 2000 and 2001, $65 million in 2002, $66 million in each
of the years 2003 and 2004, $67 million in 2005, and $68
million in each of the years 2006 and 2007.
5. Suspension of interest and certain penalties if Secretary fails to
contact individual taxpayer (sec. 3305 of the Act and sec. 6404
of the Code)
Prior Law
In general, interest and penalties accrued during periods
for which taxes were unpaid without regard to whether the
taxpayer was aware that there was tax due.
Reasons for Change
The Congress believed that the IRS should promptly inform
taxpayers of their obligations with respect to tax deficiencies
and amounts due. In addition, the Congress was concerned that
accrual of interest and penalties absent prompt resolution of
tax deficiencies may lead to the perception that the IRS is
more concerned about collecting revenue than in resolving
taxpayer's problems.
Explanation of Provision
The Act suspends the accrual of penalties and interest
after 1 year if the IRS has not sent the taxpayer a notice
specifically stating the taxpayer's liability and the basis for
the liability within the specified period. With respect to
taxable years beginning before January 1, 2004, the 1-year
period is increased to 18 months. Interest and penalties resume
21 days after the IRS sends the required notice to the
taxpayer. The provision is applied separately with respect to
each item or adjustment. The provision does not apply where a
taxpayer has self-assessed the tax. The suspension only applies
to taxpayers who file a timely tax return. The Act applies only
to individuals and does not apply to the failure to pay
penalty, in the case of fraud, or with respect to criminal
penalties.
For example, if the IRS sends a math error notice to a
taxpayer 2 months after the return is filed and also sends a
notice of deficiency related to a different item 2 years later,
the provision applies to the item reflected on the second
notice (notwithstanding that the first notice was sent within
the applicable time period).
Effective Date
The provision is effective for taxable years ending after
the date of enactment (after July 22, 1998).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts in 1998 and 1999, and to reduce
such receipts by $146 million in 2000, $174 million in 2001,
$196 million in 2002, $209 million in 2003, $248 million in
2004, $431 million in 2005, $435 million in 2006, and $439
million in 2007.
6. Procedural requirements for imposition of penalties and additions to
tax (sec. 3306 of the Act and new sec. 6751 of the Code)
Prior Law
Prior law did not require the IRS to show how penalties are
computed on the notice of penalty. In some cases, penalties may
have been imposed without supervisory approval.
Reasons for Change
The Congress believed that taxpayers are entitled to an
explanation of the penalties imposed upon them. The Congress
believed that penalties should only be imposed where
appropriate and not as a bargaining chip.
Explanation of Provision
The Act requires that each notice imposing a penalty
include the name of the penalty, the Code section imposing the
penalty, and a computation of the penalty.
The Act also requires the specific approval of IRS
management to assess all non-computer generated penalties
unless excepted. This provision does not apply to failure to
file penalties, failure to pay penalties, or to penalties for
failure to pay estimated tax.
Effective Date
The provision is effective for notices issued and penalties
assessed after December 31, 2000.
Revenue Effect
The provision is estimated to have a negligible effect on
Federal fiscal year budget receipts.
7. Personal delivery of notice of penalty under section 6672 (sec. 3307
of the Act and sec. 6672 of the Code)
Present and Prior Law
Any person who is required to collect, truthfully account
for, and pay over any tax imposed by the Internal Revenue Code
who willfully fails to do so is liable for a penalty equal to
the amount of the tax. Before the IRS may assess any such
``100-percent penalty,'' it must mail a written preliminary
notice informing the person of the proposed penalty to that
person's last known address. Under prior law, personal delivery
was not permitted. The mailing of such notice must precede any
notice and demand for payment of the penalty by at least 60
days. The statute of limitations on assessments does not expire
before the date 90 days after the date on which the notice was
mailed. These restrictions do not apply if the Secretary finds
the collection of the penalty is in jeopardy.
Reasons for Change
The imposition of the 100-percent penalty is a serious
matter. The Congress believed that permitting personal service
of the preliminary notice required under Code section 6672 may
afford taxpayers the opportunity to resolve cases involving the
100-percent penalty at an earlier stage.
Explanation of Provision
The Act permits in-person delivery, as an alternative to
delivery by mail, of a preliminary notice that the IRS intends
to assess a 100-percent penalty.
Effective Date
The provision is effective on the date of enactment (July
22, 1998).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
8. Notice of interest charges (sec. 3308 of the Act and new sec. 6631
of the Code)
Present and Prior Law
Taxpayers generally must pay interest on amounts due to the
IRS. Under prior law, there was no explicit statutory
requirement that every IRS notice sent to an individual
taxpayer that includes an amount of interest required to be
paid by the taxpayer also include a detailed computation of the
interest charged and a citation to the Code section under which
such interest is imposed.
Reasons for Change
The Congress believed that taxpayers should be provided the
detail to support the amount of interest charged by the IRS.
The computation of interest is a complex calculation, often
involving multiple interest rates. The Congress believed that
it is appropriate to require the IRS to give notice to the
taxpayer that interest is being charged, how it is calculated,
and the total amount of the interest.
Explanation of Provision
The Act requires that every IRS notice sent to an
individual taxpayer that includes an amount of interest
required to be paid by the taxpayer also include a detailed
computation of the interest charged and a citation to the Code
section under which such interest is imposed.
Effective Date
The provision is effective for notices issued after
December 31, 2000.
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
9. Abatement of interest on underpayments by taxpayers in
Presidentially declared disaster areas (sec. 3309 of the Act
and sec. 6404 of the Code)
Present and Prior Law
In the case of a Presidentially declared disaster, the
Secretary of the Treasury has the authority to postpone some
tax-related deadlines; however, under prior law, there was no
general authority to abate interest.
Under a provision of the Taxpayer Relief Act of 1997, if
the Secretary of the Treasury extends the filing date of an
individual tax return for individuals living in an area that
has been declared a disaster area by the President during
1997,50 no interest is charged as a result of the
failure of the individual taxpayer to file an individual tax
return, or to pay the taxes shown on such return, during the
extension.
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\50\ This provision also applies to disasters declared in 1998.
This reflects the technical correction enacted in section 4003(e) of
the Tax and Trade Relief Extension Act of 1998, described in Part Three
of this publication.
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Reasons for Change
The Congress believed it appropriate to extend permanently
this special 1997 rule.
Explanation of Provision
The Act provides that taxpayers located in a Presidentially
declared disaster area do not have to pay interest on taxes due
for the length of any extension for filing their tax returns
granted by the Secretary of the Treasury.
This provision is designated as emergency legislation
under section 252(e) of the Balanced Budget and Emergency
Deficit Control Act.
Effective Date
The provision is effective for disasters declared after
December 31, 1997, with respect to taxable years beginning
after December 31, 1997.
Revenue Effect
The provision is estimated to reduce Federal fiscal year
budget receipts by $8 million in 1998 and by $25 million in
each of the years 1999 through 2007.
E. Protections for Taxpayers Subject to Audit or Collection Activities
1. Due process in IRS collection actions (sec. 3401 of the Act and new
secs. 6320 and 6330 of the Code)
Present and Prior Law
Levy is the IRS's administrative authority to seize a
taxpayer's property to pay the taxpayer's tax liability. The
IRS is entitled to seize a taxpayer's property by levy if the
Federal tax lien has attached to such property. The Federal tax
lien arises automatically where (1) a tax assessment has been
made, (2) the taxpayer has been given notice of the assessment
stating the amount and demanding payment, and (3) the taxpayer
has failed to pay the amount assessed within 10 days after the
notice and demand. A Notice of Lien must be filed in order to
inform potential purchasers or creditors of the Federal
government's priority interest in the taxpayer's property.
The IRS may collect taxes by levy upon a taxpayer's
property or rights to property (including accrued salary and
wages) if the taxpayer neglects or refuses to pay the tax
within 10 days after notice and demand that the tax be paid.
Notice of the IRS's intent to collect taxes by levy must be
given no less than 30 days (90 days in the case of a life
insurance contract) before the day of the levy. The notice of
levy must describe the procedures that will be used, the
administrative appeals available to the taxpayer and the
procedures relating to such appeals, the alternatives available
to the taxpayer that could prevent levy, and the procedures for
redemption of property and release of liens.
The effect of a levy on salary or wages payable to or
received by a taxpayer is continuous from the date the levy is
first made until it is released.
If the IRS district director finds that the collection of
any tax is in jeopardy, collection by levy may be made without
regard to either notice period. A similar rule applies in the
case of termination assessments.
Reasons for Change
The Congress believed that the IRS should afford taxpayers
adequate notice of collection activity and a meaningful hearing
before the IRS deprives them of their property. When collection
of tax is in jeopardy, the Congress believed it appropriate to
provide notice and a hearing promptly after the seizure of
property. The Congress also believed that a dwelling that is
the principal residence of the taxpayer, the taxpayer's spouse,
or the taxpayer's minor children should only be seized for the
payment of taxes as a last resort and only where judicial
approval is obtained prior to seizure. The Congress believed
that following procedures designed to afford taxpayers due
process in collections would increase fairness to taxpayers.
Explanation of Provision
In general
The provision establishes new due process procedures the
IRS must follow whenever it seeks to levy against the property
of a taxpayer in the collection of a Federal tax liability or a
Notice of Lien is filed.
Levies
Before the IRS can seize a taxpayer's property, it is
required to provide the taxpayer with a ``Notice of Intent to
Levy,'' formally stating its intention to collect a tax
liability by levy against the taxpayer's property or rights to
property. Subject to the exceptions noted below, no levy can
occur within the 30-day period beginning with the mailing of
the ``Notice of Intent to Levy.'' During that 30-day period,
the taxpayer may demand a hearing before an appeals officer who
has had no prior involvement with the taxpayer's case, other
than in connection with a hearing after the filing of a notice
of tax lien. If a hearing is requested within the 30-day
period, no levy can occur until a determination by the appeals
officer is rendered. This procedure applies only with regard to
the first levy with respect to the amount of the unpaid tax for
a taxable period.
The Notice of Intent to Levy must be provided to the
taxpayer either by personal delivery, by leaving it at the
taxpayer's dwelling or usual place of business, or by sending
the notice to the taxpayer's last known address by certified or
registered mail. The due process notice must describe in simple
and nontechnical terms (1) the amount of unpaid tax, (2) the
taxpayer's right to request a hearing within the 30-day period,
and (3) the proposed action by the Secretary and the rights of
the person with respect to such action. Such notice must also
include a brief statement that sets forth the provision of the
Code applicable to the levy and sale of property, the
procedures that will be used, the administrative appeals
available to the taxpayer and the procedures relating to such
appeals, the alternatives available to the taxpayer that could
prevent levy, and the procedures for redemption of property and
release of liens.
The IRS is required to verify at the hearing that all
statutory, regulatory, and administrative requirements for the
proposed collection action have been met. These verifications
are expected to include (but not be limited to) showings that:
(1) the revenue officer recommending the collection
action has verified the taxpayer's liability;
(2) the estimated expenses of levy and sale will not
exceed the value of the property to be seized;
(3) the revenue officer has determined that there is
sufficient equity in the property to be seized to yield
net proceeds from sale to apply to the unpaid tax
liabilities; and
(4) with respect to the seizure of the assets of a
going business, the revenue officer recommending the
collection action has thoroughly considered the facts
of the case, including the availability of alternative
collection methods, before recommending the collection
action.
The taxpayer is allowed to raise any issue relevant to the
proposed collection activity at the hearing. Issues eligible to
be raised include (but are not limited to):
(1) appropriate spousal defenses under section 6015;
(2) challenges to the appropriateness of collection
actions; and
(3) collection alternatives, which could include the
posting of a bond, substitution of other assets, an
installment agreement or an offer-in-compromise.
The validity of the tax liability can be challenged during
the hearing only if the taxpayer did not actually receive the
statutory notice of deficiency or has not otherwise had an
opportunity to dispute the liability. Also, an issue may not be
raised as part of a due process hearing if it was raised and
considered at a prior due process or other judicial or
administrative hearing and the person seeking to raise the
issue meaningfully participated in that prior hearing.
Following the hearing, the appeals officer conducting the
hearing is expected to issue his or her determination. The
determination of the appeals officer is to address whether the
proposed collection action balances the need for the efficient
collection of taxes with the legitimate concern of the taxpayer
that the collection action be no more intrusive than necessary.
The Internal Revenue Office of Appeals retains jurisdiction
with respect to the determination. It may, in its discretion,
hold additional hearings at the request of the taxpayer to
determine if collection actions undertaken by the Secretary are
consistent with its determination or to consider whether a
change in circumstances justifies a revision of the original
determination. 51 Such additional hearings may be
held by the appellate officer making the original determination
or by another appellate officer.
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\51\ A taxpayer must exhaust any other available administrative
remedy before it requests that a change in circumstances be considered
as the basis for a change in a determination.
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If a delivery of a Notice of Intent to Levy is accomplished
by sending the notice to the taxpayer's last known address by
certified or registered mail and the return receipt is not
returned, the Secretary may proceed to levy on the taxpayer's
property or rights to property 30 days after the Notice of
Intent to Levy was mailed. The Congress expects that the
Secretary will provide a hearing equivalent to the pre-levy
hearing if later requested by the taxpayer. The Secretary is
not required to suspend the levy process pending the completion
of a hearing that is not requested within 30 days of the
mailing of the Notice. However, if the taxpayer demonstrates
that it did not receive the required notice and requests a
hearing after collection activity has begun, the Congress
expects that the collection process will be suspended and a
hearing provided to the taxpayer.
This provision does not apply in the case of jeopardy and
termination assessments. Jeopardy and termination assessments
are subject to post-seizure review as part of the Appeals
determination hearing as well as through any existing judicial
procedure. A jeopardy or termination assessment must be
approved by the IRS District Counsel responsible for the case.
Failure to obtain District Counsel approval would render the
jeopardy or termination assessment void. The provision does not
apply in the case of a state tax offset procedure.
Notices of lien
The IRS is required to issue a due process notice to a
taxpayer whenever it files a Notice of Lien against the
taxpayer's property or the taxpayer's rights to property. This
due process notice must be provided not more than five (5)
business days after the Notice of Lien is filed. The due
process notice must be provided to the taxpayer either by
personal delivery, by leaving it at the taxpayer's dwelling or
usual place of business, or by sending the notice to the
taxpayer's last known address by certified or registered mail.
The due process notice must describe in simple and nontechnical
terms (1) the amount of unpaid tax to which the Notice of Lien
relates, (2) the taxpayer's right to a hearing, and (3) the
administrative appeals available to the taxpayer with respect
to such lien and the procedures related to appeals. This
procedure applies only with regard to the first Notice of Lien
with respect to the amount of the unpaid tax for the taxable
period. 52
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\52\ A technical correction may be necessary to accomplish this
result.
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At any time during the 30-day period that begins with the
mailing or delivery of the due process notice that relates to
the first Notice of Lien filed in connection with a particular
tax liability, the taxpayer may demand a hearing before an
appeals officer who has had no prior involvement with respect
to the particular liability of the taxpayer. 53 In
general, any issue relevant to the lien or to the
appropriateness of any other proposed collection action against
the taxpayer can be raised at this hearing. For example, the
taxpayer can request section 6015 spousal relief, request the
abatement of penalties or interest, make an offer-in-
compromise, propose an installment agreement or suggest which
assets should be used to satisfy the tax liability. However,
the validity of the tax liability can be challenged only if the
taxpayer did not actually receive the statutory notice of
deficiency or has not otherwise had an opportunity to dispute
the liability.
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\53\ A taxpayer may waive the requirement that the hearing be held
before an Appeals officer that had no prior involvement with respect to
the particular liability.
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A taxpayer is entitled to only one hearing under this
provision with respect to the taxable period to which the
liability relates. The taxpayer must request the hearing within
the 30-day period that begins with the delivery or mailing of
the first due process notice. The receipt of subsequent due
process notices related to the same liability for the same
taxable period do not create a right to an additional hearing
under this provision, unless all previous due process notices
failed to properly inform the taxpayer of his right to a
hearing. In such cases, the Congress expects that the previous
due process notices will be disregarded for this purpose, that
the taxpayer will be properly informed of the right to a
hearing under this provision in the next due process notice,
and that any timely request for such a hearing will be
respected.
Combined hearings
The Congress anticipates that the IRS will combine Notice
of Intent to Levy and Notice of Lien hearings whenever
possible. If multiple hearings are held, it is expected that,
to the extent practicable, the same appellate officer will hear
the taxpayer with regard to both lien and levy issues. If the
taxpayer requests a hearing following receipt of a Notice of
Lien or Notice of Intent to Levy and, prior to the date of the
hearing, receives the other notice, the scheduled hearing will
serve for both purposes and the taxpayer is obligated to raise
all relevant issues at such hearing. The Congress does not
intend that a Notice of Lien hearing be delayed to allow a
Notice of Intent to Levy to be issued.
Judicial review
The Congress expects that the appeals officer will prepare
a written determination addressing the issues presented by the
taxpayer and considered at the due process hearing. The
determination of the appeals officer may be appealed to Tax
Court or, where appropriate, the Federal district court. Where
the validity of the tax liability was properly at issue in the
hearing, and where the determination with regard to the tax
liability is a part of the appeal, no levy may take place
during the pendency of the appeal. The amount of the tax
liability will in such cases be reviewed by the appropriate
court on a de novo basis. Where the validity of the tax
liability isnot properly part of the appeal, the taxpayer may
challenge the determination of the appeals officer for abuse of
discretion. In such cases, the appeals officer's determination as to
the appropriateness of collection activity will be reviewed using an
abuse of discretion standard of review. Levies will not be suspended
during the appeal provided the Secretary shows good cause why the levy
should be allowed to proceed.
No further hearings are provided under this provision as a
matter of right. It is the responsibility of the taxpayer to
raise all relevant issues at the time of the hearing. A
taxpayer can apply for consideration of new information, make
an offer-in-compromise, request an installment agreement, or
raise other considerations at any time before, during, or after
the hearing. Nothing in this provision is intended to limit any
remedy that is otherwise available under present law.
Prior judicial approval required for seizures of principal residences
No seizure of a dwelling that is the principal residence of
the taxpayer or the taxpayer's spouse, former spouse, or minor
child would be allowed without prior judicial approval. Notice
of the judicial hearing must be provided to the taxpayer and
family members residing in the property. At the judicial
hearing, the Secretary would be required to demonstrate (1)
that the requirements of any applicable law or administrative
procedure relevant to the levy have been met, (2) that the
liability is owed, and (3) that no reasonable alternative for
the collection of the taxpayer's debt exists.
Effective Date
The provision is effective for collection actions initiated
more than 180 days after the date of enactment (after January
18, 1999).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts in 1998, and to reduce such
receipts by $11 million in 1999, $7 million in each of the
years 2000 through 2004, and $8 million in each of the years
2005 through 2007.
2. Examination activities
a. Uniform application of confidentiality privilege to
taxpayer communications with federally authorized
practitioners (sec. 3411 of the Act and new sec.
7525 of the Code)
Present and Prior Law
A common law privilege of confidentiality exists for
communications between an attorney and client with respect to
the legal advice the attorney gives the client. Communications
protected by the attorney-client privilege must be based on
facts of which the attorney is informed by the taxpayer, for
the purpose of securing the professional advice of the
attorney. The privilege may not be claimed where the purpose of
the communication is the commission of a crime or tort. The
taxpayer must either be a client of the attorney or be seeking
to become a client of the attorney.
The privilege of confidentiality applies only where the
attorney is advising the client on legal matters. It does not
apply in situations where the attorney is acting in other
capacities. Thus, a taxpayer may not claim the benefits of the
attorney-client privilege simply by hiring an attorney to
perform some other function. For example, if an attorney is
retained to prepare a tax return, the attorney-client privilege
will not automatically apply to communications and documents
generated in the course of preparing the return.
The privilege of confidentiality also does not apply where
the communication is made for further communication to third
parties. For example, information that is communicated to an
attorney for inclusion in a tax return is not privileged
because it is communicated for the purpose of disclosure. The
privilege of confidentiality does not apply where an attorney
is acting in another capacity, or where an attorney who is
licensed to practice another profession is performing such
other profession.
The attorney-client privilege is considered waived if the
communication is voluntarily disclosed to anyone other than the
attorney, the client or the agents of the client or the
attorney.
The attorney-client privilege in tax matters is limited to
communications between taxpayers and attorneys. Under prior
law, no equivalent privilege was provided for communications
between taxpayers and other professionals authorized to
practice before the Internal Revenue Service, such as
accountants or enrolled agents.
Reasons for Change
The Congress believed that a right to privileged
communications between a taxpayer and his or her advisor should
be available in noncriminal proceedings before the IRS and in
noncriminal proceedings in Federal courts with respect to such
matters where the IRS is a party, so long as the advisor is
authorized to practice before the IRS. A right to privileged
communications in such situations should not depend upon
whether the advisor is also licensed to practice law.
Explanation of Provision
The provision extends the attorney-client privilege of
confidentiality to tax advice that is furnished to a client-
taxpayer (or potential client-taxpayer) by any individual who
is authorized under Federal law to practice before the IRS if
such practice is subject to regulation under section 330 of
Title 31, United States Code. Individuals subject to regulation
under section 330 of Title 31, United States Code include
attorneys, certified public accountants, enrolled agents and
enrolled actuaries. Tax advice means advice that is within the
scope of authority for such individual's practice with respect
to matters under Title 26 (the Internal Revenue Code). The
privilege of confidentiality may be asserted in any noncriminal
tax proceeding before the IRS, as well as in any noncriminal
tax proceeding in Federal court brought by or against the
United States.
The provision allows taxpayers to consult with other
qualified tax advisors in the same manner they currently may
consult with tax advisors that are licensed to practice law.
The provision does not modify the attorney-client privilege of
confidentiality, other than to extend it to other authorized
practitioners. The privilege established by the provision
applies only to the extent that communications would be
privileged if they were between a taxpayer and an attorney.
Accordingly, the privilege does not apply to any communication
between a certified public accountant, enrolled agent, or
enrolled actuary and such individual's client (or prospective
client) if the communication would not have been privileged
between an attorney and the attorney's client or prospective
client. For example, information disclosed to an attorney for
the purpose of preparing a tax return was not privileged under
prior law. Such information would not be privileged under the
provision whether it was disclosed to an attorney, certified
public accountant, enrolled agent or enrolled actuary.
The privilege granted by the provision may only be asserted
in noncriminal tax proceedings before the IRS and in any
noncriminal tax proceeding in Federal court brought by or
against the United States.
The privilege may not be asserted to prevent the disclosure
of information to any regulatory body other than the IRS. The
ability of any other regulatory body, including the Securities
and Exchange Commission (``SEC''), to gain or compel
information is unchanged by the provision. No privilege may be
asserted under this provision by a taxpayer in dealings with
such other regulatory bodies in an administrative or court
proceeding. The privilege of confidentiality created by this
provision does not apply to any written communication between a
federally authorized tax practitioner and any director,
shareholder, officer, employee, agent, or representative of a
corporation in connection with the promotion of the direct or
indirect participation of such corporation in any tax shelter
(as defined in section 6662(d)(2)(C)(iii)). A tax shelter for
this purpose is any partnership, entity, plan, or arrangement a
significant purpose of which is the avoidance or evasion of
income tax. Tax shelters for which no privilege of
confidentiality will apply include, but are not limited to,
those required to be registered as confidential corporate tax
shelter arrangements under section 6111(d).
The privilege created by this provision may be waived in
the same manner as the attorney-client privilege. For example,
if a taxpayer or federally authorized tax practitioner
discloses to a third party the substance of a communication
protected by the privilege, the privilege for that
communication and any related communications is considered to
be waived to the same extent and in the same manner as the
privilege would be waived if the disclosure related to an
attorney-client communication.
This provision relates only to matters of privileged
communications. No inference is intended as to whether aspects
of Federal tax practice covered by the new privilege constitute
the authorized or unauthorized practice of law under various
State laws.
Effective Date
The provision is effective with regard to communications
made on or after the date of enactment (July 22, 1998).
Revenue Effect
The provision is estimated to reduce Federal fiscal year
budget receipts by less than $5 million in each of the years
1998 through 2007.
b. Limitation on financial status audit techniques (sec.
3412 of the Act and sec. 7602 of the Code)
Present and Prior Law
The Secretary is authorized and required to make the
inquiries and determinations necessary to insure the assessment
of Federal income taxes. For this purpose, any reasonable
method may be used to determine the amount of Federal income
tax owed. The courts have upheld the use of financial status
and economic reality examination techniques to determine the
existence of unreported income in appropriate circumstances.
There were no restrictions under prior law on the use of these
examination techniques.
Reasons for Change
The Congress believed that financial status audit
techniques are intrusive, and that their use should be limited
to situations where the IRS already has indications of
unreported income.
Explanation of Provision
The Act prohibits the IRS from using financial status or
economic reality examination techniques to determine the
existence of unreported income of any taxpayer unless the IRS
has a reasonable indication that there is a likelihood of
unreported income.
Effective Date
The provision is effective on the date of enactment (July
22, 1998).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
c. Software trade secrets protection (sec. 3413 of the Act
and new sec. 7612 of the Code)
Present and Prior Law
The Secretary of the Treasury is authorized to examine any
books, papers, records, or other data that may be relevant or
material to an inquiry into the correctness of any Federal tax
return. The Secretary may issue and serve summonses necessary
to obtain such data, including summonses on certain third-party
recordkeepers.
The Secretary is considered to have made a prima facie case
for the enforcement of a summons if the so-called ``Powell
standards'' are met.\54\ The Powell standards require: (1) that
the examination to which the summons relates is being conducted
pursuant to a legitimate purpose; (2) that the summons seek
information that may be relevant to such examination; (3) that
the IRS not already be in possession of the information; and
(4) that the administrative steps required by the Code have
been followed. However, a summons will not be enforced if the
burden it places on the summonsed party is out of proportion to
the end sought.\55\ Where the summons is issued against a
third-party, particularly one that is a stranger to the
taxpayer's affairs, the IRS has been required to show that the
circumstances of the investigation indicate a realistic
expectation, and not merely an idle hope, that something
relevant to the investigation may be discovered in order to
have the summons enforced.\56\
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\54\ See Powell v. U.S., 379 U.S. 48 (1964).
\55\ Harrington v. U.S., 388 F. 2d 520 (2nd Cir, 1968).
\56\ Harrington, supra.
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Under prior law, there were no specific statutory
restrictions on the ability of the Secretary to demand the
production of computer records, programs, source code or
similar materials, whether held by the taxpayer or by a third-
party.
Reasons for Change
The Congress believed that the intellectual property rights
of the developers and owners of computer programs should be
respected. The Congress was concerned that the examination of
computer programs and source code by the IRS could lead to the
diminution of those rights through the inadvertent disclosure
of trade secrets. The Congress believed that special protection
against such inadvertent disclosure should be established.
The Congress also believed that the indiscriminate
examination of computer source code by the IRS is
inappropriate. The Congress believed that a summons for the
production of certain computer source code should only be
issued where the IRS is not otherwise able to ascertain through
reasonable efforts the manner in which a taxpayer has arrived
at an item on a return, identifies with specificity the portion
of the computer source code it seeks to examine, and determines
that the need to see the source code outweighs the risk of
unauthorized disclosure of trade secrets.
Explanation of Provision
The provision establishes a number of specific protections
against the disclosure and improper use of trade secrets and
confidential information incident to the examination by the
Secretary of any computer software program or source code that
comes into the possession or control of the Secretary in the
course of any examination with respect to any taxpayer. These
protections include the following:
(1) Such software or source code may be examined only
in connection with the examination of the taxpayer's
return with regard to which it was received. This is
intended to prevent the Secretary from using the
software for the purpose of examining other, unrelated
taxpayers. It is not intended to prevent the Secretary
from using knowledge it obtains in the course of the
examination, so long as such use does not result in the
disclosure of tax return information (including the
software or source code) or the violation of any
statutory protection or judicial order.
(2) Such software or source code must be maintained
in a secure area.
(3) Such source code may not be removed from the
owner's place of business without the owner's consent
unless such removal is pursuant to a court order.
(4) Such software or source code may not be
decompiled or disassembled.
(5) Such software or source code may be copied only
as necessary to perform the specific examination. The
owner of the software must be informed of any copies
that are made, such copies must be numbered, and at the
conclusion of the examination and any related court
proceedings, all such copies must be accounted for and
returned to the owner, permanently deleted, or
destroyed. The Secretary must provide the owner of such
software or source code with the names of any
individuals who will have access to such software or
source code.
(6) If an individual who is not an officer or
employee of the U.S. Government will examine the
software or source code, such individual must enter
into a written agreement with the Secretary that such
individual will not disclose such software or source
code to any person other than authorized employees or
agents of the Secretary at any time, and that such
individualwill not participate in the development of
software that is intended for a similar purpose as such software for a
period of two years.
(7) Criminal penalties are provided where any person
willfully divulges or makes known software that was
obtained (whether or not by summons) for the purpose of
examining a taxpayer's return in violation of this
provision.
(8) Computer software or source code that is obtained
by the IRS in the course of the examination of a
taxpayer's return is considered to be return
information for the purposes of section 6103.
Summons of tax-related computer software source code
No summons may be issued for tax-related computer software
source code unless (1) the Secretary is unable otherwise to
ascertain the correctness of any item on a return from the
taxpayer's books and records or the computer software program
and associated data, (2) the Secretary identifies with
reasonable specificity the portion of the computer source code
needed to verify the correctness of the item and (3) the
Secretary determines that the need for the source code
outweighs the risk of unauthorized disclosure of trade secrets.
The Secretary is considered to have satisfied the first two of
these requirements if the Secretary makes a formal request for
such materials to both the taxpayer and the owner of the
software that is not satisfied within 180 days.
This limitation on the summons of tax-related computer
software source code does not apply if the summons is issued in
connection with an inquiry into any offense connected with the
administration or enforcement of the internal revenue laws. The
limitation also does not apply to a summons of computer
software source code that was acquired or developed by the
taxpayer or a related person primarily for internal use by the
taxpayer or such person rather than for commercial
distribution. A finding that computer software source code was
developed for internal use, and thus not eligible for the
limitation in summons authority in this provision, is not
intended to be dispositive of whether such software was
intended for internal use for any other purpose of this title.
Communications between the owner of the tax-related
computer software source code and the taxpayer are not
protected from summons by this provision. Communications
between the owner of the tax-related source code and persons
not related to the taxpayer that are related to the functioning
and operation of the software may be treated as a part of the
computer software source code.
Other issues
The provision does not change or eliminate any other
requirement of the Code. A summons for third-party tax-related
computer source code that meets the standards established by
the provision will not be enforced if it would not have been
enforced under prior law. For example, if the Secretary's
purpose in issuing the summons is shown to be improper, the
summons would not be enforced, even if the Secretary otherwise
met the standards for the summons of computer source code
established by the provision. The limitations on the summons of
tax-related computer software source code apply only with
respect to computer software that is used for accounting, tax
return preparation, tax compliance or tax planning purposes. No
inference is intended with respect to computer software used
for all other purposes. In such cases, prior law will continue
to apply, subject to the protections against the disclosure and
improper use of trade secrets and other confidential
information added by this provision.
Software or source code that is required to be provided
under prior law must be provided without regard to this
provision. For example, computer software or source code that
is required to be provided in connection with the registration
of a confidential corporate tax shelter arrangement under
section 6111 would continue to be required to be provided
without regard to this provision. Thus, the registration
requirement of section 6111 cannot be avoided where the tax
benefits of the shelter are discernible only from the operation
of a computer program.
Effective Date
The provision is effective for summonses issued and
software acquired after the date of enactment (after July 22,
1998). In addition, 90 days after the date of enactment, the
protections against the disclosure and improper use of trade
secrets and confidential information added by the provision
(except for the requirement that the Secretary provide a
written agreement from non-U.S. government officers and
employees) apply to software and source code acquired on or
before the date of enactment.
Revenue Effect
The provision is estimated to have no revenue effect on
Federal fiscal year budget receipts in 1998, and to reduce such
receipts by $13 million in 1999, $16 million in 2000, $20
million in 2001, $22 million in 2002, $26 million in 2003, $30
million in 2004, $33 million in 2005, $36 million in 2006, and
$37 million in 2007.
d. Threat of audit prohibited to coerce tip reporting
alternative commitment agreements (sec. 3414 of the
Act)
Present and Prior Law
Restaurants may enter into Tip Reporting Alternative
Commitment (``TRAC'') agreements. A restaurant entering into a
TRAC agreement is obligated to educate its employees on their
tip reporting obligations, to institute formal tip reporting
procedures, to fulfill all filing and record keeping
requirements, and to pay and deposit taxes. In return, the IRS
agrees to base the restaurant's liability for employment taxes
solely on reported tips and any unreported tips discovered
during an IRS audit of an employee. Under prior law, there was
no statutory prohibition on threatening to audit a taxpayer in
an attempt to coerce the taxpayer to enter into a TRAC
agreement.
Reasons for Change
The Congress believed that it is inappropriate for the
Secretary to use the threat of an IRS audit to induce
participation in voluntary programs.
Explanation of Provision
The Act requires the IRS to instruct its employees that
they may not threaten to audit any taxpayer in an attempt to
coerce the taxpayer to enter into a TRAC agreement.
Effective Date
The provision is effective on the date of enactment (July
22, 1998).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal years budget receipts.
e. Taxpayers allowed motion to quash all third-party
summonses (sec. 3415 of the Act and sec. 7609 of
the Code)
Present and Prior Law
When the IRS issues a summons to a ``third-party
recordkeeper'' relating to the business transactions or affairs
of a taxpayer, notice of the summons must be given to the
taxpayer within three days by certified or registered mail. The
taxpayer is thereafter given up to 23 days to begin a court
proceeding to quash the summons. If the taxpayer does so,
third-party recordkeepers are prohibited from complying with
the summons until the court rules on the taxpayer's petition or
motion to quash, but the statute of limitations for assessment
and collection with respect to the taxpayer is stayed during
the pendency of such a proceeding. Under prior law, third-party
recordkeepers were generally persons who hold financial
information about the taxpayer, such as banks, brokers,
attorneys, and accountants; some third parties were not
included.
Reasons for Change
The Congress believed that a taxpayer should have notice
when the IRS uses its summons power to gather information in an
effort to determine the taxpayer's liability. Expanding the
notice requirement to cover all third party summonses will
ensure that taxpayers will receive notice and an opportunity to
contest any summons issued to a third party in connection with
the determination of their liability.
Explanation of Provision
The Act generally expands the ``third-party recordkeeper''
procedures to apply to summonses issued to persons other than
the taxpayer. Thus, the taxpayer whose liability is being
investigated receives notice of the summons and is entitled to
bring an action in the appropriate U.S. District Court to quash
the summons. As under the prior-law third-party recordkeeper
provision, the statute of limitations on assessment and
collection is stayed during the litigation, and certain kinds
of summonses specified under prior law are not subject to these
requirements. Nothing in section 7609 of the Code (relating to
special procedures for third-party summonses) shall be
construed to limit the ability of the IRS to obtain information
(other than by summons) through formal or informal procedures
authorized by the Code.
Effective Date
The provision is effective for summonses served after the
date of enactment (after July 22, 1998).
Revenue Effect
The provision is estimated to have a negligible effect on
Federal fiscal year budget receipts.
f. Service of summonses to third-party recordkeepers
permitted by mail (sec. 3416 of the Act and sec.
7603 of the Code)
Present and Prior Law
Under prior law, a summons was required to be served ``by
an attested copy delivered in hand to the person to whom it is
directed or left at his last and usual place of abode.'' Under
present and prior law, if a third-party recordkeeper summons is
served, the IRS may give the taxpayer notice of the summons via
certified or registered mail. The Federal Rules of Civil
Procedure permit service of process by mail even in summons
enforcement proceedings, under both present and prior law.
Reasons for Change
The Congress was concerned that, in certain cases, the
personal appearance of an IRS official at a place of business
for the purpose of serving a summons may be unnecessarily
disruptive. The Congress believed that it is appropriate to
permit service of summons, as well as notice of summons, by
mail.
Explanation of Provision
The Act allows the IRS the option of serving any summons
either in person or by certified or registered mail.
Effective Date
The provision is effective for summonses served after the
date of enactment (after July 22, 1998).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
g. Notice of IRS contact of third parties (sec. 3417 of the
Act and sec. 7602 of the Code)
Present and Prior Law
Third parties may be contacted by the IRS in connection
with the examination of a taxpayer or the collection of the tax
liability of the taxpayer. The IRS has the right to summon
third-party recordkeepers. In general, the taxpayer must be
notified of the service of summons on a third party within
three days of the date of service. The IRS also has the right
to seize property of the taxpayer that is held in the hands of
third parties. Except in jeopardy situations, the Internal
Revenue Manual provides that IRS will personally contact the
taxpayer and inform the taxpayer that seizure of the asset is
planned. Under prior law, there was no statutory requirement
that IRS provide reasonable notice that the IRS may contact
persons other than the taxpayer.
Reasons for Change
The Congress believed that further clarification of these
provisions would benefit taxpayers.
Explanation of Provision
The Act provides that the IRS may not contact any person
other than the taxpayer with respect to the determination or
collection of the tax liability of the taxpayer without
providing reasonable notice in advance to the taxpayer that the
IRS may contact persons other than the taxpayer. It is intended
that in general this notice will be provided as part of an
existing IRS notice provided to taxpayers. The Act also
requires the IRS to provide periodically to the taxpayer a
record of persons previously contacted during that period by
the IRS with respect to the determination or collection of that
taxpayer's tax liability. This record shall also be provided
upon request of the taxpayer. The provision does not apply to
criminal tax matters, if the collection of the tax liability is
in jeopardy, if the Secretary determines for good cause shown
that disclosure may involve reprisal against any person, or if
the taxpayer authorized the contact.
Effective Date
The provision is effective for contacts made after 180 days
after the date of enactment (after January 18, 1999).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts in 1998, and reduce such receipts
by less than $5 million in each of the years 1999 through 2007.
3. Collection activities
a. Approval process for liens, levies, and seizures (sec.
3421 of the Act)
Prior Law
Supervisory approval of liens, levies or seizures was only
required under certain circumstances. For example, a levy on a
taxpayer's principal residence was only permitted upon the
written approval of the District Director or Assistant District
Director.
Reasons for Change
The Congress believed that the imposition of liens, levies,
and seizures may impose significant hardships on taxpayers.
Accordingly, the Congress believed that extra protection in the
form of an administrative approval process is appropriate.
Explanation of Provision
The Act requires the IRS to implement an approval process
under which any lien, levy or seizure would, where appropriate,
be approved by a supervisor, who would review the taxpayer's
information, verify that a balance is due, and affirm that a
lien, levy or seizure is appropriate under the circumstances.
Circumstances to be considered include the amount due and the
value of the asset.
The Commissioner is to have discretion in promulgating the
procedures required by this provision to determine the
circumstances under which supervisory review of liens or levies
issued by the automated collection system is or is not
appropriate.
Effective Date
The provision is effective for collection actions commenced
after date of enactment (after July 22, 1998), except in the
case of any action under the automated collection system, the
provision applies to actions initiated after December 31, 2000.
Revenue Effect
The provision is estimated to have a negligible effect on
Federal fiscal year budget receipts.
b. Modifications to certain levy exemption amounts (sec.
3431 of the Act and sec. 6334 of the Code)
Present and Prior Law
IRS may levy on all non-exempt property of the taxpayer.
Under prior law, property exempt from levy included up to
$2,500 in value of fuel, provisions, furniture, and personal
effects in the taxpayer's household and up to $1,250 in value
of books and tools necessary for the trade, business or
profession of the taxpayer.
Reasons for Change
The Congress believed that a minimum amount of household
items and equipment for taxpayer's business should be exempt
from levy. To ensure that such exemption is meaningful, the
amounts should be indexed for inflation.
Explanation of Provision
The Act increases the value of personal effects exempt from
levy to $6,250 and the value of books and tools exempt from
levy to $3,125. These amounts are indexed for inflation.
Effective Date
The provision is effective for levies issued after the date
of enactment (after July 22, 1998).
Revenue Effect
The provision is estimated to reduce the Federal fiscal
year budget receipts by less than $1 million in 1998, $1
million in each of the years 1999 through 2002 and $2 million
in each of the years 2003 through 2007.
c. Release of levy upon agreement that amount is
uncollectible (sec. 3432 of the Act and sec. 6343
of the Code)
Prior Law
Some taxpayers contended that the IRS did not release a
wage levy immediately upon receipt of proof that the tax was
not collectible. Instead, they claimed, the IRS levied on one
period's wage payment before releasing the levy.
Reasons for Change
The Congress believed that taxpayers should not have
collection activity taken against them once the IRS has
determined that the amounts are uncollectible.
Explanation of Provision
The Act requires the IRS to release, as soon as
practicable, a wage levy upon agreement with the taxpayer that
the tax is not collectible. The IRS is not to intentionally
delay until after one wage payment has been made and levied
upon before releasing the levy.
Effective Date
The provision is effective for levies imposed after
December 31, 1999.
Revenue Effect
The provision is estimated to have a negligible effect on
Federal fiscal year budget receipts.
d. Levy prohibited during pendency of refund proceedings
(sec. 3433 of the Act and sec. 6331 of the Code)
Present and Prior Law
The IRS is prohibited from making a tax assessment (and
thus prohibited from collecting payment) with respect to a tax
liability while it is being contested in Tax Court. However,
under prior law, the IRS was permitted to assess and collect
tax liabilities during the pendency of a refund suit relating
to such tax liabilities.
Generally, full payment of the tax at issue is a
prerequisite to a refund suit. However, if the tax is divisible
(such as employment taxes or the trust fund penalty under Code
section 6672), the taxpayer need only pay the tax for the
applicable period before filing a refund claim.
Reasons for Change
The Congress believed that taxpayers who are litigating a
refund action over divisible taxes should be protected from
collection of the full assessed amount, because the court
considering the refund suit may ultimately determine that the
taxpayer is not liable.
Explanation of Provision
The Act requires the IRS to withhold collection of
liabilities that are the subject of a refund suit during the
pendency of the litigation. This will only apply when refund
suits can be brought without the full payment of the tax, i.e.,
in the case of divisible taxes. Collection by levy must be
withheld unless jeopardy exists or the taxpayer waives the
suspension of collection in writing (because collection will
stop the running of interest and penalties on the tax
liability). The Secretary may not commence a civil action to
collect a liability except in a proceeding related to the
initial refund proceeding. The statute of limitations on
collection is stayed for the period during which the IRS is
prohibited from collecting by levy or otherwise.
Proceedings related to a proceeding 57 under
this provision include, but are not limited to, civil actions
or third-party complaints initiated by the United States or
another person with respect to the same kinds of tax (or
related taxes or penalties) for the same (or overlapping) tax
periods. For example, if a taxpayer brings a suit for a refund
of a portion of a penalty that the taxpayer has paid under
section 6672, the United States could, consistent with this
provision, counterclaim against the taxpayer for the balance of
the penalty or initiate related claims against other persons
assessed penalties under section 6672 for the same employment
taxes.
---------------------------------------------------------------------------
\57\ For purposes of new section 6331(i)(4)(A)(ii) of the Code.
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Effective Date
The provision is effective with respect to unpaid tax
attributable to taxable periods beginning after December 31,
1998.
Revenue Effect
The provision is estimated to have a negligible effect on
Federal fiscal year budget receipts.
e. Approval required for jeopardy and termination
assessments and jeopardy levies (sec. 3434 of the
Act and sec. 7429 of the Code)
Present and Prior Law
In general, a 30-day waiting period is imposed after
assessment of all types of taxes. In certain circumstances, the
waiting period puts the collection of taxes at risk. The Code
provides special procedures that allow the IRS to make jeopardy
assessments or termination assessments in certain extraordinary
circumstances, such as if the taxpayer is leaving or removing
property from the United States, or if assessment or collection
would be jeopardized by delay. In jeopardy or termination
situations, a levy may be made without the 30-days' notice of
intent to levy that is ordinarily required. Under prior law,
there was no statutory requirement of IRS Counsel review and
approval.
Reasons for Change
The Congress believed that it is appropriate to require
Counsel review and approval of jeopardy and termination levies,
because such actions often involve difficult legal issues.
Explanation of Provision
The Act requires IRS Counsel review and approval before the
IRS can make a jeopardy assessment, a termination assessment,
or a jeopardy levy. If Counsel's approval is not obtained, the
taxpayer is entitled to obtain abatement of the assessment or
release of the levy, and, if the IRS fails to offer such
relief, to appeal first to IRS Appeals under the new due
process procedure for IRS collections and then to court.
Effective Date
The provision is effective with respect to taxes assessed
and levies made after the date of enactment (after July 22,
1998).
Revenue Effect
The provision is estimated to have a negligible revenue
effect on Federal fiscal year budget receipts.
f. Increase in amount of certain property on which lien not
valid (sec. 3435 of the Act and sec. 6323 of the
Code)
Present and Prior Law
A Federal tax lien attaches to all property and rights in
property of the taxpayer, if the taxpayer fails to pay the
assessed tax liability after notice and demand. However, the
Federal tax lien is not valid as to certain ``superpriority''
interests.
Two of these interests are limited by a specific dollar
amount. Purchasers of personal property at a casual sale were
protected, under prior law, against a Federal tax lien attached
to such property to the extent the sale was for less than $250.
In addition, prior law provided protection to mechanic's
lienors with respect to the repairs or improvements made to
owner-occupied personal residences, but only to the extent that
the contract for repair or improvement was for not more than
$1,000.
In addition, a superpriority was granted to banks and
building and loan associations which make passbook loans to
their customers, provided that those institutions retained the
passbooks in their possession until the loan was completely
paid off.
Reasons for Change
The Congress believed that it is appropriate to increase
the dollar limits on the superpriority amounts because the
dollar limits have not been increased for decades and do not
reflect current prices or values.
Explanation of Provision
The Act increases the dollar limit for purchasers at a
casual sale from $250 to $1,000, and further increases the
dollar limit from $1,000 to $5,000 for mechanics lienors
providing home improvement work for owner-occupied personal
residences. The Act indexes these amounts for inflation. The
Act also clarifies the superpriority rules to reflect present
banking practices, where a passbook-type loan may be made even
though an actual passbook is not used.
Effective Date
The provision is effective on the date of enactment (July
22, 1998).
Revenue Effect
The provision is estimated to have a negligible effect on
Federal fiscal year budget receipts.
g. Waiver of early withdrawal tax for IRS levies on
employer-sponsored retirement plans or IRAs (sec.
3436 of the Act and sec. 72(t)(2)(A) of the Code)
Present and Prior Law
Under present law, a distribution from an employer-
sponsored retirement plan or an individual retirement
arrangement (``IRA'') generally is includible in gross income
in the year it is paid or distributed, except to the extent the
amount distributed represents the employee's after-tax
contributions or investment in the contract (i.e., basis).
Distributions from qualified plans and IRAs prior to age
59\1/2\ generally are subject to a 10-percent early withdrawal
tax on the amount includible in income, unless an exception to
the tax applies. Exceptions to the 10-percent early withdrawal
tax applicable to both qualified plans andIRAs include
distributions due to death or disability, distributions made in the
form of certain periodic payments, and distributions used to pay
medical expenses in excess of 7.5 percent of adjusted gross income
(``AGI''). Also, in the case of distributions from IRAs, there are
exceptions to the 10-percent early withdrawal tax for distributions for
education expenses, for up to $10,000 of first-time homebuyer expenses,
and for the purchase of health insurance by unemployed individuals.
Furthermore, a distribution from a qualified plan made by an employee
after separation from service after attainment of age 55 is not subject
to the 10-percent early withdrawal tax.
Under present and prior law, the IRS is authorized to levy
on all non-exempt property of the taxpayer. Benefits under
employer-sponsored retirement plans (including section 403(b)
and section 457 plans) and IRAs are not exempt from levy by the
IRS.
Distributions from employer-sponsored retirement plans or
IRAs made on account of an IRS levy are includible in the gross
income of the individual, except to the extent the amount
distributed represents after-tax contributions by the employee.
Under prior law, the amount includible in income also was
subject to the 10-percent early withdrawal tax, unless an
exception described above applied.
Reasons for Change
The Congress believed that the imposition of the 10-percent
early withdrawal tax on amounts distributed from employer-
sponsored retirement plans or IRAs on account of an IRS levy
may impose significant hardships on taxpayers. Accordingly, the
Congress believed such distributions should be exempt from the
10-percent early withdrawal tax.
Explanation of Provision
The Act provides an exception to the 10-percent early
withdrawal tax for amounts withdrawn from an employer-sponsored
retirement plan or an IRA as a result of a levy by the IRS on
the plan or IRA. The exception applies only if the plan or IRA
is levied; it does not apply, for example, if the taxpayer
withdraws funds to pay taxes in the absence of a levy or if the
taxpayer withdraws funds in order to release a levy on other
interests.
Effective Date
The provision is effective for distributions after December
31, 1999.
Revenue Effect
The provision is estimated to reduce Federal fiscal year
budget receipts by $1 million in 2000, $3 million in 2001, $4
million in 2002, $4 million in 2003, $5 million in 2004, $5
million in 2005, $5 million in 2006, and $5 million in 2007.
h. Prohibition of sales of seized property at less than
minimum bid (sec. 3441 of the Act and sec. 6335 of
the Code)
Present and Prior Law
A minimum bid price must be established for seized property
offered for sale. To conserve the taxpayer's equity, the
minimum bid price should normally be computed at 80 percent or
more of the forced sale value of the property less encumbrances
having priority over the Federal tax lien. If the group manager
concurs, the minimum sales price may be set at less than 80
percent. The taxpayer is to receive notice of the minimum bid
price within 10 days of the sale. The taxpayer has the
opportunity to challenge the minimum bid price, which cannot be
more than the tax liability plus the expenses of sale. Prior
law did not contemplate a sale of the seized property at less
than the minimum bid price. Rather, if no person offered the
minimum bid price, the IRS could have bought the property at
the minimum bid price or the property could have been released
to the owner.
Reasons for Change
The Congress believed that strengthening provisions
regarding the minimum bid price, including preventing the IRS
from selling the taxpayer's property for less than the minimum
bid price, are appropriate to preserve taxpayers' rights.
Explanation of Provision
The Act prohibits the IRS from selling seized property for
less than the minimum bid price. The Act provides that the sale
of property for less than the minimum bid price would
constitute an unauthorized collection action, which would
permit an affected person to sue for civil damages.
Effective Date
This provision is effective with respect to sales occurring
after the date of enactment (after July 22, 1998).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
i. Accounting of sales of seized property (sec. 3442 of the
Act and sec. 6340 of the Code)
Present and Prior Law
The IRS is authorized to seize and sell a taxpayer's
property to satisfy an unpaid tax liability. The IRS is
required to give written notice to the taxpayer before seizure
of the property. The IRS must also give written notice to the
taxpayer at least 10 days before the sale of the seized
property.
The IRS is required to keep records of all sales of real
property. The records must set forth all proceeds and expenses
of the sale. The IRS is required to apply the proceeds first
against the expenses of the sale, then against a specific tax
liability on the seized property, if any, and finally against
any unpaid tax liability of the taxpayer. Any surplus proceeds
are credited to the taxpayer or persons legally entitled to the
proceeds.
Reasons for Change
The Congress believed that taxpayers are entitled to know
how proceeds from the sale of their property seized by the IRS
are applied to their tax liability.
Explanation of Provision
The Act requires the IRS to provide a written accounting of
all sales of seized property, whether real or personal, to the
taxpayer. The accounting must include a receipt for the amount
credited to the taxpayer's account.
Effective Date
The provision is effective for seizures occurring after the
date of enactment (after July 22, 1998).
Revenue Effect
The provision is estimated to have a negligible effect on
Federal fiscal year budget receipts.
j. Uniform asset disposal mechanism (sec. 3443 of the Act)
Present and Prior Law
The IRS must sell property seized by levy either by public
auction or by public sale under sealed bids. Under prior law,
these were often conducted by the revenue officer charged with
collecting the tax liability.
Reasons for Change
The Congress believed that it is important for fairness and
the appearance of propriety that revenue officers charged with
collecting unpaid tax liability are not personally involved
with the sale of seized property.
Explanation of Provision
The Act requires the IRS to implement a uniform asset
disposal mechanism for sales of seized property. The disposal
mechanism should be designed to remove any participation in the
sale of seized assets by revenue officers. The provision
authorizes the consideration of outsourcing of the disposal
mechanism.
Effective Date
The Act requires the uniform asset disposal system to be
implemented within two years from the date of enactment (by
July 22, 2000).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
k. Codification of IRS administrative procedures for
seizure of taxpayer's property (sec. 3444 of the
Act and sec. 6331 of the Code)
Present and Prior Law
The Internal Revenue Manual (``IRM'') provides general
guidelines for seizure actions.
Prior to the levy action, the revenue officer must
determine that there is sufficient equity in the property to be
seized to yield net proceeds from the sale to apply to unpaid
tax liabilities. If it is determined after seizure that the
taxpayer's equity is insufficient to yield net proceeds from
sale to apply to the unpaid tax, the revenue officer will
immediately release the seized property.
Reasons for Change
The Congress believed that the IRS procedures on
collections provide important protections to taxpayers.
Accordingly, the Congress believed that it is appropriate to
codify those procedures to ensure that they are uniformly
followed by the IRS.
Explanation of Provision
The Act codifies the IRS administrative procedures which
require the IRS to investigate the status of property to be
sold pursuant to section 6335 prior to levy.
Effective Date
The provision is effective on the date of enactment (July
22, 1998).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
l. Procedures for seizure of residences and businesses
(sec. 3445 of the Act and sec. 6334 of the Code)
Present and Prior Law
Subject to certain procedural rules and limitations, the
Secretary may seize the property of the taxpayer who neglects
or refuses to pay any tax within 10 days after notice and
demand. The IRS may not levy on the personal residence of the
taxpayer unless the District Director (or the assistant
District Director) personally approves in writing or in cases
of jeopardy. Under prior law, there were no special rules for
property that was used as a residence by parties other than the
taxpayer. IRS Policy Statement P-5-34 states that the facts of
a case and alternative collection methods must be thoroughly
considered before deciding to seize the assets of a going
business.
Reasons for Change
The Congress was concerned that seizure of the taxpayer's
principal residence is particularly disruptive for the taxpayer
as well as the taxpayer's family. The seizure of any residence
is disruptive to the occupants, and is not justified in the
case of a small deficiency. In the case of seizure of a
business, the seizure not only disrupts the taxpayer's life but
also may adversely impact the taxpayer's ability to enter into
an installment agreement or otherwise to continue to pay off
the tax liability. Accordingly, the Congress believed that the
taxpayer's principal residence or business should only be
seized to satisfy tax liability as a last resort, and that any
property used by any person as a residence should not be seized
for a small deficiency.
Explanation of Provision
The Act generally prohibits the IRS from seizing real
property that is used as a residence to satisfy an unpaid
liability of $5,000 or less, including penalties and interest.
This prohibition applies to any real property used as a
residence by the taxpayer or any nonrental real property of the
taxpayer used by any other individual as a residence.
The Act requires the IRS to exhaust all other payment
options before seizing the taxpayer's business assets or
principal residence. The definition of business assets applies
to tangible personal property or real property used in the
trade or business of an individual taxpayer (other than real
property that is rented). Future income that may be derived by
a taxpayer from the commercial sale of fish or wildlife under a
specified State permit must be considered in evaluating other
payment options before seizing the taxpayer's business assets.
The provision does not apply in cases of jeopardy.
A levy is permitted on a principal residence only if a
judge or magistrate of a United States district court approves
(in writing) of the levy.
Effective Date
The provision is effective on the date of enactment (July
22, 1998).
Revenue Effect
The provision is estimated to reduce the Federal fiscal
year budget receipts by less than $1 million in 1998 and by $3
million in each of the years 1999 through 2007.
4. Provisions relating to examination and collection activities
a. Procedures relating to extensions of statute of
limitations by agreement (sec. 3461 of the Act and
secs. 6501 and 6502 of the Code)
Present and Prior Law
The statute of limitations within which the IRS may assess
additional taxes is generally three years from the date a
return is filed. Prior to the expiration of the statute of
limitations, both the taxpayer and the IRS may agree in writing
to extend the statute. An extension may be for either a
specified period or an indefinite period. The statute of
limitations within which a tax may be collected after
assessment is 10 years after assessment. Under prior law, prior
to the expiration of the statute of limitations on collection,
both the taxpayer and the IRS could agree in writing to extend
the statute.
Reasons for Change
The Congress believed that taxpayers should be fully
informed of their rights with respect to the statute of
limitations on assessment. The Committee is concerned that in
some cases taxpayers have not been fully aware of their rights
to refuse to extend the statute of limitations, and have felt
that they had no choice but to agree to extend the statute of
limitations upon the request of the IRS.
Moreover, the Congress believed that the IRS should collect
all taxes within 10 years, and that such statute of limitations
should not generally be extended.
Explanation of Provision
The Act eliminates the provision of prior law that allows
the statute of limitations on collections to be extended by
agreement between the taxpayer and the IRS, except that
extensions of the statute of limitations on collection may be
made in connection with an installment agreement; the extension
is only for the period for which the waiver of the statute of
limitations entered in connection with the original written
terms of the installment agreement extends beyond the end of
the otherwise applicable 10-year period, plus 90 days.
The Act also requires that, on each occasion on which the
taxpayer is requested by the IRS to extend the statute of
limitations on assessment, the IRS must notify the taxpayer of
the taxpayer's right to refuse to extend the statute of
limitations or to limit the extension to particular issues or
to a particular period of time.
Effective Date
The provision applies to requests to extend the statute of
limitations made after December 31, 1999. If, in any request to
extend the period of limitations made on or before December 31,
1999, a taxpayer agreed to extend that period beyond the 10-
year statute of limitations on collection, that extension shall
expire on the latest of: the last day of such 10-year period,
December 31, 2002, or, in the case of an extension in
connection with an installment agreement, the 90th day after
the end of the period of such extension.
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts in 1998 and 1999, and reduce such
receipts by $9 million in 2000, $13 million in 2001, $16
million in 2002, $18 million in 2003, $19 million in each of
the years 2004 and 2005, $21 million in 2006, and $24 million
in 2007.
b. Offers-in-compromise (sec. 3462 of the Act and secs.
6331 and 7122 of the Code)
Present and Prior Law
The Code permits the IRS to compromise a taxpayer's tax
liability. An offer-in-compromise is an offer by the taxpayer
to settle unpaid tax accounts for less than the full amount of
the assessed balance due. An offer-in-compromise may be
submitted for all types of taxes, as well as interest and
penalties, arising under the Internal Revenue Code.
There are two bases on which an offer can be made: doubt as
to liability for the amount owed and doubt as to ability to pay
the amount owed.
A compromise agreement based on doubt as to ability to pay
requires the taxpayer to file returns and pay taxes for five
years from the date the IRS accepts the offer. Failure to do so
permits the IRS to begin immediate collection actions for the
original amount of the liability. The Internal Revenue Manual
provides guidelines for revenue officers to determine whether
an offer-in-compromise is adequate. An offer is adequate if it
reasonably reflects collection potential. Although the revenue
officer is instructed to consider the taxpayer's assets and
future and present income, the IRM advises that rejection of an
offer solely based on narrow asset and income evaluations
should be avoided.
Pursuant to the IRM, collection normally is withheld during
the period an offer-in-compromise is pending, unless it is
determined that the offer is a delaying tactic or collection is
in jeopardy.
Reasons for Change
The Congress believed that the ability to compromise tax
liability and to make payments of tax liability by installment
enhances taxpayer compliance. In addition, the Congress
believed that the IRS should be flexible in finding ways to
work with taxpayers who are sincerely trying to meet their
obligations and remain in the tax system. Accordingly, the
Congress believed that the IRS should make it easier for
taxpayers to enter into offer-in-compromise agreements, and
should do more to educate the taxpaying public about the
availability of such agreements.
Explanation of Provision
Rights of taxpayers entering into offers-in-compromise.--
The Act requires the IRS to develop and publish schedules of
national and local allowances that will provide taxpayers
entering into an offer-in-compromise with adequate means to
provide for basic living expenses. The IRS also is required to
consider the facts and circumstances of a particular taxpayer's
case in determining whether the national and local schedules
are adequate for that particular taxpayer. If the facts
indicate that use of scheduled allowances would be inadequate
under the circumstances, the taxpayer is not limited by the
national or local allowances.
The Act prohibits the IRS from rejecting an offer-in-
compromise from a low-income taxpayer solely on the basis of
the amount of the offer. The Act provides that, in the case of
an offer-in-compromise submitted solely on the basis of doubt
as to liability, the IRS may not reject the offer merely
because the IRS cannot locate the taxpayer's file. The Act
prohibits the IRS from requesting a financial statement if the
taxpayer makes an offer-in-compromise based solely on doubt as
to liability.
Publication of taxpayer's rights with respect to offers-in-
compromise.--The Act requires the IRS to publish guidance on
the rights and obligations of taxpayers and the IRS relating to
offers in compromise, including a compliant spouse's right to
apply to reinstate an agreement that would otherwise be revoked
due to the nonfiling or nonpayment of the other spouse,
providing all payments required under the compromise agreement
are current.
Suspend collection by levy while offer-in-compromise or
installment agreement is pending.--The Act prohibits the IRS
from collecting a tax liability by levy (1) during any period
that a taxpayer's offer-in-compromise for that liability is
being processed, (2) during the 30 days following rejection of
an offer, and (3) during any period in which an appeal of the
rejection of an offer is being considered. Collection by levy
is also prohibited while an installment agreement is pending,
under similar rules. Taxpayers whose offers are rejected and
who made good faith revisions of their offers and resubmitted
them within 30 days of the rejection or return would be
eligible for a continuous period of relief from collection by
levy. This prohibition on collection by levy does not apply if
the IRS determines that collection is in jeopardy or that the
offer was submitted solely to delay collection. The Act
provides that the statute of limitations on collection is
tolled for the period during which collection by levy is
barred.
Procedures for reviews of rejections of offers-in-
compromise and installment agreements.--The Act requires that
the IRS implement procedures to review all proposed IRS
rejections of taxpayer offers-in-compromise and requests for
installment agreements prior to the rejection being
communicated to the taxpayer. The Act requires the IRS to allow
the taxpayer to appeal any rejection of such offer or agreement
to the IRS Office of Appeals. The IRS must notify taxpayers of
their right to have an appeals officer review a rejected offer-
in-compromise on the application form for an offer-in-
compromise.
Guidelines to determine whether an offer-in-compromise
should be accepted.--The Act authorizes the Secretary to
prescribe guidelines for the IRS to determine whether an offer-
in-compromise is adequate and should be accepted to resolve a
dispute. Accordingly, it is expected that the present
regulations will be expanded so as to permit the IRS, in
certain circumstances, to consider additional factors (i.e.,
factors other than doubt as to liability or collectibility) in
determining whether to compromise the income tax liabilities of
individual taxpayers. For example, it is anticipated that the
IRS will take into account factors such as equity, hardship,
and public policy where a compromise of an individual
taxpayer's income tax liability would promote effective tax
administration. It is anticipated that, among other situations,
the IRS may utilize this new authority to resolve longstanding
cases by forgoing penalties and interest which have accumulated
as a result of delay in determining the taxpayer's liability.
Effective Date
The provision is generally effective for offers-in-
compromise and installment agreements submitted after the date
of enactment (after July 22, 1998). The provision suspending
levy is effective with respect to offers-in-compromise pending
on or made after December 31, 1999.
Revenue Effect
The provision is estimated to reduce the Federal fiscal
year budget receipts by $1 million in 1998, have no revenue
effect in 1999, and to increase such receipts by $9 million in
2000 and by $4 million in each of the years 2001 through 2007.
c. Notice of deficiency to specify deadlines for filing Tax
Court petition (sec. 3463 of the Act and sec. 6213
of the Code)
Prior Law
Taxpayers were required to file a petition with the Tax
Court within 90 days after the deficiency notice is mailed (150
days if the person is outside the United States) (sec. 6213).
If the petition was not filed within that time period, the Tax
Court did not have jurisdiction to consider the petition.
Reasons for Change
The Congress believed that taxpayers should receive
assistance in determining the time period within which they
must file a petition in the Tax Court and that taxpayers should
be able to rely on the computation of that period by the IRS.
Explanation of Provision
The Act requires the IRS to include on each deficiency
notice the date determined by the IRS as the last day on which
the taxpayer may file a petition with the Tax Court. The
provision provides that a petition filed with the Tax Court by
this date is treated as timely filed.
Effective Date
The provision is effective with respect to notices mailed
after December 31, 1998.
Revenue Effect
The provision is estimated to have a negligible effect on
Federal fiscal year budget receipts.
d. Refund or credit of overpayments before final
determination (sec. 3464 of the Act and sec. 6213
of the Code)
Present and Prior Law
Generally, the IRS may not take action to collect a
deficiency during the period a taxpayer may petition the Tax
Court, or if the taxpayer petitions the Tax Court, until the
decision of the Tax Court becomes final. Actions to collect a
deficiency attempted during this period may be enjoined, but
there was no authority under prior law for ordering the refund
of any amount collected by the IRS during the prohibited
period.
If a taxpayer contests a deficiency in the Tax Court, no
credit or refund of income tax for the contested taxable year
generally may be made, except in accordance with a decision of
the Tax Court that has become final. Where the Tax Court
determines that an overpayment has been made and a refund is
due the taxpayer, and a party appeals a portion of the decision
of the Tax Court, no provision existed under prior law for the
refund of any portion of any overpayment that is not contested
in the appeal.
Reasons for Change
The Congress believed that the Secretary should be allowed
to refund the uncontested portion of an overpayment of taxes,
without regard to whether other portions of the overpayment are
contested, as well as amounts that were collected during a
period in which collection is prohibited.
Explanation of Provision
The Act provides that a proper court (including the Tax
Court) may order a refund of any amount that was collected
within the period during which the Secretary is prohibited from
collecting the deficiency by levy or other proceeding.
The provision also allows the refund of that portion of any
overpayment determined by the Tax Court to the extent the
overpayment is not contested on appeal.
Effective Date
The provision is effective on the date of enactment (July
22, 1998).
Revenue Effect
The provision is estimated to have a negligible effect on
Federal fiscal year budget receipts.
e. IRS procedures relating to appeal of examinations and
collections (sec. 3465 of the Act and new sec. 7123
of the Code)
Present and Prior Law
IRS Appeals operates through regional Appeals offices which
are independent of the local District Director and Regional
Commissioner's offices. In general, IRS Appeals offices have
jurisdiction over both pre-assessment and post-assessment
cases. The taxpayer generally has an opportunity to seek
Appeals jurisdiction after failing to reach agreement with the
Examination function and before filing a petition in Tax Court,
after filing a petition in Tax Court (but before litigation),
after assessment of certain penalties, after a claim for refund
has been rejected by the District Director's office, and after
a proposed rejection of an offer-in-compromise in a collection
case.
In certain cases under Coordinated Examination Program
procedures, the taxpayer has an opportunity to seek early
Appeals jurisdiction over some issues while an examination is
still pending on other issues. The early referral procedures
also apply to employment tax issues on a limited basis.
A mediation or alternative dispute resolution (``ADR'')
process is also available in certain cases. ADR is used at the
end of the administrative process as a final attempt to resolve
a dispute before litigation. Under prior law, ADR was only
available for cases with more than $10 million in dispute. ADR
processes are also available in bankruptcy cases and cases
involving a competent authority determination.
In April 1996, the IRS implemented a Collections Appeals
Program within the Appeals function, which allows taxpayers to
appeal lien, levy, or seizure actions proposed by the IRS. In
January 1997, appeals for installment agreements proposed for
termination were added to the program.
Reasons for Change
The Congress believed that the IRS should be statutorily
bound to follow the procedures that the IRS had developed to
facilitate settlement in the IRS Office of Appeals. The
Congress also believed that mediation, binding arbitration,
early referral to Appeals, and other procedures would foster
more timely resolution of taxpayers' problems with the IRS.
In addition, the Congress believed that the ADR process is
valuable to the IRS and taxpayers and should be extended to all
taxpayers.
The Congress believed that all taxpayers should enjoy
convenient access to Appeals, regardless of their locality.
Explanation of Provision
The Act codifies existing IRS procedures with respect to
early referrals to Appeals and the Collections Appeals Process.
The Act also codifies the existing ADR procedures, modified by
eliminating the dollar threshold.
In addition, the IRS is required to establish a pilot
program of binding arbitration for disputes of all sizes. Under
the pilot program, binding arbitration must be agreed to by
both the taxpayer and the IRS.
The Act requires the IRS to make Appeals officers available
on a regular basis in each State, and consider
videoconferencing of Appeals conferences for taxpayers seeking
appeals in rural or remote areas.
Effective Date
The provision is effective on the date of enactment (July
22, 1998).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
f. Application of certain fair debt collection practices
(sec. 3466 of the Act and new sec. 6304 of the
Code)
Present and Prior Law
The Fair Debt Collection Practices Act provides a number of
rules relating to debt collection practices. Among these are
restrictions on communication with the consumer, such as a
general prohibition on telephone calls outside the hours of
8:00 a.m. to 9:00 p.m. local time, and prohibitions on
harassing or abusing the consumer. Under prior law, these
provisions generally did not apply to the Federal
Government.58
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\58\ Several of these provisions were applied to the IRS through
the annual appropriations process.
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Reasons for Change
The Congress believed that the IRS should be at least as
considerate to taxpayers as private creditors are required to
be with their customers. Accordingly, the Congress believed
that it is appropriate to require the IRS to comply with
applicable portions of the Fair Debt Collection Practices Act,
so that both taxpayers and the IRS are fully aware of these
requirements.
Explanation of Provision
The Act applies the restrictions relating to communication
with the taxpayer/debtor and the prohibitions on harassing or
abusing the debtor to the IRS. The restrictions relating to
communication with the taxpayer/debtor are not intended to
hinder the ability of the IRS to respond to taxpayer inquiries
(such as answering telephone calls from taxpayers).
Effective Date
The provision is effective on the date of enactment (July
22, 1998).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
g. Guaranteed availability of installment agreements (sec.
3467 of the Act and sec. 6159 of the Code)
Present and Prior Law
The Code authorizes the IRS to enter into written
agreements with any taxpayer under which the taxpayer is
allowed to pay taxes owed, as well as interest and penalties,
in installment payments if the IRS determines that doing so
will facilitate collection of the amounts owed. An installment
agreement does not reduce the amount of taxes, interest, or
penalties owed, but does provide for a longer period during
which payments may be made during which other IRS enforcement
actions (such as levies or seizures) are held in abeyance. The
IRS in most instances readily approves these requests if the
amounts involved are not large (in general, below $10,000) and
if the taxpayer has filed tax returns on time in the past. Some
taxpayers are required to submit background information to the
IRS substantiating their application.
Reasons for Change
The Congress believed that the ability to make payments of
tax liability by installment enhances taxpayer compliance. In
addition, the Congress believed that the IRS should be flexible
in finding ways to work with taxpayers who are sincerely trying
to meet their obligations. Accordingly, the Congress believed
that the IRS should make it easier for taxpayers to enter into
installment agreements.
Explanation of Provision
In the case of individual income taxes, the provision
requires the Secretary to enter an installment agreement, at
the taxpayer's option, if: (1) the liability is $10,000, or
less (excluding penalties and interest); (2) within the
previous 5 years, the taxpayer has not failed to file or to
pay, nor entered an installment agreement under this provision;
(3) if requested by the Secretary, the taxpayer submits
financial statements, and the Secretary determines that the
taxpayer is unable to pay the tax due in full; (4) the
installment agreement provides for full payment of the
liability within 3 years; and (5) the taxpayer agrees to
continue to comply with the tax laws and the terms of the
agreement for the period (up to 3 years) that the agreement is
in place.
Effective Date
The provision is effective on the date of enactment (July
22, 1998).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
h. Prohibition on requests to taxpayers to waive rights to
bring actions (sec. 3468 of the Act)
Prior Law
There was no restriction on the circumstances under which
the Government could request a taxpayer to waive the taxpayer's
right to sue the United States or one of its employees for any
action taken in connection with the tax laws.
Reasons for Change
The Congress believed it would be beneficial to taxpayers
to circumscribe these requests.
Explanation of Provision
The Act provides that the Government may not request a
taxpayer to waive the taxpayer's right to sue the United States
or one of its employees for any action taken in connection with
the tax laws, unless (1) the taxpayer knowingly and voluntarily
waives that right, or (2) the request is made to the taxpayer's
attorney or other representative. This provision is not
intended to apply to the waiver of claims for attorneys' fees
or costs or to the waiver of one or more claims brought in the
same administrative or judicial proceeding with other claims
that are being settled.
Effective Date
The provision is effective on the date of enactment.
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
F. Disclosures to Taxpayers
1. Explanation of joint and several liability (sec. 3501 of the Act)
Present and Prior Law
In general, spouses who file a joint tax return are each
fully responsible for the accuracy of the tax return and for
the full liability. Spouses who wish to avoid such joint and
several liability may file as married persons filing
separately. Special rules apply in the case of innocent
spouses.
Reasons for Change
The Congress believed that married taxpayers need to
clearly understand the legal implications of signing a joint
return and that it is appropriate for the IRS to provide the
information necessary for that understanding.
Explanation of Provision
The Act requires that the IRS establish procedures clearly
to alert married taxpayers of their joint and several liability
on all appropriate tax publications and instructions.
Notification must also be given of an individual's right to
relief under new section 6015 of the Code in Publication Number
1 and in any collection-related notices.
Effective Date
The provision requires that the procedures be established
as soon as practicable, but no later than 180 days after the
date of enactment (by January 18, 1999).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
2. Explanation of taxpayers' rights in interviews with the IRS (sec.
3502 the Act )
Present and Prior Law
Prior to or at initial in-person audit interviews, the IRS
must explain to taxpayers the audit process and taxpayers'
rights under that process and the collection process and
taxpayers' rights under that process. If a taxpayer clearly
states during an interview with the IRS that the taxpayer
wishes to consult with the taxpayer's representative, the
interview must be suspended to afford the taxpayer a reasonable
opportunity to consult with the representative.
Reasons for Change
The Congress believed that taxpayers should be more fully
informed of their rights to representation in dealings with the
IRS, and that those rights should be respected.
Explanation of Provision
The Act requires that the IRS rewrite Publication 1 (``Your
Rights as a Taxpayer'') to inform taxpayers more clearly of
their rights (1) to be represented by a representative and (2)
if the taxpayer is so represented, that the interview may not
proceed without the presence of the representative unless the
taxpayer consents.
Effective Date
The addition to Publication 1 must be made not later than
180 days after the date of enactment (by January 18, 1999).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts in 1998, and to reduce such
receipts by $13 million in 1999 and by less than $1 million in
each of the years 2000 through 2007.
3. Disclosure of criteria for examination selection (sec. 3503 of the
Act)
Present and Prior Law
The IRS examines Federal tax returns to determine the
correct liability of taxpayers. The IRS selects returns to be
audited in a number of ways, such as through a computerized
classification system (the discriminant function (``DIF'')
system).
Reasons for Change
The Congress believed it is important that taxpayers
understand the reasons they may be selected for examination.
Explanation of Provision
The provision requires that IRS add to Publication 1
(``Your Rights as a Taxpayer'') a statement which sets forth in
simple and nontechnical terms the criteria and procedures for
selecting taxpayers for examination. The statement must not
include any information the disclosure of which would be
detrimental to law enforcement. The statement must specify the
general procedures used by the IRS, including whether taxpayers
are selected for examination on the basis of information in the
media or from informants.
Effective Date
The addition to Publication 1 must be made not later than
180 days after the date of enactment (by January 18, 1999).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
4. Explanation of the appeals and collection process (sec. 3504 of the
Act)
Prior Law
There was no statutory requirement that a description of
the entire process from examination through collections be
given to taxpayers with the first letter of proposed deficiency
that allows the taxpayer an opportunity for administrative
review in the IRS Office of Appeals.
Reasons for Change
The Congress believed it is important that taxpayers
understand they have a right to have any assessment reviewed by
the IRS Office of Appeals, as well as be informed of the steps
they must take to obtain that review.
Explanation of Provision
The Act requires that, no later than 180 days after the
date of enactment, a description of the entire process from
examination through collections, including the assistance
available to taxpayers from the Taxpayer Advocate at various
points in the process, be provided with the first letter of
proposed deficiency that allows the taxpayer an opportunity for
administrative review in the IRS Office of Appeals.
Effective Date
The provision requires that the explanation be included as
soon as practicable, but no later than 180 days after the date
of enactment (by January 18, 1999).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
5. Explanation of reason for refund disallowance (sec. 3505 of the Act
and 6402 of the Code)
Present and Prior Law
The Examination Division of the IRS examines claims for
refund submitted by taxpayers. The Internal Revenue Manual
requires examination or other audit action on refund claims
within 30 days after receipt of the claims. The refund claim is
preliminarily examined to determine if it should be disallowed
because it (1) was untimely filed, (2) was based solely on
alleged unconstitutionality of the Revenue Acts, (3) was
already waived by the taxpayer as consideration for a
settlement, (4) covers a taxable year and issues which were the
subject of a final closing agreement or an offer in compromise,
or (5) relates to a return closed on the basis of a final order
of the Tax Court. In those cases, the taxpayer will receive a
form from the IRS stating that the claim for refund cannot be
considered. Under prior law, there was no statutory requirement
that this form include the reason for the disallowance (or
partial disallowance) of the claim. Other cases are examined as
quickly as possible and the disposition of the case, including
the reasons for the disallowance or partial disallowance of the
refund claim, must be stated in the portion of the revenue
agent's report that is sent to the taxpayer.
Reasons for Change
The Congress believed that taxpayers are entitled to an
explanation of the reason for the disallowance or partial
disallowance of a refund claim so that the taxpayer may
appropriately respond to the IRS.
Explanation of Provision
The Act requires the IRS to notify the taxpayer of the
specific reasons for the disallowance (or partial disallowance)
of the refund claim.
Effective Date
The provision is effective 180 days after the date of
enactment (January 18, 1999).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
6. Statements to taxpayers with installment agreements (sec. 3506 of
the Act)
Present and Prior Law
A taxpayer entering into an installment agreement to pay
tax liabilities due to the IRS must complete a Form 433-D which
sets forth the installment amounts to be paid monthly and the
total amount of tax due. Under prior law, the IRS did not
provide the taxpayer with an annual statement reflecting the
amounts paid and the remaining amount due.
Reasons for Change
The Congress believed that taxpayers who enter into an
installment agreement should be kept informed of amounts
applied towards the outstanding tax liability and amounts
remaining due.
Explanation of Provision
The Act requires the IRS to send every taxpayer in an
installment agreement an annual statement of the initial
balance owed, the payments made during the year, and the
remaining balance.
Effective Date
The provision is effective beginning on July 1, 2000.
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
7. Notification of change in tax matters partner (sec. 3507 of the Act
and sec. 6231 of the Code)
Present and Prior Law
In general, the tax treatment of items of partnership
income, loss, deductions and credits are determined at the
partnership level in a unified partnership proceeding rather
than in separate proceedings with each partner. In providing
notice to taxpayers with respect to partnership proceedings,
the IRS relies on information furnished by a party designated
as the tax matters partner (``TMP'') of the partnership. The
TMP is required to keep each partner informed of all
administrative and judicial proceedings with respect to the
partnership. Under certain circumstances, the IRS may require
the resignation of the incumbent TMP and designate another
partner as the TMP of a partnership. Under prior law, there was
no requirement that the IRS notify all partners of any
resignation of the TMP that is required by the IRS, and notify
the partners of any successor TMP.
Reasons for Change
The Congress was concerned that, in cases where the IRS
designates the TMP, that the other partners may be unaware of
such designation.
Explanation of Provision
The Act requires the IRS to notify all partners of any
resignation of the TMP that is required by the IRS, and to
notify the partners of any successor TMP.
Effective Date
The provision is effective with respect to selections of
TMPs made by the Secretary after the date of enactment (after
July 22, 1998).
Revenue Effect
The provision is estimated to reduce the Federal fiscal
year budget receipts by less than $500,000 in each of the years
1998 through 2007.
8. Conditions under which taxpayers' returns may be disclosed (sec.
3508 of the Act)
Prior Law
There was no statutory requirement that the general tax
forms instruction booklets include a description of conditions
under which tax return information may be disclosed outside the
IRS (including to States).
Reasons for Change
The Congress believed it would be valuable to require
statutorily that this description be provided to taxpayers.
Explanation of Provision
The Act requires that general tax forms instruction
booklets include a description of conditions under which tax
return information may be disclosed outside the IRS (including
to States). The statement currently contained in the general
tax forms instruction booklets was considered to be sufficient
to fulfill the requirements of this provision.
Effective Date
The provision is effective on the date of enactment (July
22, 1998).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
9. Disclosure of Chief Counsel advice (sec. 3509 of the Act and sec.
6110 of the Code)
Present and Prior Law
Section 6110 of the Code provides for the public inspection
of written determinations, i.e., rulings, determination
letters, and technical advice memoranda. The IRS issues annual
revenue procedures setting forth the procedures for requests
for these various forms of written determinations and
participation in the formulation of such
determinations.59 Under section 6110 and the
regulations promulgated thereunder, the taxpayer who is the
subject of a written determination can participate in the
redaction of the documents to ensure that the taxpayer's
privacy is protected and that sensitive private information is
removed before the determination is publicly disclosed. In the
event there is disagreement as to the information to be
deleted, the section provides for litigation in the courts to
resolve such disagreements.
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\59\ See, e.g., Rev. Procs. 98-1 and 98-2.
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One of the Office of Chief Counsel's major roles is to
advise IRS personnel on legal matters at all stages of case
development. The Office of Chief Counsel thus issues various
forms of written legal advice to field agents of the IRS and to
its own field attorneys that do not fall within the current
definition of ``written determination'' under section 6110.
Traditionally, field Counsel offices provided most of the
assistance to the IRS, usually at IRS field offices, but since
1988, the National Office of Chief Counsel has been rendering
more assistance to field Counsel and IRS offices. National
Office of Chief Counsel assistance in taxpayer-specific cases
is generally called ``field service advice.'' The taxpayers who
are the subject of field service advice generally do not
participate in the process, leading some tax commentators to
express concern that the field service advice process was
displacing the technical advice process.
There had been controversy under prior law as to whether
the Office of Chief Counsel must release forms of advice other
than written determinations pursuant to the Freedom of
Information Act (``FOIA''). In Tax Analysts v.
IRS,60 the D.C. Circuit held that the legal analysis
portions of field service advice created in the context of
specific taxpayers' cases are not ``return information,'' as
defined by section 6103(b)(2), and must be released under FOIA.
The court also found that portions of field service advice
issued in docketed cases may be withheld as privileged attorney
work product. However, under prior law, some issues remained
outstanding. Although the extent to which such materials must
be released was still in dispute, it was clear that they were
not expressly covered by section 6110. As a consequence, there
existed no mechanism by which taxpayers could participate in
the administrative process of redacting their private
information from such documents or to resolve disagreements in
court.
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\60\ 117 F.3d 607 (D.C. Cir. 1997).
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Explanation of Provision
In general
The Congress believed that written documents issued by the
National Office of Chief Counsel to its field components and
field agents of the IRS should be subject to public release in
a manner similar to technical advice memoranda or other written
determinations. In this way, all taxpayers can be assured of
access to the ``considered view of the Chief Counsel's national
office on significant tax issues.'' 61 Creating a
structured mechanism by which these types of legal memoranda
are open to public inspection will increase the public's
confidence that the tax system operates fairly and in an even-
handed manner with respect to all taxpayers.
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\61\ 117 F.3d at 617.
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As part of making these documents public, however, the
privacy of the taxpayer who is the subject of the advice must
be protected. Any procedure for making such advice public must
therefore include adequate safeguards for taxpayers whose
privacy interests are implicated. There should be a mechanism
for taxpayer participation in the deletion of any private
information. There should also be a process whereby appropriate
governmental privileges may be asserted by the IRS and
contested by the public or the taxpayer.
The provision amends section 6110 of the Code, establishing
a structured process by which the IRS will make certain work
products, designated as ``Chief Counsel Advice,'' open to
public inspection on an ongoing basis. It is designed to
protect taxpayer privacy while allowing the public inspection
of these documents in a manner generally consistent with the
mechanism of section 6110 for the public inspection of written
determinations. In general, the provision operates by
establishing that Chief Counsel Advice are written
determinations subject to the public inspection provisions of
section 6110.
Definition of Chief Counsel Advice
For purposes of this provision, Chief Counsel Advice is
written advice or instruction prepared and issued by any
national office component of the Office of Chief Counsel to
field employees of the Service or the Office of Chief Counsel
that convey certain legal interpretations or positions of the
IRS or the Office of Chief Counsel concerning existing or
former revenue provisions. For these purposes, the term
``revenue provisions'' includes, without limitation: the
Internal Revenue Code itself; regulations, revenue rulings,
revenue procedures, or other administrative interpretations or
guidance, whether published or unpublished (including, for
example, other Chief Counsel Advice); tax treaties; and court
decisions and opinions. Chief Counsel Advice also includes
legal interpretations of State law, foreign law, or other
federal law relating to the assessment or collection of
liabilities under revenue provisions.
Chief Counsel Advice may interpret or set forth policies
concerning the internal revenue laws either in general or as
applied to specific taxpayers or groups of specific taxpayers.
The definition is not, however, meant to include advice written
with respect to nontax matters, including but not limited to
employment law, conflicts of interest, or procurement matters.
The new statutory category of written determination
encompasses certain existing categories of advisory memoranda
or instructions written by the National Office of Chief Counsel
to field personnel of either the IRS or the Office of Chief
Counsel. Specifically, Chief Counsel Advice includes field
service advice, technical assistance to the field, service
center advice, litigation guideline memoranda, tax litigation
bulletins, general litigation bulletins, and criminal tax
bulletins. The definition applies not only to the case-specific
field service advice issued from the offices of the Associate
Chief Counsel (International), Associate Chief Counsel
(Employee Benefits and Exempt Organizations), and the Assistant
Chief Counsel (Field Service), which were at issue in the Tax
Analysts decision, but any case-specific or noncase-specific
written advice or instructions issued by the National Office of
Chief Counsel to field personnel of either the IRS or the
Office of Chief Counsel.
Moreover, Chief Counsel Advice includes any documents
created subsequent to the enactment of this provision that
satisfy the general statutory definition, regardless of their
name or designation. Chief Counsel Advice also includes any
such advice or instruction even if the organizations currently
issuing them are reorganized or reconstituted as part of any
IRS restructuring.
The new subsection covers written advice ``issued'' to
field personnel of either the IRS or the Office of Chief
Counsel in its final form. With respect to Chief Counsel
Advice, issuance occurs when the Chief Counsel Advice has been
approved within the national office component of the office of
Chief Counsel in which the Chief Counsel Advice was proposed,
signed by the person authorized to do so (usually the Assistant
Chief Counsel or a Branch Chief), and sent to the field. Chief
Counsel Advice does not include written recordations of
informal telephonic advice by the National Office of Chief
Counsel to field personnel of either the IRS or the Office of
Chief Counsel. Drafts of Chief Counsel Advice sent to the field
for review, criticism, or comment prior to approval within the
National Office also need not be made public. However, Chief
Counsel Advice may be treated as issued even if supplemental
advice is contemplated. The Secretary is expected to issue
regulations to clarify the distinction between issuance as it
applies to Chief Counsel Advice and as it applies to other
documents disclosed under section 6110.
The provision also allows the Secretary to promulgate
regulations providing that additional types of advice or
instruction issued by the Office of Chief Counsel (or
components of the Office of Chief Counsel, such as regional or
local Counsel offices) will be treated as ChiefCounsel Advice
and subject to public inspection pursuant to this provision. No
inference is to be drawn from the failure of the Secretary to treat
additional types of advice or instruction as Chief Counsel Advice in
determining whether such advice or instruction is to be disclosed under
FOIA.
As with other written determinations, Chief Counsel Advice
may not be used or cited as precedent, except as the Secretary
otherwise establishes by regulation.
Redaction process
Under this provision, Chief Counsel Advice will be redacted
prior to their public release in a manner similar to that
provided for private letter rulings, technical advice
memoranda, and determination letters. Specific taxpayers or
groups of specific taxpayers who are the subject of Chief
Counsel Advice will be afforded the opportunity to participate
in the process of redacting the Chief Counsel Advice prior to
their public release.
In addition, the new provision affords additional
protection for certain governmental interests implicated by
Chief Counsel Advice. Information may be redacted from Chief
Counsel Advice under subsections (b) and (c) of the FOIA, 5
U.S.C. sec. 552 (except, with respect to 5 U.S.C. sec.
552(b)(3), only material required to be withheld under a
Federal statute, other than title 26, may be redacted), as
those provisions have been, or shall be, interpreted by the
courts of the United States. For those deletions that are
discretionary, such as those under FOIA section 552(b)(5), it
is expected that the Office of Chief Counsel and the IRS will
apply any discretionary standards applicable to federal
agencies in general or the Chief Counsel or the IRS in
particular.62
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\62\ The current standards for the exercise of such discretion are
set forth in the Internal Revenue Manual (part 1230, section 293(2))
and the Attorney General's October 4, 1993, Memorandum for Heads of
Departments and Agencies.
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Under new section 6110(i), as with prior and present
section 6110(c)(1), identifying details consisting of names,
addresses, and any other information that the Secretary
determines could identify any person, including the taxpayer's
representative, will be redacted, after the participation of
the taxpayer in the redaction process. In some situations,
information included in a Chief Counsel Advice (other than a
name or address) may not identify a person as of the time the
advice is made open to public inspection, but that information,
together with information that is expected to be disclosed by
another source at a later date, will serve to identify a
person. Consequently, in deciding whether a Chief Counsel
Advice contains identifying information, the Secretary is to
take into account information that is available to the public
at the time that the advice is made open to public inspection
as well as information that is expected to be publicly
available from other sources within a reasonable time after the
Chief Counsel Advice is made open to public inspection.
Generally, it is intended that the standard the IRS is to use
in determining whether information will identify a person is a
standard of a reasonable person generally knowledgeable with
respect to the appropriate community. The standard is not,
however, to be one of a person with inside knowledge of the
particular taxpayer.
As under prior section 6110, taxpayers who are the subject
of Chief Counsel Advice, as well as members of the public, will
be afforded the opportunity to challenge judicially the
redaction determinations by the Secretary.
Relation to prior law
The public inspection of Chief Counsel Advice is to be
accomplished only pursuant to the rules and procedures set
forth in section 6110, as amended, and not under those of any
other provision of law, such as FOIA. This provision is not
intended to affect the disclosure under FOIA, or under any
other provision of law, of any documents not included within
the definition of Chief Counsel Advice in new sections
6110(i)(1) and (i)(2). The only FOIA exemption affected by this
provision is 5 U.S.C. section 552(b)(3), to the extent that it
incorporates section 6103 of the Code. The timetable and the
manner in which existing Chief Counsel Advice may ultimately be
open to public inspection shall be governed by this provision,
except that the provision is inapplicable to Chief Counsel
Advice that any federal district court has, prior to the date
of enactment, ordered be disclosed. Disclosure of any documents
that are subject to such a court order is to proceed pursuant
to the order rather than this provision. Finally, no inference
is intended with respect to the disclosure, under FOIA or any
other provision of law, of any other documents produced by the
Office of Chief Counsel that are not included in the definition
of Chief Counsel Advice.
Effective Date
The provision applies to Chief Counsel Advice issued more
than 90 days after enactment (after October 20, 1998). In
addition, the provision contains certain rules governing
disclosure of any document fitting the definition of Chief
Counsel Advice issued after 1985 and before 90 days after the
date of enactment by the offices of the Associate Chief Counsel
for domestic, employee benefits and exempt organizations, and
international. It sets forth a schedule for the IRS to release
such Chief Counsel Advice over a six year period after the date
of enactment. Finally, additional advice or instruction that
the Secretary determines by regulations to treat as Chief
Counsel Advice shall be made public pursuant to this provision
in accordance with the effective dates set forth in such
regulations.
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
G. Low-Income Taxpayer Clinics (sec. 3601 of the Act and new sec. 7526
of the Code)
Prior Law
There were no provisions in prior law providing for grants
from the Treasury Department to clinics that assist low-income
taxpayers.
Reasons for Change
The Congress believed that the provision of tax services by
accredited nominal-fee clinics to low-income individuals and
those for whom English is a second language will improve
compliance with the Federal tax laws and should be encouraged.
Explanation of Provision
The Act provides that the Secretary is authorized to
provide up to $6,000,000 per year in matching grants to certain
low-income taxpayer clinics. No clinic can receive more than
$100,000 per year. Eligible clinics are those that charge no
more than a nominal fee to either represent low-income
taxpayers in controversies with the IRS or provide tax
information to individuals for whom English is a second
language.
A ``clinic'' includes (1) a clinical program at an
accredited law, business, or accounting school, in which
students represent low-income taxpayers, or (2) an organization
exempt from tax under Code section 501(c) which either
represents low-income taxpayers or provides referral to
qualified representatives.
Effective Date
The provision is effective on the date of enactment (July
22, 1998).
Revenue Effect
The provision is estimated to have no effect on Federal
year budget receipts.
H. Other Provisions
1. Cataloging complaints (sec. 3701 of the Act)
Present and Prior Law
The IRS is required to make an annual report to the
Congress, beginning in 1997, on all categories of instances
involving allegations of misconduct by IRS employees, arising
either from internally identified cases or from taxpayer or
third-party initiated complaints. The report must identify the
nature of the misconduct or complaint, the number of instances
received by category, and the disposition of the complaints.
Reasons for Change
The Congress believed that all allegations of misconduct by
IRS employees must be carefully investigated. The Congress also
believed that the annual report to Congress will help develop a
public perception that the IRS takes such allegations of
misconduct seriously. The Congress was concerned that, in the
absence of records detailing taxpayer complaints of misconduct
on an individual employee basis, the IRS will not be able to
adequately investigate such allegations or properly prepare the
required report.
Explanation of Provision
The Act requires that, in collecting data for this report,
records of taxpayer complaints of misconduct by IRS employees
must be maintained on an individual employee basis. These
individual records are not to be listed in the report.
Effective Date
The provision is effective beginning on January 1, 2000.
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
2. Archive of records of Internal Revenue Service (sec. 3702 of the Act
and sec. 6103 of the Code)
Present and Prior Law
The IRS is obligated to transfer agency records to the
National Archives and Records Administration (``NARA'') for
retention or disposal. The IRS is also obligated to protect
confidential taxpayer records from disclosure. These two
obligations have created conflict between NARA and the IRS.
Under prior law, the IRS determined whether records contain
taxpayer information. Once the IRS had made that determination,
NARA was not permitted to examine those records. NARA had
expressed concern that the IRS may be using the disclosure
prohibition to improperly conceal agency records with
historical significance.
The Internal Revenue Code prohibits disclosure of tax
returns and return information, except to the extent
specifically authorized by the Internal Revenue Code (sec.
6103). Unauthorized disclosure is a felony punishable by a fine
not exceeding $5,000 or imprisonment of not more than five
years, or both (sec. 7213). An action for civil damages also
may be brought for unauthorized disclosure (sec. 7431). Under
prior law, section 6103 did not authorize the disclosure of
confidential return information to NARA.
Reasons for Change
The Congress believed that it is appropriate to permit
disclosure to NARA for purposes of scheduling records for
destruction or retention, while at the same time preserving the
confidentiality of taxpayer information in those documents.
Explanation of Provision
The Act provides an exception to the disclosure rules to
require IRS to disclose IRS records to officers or employees of
NARA, upon written request from the U.S. Archivist, for
purposes of the appraisal of such records for destruction or
retention. The prohibitions on and penalties for disclosure of
tax information generally apply to NARA.
Effective Date
The provision is effective for requests made by the
Archivist after the date of enactment (after July 22, 1998).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
3. Payment of taxes (sec. 3703 of the Act)
Present and Prior Law
The Code provides that it is lawful for the Secretary to
accept checks or money orders as payment for taxes, to the
extent and under the conditions provided in regulations
prescribed by the Secretary (sec. 6311). Under prior law, those
regulations stated that checks or money orders should be made
payable to the Internal Revenue Service.
Reasons for Change
The Congress believed it more appropriate that checks be
made payable to the United States Treasury.
Explanation of Provision
The Act requires the Secretary or his delegate to establish
such rules, regulations, and procedures as are necessary to
allow payment of taxes by check or money order to be made
payable to the United States Treasury.
Effective Date
The provision is effective on the date of enactment (July
22, 1998).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
4. Clarification of authority of Secretary relating to the making of
elections (sec. 3704 of the Act and sec. 7805 of the Code)
Prior Law
Except as otherwise provided, elections provided by the
Code were to be made in such manner as the Secretary shall by
regulations or forms prescribe.
Reasons for Change
The Congress wished to eliminate any confusion over the
type of guidance in which the Secretary may prescribe the
manner of making any election.
Explanation of Provision
The Act clarifies that, except as otherwise provided, the
Secretary may prescribe the manner of making of any election by
any reasonable means.
Effective Date
The provision is effective on the date of enactment (July
22, 1998).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
5. IRS employee contacts (sec. 3705 of the Act)
Present and Prior Law
The IRS sends many different notices to taxpayers. Under
prior law, some (but not all) of these notices contained a name
and telephone number of an IRS employee whom the taxpayer may
call if the taxpayer has any questions.
Reasons for Change
The Congress believed that it is important that taxpayers
receive prompt answers to their questions about their tax
liability. Many taxpayers report frustration because they
cannot determine the appropriate IRS employee to contact for
information.
Explanation of Provision
The Act requires that any manually generated correspondence
received by a taxpayer from the IRS must include in a prominent
manner the name, telephone number, and unique identifying
number of an IRS employee the taxpayer may contact with respect
to the correspondence. Any other correspondence or notice
received by a taxpayer from the IRS must include in a prominent
manner a telephone number that the taxpayer may contact. An IRS
employee must give a taxpayer during a telephone or personal
contact the employee's name and unique identifying number. In
addition, to the extent practicable and advantageous to the
taxpayer, the IRS should assign one employee to handle a matter
with respect to a taxpayer until that matter is resolved.
The Act also requires that, in appropriate circumstances,
IRS telephone helplines provide that taxpayer questions on
those IRS telephone helplines are answered in Spanish.
Further, the Act requires that IRS telephone helplines
provide, in appropriate circumstances, an option for any
taxpayer to talk to an IRS employee during normal business
hours. That person can then direct the taxpayer to other IRS
personnel who can provide assistance to the taxpayer.
Effective Date
The notice provisions are effective 60 days after the date
of enactment (after September 20, 1998).
The requirements pertaining to a unique identifying number
are effective six months after the date of enactment (after
January 18, 1998). The telephone helpline provisions are
effective on January 1, 2000.
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
6. Use of pseudonyms by IRS employees (sec. 3706 of the Senate
amendment)
Prior Law
The Federal Service Impasses Panel had ruled that if an
employee believes that use of the employee's last name only
will identify the employee due to the unique nature of the
employee's last name, and/or nature of the office locale, then
the employee may ``register'' a pseudonym with the employee's
supervisor.
Reasons for Change
The Congress was concerned that IRS employees may use
pseudonyms in inappropriate circumstances.
Explanation of Provision
The Act provides that an IRS employee may use a pseudonym
only if (1) adequate justification, such as protecting personal
safety, for using the pseudonym was provided by the employee as
part of the employee's request, and (2) management has approved
the request to use the pseudonym prior to its use.
Effective Date
The provision is effective with respect to requests made
after the date of enactment (July 22, 1998).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
7. Illegal tax protester designations (sec. 3707 of the Act)
Prior Law
The IRS designated individuals who met certain criteria as
``illegal tax protesters'' in the IRS master file.
Reasons for Change
The Congress was concerned that taxpayers may be
stigmatized by a designation as an ``illegal tax protester.''
Explanation of Provision
The Act prohibits the use by the IRS of the ``illegal tax
protester'' designation. Any extant designation in the
individual master file (the main computer file for individual
income taxes) must be removed and any other extant designation
(such as on paper records that have been archived) must be
disregarded. The IRS is, however, permitted to designate
appropriate taxpayers as nonfilers. The IRS must remove the
nonfiler designation once the taxpayer has filed valid tax
returns for two consecutive years and paid all taxes shown on
those returns.
While this provision prohibits the use by the IRS of the
``illegal tax protester'' designation, it does allow the IRS to
continue its current practice of tracking ``potentially
dangerous taxpayers.'' The Congress recognized the potential
hazards connected with the assessment and collection of taxes,
and this provision is not intended to jeopardize the safety of
IRS employees. Accordingly, if the IRS needs to implement
additional procedures, such as the maintenance of appropriate
records, in connection with this provision so as to ensure IRS
employees' safety, it has the authority to do so.
Effective Date
The provision is effective on the date of enactment (July
22, 1998), except that the removal of any designation from the
master file is not required to begin before January 1, 1999.
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
8. Provision of confidential information to Congress by whistleblowers
(sec. 3708 of the Act and sec. 6103(f) of the Code)
Present and Prior Law
Tax return information generally may not be disclosed,
except as specifically provided by statute. The Secretary of
the Treasury may furnish tax return information to the Senate
Committee on Finance, the House Committee on Ways and Means,
and the Joint Committee on Taxation upon a written request from
the chairmen of such committees. If the information can be
associated with, or otherwise identify, directly or indirectly,
a particular taxpayer, the information may be furnished to the
committee only while sitting in closed executive session unless
such taxpayer otherwise consents in writing to such disclosure.
Reasons for Change
The Congress believed that it is appropriate to have the
opportunity to receive tax return information directly from
whistleblowers.
Explanation of Provision
The Act provides that any person (i.e., a whistleblower)
who otherwise has or had access to any return or return
information under section 6103 may disclose such return or
return information to the House Ways and Means Committee, the
Senate Finance Committee, or the Joint Committee on Taxation or
to any individual authorized by one of those committees to
receive or inspect any return or return information if such
person (the whistleblower) believes such return or return
information may relate to evidence of possible misconduct,
maladministration, or taxpayer abuse. Disclosure to one of
these committees could be made either to the Chairman or to the
full committee (sitting in closed executive session), but would
not be permitted to be made to an individual Member of Congress
(unless explicitly authorized as an agent). No inference is
intended that such whistleblower disclosures were not permitted
under prior law.
Effective Date
The provision is effective on the date of enactment (July
22, 1998).
Revenue Effect
The provision is estimated to have no revenue effect on
Federal fiscal year budget receipts.
9. Listing of local IRS telephone numbers and addresses (sec. 3709 of
the Act)
Prior Law
The IRS was not statutorily required to publish the local
telephone number or address of its local offices.
Reasons for Change
The Congress believed it could be helpful to taxpayers if
the addresses and local phone numbers of local IRS offices were
published in local telephone directories.
Explanation of Provision
The Act requires the IRS, as soon as is practicable, to
publish addresses and local telephone numbers of local IRS
offices in a local telephone directory for that area. It is
intended that (1) the IRS not be required to publish in more
than one directory in any local area and (2) publication in
alternate language directories is permissible.
Effective Date
The provision is effective on the date of enactment (July
22, 1998).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
10. Identification of return preparers (sec. 3710 of the Act and sec.
6109 of the Code)
Prior Law
Any return or claim for refund prepared by an income tax
return preparer was required to bear the social security number
of the return preparer, if such preparer is an individual.
Reasons for Change
The Congress was concerned that inappropriate use might be
made of a return preparer's social security number.
Explanation of Provision
The Act authorizes the IRS to approve alternatives to
social security numbers to identify tax return preparers.
Effective Date
The provision is effective on the date of enactment (July
22, 1998).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
11. Offset of past-due, legally enforceable State income tax
obligations against overpayments (sec. 3711 of the Act and sec.
6402 of the Code)
Present and Prior Law
Overpayments of Federal tax may be used to pay past-due
child support and debts owed to Federal agencies, without the
consent of the taxpayer. Prior law did not permit the offset of
past-due, legally enforceable State income tax obligations
against overpayments.
Reasons for Change
The Congress believed it is appropriate to expand the
offset program to encompass past-due, legally enforceable State
income tax obligations.
Explanation of Provision
The Act permits States to participate in the IRS refund
offset program for specified past-due, legally enforceable
State income tax debts, providing the person making the Federal
tax overpayment has shown on the Federal return for the taxable
year of the overpayment an address that is within the State
seeking the tax offset. The offset applies after the offsets
provided in present and prior law for internal revenue tax
liabilities, past-due support, and past-due, legally
enforceable obligations owed a Federal agency. The offset
occurs before the designation of any refund toward future
Federal tax liability. The provision permits the Secretary to
prescribe additional conditions (pursuant to new section
6402(e)(4)(D)) to ensure that the determination is valid that
the State or local income tax liability is past-due and legally
enforceable. This is intended to include consideration of
questions that may arise as a result of the taxpayer being a
Native American.
Effective Date
The provision is effective with respect to Federal income
tax refunds payable after December 31, 1999.
Revenue Effect
The provision is estimated to have no revenue effect on
Federal fiscal year budget receipts in 1998 and 1999, and to
increase such receipts by $2 million in 2000, $3 million in
each of the years 2001 through 2004, and $4 million in each of
the years 2005 through 2007.
12. Reporting requirements relating to education tax credits (sec. 3712
of the Act and sec. 6050S of the Code)
Present and Prior Law
Individual taxpayers are allowed to claim a nonrefundable
HOPE credit against Federal income taxes up to $1,500 per
eligible student per year of qualified tuition and related
expenses for the first two years of the student's post-
secondary education in a degree program. A nonrefundable
Lifetime Learning credit against Federal income taxes equal to
20 percent of qualified expenses (up to a maximum credit of
$1,000 per taxpayer return for 1998 through 2002 and $2,000 per
taxpayer return after 2002) also is available with respect to
students for whom a Hope credit is not claimed. Qualified
tuition and related expenses do not include expenses covered by
educational assistance that is not required to be included in
the gross income of either the student or the taxpayer claiming
the credit (e.g., scholarship or fellowship grants).
Under present and prior law, Code section 6050S requires
information reporting by eligible educational institutions
which receive payments for qualified tuition and related
expenses, and certain other persons who make reimbursement or
refunds of qualified tuition and related expenses, in order to
assist students, their parents, and the IRS in calculating the
amount of the HOPE and Lifetime Learning credits potentially
available. Under prior law, section 6050S(b) provided that the
annual information report to the Secretary must be in the form
prescribed by the Secretary and must contain the following: (1)
the name, address, and taxpayer identification number (``TIN'')
of the individual with respect to whom the qualified tuition
and related expenses were received or the reimbursement or
refund was paid; (2) the name, address, and TIN of any
individual certified by the student as the taxpayer who will
claim that student as a dependent for purposes of the deduction
under section 151 for any taxable years ending with or within
the year for which the information return is filed; (3) the
aggregate amount of payments of qualified tuition and related
expenses received by the eligible educational institution and
the aggregate amount of reimbursements or refunds (or similar
amounts) paid during the calendar year with respect to the
student; and (4) such other information as the Secretary may
prescribe. Under section 6050S(d), an eligible educational
institution also must provide to each person identified on the
information return submitted to the Secretary (e.g., the
student and his or her parent(s)) a written statement showing
the name, address, and phone number of the reporting person's
information contact, and the amounts set forth in (3) above.
On December 22, 1997, the Department of Treasury issued
Notice 97-73 setting forth the information reporting
requirements under section 6050S for 1998. Notice 97-73
describes who must report information and the nature of the
information that must be reported for 1998. In general, the
required reporting under Notice 97-73 is more limited than that
which ultimately will be required under section 6050S upon the
issuance of final regulations. Accordingly, for 1998,
educational institutions must report the following information:
(1) the name, address, and TIN of the educational institution;
(2) the name, address, and TIN of the student with respect to
whom payments of qualified tuition and related expenses were
received during 1998; (3) an indication as to whether the
student was enrolled for at least half the full-time academic
workload during any academic period commencing in 1998; and (4)
an indication as to whether the student was enrolled
exclusively in a program or programs leading to a graduate-
level degree, graduate-level certificate, or other recognized
graduate-level educational credential. Educational institutions
must provide the information listed above to students, as well
as the phone number of the information contact at the school.
Information returns must be provided to students by February 1,
1999 and filed with the IRS by March 1, 1999. Notice 97-73
states that until final regulations are adopted, no penalties
will be imposed under sections 6721 and 6722 for failure to
file correct information returns or to furnish correct
statements to the individuals with respect to whom information
reporting is required under section 6050S. In addition, Notice
97-73 states that, even after final regulations are adopted, no
penalties will be imposed under sections 6721 and 6722 for 1998
if the institution made a good faith effort to file information
returns and furnish statements in accordance with Notice 97-73.
On August 20, 1998, the Department of Treasury issued Notice
98-46 (I.R.B. 98-36, Sept. 8, 1998), which extended the
application of Notice 97-73 to information reporting required
under section 6050S for 1999.
Explanation of Provision
The Act modifies the information reporting requirements
under section 6050S. In addition to reporting the aggregate
amount of payments for qualified tuition and related
expensesreceived by the educational institution with respect to a
student, the institution must report any grant amount received by the
student and processed through the institution during the applicable
calendar year. The institution is not required to report on grant aid
that is paid directly to the student and is not processed through the
institution. Furthermore, an educational institution is required to
report only the aggregate amount of reimbursements or refunds paid to a
student by the institution (and not by any other party). The Act also
clarifies that the definition of ``qualified tuition and related
expenses'' shall be as set forth in section 25A, determined without
regard to section 25A(g)(2) (which requires adjustments for certain
scholarships).
Under the Act, eligible educational institutions that
receive payments of qualified tuition and related expenses (or
reimburse or refund such payments) are required separately to
report the following items with respect to each student under
section 6050S(b)(2)(C): (1) the aggregate amount of qualified
tuition and related expenses (not including certain expenses
relating to sports, games, or hobbies, or nonacademic fees);
(2) any grant amount (whether or not excludable from income)
received by such individual for payment of costs of attendance
and processed through the institution during the applicable
calendar year; and (3) the aggregate amount of reimbursements
or refunds (or similar amounts) paid to such individual during
the calendar year by the institution.
The Congress understood that the Department of Treasury is
in the process of issuing regulatory guidance with respect to
the education credit reporting requirements. In developing such
guidance, the Congress urged Treasury to minimize the reporting
burdens imposed on educational institutions in connection with
the HOPE Scholarship and Lifetime Learning credits. For
example, section 472(1) of the Higher Education Act contains a
definition of tuition and fees that is used in calculating a
student's total ``cost of attendance.'' The Congress urged
Treasury to conform the definition of ``qualified tuition and
related expenses'' for purposes of the HOPE Scholarship and
Lifetime Learning credits to the definition set forth in
section 472(1) to the extent possible, so as to minimize the
additional reporting burden on educational institutions.
In general, the Congress expressed its expectation that the
regulatory guidance regarding the education credit reporting
requirements will have an effective date that will provide
educational institutions with sufficient time, after any notice
and comment period, to implement additional required reporting.
In addition, although the provision generally applies to
taxable years beginning after December 31, 1998, the Congress
intended that no reporting beyond the reporting currently
required in Notice 97-73 would be required of educational
institutions until such final regulatory guidance is available.
In furtherance of the objective of minimizing the reporting
burden on educational institutions, the Congress noted that,
pursuant to the regulatory authority granted in section 25A(i),
Treasury may exempt educational institutions from the reporting
requirements with respect to certain categories of students,
such as non-degree students enrolled in a course for which
academic credit is not granted by the institution, provided
that such exemptions do not undermine the overall compliance
objectives of the provision. The Congress further expressed its
expectation that Treasury will provide clarification regarding
the reasonable cause exception contained in section 6724(a) as
it may apply to the education information reporting
requirements. Finally, the Congress urged that any update and
modernization of IRS computer systems incorporate the capacity
to match a dependent's TIN with the return filed by the person
claiming the individual as a dependent.
Effective Date
The provision applies to returns required to be filed with
respect to taxable years beginning after December 31, 1998.
Revenue Effect
The provision is estimated to have a negligible effect on
Federal fiscal year budget receipts.
I. Studies
1. Administration of penalties and interest (sec. 3801 of the Act)
Prior Law
The last major comprehensive revision of the overall
penalty structure in the Internal Revenue Code was the
``Improved Penalty Administration and Compliance Tax Act,''
enacted as part of the Omnibus Budget Reconciliation Act of
1989.
Reasons for Change
The Congress believed that it is appropriate to undertake a
study of penalty and interest administration, which will
provide the Congress with legislative and administrative
recommendations for improvement of the current penalty and
interest structure.
Explanation of Provision
The Act requires the Joint Committee on Taxation and the
Treasury to each conduct a separate study reviewing the
interest and penalty provisions of the Code, and making any
legislative and administrative recommendations they deem
appropriate to simplify penalty administration and reduce
taxpayer burden. It is expected that the Joint Committee on
Taxation and the Treasury Department studies will examine
whether the current penalty and interest provisions encourage
voluntary compliance. The studies should also consider whether
the provisions operate fairly, whether they are effective
deterrents to undesired behavior, and whether they are designed
in a manner that promotes efficient and effective
administration of the provisions by the IRS. It is expected
that the Joint Committee on Taxation and the Treasury
Department will consider comments from taxpayers and
practitioners on issues relevant to the studies.
Effective Date
The reports must be provided not later than one year after
the date of enactment (by July 22, 1999).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
2. Confidentiality of tax return information (sec. 3802 of the Act)
Present and Prior Law
The Internal Revenue Code prohibits disclosure of tax
returns and return information, except to the extent
specifically authorized by the Internal Revenue Code.
Unauthorized disclosure is a felony punishable by a fine not
exceeding $5,000 or imprisonment of not more than five years,
or both. An action for civil damages also may be brought for
unauthorized disclosure. No tax information may be furnished by
the IRS to another agency unless the other agency establishes
procedures satisfactory to the IRS for safeguarding the tax
information it receives.
Reasons for Change
The Congress believed that a study of the confidentiality
provisions would be useful in assisting the Congress in
determining whether improvements can be made to these
provisions.
Explanation of Provision
The Act requires the Joint Committee on Taxation and
Treasury to each conduct a separate study on provisions
regarding taxpayer confidentiality. The studies are to examine:
(1) present-law protections of taxpayer privacy;
(2) the need, if any, for third parties to use tax
return information;
(3) whether greater levels of voluntary compliance
can be achieved by allowing the public to know who is
legally required to file tax returns but does not do
so;
(4) the interrelationship of the taxpayer
confidentiality provisions in the Internal Revenue Code
with those elsewhere in the United States Code (such as
the Freedom of Information Act);
(5) the impact on taxpayer privacy of sharing tax
information for the purposes of enforcing State and
local tax laws (other than income tax laws); and
(6) an examination of whether the public interest
would be served by greater disclosure of information
relating to tax-exempt organizations (described in
section 501 of the Code).
Effective Date
The findings of the studies, along with any
recommendations, are required to be reported to the Congress no
later than 18 months after the date of enactment (by January
22, 2000).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
3. Noncompliance with revenue laws by taxpayers (sec. 3803 of the Act)
Prior Law
No provision of prior law required that a study of
noncompliance with the internal revenue laws be conducted.
Reasons for Change
The Congress believed it would be valuable to receive a
study of noncompliance with the internal revenue laws.
Explanation of Provision
The Act provides that the Secretary of the Treasury and the
Commissioner of the Internal Revenue Service, in consultation
with the Joint Committee on Taxation, must jointly conduct a
study of noncompliance with the internal revenue laws by
taxpayers (including willful noncompliance and noncompliance
due to tax law complexity or other factors).
Effective Date
The study must be reported to the Congress within one year
of the date of enactment (by July 22, 1999).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
4. Payments for detection of underpayments and fraud (sec. 3804 of the
Act)
Present and Prior Law
Rewards may be paid for information relating to civil
violations, as well as criminal violations. The rewards are
paid out of the proceeds of amounts (other than interest)
collected by reason of the information provided. An annual
report on the rewards program is required.
Reasons for Change
The Congress believed that it would be valuable to receive
a study of this provision.
Explanation of Provision
The Act requires that a study and report be completed by
the Treasury and submitted to the Congress (within one year of
the date of enactment) of the reward program (including
results) and any legislative or administrative recommendations
regarding the program and its application.
Effective Date
The study must be reported to the Congress within one year
of the date of enactment (by July 22, 1999).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
TITLE IV. CONGRESSIONAL ACCOUNTABILITY FOR THE IRS
A. Review of Requests for GAO Investigations of the IRS (sec. 4001 of
the Act and sec. 8021(e) of the Code)
Present and Prior Law
Under prior law, there was no specific statutory
requirement that requests for investigations by the General
Accounting Office (``GAO'') relating to the IRS be reviewed by
the Joint Committee on Taxation (the ``Joint Committee'').
However, some of the studies that GAO conducts relating to
taxation and oversight of the IRS require access under section
6103 of the Code to confidential tax returns and return
information. Under section 6103, the GAO may inform the Joint
Committee of its initiation of an audit of the IRS and obtain
access to confidential taxpayer information unless, within 30
days, \3/5\ths of the Members of the Joint Committee disapprove
of the audit. This provision has not been utilized; the GAO
generally seeks advance access to confidential taxpayer return
information from the Joint Committee.
Reasons for Change
The Restructuring Commission recommended changes to the
approval process for GAO reports based on its findings that the
GAO conducts myriad audits of the IRS, many of which relate to
lesser matters and which are not integrated into a
constructive, focused package. The Congress believed that GAO
audits and reports can be helpful as an oversight tool, but
that they should be coordinated so as to ensure appropriate
allocation of resources, both of the IRS and the GAO.
Explanation of Provision
Under the provision, the Joint Committee on Taxation
reviews all requests (other than requests by the chair or
ranking member of a Committee or Subcommittee of the Congress)
for investigations of the IRS by the GAO and approves such
requests when appropriate. In reviewing such requests, the
Joint Committee is to eliminate overlapping investigations,
ensure that the GAO has the capacity to handle the
investigation, and ensure that investigations focus on areas of
primary importance to tax administration. The Congress intends
that the provision exclude requests made by the chairman or
ranking member of a committee or subcommittee, investigations
required by statute, and work initiated by GAO under its basic
statutory authorities.
The provision does not change the rules under section 6103.
Effective Date
The provision is effective with respect to requests for GAO
investigations made after the date of enactment (after July 22,
1998).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
B. Joint Congressional Reviews and Coordinated Oversight Reports (secs.
4001 and 4002 of the Act and secs. 8021(f) and 8022 of the Code)
Present and Prior Law
Under the Congressional committee structure, a number of
committees have jurisdiction with respect to IRS oversight. The
committees most responsible for IRS oversight are the House
Committees on Ways and Means, Appropriations, Government Reform
and Oversight, the corresponding Senate Committees on Finance,
Appropriations, and Government Affairs, and the Joint Committee
on Taxation. While these Committees have a shared interest in
IRS matters, they typically act independently, and have
separate hearings and make separate investigations into IRS
matters. Each committee also has jurisdiction over certain
issues. For example, the House Ways and Means Committee and the
Senate Finance Committee have exclusive jurisdiction over
changes to the tax laws. Similarly, the House and Senate
Appropriations Committees have exclusive jurisdiction over IRS
annual appropriations. The Joint Committee on Taxation does not
have legislative jurisdiction, but has significant
responsibilities with respect to tax matters and IRS oversight.
Reasons for Change
The Restructuring Commission found that the Congressional
committees responsible for IRS oversight ``focus on different
issues that change from year to year. While these issues are
important, there is a lack of coordinated focus on high level
and strategic matters. Because the IRS tries to satisfy
requests from Congress, this nonintegrated approach to
oversight further blurs the ability to set strategic direction
and focus on priorities.''
The Congress believed that Congressional oversight of the
IRS should be more coordinated, and should include long-term
objectives.
Explanation of Provision
Under the provision, there will be one annual joint review
of: (1) the progress of the IRS in meeting its objectives under
the strategic and business plans; (2) the progress of the IRS
in improving taxpayer service and compliance; (3) the progress
of the IRS on technology modernization; and (4) the annual
filing season. The review is conducted by two majority and one
minority members of each of the Senate Committees on Finance,
Appropriations, and Government Affairs and the House Committees
on Ways and Means, Appropriations, and Government Reform and
Oversight. The joint review will be held at the call of the
Chairman of the Joint Committee on Taxation, and is to take
place before June 1 of each calendar year. The provision does
not modify the existing jurisdiction of the Committees involved
in the joint review.
The provision provides that the Joint Committee on Taxation
is to make a report once in each Congress to the Committee on
Finance and the Committee on Ways and Means on the overall
state of the Federal tax system, together with recommendations
with respect to possible simplification proposals and other
matters relating to the administration of the Federal tax
system as it may deem advisable. This report shall be prepared
only if amounts necessary to carry out this requirement are
specifically appropriated to the Joint Committee on Taxation.
The Joint Committee on Taxation also is to report annually to
the Senate Committees on Finance, Appropriations, and
Government Affairs and the House Committees on Ways and Means,
Appropriations, and Government Reform and Oversight with
respect to the matters that are the subject of the joint
reviews by members of such Committees.
Effective Date
The provision generally is effective on the date of
enactment (July 22, 1998), except that the requirement for an
annual joint review, and report by the Joint Committee on
Taxation, applies only for calendar years 1999-2003.
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
C. Funding for Century Date Change (sec. 4011 of the Act)
Present Law
No specific provision.
Reasons for Change
Operations of the IRS computer systems are critical to the
viability of the Federal tax system. The Congress believed that
adequate funding of efforts to resolve this problem is
essential.
Explanation of Provision
The provision provides that it is the sense of the Congress
that the IRS should place resolving the century date change
computing problems as a high priority, and that the IRS efforts
to resolve the century date change computing problems should be
fully funded to provide for certain resolution of such
problems.
Effective Date
The provision is effective on the date of enactment (July
22, 1998).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
D. Tax Law Complexity Analysis (secs. 4021-4022 of the Act)
Present Law
Present law does not require a formal complexity analysis
with respect to changes to the tax laws.
Reasons for Change
The National Commission on Restructuring the IRS found a
clear connection between the complexity of the Internal Revenue
Code and the difficulty of tax law administration and taxpayer
frustration. The Committee shares the concern that complexity
is a serious problem with the Federal tax system. Complexity
and frequent changes in the tax laws create burdens for both
the IRS and taxpayers. Failure to address complexity may
ultimately reduce voluntary compliance.
The Congress was aware that it may not be possible or
desirable to eliminate all complexity in the tax system. There
are many objectives of a tax system and particular tax
provisions, and simplicity is only one. In some cases other
policies, such as fairness, may outweigh concerns about
complexity. Nevertheless, the Congress believed complexity of
the tax system should be reduced whenever possible.
Accordingly, the Congress believed it appropriate to introduce
new procedural rules that will focus attention on complexity.
The Congress also believed that the tax-writing committees
should receive periodic input from the IRS regarding areas of
the law that cause problems for taxpayers. This input will be
valuable in developing future legislation.
Explanation of Provision
Role of the IRS
The provision provides that it is the sense of the Congress
that the IRS should provide the Congress with an independent
view of tax administration and that the tax-writing committees
should hear from front-line technical experts at the IRS during
the legislative process with respect to the administrability of
pending amendments to the Internal Revenue Code.
The IRS Commissioner is to report to the House Ways and
Means Committee and the Senate Finance Committee annually not
later than March 1 of each year, regarding sources of
complexity in the administration of the Federal tax laws.
Factors the IRS may take into account include: (1) frequently
asked questions by taxpayers; (2) common errors made by
taxpayers in filling out returns; (3) areas of the law that
frequently result in disagreements between taxpayers and the
IRS; (4) major areas in which there is no or incomplete
published guidance or in which the law is uncertain; (5) areas
in which revenue agents make frequent errors in interpreting or
applying the law; (6) impact of recent legislation on
complexity; (7) information regarding forms, including a
listing of IRS forms, the time it takes for taxpayers to
complete and review forms, the number of taxpayers who use each
form, and how the time required changed as a result of recently
enacted legislation; and (8) recommendations for reducing
complexity in the administration of the Federal tax system.
Complexity analysis with respect to current legislation
The provision requires the Joint Committee on Taxation (in
consultation with the IRS and Treasury) to provide an analysis
of complexity or administrability concerns raised by tax
provisions of widespread applicability to individuals or small
businesses. The analysis is to be included in any Committee
Report of the House Ways and Means Committee or Senate Finance
Committee or Conference Report containing tax provisions, or
provided to the Members of the relevant Committee or Committees
as soon as practicable after the report is filed. The analysis
is to include: (1) an estimate of the number and type of
taxpayers affected; and (2) if applicable, the income level of
affected individual taxpayers. In addition, such analysis
should include, if determinable, the following: (1) the extent
to which existing tax forms would require revision and whether
a new form or forms would be required; (2) whether and to what
extent taxpayers would be required to keep additional records;
(3) the estimated cost to taxpayers to comply with the
provision; (4) the extent to which enactment of the provision
would require the IRS to develop or modify regulatory guidance;
(5) whether and to what extent the provision can be expected to
lead to disputes between taxpayers and the IRS; and (6) how the
IRS can be expected to respond to the provision (including the
impact on internal training, whether the Internal Revenue
Manual would require revision, whether the change would require
reprogramming of computers, and the extent to which the IRS
would be required to divert or redirect resources in response
to the provision).
The provision provides that a point of order arises in the
House of Representatives with respect to the floor
consideration of a bill or conference report if the required
complexity analysis has not been completed. The point of order
may be waived by a majority vote. The point of order is subject
to the Constitutional right of each House of the Congress to
establish its own rules and procedures; thus, such point of
order may be changed at any time pursuant to the procedures of
the House of Representatives. The Congress intended that the
complexity analysis be prepared by the staff of the Joint
Committee on Taxation, and that it shall, to the extent
feasible, be included in committee or conference committee
reports.
Effective Date
The provisions are effective for calendar years after 1998.
Revenue Effect
The provisions are estimated to have no effect on Federal
fiscal year budget receipts.
TITLE V. ADDITIONAL PROVISIONS
A. Elimination of 18-Month Holding Period for Capital Gains (sec. 5001
of the Act and sec. 1(h) of the Code)
Prior Law
The Taxpayer Relief Act of 1997 Act (``the 1997 Act'')
provided lower capital gains rates for individuals. Generally,
the 1997 Act reduced the maximum rate on the adjusted net
capital gain of an individual from 28 percent to 20 percent and
provided a 10-percent rate for the adjusted net capital gain
otherwise taxed at a 15-percent rate. The ``adjusted net
capital gain'' is the net capital gain determined without
regard to certain gain for which the 1997 Act provided a higher
maximum rate of tax. The 1997 Act retained the prior-law 28-
percent maximum rate for net long-term capital gain
attributable to the sale or exchange of collectibles, certain
small business stock to the extent the gain is included in
income, and property held more than one year but not more than
18 months. In addition, the 1997 Act provided a maximum rate of
25 percent for the long-term capital gain attributable to
depreciation from real estate held more than 18 months.
Beginning in 2001, lower rates of 8 and 18 percent will apply
to the gain from certain property held more than five years.
Explanation of Provision
Under the Act, capital gain from the sale of property held
more than one year (rather than more than 18 months) will be
eligible for the 10-, 20-, and 25-percent capital gain rates
provided by the 1997 Act.
Effective Date
The provision applies to capital gains from the sale of
property held more than one year which are properly taken into
account on or after January 1, 1998. This generally has the
effect of applying the lower capital gain rates to property
sold or exchanged (or installment payments received) after
1997.
Generally, in the case of a pass-thru entity, such as a
partnership or S corporation, capital gains properly taken into
account by the entity on or after January 1, 1998, will qualify
for the lower capital gain rates. In the case of a RIC or REIT,
capital gain dividends made on or after January 1, 1998, will
qualify for the lower capital gain rates, except for capital
gains properly taken into account by the RIC or REIT before
January 1, 1998, by reason of holding an interest in certain
other pass-thru entities.63 The lower capital gain
rates will apply to capital gain distributions made by
charitable remainder trusts on or after January 1,
1998.64
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\63\ The application of this provision to shareholders of RICs and
REITs reflects the technical correction enacted by section 4002(i)(2)
of the Tax and Trade Relief Extension Act of 1998, which is described
in Part Three of this publication.
\64\ The application of this provision to beneficiaries of
charitable remainder trusts reflects the technical correction enacted
by section 4002(i)(3) of the Tax and Trade Relief Extension Act of
1998, which is described in Part Three of this publication.
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Revenue Effect
The provision is estimated to increase Federal fiscal year
budget receipts by $35 million in 1998 and $611 million in 1999
and to reduce Federal fiscal year budget receipts by $312
million in 2000, $335 million in 2001, $335 million in 2002,
$337 million in 2003, $341 million in 2004, $347 million in
2005, $354 million in 2006 and $362 million in 2007.
B. Deductibility of Meals Provided for the Convenience of the Employer
(sec. 5002 of the Act and sec. 119 of the Code)
Present and Prior Law
In general, subject to several exceptions, only 50 percent
of business meals and entertainment expenses are allowed as a
deduction (sec. 274(n)). Under one exception, meals that are
excludable from employees' incomes as a de minimis fringe
benefit (sec. 132) are fully deductible by the employer.
In addition, under prior law, the courts that considered
the issue held that if substantially all of the meals are
provided for the convenience of the employer pursuant to
section 119, the cost of such meals is fully deductible because
the employer is treated as operating a de minimis eating
facility within the meaning of section 132(e)(2) (Boyd Gaming
Corp. v. Commissioner 65 and Gold Coast Hotel &
Casino v. I.R.S.66).
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\65\ 106 T.C. No. 19 (May 23, 1996).
\66\ U.S. D. C. Nev. CV-5-94-1146-HDM(LRL) (September 26, 1996).
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Reasons for Change
The Congress believed it was appropriate to modify the
applicability of these rules.
Explanation of Provision
The Act provides that all meals furnished to employees at a
place of business for the convenience of the employer are
treated as provided for the convenience of the employer under
section 119 if more than one-half of employees to whom such
meals are furnished on the premises are furnished such meals
for the convenience of the employer under section 119. If these
conditions are satisfied, the value of all such meals is
excludable from the employee's income and fully deductible to
the employer. No inference is intended as to whether such meals
are fully deductible under prior law.
Effective Date
The provision is effective for taxable years beginning
before, on, or after the date of enactment (July 22, 1998).
Revenue Effect
The provision is estimated to reduce Federal fiscal year
budget receipts by $20 million in 1999, $33 million in 2000,
$34 million in 2001, $35 million in 2002, $36 million in 2003,
$38 million in 2004, $39 million in 2005, $40 million in 2006,
and $41 million in 2007.
TITLE VI. TAX TECHNICAL CORRECTIONS
TECHNICAL CORRECTIONS TO THE TAXPAYER RELIEF ACT OF 1997
A. Amendments to Title I of the 1997 Act Relating to the Child Credit
1. Stacking rules for the child credit under the limitations based on
tax liability (sec. 6003(a) of the 1998 IRS Restructuring Act,
sec. 101(a) of the 1997 Act, and sec. 24 of the Code)
Present and Prior Law
Present law provides a $500 ($400 for taxable year 1998)
tax credit for each qualifying child under the age of 17. A
qualifying child is defined as an individual for whom the
taxpayer can claim a dependency exemption and who is a son or
daughter of the taxpayer (or a descendent of either), a stepson
or stepdaughter of the taxpayer or an eligible foster child of
the taxpayer. For taxpayers with modified adjusted gross income
in excess of certain thresholds, the allowable child credit is
phased out. The length of the phase-out range is affected by
the number of the taxpayer's qualifying children.
Generally, the maximum amount of a taxpayer's child credit
for each taxable year is limited to the excess of the
taxpayer's regular tax liability over the taxpayer's tentative
minimum tax liability (determined without regard to the
alternative minimum foreign tax credit). In the case of a
taxpayer with three or more qualifying children, the maximum
amount of the taxpayer's child credit for each taxable year is
limited to the greater of: (1) the amount computed under the
rule described above, or (2) an amount equal to the excess of
the sum of the taxpayer's regular income tax liability and the
employee share of FICA taxes (and one-half of the taxpayer's
SECA tax liability, if applicable) reduced by the earned income
credit. In the case of a taxpayer with three or more qualifying
children, the excess of the amount allowed in (2) over the
amount computed in (1) is a refundable credit.
Nonrefundable credits may not be used to reduce tax
liability below a taxpayer's tentative minimum tax. Certain
credits not used as result of this rule may be carried over to
other taxable years, while others may not. Special stacking
rules apply in determining which nonrefundable credits are used
in the current year. Generally, the stacking rules require that
nonrefundable personal credits be considered first,
67 followed by other credits, business credits, and
the investment tax credit. Under prior law, refundable credits,
which are not limited by the minimum tax, were not stacked
until after the nonrefundable credits.
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\67\ It is understood that there is also a stacking rule under
which the income tax liability limitation applies between the
nonrefundable personal credits, including the nonrefundable portion of
the child credit. Generally, the nonrefundable portion of the child
credit and the other nonrefundable personal credits which do not
provide a carryforward are grouped together and stacked first followed
by the nonrefundable personal credits which provide a carryforward for
purposes of applying the income tax liability limitation. Therefore, if
the sum of the taxpayer's nonrefundable credits exceeds the difference
between the taxpayer's regular income tax liability and the taxpayer's
tentative minimum tax (determined without regard to the alternative
minimum foreign tax credit) then the nonrefundable personal credits
which do not provide a carryforward would be applied to reduce the
income tax liability for that year first and any excess credits which
allow a carryforward would be available to reduce the taxpayer's income
tax liability in future years.
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Explanation of Provision
The provision clarifies the application of the income tax
liability limitation to the refundable portion of the child
credit by treating the refundable portion of the child credit
in the same way as the other refundable credits. Specifically,
after all the other credits are applied according to the
stacking rules of the income tax limitation then the refundable
credits are applied first to reduce the taxpayer's tax
liability for the year and then to provide a credit in excess
of income tax liability for the year.
Effective Date
The provision is effective for taxable years beginning
after December 31, 1997.
2. Treatment of a portion of the child credit as a supplemental child
credit (sec. 6003(b) of the 1998 IRS Restructuring Act, sec.
101(b) of the 1997 Act, and sec. 32(n) of the Code)
Present and Prior Law
A portion of the child credit may be treated as a
supplemental child credit. The supplemental child credit is
treated as provided under the earned income credit and the
child credit amount is reduced by the amount of the
supplemental child credit.
Explanation of Provision
The provision clarifies that the treatment of a portion of
the child credit as a supplemental child credit under the
earned income credit (sec. 32) and the offsetting reduction of
the child credit (sec. 24) does not affect the total tax
credits allowed to the taxpayer or any other tax credit
available to the taxpayer. Rather, it simply reduces the
otherwise allowable nonrefundable child credit dollar-for-
dollar by the amount treated as a supplemental child credit.
The provision also clarifies that the amount of the
supplemental child credit under section 32(n) is the lesser of
(1) the amount by which the taxpayer's total nonrefundable
personal credits (as limited by the tax liability limitation of
section 26(a)) are increased by reason of the child credit, or
(2) the ``negative'' tax liability of the taxpayer, defined as
the excess of taxpayer's total tax credits,including the earned
income credit over the sum of the taxpayer's regular income taxes and
social security taxes. For purposes of this calculation, subsection
32(n) is not taken into account. The provision also clarifies that the
earned income credit rules (e.g., the phaseout of the earned income
credit) generally do not apply to the supplemental child credit.
Effective Date
The provision is effective for taxable years beginning
after December 31, 1997.
B. Amendments to Title II of the 1997 Act Relating to Education
Incentives
1. Clarifications to HOPE and Lifetime Learning tax credits (sec.
6004(a) of the 1998 IRS Restructuring Act, sec. 201 of the 1997
Act, and secs. 25A and 6050S of the Code)
Present and Prior Law
Individual taxpayers are allowed to claim a nonrefundable
HOPE credit against Federal income taxes up to $1,500 per
student for qualified tuition and fees paid during the year on
behalf of a student (i.e., the taxpayer, the taxpayer's spouse,
or a dependent of the taxpayer) who is enrolled in a post-
secondary degree or certificate program at an eligible post-
secondary institution on at least a half-time basis. The HOPE
credit is available only for the first two years of a student's
post-secondary education. The credit rate is 100 percent of the
first $1,000 of qualified tuition and fees and 50 percent on
the next $1,000 of qualified tuition and fees. The HOPE credit
amount that a taxpayer may otherwise claim is phased out for
taxpayers with modified adjusted gross income (AGI) between
$40,000 and $50,000 ($80,000 and $100,000 for joint returns).
For taxable years beginning after 2001, the $1,500 maximum HOPE
credit amount and the AGI phase-out range will be indexed for
inflation. The HOPE credit is available for expenses paid after
December 31, 1997, for education furnished in academic periods
beginning after such date.
If a student is not eligible for the HOPE credit (or in
lieu of claiming a HOPE credit with respect to a student),
individual taxpayers are allowed to claim a nonrefundable
Lifetime Learning credit against Federal income taxes equal to
20 percent of qualified tuition and fees paid during the
taxable year on behalf of the taxpayer, the taxpayer's spouse,
or a dependent. In contrast to the HOPE credit, the student
need not be enrolled on at least a half-time basis in order to
be eligible for the Lifetime Learning credit, which is
available for an unlimited number of years of post-secondary
training. For expenses paid before January 1, 2003, up to
$5,000 of qualified tuition and fees per taxpayer return will
be eligible for the Lifetime Learning credit (i.e., the maximum
credit per taxpayer return will be $1,000). For expenses paid
after December 31, 2002, up to $10,000 of qualified tuition and
fees per taxpayer return will be eligible for the Lifetime
Learning credit (i.e., the maximum credit per taxpayer return
will be $2,000). The Lifetime Learning credit amount that a
taxpayer may otherwise claim is phased out over the same
modified AGI phase-out range as applies for purposes of the
HOPE credit. The Lifetime Learning credit is available for
expenses paid after June 30, 1998, for education furnished in
academic periods beginning after such date.
Under prior law, Section 6050S provided that certain
educational institutions and other taxpayers engaged in a trade
or business must file information returns with the IRS and
certain individual taxpayers, as required by regulations
prescribed by the Secretary of the Treasury, containing
information on individuals who made payments for qualified
tuition and related expenses or to whom reimbursements or
refunds were made of such expenses.
Explanation of Provision
The provision clarifies that, under section 6050S,
information returns containing information with respect to
qualified tuition and fees must be filed by a person that is
not an eligible educational institution only if such person is
engaged in a trade or business of making payments to any
individual under an insurance arrangement as reimbursements or
refunds (or similar payments) of qualified tuition and related
expenses. As under prior law, section 6050S continues to
require the filing of information returns by persons engaged in
a trade or business if, in the course of such trade or
business, the person receives from any individual interest
aggregating $600 or more for any calendar year on one or more
qualified education loans.
Effective Date
The provision is effective as if included in the 1997 Act,
i.e., for expenses paid after December 31, 1997, for education
furnished in academic periods beginning after such date.
2. Deduction for student loan interest (sec. 6004(b) of the 1998 IRS
Restructuring Act, sec. 202 of the 1997 Act, and sec. 221 of
the Code)
Present and Prior Law
Certain individuals who have paid interest on qualified
education loans may claim an above-the-line deduction for such
interest expenses, up to a maximum deduction of $2,500 per
year. The deduction is allowed only with respect to interest
paid on a qualified education loan during the first 60 months
in which interest payments are required. In this regard,
required payments of interest do not include nonmandatory
payments, such as interest payments made during a period of
loan forbearance. Months during which the qualified education
loan is in deferral or forbearance do not count against the 60-
month period. No deduction is allowed to an individual if that
individual is claimed as a dependent on another taxpayer's
return for the taxable year.
A qualified education loan generally is defined as any
indebtedness incurred to pay for the qualified higher education
expenses of the taxpayer, the taxpayer's spouse, or any
dependent of the taxpayer as of the time the indebtedness was
incurred in attending (1) post-secondary educational
institutions and certain vocational schools defined by
reference to section 481 of the Higher Education Act of 1965,
or (2) institutions conducting internship or residency programs
leading to a degree or certificate from an institution of
higher education, a hospital, or a health care facility
conducting postgraduate training.
Explanation of Provision
The provision clarifies that the student loan interest
deduction may be claimed only by a taxpayer who is legally
obligated to make the interest payments pursuant to the terms
of the loan.
The provision clarifies that a ``qualified education loan''
means any indebtedness incurred solely to pay qualified higher
education expenses. Thus, revolving lines of credit generally
do not constitute qualified education loans unless the borrower
agreed to use the line of credit to pay only qualifying
education expenses. The provision further provides Treasury
with authority to issue regulations regarding the calculation
of the 60-month period in the case of consolidated loans,
collapsed loans, and loans made before the date of enactment of
the Taxpayer Relief Act of 1997 (August 5, 1997) for purposes
of determining the deductibility of interest paid on such
loans. In this regard, it is expected that such regulations
will mirror the guidance contained in Notice 98-7 issued
regarding the establishment of the 60-month period with respect
to such loans for reporting purposes.
Effective Date
The provision is effective for interest payments due and
paid after December 31, 1997, on any qualified education loan.
3. Qualified State tuition programs (sec. 6004(c) of the 1998 IRS
Restructuring Act, sec. 211 of the 1997 Act, and sec. 529 of
the Code)
Present and Prior Law
Section 529 provides tax-exempt status to ``qualified State
tuition programs,'' meaning certain programs established and
maintained by a State (or agency or instrumentality thereof)
under which persons may (1) purchase tuition credits or
certificates on behalf of a designated beneficiary that entitle
the beneficiary to a waiver or payment of qualified higher
education expenses of the beneficiary, or (2) make
contributions to an account that is established for the purpose
of meeting qualified higher education expenses of the
designated beneficiary of the account. The term ``qualified
higher education expenses'' means expenses for tuition, fees,
books, supplies, and equipment required for the enrollment or
attendance at an eligible post-secondary educational
institution, as well as room and board expenses (meaning the
minimum room and board allowance applicable to the student as
determined by the institution in calculating costs of
attendance for Federal financial aid programs under sec. 472 of
the Higher Education Act of 1965) for any period during which
the student is at least a half-time student.
Section 529 also provides that no amount shall be included
in the gross income of a contributor to, or beneficiary of, a
qualified State tuition program with respect to any
distribution from, or earnings under, such program, except that
(1) amounts distributed or educational benefits provided to a
beneficiary (e.g., when the beneficiary attends college) will
be included in the beneficiary's gross income (unless
excludable under another Code section) to the extent such
amounts or the value of the educational benefits exceed
contributions made on behalf of the beneficiary, and (2)
amounts distributed to a contributor or another distributee
(e.g., when a parent receives a refund) will be included in the
contributor's/distributee's gross income to the extent such
amounts exceed contributions made on behalf of the beneficiary.
Earnings on an account may be refunded to a contributor or
beneficiary, but the State or instrumentality must impose a
more than de minimis monetary penalty unless the refund is (1)
used for qualified higher education expenses of the
beneficiary, (2) made on account of the death or disability of
the beneficiary, or (3) made on account of a scholarship
received by the designated beneficiary to the extent the amount
refunded does not exceed the amount of the scholarship used for
higher education expenses.
A transfer of credits (or other amounts) from one account
benefiting one designated beneficiary to another account
benefiting a different beneficiary will be considered a
distribution (as will a change in the designated beneficiary of
an interest in a qualified State tuition program), unless the
beneficiaries are members of the same family. For this purpose,
the term ``member of the family'' means persons described in
paragraphs (1) through (8) of section 152(a)--e.g., sons,
daughters, brothers, sisters, nephews and nieces, certain in-
laws, etc--and any spouse of such persons.
Explanation of Provision
The provision clarifies that, under rules contained in
section 72, distributions from qualified State tuition programs
are treated as representing a pro-rata share of the principal
(i.e., contributions) and accumulated earnings in the account.
In addition, the provision modifies section 529(e)(2) to
clarify that--for purposes of tax-free rollovers and changes of
designated beneficiaries--a ``member of the family'' includes
the spouse of the original beneficiary.
Effective Date
The provisions are effective for distributions made after
December 31, 1997.
4. Education IRAs (sec. 6004(d) of the 1998 IRS Restructuring Act, sec.
213 of the 1997 Act, and sec. 530 of the Code)
Present and Prior Law
Section 530 provides that taxpayers may establish
``education IRAs,'' meaning certain trusts or custodial
accounts created exclusively for the purpose of paying
qualified higher education expenses of a named beneficiary.
Annual contributions to education IRAs may not exceed $500 per
designated beneficiary, and may not be made after the
designated beneficiary reaches age 18. Contributions to an
education IRA may not be made by certain high-income
taxpayers--i.e., the contribution limit is phased out for
taxpayers with modified adjusted gross income between $95,000
and $110,000 ($150,000 and $160,000 for taxpayers filing joint
returns). No contribution may be made to an education IRA
during any year in which any contributions are made by anyone
to a qualified State tuition program on behalf of the same
beneficiary.
Until a distribution is made from an education IRA,
earnings on contributions to the account generally are not
subject to tax.68 In addition, distributions from an
education IRA are excludable from gross income to the extent
that the distribution does not exceed qualified higher
education expenses incurred by the beneficiary during the year
the distribution is made (provided that a HOPE credit or
Lifetime Learning credit is not claimed with respect to the
beneficiary for the same taxable year). The earnings portion of
an education IRA distribution not used to pay qualified higher
education expenses is includible in the gross income of the
distributee and generally is subject to an additional 10-
percent tax.69 However, the additional 10-percent
tax does not apply if a distribution is made of excess
contributions above the $500 limit (and any earnings
attributable to such excess contributions) if the distribution
is made on or before the date that a return is required to be
filed (including extensions of time) by the contributor for the
year in which the excess contribution was made. In addition,
section 530 allows tax-free rollovers of account balances from
an education IRA benefiting one family member to an education
IRA benefiting another family member. Section 530 is effective
for taxable years beginning after December 31, 1997.
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\68\ However, education IRAs are subject to the unrelated business
income tax (``UBIT'') imposed by section 511.
\69\ This 10-percent additional tax does not apply if a
distribution from an education IRA is made on account of the death,
disability, or scholarship received by the designated beneficiary.
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Explanation of Provision
Consistent with the legislative history to the 1997 Act,
the provision provides that any balance remaining in an
education IRA is deemed to be distributed within 30 days after
the date that the designated beneficiary reaches age 30 (or, if
earlier, within 30 days of the date that the beneficiary dies).
The provision further clarifies that, in the event of the death
of the designated beneficiary, the balance remaining in an
education IRA may be distributed (without imposition of the
additional 10-percent tax) to any other (i.e., contingent)
beneficiary or to the estate of the deceased designated
beneficiary. If any member of the family of the deceased
beneficiary becomes the new designated beneficiary of an
education IRA, then no tax is imposed on such redesignation and
the account will continue to be treated as an education IRA.
The provision clarifies that for purposes of the special
rules regarding tax-free rollovers and changes of designated
beneficiaries, the new beneficiary must be under the age of 30.
Under the provision, the additional 10-percent tax provided
for by section 530(d)(4) does not apply to a distribution from
an education IRA, which (although used to pay for qualified
higher education expenses) is includible in the beneficiary's
gross income solely because the taxpayer elects to claim a HOPE
or Lifetime Learning credit with respect to the beneficiary.
The provision further provides that the additional 10-percent
tax does not apply to the distribution of any contribution to
an education IRA made during a taxable year if such
distribution is made on or before the date that a return is
required to be filed (including extensions of time) by the
beneficiary for the taxable year during which the contribution
was made (or, if the beneficiary is not required to file such a
return, April 15th of the year following the taxable year
during which the contribution was made). In addition, the
provision amends section 4973(e) to provide that the excise tax
penalty applies under that section for each year that an excess
contribution remains in an education IRA (and not merely the
year that the excess contribution is made).
The provision clarifies that, in order for taxpayers to
establish an education IRA, the designated beneficiary must be
a life-in-being. The provision also clarifies that, under rules
contained in present-law section 72, distributions from
education IRAs are treated as representing a pro-rata share of
the principal (i.e., contributions) and accumulated earnings in
the account.70
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\70\ For example, if an education IRA has a total balance of
$10,000, of which $4,000 represents principal (i.e., contributions) and
$6,000 represents earnings, and if a distribution of $2,000 is made
from such an account, then $800 of that distribution will be treated as
a return of principal (which under no event is includible in the gross
income of the distributee) and $1,200 of the distribution will be
treated as accumulated earnings. In such a case, if qualified higher
education expenses of the beneficiary during the year of the
distribution are at least equal to the $2,000 total amount of the
distribution (i.e., principal plus earnings), then the entire earnings
portion of the distribution will be excludible under section 530,
provided that a Hope credit or Lifetime Learning credit is not claimed
for that same taxable year on behalf of the beneficiary. If, however,
the qualified higher education expenses of the beneficiary for the
taxable year are less than the total amount of the distribution, then
only a portion of the earnings will be excludable from gross income
under section 530. Thus, in the example discussed above, if the
beneficiary incurs only $1,500 of qualified higher education expenses
in the year that a $2,000 distribution is made, then only $900 of the
earnings will be excludable from gross income under section 530 (i.e.,
an exclusion will be provided for the pro-rata portion of the earnings,
based on the ratio that the $1,500 of qualified higher education
expenses bears to the $2,000 distribution) and the remaining $300 of
the earnings portion of the distribution will be includible in the
distributee's gross income.
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The provision also provides that, if any qualified higher
education expenses are taken into account in determining the
amount of the exclusion under section 530 for a distribution
from an education IRA, then no deduction (under section 162 or
any other section), or exclusion (under section 135) or credit
is allowed under the Internal Revenue Code with respect to such
qualified higher education expenses.
In addition, because the 1997 Act allows taxpayers to
redeem U.S. Savings Bonds and be eligible for the exclusion
under present-law section 135 (as if the proceeds were used to
pay qualified higher education expenses) provided the proceeds
from the redemption are contributed to an education IRA (or to
a qualified State tuition program defined under section 529) on
behalf of the taxpayer, the taxpayer's spouse, or a dependent,
the provision conforms the definition of ``eligible educational
institution'' under section 135 to the broader definition of
that term under present-law section 530 (and section 529).
Thus, for purposes of section 135, as under present-law
sections 529 and 530, the term ``eligible educational
institution'' is defined as an institution which (1) is
described in section 481 of the Higher Education Act of 1965
(20 U.S.C. 1088) and (2) is eligible to participate in
Department of Education student aid programs.
Effective Date
The provisions are effective as if included in the 1997
Act, i.e., for taxable years beginning after December 31, 1997.
5. Enhanced deduction for corporate contributions of computer
technology and equipment (sec. 6004(e) of the 1998 IRS
Restructuring Act, sec. 224 of the 1997 Act, and sec. 170(e)(6)
of the Code)
Present and Prior Law
In computing taxable income, a taxpayer who itemizes
deductions generally is allowed to deduct the fair market value
of property contributed to a charitable organization. However,
in the case of a charitable contribution of inventory or other
ordinary-income property, short-term capital gain property, or
certain gifts to private foundations, the amount of the
deduction is limited to the taxpayer's basis in the property.
In the case of a charitable contribution of tangible personal
property, a taxpayer's deduction is limited to the adjusted
basis in such property if the use by the recipient charitable
organization is unrelated to the organization's tax-exempt
purpose.
The Taxpayer Relief Act of 1997 provided that certain
contributions of computer and other equipment to eligible
donees to be used for the benefit of elementary and secondary
school children qualify for an augmented deduction. Under this
special rule, the amount of the augmented deduction available
to a corporation making a qualified contribution generally is
equal to its basis in the donated property plus one-half of the
amount of ordinary income that would have been realized if the
property had been sold. However, the augmented deduction cannot
exceed twice the basis of the donated property. To qualify for
the augmented deduction, the contribution must satisfy various
requirements.
The legislative history of the provision states that the
special tax treatment for contributions of computer and other
equipment was to be effective for contributions made during a
three-year period in taxable years beginning after December 31,
1997, and before January 1, 2001.71 However, as a
result of a drafting error, the statutory provision did not
apply to contributions made during taxable years beginning
after December 31, 1999.
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\71\ H. Rept. 105-220, p. 374.
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Explanation of Provision
The provision corrects the termination date of the
provision to provide that the special rule applies to
contributions made during taxable years beginning after
December 31, 1997, and before December 31, 2000.
In addition, the provision clarifies that the requirements
set forth in section 170(e)(6)(B)(ii)-(vii) apply regardless of
whether the donee is an educational organization or a tax-
exempt charitable entity. Similarly, the rule in section
170(e)(6)(C)(ii)(I) regarding subsequent contributions by
private foundations is clarified to permit contributions to
either educational organizations or tax-exempt charitable
entities described in section 170(e)(6)(B)(i).
Effective Date
The provision is effective as of August 5, 1997, the date
of enactment of the 1997 Act.
6. Treatment of cancellation of certain student loans (6004(f) of the
1998 IRS Restructuring Act, sec. 225 of the 1997 Act, and sec.
108(f) of the Code)
Present and Prior Law
An individual's gross income does not include forgiveness
of loans made by tax-exempt educational organizations if the
proceeds of such loans are used to pay costs of attendance at
an educational institution or to refinance outstanding student
loans and the student is not employed by the lender
organization. The exclusion applies only if the forgiveness is
contingent on the student's working for a certain period of
time in certain professions for any of a broad class of
employers. In addition, the student's work must fulfill a
public service requirement.
Explanation of Provision
The provision clarifies that gross income does not include
amounts from the forgiveness of loans made by educational
organizations and certain tax-exempt organizations to refinance
any existing student loan (and not just loans made by
educational organizations). In addition, the provision
clarifies that refinancing loans made by educational
organizations and certain tax-exempt organizations must be made
pursuant to a program of the refinancing organization (e.g.,
school or private foundation) that requires the student to
fulfill a public service work requirement.
Effective Date
The provision is effective as of August 5, 1997, the date
of enactment of the 1997 Act.
7. Qualified zone academy bonds (sec. 6004(g) of the 1998 IRS
Restructuring Act, sec. 226 of the 1997 Act, and sec. 1397E of
the Code)
Present and Prior Law
Certain financial institutions (i.e., banks, insurance
companies, and corporations actively engaged in the business of
lending money) that hold ``qualified zone academy bonds'' are
entitled to a nonrefundable tax credit in an amount equal to a
credit rate (set monthly by the Treasury Department
72) multiplied by the face amount of the bond (sec.
1397E). The credit rate applies to all such bonds issued in
each month. A taxpayer holding a qualified zone academy bond on
the credit allowance date (i.e., each one-year anniversary of
the issuance of the bond) is entitled to a credit. The credit
is includible in gross income (as if it were an interest
payment on the bond), and may be claimed against regular income
tax and AMT liability.
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\72\ The Treasury Department will set the credit rate each month at
a rate estimated to allow issuance of qualified zone academy bonds
without discount and without interest cost to the issuer.
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``Qualified zone academy bonds'' are defined as any bond
issued by a State or local government, provided that (1) at
least 95 percent of the proceeds are used for the purpose of
renovating, providing equipment to, developing course materials
for use at, or training teachers and other school personnel in
a ``qualified zone academy''--meaning certain public schools
located in empowerment zones or enterprise communities or with
a certain percentage of students from low-income families--and
(2) private entities have promised to make contributions to the
qualified zone academy with a value equal to at least 10
percent of the bond proceeds.
A total of $400 million of ``qualified zone academy bonds''
may be issued in each of 1998 and 1999. The $400 million
aggregate bond cap will be allocated each year to the States
according to their respective populations of individuals below
the poverty line.73 Each State, in turn, will
allocate the credit to qualified zone academies within such
State. A State may carry over any unused allocation into
subsequent years.
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\73\ See Rev. Proc. 98-57, which sets forth the maximum face amount
of qualified zone academy bonds that may be issued for each State
during 1999; IRS Proposed Rules (REG-119449-97), which provides
guidance to holders and issuers of qualified zone academy bonds.
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Explanation of Provision
The provision clarifies that, for purposes of section
6655(g)(1)(B), the credit for certain holders of qualified zone
academy bonds may be claimed for estimated tax purposes.
Similarly, the provision clarifies for purposes of section
6401(b)(1) the manner in which the credit is taken into account
when determining whether a taxpayer has made an overpayment of
tax.
Effective Date
The provisions are effective for obligations issued after
December 31, 1997.
C. Amendments to Title III of the 1997 Act Relating to Savings
Incentives
1. Conversions of IRAs into Roth IRAs (sec. 6005(b) of the 1998 IRS
Restructuring Act, sec. 302 of the 1997 Act, and secs. 408A and
72(t) of the Code)
Present and Prior Law
A taxpayer with adjusted gross income of $100,000 or less
may convert a deductible or nondeductible IRA into a Roth IRA
at any time. The amount converted is includible in income in
the year of the conversion, except that, if the conversion
occurs in 1998, the amount converted is includible in income
ratably over the 4-year period beginning with the year in which
the conversion occurs.74 Under prior law, the
application of the 4-year spread was automatic. Under present
and prior law, amounts includible in income as a result of the
conversion are not taken into account in determining whether
the $100,000 threshold is exceeded. The 10-percent tax on early
withdrawals does not apply to conversions of IRAs into Roth
IRAs.
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\74\ If the conversion is accomplished by means of a withdrawal and
a rollover into a Roth IRA, the 4-year rule applies if the withdrawal
is made during 1998 and the rollover occurs within 60 days of the
withdrawal. In such a case, the 4-year period begins with the year in
which the withdrawal was made. For purposes of this discussion, such
conversions are treated as occurring in 1998.
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In general, distributions of earnings from a Roth IRA are
excludable from income if the individual has had a Roth IRA for
at least 5 years and certain other requirements are satisfied.
(Distributions that are excludable from income are referred to
as qualified distributions.) Under prior law, the 5-year
holding period with respect to conversion Roth IRAs began with
the year of the conversion.
Prior law did not contain a specific rule addressing what
happens if an individual dies during the 4-year spread period
for 1998 conversions.
Explanation of Provision
Distributions of converted amounts
Distributions before the end of the 4-year spread
The provision modifies the rules relating to conversions of
IRAs into Roth IRAs in order to prevent taxpayers from
receiving premature distributions from a Roth conversion IRA
while retaining the benefits of 4-year income averaging. In the
case of conversions to which the 4-year income inclusion rule
applies, income inclusion is accelerated with respect to any
amounts withdrawn before the final year of inclusion. Under
this rule, a taxpayer that withdraws converted amounts prior to
the last year of the 4-year spread is required to include in
income the amount otherwise includible under the 4-year rule,
plus the lesser of (1) the taxable amount of the withdrawal, or
(2) the remaining taxable amount of the conversion (i.e., the
taxable amount of the conversion not included in income under
the 4-year rule in the current or a prior taxable year). In
subsequent years (assuming no such further withdrawals), the
amount includible in income under the 4-year will be the lesser
of (1) the amount otherwise required under the 4-year rule
(determined without regard to the withdrawal) or (2) the
remaining taxable amount of the conversion.
Under the provision, application of the 4-year spread is
elective. The election is made in the time and manner
prescribed by the Secretary. If no election is made, the 4-year
rule will be deemed to be elected. An election, or deemed
election, with respect to the 4-year spread cannot be changed
after the due date for the return for the first year of the
income inclusion (including extensions).
The following example illustrates the application of these
rules.
Example: Taxpayer A has a nondeductible IRA with a value of
$100 (and no other IRAs). The $100 consists of $75 of
contributions and $25 of earnings. A converts the IRA into a
Roth IRA in 1998 and elects the 4-year spread. As a result of
the conversion, $25 is includible in income ratably over 4
years ($6.25 per year). The 10-percent early withdrawal tax
does not apply to the conversion. At the beginning of 1999, the
value of the account is $110, and A makes a withdrawal of $10.
Under the provision, the withdrawal is treated as attributable
entirely to amounts that were includible in income due to the
conversion. In the year of withdrawal, $16.25 is includible in
income (the $6.25 includible in the year of withdrawal under
the 4-year rule, plus $10 ($10 is less than the remaining
taxable amount of $12.50 ($25-$12.50)). In the next year, $2.50
is includible in income under the 4-year rule. No amount is
includible in income in year 4 due to the conversion.
Application of early withdrawal tax to converted amounts
The provision modifies the rules relating to conversions to
prevent taxpayers from receiving premature distributions (i.e.,
within 5 years) while retaining the benefit of the nonpayment
of the early withdrawal tax. Under the provision, if converted
amounts are withdrawn within the 5-year period beginning with
the year of the conversion, then, to the extent attributable to
amounts that were includible in income due to the conversion,
the amount withdrawn is subject to the 10-percent early
withdrawal tax.75
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\75\ The otherwise available exceptions to the early withdrawal
tax, e.g., for distributions after age 59\1/2\, apply.
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Applying this rule to the example above, the $10 withdrawal
is subject to the 10-percent early withdrawal tax (unless as
exception applies).
Application of 5-year holding period
The provision also eliminates the special rule under which
a separate 5-year holding period begins for purposes of
determining whether a distribution of amounts attributable to a
conversion is a qualified distribution; thus, the 5-year
holding rule for Roth IRAs begins with the year for which a
contribution is first made to a Roth IRA. A subsequent
conversion does not start the running of a new 5-year period.
Ordering rules
Ordering rules apply to determine what amounts are
withdrawn in the event a Roth IRA contains both conversion
amounts (possibly from different years) and other
contributions. Under these rules, regular Roth IRA
contributions are deemed to be withdrawn first, then converted
amounts (starting with the amounts first converted).
Withdrawals of converted amounts are treated as coming first
from converted amounts that were includible in income. As under
prior law, earnings are treated as withdrawn after
contributions. For purposes of these rules, all Roth IRAs,
whether or not maintained in separate accounts, will be
considered a single Roth IRA.
Corrections
In order to assist individuals who erroneously convert IRAs
into Roth IRAs or otherwise wish to change the nature of an IRA
contribution, contributions to an IRA (and earnings thereon)
may be transferred in a trustee-to-trustee transfer from any
IRA to another IRA by the due date for the taxpayer's return
for the year of the contribution (including extensions). Any
such transferred contributions are treated as if contributed to
the transferee IRA (and not to the transferor IRA). Trustee-to-
trustee transfers include transfers between IRA trustees as
well as IRA custodians, apply to transfers from and to IRA
accounts and annuities, and apply to transfers between IRA
accounts and annuities with the same trustee or custodian.
Effect of death on 4-year spread
Under the provision, in general, any amounts remaining to
be included in income as a result of a 1998 conversion are
includible in income on the final return of the taxpayer. If
the surviving spouse is the sole beneficiary of the Roth IRA,
the spouse may continue the deferral by including the remaining
amounts in his or her income over the remainder of the 4-year
period.
Calculation of AGI limit for conversions
The provision clarifies that for purposes of determining
the $100,000 adjusted gross income (``AGI'') limit on IRA
conversions to Roth IRAs, the conversion amount is not taken
into account. Thus, for this purpose, AGI (and all AGI-based
phaseouts) are to be determined without taking into account the
conversion amount. For purposes of computing taxable income,
the conversion amount (to the extent otherwise includible in
AGI) is to be taken into account in computing the AGI-based
phaseout amounts.
Effective Date
The provision is effective as if included in the 1997 Act,
i.e., for taxable years beginning after December 31, 1997.
2. Penalty-free distributions for education expenses and purchase of
first homes (sec. 6005(c) of the 1998 IRS Restructuring Act,
secs. 203 and 303 of the 1997 Act, and sec. 402 of the Code)
Present and Prior Law
The 10-percent early withdrawal tax does not apply to
distributions from an IRA if the distribution is for first-time
homebuyer expenses, subject to a $10,000 life-time cap, or for
higher education expenses. These exceptions do not apply to
distributions from employer-sponsored retirement plans. A
distribution from an employer-sponsored retirement plan that is
an ``eligible rollover distribution'' may be rolled over to an
IRA. The term ``eligible rollover distribution'' means any
distribution to an employee of all or a portion or the balance
to the credit of the employee in a qualified trust, except the
term does not include certain periodic distributions,
distributions based on life or joint life expectancies and
distributions required under the minimum distribution rules.
Generally, distributions from cash or deferred arrangements
made on account of hardship are eligible rollover
distributions. An eligible rollover distribution which is not
transferred directly to another retirement plan or an IRA is
subject to 20-percent withholding on the distribution. Under
prior law, participants in employer-sponsored retirement plans
could avoid the early withdrawal tax applicable to such plans
by rolling over hardship distributions to an IRA and
withdrawing the funds from the IRA.
Explanation of Provision
The provision modifies the rules relating to the ability to
roll over hardship distributions from employer-sponsored
retirement plans (including section 403(b) plans) in order to
prevent avoidance of the 10-percent early withdrawal tax. The
provision provides that distributions from cash or deferred
arrangements and similar arrangements made on account of
hardship of the employee are not eligible rollover
distributions. Such distributions are not subject to the 20-
percent withholding applicable to eligible rollover
distributions.
Effective Date
The provision is effective for distributions after December
31, 1998.
3. Limits based on modified adjusted gross income (sec. 6005(b) of the
1998 IRS Restructuring Act, sec. 302(a) of the 1997 Act, and
sec. 72(t) of the Code)
Present and Prior Law
The $2,000 Roth IRA maximum contribution limit is phased
out for individual taxpayers with adjusted gross income
(``AGI'') between $95,000 and $110,000 and for married
taxpayers filing a joint return with AGI between $150,000 and
$160,000. The maximum deductible IRA contribution is phased out
between $0 and $10,000 of AGI in the case of married couples
filing a separate return.
Explanation of Provision
The provision clarifies the phase-out range for the Roth
IRA maximum contribution limit for a married individual filing
a separate return and conforms it to the range for deductible
IRA contributions. Under the provision, the phase-out range for
married individuals filing a separate return will be $0 to
$10,000 of AGI.
Effective Date
The provision is effective as if included in the 1997 Act,
i.e., for taxable years beginning after December 31, 1997.
4. Contribution limit to Roth IRAs (sec. 6005(b) of the 1998 IRS
Restructuring Act, sec. 302 of the 1997 Act, and sec. 408A(c)
of the Code)
Present and Prior Law
An individual who is an active participant in an employer-
sponsored plan may deduct annual IRA contributions up to the
lesser of $2,000 or 100 percent of compensation if the
individual's adjusted gross income (``AGI'') does not exceed
certain limits. For 1998, the limit is phased-out over the
following ranges of AGI: $30,000 to $40,000 in the case of a
single taxpayer and $50,000 to $60,000 in the case of married
taxpayers. An individual who is not an active participant in an
employer-sponsored retirement plan (and whose spouse is not an
active participant) may deduct IRA contributions up to the
limits described above without limitation based on income. An
individual who is not an active participant in an employer-
sponsored retirement plan (and whose spouse is such an active
participant) may deduct IRA contributions up to the limits
described above if the AGI of the such individuals filing a
joint return does not exceed certain limits. The limit is
phased for out for such individuals with AGI between $150,000
and $160,000.
An individual may make nondeductible contributions up to
the lesser of $2,000 or 100 percent of compensation to a Roth
IRA if the individual's AGI does not exceed certain limits. An
individual may make nondeductible contributions to an IRA to
the extent the individual does not or cannot make deductible
contributions to an IRA or contributions to a Roth IRA.
Contributions to all an individual's IRAs for a taxable year
may not exceed $2,000.
Explanation of Provision
The provision clarifies the intent of the 1997 Act that an
individual may contribute up to $2,000 a year to all the
individual's IRAs. Thus, for example, suppose an individual is
not eligible to make deductible IRA contributions because of
the phase-out limits, and is eligible to make a $1,000 Roth IRA
contribution. The individual could contribute $1,000 to the
Roth IRA and $1,000 to a nondeductible IRA.
Effective Date
The provision is effective as if included in the 1997 Act,
i.e., for taxable years beginning after December 31, 1997.
5. Contribution limitations for active participants in an IRA (sec.
6005(a) of the 1998 IRS Restructuring Act, sec. 301(b) of the
1997 Act, and sec. 219(g) of the Code)
Present and Prior Law
If a married individual (filing a joint return) is an
active participant in an employer-sponsored retirement plan,
the $2,000 IRA deduction limit is phased out over the following
levels of adjusted gross income (``AGI''):
Taxable years beginning in-- Phase-out range
1997.......................................... $40,000 to $50,000
1998.......................................... $50,000 to $60,000
1999.......................................... $51,000 to $61,000
2000.......................................... $52,000 to $62,000
2001.......................................... $53,000 to $63,000
2002.......................................... $54,000 to $64,000
2003.......................................... $60,000 to $70,000
2004.......................................... $65,000 to $75,000
2005.......................................... $70,000 to $80,000
2006.......................................... $75,000 to $85,000
2007.......................................... $80,000 to $100,000
An individual is not considered an active participant in an
employer-sponsored retirement plan merely because the
individual's spouse is an active participant. The $2,000
maximum deductible IRA contribution for an individual who is
not an active participant, but whose spouse is, is phased out
for taxpayers with AGI between $150,000 and $160,000.
Explanation of Provision
The provision clarifies the intent of the 1997 Act relating
to the AGI phase-out ranges for married individuals who are
active participants in employer-sponsored plans and the AGI
phase-out range for spouses of such active participants as
described above.
Effective Date
The provision is effective as if included in the 1997 Act,
i.e., for taxable years beginning after December 31, 1997.
D. Amendments to Title III of the 1997 Act Relating to Capital Gains
1. Individual capital gains rate reductions (sec. 6005(d) of the 1998
IRS Restructuring Act, sec. 311 of the 1997 Act, and sec. 1(h)
of the Code)
Present and Prior Law
The 1997 Act provided lower capital gains rates for
individuals. Generally, the 1997 Act reduced the maximum rate
on the adjusted net capital gain of an individual from 28
percent to 20 percent and provided a 10-percent rate for the
adjusted net capital gain otherwise taxed at a 15-percent rate.
The ``adjusted net capital gain'' means the net capital gain
determined without regard to certain gain for which the 1997
Act provided a higher maximum rate of tax. The 1997 Act
generally retained a 28-percent maximum rate for the long-term
capital gain from collectibles, certain long-term capital gain
included in income from the sale of small business stock, and
the net capital gain determined by including all capital gains
and losses properly taken into account after July 28, 1997,
from property held more than one year but not more than 18
months and all capital gains and losses properly taken into
account for the portion of the taxable year before May 7, 1997.
In addition, the 1997 Act provided a maximum rate of 25 percent
for the long-term capital gain attributable to real estate
depreciation (``unrecaptured section 1250 gain''). Beginning in
2001 and 2006, lower rates of 8 and 18 percent will apply to
certain property held more than five years.
The amounts taxed at the 28- and 25-percent rates may not
exceed the individual's net capital gain and also are reduced
by amounts otherwise taxed at a 15-percent rate.
Under the provisions of the 1997 Act, net short-term
capital losses and long-term capital loss carryovers reduce the
amount of adjusted net capital gain before reducing amounts
taxed at the maximum 25- and 28-percent rates.
The 1997 Act failed to coordinate the new multiple holding
periods with certain provisions of the Code.
Explanation of Provision
Under the provision, the ``adjusted net capital gain'' of
an individual is the net capital gain reduced (but not below
zero) by the sum of the 28-percent rate gain and the
unrecaptured section 1250 gain.
``28-percent rate gain'' means the amount of net gain
attributable to collectibles gains and losses, an amount of
gain equal to the gain excluded from gross income on the sale
of certain small business stock under section 1202,
76 long-term capital gains and losses properly taken
into account after July 28, 1997, from property held more than
one year but not more than 18 months 77, the net
short-term capital loss for the taxable year and the long-term
capital loss carryover to the taxable year. Long-term capital
gains and losses properly taken into account before May 7,
1997, also are included in computing 28-percent rate gain.
78
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\76\ For example, assume an individual has $300,000 gain from the
sale of qualified stock in a small business corporation and assume that
section 1202(b) limits the gain that may be taken into account under
section 1202(a) to $240,000. $120,000 of the gain (50 percent of
$240,000) is excluded from gross income under section 1202(a). The
$180,000 of gain that is included in gross income is included in the
computation of net capital gain, and $120,000 of that gain is taken
into account under section 1(h)(5) in computing 28-percent rate gain.
The maximum effective regular tax rate on the $240,000 of gain to which
the 50-percent section 1202 exclusion applies is 14 percent and the
maximum rate on the remaining $60,000 of gain is 20 percent.
\77\ Section 5001 of the 1998 IRS Restructuring Act eliminated the
18-month holding period, effective January 1, 1998. This description
does not include the changes made by that provision.
\78\ The application of this provision to the beneficiaries of
charitable remainder trusts was modified by section 4003(b) of the Tax
and Trade Relief Act of 1998, described in part Three of this
publication.
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``Unrecaptured section 1250 gain'' means the amount of
long-term capital gain (not otherwise treated as ordinary
income) which would be treated as ordinary income if section
1250 recapture applied to all depreciation (rather than only to
depreciation in excess of straight-line depreciation) from
property held more than 18 months (one year for amounts
properly taken into account after May 6, 1997, and before July
29, 1997). 79 The unrecaptured section 1250
depreciation is reduced (but not below zero) by the excess (if
any) of amount of losses taken into account in computing 28-
percent gain over the amount of gains taken into account in
computing 28-percent rate gain.
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\79\ In the case of a disposition of a partnership interest held
more than 18 months, the amount of the individual's long-term capital
gain which would be treated as ordinary income under section 751(a) if
section 1250 applied to all depreciation, will be taken into account in
computing unrecaptured section 1250 gain.
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The provision contains several conforming amendments to
coordinate the multiple holding periods with other provisions
of the Code. Inherited property (sec. 1223 (11) and (12)) and
certain patents (sec. 1235) are deemed to have a holding period
of more than 18 months, allowing the 10- and 20-percent rates
to apply. Amounts treated as ordinary income by reason of
section 1231(c) will be allocated among categories of net
section 1231 gain in accordance with IRS forms or regulations.
The provision clarifies that the amount treated as long-term
capital gain or loss on a section 1256 contract is treated as
attributable to property held for more than 18 months.
Under the provision, in applying section 1233(b) where the
substantially identical property has been held more than one
year but not more than 18 months, any gain on the closing of
the short sale will be considered gain from property held not
more than 18 months, and the substantially identical property
will have be treated as held for one year on the day before the
earlier of the date of the closing of the short sale or the
date the property is disposed of. In applying section 1233(d)
where, on the date of the short sale, the substantially
identical property has been held more than 18 months, any loss
on the closing of the short sale will be treated as a loss from
the sale or exchange of a capital asset held more than 18
months. Finally, in applying section 1092(f), any loss with
respect to the option shall be treated as a loss from the sale
or exchange of a capital asset held more than 18 months, if at
the time the loss is realized, gain on the sale or exchange of
the stock would be treated as gain from the sale or exchange of
a capital asset held more than 18 months. 80
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\80\ Any loss treated as a long-term capital loss by reason of
section 1233(d) or 1092(f) will be taken into account in computing 28-
percent rate gain where the property causing such loss to be treated as
a long-term capital loss was held not more than 18 months on the
applicable date.
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The provision reorders the rate structure under sections
1(h)(1) and 55(b)(3) without any substantive change.
The provision makes minor technical changes, including a
provision to reduce the minimum tax preference on certain small
business stock to 28 percent, beginning in 2006. 81
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\81\ Thus, the maximum rate under the minimum tax will be 17.92
percent (.64 times 28 percent).
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Effective Date
The provision applies to taxable years ending after May 6,
1997.
2. Exclusion of gain on the sale of a principal residence owned and
used less than two years (sec. 6005(e)(1) and (2) of the 1998
IRS Restructuring Act, sec. 312(a) of the 1997 Act, and sec.
121 of the Code)
Present and Prior Law
A taxpayer generally is able to exclude up to $250,000
($500,000 if married filing a joint return) of gain realized on
the sale or exchange of a principal residence. To be eligible
for the exclusion, the taxpayer must have owned the residence
and used it as a principal residence for at least two of the
five years prior to the sale or exchange. A taxpayer who fails
to meet these requirements by reason of a change of place of
employment, health, or unforeseen circumstances is able to
exclude a fraction of the taxpayer's realized gain equal to the
fraction of the two years that the requirements are met.
Explanation of Provision
The provision clarifies that an otherwise qualifying
taxpayer who fails to satisfy the two-year ownership and use
requirements is able to exclude an amount equal to the fraction
of the $250,000 ($500,000 if married filing a joint return),
not the fraction of the realized gain which is equal to the
fraction of the two years that the ownership and use
requirements are met. For example, an unmarried taxpayer who
owns and uses a principal residence for one year then sells at
realized gain of $500,000 may exclude $125,000 of gain (one-
half of $250,000) not $250,000 of gain (one-half of the
realized gain). Similarly, an unmarried taxpayer who owns and
uses a principal residence for one year then sells at a
realized gain of $50,000 may exclude the entire $50,000 of gain
since it is less than one half of $250,000. The exclusion is
not limited to $25,000 (one-half of the $50,000 realized gain).
In addition, the provision provides that if a married
couple filing a joint return does not qualify for the $500,000
maximum exclusion, the amount of the maximum exclusion that may
be claimed by the couple is the sum of each spouse's maximum
exclusion determined on a separate basis.
Effective Date
The provision is effective as if included in section 312 of
the 1997 Act.
3. Effective date of the exclusion of gain on the sale of a principal
residence (sec. 6005(e)(3) of the 1998 IRS Restructuring Act,
sec. 312(d)(2) of the 1997 Act, and sec. 121 of the Code)
Present and Prior Law
The exclusion for gain on sale of a principal residence as
added by the 1997 Act generally applies to sales or exchanges
occurring after May 6, 1997. A taxpayer may elect, however, to
apply the law in effect prior to the 1997 Act to a sale or
exchange (1) made before the date of enactment of the Act, (2)
made after the date of enactment pursuant to a binding contract
in effect on such date, or (3) where a replacement residence
was acquired on or before the date of enactment (or pursuant to
a binding contract in effect on the date of enactment) and the
prior-law rollover provision would apply.
Explanation of Provision
The provision clarifies that a taxpayer may elect to apply
the law in effect prior to the 1997 Act with respect to a sale
or exchange on the date of enactment of section 312 of the 1997
Act.
Effective Date
The provision is effective as if included in section 312 of
the 1997 Act.
4. Rollover of gain from sale of qualified stock (sec. 6005(f) of the
1998 IRS Restructuring Act, sec. 313 of the 1997 Act, and sec.
1045 of the Code)
Present and Prior Law
The 1997 Act provided that gain from the sale of qualified
small business stock held by an individual for more than six
months can be ``rolled over'' tax-free to other qualified small
business stock.
Explanation of Provision
The provision provides that rules similar to the rules
contained in subsections (f) through (k) of section 1202 will
apply for purposes of the rollover provision (sec. 1045). Under
these rules, for example, the benefit of a tax-free rollover
with respect to the sale of small business stock by a
partnership will flow through to a partner who is not a
corporation if the partner held its partnership interest at all
times the partnership held the small business stock. A similar
rule applies to S corporations.
Effective Date
The provision applies to sales on or after August 5, 1997,
the date of enactment of the 1997 Act.
E. Amendments to Title IV of the 1997 Act Relating to Alternative
Minimum Tax
1. Clarification of the small business exemption (sec. 6006(a) of the
1998 IRS Restructuring Act, sec. 401 of the 1997 Act, and sec.
55 of the Code)
Present and Prior Law
The corporate alternative minimum tax is repealed for small
corporations for taxable years beginning after December 31,
1997. A small corporation is one that had average gross
receipts of $5 million or less for a prior three-year period. A
corporation that meets the $5 million gross receipts test will
continue to be treated as a small corporation exempt from the
alternative minimum tax so long as its average gross receipts
do not exceed $7.5 million.
Explanation of Provision
The provision clarifies the application of the $5 million
and $7.5 million average annual gross receipts tests that a
corporation must meet to be a small corporation exempt from the
AMT. Under the provision, in order for a corporation to qualify
as a small corporation exempt from the AMT for a taxable year,
the corporation's average annual gross receipts for all 3-
taxable-year periods beginning after December 31, 1993 and
ending before such taxable year must be $7.5 million or less.
The $7.5 million amount is reduced to $5 million for the
corporation's first 3-taxable-year period (or portion thereof)
beginning after December 31, 1993, and ending before the
taxable year for which the exemption is claimed.
If a corporation's first taxable year beginning after
December 31, 1997 (the first year the exemption is available)
is its first taxable year (and the corporation does not lose
its status as a small corporation because it is aggregated with
one or more corporations under section 448(c)(2) or treated as
having a predecessor corporation under section 448(c)(3)(D)),
the corporation will be treated as an exempt small corporation
for such year regardless of its gross receipts for such year.
The operation of the gross receipts tests for the small
corporation AMT exemption is demonstrated by the following
examples.
Example 1: Assume a calendar-year corporation was in
existence on January 1, 1994. In order to qualify as a small
corporation for 1998 (the first year the exemption is
available), (1) the corporation's average annual gross receipts
for the 3-taxable-year period 1994 through 1996 must be $5
million or less and (2) the corporation's average annual gross
receipts for the 1995 through 1997 period must be $7.5 million
or less. If the corporation qualifies for 1998, the corporation
will qualify for 1999 if its average annual gross receipts for
the 3-taxable-year period 1996 through 1998 also is $7.5
million or less. If the corporation does not qualify for 1998,
the corporation cannot qualify for 1999 or any subsequent year.
Example 2: Assume a calendar-year corporation is first
incorporated in 1999 and is neither aggregated with a related,
existing corporation under section 448(c)(2) nor treated as
having a predecessor corporation under section 448(c)(3)(D).
The corporation will qualify as a small corporation for 1999
regardless of its gross receipts for such year. In order to
qualify as a small corporation for 2000, the corporation's
gross receipts for 1999 must be $5 million or less.
82 If the corporation qualifies for 2000, the
corporation also will qualify for 2001 if its average annual
gross receipts for the 2-taxable-year period 1999 through 2000
is $7.5 million or less. If the corporation does not qualify
for 2000, the corporation cannot qualify for 2001 or any
subsequent year. If the corporation qualifies for 2001, the
corporation will qualify for 2002 if its average annual gross
receipts for the 3-taxable-year period 1999 through 2001 is
$7.5 million or less.
---------------------------------------------------------------------------
\82\ The gross receipts for 1999 must be annualized under section
448(c)(3)(B) if the 1999 taxable year is less than 12 months.
---------------------------------------------------------------------------
Effective Date
The provision is effective for taxable years beginning
after December 31, 1997.
2. Election to use AMT depreciation for regular tax purposes (sec.
6006(b) of the 1998 IRS Restructuring Act, sec. 402 of the 1997
Act, and sec. 168 of the Code)
Present and Prior Law
For regular tax purposes, depreciation deductions for
certain shorter-lived tangible property may be determined using
the 200-percent declining balance method over 3-, 5-, 7-, or
10-year recovery periods (depending on the type of property).
For alternative minimum tax (``AMT'') purposes, depreciation on
such property placed in service after 1986 and before 1999 is
computed by using the 150-percent declining balance method over
the longer class lives prescribed by the alternative
depreciation system of section 168(g). A taxpayer may elect to
use the methods and lives applicable to AMT depreciation for
regular tax purposes.
The 1997 Act conformed the recovery periods (but not the
methods) used for purposes of the AMT depreciation to the
recovery periods used for purposes of the regular tax, for
property placed in service after 1998. The 1997 Act did not
make a conforming change to the election to use the pre-1998
AMT recovery methods and recovery periods for regular tax
purposes.
Explanation of Provision
For property placed in service after 1998, a taxpayer is
allowed to elect, for regular tax purposes, to compute
depreciation on tangible personal property otherwise qualified
for the 200-percent declining balance method by using the 150-
percent declining balance method over the recovery periods
applicable to the regular tax (rather than the longer class
lives of the alternative depreciation system of sec. 168(g)).
Effective Date
The provision is effective for property placed in service
after December 31, 1998.
F. Amendments to Title V of the 1997 Act Relating to Estate and Gift
Taxes
1. Clarification of effective date for indexing of generation-skipping
exemption (sec. 6007(a) of the 1998 IRS Restructuring Act,
secs. 501(d) and (f) of the 1997 Act, and sec. 2631(c) of the
Code)
Present and Prior Law
The 1997 Act provided for the indexation of the $1 million
exemption from generation-skipping transfers effective for
decedents dying after December 31, 1998.
Explanation of Provision
The provision clarifies that the indexing of the exemption
from generation-skipping transfers is effective with respect to
all generation-skipping transfers (i.e., direct skips, taxable
terminations, and taxable distributions) made after 1998.
With respect to existing trusts, transferors are permitted
to make a late allocation of any additional GST exemption
amount attributable to indexing adjustments in accordance with
the present-law rules applicable to late allocations as set
forth in sections 2632 and 2642, and the regulations
promulgated thereunder. For example, assume an individual
transferred $2 million to a trust in 1995, and allocated his
entire $1 million GST exemption to the trust at that time
(resulting in an inclusion ratio of .50). Assume further that
in 2001, the GST exemption has increased to $1,100,000 as the
result of indexing, and that the value of the trust assets is
now $3 million. If the individual is still alive in 2001, he is
permitted to make a late allocation of $100,000 of GST
exemption to the trust, resulting in a new inclusion ratio of
1-(($1,500,000+100,000)/$3,000,000), or .467.
Effective Date
The provision is effective for generation-skipping
transfers (i.e., direct skips, taxable terminations, and
taxable distributions) made after December 31, 1998.
2. Conversion of qualified family-owned business exclusion into a
deduction (sec. 6007(b)(1)(A) of the 1998 IRS Restructuring
Act, sec. 502 of the 1997 Act, and redesignated sec. 2057 of
the Code)
Present and Prior Law
The qualified family-owned business provision added by the
1997 Act provides an exclusion from estate taxes for certain
qualified family-owned business interests. It is unclear
whether the provision provided an exclusion of value or an
exclusion of property from the estate, and thus it is unclear
how the new provision interacts with other provisions in the
Internal Revenue Code (e.g., secs. 1014, 2032A, 2056, 2612, and
6166).
Explanation of Provision
The provision converts the qualified family-owned business
exclusion into a deduction, and redesignates section 2033A as
section 2057. Except as provided below, the requirements of the
qualified family-owned business provision otherwise remain
unchanged. The qualified family-owned business deduction is not
available for generation-skipping transfer tax purposes.
Effective Date
The provision is effective with respect to estates of
decedents dying after December 31, 1997.
3. Coordination between unified credit and family-owned business
provision (secs. 6007(b)(1)(B) and 6007(b)(4) of the 1998 IRS
Restructuring Act, sec. 502 of the 1997 Act, and redesignated
sec. 2057(a) of the Code)
Present and Prior Law
The 1997 Act effectively increased the amount of lifetime
gifts and transfers at death that are exempt from unified
estate and gift tax from $600,000 to $1,000,000 over the period
1997 to 2006, through increases in an individual's unified
credit. In addition, the 1997 Act provided a limited exclusion
for certain family-owned business interests. The exclusion for
family-owned business interests may be taken only to the extent
that the exclusion for family-owned business interests, plus
the amount effectively exempted by the unified credit, does not
exceed $1.3 million. As a result, for years after 1998, the
maximum amount of exclusion for family-owned business interests
is reduced by increases in the dollar amount of transfers
effectively exempted through the unified credit.
Because the structure of the 1997 Act increases the unified
credit over time (until 2006) while decreasing over the same
period the benefit of the closely-held business exclusion, the
estate tax on estates with family-owned businesses increases
over time until 2006. This increase in estate tax results from
the fact that increases in the unified credit provide a benefit
at the decedent's lowest estate tax brackets, while the
exclusion for family-owned businesses provides a benefit at the
decedent's highest estate tax brackets.
Explanation of Provision
Under the provision, if an executor elects to utilize the
qualified family-owned business deduction, the estate tax
liability is calculated as if the estate were allowed a maximum
qualified family-owned business deduction of $675,000 and an
applicable exclusion amount under section 2010 (i.e., the
amount exempted by the unified credit) of $625,000, regardless
of the year in which the decedent dies. If the estate includes
less than $675,000 of qualified family-owned business
interests, the applicable exclusion amount is increased on a
dollar-for-dollar basis, but only up to the applicable
exclusion amount generally available for the year of death.
For example, assume the decedent dies in 2005, when the
applicable exclusion amount under section 2010 is $800,000. If
the estate includes qualified family-owned business interests
valued at $675,000 or more, the estate tax liability is
calculated as if the estate were allowed a qualified family-
owned business deduction of $675,000, and the applicable
exclusion amount under section 2010 is limited to $625,000. If
the estate includes qualified family-owned business interests
of $500,000 or less, all of the qualified family-owned business
interests could be deducted from the estate, and the applicable
exclusion amount under section 2010 is $800,000. If the estate
includes qualified family-owned business interests valued
between $500,000 and $675,000, all of the qualified family-
owned business interests could be deducted from the estate, and
the applicable exclusion amount under section 2010 is
calculated as the excess of $1.3 million over the amount of
qualified family-owned business interests. (For example, if the
qualified family-owned business interests were valued at
$600,000, the applicable exclusion amount under section 2010 is
$700,000.)
If a recapture event occurs with respect to any qualified
family-owned business interest, the total amount of estate
taxes potentially subject to recapture is calculated as the
difference between the actual amount of estate tax liability
for the estate, and the amount of estate taxes that would have
been owed had the qualified family-owned business election not
been made.
Effective Date
The provision is effective for decedents dying after
December 31, 1997.
4. Clarification of businesses eligible for family-owned business
provision (sec. 6007(b)(2) of the 1998 IRS Restructuring Act,
sec. 502 of the 1997 Act, and redesignated sec. 2057(b)(3) of
the Code)
Present and Prior Law
In order to be eligible to exclude from the gross estate a
portion of the value of a family-owned business, the sum of (1)
the adjusted value of family-owned business interests
includible in the decedent's estate, and (2) the amount of
gifts of family-owned business interests to family members of
the decedent that are not included in the decedent's gross
estate, must exceed 50 percent of the decedent's adjusted gross
estate.
Explanation of Provision
The provision clarifies the formula for determining the
amount of gifts of family-owned business interests made to
members of the decedent's family that are not otherwise
includible in the decedent's gross estate.
Effective Date
The provision is effective with respect to decedents dying
after December 31, 1997.
5. Clarification of ``trade or business'' requirement for family-owned
business provision (sec. 6007(b)(5) of the 1998 IRS
Restructuring Act, sec. 502 of the Act, and redesignated secs.
2057(e)(1) and 2057(f) of the Code)
Present and Prior Law
A qualified family-owned business interest is defined as
any interest in a trade or business that meets certain
requirements--e.g., the decedent and members of his family must
own certain percentages of the trade or business, the decedent
or members of his family must have materially participated in
the trade or business for five of the eight years preceding the
decedent's death, and the qualified heir or members of his
family must materially participate in the trade or business for
at least five years of any eight-year period within 10 years
following the decedent's death.
Explanation of Provision
The provision clarifies that an individual's interest in
property used in a trade or business may qualify for the
qualified family-owned business provision as long as such
property is used in a trade or business by the individual or a
member of the individual's family. Thus, for example, if a
brother and sister inherit farmland upon their father's death,
and the sister cash-leases her portion to her brother, who is
engaged in the trade or business of farming, the ``trade or
business'' requirement is satisfied with respect to both the
brother and the sister. Similarly, if a father cash-leases
farmland to his son, and the son materially participates in the
trade or business of farming the land for at least five of the
eight years preceding his father's death, the pre-death
material participation and ``trade or business'' requirements
are satisfied with respect to the father's interest in the
farm.
Effective Date
The provision is effective with respect to estates of
decedents dying after December 31, 1997.
6. Clarification that interests eligible for family-owned business
provision must be passed to a qualified heir (secs.
6007(b)(1)(B) of the 1998 IRS Restructuring Act, sec. 502 of
the Act, and redesignated sec. 2057(a)(1) of the Code)
Present and Prior Law
The 1997 Act provided a new exclusion for qualified family-
owned business interests. One of the requirements for the
exclusion is that such interests must pass to a ``qualified
heir,'' which includes members of the decedent's family and any
individual who has been actively employed by the trade or
business for at least 10 years prior to the date of the
decedent's death.
Explanation of Provision
The provision clarifies that qualified family-owned
business interests must pass to a qualified heir in order to
qualify for the deduction. For this purpose, if all
beneficiaries of a trust are qualified heirs (and in such other
circumstances as the Secretary of the Treasury may provide),
property passing to the trust may be treated as having passed
to a qualified heir.
Effective Date
The provision is effective with respect to estates of
decedents dying after December 31, 1997.
7. Other modifications to the qualified family-owned business provision
(secs. 6007(b)(3), 6007(b)(6), and 6007(b)(7) of the 1998 IRS
Restructuring Act, sec. 502 of the 1997 Act, and redesignated
sec. 2057 of the Code)
Present and Prior Law
The qualified family-owned business provision incorporates
by cross-reference several other provisions of the Code,
including a number of provisions in section 2032A and the
personal holding company rules of section 543(a).
Explanation of Provision
The provision modifies section 2033A(g) (relating to the
security requirements for noncitizen qualified heirs) by
deleting the cross-reference to section 2033A(i)(3)(M), which
does not appear to be appropriate. The provision also makes
rules similar to those set forth in section 2032A (h) and (i)
(relating to conversions and exchanges of property under
sections 1031 and 1033) applicable for purposes of section
2033A. The provision clarifies that, in identifying assets that
produce (or are held for the production of) income of a type
described in section 543(a), section 543(a) is applied without
regard to section 543(a)(2)(B) (the dividend requirement for
corporate entities).
The provision clarifies that an interest in property will
not be disqualified, in whole or in part, as an interest in a
family-owned business where the decedent leases that interest
on a net cash basis to a member of the decedent's family who
uses the leased property in an active business. The rental
income derived by the decedent from the net cash lease in those
circumstances is not treated as personal holding company income
for purposes of Code section 2057.
Effective Date
The provision is effective with respect to estates of
decedents dying after December 31, 1997.
8. Clarification of interest on installment payment of estate tax on
holding companies (sec. 6007(c) of the 1998 IRS Restructuring
Act, sec. 503 of the 1997 Act, and secs. 6166(b)(7)(A) and
6166(b)(8)(A) of the Code)
Present and Prior Law
If certain conditions are met, a decedent's estate may
elect to pay the estate tax attributable to certain closely-
held businesses over a 14-year period. The 1997 Act provided
for a 2-percent interest rate on the estate tax on first $1
million in value of interests in qualified closely-held
businesses, and a rate equal to 45 percent of the regular
deficiency rate on the amount in excess of the portion eligible
for the 2-percent rate, but also provided that none of interest
on the deferred payment of estate taxes is deductible for
income or estate tax purposes. Interests in holding companies
and non-readily-tradeable business interests are not eligible
for the 2-percent rate.
Explanation of Provision
The provision clarifies that deferred payments of estate
tax on holding companies and non-readily-tradable business
interests do not qualify for the 2-percent interest rate, but
instead are subject to a rate of 45 percent of the regular
deficiency rate. Such interest payments are not deductible for
income or estate tax purposes.
Effective Date
The provision generally is effective for decedents dying
after December 31, 1997.
9. Clarification on declaratory judgment jurisdiction of U.S. Tax Court
regarding installment payment of estate tax (sec. 6007(d) of
the 1998 IRS Restructuring Act, sec. 505 of the 1997 Act, and
sec. 7479(a) of the Code)
Present and Prior Law
If certain conditions are met, a decedent's estate may
elect to pay estate tax attributable to certain closely-held
business over a 14-year period. The 1997 Act provided that the
U.S. Tax Court would have jurisdiction to determine whether the
estate of a decedent qualifies for the 14-year installment
payment of estate tax.
Explanation of Provision
The provision clarifies that the jurisdiction of the U.S.
Tax Court to determine whether an estate qualifies for
installment payment of estate tax on closely-held businesses
extends to determining which businesses in an estate are
eligible for the deferral.
Effective Date
The provision is effective for decedents dying after the
date of enactment of the 1997 Act.
10. Clarification of rules governing revaluation of gifts (sec. 6007(e)
of the 1998 IRS Restructuring Act, sec. 506 of the 1997 Act,
and sec. 2504(c) of the Code)
Present and Prior Law
The valuation of a gift becomes final for gift tax purposes
after the statute of limitations on any gift tax assessed or
paid has expired. The 1997 Act extended that rule to apply for
estate tax purposes, provided for a lengthened statute of
limitations for gift tax purposes if certain information is not
disclosed with the gift tax return, and provided jurisdiction
to the U.S. Tax Court to determine the value of any gift.
Explanation of Provision
The provision clarifies that in determining the amount of
taxable gifts made in preceding calendar periods, the value of
prior gifts is the value of such gifts as finally determined,
even if no gift tax was assessed or paid on that gift. For this
purpose, final determinations include, e.g., the value reported
on the gift tax return (if not challenged by the IRS prior to
the expiration of the statute of limitations), the value
determined by the IRS (if not challenged in court by the
taxpayer), the value determined by the courts, or the value
agreed to by the IRS and the taxpayer in a settlement
agreement.
Effective Date
The provision is effective with respect to gifts made after
the date of enactment of the 1997 Act.
11. Clarification with respect to post-mortem conservation easements
(sec. 6007(g) of the 1998 IRS Restructuring Act, sec. 508 of
the 1997 Act, and sec. 2031(c) of the Code)
Present and Prior Law
A deduction is allowed for estate tax purposes for a
contribution of a qualified real property interest to a charity
(or other qualified organization) exclusively for conservation
purposes (sec. 2055(f)). The 1997 Act also provided an election
to exclude from the taxable estate 40 percent of the value of
any land subject to a qualified conservation easement that
meets certain requirements. The 1997 Act provided that the
executor of the decedent's estate, or the trustee of a trust
holding the land, could grant a qualifying easement after the
decedent's death, as long as the easement is granted prior to
the date of the election (generally, within nine months after
the date of the decedent's death).
Explanation of Provision
The provision clarifies that, in the case of a qualified
conservation contribution made after the date of the decedent's
death, an estate tax deduction is allowed under section
2055(f). However, no income tax deduction is allowed to the
estate or the qualified heirs with respect to such post-mortem
conservation easements.
Effective Date
The provision is effective with respect to estates of
decedents dying after December 31, 1997.
G. Amendments to Title VII of the 1997 Act Relating to Incentives for
the District of Columbia (sec. 6008 of the 1998 IRS Restructuring Act,
sec. 701 of the 1997 Act, and secs. 1400, 1400B and 1400C of the Code)
Present and Prior Law
Designation of D.C. Enterprise Zone
Certain economically depressed census tracts within the
District of Columbia are designated as the ``D.C. Enterprise
Zone,'' within which businesses and individual residents are
eligible for special tax incentives. The census tracts that
compose the D.C. Enterprise Zone for purposes of the wage
credit, expensing, and tax-exempt financing incentives include
all census tracts that presently are part of the D.C.
enterprise community and census tracts within the District of
Columbia where the poverty rate is not less than 20 percent.
The D.C. Enterprise Zone designation generally will remain in
effect for five years for the period from January 1, 1998,
through December 31, 2002.
Empowerment zone wage credit, expensing, and tax-exempt financing
The following tax incentives generally are available in the
D.C. Enterprise Zone: (1) a 20-percent wage credit for the
first $15,000 of wages paid to D.C. residents who work in the
D.C. Enterprise Zone; (2) an additional $20,000 of expensing
under Code section 179 for qualified zone property placed in
service by a ``qualified D.C. Zone business''; and (3) special
tax-exempt financing for certain zone facilities.
Qualified D.C. Zone business
For purposes of the increased expensing under section 179,
as well as for purposes of the zero percent capital gains rate
(described below), a corporation or partnership is a qualified
D.C. Zone business if: (1) the sole trade or business of the
corporation or partnership is the active conduct of a
``qualified business'' (defined below) within the D.C. Zone;
(2) at least 50 percent (80 percent for purposes of the zero
percent capital gains rate) of the total gross income of such
entity is derived from the active conduct of a qualified
business within the D.C. Zone; (3) a substantial portion of the
use of the entity's tangible property (whether owned or leased)
is within the D.C. Zone; (4) a substantial portion of the
entity's intangible property is used in the active conduct of
such business; (5) a substantial portion of the services
performed for such entity by its employees are performed within
the D.C. Zone; and (6) less than 5 percent of the average of
the aggregate unadjusted bases of the property of such entity
is attributable to (a) certain financial property, or (b)
collectibles not held primarily for sale to customers in the
ordinary course of an active trade or business. Similar rules
apply to a qualified business carried on by an individual as a
proprietorship.
In general, a ``qualified business'' means any trade or
business. However, a ``qualified business'' does not include
any trade or business that consists predominantly of the
development or holding of intangibles for sale or license. In
addition, a qualified business does not include any private or
commercial golf course, country club, massage parlor, hot tub
facility, suntan facility, racetrack or other facility used for
gambling, liquor store, or certain large farms (so-called
``excluded businesses''). The rental of residential real estate
is not a qualified business. The rental of commercial real
estate is a qualified business only if at least 50 percent of
the gross rental income from the real property is from
qualified D.C. Zone businesses. The rental of tangible personal
property to others also is not a qualified business unless at
least 50 percent of the rental of such property is by qualified
D.C. Zone businesses or by residents of the D.C. Zone.
For purposes of the tax-exempt financing provisions, the
term ``D.C. Zone business'' generally is defined as for
purposes of the increased expensing under section 179. However,
a qualified D.C. Zone business for purposes of the tax-exempt
financing provisions includes a business located in the D.C.
Zone that would qualify as a D.C. Zone business if it were
separately incorporated. In addition, under a special rule
applicable only for purposes of the tax-exempt financing rules,
a business is not required to satisfy the requirements
applicable to a D.C. Zone business until the end of a startup
period if, at the beginning of the startup period, there is a
reasonable expectation that the business will be a qualified
D.C. Zone business at the end of the startup period and the
business makes bona fide efforts to be such a business. With
respect to each property financed by a bond issue, the startup
period ends at the beginning of the first taxable year
beginning more than two years after the later of (1) the date
of the bond issue financing such property, or (2) the date the
property was placed in service (but in no event more than three
years after the date of bond issuance). In addition, if a
business satisfies certain requirements applicable to a
qualified D.C. Zone business for a three-year testing period
following the end of the start-up period and thereafter
continues to satisfy certain business requirements, then it
will be treated as a qualified D.C. Zone business for all years
after the testing period irrespective of whether it satisfies
all of the requirements of a qualified D.C. Zone business.
Zero-percent capital gains rate
A zero-percent capital gains rate applies to capital gains
from the sale of certain qualified D.C. Zone assets held for
more than five years. For purposes of the zero-percent capital
gains rate, the D.C. Enterprise Zone is defined to include all
census tracts within the District of Columbia where the poverty
rate is not less than 10 percent. Only capital gain that is
attributable to the 10-year period beginning January 1, 1998,
and ending December 31, 2007, is eligible for the zero-percent
rate.
In general, qualified ``D.C. Zone assets'' mean stock or
partnership interests held in, or tangible property held by, a
D.C. Zone business. Such assets must generally be acquired
after December 31, 1997, and before January 1, 2003. However,
under a special rule, qualified D.C. Zone assets include
property that was a qualified D.C. Zone asset in the hands of a
prior owner, provided that at the time of acquisition, and
during substantially all of the subsequent purchaser's holding
period, either (1) substantially all of the use of the property
is in a qualified D.C. Zone business, or (2) the property is an
ownership interest in a qualified D.C. Zone business.
First-time homebuyer tax credit
First-time homebuyers of a principal residence in the
District are eligible for a tax credit of up to $5,000 of the
amount of the purchase price, except that the credit phases out
for individual taxpayers with adjusted gross income (``AGI'')
between $70,000 and $90,000 ($110,000-$130,000 for joint
filers). The credit is available with respect to property
purchased after the date of enactment and before January 1,
2001. Any excess credit may be carried forward indefinitely to
succeeding taxable years.
Explanation of Provision
Eligible census tracts
The provision clarifies that the determination of whether a
census tract in the District of Columbia satisfies the
applicable poverty criteria for inclusion in the D.C.
Enterprise Zone for purposes of the wage credit, expensing, and
special tax-exempt financing incentives (poverty rate of not
less than 20 percent) or for purposes of the zero-percent
capital gains rate (poverty rate of not less than 10 percent)
is based on 1990 decennial census data. Thus, data from the
2000 decennial census would not result in the expansion or
other reconfiguration of the D.C. Enterprise Zone.
Qualified D.C. Zone business
The provision modifies section 1400B(c) to clarify that a
proprietorship can constitute a D.C. Zone business for purposes
of the zero-percent capital gains rate.
The provision also clarifies that qualified D.C. Zone
businesses that take advantage of the special tax-exempt
financing incentives do not become subject to a 35-percent zone
resident requirement after the close of the testing period.
Zero-percent capital gains rate
The provision clarifies that there is no requirement that
D.C. Zone business property be acquired by a subsequent
purchaser prior to January 1, 2003, to be eligible for the
special rule applicable to subsequent purchasers.
In addition, the provision clarifies that the termination
of the D.C. Enterprise Zone designation at the end of 2002 will
not, by itself, result in property failing to be treated as a
qualified D.C. Zone asset for purposes of the zero-percent
capital gains rate, provided that the property otherwise
continues to qualify were the D.C. Zone designation in effect.
First-time homebuyer credit
The provision clarifies that, for purposes of the first-
time homebuyer credit, a ``first-time homebuyer'' means any
individual if such individual (and, if married, such
individual's spouse) did not have a present ownership interest
in a principal residence in the District of Columbia during the
one-year period ending on the date of the purchase of the
principal residence to which the credit applies.
The provision also clarifies that the phaseout of the
credit for individual taxpayers with adjusted gross income
between $70,000 and $90,000 ($110,000-$130,000 for joint
filers) applies only in the year the credit is generated, and
does not apply in subsequent years to which the credit may be
carried over.
In addition, the provision clarifies that the term
``purchase price'' means the adjusted basis of the principal
residence on the date the residence is purchased. Newly
constructed residences are treated as purchased by the taxpayer
on the date the taxpayer first occupies such residence.
The provision clarifies that the first-time homebuyer
credit is a nonrefundable personal credit and provides that the
first-time homebuyer credit is claimed after the credits
described in Code sections 25 (credit for interest on certain
home mortgages) and 23 (adoption credit).
Finally, the provision clarifies that the first-time
homebuyer credit is available only for property purchased after
August 4, 1997, and before January 1, 2001. Thus, the credit is
available to first-time home purchasers who acquire title to a
qualifying principal residence on or after August 5, 1997, and
on or before December 31, 2000, irrespective of the date the
purchase contract was entered into.
Effective Date
The provision is effective as of August 5, 1997, the date
of enactment of the 1997 Act.
H. Amendments to Title IX of the 1997 Act Relating to Miscellaneous
Provisions
1. Clarification of qualification for reduced rate of excise tax on
certain hard ciders (sec. 6009(a) of the 1998 IRS Restructuring
Act, sec. 908 of the 1997 Act, and sec. 5041 of the Code)
Present and Prior Law
Distilled spirits are taxed at a rate of $13.50 per proof
gallon; beer is taxed at a rate of $18 per barrel
(approximately 58 cents per gallon); and still wines of 14
percent alcohol or less are taxed at a rate of $1.07 per wine
gallon. The Code defines still wines as wines containing not
more than 0.392 gram of carbon dioxide per hundred milliliters
of wine. Higher rates of tax are applied to wines with greater
alcohol content, to sparkling wines (e.g., champagne), and to
artificially carbonated wines.
Certain small wineries may claim a credit against the
excise tax on wine of 90 cents per wine gallon on the first
100,000 gallons of still wine produced annually (i.e., net tax
rate of 17 cents per wine gallon on wines with an alcohol
content of 14 percent or less). No credit is allowed on
sparkling wines. Certain small breweries pay a reduced tax of
$7.00 per barrel (approximately 22.6 cents per gallon) on the
first 50,000 barrels of beer produced annually.
The 1997 Act provided a lower excise tax rate of 22.6 cents
per gallon on hard cider. Hard cider is defined as a still wine
fermented solely from apples or apple concentrate and water,
containing no other fruit product and containing at least one-
half of one percent and less than 7 percent alcohol by volume.
Once fermented, eligible hard cider may not be altered by the
addition of other fruit juices, flavor, or other ingredients
that alter the flavor that results from the fermentation
process. Qualifying small producers that produce 250,000
gallons or less of hard cider and other wines in a calendar
year may claim a credit of 5.6 cents per wine gallon on the
first 100,000 gallons of hard cider produced. (This credit
produces an effective tax rate of 17 cents per gallon, the same
effective rate as that applies to small producers of the still
wines having an alcohol content of 14 percent or less.)
Explanation of Provision
The provision clarifies that the 22.6-cents-per-gallon tax
rate applies only to apple cider that otherwise would be a
still wine subject to a tax rate of $1.07 per wine gallon,
i.e., still wines having an alcohol content of 14 percent or
less.
Effective Date
The provision is effective as if included in the 1997 Act.
2. Election for 1987 partnerships to continue exception from treatment
of publicly traded partnerships as corporations (sec. 6009(b)
of the 1998 IRS Restructuring Act, sec. 964 of the 1997 Act,
and sec. 7704 of the Code)
Present and Prior Law
In general
In the case of an electing 1987 partnership that elects to
be subject to a 3.5-percent tax on gross income from the active
conduct of a trade or business, the general rule treating a
publicly traded partnership as a corporation does not apply.
The 3.5-percent tax was intended to approximate the corporate
tax the partnership would pay if it were treated as a
corporation for Federal tax purposes.
Tax on partnership
The 3.5-percent tax is imposed on the electing 1987
partnership (sec. 7704(g)(3)). Prior law did not specifically
make inapplicable, however, the general rule that a partnership
as such is not subject to income tax, but rather, the partners
are liable for the tax in their separate or individual
capacities (sec. 701).
Estimated tax payments
Prior law did not specifically make applicable the
requirements for payment of estimated tax that apply generally
to payments of corporate tax.
Explanation of Provision
Tax on partnership
The provision clarifies that the 3.5-percent tax is paid by
the partnership. The general rule of section 701(a) that a
partnership as such is not subject to income tax, but rather,
the partners are liable for the tax in their separate or
individual capacities does not apply to the payment of the 3.5-
percent tax by the partnership.
Estimated tax payments
The provision provides that the corporate estimated tax
payment rules of section 6655 are applied to the 3.5-percent
tax payable by an electing 1987 partnership in the same manner
as if the partnership were a corporation and the tax were
imposed under section 11 (relating to corporate tax rates).
References in section 11 to taxable income are to be applied
for this purpose as if they were references to gross income of
the partnership for the taxable year from the active conduct of
trades and businesses by the partnership.
Effective Date
Tax on partnership
The provision is effective as if enacted with the 1997 Act.
Estimated tax payments
The provision is effective for taxable years beginning
after the date of enactment.
3. Depreciation limitations for electric vehicles (sec. 6009(c) of the
1998 IRS Restructuring Act, sec. 971 of the 1997 Act, and sec.
280F of the Code)
Present and Prior Law
Annual depreciation deductions with respect to passenger
automobiles are limited to specified dollar amounts, indexed
for inflation. Any cost not recovered during the 6-year
recovery period of such vehicles may be recovered during the
years succeeding the recovery period, subject to similar
limitations. The recovery-period limitations are trebled for
vehicles that are propelled primarily by electricity.
Explanation of Provision
The depreciation limitations applicable to post-recovery
periods under section 280F are trebled for vehicles that are
propelled primarily by electricity.
Effective Date
The provision is effective for property placed in service
after August 5, 1997 and before January 1, 2005.
4. Combined employment tax reporting demonstration project (sec.
6009(d) of the 1998 IRS Restructuring Act, sec. 976 of the 1997
Act, and sec. 6103 of the Code)
Present and Prior Law
Traditionally, Federal tax forms are filed with the Federal
Government and State tax forms are filed with individual
states. This necessitates duplication of items common to both
returns. Some States have recently been working with the IRS to
implement combined State and Federal reporting of certain types
of items on one form as a way of reducing the burdens on
taxpayers. The State of Montana and the IRS have cooperatively
developed a system to combine State and Federal employment tax
reporting on one form. The one form would contain exclusively
Federal data, exclusively State data, and information common to
both: the taxpayer's name, address, TIN, and signature.
The Internal Revenue Code prohibits disclosure of tax
returns and return information, except to the extent
specifically authorized by the Internal Revenue Code (sec.
6103). Unauthorized disclosure is a felony punishable by a fine
not exceeding $5,000 or imprisonment of not more than five
years, or both (sec. 7213). An action for civil damages also
may be brought for unauthorized disclosure (sec. 7431). No tax
information may be furnished by the Internal Revenue Service
(``IRS'') to another agency unless the other agency establishes
procedures satisfactory to the IRS for safeguarding the tax
information it receives (sec. 6103(p)).
Implementation of the combined Montana-Federal employment
tax reporting project had been hindered under prior law because
the IRS interpreted section 6103 to apply that provision's
restrictions on disclosure to information common to both the
State and Federal portions of the combined form, although these
restrictions would not have applied to the State with respect
to the State's use of State-requested information if that
information were supplied separately to both the State and the
IRS.
The 1997 Act permits implementation of a demonstration
project to assess the feasibility and desirability of expanding
combined reporting in the future. There are several limitations
on the demonstration project. First, it is limited to the State
of Montana and the IRS. Second, it is limited to employment tax
reporting. Third, it is limited to disclosure of the name,
address, TIN, and signature of the taxpayer, which is
information common to both the Montana and Federal portions of
the combined form. Fourth, it is limited to a period of five
years.
Explanation of Provision
The provision permits Montana to use this information as if
it had collected it separately by eliminating Federal penalties
for disclosure of this information. The provision also corrects
a cross-reference to the provision.
Effective Date
The provision is effective as of the date of enactment of
the 1997 Act (August 5, 1997), and will expire on the date five
years after the date of enactment of the 1997 Act.
5. Modification of operation of elective carryback of existing net
operating losses of the National Railroad Passenger Corporation
(``Amtrak'') (sec. 6009(e) of the 1998 IRS Restructuring Act
and sec. 977 of the 1997 Act)
Present and Prior Law
The 1997 Act provided elective procedures that allow Amtrak
to consider the tax attributes of its predecessors (i.e., those
railroads that were relieved of their responsibility to provide
intercity rail passenger service as a result of the Rail
Passenger Service Act of 1970) in the use of Amtrak's net
operating losses. The benefit allowable under these procedures
is limited to the least of: (1) 35 percent of Amtrak's existing
qualified carryovers, (2) the net tax liability for the
carryback period, or (3) $2,323,000,000. One half of the amount
so calculated will be treated as a payment of the tax imposed
by chapter 1 of the Internal Revenue Code of 1986 for Amtrak's
taxable year ending December 31, 1997, and a similar amount for
Amtrak's taxable year ending December 31, 1998.
The availability of the elective procedures is conditioned
on Amtrak (1) agreeing to make payments of one percent of the
amount it receives to each of the non-Amtrak States to offset
certain transportation related expenditures and (2) using the
balance for certain qualified expenses. Non-Amtrak States are
those States that are not receiving Amtrak service at any time
during the period beginning on the date of enactment and ending
on the date of payment.
Explanation of Provision
The provision provides that the term ``non-Amtrak State''
means any State that is not receiving intercity passenger rail
service from Amtrak as of the date of enactment of the 1997 Act
(August 5, 1997). Thus, a State does not lose its status as a
non-Amtrak State with respect to any payment by reason of
acquiring Amtrak service with any payment from Amtrak under the
1997 Act provision.
Effective Date
The provision is effective as if included in section 977 of
the 1997 Act.
I. Amendments to Title X of the 1997 Act Relating to Revenue-Raising
Provisions
1. Exception from constructive sales rules for certain debt positions
(sec. 6010(a)(1) of the 1998 IRS Restructuring Act, sec.
1001(a) of the 1997 Act, and sec. 1259(b)(2) of the Code)
Present and Prior Law
A taxpayer is required to recognize gain (but not loss)
upon entering into a constructive sale of an ``appreciated
financial position,'' which generally includes an appreciated
position with respect to any stock, debt instrument or
partnership interest. An exception is provided for positions
with respect to debt instruments that have an unconditionally
payable principal amount, that are not convertible into the
stock of the issuer or a related person, and the interest on
which is either fixed, payable at certain variable rates or
based on certain interest payments on a pool of mortgages.
Explanation of Provision
The provision clarifies that, to qualify for the exception
for positions with respect to debt instruments, the position
would either have to meet the requirements as to unconditional
principal amount, non-convertibility and interest terms or,
alternatively, be a hedge of a position meeting these
requirements. A hedge for purposes of the provision includes
any position that reduces the taxpayer's risk of interest rate
or price changes or currency fluctuations with respect to
another position.
Effective Date
The provision is generally effective for constructive sales
entered into after June 8, 1997.
2. Definition of forward contract under constructive sales rules (sec.
6010(a)(2) of the 1998 IRS Restructuring Act, sec. 1001(a) of
the 1997 Act, and sec. 1259(d)(1) of the Code)
Present and Prior Law
A constructive sale of an appreciated financial position
generally results when the taxpayer enters into a forward
contact to deliver the same or substantially identical
property. A forward contract for this purpose is defined as a
contract that provides for delivery of a substantially fixed
amount of property at a substantially fixed price.
Explanation of Provision
The provision clarifies that the definition of a forward
contract includes a contract that provides for cash settlement
with respect to a substantially fixed amount of property at a
substantially fixed price.
Effective Date
The provision is generally effective for constructive sales
entered into after June 8, 1997.
3. Treatment of mark-to-market gains of electing traders (sec.
6010(a)(3) of the 1998 IRS Restructuring Act, sec. 1001(b) of
the 1997 Act, and sec. 475(f)(1)(D) of the Code)
Present and Prior Law
Securities and commodities traders may elect application of
the mark-to-market accounting rules. Gain or loss recognized by
an electing taxpayer under these rules is treated as ordinary
gain or loss.
Under the Self-Employment Contributions Act (``SECA''), a
tax is imposed on an individual's net earnings from self-
employment (``NESE''). Gain or loss from the sale or exchange
of a capital asset is excluded from NESE.
A publicly-traded partnership generally is treated as a
corporation for Federal tax purposes. An exception to this rule
applies if 90 percent or more of the partnership's gross income
consists of passive-type income, which includes gain from the
sale or disposition of a capital asset.
Explanation of Provision
The provision clarifies that gain or loss of a securities
or commodities trader that is treated as ordinary solely by
reason of election of mark-to-market treatment is not treated
as other than gain or loss from a capital asset for purposes of
determining NESE for SECA tax purposes, determining whether the
passive-type income exception to the publicly-traded
partnership rules is met or for purposes of any other Code
provision specified by the Treasury Department in regulations.
Effective Date
The provision applies to taxable years of electing
securities and commodities traders ending after the date of
enactment of the 1997 Act.
4. Special effective date for constructive sale rules (sec. 6010(a)(4)
of the 1998 IRS Restructuring Act, sec. 1001(d) of the 1997
Act, and sec. 1259 of the Code)
Present and Prior Law
The constructive sales rules contain a special effective
date provision for decedents dying after June 8, 1997, if (1) a
constructive sale of an appreciated financial position occurred
before such date, (2) the transaction remains open for not less
than two years, (3) the transaction remains open at any time
during the three years prior to the decedent's death, and (4)
the transaction is not closed within the 30-day period
beginning on the date of enactment of the 1997 Act. If the
requirements of the special effective date provision are met,
both the appreciated financial position and the transaction
resulting in the constructive sale are generally treated as
property constituting rights to receive income in respect of a
decedent under section 691. However, gain with respect to a
position in a constructive sale transaction that accrues after
the transaction is closed is not included in income in respect
of a decedent.
Explanation of Provision
The provision clarifies the special effective date rule to
provide that the rule does not apply if the constructive sale
transaction is closed at any time prior to the end of the 30th
day after the date of enactment of the 1997 Act.
Effective Date
The provision is effective for decedents dying after June
8, 1997.
5. Gain recognition for certain extraordinary dividends (sec. 6010(b)
of the 1998 IRS Restructuring Act, sec. 1011 of the 1997 Act,
and sec. 1059 of the Code)
Present and Prior Law
A corporate shareholder generally can deduct at least 70
percent of a dividend received from another corporation. This
dividends received deduction is 80 percent if the corporate
shareholder owns at least 20 percent of the distributing
corporation and generally 100 percent if the shareholder owns
at least 80 percent of the distributing corporation.
Section 1059 of the Code requires a corporate shareholder
that receives an ``extraordinary dividend'' to reduce the basis
of the stock with respect to which the dividend was received by
the nontaxed portion of the dividend. Whether a dividend is
``extraordinary'' is determined, among other things, by
reference to the size of the dividend in relation to the
adjusted basis of the shareholder's stock. In addition,
dividends resulting from non pro rata redemptions, partial
liquidations, and certain other redemptions are extraordinary
dividends. Pursuant to a provision of the 1997 Act, gain is
recognized to the extent the reduction in basis of stock
exceeds the basis in the stock with respect to which an
extraordinary dividend is received. Prior to the 1997 Act, the
recognition of such gain generally was deferred until the stock
to which the adjustment related was sold or disposed of.
The consolidated return regulations provide basis
adjustment rules with respect to dividends paid within a
consolidated group of corporations. These rules provide that a
dividend paid from one member of a group to its parent reduces
the parent's basis in the stock of the payor and if such
reduction exceeds the parent's basis, an ``excess loss
account'' is created or increased. Excess loss accounts
generally are not restored to income until the occurrence of
certain specified events (e.g., when the corporation to which
the excess loss account relates leaves the consolidated group).
Legislative history indicates that, except as provided in
regulations, the extraordinary dividend provisions do not apply
to result in a double reduction in basis in the case of
distributions between members of an affiliated group filing
consolidated returns or in the double inclusion of earnings and
profits.
Explanation of Provision
The provision provides the Treasury Department regulatory
authority to coordinate the basis adjustment rules of section
1059 and the consolidated return regulations. Congress intended
that, except as provided in regulations to be issued, section
1059 does not cause current gain recognition to the extent that
the consolidated return regulations require the creation or
increase of an excess loss account with respect to a
distribution. Thus, current Treas. Reg. sec. 1.1059(e)-1(a)
does not result in gain recognition with respect to
distributions within a consolidated group to the extent such
distribution results in the creation or increase of an excess
loss account under the consolidated return regulations.
Effective Date
The provision generally is effective for distributions
after May 3, 1995.
6. Treatment of certain corporate distributions (sec. 6010(c) of the
1998 IRS Restructuring Act, sec. 1012 of the 1997 Act, and
secs. 355, 358(c), 351(c) and 368(a) of the Code)
Present and Prior Law
The 1997 Act (sec. 1012(a)) requires a distributing
corporation (``distributing'') to recognize corporate level
gain on the distribution of stock of a controlled corporation
(``controlled'') under section 355 of the Code if, pursuant to
a plan or series of related transactions, one or more persons
acquire a 50-percent or greater interest (defined as 50 percent
or more of the voting power or value of the stock) of either
the distributing or controlled corporation (Code sec. 355(e)).
Certain transactions are excepted from the definition of
acquisition for this purpose, including, under section
355(e)(3)(A)(iv), the acquisition by a person of stock in a
corporation if shareholders owning directly or indirectly stock
possessing more than 50 percent of the voting power and more
than 50 percent of the value of the stock in distributing or
any controlled corporation before such acquisition own directly
or indirectly stock possessing such vote and value in such
distributing or controlled corporation after such
acquisition.83
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\83\ This exception (as certain other exceptions) does not apply if
the stock held before the acquisition was acquired pursuant to a plan
(or series of related transactions) to acquire a 50-percent or greater
interest in the distributing or a controlled corporation.
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In the case of a 50-percent or more acquisition of either
the distributing corporation or the controlled corporation, the
amount of gain recognized is the amount that the distributing
corporation would have recognized had the stock of the
controlled corporation been sold for fair market value on the
date of the distribution. The Conference Report to the 1997 Act
states that no adjustment to the basis of the stock or assets
of either corporation is allowed by reason of the recognition
of the gain.84
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\84\ The 1997 Act does not limit the otherwise applicable Treasury
regulatory authority under section 336(e) of the Code. Nor does it
limit the otherwise applicable provisions of section 1367 with respect
to the effect on shareholder stock basis of gain recognized by an S
corporation under this provision.
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The 1997 Act (sec. 1012(b)(1)) also provides that, except
as provided in regulations, section 355 shall not apply to the
distribution of stock from one member of an affiliated group of
corporations (as defined in section 1504(a)) to another member
of such group (an intragroup spin-off) if such distribution is
part of a such a plan or series of related transactions
pursuant to which one or more persons acquire stock
representing a 50-percent or greater interest in a distributing
or controlled corporation, determined after the application of
the rules of section 355(e).
In addition, the 1997 Act (sec. 1012(b)(2)) provides that
in the case of any distribution of stock of one member of an
affiliated group of corporations to another member under
section 355, the Treasury Department has regulatory authority
under section 358(g) to provide adjustments to the basis of any
stock in a corporation which is a member of such group, to
reflect appropriately the proper treatment of such
distribution.
The 1997 Act (sec. 1012(c)) also modified certain rules for
determining control immediately after a distribution in the
case of certain divisive transactions in which a controlled
corporation is distributed and the transaction meets the
requirements of section 355. In such cases, under section 351
and modified section 368(a)(2)(H) with respect to
reorganizations under section 368(a)(1)(D), those shareholders
receiving stock in the distributed corporation are treated as
in control of the distributed corporation immediately after the
distribution if they hold stock representing a greater than 50
percent interest in the vote and value of stock of the
distributed corporation.
The effective date (1997 Act section 1012(d)(1)) states
that the forgoing provisions of the 1997 Act apply to
distributions after April 16, 1997, pursuant to a plan (or
series of related transactions) which involves an acquisition
occurring after such date (unless certain transition provisions
apply).
Explanation of Provision
Acquisition of a 50-percent or greater interest
The provision clarifies that the acquisitions described in
Code section 355(e)(3)(A) are disregarded in determining
whether there has been an acquisition of a 50-percent or
greater interest in a corporation. However, other transactions
that are part of a plan or series of related transactions could
result in an acquisition of a 50-percent or greater interest.
In the case of acquisitions under section 355(e)(3)(A)(iv),
the provision clarifies that the acquisition of stock in the
distributing corporation or any controlled corporation is
disregarded to the extent that the percentage of stock owned
directly or indirectly in such corporation by each person
owning stock in such corporation immediately before the
acquisition does not decrease.
Example: Shareholder A owns 10 percent of the vote and
value of the stock of corporation D (which owns all of
corporation C). There are nine other equal shareholders of D. A
also owns 100 percent of the vote and value of the stock of
unrelated corporation P. D distributes C to all the
shareholders of D. Thereafter, pursuant to a plan or series of
related transactions, D (worth 100x) merges with corporation P
(worth 900x). After the merger, each of the former shareholders
of corporation D owns stock of the merged entity reflecting the
vote and value attributable to that shareholder's respective 10
percent former stock ownership of D. Each of the former
shareholders of D owns 1 percent of the stock of the merged
corporation, except that shareholder A (who owned 100 percent
of corporation P and 10 percent of corporation D before the
merger) now owns 91 percent of the stock of the merged
corporation. In determining whether a 50-percent or greater
interest in D has been acquired, the interest of each of the
continuing shareholders is disregarded only to the extent there
has been no decrease in such shareholder's direct or indirect
ownership. Thus, the 10-percent interest of A, and the 1-
percent interest of each of the nine other former shareholder
of D, is not counted. The remaining 81 percent ownership of the
merged corporation, representing a decrease of nine percent in
the interests of each of the nine former shareholders other
than A, is counted in determining the extent of an acquisition.
Therefore, a 50-percent or greater interest in D has been
acquired.
Treasury regulatory authority
The provision also clarifies that the regulatory authority
of the Treasury Department under section 358(c) applies to
distributions after April 16, 1997, without regard to whether a
distribution involves a plan (or series of related
transactions) which involves an acquisition. As stated in the
Conference Report to the 1997 Act, with respect to the Treasury
Department regulatory authority under section 358(c) as applied
to intragroup spin-off transactions that are not part of a plan
or series of related transactions that involve an acquisition
of a 50-percent or greater interest under new section 355(f),
it is expected that any Treasury regulations will be applied
prospectively, except in cases to prevent abuse.
Section 351(c) and section 368(a)(2)(H) ``control immediately after''
requirement
In general, the 1997 Act modifications to the control
immediately after requirement of Section 351(c) and section
368(a)(2)(H) were intended to minimize certain differences in
the results of a transaction involving a contribution of assets
to controlled corporation prior to a section 355 spin-off that
could occur depending on whether the distributing or controlled
corporation were acquired subsequent to the spin-off.
The provision clarifies that in the case of certain
divisive transactions in which a corporation contributes assets
to a controlled corporation and then distributes the stock of
the controlled corporation in a transaction that meets the
requirements of section 355 (or so much of section 356 as
relates to section 355), solely for purposes of determining the
tax treatment of the transfers of property to the controlled
corporation by the distributing corporation, the fact that the
shareholders of the distributing corporation dispose of part or
all of the distributed stock, or the fact that the corporation
whose stock was distributed issues additional
stock,85 shall not be taken into account for
purposes of the control immediately after requirement of
section 351(a) or 368(a)(1)(D).
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\85\ This portion of the provision (relating to the fact that the
corporation whose stock was distributed issues additional stock)
reflects the technical correction enacted in section 4003(f) of the Tax
and Trade Relief Extension Act of 1998, described in Part Three of this
publication.
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For purposes of determining the tax treatment of transfers
of property to the controlled corporation by parties other than
the distributing corporation, the disposition of part or all of
the distributed stock continues to be taken into account, as
under prior law, in determining whether the control immediately
after requirement is satisfied.
Example 1: Distributing corporation D transfers appreciated
business X to subsidiary C in exchange for 100 percent of C
stock. D distributes its stock of C to D shareholders. As part
of a plan or series of related transactions, C merges into
unrelated acquiring corporation A, and the C shareholders
receive 25 percent of the vote or value of A stock. If the
requirements of section 355 are met with respect to the
distribution, then the control immediately after requirement
will be satisfied solely for purposes of determining the tax
treatment of the transfers of property by D to C. Accordingly,
the business X assets transferred to C and held by A after the
merger will have a carryover basis from D. Section 355(e) will
require D to recognize gain as if the C stock had been sold at
fair market value.
Example 2: Distributing corporation D transfers appreciated
business X to subsidiary C in exchange for 85 percent of C
stock. Unrelated persons transfer appreciated assets to C in
exchange for the remaining 15 percent of C stock. D distributes
all its stock of C to D shareholders. As part of a plan or
series of related transactions, C merges into acquiring
corporation A; and the interests attributable to the D
shareholders' receipt of C stock with respect to their D stock
in the distribution represent 25 percent of the vote and value
of A stock. If the requirements of section 355 are met with
respect to the distribution, then the control immediately after
requirement will be satisfied solely for purposes of
determining the tax treatment of the transfers of property by D
to C. Section 355(e) will require recognition of gain as if the
C stock had been sold for fair market value. The business X
assets transferred to C and held by A after the merger will
have a carryover basis from D. The persons other than D who
transferred assets to C for 15 percent of C stock will
recognize gain on the appreciation in their assets transferred
to C if the control immediately after requirement is not
satisfied after taking into account any post-spin-off
dispositions that would have been taken into account under
prior law.
Example 3: The facts are the same as in example 2, except
that the interests attributable to the D shareholders' receipt
of C stock with respect to their D stock in the distribution
represent 55 percent of the vote and value of A stock in the
merger. If the requirements of section 355 are met with respect
to the distribution, then the control immediately after
requirement will be satisfied solely for purposes of
determining the tax treatment of the transfers by D to C. The
business X assets in C (and in A after the merger) will
therefore have a carryover basis from D. Because the D
shareholders retain more than 50 percent of the stock of A,
section 355(e) will not apply. The persons other than D who
transferred property for the 15 percent of C stock will
recognize gain on the appreciation in their assets transferred
to C if the control immediately after requirement is not
satisfied after taking into account any post-spin-off
dispositions that would have been taken into account under
prior law.
Effective Date
The provision generally is effective for distributions
after April 16, 1997.
7. Application of section 304 to certain international transactions
(sec. 6010(d) of the 1998 IRS Restructuring Act, sec. 1013 of
the 1997 Act, and sec. 304 of the Code)
Present and Prior Law
Under section 304, if one corporation purchases stock of a
related corporation, the transaction generally is
recharacterized as a redemption. Under section 304(a), as
amended by the 1997 Act, to the extent that a section 304
transaction is treated as a distribution under section 301, the
transferor and the acquiring corporation are treated as if (1)
the transferor had transferred the stock involved in the
transaction to the acquiring corporation in exchange for stock
of the acquiring corporation in a transaction to which section
351(a) applies, and (2) the acquiring corporation had then
redeemed the stock it is treated as having issued. In the case
of a section 304 transaction, both the amount which is a
dividend and the source of such dividend is determined as if
the property were distributed by the acquiring corporation to
the extent of its earnings and profits and then by the issuing
corporation to the extent of its earnings and profits (sec.
304(b)(2)). Section 304(b)(5), as added by the 1997 Act,
provides special rules that apply if the acquiring corporation
in a section 304 transaction is a foreign corporation. Under
section 304(b)(5), the earnings and profits of the acquiring
corporation that are taken into account are limited to the
portion of such earnings and profits that (1) is attributable
to stock of such acquiring corporation held by a corporation or
individual who is the transferor (or a person related thereto)
and who is a U.S. shareholder (within the meaning of sec.
951(b)) of such corporation and (2) was accumulated during
periods in which such stock was owned by such person while such
acquiring corporation was a controlled foreign corporation. For
purposes of this rule, except as otherwise provided by the
Secretary of the Treasury, the rules of section 1248(d)
(relating to certain exclusions from earnings and profits)
apply. The Secretary is to prescribe regulations as
appropriate, including regulations determining the earnings and
profits that are attributable to particular stock of the
acquiring corporation.
For foreign tax credit purposes, under section 902, a U.S.
corporation that receives a dividend from a foreign corporation
in which it owns at least 10 percent of the voting stock is
treated as if it had paid the foreign income taxes paid by the
foreign corporation which are attributable to such dividend.
The Internal Revenue Service issued rulings providing that a
domestic corporation that is a transferor in a section 304
transaction may compute foreign taxes deemed paid under section
902 on the dividends from both a foreign acquiring corporation
and a foreign issuing corporation. Rev. Rul. 92-86, 1992-2 C.B.
199; Rev. Rul. 91-5, 1991-1 C.B. 114. Both rulings involve
section 304 transactions in which both the domestic transferor
and the foreign acquiring corporation are wholly owned by a
domestic parent corporation.
Explanation of Provision
Under the provision, in the case of a section 304
transaction in which the acquiring corporation or the issuing
corporation is a foreign corporation, the Secretary of the
Treasury is to prescribe regulations providing rules to prevent
the multiple inclusion of an item of income and to provide
appropriate basis adjustments, including rules modifying the
application of sections 959 and 961 in the case of a section
304 transaction. It is expected that such regulations will
provide for an exclusion from income for distributions from
earnings and profits of the acquiring corporation and the
issuing corporation that represent previously taxed income
under subpart F. It further is expected that such regulations
will provide for appropriate adjustments to the basis of stock
held by the corporation treated as receiving the distribution
or by the corporation that had the prior inclusion with respect
to the previously taxed income. No inference is intended
regarding the treatment of previously taxed income in a section
304 transaction under prior law. The 1997 Act amendments to
section 304, including the modifications under this provision,
are not intended to change the foreign tax credit results
reached in Rev. Rul. 92-86 and 91-5.
The provision also eliminates the cross-reference to the
rules of section 1248(d) for purposes of determining the
earnings and profits to be taken into account under section
304(b)(5).
Effective Date
The provision generally is effective for distributions or
acquisitions after June 8, 1997.
8. Certain preferred stock treated as ``boot''--treatment of transferor
(sec. 6010(e)(1) of the 1998 IRS Restructuring Act, sec. 1014
of the 1997 Act, and sec. 351(g) of the Code)
Present and Prior Law
The 1997 Act amended section 351 of the Code to provide
that in the case of a person who transfers property to a
controlled corporation and receives nonqualified preferred
stock, section 351(b) will apply to such person. Section 351(b)
provides that if section 351(a) of the Code would apply to an
exchange but for the fact that there is received, in addition
to stock permitted to be received under section 351(a), other
property or money, then gain but no loss to such recipient
shall be recognized. The Conference Report to the 1997 Act
states that if nonqualified preferred stock is received, gain
but not loss shall be recognized.
Explanation of Provision
The provision clarifies that section 351(b) applies to a
transferor who transfers property in a section 351 exchange and
receives nonqualified preferred stock in addition to stock that
is not treated as ``other property'' under that section. Thus,
if a transferor received only nonqualified preferred stock but
the transaction in the aggregate otherwise qualified as a
section 351 exchange, such a transferor would recognize loss
and the basis of the nonqualified preferred stock and of the
property in the hands of the transferee corporation would
reflect the transaction in the same manner as if that
particular transferor had received solely ``other property'' of
any other type. As under the 1997 Act, the nonqualified
preferred stock continues to be treated as stock received by a
transferor for purposes of qualification of a transaction under
section 351(a), unless and until regulations may provide
otherwise.
Effective Date
The provision applies to transactions after June 8, 1997.
9. Certain preferred stock treated as ``boot''--statute of limitations
(sec. 6010(e)(2) of the 1998 IRS Restructuring Act, sec. 1014
of the 1997 Act, and sec. 354(a) of the Code)
Present and Prior Law
Under the 1997 Act, certain preferred stock received in
otherwise tax-free transactions is treated as ``other
property.'' Exchanges of stock in certain recapitalizations of
family-owned corporations are excepted from this rule. A
family-owned corporation is defined as any corporation if at
least 50 percent of the total voting power and value of the
stock of such corporation is owned by the same family for five
years preceding the recapitalization. In addition, a
recapitalization does not qualify for the exception if the same
family does not own 50 percent of the total voting power and
value of the stock throughout the three-year period following
the recapitalization.
Explanation of Provision
The provision provides that the statutory period for the
assessment of any deficiency attributable to a corporation
failing to be a family-owned corporation shall not expire
before the expiration of three years after the date the
Secretary of the Treasury is notified by the corporation (in
such manner as the Secretary may prescribe) of such failure,
and such deficiency may be assessed before the expiration of
such three-year period notwithstanding the provisions of any
other law or rule of law which would otherwise prevent such
assessment.
Effective Date
The provision applies to transactions after June 8, 1997.
10. Establish IRS continuous levy and improve debt collection (sec.
6010(f) of the 1998 IRS Restructuring Act, secs. 1024, 1025,
and 1026 of the 1997 Act, and secs. 6331 and 6334 of the Code)
Present and Prior Law
If any person is liable for any internal revenue tax and
does not pay it within 10 days after notice and demand by the
IRS, the IRS may then collect the tax by levy upon all property
and rights to property belonging to the person, unless there is
an explicit statutory restriction on doing so. A levy is the
seizure of the person's property or rights to property. A levy
on salary and wages is continuous from the date it is first
made until the date it is fully paid or becomes unenforceable.
The 1997 Act provided that a continuous levy is also
applicable to non-means tested recurring Federal payments and
specified wage replacement payments.
Explanation of Provision
The provision clarifies that the IRS must approve the use
of a continuous levy before it may take effect.
Effective Date
The provision is effective for levies issued after the date
of enactment of the 1997 Act (August 5, 1997).
11. Clarification regarding aviation gasoline excise tax (sec. 6010(g)
of the 1998 IRS Restructuring Act, sec. 1031 of the 1997 Act,
and sec. 6421 of the Code)
Present and Prior Law
Before enactment of the 1997 Act, aviation gasoline was
subject to a 19.3-cents-per-gallon tax rate, with 15 cents per
gallon being deposited in the Airport and Airway Trust Fund and
4.3 cents per gallon being retained in the General Fund. The
1997 Act extended the 15-cents-per-gallon rate for 10 years,
through September 30, 2007, and expanded deposits to the Trust
Fund to include revenues from the 4.3-cents-per-gallon rate.
The tax does not apply to fuel used in flight segments outside
the United States or to flight segments from the United States
to foreign countries.
Explanation of Provisions
The provision clarifies the application of the gasoline tax
refund provisions to aviation gasoline used in flight segments
outside the United States and to flight segments from the
United States to foreign countries.
A second provision clarifies of the rules under which
aviation grade kerosene may be removed for use as aviation fuel
without payment of the highway excise taxes.
Effective Date
The provisions are effective as if included in the 1997
Act.
12. Clarification of requirement that registered fuel terminals offer
dyed fuel (sec. 6010(h) of the 1998 IRS Restructuring Act, sec.
1032 of the 1997 Act and sec. 4101 of the Code)
Present and Prior Law
The 1997 Act provides that fuel terminals are eligible to
register to handle non-tax-paid diesel fuel and kerosene only
if the terminal operator offers both undyed (taxable) and dyed
(nontaxable) fuel.86
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\86\ The effective date of the requirement that terminals offer
dyed fuel is delayed two years, to July 1, 2000, under section 9008 of
the Transportation Equity Act for the 21st Century, described in Part
One of this publication.
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Explanation of Provision
The provision clarifies that the Code requires terminals
eligible to handle non-tax-paid diesel to offer dyed diesel
fuel and terminals eligible to handle non-tax-paid kerosene
(including diesel fuel #1 and kerosene-type aviation fuel) to
offer dyed kerosene. The dyed fuel rule does not require that a
terminal offer for sale kerosene as a condition of receiving
diesel fuel on a non-tax-paid basis. Similarly, the dyed fuel
rule does not require terminals that sell only kerosene to
offer diesel fuel as a condition of receiving non-tax-paid
kerosene.
Effective Date
The provision is effective as if included in the 1997 Act.
13. Clarification of treatment of prepaid telephone cards (sec. 6010(i)
of the 1998 IRS Restructuring Act, sec. 1034 of the 1997 Act,
and sec. 4251 of the Code)
Present and Prior Law
A 3-percent excise tax is imposed on amounts paid for local
and toll (long-distance) telephone service and teletypewriter
exchange service. The tax is collected by the provider of the
service from the consumer. In the case of so-called ``prepaid
telephone cards,'' the tax is treated as paid when the card is
transferred by any telecommunications carrier to any person who
is not a telecommunications carrier.
A ``prepaid telephone card'' is defined as any card or
other similar arrangement which permits its holder to obtain
communications services and pay for such services in advance.
Explanation of Provision
The provision inserts the word ``any'' prior to ``other
similar arrangement'' to clarify that payment to a
telecommunications carrier from a third party such as a joint
venture credit card company is treated as payment made by the
holder of the credit card to obtain communication services and
the tax is treated as paid in a manner similar to that applied
to prepaid telephone cards. The tax applies to payments if the
rights to telephone service for which payments are made can be
used in whole or in part for telephone service that, if
purchased directly, would be subject to the 3-percent excise
tax on telephone service. Also, the tax applies without regard
to whether telephone service ultimately is provided pursuant to
the transferred rights.
Effective Date
The provision is effective as if included in the 1997 Act.
14. Modify UBIT rules applicable to second-tier subsidiaries (sec.
6010(j) of the 1998 IRS Restructuring Act, sec. 1041 of the
1997 Act, and sec. 512(b)(13) of the Code)
Present and Prior Law
In general, interest, rents, royalties and annuities are
excluded from the unrelated business income (``UBI'') of tax-
exempt organizations. However, section 512(b)(13) treats
otherwise excluded rent, royalty, annuity, and interest income
as UBI if such income is received from a taxable or tax-exempt
subsidiary that is controlled by the parent tax-exempt
organization.
Under the provision, interest, rent, annuity, or royalty
payments made by a controlled entity to a tax-exempt
organization are subject to the unrelated business income tax
to the extent the payment reduces the net unrelated income (or
increases any net unrelated loss) of the controlled entity. In
this regard, section 512(b)(13)(B)(i)(I) cross references a
non-existent Code section.
The provision generally applies to taxable years beginning
after the date of enactment. However, the provision does not
apply to payments made during the first two taxable years
beginning on or after the date of enactment if such payments
are made pursuant to a binding written contract in effect as of
June 8, 1997, and at all times thereafter before such payment.
Explanation of Provision
The provision clarifies that rent, royalty, annuity, and
interest income that would otherwise be excluded from UBI is
included in UBI under section 512(b)(13) if such income is
received or accrued from a taxable or tax-exempt subsidiary
that is controlled by the parent tax-exempt organization. The
provision further clarifies that the provision does not apply
to any payment received or accrued during the first two taxable
years beginning on or after the date of enactment if such
payment is received or accrued pursuant to a binding written
contract in effect on June 8, 1997, and at all times thereafter
before such payment (but not pursuant to any contract provision
that permits optional accelerated payments).
Effective Date
The provision is effective as of August 5, 1997, the date
of enactment of the 1997 Act.
15. Application of foreign tax credit holding period rule to RICs and
clarification of exception from such rule for securities
dealers (sec. 6010(k) of the 1998 IRS Restructuring Act, sec.
1053 of the 1997 Act, and secs. 853 and 901 of the Code)
Present and Prior Law
Section 901(k), as added by the 1997 Act, generally imposes
a holding period requirement for claiming foreign tax credits
with respect to dividends. Under section 901(k), foreign tax
credits with respect to a dividend from a foreign corporation
or a regulated investment company (a ``RIC'') are disallowed if
the shareholder has not held the stock for more than 15 days in
the case of common stock or more than 45 days in the case of
preferred stock. This disallowance applies both to foreign tax
credits for foreign withholding taxes that are paid on the
dividend where the dividend-paying stock is not held for the
required period and to indirect foreign tax credits for taxes
paid by a lower-tier foreign corporation or a RIC where any of
the stock in the required chain of ownership is not held for
the required period. Foreign taxes for which credits are
disallowed under section 901(k) may be deducted.
Under section 853, a RIC may elect to flow through to its
shareholders the foreign tax credits for foreign taxes paid by
the RIC. Under this election, the RIC is not entitled to a
deduction or credit for foreign taxes paid; the shareholders of
an electing RIC are treated as having paid their proportionate
shares of the foreign taxes paid by the RIC. Accordingly,
foreign tax credits are claimed at the shareholder level and
not at the RIC level.
Section 901(k)(4), ``Exception for certain taxes paid by
securities dealers,'' provides an exception from the section
901(k) holding period requirement for foreign tax credits with
respect to certain dividends received on stock held in the
active conduct of a securities business in a foreign country.
The Ways and Means and Finance committee reports provide that
the exception is available only for dividends received on
``stock which the shareholder holds in its capacity as a dealer
in securities.'' 87
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\87\ H. Rept. 105-148, 105th Cong., 1st Sess. 546 (1997); S. Rept.
105-33, 105th Cong., 1st Sess. 176 (1997).
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Explanation of Provision
Under the provision, the flow-through election of section
853 does not apply to any foreign taxes paid by the RIC for
which a credit is disallowed under section 901(k) because the
RIC did not satisfy the applicable holding period. Accordingly,
such taxes are deductible at the RIC level. The election of
section 853 applies only to foreign taxes with respect to which
the RIC has satisfied any applicable holding period
requirement.
The provision clarifies that the exception of section
901(k)(4) is available only for dividends received on stock
that the shareholder holds in its capacity as a dealer in
securities.
Effective Date
The provision is effective for dividends paid or accrued
more than 30 days after the date of enactment of the 1997 Act.
16. Clarification of provision expanding the limitations on
deductibility of premiums and interest with respect to life
insurance, endowment, and annuity contracts (sec. 6010(o) of
the 1998 IRS Restructuring Act, sec. 1084 of the 1997 Act, and
sec. 264 of the Code)
Present and Prior Law
Master contracts
The 1997 Act provided limitations on the deductibility of
interest and premiums with respect to life insurance, endowment
and annuity contracts. Under the pro rata interest disallowance
provision added by the Act, an exception is provided for any
policy or contract owned by an entity engaged in a trade or
business, covering an individual who is an employee, officer or
director of the trade or business at the time first covered.
The exception applies to any policy or contract owned by an
entity engaged in a trade or business, which covers one
individual who (at the time first insured under the policy or
contract) is (1) a 20-percent owner of the entity, or (2) an
individual (who is not a 20-percent owner) who is an officer,
director or employee of the trade or business.88
Prior law was silent as to the treatment of coverage of such an
individual under a master contract.
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\88\ The exception also applies in the case of a joint-life policy
or contract under which the sole insureds are a 20-percent owner and
the spouse of the 20-percent owner. A joint-life contract under which
the sole insureds are a 20-percent owner and his or her spouse is the
only type of policy or contract with more than one insured that comes
within the exception.
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Reporting
The provision does not apply to any policy or contract held
by a natural person; however, if a trade or business is
directly or indirectly the beneficiary under any policy or
contract, the policy or contract is treated as held by the
trade or business and not by a natural person. In addition, the
provision includes a reporting requirement. Specifically, the
provision provides that the Treasury Secretary shall require
such reporting from policyholders and issuers as is necessary
to carry out the rule applicable when the trade or business is
directly or indirectly the beneficiary under any policy or
contract held by a natural person. Any report required under
this reporting requirement is treated as a statement referred
to in Code section 6724(d)(1) (relating to information
returns). Prior law did not specifically refer to Code section
6724(d)(2) (relating to payee statements).
Additional covered lives
The 1997 Act provision limiting the deductibility of
certain interest and premiums is effective generally with
respect to contracts issued after June 8, 1997. To the extent
of additional covered lives under a contract after June 8,
1997, the contract is treated as a new contract.
Explanation of Provision
Master contracts
The provision clarifies that if coverage for each insured
individual under a master contract is treated as a separate
contract for purposes of sections 817(h), 7702, and 7702A of
the Code, then coverage for each such insured individual is
treated as a separate contract, for purposes of the exception
to the pro rata interest disallowance rule for a policy or
contract covering an individual who is a 20-percent owner,
employee, officer or director of the trade or business at the
time first covered. A master contract does not include any
contract if the contract (or any insurance coverage provided
under the contract) is a group life insurance contract within
the meaning of Code section 848(e)(2). No inference is intended
that coverage provided under a master contract, for each such
insured individual, is not treated as a separate contract for
each such individual for other purposes under prior law.
Reporting
The provision clarifies that the required reporting to the
Treasury Secretary is an information return (within meaning of
sec. 6724(d)(1)), and any reporting required to be made to any
other person is a payee statement (within the meaning of sec.
6724(d)(2)). Thus, the $50-per-report penalty imposed under
sections 6722 and 6723 of the Code for failure to file or
provide such an information return or payee statement apply. It
is clarified that the Treasury Secretary may require reporting
by the issuer or policyholder of any relevant information
either by regulations or by any other appropriate guidance
(including but not limited to publication of a form).
Additional covered lives
The provision clarifies that the treatment of additional
covered lives under the effective date of the 1997 Act
provision applies only with respect to coverage provided under
a master contract, provided that coverage for each insured
individual is treated as a separate contract for purposes of
Code sections 817(h), 7702 and 7702A, and the master contract
or any coverage provided thereunder is not a group life
insurance contract within the meaning of Code section
848(e)(2).
Effective Date
The provisions are effective as if included in the 1997
Act.
17. Clarification of allocation of basis of properties distributed to a
partner by a partnership (sec. 6010(m) of the 1998 IRS
Restructuring Act, sec. 1061 of the 1997 Act, and sec. 732(c)
of the Code)
Present and Prior Law
Present law, as amended by the 1997 Act, provides rules for
allocating basis to property in the hands of a partner that
receives a distribution from a partnership. Under these rules,
basis is first allocated to unrealized receivables and
inventory items in an amount equal to the partnership's
adjusted basis in each property. If the basis to be allocated
is less than the sum of the adjusted bases of the properties in
the hands of the partnership, then, to the extent a decrease is
required to make the total adjusted bases of the properties
equal the basis to be allocated, the decrease is allocated (as
described below) for adjustments that are decreases. To the
extent of any basis not allocated to inventory and unrealized
receivables under the above rules, basis is allocated to other
distributed properties, first to the extent of each distributed
property's adjusted basis to the partnership. Any remaining
basis adjustment, if an increase, is allocated among properties
with unrealized appreciation in proportion to their respective
amounts of unrealized appreciation (to the extent of each
property's appreciation), and then in proportion to their
respective fair market values. If the remaining basis
adjustment is a decrease, it is allocated among properties with
unrealized depreciation in proportion to their respective
amounts of unrealized depreciation (to the extent of each
property's depreciation), and then in proportion to their
respective adjusted bases (taking into account the adjustments
already made).
For purposes of these rules, ``unrealized receivables'' has
the meaning set forth in section 751(c) (as provided in sec.
732(c)(1)(A)(i)). Section 751(c) provides that the term
``unrealized receivables'' includes certain accrued but
unreported income. In addition, the last two sentences of
section 751(c) provide that for purposes of certain specified
partnership provisions (sections 731, 741 and 751), the term
``unrealized receivables'' includes certain property the sale
of which will give rise to ordinary income (for example,
depreciation recapture under sections 1245 or 1250), but only
to the extent of the amount that would be treated as ordinary
income on a sale of that property at fair market value.
Explanation of Provision
The provision clarifies that for purposes of the allocation
rules of section 732(c), ``unrealized receivables'' has the
meaning in section 751(c) including the last two sentences of
section 751(c), relating to items of property that give rise to
ordinary income. Thus, in applying the allocation rules of
section 732(c) to property listed in the last two sentences of
section 751(c), such as property giving rise to potential
depreciation recapture, the amount of unrealized appreciation
in any such property does not include any amount that would be
treated as ordinary income if the property were sold at fair
market value, because such amount is treated as a separate
asset for purposes of the basis allocation rules.89
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\89\ Treasury regulations under section 751(b) provide for a
similar bifurcation of assets among potential ordinary income amounts
and other amounts in applying the definition of ``unrealized
receivables'' for purposes of that section. Treas. Reg. 1.751-1(c)(4).
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For example, assume that a partnership has 3 partners, A, C
and D. The partnership has 6 assets. Three are capital assets
each with adjusted basis equal to fair market value of $20,000.
The other three are depreciable equipment each with adjusted
basis of $5,000 and fair market value of $30,000. Each of the
pieces of equipment would have $25,000 of depreciation
recapture if sold by the partnership for its $30,000 value. A
has a basis in its partnership interest of $60,000. Assume that
one of the capital assets and one of the pieces of equipment is
distributed to A in liquidation of its interest. A is treated
as receiving three assets: (1) depreciation recapture (an
unrealized receivable) with a basis to the partnership of zero
and a value of $25,000; (2) a piece of equipment with a basis
to the partnership of $5,000 and a value of $5,000 (its $30,000
value reduced by the $25,000 of depreciation recapture); and
(3) a capital asset with a basis to the partnership of $20,000
and a value of $20,000.
Under the provision, A's $60,000 basis in its partnership
interest is allocated as follows. First, basis is allocated to
the depreciation recapture, an unrealized receivable, in an
amount equal to the partnership's adjusted basis in it, or zero
(sec. 732(c)(1)(A)(i)). Then basis is allocated to the extent
of each of the other distributed properties' adjusted basis to
the partnership, or $5,000 to the equipment (not including the
depreciation recapture), and $20,000 to the capital asset. A's
remaining $35,000 of basis is allocated next among properties
(other than inventory and unrealized receivables) with
unrealized appreciation, in proportion to their respective
amounts of unrealized appreciation (to the extent of each
property's appreciation), but neither of the distributed
properties to which basis may be allocated has unrealized
appreciation. Basis is then allocated then in proportion to the
properties' respective fair market values ($5,000 for the
equipment and $20,000 for the capital asset). Thus, of the
remaining $35,000, $7,000 is allocated to the equipment, so
that its total basis in the partner's hands is $12,000; and
$28,000 is allocated to the capital asset, so that its total
basis in the partner's hands is $48,000.
Effective Date
The provision is effective as if enacted with the 1997 Act.
18. Clarification to the definition of modified adjusted gross income
for purposes of the earned income credit phaseout (sec. 6010(p)
of the 1998 IRS Restructuring Act, sec. 1085(d) of the 1997
Act, and sec. 32(c) of the Code)
Present and Prior Law
The earned income credit (``EIC'') is phased out above
certain income levels. For individuals with earned income (or
modified adjusted gross income (``modified AGI''), if greater)
in excess of the beginning of the phaseout range, the maximum
credit amount is reduced by the phaseout rate multiplied by the
amount of earned income (or modified AGI, if greater) in excess
of the beginning of the phaseout range. For individuals with
earned income (or modified AGI, if greater) in excess of the
end of the phaseout range, no credit is allowed. The definition
of modified AGI used for the phase out of the earned income
credit is the sum of: (1) AGI with certain losses disregarded,
and (2) certain nontaxable amounts not generally included in
AGI. The losses disregarded are: (1) net capital losses (if
greater than zero); (2) net losses from trusts and estates; (3)
net losses from nonbusiness rents and royalties; (4) 75 percent
of the net losses from business, computed separately with
respect to sole proprietorships (other than in farming), sole
proprietorships in farming, and other businesses.90
The nontaxable amounts included in modified AGI which are
generally not included in AGI are: (1) tax-exempt interest; and
(2) nontaxable distributions from pensions, annuities, and
individual retirement arrangements (but only if not rolled over
into similar vehicles during the applicable rollover period).
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\90\ The 1997 Act increased the amount of net losses from
businesses, computed separately with respect to sole proprietorships
(other than farming), sole proprietorships in farming, and other
businesses disregarded from 50 percent to 75 percent.
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Explanation of Provision
The provision clarifies that the two nontaxable amounts
that are added to adjusted gross income to compute modified AGI
for purposes of the EIC phaseout are additions to adjusted
gross income and not disregarded losses.
Effective Date
The provision is effective for taxable years beginning
after December 31, 1997.
J. Amendments to Title XI of the 1997 Act Relating to Foreign
Provisions
1. Application of attribution rules under PFIC provisions (sec.
6011(b)(2) of the 1998 IRS Restructuring Act, sec. 1121 of the
1997 Act, and sec. 1298 of the Code)
Present and Prior Law
Special attribution rules apply to the extent that the
effect is to treat stock of a passive foreign investment
company (``PFIC'') as owned by a U.S. person. In general, if 50
percent or more in value of the stock of a corporation is owned
(directly or indirectly) by or for any person, such person is
considered as owning a proportionate part of the stock owned
directly or indirectly by or for such corporation, determined
based on the person's proportionate interest in the value of
such corporation's stock. However, this 50-percent limitation
does not apply in the case of a corporation that is a PFIC.
Accordingly, a person that is a shareholder of a PFIC is
considered as owning a proportionate part of the stock owned
directly or indirectly by or for such PFIC, without regard to
whether such shareholder owns at least 50 percent of the PFIC's
stock by value.
A corporation is not treated as a PFIC with respect to a
shareholder during the qualified portion of the shareholder's
holding period for the stock of such corporation. The qualified
portion of the shareholder's holding period generally is the
portion of such period which is after the effective date of the
1997 Act and during which the shareholder is a United States
shareholder (as defined in sec. 951(b)) and the corporation is
a controlled foreign corporation.
If a corporation is not treated as a PFIC with respect to a
shareholder for the qualified portion of such shareholder's
holding period, it was unclear whether the attribution rules
that apply with respect to stock owned by or for such
corporation apply without regard to the requirement that the
shareholder own 50 percent or more of the corporation's stock.
Explanation of Provision
The provision clarifies that the attribution rules apply
without regard to the provision that treats a corporation as a
non-PFIC with respect to a shareholder for the qualified
portion of the shareholder's holding period. Accordingly, stock
owned directly or indirectly by or for a corporation that is
not treated as a PFIC for the qualified portion of the
shareholder's holding period nevertheless will be attributed to
such shareholder, regardless of the shareholder's ownership
percentage of such corporation.
Effective Date
The provision is effective for taxable years of U.S.
persons beginning after December 31, 1997 and taxable years of
foreign corporations ending with or within such taxable years
of U.S. persons.
2. Treatment of PFIC option holders (sec. 6011(b)(1) of the 1998 IRS
Restructuring Act, sec. 1121 of the 1997 Act, and secs. 1297
and 1298 of the Code)
Present and Prior Law
Under the provisions of subpart F, a controlled foreign
corporation (a ``CFC'') is defined generally as any foreign
corporation if U.S. persons own more than 50 percent of the
corporation's stock (measured by vote or value), taking into
account only those U.S. persons that own at least 10 percent of
the stock (measured by vote only) (sec. 957). Stock ownership
includes not only stock owned directly, but also stock owned
indirectly through a foreign entity or constructively (sec.
958). Pursuant to the constructive ownership rules, a person
that has an option to acquire stock generally is treated as
owning such stock (secs. 958(b) and 318(a)(4)).
The U.S. 10-percent shareholders of a CFC are subject to
current U.S. tax on their pro rata shares of certain income of
the CFC and their pro rata shares of the CFC's earnings
invested in certain U.S. property (sec. 951). For purposes of
determining the U.S. shareholder's includible pro rata share of
the CFC's income and earnings, only stock held directly or
indirectly through a foreign entity (and not stock held
constructively) is taken into account (secs. 951(b) and
958(a)).
A foreign corporation is a passive foreign investment
company (a ``PFIC'') if it satisfies a passive income test or a
passive assets test for the taxable year (sec. 1297). A U.S.
shareholder of a PFIC generally is subject to U.S. tax, plus an
interest charge, on distributions from a PFIC and gain realized
upon a disposition of PFIC stock (sec. 1291). Alternatively,
the U.S. shareholder may elect either to be subject to current
U.S. tax on the shareholder's share of the PFIC's earnings or,
in the case of PFIC stock that is marketable, to mark to market
the PFIC stock (secs. 1293 and 1296). For purposes of the PFIC
provisions, constructive ownership rules apply (sec. 1298(a)).
Under these rules, an option to acquire stock is treated as
stock for purposes of applying the interest charge regime to a
disposition of such option, and the holding period for stock
acquired pursuant to the exercise of an option includes the
holding period for such option (sec. 1298(a)(4) and prop.
Treas. reg. secs. 1.1291-1(d) and (h)(3)).
A corporation that is a CFC is also a PFIC if it meets the
passive income test or the passive assets test. Under section
1297(e), as added by the 1997 Act, a corporation is not treated
as a PFIC with respect to a shareholder during the period after
December 31, 1997 in which the corporation is a CFC and the
shareholder is a U.S. shareholder (within the meaning of sec.
951(b)) thereof. Under this rule eliminating the overlap
between the PFIC and CFC provisions, a shareholder that is
subject to the subpart F rules with respect to a corporation is
not also subject to the PFIC rules with respect to such
corporation.
Explanation of Provision
Under the provision, the elimination of the overlap between
the PFIC and the CFC provisions generally does not apply to a
U.S. person with respect to PFIC stock that such person is
treated as owning by reason of an option to acquire such stock.
Accordingly, for example, the PFIC rules continue to apply to a
U.S. person that holds only an option on stock of a corporation
that is a CFC because such person does not own stock of such
corporation directly or indirectly through a foreign entity and
therefore is not subject to the current inclusion rules of
subpart F with respect to such corporation. However, under the
provision, the elimination of the overlap does apply to a U.S.
person that holds an option on stock if such stock is held by a
person that is subject to the current inclusion rules of
subpart F with respect to such stock and is not a tax-exempt
person. Accordingly, an option holder is not subject to the
PFIC rules with respect to an option if the option is on stock
that is held by a non-tax-exempt person that is subject to the
current inclusion rules of subpart F with respect to such
stock.
Effective Date
The provision is effective for taxable years of U.S.
persons beginning after December 31, 1997 and taxable years of
foreign corporations ending with or within such taxable years
of U.S. persons.
3. Application of PFIC mark-to-market rules to RICs (sec. 6011(c)(3) of
the 1998 IRS Restructuring Act, sec. 1122 of the 1997 Act, and
sec. 1296 of the Code)
Present and Prior Law
Under section 1296, as added by the 1997 Act, a shareholder
of a passive foreign investment company (a ``PFIC'') may make a
mark-to-market election with respect to the stock of the PFIC,
provided that such stock is marketable. Under this election,
the shareholder includes in income each year an amount equal to
the excess, if any, of the fair market value of the PFIC stock
as of the close of the taxable year over the shareholder's
adjusted basis in such stock. The shareholder is allowed a
deduction for the excess, if any, of the shareholder's adjusted
basis in the PFIC stock over its fair market value as of the
close of the taxable year, but only to the extent of any net
mark-to-market gains with respect to such stock included by the
shareholder under section 1296 for prior years.
The mark-to-market election of section 1296 is effective
for taxable years of U.S. persons beginning after December 31,
1997 and taxable years of foreign corporations ending with or
within such taxable years of U.S. persons. Prior to the
enactment of section 1296, a proposed Treasury regulation
provided for a mark-to-market election with respect to PFIC
stock held by certain regulated investment companies (``RICs'')
(prop. Treas. reg. sec. 1.1291-8). Under this mark-to-market
election, gains but not losses were recognized.
Section 1296(j) provides rules applicable in the case of a
shareholder that makes a mark-to-market election under section
1296 later than the beginning of the shareholder's holding
period for the PFIC stock. Special rules apply in the case of a
RIC that makes such a mark-to-market election under section
1296 with respect to PFIC stock that the RIC had previously
marked to market under the proposed Treasury regulation.
Explanation of Provision
Under the provision, for purposes of determining allowable
deductions for any excess of the shareholder's adjusted basis
in PFIC stock over the fair market value of the stock as of the
close of the taxable year, deductions are allowed to the extent
not only of prior mark-to-market inclusions under section 1296
but also of prior mark-to-market inclusions under the proposed
Treasury regulation applicable to a RIC that holds stock in a
PFIC.
Effective Date
The provision is effective for taxable years of U.S.
persons beginning after December 31, 1997 and taxable years of
foreign corporations ending with or within such taxable years
of U.S. persons.
4. Interaction between the PFIC provisions and other mark-to-market
rules (sec. 6011(c)(2) of the 1998 IRS Restructuring Act, sec.
1122 of the 1997 Act, and secs. 1291 and 1296 of the Code)
Present and Prior Law
A U.S. shareholder of a passive foreign investment company
(a ``PFIC'') generally is subject to U.S. tax, plus an interest
charge, on distributions from a PFIC and gain realized upon a
disposition of PFIC stock (sec. 1291). As an alternative to
this interest charge regime, the U.S. shareholder may elect to
be subject to current U.S. tax on the shareholder's share of
the PFIC's earnings (sec. 1293). Section 1296, as added by the
1997 Act, provides another alternative available in the case of
a PFIC the stock of which is marketable; under section 1296, a
U.S. shareholder of a PFIC may make a mark-to-market election
with respect to the stock of the PFIC.
The interest charge regime generally does not apply to
distributions from, and dispositions of stock of, a PFIC for
which the U.S. shareholder has made either a mark-to-market
election under section 1296 or an election to include the
PFIC's earnings in income currently (sec. 1291(d)(1)). However,
special coordination rules provide for limited application of
the interest charge regime in the case of a U.S. shareholder
that makes a mark-to-market election under section 1296 later
than the beginning of the shareholder's holding period for the
PFIC stock (sec. 1296(j)).
Under section 475(a), a dealer in securities is required to
mark to market certain securities held by the dealer. Under
section 475(f), as added by the 1997 Act, a trader in
securities may elect to mark to market securities held in
connection with the person's trade or business as a trader in
securities. Other provisions similarly allow stock to be marked
to market (e.g., sec. 1092(b)(1) and temp. Treas. reg. Sec.
1.1092(b)-4T).
Explanation of Provision
Under the provision, the interest charge regime generally
does not apply to distributions from, and dispositions of stock
of, a PFIC where the U.S. shareholder has marked to market such
stock under section 475 or any other provision (in the same
manner that such regime does not apply where the shareholder
has marked to market such stock under sec. 1296). In addition,
under the provision, coordination rules like those provided in
section 1296(j) apply in the case of a U.S. shareholder that
marks to market PFIC stock under section 475 or any other
provision later than the beginning of the shareholder's holding
period for the PFIC stock.
Effective Date
The provision is effective for taxable years of U.S.
persons beginning after December 31, 1997 and taxable years of
foreign corporations ending with or within such taxable years
of U.S. persons. No inference is intended regarding the
treatment of PFIC stock that was marked to market prior to the
effective date of the provision.
5. Information reporting with respect to certain foreign corporations
and partnerships (sec. 6011(f) of the 1998 IRS Restructuring
Act, sec. 1142 of the 1997 Act, and sec. 6038 of the Code)
Present and Prior Law
The 1997 Act added reporting rules that apply to controlled
foreign corporations and foreign partnerships (sec. 6038).
Explanation of Provision
The provision clarifies that guidance relating to the
furnishing of required information is to be provided by the
Secretary of the Treasury (not specifically through
regulations), and conforms the use of the defined term, foreign
business entity.
Effective Date
The provision is effective as if included in the 1997 Act.
K. Amendments to Title XII of the 1997 Act Relating to Simplification
Provisions
1. Travel expenses of Federal employees participating in a Federal
criminal investigation (sec. 6012(a) of the 1998 IRS
Restructuring Act, sec. 1204 of the 1997 Act, and sec. 162 of
the Code)
Present and Prior Law
Unreimbursed ordinary and necessary travel expenses paid or
incurred by an individual in connection with temporary
employment away from home (e.g., transportation costs and the
cost of meals and lodging) are generally deductible, subject to
the two-percent floor on miscellaneous itemized deductions.
Travel expenses paid or incurred in connection with indefinite
employment away from home, however, are not deductible. A
taxpayer's employment away from home in a single location is
indefinite rather than temporary if it lasts for one year or
more; thus, no deduction is permitted for travel expenses paid
or incurred in connection with such employment (sec. 162(a)).
If a taxpayer's employment away from home in a single location
lasts for less than one year, whether such employment is
temporary or indefinite is determined on the basis of the facts
and circumstances.
The 1997 Act provided that the one-year limitation with
respect to deductibility of expenses while temporarily away
from home does not include any period during which a Federal
employee is certified by the Attorney General (or the Attorney
General's designee) as traveling on behalf of the Federal
Government in a temporary duty status to investigate or provide
support services to the investigation of a Federal crime. Thus,
expenses for these individuals during these periods are fully
deductible, regardless of the length of the period for which
certification is given (provided that the other requirements
for deductibility are satisfied).
Explanation of Provision
The provision clarifies that prosecuting a Federal crime or
providing support services to the prosecution of a Federal
crime is considered part of investigating a Federal crime.
Effective Date
The provision is effective for amounts paid or incurred
with respect to taxable years ending after the date of
enactment of the 1997 Act.
2. Magnetic media returns for partnerships having more than 100
partners (sec. 6012(d) of the 1998 IRS Restructuring Act, sec.
1223 of the 1997 Act, and sec. 6724(c) of the Code)
Present and Prior Law
The 1997 Act added rules providing that the Treasury
Secretary is to require partnerships with more than 100
partners to file returns on magnetic media (sec. 6011(e)).
These rules impose a penalty in the case of failure to meet
magnetic media requirements.
Explanation of Provision
The provision clarifies that the penalty under section
6724(c) for failure to comply with the requirement of filing
returns on magnetic media applies to the extent such a failure
occurs with respect to more than 100 information returns, in
the case of a partnership with more than 100 partners.
Effective Date
The provision is effective as if enacted in the 1997 Act.
3. Effective date for provisions relating to electing large
partnerships, partnership returns required on magnetic media,
and treatment of partnership items of individual retirement
arrangements (sec. 6012(e) of the 1998 IRS Restructuring Act
and sec. 1226 of the 1997 Act)
Present and Prior Law
Rules for simplified flowthrough and simplified audit
procedures for electing large partnerships, as well as a March
15 due date for furnishing information to partners of an
electing large partnership, were added by the 1997 Act. The
1997 Act also added a rule providing that partnership returns
are required on magnetic media, and modified the treatment of
partnership items of individual retirement arrangements. The
1997 Act statement of managers provided that these provisions
apply to partnership taxable years beginning after December 31,
1997. The statute provided that the rules for simplified
flowthrough for electing large partnerships apply to
partnership taxable years beginning after December 31, 1997
(1997 Act sec. 1221(c)), although the statute also provided
that all the provisions apply to partnership taxable years
ending on or after December 31, 1997 (1997 Act sec. 1226).
Explanation of Provision
The provision provides that these provisions apply to
partnership taxable years beginning after December 31, 1997.
Effective Date
The provision is effective as if enacted in the 1997 Act.
4. Modification of distribution rules for REITs (sec. 6012(g) of the
1998 IRS Restructuring Act, sec. 1256 of the 1997 Act, and sec.
857 of the Code)
Present and Prior Law
In general, a real estate investment trust (``REIT'') is an
entity that receives most of its income from passive real
estate investments and meets certain other requirements. A REIT
receives conduit treatment (i.e., one level of tax) for income
distributed to its shareholders. A REIT generally must
distribute 95 percent of its earnings (sec. 857(a)(1)). An
entity loses its status as a REIT if it retains non-REIT
earnings and profits (sec. 857(a)(2)). A REIT simplification
provision in the 1997 Act provides that any distribution from a
REIT will be deemed to first come from the earliest earnings
and profits of the entity. As a result, in the case of a REIT
with accumulated REIT earnings and profits that inherits
subsequently earned non-REIT earnings and profits (e.g., by way
of merger with a C corporation), that the entity must
distribute both the accumulated REIT earnings and profits as
well as the inherited non-REIT earnings and profits under the
1997 Act provision in order to retain its REIT status.
Explanation of Provision
The provision amends the simplification provision to
provide that any distribution from a REIT will be deemed to
first come from earnings and profits that were generated when
the entity did not qualify as a REIT. The provision does not
change the requirement that a REIT must distribute 95 percent
of its REIT earnings, or any other requirement.
Effective Date
The provision is effective for taxable years beginning
after August 5, 1997.
L. Amendments to Title XIII of the 1997 Act Relating to Estate, Gift
and Trust Simplification
1. Clarification of treatment of revocable trusts for purposes of the
generation-skipping transfer tax (sec. 6013(a) of the 1998 IRS
Restructuring Act, sec. 1305 of the 1997 Act, and secs. 2652
and 2654 of the Code)
Present and Prior Law
The 1997 Act provided an irrevocable election to treat a
qualified revocable trust as part of the decedent's estate for
Federal income tax purposes. For this purpose, a qualified
revocable trust is any trust (or portion thereof) which was
treated as owned by the decedent with respect to whom the
election is being made, by reason of a power in the grantor
(i.e., trusts that are treated as owned by the decedent solely
by reason of a power in a nonadverse party would not qualify).
A conforming change was also made to section 2652(b) for
generation-skipping transfer tax purposes.
Explanation of Provision
The provision clarifies that the election to treat a
qualified revocable trust as part of the decedent's estate
applies for generation-skipping transfer tax purposes only with
respect to the application of section 2654(b) (describing when
a single trust may be treated as two or more trusts). The
election has no other effect for generation-skipping transfer
tax purposes.
Effective Date
The provision applies to decedents dying after the date of
enactment of the 1997 Act.
2. Provision of regulatory authority for simplified reporting of
funeral trusts terminated during the taxable year (sec. 6013(b)
of the 1998 IRS Restructuring Act, sec. 1309 of the 1997 Act
and sec. 685(f) of the Code)
Present and Prior Law
The 1997 Act provided an election which allows the trustee
of a qualified pre-need funeral trust to elect special tax
treatment for such a trust, to the extent the trust would
otherwise be treated as a grantor trust. As part of this
provision, the Secretary of the Treasury was granted regulatory
authority to prescribe rules for simplified reporting of all
trusts having a single trustee.
Explanation of Provision
The provision clarifies that a pre-need funeral trust may
continue to qualify for these special rules for the 60-day
period after the decedent's death, even though the trust ceases
to be a grantor trust during that time. In addition, the
provision extends the Secretary's regulatory authority to
include rules providing for the inclusion of trusts terminated
during the year (e.g., in the event of the death of the
beneficiary) in the simplified reporting.
Effective Date
The provision applies to decedents dying after the date of
enactment of the 1997 Act.
M. Amendment to Title XIV of the 1997 Act Relating to Excise Tax
Simplification
1. Transfers of bulk imports of wine to wineries or beer to breweries
(secs. 6014(a)(1) and (b)(1) of the 1998 IRS Restructuring Act,
secs. 1421 and 1422 of the 1997 Act, and secs. 5043 and 5054 of
the Code)
Present and Prior Law
Prior to the 1997 Act, imported beer and wine always were
taxed upon importation (secs. 5043 and 5054). The 1997 Act
added provisions for non-tax-paid transfers of bulk imports to
breweries and wineries (secs. 5364 and 5418).
Explanation of Provision
The provision conforms the provisions imposing tax in all
cases on importation to recognize these allowed transfers.
Under the provision, liability for tax payment shifts to the
brewery or winery when bulk imports are transferred with
payment of tax, just as those parties are liable for payment of
tax on domestically produced beer and wine.
Effective Date
The provision is effective as if included in the 1997 Act.
2. Refunds when wine returned to wineries or beer returned to breweries
(sec. 6014(a)(2) and (b)(2) of the 1998 IRS Restructuring Act,
secs. 1421 and 1422 of the 1997 Act, and secs. 5044 and 5056 of
the Code)
Present and Prior Law
The 1997 Act added a provision that tax is refunded when
tax-paid wine is returned to a winery or tax-paid beer is
returned to a brewery (secs. 5044 and 5056). The Code
provisions allowing these refunds speak of beverages produced
in the United States. A separate provision of the 1997 Act
provided that beer and wine imported ``in bulk'' would be taxed
under the rules for domestically produced beverages.
Explanation of Provision
The provision coordinates the refund provisions with the
provision on tax treatment of bulk imports.
Effective Date
The provision is effective as if included in the 1997 Act.
3. Clarification of the provision allowing wine imported in bulk to be
transferred to a U.S. winery without payment of tax (sec.
6014(b)(3) of the 1998 IRS Restructuring Act, sec. 1422 of the
1997 Act, and sec. 5364 of the Code)
Present and Prior Law
Wine is subject to an excise tax ranging from $1.07 per
gallon to $3.40 per gallon, depending on its alcohol content.
Distilled spirits are subject to excise tax at a rate of $13.50
per proof gallon. A tax credit equal to the difference between
the distilled spirits tax rate and the wine tax rate is allowed
for wine that is blended into distilled spirits products (sec.
5010). The wine excise tax is imposed on removal of the
beverage from a winery, or on importation. The 1997 Act
included a provision allowing wine to be imported in bulk and
transferred to a U.S. winery without payment of tax (generally
until the wine is removed from the winery).
U.S. law defines wine generally as alcohol that is derived
from fruit or fruit residues (``natural wine''). Natural wine
may not be fortified with grain or other non-fruit derived
alcohol if produced in the United States. Certain other
countries allow wine that is marketed as a natural wine to be
fortified with alcohol from other sources. U.S. law follows the
laws of the country of origin in classifying imported wine.
Explanation of Provision
The provision clarifies that the provision of the 1997 Act
liberalizing rules for bulk importation of wine applies only to
alcohol that would qualify as a natural wine if produced in the
United States.
Effective Date
The provision is effective as if included in the 1997 Act.
N. Amendment to Title XV of the 1997 Act Relating to Pensions and
Employee Benefits
1. Treatment of certain disability payments to public safety employees
(sec. 6015(c) of the 1998 IRS Restructuring Act, sec. 1529 of
the 1997 Act, and sec. 104 of the Code)
Present and Prior Law
Certain payments made on behalf of full-time employees of
any police or fire department organized and operated by a State
(or any political subdivision, agency, or instrumentality
thereof) are excludable from income. This treatment applies to
payments made on account of heart disease or hypertension of
the employee and that were received in 1989, 1990, or 1991
pursuant to a State law as amended on May 19, 1992, which
irrebuttably presumed that heart disease and hypertension are
work-related illnesses (but only for employees separating from
service before July 1, 1992). Claims for refund or credit for
overpayments resulting from the provision may be filed up to 1
year after August 5, 1997, without regard to the otherwise
applicable statute of limitations.
Explanation of Provision
In order to address problems taxpayers were encountering
with the IRS in seeking refunds under the prior-law provision,
the provision clarifies the scope of the exclusion.
The provision provides that payments made on account of
heart disease or hypertension of the employee and that were
received in 1989, 1990, or 1991 pursuant to a State law as
described under prior law, or received by an individual
referred to in such State law under any other statute,
ordinance, labor agreement, or similar provision as a
disability pension payment or in the nature of a disability
pension payment attributable to employment as a police officer
or as a fireman is excludable from income.
Effective Date
The provision is effective as if included in the Taxpayer
Relief Act.
O. Amendments to Title XVI of the 1997 Act Relating to Technical
Corrections
1. Application of requirements for SIMPLE IRAs in the case of mergers
and acquisitions (sec. 6016(a)(1) of the 1998 IRS Restructuring
Act, sec. 1601(d)(1) of the 1997 Act, and sec. 408(p)(2) of the
Code)
Present and Prior Law
If an employer maintains a qualified plan and a SIMPLE IRA
in the same year due to an acquisition, disposition or similar
transaction, the SIMPLE IRA is treated as a qualified salary
reduction arrangement for the year of the transaction and the
following calendar year provided rules similar to the special
coverage rules of section 410(b)(6)(C) apply. There is a
similar provision with respect to an employer who, because of
an acquisition, disposition or similar transaction, fails to be
an eligible employer because such employer employs more than
100 employees. In this situation, the employer is treated as an
eligible employer for two years following the transaction
provided rules similar to the coverage rules of section
410(b)(6)(C)(i) apply.
Explanation of Provision
The provision conforms the treatment applicable to SIMPLE
IRAs upon acquisition, disposition or similar transaction for
purposes of (1) the 100 employee limit, (2) the exclusive plan
requirement, and (3) the coverage rules for participation. In
the event of such a transaction, the employer is treated as an
eligible employer and the arrangement is treated as a qualified
salary reduction arrangement for the year of the transaction
and the two following years, provided rules similar to the
rules of section 410(b)(6)(C)(i)(II) are satisfied and the
arrangement would satisfy the requirements to be a qualified
salary reduction arrangement after the transaction if the trade
or business that maintained the arrangement prior to the
transaction had remained a separate employer.
Effective Date
The provision is effective as if included in the Small
Business Job Protection Act of 1996.
2. Treatment of Indian tribal governments under section 403(b) (sec.
6016(a)(2) of the 1998 IRS Restructuring Act, sec.
1601(d)(4)(A) of the 1997 Act, and sec. 403(b) of the Code)
Present and Prior Law
Any 403(b) annuity contract purchased in a plan year
beginning before January 1, 1995, by an Indian tribal
government is treated as purchased by an entity permitted to
maintain a tax-sheltered annuity plan. Such contracts may be
rolled over into a section 401(k) plan maintained by the Indian
tribal government in accordance with the rollover rules of
section 403(b)(8). An employee participating in a 403(b)
annuity contract of the Indian tribal government may roll over
amounts from such contract to a section 401(k) plan maintained
by the Indian tribal government whether or not the annuity
contract is terminated.
Explanation of Provision
The provision clarifies that an employee participating in a
403(b)(7) custodial account of the Indian tribal government may
roll over amounts from such account to a section 401(k) plan
maintained by the Indian tribal government.
Effective Date
The provision is effective as if included in the Small
Business Job Protection Act of 1996.
TECHNICAL CORRECTIONS TO OTHER TAX LEGISLATION
A. Amendments Related to Transportation Equity Act for the 21st Century
(``TEA 21'')
1. Simplified refund provisions for tax on gasoline, diesel fuel and
kerosene (sec. 6017 of the 1998 IRS Restructuring Act and sec.
6427(i)(2) of the Code)
Present and Prior Law
TEA 21 included a provision combining the Code refund
provisions for gasoline, diesel fuel, and kerosene and reducing
the minimum claim amount. Under TEA 21, claims may be filed
once a $750 threshold is reached for gasoline, diesel fuel, and
kerosene combined, and overpayments attributable to multiple
calendar quarters may be aggregated in determining whether this
threshold is met (rather than claims being filed only with
respect to a single calendar quarter).
Explanation of Provision
The provision conforms a Code timing provision to reflect
the portion of the TEA 21 provision that allows aggregation of
multiple calendar quarters into a single refund claim.
Effective Date
The provision is effective as if included in the amendments
made by section 909 of the TEA 21.
2. Conforming changes to Highway Trust Fund expenditure authority (sec.
9015 of the 1998 IRS Restructuring Act)
Present and Prior Law
TEA 21 authorized expenditures for Federal Highway and mass
transit programs through September 30, 2003. These authorized
expenditures are approved purposes under the Code's Highway
Trust Fund expenditure provisions.
Explanation of Provision
The Act made numerous non-tax corrections to the
expenditure provisions of TEA 21 (secs. 9001-9016 of the Act),
and also included necessary conforming amendments to the Code's
Highway Trust Fund Expenditure authority.
B. Amendment Related to the Small Business Job Protection Act of 1996
1. Treatment of adoption tax credit carryovers (sec. 6018 of the 1998
IRS Restructuring Act, sec. 1807(a) of the small business job
protection act of 1996, and sec. 23 of the Code)
Present and Prior Law
Taxpayers are allowed a maximum nonrefundable credit
against income tax liability of $5,000 per child for qualified
adoption expenses paid or incurred by the taxpayer. In the case
of a special needs adoption, the maximum credit amount is
$6,000 ($5,000 in the case of a foreign special needs
adoption). To the extent the otherwise allowable credit exceeds
the tax liability limitation of section 26 (reduced by other
personal credits) the excess is carried forward as an adoption
credit into the next taxable year, up to a maximum of five
taxable years.
The credit is phased out ratably for taxpayers with
modified adjusted gross income (AGI) above $75,000, and is
fully phased out at $115,000 of modified AGI. For these
purposes modified AGI is computed by increasing the taxpayer's
AGI by the amount otherwise excluded from gross income under
Code sections 911, 931, or 933 (relating to the exclusion of
income of U.S. citizens or residents living abroad; residents
of Guam, American Samoa, and the Northern Mariana Islands, and
residents of Puerto Rico, respectively).
Explanation of Provision
The provision clarifies that the AGI phaseout only applies
in the year that the credit is generated and is not reapplied
to further reduce any carryforward amounts.
Effective Date
The provision is effective as if included in the Small
Business Job Protection Act of 1996.
C. Amendments Related to Taxpayer Bill of Rights 2
1. Disclosure requirements for apostolic organizations (sec. 6019(a)
and (b) of the 1998 IRS Restructuring Act, sec. 1313 of the
Taxpayer Bill of Rights 2, and sec. 6104 of the Code)
Present and Prior Law
Section 501(d) provides tax-exempt status to certain
religious or apostolic associations or corporations, if such
associations or corporations have a common treasury or
community treasury, even if such associations or corporations
engage in business for the common benefit of the members, but
only if the members thereof include (at the time of filing
their returns) in their gross income their entire pro rata
shares, whether distributed or not, of the taxable income of
the association or corporation for such year.91 Any
amount so included in the gross income of a member is treated
as a dividend received. The effect of section 501(d) is to
exempt the religious and apostolic associations or corporations
which conduct communal activities (such as farming) from the
Federal corporate-level income tax and the undistributed-
profits tax, provided that members claim their shares of the
corporation's income on their own individual returns.
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\91\ Under section 501(d), the requirement of a ``common treasury''
or ``community treasury'' is satisfied when all of the income generated
from property owned by the organization is placed into a common fund
that is maintained by such organization and is used for the maintenance
and support of its members, with all members having equal, undivided
interests in this common fund, but no right to claim title to any part
thereof. See Twin Oaks Community, Inc. v. Commissioner, 87 T.C. 1233,
at 1254 (1986). See also Rev. Rul. 78-100, 1978-1 C.B. 162 (sec. 501(d)
entity must be supported by internally operated business activities
rather than merely being supported by wages of members who are engaged
in outside employment).
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Section 6033 generally requires tax-exempt organizations to
file annual information returns, and such information returns
are available for public inspection under sections 6104(b) and
6104(e), except that public disclosure is not required of the
identity of contributors to an organization. Section 501(d)
entities must include with their annual information return
(Form 1065) a Schedule K-1 that identifies the members of the
association or corporation and their ratable portions of net
income and expenses.
Explanation of Provision
The provision amends sections 6104(b) and 6104(e) to
provide that public disclosure is not required of a Schedule K-
1 filed by a religious or apostolic organization described in
section 501(d).
Effective Date
The provision is effective on the date of enactment.
2. Disclosure of returns and return information (sec. 6019(c) of the
1998 IRS Restructuring Act and sec. 6103(e) of the Code)
Present and Prior Law
The rules regarding disclosure of returns and return
information were amended in 1996 to permit certain disclosures
in two additional circumstances. In the case of a deficiency
with respect to a joint return of individuals who are no longer
married or no longer residing in the same household, the
Treasury Secretary is permitted to disclose to one such
individual whether there has been an attempt to collect the
deficiency from the other individual, the general nature of
such collection activities, and the amount collected (sec.
6103(e)(8)). If the Treasury Secretarydetermines that a person
is liable for a penalty for failure to collect and pay over tax, the
Secretary is permitted to disclose to that person the name of any other
person liable for that penalty, and whether there has been an attempt
to collect the deficiency from the other individual, the general nature
of such collection activities, and the amount collected (sec.
6103(e)(9)).
Explanation of Provision
The provision clarifies that these disclosures, like
certain other disclosures permitted under present law, may be
made under section 6103(e)(6) to the duly authorized attorney
in fact of the person making the disclosure request.
Effective Date
The provision takes effect on date of enactment.
D. Amendment Related to the Omnibus Budget Reconciliation Act of 1993
1. Allow deduction for unused employer social security credit (sec.
6020 of the 1998 IRS Restructuring Act, sec. 13443 of the
Omnibus Budget Reconciliation Act of 1993, and sec. 196 of the
Code)
Present and Prior Law
The general business credit (``GBC'') consists of various
individual tax credits (including the employer social security
credit of Code section 45B) allowed with respect to certain
qualified expenditures and activities. In general, the various
individual tax credits contain provisions that prohibit
``double benefits,'' either by denying deductions in the case
of expenditure-related credits or by requiring income
inclusions in the case of activity-related credits. Unused
credits may be carried back one year and carried forward 20
years. Section 196 allows a deduction to the extent that
certain portions of the GBC expire unused after the end of the
carry forward period. Section 196 does not allow a deduction to
the extent that the portion of the GBC that expires unused
after the end of the carry forward period relates to the
employer social security credit.
Explanation of Provision
The provision allows a deduction to the extent that the
portion of the GBC relating to the employer social security
credit expires unused after the end of the carry forward
period.
Effective Date
The provision is effective as if included in the Omnibus
Budget Reconciliation Act of 1993.
E. Amendment Related to the Revenue Reconciliation Act of 1990
1. Earned income credit qualification rules (sec. 6021 of the 1998 IRS
Restructuring Act, sec. 11111(a) of the Revenue Reconciliation
Act of 1990, as amended by sec. 742 of the Uruguay Round
Agreements Act and sec. 451(a) of the Personal Responsibility
and Work Opportunity Reconciliation Act of 1996, and sec. 32 of
the Code)
Present and Prior Law
In general
In order to claim the earned income credit (``EIC''), an
individual must be an eligible individual. To be an eligible
individual, an individual must include a taxpayer
identification number (``TIN'') for the taxpayer and the
taxpayer's spouse and must either have a qualifying child or
meet other requirements. In order to claim the EIC without a
qualifying child, an individual must not be a dependent and
must be over age 24 and under age 65.
Qualifying child
A qualifying child must meet a relationship test, an age
test, an identification test, and a residence test. Under the
relationship and age tests, an individual is eligible for the
EIC with respect to another person only if that other person:
(1) is a son, daughter, or adopted child (or a descendent of a
son, daughter, or adopted child); a stepson or stepdaughter; or
a foster child of the taxpayer (a foster child is defined as a
person whom the individual cares for as the individual's child;
it is not necessary to have a placement through a foster care
agency); and (2) is under the age of 19 at the close of the
taxable year (or is under the age of 24 at the end of the
taxable year and was a full-time student during the taxable
year), or is permanently and totally disabled. Also, if the
qualifying child is married at the close of the year, the
individual may claim the EIC for that child only if the
individual may also claim that child as a dependent.
To satisfy the identification test, an individual must
include on their tax return the name, age, and ``TIN'' of each
qualifying child.
The residence test requires that a qualifying child must
have the same principal place of abode as the taxpayer for more
than one-half of the taxable year (for the entire taxable year
in the case of a foster child), and that this principal place
of abode must be located in the United States. For purposes of
determining whether a qualifying child meets the residence
test, the principal place of abode shall be treated as in the
United States for any period during which a member of the Armed
Forces is stationed outside the United States while serving on
extended active duty.
Explanation of Provision
The provision clarifies that the identification requirement
is a requirement for claiming the EIC, rather than an element
of the definitions of ``eligible individual'' and ``qualifying
child.''
Effective Date
The provision is effective as if included in the originally
enacted related legislation.
TITLE VII. REVENUE OFFSETS
A. Employer Deductions for Vacation and Severance Pay (sec. 7001 of the
Act and sec. 404 of the Code)
Present and Prior Law
For deduction purposes, any method or arrangement that has
the effect of a plan deferring the receipt of compensation or
other benefits for employees is treated as a deferred
compensation plan (sec. 404(b)). In general, contributions
under a deferred compensation plan (other than certain pension,
profit-sharing and similar plans) are deductible in the taxable
year in which an amount attributable to the contribution is
includible in income of the employee. However, vacation pay
that is treated as deferred compensation is deductible for the
taxable year of the employer in which the vacation pay is paid
to the employee (sec. 404(a)(5)).
Temporary Treasury regulations provide that a plan, method,
or arrangement defers the receipt of compensation or benefits
to the extent it is one under which an employee receives
compensation or benefits more than a brief period of time after
the end of the employer's taxable year in which the services
creating the right to such compensation or benefits are
performed. A plan, method or arrangement is presumed to defer
the receipt of compensation for more than a brief period of
time after the end of an employer's taxable year to the extent
that compensation is received after the 15th day of the 3rd
calendar month after the end of the employer's taxable year in
which the related services are rendered (the ``2\1/2\ month''
period). A plan, method or arrangement is not considered to
defer the receipt of compensation or benefits for more than a
brief period of time after the end of the employer's taxable
year to the extent that compensation or benefits are received
by the employee on or before the end of the applicable 2\1/2\
month period. (Temp. Treas. Reg. sec. 1.404(b)-1T A-2).
The Tax Court recently addressed the issue of when vacation
pay and severance pay are considered deferred compensation in
Schmidt Baking Co., Inc., 107 T.C. 271 (1996). In Schmidt
Baking, the taxpayer was an accrual basis taxpayer with a
fiscal year that ended December 28, 1991. The taxpayer funded
its accrued vacation and severance pay liabilities for 1991 by
purchasing an irrevocable letter of credit on March 13, 1992.
The parties stipulated that the letter of credit represented a
transfer of a substantially vested interest in property to
employees for purposes of section 83, and that the fair market
value of such interest was includible in the employees' gross
incomes for 1992 as a result of the transfer.92 The
Tax Court held that the purchase of the letter of credit, and
the resulting income inclusion, constituted payment of the
vacation and severance pay within the 2\1/2\ month period.
Thus, the vacation and severance pay were treated as received
by the employees within the 2\1/2\ month period and were not
treated as deferred compensation. The vacation pay and
severance pay were deductible by the taxpayer for its 1991
fiscal year pursuant to its normal accrual method of
accounting.
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\92\ While the rules of section 83 may govern the income inclusion,
section 404 governs the deduction if the amount involved is deferred
compensation.
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Reasons for Change
The Congress believed that the decision in Schmidt Baking
reaches an inappropriate and unintended result. To permit
methods such as that used in Schmidt Baking to be considered
payment or receipt would allow taxpayers to avoid the 2\1/2\
month rule and inappropriately accelerate deductions. The
Congress believed that the intent of the 2\1/2\ month rule
clearly was to provide that a deduction for deferred
compensation is not available for the current taxable year
unless the compensation is actually paid to employees within
2\1/2\ months after the end of the year. Moreover, previous
legislative histories reflect Congressional intent and
understanding that compensation actually paid beyond the 2\1/2\
month period is deferred compensation.93
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\93\ See, e.g., the legislative history to sec. 10201 of the
Omnibus Budget Reconciliation Act of 1987.
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Further, the Congress was concerned that taxpayers may
inappropriately extend the rationale of Schmidt Baking to other
situations in which a deduction or other tax consequences are
contingent upon an item being paid. The Congress did not
believe that, as a general rule, letters of credit and similar
mechanisms should be considered payment for any purposes of the
Code.
Explanation of Provision
Under the Act, for purposes of determining whether an item
of compensation is deferred compensation (under sec. 404), the
compensation is not considered to be paid or received until
actually received by the employee. In addition, an item of
deferred compensation is not considered paid to an employee
until actually received by the employee. The provision is
intended to overrule the result in Schmidt Baking. For example,
with respect to the determination of whether vacation pay is
deferred compensation, the fact that the value of the vacation
pay is includible in the income of employees within the
applicable 2\1/2\ month period is not relevant. Rather, the
vacation pay must have been actually received by employees
within the 2\1/2\ month period in order for the compensation
not to be treated as deferred compensation.
It is intended that similar arrangements, in addition to
the letter of credit approach used in Schmidt Baking, do not
constitute actual receipt by the employee, even if there is an
income inclusion. Thus, for example, actual receipt does not
include the furnishing of a note or letter or other evidence of
indebtedness of the taxpayer, whether or not the evidence is
guaranteed by any other instrument or by any third party. As a
further example, actual receipt does not include a promise of
the taxpayer to provide service or property in the future
(whether or not the promise is evidenced by a contract or other
written agreement). In addition, actual receipt does not
include an amount transferred as a loan, refundable deposit, or
contingent payment. Amounts set aside in a trust for employees
are not considered to be actually received by the employee.
The provision does not change the rule under which deferred
compensation (other than vacation pay and deferred compensation
under qualified plans) is deductible in the year includible in
the gross income of employees participating in the plan if
separate accounts are maintained for each employee.
While Schmidt Baking involved only vacation pay and
severance pay, there is concern that this type of arrangement
may be used to attempt to circumvent other provisions of the
Code where payment is required in order for a deduction to
occur. Thus, it is intended that the Secretary will prevent the
use of similar arrangements. No inference is intended that the
result in Schmidt Baking is prior law beyond its immediate
facts or that the use of similar arrangements is permitted
under present or prior law.
The provision does not affect the determination of whether
an item is includible in income. Thus, for example, using the
mechanism in Schmidt Baking for vacation pay could still result
in income inclusion to the employees, but the employer would
not be entitled to a deduction for the vacation pay until
actually paid to and received by the employees.
In light of the change being made and its effect on all
cases involving this issue, it is intended that the Secretary
consider whether, on a case-by-case basis, continued challenge
of these arrangements for prior years represents the best use
of litigation resources.
Effective Date
The provision is effective for taxable years ending after
the date of enactment (after July 22, 1998). Any change in
method of accounting required by the provision is treated as
initiated by the taxpayer with the consent of the Secretary of
the Treasury. Any adjustment required by section 481 as a
result of the change is taken into account over a three-year
period beginning with the first year for which the provision is
effective.
Revenue Effect
The provision is estimated to increase Federal fiscal year
budget receipts by $593 million in 1998, $893 million in 1999,
$997 million in 2000, $456 million in 2001, $308 million in
2002, $156 million in 2003, $163 million in 2004, $172 million
in 2005, $180 million in 2006, and $189 million in 2007.
B. Freeze Grandfather Status of Stapled REITs (sec. 7002 of the Act)
Present and Prior Law
A real estate investment trust (``REIT'') is an entity that
receives most of its income from passive real estate related
investments and that essentially receives pass-through
treatment for income that is distributed to shareholders. If an
electing entity meets the qualifications for REITstatus, the
portion of its income that is distributed to the investors each year
generally is taxed to the investors without being subjected to a tax at
the REIT level. In general, a REIT must derive its income from passive
sources and not engage in any active trade or business.
A REIT must satisfy a number of tests on a year-by-year
basis that relate to the entity's: (1) organizational
structure; (2) source of income; (3) nature of assets; and (4)
distribution of income. Under the source-of-income tests, at
least 95 percent of its gross income generally must be derived
from rents, dividends, interest and certain other passive
sources (the ``95-percent test''). In addition, at least 75
percent of its income generally must be from real estate
sources, including rents from real property and interest on
mortgages secured by real property (the ``75-percent test'').
A REIT is permitted to have a wholly-owned subsidiary
subject to certain restrictions (a ``qualified REIT
subsidiary''). All of the assets, liabilities, income,
deductions and credits of a qualified REIT subsidiary are
treated as attributes of the REIT.
In a stapled REIT structure, both the shares of a REIT and
a C corporation may be traded, but are subject to a provision
that they may not be sold separately. In the Deficit Reduction
Act of 1984 (the ``1984 Act''), Congress required that, in
applying the tests for REIT status, all stapled entities are
treated as one entity (sec. 269B(a)(3)). The 1984 Act included
grandfather rules, one of which provided that certain then-
existing stapled REITs were not subject to the new provision
(sec. 136(c)(3) of the 1984 Act). That grandfather rule
provided that the new provision did not apply to a REIT that
was a part of a group of stapled entities if the group of
entities was stapled on June 30, 1983, and included a REIT on
that date.
Reasons for Change
In the 1984 Act, Congress eliminated the tax benefits of
the stapled REIT structure out of concern that it could
effectively result in one level of tax on active corporate
business income that would otherwise be subject to two levels
of tax. Congress also believed that allowing a corporate
business to be stapled to a REIT was inconsistent with the
policy that led Congress to create REITs.
As part of the 1984 Act provision, Congress provided
grandfather relief to the small number of stapled REITs that
were already in existence. Since 1984, however, many of the
grandfathered stapled REITs have been acquired by new owners.
Some have entered into new lines of businesses, and most of the
grandfathered REITs have used the stapled structure to engage
in large-scale acquisitions of assets. As a result, Congress
believed that such unlimited relief from a general tax
provision by a handful of taxpayers raised new questions not
only of fairness, but of unfair competition, because the
stapled REITs are in direct competition with other companies
that cannot use the benefits of the stapled structure.
Congress believed that it would be unfair to remove the
benefit of the stapled REIT structure with respect to real
estate interests that had already been acquired. On the other
hand, Congress believed that future acquisitions of interests
in real property by these grandfathered entities, or
improvements of property that are tantamount to new
acquisitions, should not be accorded the benefits of the
stapled REIT structure. Accordingly, the rules of the Act
generally apply with respect to real property interests
acquired by the REIT or a stapled entity after March 26, 1998,
pursuant to transactions not in progress on that date. Further,
Congress was concerned that the some of the benefit of the
stapled REIT structure could be derived through mortgages and
interests in subsidiaries and partnerships. Accordingly, the
Act provides rules for mortgages acquired after March 26, 1998,
and indirect acquisitions of real property interests through
entities after such date (with transition relief similar to
that for direct acquisitions).
Explanation of Provision
Overview
Under the Act, rules similar to the rules of prior law
treating a REIT and all stapled entities as a single entity for
purposes of determining REIT status (sec. 269B) apply to real
property interests acquired after March 26, 1998, by an
existing stapled REIT, a stapled entity, or a subsidiary or
partnership in which a 10-percent or greater interest is owned
by an existing stapled REIT or stapled entity (together
referred to as the ``stapled REIT group''), unless the real
property interest is grandfathered as described below. Special
rules apply to certain mortgages acquired by the stapled REIT
group after March 26, 1998, where a member of the stapled REIT
group performs services with respect to the property secured by
the mortgage.
Rules for real property interests
In general
The Act generally applies to real property interests
acquired by a member of the stapled REIT group after March 26,
1998. Real property interests that are acquired by a member of
the REIT group after such date, and which are not grandfathered
under the rules described below, are referred to as
``nonqualified real property interests''.
The Act treats activities and gross income of a stapled
REIT group with respect to nonqualified real property interests
held by any member of the stapled REIT group as activities and
income of the REIT for certain purposes in the same manner as
if the stapled REIT group were a single entity. This treatment
applies for purposes of the following provisions that depend on
a REIT's gross income: (1) the 95-percent test (sec.
856(c)(2)); (2) the 75-percent test (sec. 856(c)(3)); (3) the
``reasonable cause'' exception for failure to meet either test
(sec. 856(c)(6)); and (4) the special tax on excess gross
income for REITs with net income from prohibited transactions
(sec. 857(b)(5)).
Thus, for example, where a stapled entity leases
nonqualified real property from the REIT and earns gross income
from operating the property, such gross income is subject to
the Act. TheREIT and the stapled entity are treated as a single
entity, with the result that the lease payments from the stapled entity
to the REIT are ignored. The gross income earned by the stapled entity
from operating the property is treated as gross income of the REIT,
with the result that either the 75-percent or 95-percent test might not
be met and REIT status might be lost. Similarly, where a stapled entity
leases property from a third party after March 26, 1998, and uses that
property in a business, the gross income it derives is treated as
income of the REIT because the lease is a nonqualified real property
interest.
In the event that a stapled REIT group ceases to be
stapled, the rules treating assets, activities and gross income
of members of the stapled REIT group as attributes of the REIT
apply only to the portion of the year in which the group was a
stapled REIT group.
Grandfathered real property interests
Under the Act, all real property interests acquired by a
member of the stapled REIT group after March 26, 1998, are
treated as nonqualified real property interests subject to the
general rules described above, unless they qualify under one of
the grandfather rules. An option to acquire real property is
generally treated as a real property interest for purposes of
the Act. Real property acquired by exercise of a call option
after March 26, 1998, is treated as a nonqualified real
property interest, even though the call option was acquired
before such date. However, real property acquired by exercise
of a put option, buy-sell agreement or an agreement relating to
a third party default that was binding on March 26, 1998, and
at all times thereafter, is generally treated as a
grandfathered real property interest. It is the intention of
Congress that this rule apply only to substantive economic
arrangements that are outside of the control of the stapled
REIT group.
Under the Act, grandfathered real property interests
include properties acquired by a member of the stapled REIT
group after March 26, 1998, pursuant to a written agreement
which was binding on March 26, 1998, and all times thereafter.
Grandfathered properties also include certain properties the
acquisition of which were described in a public announcement or
in a filing with the Securities and Exchange Commission on or
before March 26, 1998.
A real property interest does not generally lose its status
as a grandfathered interest by reason of a repair to, an
improvement of, or a lease of, the real property. Thus, if a
REIT owns a grandfathered real property interest that is leased
to a third party and, at the expiration of that lease, the REIT
leases the property to a stapled entity, the interest would
remain a grandfathered interest. Similarly, a lease or renewal
of a lease of grandfathered property between members of the
stapled REIT group, or a renewal of a lease of property from a
third party to a member of the stapled REIT group, does not
generally terminate grandfathered status, whether the renewal
is pursuant to the terms of the lease or
otherwise.94 However, renewal of a lease can cause
loss of grandfather status if the property is improved to the
extent that grandfather status would be lost under the
improvement rules described below. Moreover, for leases and
renewals entered into after March 26, 1998 (whether from
members of the stapled REIT group or third parties),
grandfather status is lost if the rent on the lease or renewal
exceeds an arm's length rate.
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\94\ In the case of a lease from a third party, a renewal will not
qualify if there is a significant time period between the two
tenancies.
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An improvement of a grandfathered real property interest
causes loss of grandfather status and becomes a nonqualified
real property interest in certain circumstances. Any expansion
beyond the boundaries of the land of the otherwise
grandfathered interest occurring after March 26, 1998, is
treated as a non-qualified real property interest to the extent
of such expansion. Moreover, any improvement of an otherwise
grandfathered real property interest (within its land
boundaries) that is placed in service after December 31, 1999,
is treated as a separate nonqualified real property interest in
certain circumstances. Such treatment applies where (1) the
improvement changes the use of the property and (2) its cost is
greater than (a) 200 percent of the undepreciated cost of the
property (prior to the improvement) or (b) in the case of
property acquired where there is a substituted basis, the fair
market value of the property on the date that the property was
acquired by the stapled entity or the REIT. There is an
exception for improvements placed in service before January 1,
2004, pursuant to a binding contract in effect on December 31,
1999, and at all times thereafter. The rule treating
improvements as nonqualified real property interests could
apply, for example, if a member of the stapled REIT group
constructs a building after December 31, 1999, on previously
undeveloped raw land that had been acquired on or before March
26, 1998.
Ownership through entities
If a REIT or stapled entity owns, directly or indirectly, a
10-percent-or-greater interest in a corporate subsidiary or
partnership (or other entity described below) that owns a real
property interest, the above rules apply with respect to a
proportionate part of the entity's real property interests,
activities and gross income. Thus, any real property interest
acquired by such a subsidiary or partnership that is not
grandfathered is treated as a nonqualified real property
interest held by the REIT or stapled entity in the same
proportion as its ownership interest in the entity. The same
proportion of the subsidiary's or partnership's gross income
from any nonqualified real property interest owned by it or
another member of the stapled REIT group will be treated as
income of the REIT under the rules described above. However, an
interest in real property acquired by a grandfathered 10-
percent-or-greater partnership or subsidiary is treated as
grandfathered if such interest would be a grandfathered
interest if held directly by the REIT or stapled entity. Thus,
an interest in real property acquired by a 10-percent-or-
greater partnership or subsidiary pursuant to a binding written
agreement, public announcement, SEC filing, put option, buy-
sell agreement or agreement relating to a third-party default
(a ``qualified transaction'') is treated as grandfathered if
such interest would be a grandfathered interest if acquired
directly by the REIT or stapled entity.
Similar rules attributing the proportionate part of the
subsidiary's or partnership's real property interests and gross
income will apply when a REIT or a stapled entity acquires a
10-percent-or-greater interest (or in the case of a previously-
owned entity, acquires an additional interest) after March 26,
1998, with exceptions for interests acquired by a member of the
stapledREIT group pursuant to qualified transactions described
above. Transition relief can apply to both an entity's assets and the
interest in the entity under the above rules. Thus, if on March 26,
1998, and at all times thereafter, a stapled entity has a binding
written contract to buy 10-percent or more of the stock of a
corporation and the corporation also has a binding written contract to
buy real property, no portion of the property will be treated as a
nonqualified real property interest as a result of the transaction.
Under the above rules, gross income of a REIT or stapled
entity with respect to a nonqualified real property interest
held by a 10-percent-or-greater partnership or subsidiary is
subject to the rules for nonqualified real property interests
only in proportion to the interest held in the partnership or
subsidiary. For example, assume that a stapled entity has a
contract to manage a nonqualified real property interest held
by a partnership in which the stapled entity owns an 85-percent
interest. Under the above rules, for purposes of applying the
gross income tests, 85 percent of the partnership's activities
and gross income from the property are attributed to the REIT.
As a result, 85 percent of the stapled entity's income from the
management contract is ignored under the single-entity analysis
described above. The remaining 15 percent of the management fee
is not treated as gross income of the REIT because it is not
income from a nonqualified real property interest held or
deemed held by the REIT or a stapled entity.
Where a REIT's or stapled entity's interest in a
partnership or subsidiary changes during the year, the rules
treating a proportionate part of the assets, activities and
gross income of the partnership or subsidiary as attributes of
the REIT or stapled entity apply on a partial-year basis.
There is a provision intended to deal with the special
situation of so-called ``UPREIT'' partnerships (see Treas. reg.
1.701-2(d)(example 4)), which generally treats 100 percent of
the real property interests, mortgages, activities and gross
income of such partnerships as interests, activities and gross
income of the REIT or stapled entity that owns a partnership
interest. The provision applies where (i) an exempt REIT or
stapled entity owned directly or indirectly) at least a 60-
percent interest in a partnership as of March 26, 1998, (ii) 90
percent or more of the interests in the partnership (other than
those held by the exempt REIT or stapled entity) are or will be
redeemable or exchangeable for consideration with a value
determined with reference to the stock of the REIT or stapled
entity or both. The provision also applies to an interest in a
partnership formed after March 26, 1998, which meets the
provision's other requirements, where the partnership was
formed to mirror the stapling of an exempt REIT and a stapled
entity in connection with an acquisition agreed to or announced
on or before March 26, 1998. If, as of January 1, 1999, more
than one partnership owned (directly or indirectly) by either
an exempt REIT or stapled entity meets the requirements of the
provision, only the largest such partnership (determined by
aggregate asset bases) is treated as meeting such requirements.
Intragroup transfers
A transfer, direct or indirect, of a grandfathered real
property interest between members of a stapled REIT group does
not result in a loss of grandfather status if the total direct
and indirect interests of both the exempt REIT and stapled
entity in the real property interest does not increase as a
result of the transfer. If the total direct and indirect
interest of the exempt REIT and stapled entity increases, the
transferred real property interest will be deemed to lose
grandfather status only to the extent of such increase. The
provision applies to all types of transfers of real property
interests among group members, such as sales, contributions and
distributions, whether taxable or tax-free. Moreover, the
provision applies both to direct transfers of real property
interests and transfers of such interests indirectly through
transfer of interests in 10-percent-or-greater owned
partnerships and subsidiaries. The application of the provision
is illustrated by the following examples. First, assume that an
exempt REIT sells a portion of a grandfathered real property
interest to a stapled entity. The real property interest
remains grandfathered because there is no increase in the total
interests of the REIT and the stapled entity (100 percent both
before and after the transfer). Second, assume that a
grandfathered real property interest is contributed by a
stapled entity to a partnership or subsidiary in which the
stapled entity owns a 10-percent-or-greater interest (either
prior to, or as a result of, the contribution) under the rules
described above. The real property interest remains
grandfathered because the previous total interests of the
exempt REIT and stapled entity (the stapled entity's 100-
percent interest) are not increased by the
transfer.95 Third, assume a REIT owns a 50-percent
interest in a partnership that distributes a grandfathered real
property interest to the REIT in complete liquidation of its
interest. The 50-percent interest that was previously deemed
owned by the REIT will continue to be grandfathered; the
remaining 50-percent interest will become a non-grandfathered
interest because it represents an increase in the total direct
and indirect interests of the REIT and stapled entity in the
real property interest. Fourth, assume that a partnership in
which an exempt REIT or stapled entity owns a 10-percent or
greater interest under the rules described above terminates as
a result of a sale of 50 percent or more of the total
partnership interests during a 12-month period that does not
involve the REIT or a stapled entity (sec. 708(b)(1)(B)).
Grandfather status of real property interests owned by the
partnership is not lost in the transfer because, as a result of
the termination, the partnership's assets are deemed
contributed to a new partnership and interests in that
partnership are deemed distributed to the purchasing and other
partners in proportion to their interests (Treas. reg. sec.
1.708-1(b)(1)(iv)). Thus, there is no change in the total
interest of the REIT and stapled entity in the partnership's
assets.
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\95\ Nevertheless, if the REIT's interest in the partnership or
subsidiary increases as a result of the contribution, a portion of each
of the entity's real property interests other than the interest
contributed, reflecting the proportionate increase in the REIT's
interest in the entity, will be treated as a non-grandfathered real
property interest.
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Mortgage rules
Under the Act, special rules apply where a member of the
stapled REIT group holds a mortgage (that is not an existing
obligation under the rules described below) that is secured by
an interest in real property, and a member of the stapled REIT
group engages in certain activities with respect to that
property. The activities that have this effect under the Act
are activities that would result in impermissible tenant
service income (as defined in sec. 856(d)(7)) if performed by
the REIT with respect to property it held. In such a case, all
interest on the mortgage that is allocable to that property and
all gross income received by a member of the stapled REIT group
from the activity will be treated as impermissible tenant
service income of the REIT, which is not qualifying income
under either the 75-percent or 95-percent tests. For example,
assume that the REIT makes a mortgage loan on a hotel owned by
a third party which is operated by a stapled entity under a
management contract. Unless an exception applies, both the
management fees earned by the stapled entity and the interest
earned by the REIT will be treated as impermissible tenant
services income of the REIT.
An exception to the above rules is provided for mortgages
the interest on which does not exceed an arm's-length rate and
which would be treated as interest for purposes of the REIT
rules. An exception also is available for mortgages that are
held by a member of the stapled REIT group on March 26, 1998,
and at all times thereafter, and which are secured by an
interest in real property on that date, and at all times
thereafter (the ``existing mortgage exception''). The existing
mortgage exception ceases to apply if the mortgage is
refinanced and the principal amount is increased in such
refinancing.
In the case of a partnership or subsidiary in which the
REIT or a stapled entity owns a 10-percent-or-greater interest,
a proportionate part of the entity's mortgages, interest and
gross income from activities would be attributed to the REIT or
the stapled entity, subject to rules similar to those for
nonqualified real property interests. Thus, if a REIT or a
stapled entity acquires a 10-percent-or-greater interest in a
partnership or corporation after March 26, 1998, no mortgage
held by the partnership or subsidiary at such time would
qualify for the existing mortgage exception. Similarly, if a
REIT or stapled entity owns a 10-percent-or-greater interest in
a partnership or subsidiary on March 26, 1998, and the REIT or
the stapled entity subsequently acquires a greater interest, a
portion of each of the partnership's or subsidiary's mortgages
that is the same as the proportionate increase in the ownership
interest would fail to qualify for the existing mortgage
exception.
Under the Act's priority rules, the mortgage rules do not
apply to any part of a real property interest that is owned or
deemed owned by the REIT or a stapled entity under the rules
for real property interests described above. Thus, for example,
if the REIT makes a mortgage loan on real property owned by a
stapled entity, the mortgage rules would not apply. If the
property is a nonqualified real property interest, the interest
on the mortgage would be ignored under the single-entity
analysis described above, and the gross income of the stapled
entity from the property would be treated as income of the
REIT. Similarly, assume that a stapled entity owns 75 percent
of the stock of a subsidiary and has a management contract to
operate a hotel owned by the subsidiary. Assume also that the
REIT makes a mortgage loan for the hotel. Under the real
property interest rules, 75 percent of the hotel is treated as
owned by the stapled entity. Thus, if the hotel is a
nonqualified real property interest, 75 percent of the
subsidiary's gross income from the hotel is treated as income
of the REIT and 75 percent of the income on the management
contract is ignored under the single-entity analysis. With
respect to the remaining 25-percent interest in the subsidiary,
the real property interest rules do not apply, but the mortgage
rules would treat 25percent of the mortgage interest and 25
percent of management contract income as impermissible tenant services
income of the REIT.
For mortgages held on March 26, 1998, an increase in
interest payable on a mortgage (except pursuant to an interest
arrangement, such as variable interest, under the mortgage's
terms as of March 26, 1998), or an increase in interest payable
as a result of a refinancing, causes the mortgage to cease to
qualify for the exception unless the new interest rate meets an
arm's-length standard.
Other rules
For purposes of both the real property interest and
mortgage rules, if a stapled REIT is not stapled as of March
26, 1998, and at all times thereafter, or if it fails to
qualify as a REIT as of such date or any time thereafter, no
assets of any member of the stapled REIT group would qualify
under the grandfather rules. Thus, all of the real property
interests held by the group would be nonqualified real property
interests and none of the mortgages held by the group would
qualify for the existing mortgage exception.
For a corporate subsidiary owned by a stapled entity, the
10-percent ownership test would be met if a stapled entity
owns, directly or indirectly, 10 percent or more of the
corporation's stock, by either vote or value.96 For
this purpose, any change in proportionate ownership that is
attributable solely to fluctuations in the relative fair market
values of different classes of stock is not taken into account.
For interests in partnerships, the ownership test would be met
if the share of capital or profits, whichever is larger, owned
by the REIT or stapled entity is 10 percent or greater.
Interests in other entities, such as trusts, are treated in the
same manner as 10-percent-or-greater interests in partnerships
or corporations if the REIT or a stapled entity owns, directly
or indirectly, 10 percent or more of the beneficial interests
in the entity.
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\96\ The Act does not apply to a stapled REIT's ownership of a
corporate subsidiary, although the REIT would be subject to the normal
restrictions on a REIT's ownership of stock in a corporation.
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In the case of a qualified REIT subsidiary (sec. 856(i)),
all real property interests, mortgages, activities and gross
income are treated as attributes of the REIT for purposes of
the Act.
Under the Act, terms used that are also used in the stapled
stock rules (sec. 269B) or the REIT rules (sec. 856) have the
same meanings as under those rules.
The Secretary of the Treasury is given authority to
prescribe such guidance as may be necessary or appropriate to
carry out the purposes of the Act, including guidance to
prevent the double counting of income and to prevent
transactions that would avoid the purposes of the Act.
Effective Date
The provision is effective for taxable years ending after
March 26, 1998.
Revenue Effect
The provision is estimated to increase Federal fiscal year
budget receipts by $1 million in 1999, $3 million in 2000, $6
million in 2001, $10 million in 2002, $14 million in 2003, $19
million in 2004, $26 million in 2005, $35 million in 2006 and
$45 million in 2007.
C. Make Certain Trade Receivables Ineligible for Mark-to-Market
Treatment (sec. 7003 of the Act and sec. 475 of the Code)
Present and Prior Law
In general, a dealer in securities is required to use a
mark-to-market method of accounting for securities. A dealer in
securities is a taxpayer who regularly purchases securities
from or sells securities to customers in the ordinary course of
a trade or business, or who regularly offers to enter into,
assume, offset, assign, or otherwise terminate positions in
certain types of securities with customers in the ordinary
course of a trade or business. A security includes an evidence
of indebtedness.
Treasury regulations provide that if a taxpayer would be a
dealer in securities only because of its purchases and sales of
debt instruments that, at the time of purchase or sale, are
customer paper with respect to either the taxpayer or a
corporation that is a member of the same consolidated group,
the taxpayer will not normally be treated as a dealer in
securities. However, the regulations allow such a taxpayer to
elect out of this exception to dealer status.97 For
this purpose, a debt instrument is customer paper with respect
to a person if: (1) the person's principal activity is selling
non-financial goods or providing non-financial services; (2)
the debt instrument was issued by the purchaser of the goods or
services at the time of the purchase of those goods and
services in order to finance the purchase; and (3) at all times
since the debt instrument was issued, it has been held either
by the person selling those goods or services or by a
corporation that is a member of the same consolidated group as
that person.
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\97\ Treas. reg. sec. 1.475(c)-1(b), issued December 23, 1996; the
``customer paper election.''
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Reasons for Change
Congress enacted the mark-to-market rules of section 475 to
provide a more accurate reflection of the income of securities
dealers. The Congress did not believe that the mark-to-market
rules were intended to be used by taxpayers whose principal
activity was the selling of goods and services to obtain a
deduction earlier than would otherwise be permitted.
Explanation of Provision
The provision makes certain trade receivables ineligible
for mark-to-market treatment. A trade receivable is ineligible
for mark-to-market treatment if it is a note, bond, debenture,
or other evidence of indebtedness arising out of the sale of
goods or services by a person the principal activity of which
is selling or providing non-financial goods and services, and
it is held by such person (or a related person) at all times
since it was issued. A receivable meeting the above definition
is not treated as a security for purposes of the mark-to-market
rules (sec. 475). Thus, such a receivable is not marked-to-
market, even if the taxpayer qualifies as a dealer in other
securities.
The provision applies to trade receivables arising from
services performed by independent contractors, as well as
employees. Thus, for example, if a taxpayer's principal
activity is selling non-financial services and some or all of
such services are performed by independent contractors, no
receivables that the taxpayer accepts for services can be
marked-to-market under the provision. Congress intended that,
pursuant to the authority granted by section 475(g)(1), the
Secretary of the Treasury is authorized to issue regulations to
prevent abuse of the trade receivables exception, including
through independent contractor arrangements.
To the extent provided in Treasury regulations, trade
receivables that are held as inventory for sale to customers by
the taxpayer or a related person may be treated as
``securities'' for purposes of the mark-to-market rules, and
transactions in such receivables could result in a taxpayer
being treated as a dealer in securities (sec. 475(c)(1)).
Unless this regulatory exception for trade receivables held as
inventory applies, a taxpayer will not be treated as a dealer
in securities as a result of sales of trade receivables covered
by the provision.
It is the intention of Congress that, for trade receivables
that are excepted from the statutory mark-to-market rules (sec.
475) under the provision, mark-to-market or lower-of-cost-or-
market will not be permissible methods of accounting (see sec.
446(b)).
Effective Date
The provision is effective for taxable years ending after
the date of enactment (after July 22, 1998). Adjustments
required under section 481 as a result of the change in method
of accounting generally are required to be taken into account
ratably over the four-year period beginning in the first
taxable year for which the provision is in effect. However,
where the taxpayer terminates its existence or ceases to engage
in the trade or business that generated the receivables (except
as a result of a tax-free transfer), any remaining balance of
the section 481 adjustment is taken into account entirely in
the year of such cessation or termination (see sec. 5.04(3)(c)
of Rev. Proc. 97-37, 1997-33 I.R.B. 18).
Revenue Effect
The provision is estimated to increase Federal budget
receipts by $33 million in 1998, $317 million in 1999, $500
million in 2000, $333 million in 2001, $117 million in 2002,
$70 million in 2003, $73 million in 2004, $77 million in 2005,
$81 million in 2006, and $85 million in 2007.
D. Exclusion of Minimum Required Distributions from AGI for Roth IRA
Conversions (sec. 7004 of the Act and sec. 408A of the Code)
Present and Prior Law
Under present and prior law, uniform minimum distribution
rules apply to qualified retirement plans and annuities,
individual retirement arrangements (``IRAs'') other than Roth
IRAs, and tax-sheltered annuities (sec. 403(b)).
Under present and prior law, minimum required distributions
must begin no later than the individual's required beginning
date (sec. 401(a)(9)). In the case of an IRA, the required
beginning date is April 1 of the calendar year following the
calendar year in which the IRA owner attains age 70\1/2\. In
general, minimum required distributions are includible in gross
income in the year of distribution. An excise tax equal to 50
percent of the minimum required distribution applies to the
extent a required distribution is not made.
Under present and prior law, taxpayers with adjusted gross
income (``AGI'') of $100,000 or less are eligible to convert
all or any part of amounts in a deductible or nondeductible IRA
into a Roth IRA. In the case of a married taxpayer, AGI is the
combined AGI of the couple. Under prior law, minimum required
distributions were included in the definition of AGI for
purposes of determining eligibility to convert from an IRA to a
Roth IRA. Married taxpayers filing a separate return are not
eligible to make a conversion.
Explanation of Provision
The provision amends section 408A(c)(3)(C)(i) to exclude
minimum required distributions from IRAs (but not distributions
from qualified plans) from the definition of AGI solely for
purposes of determining eligibility to convert from a
deductible or nondeductible IRA into a Roth IRA. Under present
and prior law, the required minimum distribution is not
eligible for conversion and is includible in gross income.
Effective Date
The provision is effective for taxable years beginning
after December 31, 2004.
Revenue Effect
The provision is estimated to increase Federal fiscal year
budget receipts by $2,362 million in 2005, $2,854 million in
2006, and $2,812 million in 2007.
TITLE VIII. IDENTIFICATION OF LIMITED TAX BENEFITS UNDER THE LINE ITEM
VETO ACT (sec. 8001 of the Act)
Present and Prior Law
The Line Item Veto Act amended the Congressional Budget and
Impoundment Act of 1974 to grant the President the limited
authority to cancel specific dollar amounts of discretionary
budget authority, certain new direct spending, and limited tax
benefits. The Line Item Veto Act provides that the Joint
Committee on Taxation is required to examine any revenue or
reconciliation bill or joint resolution that amends the
Internal Revenue Code of 1986 prior to its filing by a
conference committee in order to determine whether or not the
bill or joint resolution contains any limited tax benefits and
to provide a statement to the conference committee that either
(1) identifies each limited tax benefit contained in the bill
or resolution, or (2) states that the bill or resolution
contains no limited tax benefits. The Line Item Veto Act
provides that the conferees determine whether or not to include
the Joint Committee's statement in the conference report. If
the conference report includes the information from the Joint
Committee on Taxation identifying provisions that are limited
tax benefits, then the President can cancel one or more of
those, but only those, provisions that have been identified. If
such a conference report contains a statement from the Joint
Committee on Taxation that none of the provisions in the
conference report are limited tax benefits, then the President
has no authority to cancel any of the specific tax provisions,
because there are no tax provisions that are eligible for
cancellation under the Line Item Veto Act.
On June 25, 1998, the U.S. Supreme Court held that the
cancellation procedures set forth in the Line Item Veto Act are
unconstitutional. Clinton v. City of New York, 118 S. Ct. 2091
(June 25, 1998).
Explanation of Provision
Pursuant to the provisions of the Line Item Veto Act as in
effect at the time the Internal Revenue Service Restructuring
and Reform Act was passed by the Congress, that Act contains a
list of provisions that the Joint Committee on Taxation
identified as limited tax benefits within the meaning of the
Line Item Veto Act. These provisions are:
(1) Section 3105 (relating to administrative appeal of
adverse IRS determination of tax-exempt status of bond issue);
and
(2) Section 3445(c)(relating to State fish and wildlife
permits).
PART THREE: TAX AND TRADE RELIEF EXTENSION ACT OF 1998 (DIVISION J OF
H.R. 4328, OMNIBUS CONSOLIDATED AND EMERGENCY SUPPLEMENTAL
APPROPRIATIONS ACT, 1999) 98
TITLE I. EXTENSION OF EXPIRING PROVISIONS
A. Extension of Research Tax Credit (sec. 1001 of the Act and sec. 41
of the Code)
Present and Prior Law
Section 41 provides for a research tax credit equal to 20
percent of the amount by which a taxpayer's qualified research
expenditures for a taxable year exceeded its base amount for
that year. The research tax credit expired and generally does
not apply to amounts paid or incurred after June 30, 1998.
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\98\ P.L. 105-277. The revenue provisions of H.R. 4328 generally
originated in H.R. 4738. H.R. 4738 was reported by the Committee on
Ways and Means on October 12, 1998 (H. Rept. 105-817), and was passed
by the House on October 12, 1998. Some provisions were included in S.
2260, as introduced by Senators Roth and Moynihan. The conference
report on H.R. 4328 was filed on October 19, 1998 (H. Rept 105-825).
The House passed the conference report on October 20, 1998, and the
Senate passed it on October 21, 1998.
H.R. 4328 was signed by the President on October 21, 1998.
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Except for certain university basic research payments made
by corporations, the research tax credit applies only to the
extent that the taxpayer's qualified research expenditures for
the current taxable year exceed its base amount. The base
amount for the current year generally is computed by
multiplying the taxpayer's ``fixed-base percentage'' by the
average amount of the taxpayer's gross receipts for the four
preceding years. If a taxpayer both incurred qualified research
expenditures and had gross receipts during each of at least
three years from 1984 through 1988, then its ``fixed-base
percentage'' is the ratio that its total qualified research
expenditures for the 1984-1988 period bears to its total gross
receipts for that period (subject to a maximum ratio of .16).
All other taxpayers (so-called ``start-up firms'') are assigned
a fixed-base percentage of 3 percent.
Taxpayers are allowed to elect an alternative incremental
research credit regime. If a taxpayer elects to be subject to
this alternative regime, the taxpayer is assigned a three-
tiered fixed-base percentage (that is lower than the fixed-base
percentage otherwise applicable under present law) and the
credit rate likewise is reduced. Under the alternative credit
regime, a credit rate of 1.65 percent applies to the extent
that a taxpayer's current-year research expenses exceed a base
amount computed by using a fixed-base percentage of 1 percent
(i.e., the base amount equals 1 percent of the taxpayer's
average gross receipts for the four preceding years) but do not
exceed a base amount computed by using a fixed-base percentage
of 1.5 percent. A credit rate of 2.2 percent applies to the
extent that a taxpayer's current-year research expenses exceed
a base amount computed by using a fixed-base percentage of 1.5
percent but do not exceed a base amount computed by using a
fixed-base percentage of 2 percent. A credit rate of 2.75
percent applies to the extent that a taxpayer's current-year
research expenses exceed a base amount computed by using a
fixed-base percentage of 2 percent. An election to be subject
to this alternative incremental credit regime may be made for
any taxable year beginning after June 30, 1996, and such an
election applies to that taxable year and all subsequent years
(in the event that the credit subsequently is extended by
Congress) unless revoked with the consent of the Secretary of
the Treasury.
Reasons for Change
The Congress believed that increasing technological
knowledge ultimately will lead to new and better products
produced at lower costs. New and better products and lower
production costs are the genesis of economic growth. For this
reason, the Congress believed it was important to extend the
research and experimentation tax credit.
Explanation of Provision
The provision extends the research credit for 12 months--
i.e., generally, for the period July 1, 1998, through June 30,
1999.
In extending the credit, the Congress reaffirmed the scope
of the term ``qualified research.'' Section 41 targets the
credit to research which is undertaken for the purpose of
discovering information which is technological in nature and
the application of which is intended to be useful in the
development of a new or improved business component of the
taxpayer. However, eligibility for the credit does not require
that the research be successful--i.e., the research need not
achieve its desired result. Moreover, evolutionary research
activities intended to improve functionality, performance,
reliability, or quality are eligible for the credit, as are
research activities intended to achieve a result that has
already been achieved by other persons but is not yet within
the common knowledge (e.g., freely available to the general
public) of the field (provided that the research otherwise
meets the requirements of sec. 41, including not being excluded
by subsection (d)(4)).
Activities constitute a process of experimentation, as
required for credit eligibility, if they involve evaluation of
more than one alternative to achieve a result where the means
of achieving the result are uncertain at the outset, even if
the taxpayer knows at the outset that it may be technically
possible to achieve the result. Thus, even though a researcher
may know of a particular method of achieving an outcome, the
use of the process of experimentation to effect a new or better
method of achieving that outcome may be eligible for the credit
(provided that the research otherwise meets the requirements of
sec. 41, including not being excluded by subsection (d)(4)).
Lastly, the Congress observed the lack of clarity in the
interpretation of the distinction between internal-use
software, the costs of which may be eligible for the credit if
additional tests are met, and other software. The Congress
emphasized that application of the definition of internal-use
software should fully reflect Congressional intent.
Effective Date
The extension of the research credit is effective for
qualified research expenditures paid or incurred during the
period July 1, 1998, through June 30, 1999.
Revenue Effect
The provision is estimated to reduce Federal fiscal year
receipts by $1,126 million in 1999, $505 million in 2000, $258
million in 2001, $184 million in 2002, $94 million in 2003, and
$20 million in 2004.
B. Extension of the Work Opportunity Tax Credit (sec. 1002 of the Act
and sec. 51 of the Code)
Present and Prior Law
In general
The work opportunity tax credit (``WOTC''), which expired
on June 30, 1998, was available on an elective basis for
employers hiring individuals from one or more of eight targeted
groups. The credit equals 40 percent (25 percent for employment
of 400 hours or less) of qualified wages. Qualified wages are
wages attributable to service rendered by a member of a
targeted group during the one-year period beginning with the
day the individual began work for the employer. For a
vocational rehabilitation referral, however, the period begins
on the day the individual began work for the employer on or
after the beginning of the individual's vocational
rehabilitation plan.
The maximum credit per employee is $2,400 (40 percent of
the first $6,000 of qualified first-year wages). With respect
to qualified summer youth employees, the maximum credit is
$1,200 (40 percent of the first $3,000 of qualified first-year
wages).
The employer's deduction for wages is reduced by the amount
of the credit.
Targeted groups eligible for the credit
The eight targeted groups are: (1) families eligible to
receive benefits under the Temporary Assistance for Needy
Families (``TANF'') Program; (2) high-risk youth; (3) qualified
ex-felons; (4) vocational rehabilitation referrals; (5)
qualified summer youth employees; (6) qualified veterans; (7)
families receiving food stamps; and (8) persons receiving
certain Supplemental Security Income (``SSI'') benefits.
Minimum employment period
No credit is allowed for wages paid to employees who work
less than 120 hours in the first year of employment.
Expiration date
Under prior law, the credit expired for wages paid or
incurred to an otherwise qualified individual who began work
for an employer on or after July 1, 1998.
Reasons for Change
The Congress believed the preliminary experience of the
WOTC showed promise as an incentive for employers to hire
individuals who are underskilled, undereducated, or who
generally may be less desirable to employers. A temporary
extension of this credit allows the Congress and the Treasury
and Labor Departments to continue to monitor the effectiveness
of the credit.
Explanation of Provision
The Act extends the work opportunity tax credit for 12
months (through June 30, 1999).
Effective Date
The provision is effective for wages paid or incurred to
qualified individuals who begin work for the employer on or
after July 1, 1998, and before July 1, 1999.
Revenue Effect
The provision is estimated to reduce Federal fiscal year
budget receipts by $191 million in 1999, $140 million in 2000,
$73 million in 2001, $29 million in 2002, $10 million in 2003,
and $2 million in 2004.
C. Extension of the Welfare-To-Work Tax Credit (sec. 1003 of the Act
and sec. 51A of the Code)
Present and Prior Law
Employers are allowed a tax credit for eligible wages paid
to qualified long-term family assistance recipients during the
first two years of employment. The credit is 35 percent of the
first $10,000 of eligible wages in the first year of employment
and 50 percent of the first $10,000 of eligible wages in the
second year of employment. The maximum credit is $8,500 per
qualified employee.
Qualified long-term family assistance recipients are: (1)
members of a family that have received family assistance for at
least 18 consecutive months ending on the hiring date; (2)
members of a family that have received family assistance for a
total of at least 18 months (whether or not consecutive) after
the date of enactment of this credit (August 5, 1997) if they
are hired within 2 years after the date that the 18-month total
is reached; and (3) members of a family who are no longer
eligible for family assistance because of either Federal or
State time limits, if they are hired within 2 years after the
Federal or State time limits made the family ineligible for
family assistance.
Eligible wages include cash wages paid to an employee plus
amounts paid by the employer for the following: (1) educational
assistance excludable under a section 127 program (or that
would be excludable but for the expiration of sec. 127); (2)
accident and health plan coverage for the employee, but not
more than the applicable premium defined under the health care
continuation rules (sec. 4980B(f)(4)); and (3) dependent care
assistance excludable under section 129.
Under prior law, the welfare-to-work credit was effective
for wages paid or incurred to a qualified individual who began
work for an employer on or after January 1, 1998, and before
May 1, 1999.
Reasons for Change
When enacted in the Taxpayer Relief Act of 1997, the goals
of the welfare-to-work credit were: (1) to provide an incentive
to hire long-term welfare recipients; (2) to promote the
transition from welfare to work by increasing access to
employment; and (3) to encourage employers to provide these
individuals with training, health coverage, dependent care and
ultimately better job attachment. The Congress believed that
the credit should be temporarily extended to provide the
Congress and the Treasury and Labor Departments a better
opportunity to assess the operation and effectiveness of the
credit in meeting its goals.
Explanation of Provision
The Act extends the welfare-to-work credit for an
additional two months (through June 30, 1999).
Effective Date
The provision is effective for wages paid or incurred to a
qualified individual who begins work for an employer on or
after May 1, 1999, and before July 1, 1999.
Revenue Effect
The provision is estimated to reduce Federal fiscal year
budget receipts by $4 million in 1999, $10 million in 2000, $7
million in 2001, $3 million in 2002, and $1 million in 2003.
D. Make Permanent the Deduction Provided for Contributions of
Appreciated Stock to Private Foundations; Public Inspection of Private
Foundation Annual Returns
1. Make permanent the deduction provided for contributions of
appreciated stock to private foundations (sec. 1004(a) of the
Act and sec. 170(e)(5) of the Code)
Present and Prior Law
In computing taxable income, a taxpayer who itemizes
deductions generally is allowed to deduct the fair market value
of property contributed to a charitable
organization.99 However, in the case of a charitable
contribution of short-term gain, inventory, or other ordinary
income property, the amount of the deduction generally is
limited to the taxpayer's basis in the property. In the case of
a charitable contribution of tangible personal property, the
deduction is limited to the taxpayer's basis in such property
if the use by the recipient charitable organization is
unrelated to the organization's tax-exempt purpose.
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\99\ The amount of the deduction allowable for a taxable year with
respect to a charitable contribution may be reduced depending on the
type of property contributed, the type of charitable organization to
which the property is contributed, and the income of the taxpayer
(secs. 170(b) and 170(e)).
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In cases involving contributions to a private foundation
(other than certain private operating foundations), the amount
of the deduction is limited to the taxpayer's basis in the
property. However, under a special rule contained in section
170(e)(5), taxpayers are allowed a deduction equal to the fair
market value of ``qualified appreciated stock'' contributed to
a private foundation. Qualified appreciated stock is defined as
publicly traded stock which is capital gain property. The fair-
market-value deduction for qualified appreciated stock
donations applies only to the extent that total donations made
by the donor to private foundations of stock in a particular
corporation did not exceed 10 percent of the outstanding stock
of that corporation. For this purpose, an individual is treated
as making all contributions that were made by any member of the
individual's family.
Under prior law, the special rule contained in section
170(e)(5) expired on June 30, 1998.
Reasons for Change
The Congress believed that, to encourage donations to
charitable private foundations, it was appropriate to extend
permanently the rule that allows a fair-market-value deduction
for certain gifts of appreciated stock to private foundations.
Explanation of Provision
The Act extends permanently the special rule contained in
section 170(e)(5).
Effective Date
The provision is effective for contributions of qualified
appreciated stock to private foundations made on or after July
1, 1998.
Revenue Effect
The provision is estimated to decrease Federal fiscal year
budget receipts by $23 million in 1999, $56 million in 2000,
$71 million in 2001, $83 million in 2002, $91 million in 2003,
$95 million in 2004, $100 million in 2005, $104 million in
2006, and $109 million in 2007.
2. Public inspection of private foundation annual returns (sec. 1004(b)
of the Act and secs. 6104(d) and (e) of the Code)
Present and Prior Law
Tax-exempt organizations (other than churches and certain
small organizations) are required to file an annual information
return (Form 990) with the Internal Revenue Service (``IRS''),
setting forth the organization's items of gross income and
expenses attributable to such income, disbursements for tax-
exempt purposes, plus certain other information for the taxable
year.
Under prior law, private foundations were required to make
the current year's annual information return (Form 990-PF)
available for public inspection at the foundation's principal
office during regular business hours (sec. 6104(d)). Such
return was required to be made available for inspection by any
citizen on request made within 180 days after the date of
publication of notice of its availability. Notice had to be
published, not later than the day the return was required to be
filed, in a newspaper having general circulation in the county
in which the principal office of the foundation was located.
The notice was required to state that the annual return was
available for public inspection by any citizen who requested
it, and had to state the address and telephone number of the
private foundation's principal office and the name of its
principal manager.
Under present law, tax-exempt organizations (other than
private foundations) that are required to file a Form 990,
including public charities, are required to allow public
inspection at the organization's principal office (and certain
regional or district offices) of their Forms 990 for the three
most recent taxable years (sec. 6104(e)).
The Taxpayer Bill of Rights 2, which was enacted in 1996,
imposed additional public inspection requirements on tax-exempt
organizations. All tax-exempt organizations, except private
foundations, will be required to comply with requests made in
person or in writing by individuals who seek a copy of the
organization's Form 990 for any of the organization's three
most recent taxable years. Upon such a request, the
organization is required to supply copies without charge other
than a reasonable fee for reproduction and mailing costs. If
the request for copies is made in person, then the organization
must immediately provide such copies. If the request for copies
is made in writing, then copies must be provided within 30
days. In addition, all tax-exempt organizations, including
private foundations, will be required to comply in the same
manner with requests made in person or in writing by
individuals who seek a copy of the organization's application
for recognition of tax-exempt status and certain related
documents. However, an organization may be relieved of its
obligation to provide copies if, in accordance with regulations
to be promulgated by the Secretary of Treasury, (1) the
organization has made the requested documents widely available
or (2) the Secretary of the Treasury determined, upon
application by the organization, that the request is part of a
harassment campaign and that compliance with such request is
not in the public interest. These additional public inspection
provisions enacted in 1996 apply to requests made no earlier
than 60 days after the date on which the Treasury Department
publishes regulations defining when requested documents have
been made widely available or when a request is part of a
harassment campaign.100 While proposed regulations
have been issued, final regulations have not been published;
therefore, the provision is not yet in effect.101
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\100\ However, the legislative history of the provision indicates
that Congress expected that organizations will comply voluntarily with
the public inspection provisions prior to the issuance of such final
regulations.
\101\ Prop. Treas. Reg. secs. 301.6104(e)-1, -2, -3.
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Upon written request to the IRS, members of the general
public also are permitted to inspect annual information returns
of tax-exempt organizations and applications for recognition of
tax-exempt status (and related documents) at the National
Office of the IRS in Washington, D.C. A person making such a
written request is notified by the IRS when the material is
available for inspection at the National Office, where notes
may be taken of the material open for inspection, photographs
taken with the person's own equipment, or copies of such
material obtained from the IRS for a fee (Treas. Reg. secs.
301.6104(a)-6 and 301.6104(b)-1).
Reasons for Change
To enhance oversight and public accountability of non-
profit organizations, the Congress believed that the disclosure
provisions applicable to private foundations should be
consistent with those applicable to public charities and other
tax-exempt organizations. In addition, the Congress believed
that this change will result in more efficient use of private
foundation resources by eliminating the present-law publication
requirements.
Explanation of Provision
Under the Act, private foundations are subject to the same
public inspection requirements that currently apply to public
charities and all other tax-exempt organizations that file
annual information returns.102 Accordingly, private
foundations will be required to comply with requests from
individuals who seek a copy of the foundation's annual
information return for any of the foundation's three most
recent taxable years. The material private foundations must
disclose to the public, however, remains the same as under
prior law. Thus, private foundations will continue to be
required to disclose their substantial contributors. Private
foundations will no longer be subject to the publication
requirements of section 6104(d). 103
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\102\ A technical correction may be required to clarify that
nonexempt charitable trusts described in section 4947(a)(1) and
nonexempt private foundations are subject to the public disclosure
requirements under section 6104(d), just as such organizations are
subject to the information reporting requirements of section 6033
pursuant to section 6033(d).
\103\ In the legislative history of the provision, the Congress
noted that the length of annual information returns filed by certain
private foundations may make duplication and mailing of the return
expensive and administratively burdensome. The Congress expressed its
expectation that the Treasury Department will publish regulations to
address this issue (e.g., by permitting persons to request a copy of
particular portions of the return).
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Effective Date
The additional public inspection requirements apply to
requests made after the later of: (1) the date which is 60 days
after the date on which the Treasury Department publishes
regulations defining when requested documents have been made
widely available or when a request is part of a harassment
campaign, or (2) December 31, 1998. The repeal of the prior-law
publication requirement shall apply only to those returns the
due date for filing of which is on or after the date the public
inspection requirements become effective.
Revenue Effect
The provision is estimated to have a negligible revenue
effect on Federal fiscal year budget receipts.
E. Exceptions Under Subpart F for Certain Active Financing Income (sec.
1005 of the Act and secs. 953 and 954 of the Code)
Present and Prior Law
In general
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, among other things, ``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 (i.e., income derived from services performed
for a related person outside the country in which the CFC is
organized).
Foreign personal holding company income generally consists
of the following: (1) dividends, interest, royalties, rents and
annuities; (2) net gains from the sale or exchange of (a)
property that gives rise to the preceding types of income, (b)
property that does not give rise to income, and (c) interests
in trusts, partnerships, and REMICs; (3) net gains from
commodities transactions; (4) net gains from foreign currency
transactions; (5) income that is equivalent to interest; (6)
income from notional principal contracts; and (7) payments in
lieu of dividends.
Insurance income subject to current inclusion under the
subpart F rules includes any income of a CFC attributable to
the issuing or reinsuring of any insurance or annuity contract
in connection with risks located in a country other than the
CFC's country of organization. Subpart F insurance income also
includes income attributable to an insurance contract in
connection with risks located within the CFC's country of
organization, as the result of an arrangement under which
another corporation receives a substantially equal amount of
consideration for insurance of other-country risks. Investment
income of a CFC that is allocable to any insurance or annuity
contract related to risks located outside the CFC's country of
organization is taxable as subpart F insurance income (Prop.
Treas. Reg. sec. 1.953-1(a)).
Temporary exceptions from foreign personal holding company
income and foreign base company services income apply for
subpart F purposes for certain income that is derived in the
active conduct of a banking, financing, insurance, or similar
business. These exceptions (described below) are applicable
only for taxable years beginning in 1998.
Income from the active conduct of a banking, financing, or similar
business
A temporary exception from foreign personal holding company
income applies to income that is derived in the active conduct
of a banking, financing, or similar business by a CFC that is
predominantly engaged in the active conduct of such business.
For this purpose, income derived in the active conduct of a
banking, financing, or similar business generally is determined
under the principles applicable in determining financial
services income for foreign tax credit limitation purposes.
However, in the case of a corporation that is engaged in the
active conduct of a banking or securities business, the income
that is eligible for this exception is determined under the
principles applicable in determining the income which is
treated as nonpassive income for purposes of the passive
foreign investment company provisions. In this regard, the
income of a corporation engaged in the active conduct of a
banking or securities business that is eligible for this
exception is the income that is treated as nonpassive under the
regulations proposed under section 1296(b) (as in effect prior
to the enactment of the Taxpayer Relief Act of 1997). See Prop.
Treas. Reg. secs. 1.1296-4 and 1.1296-6. The Secretary of the
Treasury was directed to prescribe regulations applying look-
through treatment in characterizing for this purpose dividends,
interest, income equivalent to interest, rents and royalties
from related persons.
For purposes of the temporary exception, a corporation is
considered to be predominantly engaged in the active conduct of
a banking, financing, or similar business if it is engaged in
the active conduct of a banking or securities business or is a
qualified bank affiliate or qualified securities affiliate. In
this regard, a corporation is considered to be engaged in the
active conduct of a banking or securities business if the
corporation would be treated as so engaged under the
regulations proposed under prior law section 1296(b) (as in
effect prior to the enactment of the Taxpayer Relief Act of
1997); qualified bank affiliates and qualified securities
affiliates are as determined under such proposed regulations.
See Prop. Treas. Reg. secs. 1.1296-4 and 1.1296-6.
Alternatively, a corporation is considered to be engaged in
the active conduct of a banking, financing, or similar business
if more than 70 percent of its gross income is derived from
such business from transactions with unrelated persons located
within the country under the laws of which the corporation is
created or organized. For this purpose, income derived by a
qualified business unit (``QBU'') of a corporation from
transactions with unrelated persons located in the country in
which the QBU maintains its principal office and conducts
substantial business activity is treated as derived by the
corporation from transactions with unrelated persons located
within the country in which the corporation is created or
organized. A person other than a natural person is considered
to be located within the country in which it maintains an
office through which it engages in a trade or business and by
which the transaction is effected. A natural person is treated
as located within the country in which such person is
physically located when such person enters into the
transaction.
Income from the active conduct of an insurance business
A temporary exception from foreign personal holding company
income applies for certain investment income of a qualifying
insurance company with respect to risks located within the
CFC's country of creation or organization. These rules differ
from the rules of section 953 of the Code, which determines the
subpart F inclusions of a U.S. shareholder relating to
insurance income of a CFC. Such insurance income under section
953 generally is computed in accordance with the rules of
subchapter L of the Code.
The temporary exception applies for income (received from a
person other than a related person) from investments made by a
qualifying insurance company of its reserves or 80 percent of
its unearned premiums. For this purpose, in the case of
contracts regulated in the country in which sold as property,
casualty or health insurance contracts, unearned premiums and
reserves are defined as unearned premiums and reserves for
losses incurred determined using the methods and interest rates
that would be used if the qualifying insurance company were
subject to tax under subchapter L of the Code. Thus, for this
purpose, unearned premiums are determined in accordance with
section 832(b)(4), and reserves for losses incurred are
determined in accordance with section 832(b)(5) and 846 of the
Code (as well as any other rules applicable to a U.S. property
and casualty insurance company with respect to such amounts).
In the case of a contract regulated in the country in which
sold as a life insurance or annuity contract, the following
three alternative rules for determining reserves apply. Any one
of the three rules can be elected with respect to a particular
line of business.
First, reserves for such contracts can be determined
generally under the rules applicable to domestic life insurance
companies under subchapter L of the Code, using the methods
there specified, but substituting for the interest rates in
Code section 807(d)(2)(B) an interest rate determined for the
country in which the qualifying insurance company was created
or organized, calculated in the same manner as the mid-term
applicable Federal interest rate (``AFR'') (within the meaning
of section 1274(d)).
Second, the reserves for such contracts can be determined
using a preliminary term foreign reserve method, except that
the interest rate to be used is the interest rate determined
for the country in which the qualifying insurance company was
created or organized, calculated in the same manner as the mid-
term AFR. If a qualifying insurance company uses such a
preliminary term method with respect to contracts insuring
risks located in the country in which the company is created or
organized, then such method is the method that applies for
purposes of this election.
Third, reserves for such contracts can be determined to be
equal to the net surrender value of the contract (as defined in
section 807(e)(1)(A)).
In no event can the reserve for any contract at any time
exceed the foreign statement reserve for the contract, reduced
by any catastrophe or deficiency reserve. This rule applies
whether the contract is regulated as a property, casualty,
health, life insurance, annuity or any other type of contract.
A temporary exception from foreign personal holding company
income also applies for income from investment of assets equal
to: (1) one-third of premiums earned during the taxable year on
insurance contracts regulated in the country in which sold as
property, casualty, or health insurance contracts; and (2) the
greater of 10 percent of reserves, or, in the case of a
qualifying insurance company that is a startup company, $10
million. For this purpose, a startup company is a company
(including any predecessor) that has not been engaged in the
active conduct of an insurance business for more than five
years. In general, the five-year period commences when the
foreign company first is engaged in the active conduct of an
insurance business. If the foreign company was formed before
being acquired by the U.S. shareholder, the five-year period
commences when the acquired company first was engaged in the
active conduct of an insurance business. In the event of the
acquisition of a book of business from another company through
an assumption or indemnity reinsurance transaction, the five-
year period commences when the acquiring company first engaged
in the active conduct of an insurance business, except that if
more than a substantial part (e.g., 80 percent) of the business
of the ceding company is acquired, then thefive-year period
commences when the ceding company first engaged in the active conduct
of an insurance business. Reinsurance transactions among related
persons may not be used to multiply the number of five-year periods.
Under rules prescribed by the Secretary, income is
allocated to contracts as follows. In the case of contracts
that are separate account-type contracts (including variable
contracts not meeting the requirements of sec. 817), only the
income specifically allocable to such contracts is taken into
account. In the case of other contracts, income not
specifically allocable is allocated ratably among such
contracts.
A qualifying insurance company is defined as any entity
which: (1) is regulated as an insurance company under the laws
of the country in which it is incorporated; (2) derives at
least 50 percent of its net written premiums from the insurance
or reinsurance of risks situated within its country of
incorporation; and (3) is engaged in the active conduct of an
insurance business and would be subject to tax under subchapter
L if it were a domestic corporation.
The temporary exceptions do not apply to investment income
(includable in the income of a U.S. shareholder of a CFC
pursuant to sec. 953) allocable to contracts that insure
related party risks or risks located in a country other than
the country in which the qualifying insurance company is
created or organized.
Anti-abuse rule
An anti-abuse rule applies for purposes of these temporary
exceptions. For purposes of applying these exceptions, items
with respect to a transaction or series of transactions are
disregarded if one of the principal purposes of the transaction
or transactions is to qualify income or gain for these
exceptions, including any change in the method of computing
reserves or any other transaction or transactions one of the
principal purposes of which is the acceleration or deferral of
any item in order to claim the benefits of these exceptions.
Foreign base company services income
A temporary exception from foreign base company services
income applies for income derived from services performed in
connection with the active conduct of a banking, financing,
insurance or similar business by a CFC that is predominantly
engaged in the active conduct of such business or is a
qualifying insurance company.
Reasons for Change
The subpart F rules historically have been aimed at
requiring current inclusion by the U.S. shareholders of income
of a CFC that is either passive or easily moveable. Under the
subpart F rules, certain U.S. shareholders of a CFC are subject
to U.S. tax on a current basis on certain income (including
certain insurance income and foreign personal holding company
income) earned by the CFC, whether or not such income is
distributed to the shareholders. Prior to the enactment of the
Tax Reform Act of 1986 (the ``1986 Act''), exceptions from
foreign personal holding company income were provided for
income derived in the active conduct of a banking, financing,
or similar business, or derived from certain investments made
by an insurance company. The Congress recognized that the 1986
Act's repeal of these exceptions may be viewed as causing the
subpart F rules to apply to income that is neither passive nor
easily moveable, requiring inclusion of such income on a
current basis by U.S. shareholders. In the Taxpayer Relief Act
of 1997, a one-year temporary exception from foreign personal
holding company income was enacted 104 for income
from the active conduct of an insurance, banking, financing, or
similar business. The Congress believed that it was appropriate
to extend for one year these exceptions from subpart F, with
certain modifications.
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\104\ The President canceled this provision in 1997 pursuant to the
Line Item Veto Act. A modified version of the provision was included in
H.R. 2513, which was passed by the House on November 8, 1997. See
report of the House Committee on Ways and Means, H. Rept. 105-318, Part
I, October 9, 1997. On June 25, 1998, the U.S. Supreme Court held that
the cancellation procedures set forth in the Line Item Veto Act are
unconstitutional. Clinton v. City of New York, 118 S. Ct. 2091 (June
25, 1998).
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The Congress believed that modifications to the prior-law
provision were appropriate, including changes designed to treat
various types of businesses with active financing income more
similarly to each other than did the prior-law provision. The
Congress also believed that it was appropriate to modify the
prior-law provision to require that eligible businesses conduct
substantial activity with regard to their respective financial
service businesses, and that the income eligible for the
exceptions have a nexus with the business activities giving
rise to such income. In the case of transactions conducted with
persons located outside the home country of the CFC or its
foreign branch (so-called ``cross border'' transactions), the
Congress believed that it was appropriate to impose higher
standards for qualifying under the provision due to the
increased concerns with respect to the mobility of income from
such transactions.
Explanation of Provision
In general
The Act extends and modifies the prior-law temporary
exceptions from subpart F for income that is derived in the
active conduct of a banking, financing, or similar business or
in the conduct of an insurance business. These exceptions (as
modified) are applicable only for taxable years beginning in
1999.
With respect to income derived in the active conduct of a
banking, financing, or similar business, the Act differs from
the prior-law temporary exceptions in the following significant
respects. First, the Act requires a CFC to conduct substantial
activity with respect to its business in order to qualify for
the exceptions. Second, the Act adds certain nexus requirements
which require that income which is derived by a CFC or QBU from
transactions with customers is eligible for the exceptions if,
among other things, substantially all of the activities in
connection with such transactions are conducted directly by the
CFC or QBU in its home country, and such income is treated as
earned by the CFC or QBU in its home country for purposes of
such country's tax laws. Third, the Act modifies the tests for
determining whether a CFC is predominantly engaged in the
active conduct of a banking, financing, or similar business,
including modifications for income derived from a lending or
finance business. Fourth, the Act extends the exceptions to
income derived from certain cross border transactions, provided
that certain requirements are met. Fifth, the determination of
where a customer is treated as located is made under rules
prescribed by the Secretary of the Treasury. Finally, the look-
through rule that was included in the prior-law provision for
purposes of determining the income eligible for the exceptions
is eliminated.
In the case of insurance, the Act differs from prior law in
the following significant respects. In addition to the
exception for certain income of a qualifying insurance company
with respect to risks located within the CFC's country of
creation or organization that is provided under prior law, the
Act provides additional exceptions. First, the Act provides
temporary exceptions from insurance income and from foreign
personal holding company income for certain income of a
qualifying branch of a qualifying insurance company with
respect to risks located within the home country of the branch,
provided certain requirements are met under each of the
exceptions. Further, the Act adds additional temporary
exceptions from insurance income and from foreign personal
holding company income for certain income of certain CFCs or
branches with respect to risks located in any country other
than the United States, provided that the requirements for
these exceptions are met.
Income from the active conduct of a banking, financing, or similar
business
Substantial activity requirement
The Act modifies the exceptions from subpart F for income
derived in the active conduct of a banking, financing, or
similar business by, among other things, incorporating a
substantial activity requirement. Under the Act, the subpart F
exceptions apply to a CFC that is an eligible controlled
foreign corporation (an ``eligible CFC''). An eligible CFC is
defined as a CFC which is predominantly engaged in the active
conduct of a banking, financing, or similar business, but only
if it conducts substantial activity with respect to such
business.
Whether a CFC is considered to conduct substantial activity
with respect to a banking, financing, or similar business is
determined under all the facts and circumstances. The Congress
intended that as part of this facts and circumstances analysis
in determining whether the activities conducted by the CFC are
substantial, all relevant factors are taken into account,
including the overall size of the CFC, the amount of its
revenues and expenses, the number of its employees, the ratio
of its revenues per employee, the amount of property it owns,
and the nature, size, and relative significance of the
applicable activities conducted by the CFC. Under the Act, the
Treasury Secretary is granted the authority to prescribe
regulations to carry out the purposes of theseexceptions. The
Congress intended that such authority includes the authority to
prescribe rules relating to whether a CFC (or, as relevant, a QBU) is
considered to conduct substantial activity.
The Congress also intended that as part of this facts and
circumstances analysis, a CFC is required to conduct
substantially all of the activities necessary for the
generation of income with respect to the business, which
generally include the following:
Initial solicitation of customers (including vendors);
Advising customers on financial needs, including
funding and financial products;
Providing financial and technical advice to customers;
Designing or tailoring financial products to
customers' needs;
Negotiating terms with customers;
Performing credit analysis on customers and evaluating
noncredit risks;
Providing related services to customers;
Making loans, entering into leases, extending credit
or entering into other transactions with customers that
generate income that would be considered derived in the
active conduct of a banking, financing, or similar
business;
Collecting from customers;
Performing remarketing activities (including sales)
following termination of transactions with customers;
Responding to customers' failure to satisfy their
obligations under transactions, including enforcement or
renegotiation of terms, liquidation of collateral,
foreclosure, and/or institution of litigation; and
Holding collateral for transactions with customers.
The Congress intended that the performance of back-office
functions (including accounting for income or loss,
recordkeeping, and routine communicating with customers) not be
taken into account in determining whether the substantial
activity requirement is satisfied. The Congress also intended
that the relevant activities of the business may be modified by
Treasury regulation to take into account future changes in the
operations of these businesses.
In general, the substantial activity requirement is applied
based on the activities of the CFC as a whole, including the
activities of any QBUs of the CFC. In determining whether the
substantial activity requirement is satisfied, activities
performed in the country in which the CFC is incorporated (or
in the country in which the QBU has its principal office) by
employees of a related person of the CFC are taken into
account, but only to the extent that the related person is
compensated on an arm's-length basis for the services of such
employees and such compensation is includible in the related
person's income in such country for purposes of such country's
income tax laws. For this purpose, a related person has the
meaning provided in section 954(d)(3), substituting ``at least
80 percent'' for ``more than 50 percent.'' The Congress
intended that the activities of such a related person are not
again taken into account in determining whether another CFC or
QBU (e.g., the related person) satisfies the substantial
activity requirement.
Predominantly engaged requirement
The Act also modifies the rules for determining whether a
CFC is predominantly engaged in the active conduct of a
banking, financing, or similar business. Alternative rules
apply for this purpose.
Banking or securities business.--The Act modifies the
prior-law application of the banking or securities business
tests for determining whether a CFC is predominantly engaged in
the active conduct of a banking, financing, or similar
business. Under the Act, a CFC is considered to be
predominantly engaged in the active conduct of a banking,
financing, or similar business if it is engaged in the active
conduct of a banking business and is an institution licensed to
do business as a bank in the United States (or is any other
corporation not so licensed which is specified in regulations).
In addition, a CFC is considered to be predominantly engaged in
the active conduct of a banking, financing, or similar business
if it is engaged in the active conduct of a securities business
and is registered as a securities broker or dealer under
applicable U.S. securities laws (or is any other corporation
not so registered which is specified in regulations). The
Congress generally intended that these requirements for the
active conduct of a banking or securities business be
interpreted in the manner provided in the regulations proposed
under prior law section 1296(b) (as in effect prior to the
enactment of the Taxpayer Relief Act of 1997). See Prop. Treas.
Reg. secs. 1.1296-4 and 1.1296-6. Specifically, the Congress
intended that these requirements include the requirements for
foreign banks under Prop. Treas. Reg. sec. 1.1296-4 as
currently drafted. However, the Congress did not intend that
these requirements be considered to be satisfied by a CFC
merely because it is a qualified bank affiliate or a qualified
securities affiliate within the meaning of the proposed
regulations under former section 1296(b).
Lending or finance business.--The Act modifies the prior-
law 70-percent test for determining whether a CFC is
predominantly engaged in the active conduct of a banking,
financing, or similar business. Under the Act, a CFC is
considered to be predominantly engaged in the active conduct of
such business if more than 70 percent of its gross income is
derived directly from the active and regular conduct of a
lending or finance business from transactions with customers
which are unrelated persons. For this purpose, the Congress
intended that transactions with customers located in the United
States not be taken into account in determining whether the 70-
percent test is satisfied.
For this purpose, a CFC is considered to be engaged in a
lending or finance business if it is engaged in the business
of:
(1) making loans;
(2) purchasing or discounting accounts receivable,
notes (including loans), or installment obligations;
(3) engaging in leasing (including entering into
leases and purchasing, servicing and disposing of
leases and leased assets);
(4) issuing letters of credit and providing
guarantees;
(5) providing charge and credit card services; or
(6) rendering services or making facilities available
in connection with the foregoing activities carried on
by the corporation rendering such services or
facilities, or by another corporation which is a member
of the same affiliated group.
For this purpose, whether two corporations are affiliated
is determined by reference to section 1504 with one
modification: the exclusion for foreign corporations is
disregarded.
Whether any portion of a CFC's gross income is derived
directly from the active and regular conduct of a lending or
finance business is determined under all the facts and
circumstances. Under the Act, the Treasury Secretary is granted
the authority to prescribe regulations to carry out the
purposes of these exceptions. The Congress intended that such
authority includes the authority to prescribe rules relating to
this determination.
Qualified banking or financing income exempt from
subpart F
In general.--If a CFC is treated as an eligible CFC (i.e.,
it satisfies the substantial activity and predominantly engaged
requirements), the subpart F exceptions apply to qualified
banking or financing income of such corporation. Qualified
banking or financing income is defined as income which is
derived in the active conduct of a banking, financing, or
similar business by an eligible CFC or a QBU of such CFC if:
(1) the income is derived from transactions with customers not
located in the United States, (2) substantially all of the
activities in connection with such transactions are conducted
directly by the corporation or unit in its home country, and
(3) the income is treated as earned by such corporation or unit
in its home country forpurposes of such country's tax laws. For
this purpose, income is considered to be earned by a CFC or a QBU in
its home country if such income is sourced and allocable to such CFC or
QBU in its home country for purposes of such country's tax laws. In
addition, for this purpose, activities are considered to be conducted
by a CFC or QBU if such activities are performed by employees of the
CFC or QBU. Except as provided by regulations, a CFC's home country is
defined as its country of creation or organization, and a QBU's home
country is defined as the country in which the unit maintains its
principal office. Moreover, income derived from transactions with
customers apply only to transactions with customers acting in their
capacity as such.
For this purpose, the Congress intended that income derived
by an eligible CFC or QBU of such CFC from the following types
of activities be considered to be income derived in the active
conduct of a banking, financing, or similar business (provided
that the other requirements for these exceptions are
satisfied):
(1) regularly making personal, mortgage, industrial,
or other loans in the ordinary course of the
corporation's trade or business;
(2) factoring evidences of indebtedness for
customers;
(3) purchasing, selling, discounting, or negotiating
for customers notes, drafts, checks, bills of exchange,
acceptances, or other evidences of indebtedness;
(4) issuing letters of credit and negotiating drafts
drawn thereunder for customers;
(5) performing trust services, including as a
fiduciary, agent, or custodian, for customers, provided
such trust activities are not performed in connection
with services provided by a dealer in stock, securities
or similar financial instruments;
(6) arranging foreign exchange transactions
(including any section 988 transaction within the
meaning of section 988(c)(1)) for, or engaging in
foreign exchange transactions with, customers;
(7) arranging interest rate or currency futures,
forwards, options or notional principal contracts for,
or entering into such transactions with, customers;
(8) underwriting issues of stock, debt instruments or
other securities under best efforts or firm commitment
agreements for customers;
(9) engaging in leasing (including entering into
leases and purchasing, servicing and disposing of
leases and leased assets);
(10) providing charge and credit card services for
customers or factoring receivables obtained in the
course of providing such services;
(11) providing traveler's check and money order
services for customers;
(12) providing correspondent bank services for
customers;
(13) providing paying agency and collection agency
services for customers;
(14) maintaining restricted reserves (including money
or securities) in a segregated account in order to
satisfy a capital or reserve requirement imposed by a
local banking or securities regulatory authority;
(15) engaging in hedging activities directly related
to another activity described herein;
(16) repackaging mortgages and other financial assets
into securities and servicing activities with respect
to such assets (including the accrual of interest
incidental to such activity);
(17) engaging in financing activities typically
provided in the ordinary course by an investment bank,
such as project financing provided in connection with
construction projects, structured finance (including
the extension of a loan and the sale of participations
or interests in the loan to other financial
institutions or investors), and leasing activities to
the extent incidental to such financing activities;
(18) providing financial or investment advisory
services, investment management services, fiduciary
services, or custodial services;
(19) purchasing or selling stock, debt instruments,
interest rate or currency futures or other securities
or derivative financial products (including notional
principal contracts) from or to customers and holding
stock, debt instruments and other securities as
inventory for sale to customers, unless the relevant
securities or derivative financial products are not
held in a dealer capacity;
(20) effecting transactions in securities for
customers as a securities broker; and
(21) any other activity that the Secretary of the
Treasury determines to be a financing activity
conducted by active corporations in the ordinary course
of their business.
Qualified banking or financing income of an eligible CFC or
QBU of such CFC is determined separately for the CFC and each
QBU, taking into account, in the case of an eligible CFC, only
items of income, gain, deduction, loss or other items, as well
as activities, of such CFC that are not properly allocable to
any QBUs. Similarly, in the case of a QBU, qualified banking or
financing income is determined by taking into account such
applicable items (e.g., income and activities) that are
properly allocable to such QBU. Under the Act, the Treasury
Secretary is granted the authority to prescribe regulations to
carry out the purposes of these exceptions. The Congress
intended that such authority includes the authority to
prescribe rules for properly allocating items and activities
among branches or units of a CFC, and between the CFC and its
branches or units.
Income from local customer transactions.--If the
requirements above are satisfied, the exceptions apply to
income that is derived from transactions with customers located
in the CFC's home country. In addition, the exceptions apply to
income that is derived by a QBU of an eligible CFC from
transactions with customers located in the QBU's home country.
For example, assume that a CFC is incorporated in the
United Kingdom and has operations in France that constitute a
QBU. Also assume that the activities of the U.K. CFC's head
office together with the activities of the French QBU satisfy
the substantial activity requirement. Under the Act, income
derived by the U.K. CFC from transactions with customers in the
United Kingdom is eligible for the exceptions if substantially
all of the activities in connection with the transaction are
performed in the United Kingdom by employees of the U.K. CFC,
and the income is treated as earned by the U.K. CFC in the
United Kingdom for U.K. income tax purposes. In addition,
income derived by the French QBU from transactions with
customers in France is eligible for the exceptions if
substantially all of the activities in connection with the
transactions are performed in France by employees of the French
QBU, and the income is treated as earned by the French QBU in
France for French income tax purposes.
Income from cross border transactions.--If the requirements
above are satisfied, the exceptions also apply to income from
certain cross border transactions, but only if a higher
standard with respect to the substantial activity requirement
is satisfied. Under the Act, income derived by a CFC from
transactions with customers not located in the CFC's home
country or the United States is eligible for the exceptions if
the CFC conducts substantial activity with respect to a
banking, financing, or similar business in its home country. In
addition, income derived by a QBU of an eligible CFC from
transactions with customers not located in the QBU's home
country or the United States is eligible for the exceptions,
but only if the QBU conducts substantial activity with respect
to such a business in its home country. For this purpose, the
substantial activity requirement is applied by looking only at
the activities of the applicable CFC or QBU on a stand-alone
basis. Thus, income derived by a QBU from transactions with
customers not located in its home country (or in the United
States) is eligible for the exceptions if the activities of the
QBU itself constitute substantial activities (provided that the
other requirements are satisfied).
Consider again the U.K. CFC and the French QBU. If the head
office of the U.K. CFC derives income from a transaction with a
customer in Germany, the income is eligible for the exceptions
if the activities of the CFC itself (without regard to those of
the French QBU) satisfy the substantial activity requirement.
Alternatively, if the French QBU derives income from a
transaction with a German customer, the income is eligible for
the exceptions if the activities of the French QBU itself
satisfy the substantial activity requirement.
Home country requirement for income earned with respect to
a lending or finance business.--In the case of a lending or
finance business, in addition to the requirements
describedabove, the Act includes an additional requirement to qualify
for the exceptions in the case of income earned by a CFC which
qualifies as an eligible CFC by satisfying the predominantly engaged
requirement for an active lending or finance business. For such an
eligible CFC, income derived by such CFC is eligible for the exceptions
only if such CFC derives more than 30 percent of its gross income
directly from the active and regular conduct of a lending or finance
business from transactions with customers that are unrelated persons
and that are located within the CFC's home country (the ``home
country'' requirement). In addition, income derived by a QBU of such an
eligible CFC is eligible for the exceptions only if such QBU derives
more than 30 percent of its gross income directly from the active and
regular conduct of a lending or finance business from transactions with
customers that are unrelated persons and that are located within the
QBU's home country. For this purpose, the Congress intended that
transactions with customers located in the United States not be taken
into account.
The home country requirement is applied on a stand-alone
basis to the particular CFC or QBU. Thus, the 30-percent gross
income test takes into account only the gross income of a
particular CFC (without regard to the income of its QBUs) from
transactions with its home-country unrelated customers.
Similarly, in the case of a QBU, there is taken into account
the gross income of the particular QBU (without regard to the
income of the CFC or other QBUs) from transactions with its
home-country unrelated customers. Accordingly, if more than 70
percent of the CFC's gross income is derived directly from the
active and regular conduct of a lending or finance business
from transactions with unrelated customers, and one of the
CFC's QBUs satisfies the home country requirement but another
QBU does not satisfy such requirement, income derived by the
QBU that satisfies the home country requirement is eligible for
the exceptions from subpart F (provided that the other
requirements are satisfied), but income derived by the other
QBU is not eligible for the exceptions.
Coordination with other rules.--The Act provides that the
exceptions under section 954(h) for income derived in the
active conduct of a banking, financing, or similar business do
not apply to income described in the dealer exception under
section 954(c)(2)(C)(ii) (described below) for a dealer in
securities which is an eligible CFC that satisfies the
predominantly engaged requirement for a securities business.
In addition, the Congress expected that the Treasury
Department and the Internal Revenue Service will issue timely
guidance to make currently effective conforming changes to
existing regulations in order to reflect the exceptions under
section 954(h), including conforming changes to the regulations
under section 954(c)(3).
Exception for securities dealers
The Act provides an additional exception from foreign
personal holding company income for certain income derived by a
securities dealer within the meaning of section 475 (the so-
called ``dealer exception''). The dealer exception applies to
interest or dividends (or equivalent amounts described in sec.
954(c)(1)(E) or (G)) from any transaction (including a hedging
transaction or a transaction consisting of a deposit of
collateral or margin described in sec. 956(c)(2)(J)) entered
into in the ordinary course of the dealer's trade or business
as such a securities dealer, but only if the income is
attributable to activities of the dealer in the country in
which the dealer is created or organized (or, in the case of a
QBU of the dealer, is attributable to activities of the QBU in
the country in which the QBU both maintains its principal
office and conducts substantial business activity). For this
purpose, income is considered to be attributable to activities
of the dealer in its country of incorporation (or to a QBU in
the country in which the QBU both maintains its principal
office and conducts substantial business activity), if such
income is attributable to activities performed in such country
by employees of the dealer (or QBU), and such income is treated
as earned in such country by the dealer (or QBU) for purposes
of such country's tax laws. For this purpose, income is
considered to be earned in the country in which the dealer is
created or organized (or, in the case of a QBU, in the country
in which the QBU both maintains its principal office and
conducts substantial business activity), if such income is
sourced and allocable to such dealer (or QBU) in such country
for purposes of such country's tax laws. The Congress intended
that the dealer exception not apply to income from transactions
with persons located in the United States with respect to U.S.
securities. This reflects the understanding of the Congress
that the exception from current inclusion under subpart F for
income earned by dealers in securities does not apply to
activities that would otherwise be conducted in the United
States. In addition, the Congress intended that the dealer
exception will apply to interest paid by customers to the
dealer on margin loans in connection with sales of securities
(provided that the other requirements of the provision are
satisfied).
Insurance income
In general
The Act provides a temporary exception to insurance income
under section 953. For purposes of the exception to insurance
income, reserves for an exempt insurance or annuity contract
are determined in the same manner as under the temporary
exception, described below, for foreign personal holding
company income relating to certain insurance contracts (sec.
954(i), as added by the Act). For purposes of these provisions,
the Congress intended reserves to include discounted unpaid
losses or losses incurred, as appropriate, for property and
casualty contracts.
Operation of the exception
The Act provides an exception from insurance income for
income derived by a qualifying insurance company that is
attributable to the issuing (or reinsuring) of an exempt
contract by the qualifying insurance company or a qualifying
insurance company branch of such a company, and that is treated
as earned by the company or branch in that company's, or
branch's, home country for purposes of that country's tax laws.
The exception from insurance income does not apply to income
attributable to the issuing (or reinsuring) of an exempt
contract as the result of any arrangement whereby another
corporation receives a substantially equal amount of premiums
or other consideration in respect of issuing (or reinsuring a
contract that is not an exempt contract). An exempt contract is
an insurance or annuity contract issued or reinsured by a
qualifying insurance company or qualified insurance company
branch in connection with property in, liability arising out of
activity in, or the lives or health of residents of, a country
other than the United States.
No contract is treated as an exempt contract unless the
qualifying insurance company or branch derives more than 30
percent of its net written premiums from exempt contracts
(determined without regard to this sentence) covering
applicable home country risks, and with respect to which no
policyholder, insured, annuitant, or beneficiary is a related
person (within the meaning of sec. 954(d)(3)). Applicable home
country risks are risks in connection with property in,
liability arising out of activity in, or the lives or health of
residents of, the home country of the qualifying insurance
company or branch, as the case may be. In all cases, the 30-
percent test is applied on a unit-by-unit basis. Accordingly,
income derived by a qualifying insurance company branch of a
CFC qualifies only if such branch alone satisfies the 30-
percent test (without regard to the net written premiums of any
other branch). Income derived by the CFC qualifies only if the
CFC alone satisfies the 30-percent test without regard to the
net written premiums of any other unit or branch of the CFC.
When determinations under the Act are made separately with
respect to a qualifying insurance company and its qualifying
insurance company branch or branches, then in the case of the
qualifying insurance company, only income, gain, or loss and
activities of the company not properly allocable or
attributable to any qualifying insurance company branch are
taken into account. In the case of a qualifying insurance
company branch, only income, gain, or loss and activities of
the branch that are properly allocable or attributable to it
are taken into account. Under the Act, the Treasury Secretary
is granted the authority to carry out the purposes of these
exceptions. The Congress intended that such authority includes
the authority to prescribe rules for properly allocating items
and activities among branches or units of a CFC, and among the
CFC and its branches or units.
The home country of a CFC is the country in which the CFC
is created or organized. The home country of a QBU that is a
qualifying insurance company branch of a qualifying insurance
company means the country in which the principal office of such
unit is located and in which such unit is licensed, authorized,
or regulated by the applicable insurance regulatory body to
sell insurance, reinsurance or annuity contracts to persons
other than related persons (within the meaning of sec.
954(d)(3)) in that country.
Qualifying insurance company
A qualifying insurance company is a CFC that meets the
following requirements, which are intended to distinguish firms
that have a real business nexus with a foreign country or
countries from firms that do not. The first requirement is that
the CFC be subject to regulation as an insurance (or
reinsurance) company by its home country, and that the CFC be
licensed, authorized, or regulated by the applicable insurance
regulatory body for its home country to sell
insurance,reinsurance, or annuity contracts to persons other than
related persons (within the meaning of sec. 954(d)(3)) in its home
country.
The second requirement is that the CFC derive more than 50
percent of its aggregate net written premiums from the
insurance or reinsurance by the CFC (on an aggregate basis,
including qualifying insurance company branches) covering
applicable home country risks (as described above) of the CFC
or branch, as the case may be. For purposes of this rule, if a
policyholder, insured, annuitant, or beneficiary is a related
person, then the contract is treated as not covering home
country risks. A related person has the meaning set forth in
section 954(d)(3). In the case of a qualifying insurance
company branch, premiums are taken into account under this
second requirement only to the extent that the premiums are
treated as earned by the branch in its home country for
purposes of that country's tax laws.
The 50-percent test applies on an aggregate basis. For
example, assume that a German CFC has a branch in France and a
branch in Italy. Assume that $50 of net written premiums are
properly allocable to the Italian branch, $100 of net written
premiums are properly allocable to the French branch, and $100
of net written premiums are properly allocable to the CFC in
Germany. For the Italian branch, assume $20 of the $50, or 40
percent, is from home country risks. For the French branch,
assume that $80 of the $100, or 80 percent, is from home
country risks. For the CFC in Germany, assume that $60 of the
$100, or 60 percent, is from home country risks. Taking into
account the respective amounts and percentages, the CFC has 64
percent of its net written premiums from home country risks on
an aggregate basis.
The third requirement is that the CFC be engaged in the
insurance business and that it would be subject to tax under
subchapter L if it were a domestic corporation. A CFC is
considered to be engaged in the insurance business, within the
meaning of this provision of the Act, if it operates in a
manner consistent with the operation of other bona fide
commercial insurance companies that sell insurance products to
unrelated parties in its home country, and conducts managerial
activities in that country with respect to the major functions
of the insurance business. A factor, among others, that could
be considered in determining whether it conducts managerial
activities in its home country with respect to the major
functions of the insurance business may be whether in its home
country it exercises key decision making in determining
business strategy with respect to the major functions of the
insurance business. For purposes of the requirement that the
CFC be engaged in the insurance business, activities performed
in the home country of the CFC by employees of the CFC and of a
related person are taken into account, to the extent that the
related person is compensated on an arm's-length basis for the
services of such employees and such compensation is includible
in the related person's income in such country for purposes of
that country's tax laws. For this purpose, a related person has
the meaning provided in section 954(d)(3), substituting ``at
least 80 percent'' for ``more than 50 percent.'' In determining
whether a CFC is engaged in the insurance business, for
example, an entity that is not engaged in regular and
continuous transactions with persons that are not related
persons (as described in the anti-abuse rules) is not
considered as engaged in the insurance business.
Qualifying insurance company branch
A qualifying insurance company branch is a qualified
business unit of a CFC that meets two requirements. A qualified
business unit means any separate and clearly identified unit of
a trade or business of a taxpayer which maintains separate
books and records (within the meaning of sec. 989(a)). The
first requirement is that the unit be licensed, authorized, or
regulated by the applicable insurance regulatory body for its
home country to sell insurance, reinsurance or annuity
contracts to persons other than related persons (within the
meaning of sec. 954(d)(3)) in that country. The Congress
intended that the applicable insurance regulatory body be the
regulatory body that has the authority to license, authorize,
or regulate with respect to the insurance business in the
country where the branch is located and a branch that is
regulated by such a body be considered to be regulated in the
country where the branch is located. The second requirement is
that the CFC (of which the branch is a unit) be a qualifying
insurance company, taking the unit into account for purposes of
the applicable tests (above) as if it were a qualifying
insurance company branch.
Additional requirements in the case of cross border risks
The Act imposes additional requirements with respect to any
contract that covers cross border risks (that is, risks other
than applicable home country risks), due to the increased
concern about mobility of income in cross border business. A
contract issued by a qualifying insurance company or qualifying
insurance company branch that covers risks other than
applicable home country risks is not treated as an exempt
contract unless such company or branch, as the case may be, (1)
conducts substantial activity in its home country with respect
to the insurance business, and (2) performs in its home country
substantially all of the activities necessary to give rise to
the income generated by the contract.
Whether a CFC or unit thereof is considered to perform in
its home country substantial activities with respect to the
insurance business is determined under all the facts and
circumstances. The Congress intended that as part of this facts
and circumstances analysis in determining whether the
activities conducted by the CFC or unit are substantial, all
relevant factors are taken into account, including the overall
size of the CFC or unit, the amount of its revenues and
expenses, the number of its employees, the ratio of its
revenues per employee, the amount of property it owns, and the
nature, size and relative significance of the applicable
activities conducted by the CFC or unit. Under the Act, the
Treasury Secretary is granted the authority to carry out the
purposes of these exceptions. The Congress intended that such
authority includes the authority to prescribe regulations
relating to whether a CFC or unit is considered to conduct
substantial activity.
The Congress also intended that as part of this facts and
circumstances analysis, a CFC or unit is required to conduct
substantially all of the activities necessary for the
generation of income with respect to the insurance business.
Such activities of an insurance business generally depend on
the line of business, and could include:
Designing or tailoring insurance products to meet
market or customer requirements;
Performing actuarial analysis with respect to
insurance products;
Determining investment options for separate account-
type products;
Performing underwriting functions with respect to
insurance products;
Performing analysis for purposes of risk assessment;
Performing analysis for purposes of setting premium
rates;
Performing analysis for purposes of calculating
reserves;
Performing claims management and adjustment functions;
Developing marketing strategies, advertising and other
public image activities;
Making (or arranging for) sales to customers;
Maintaining reserves and surplus (other than excess
surplus);
Making (or arranging for) investments; and
Collecting from customers.
The Congress further intended that the performance of back-
office functions (including accounting for income or loss,
recordkeeping, and routine communicating with customers) not be
taken into account in determining whether the substantial
activity requirement is satisfied. The Congress also intended
that the relevant activities of the business may be modified by
Treasury regulation to take into account the actual operation
of lines of insurance business and future changes in the
operation of lines of insurance business.
The Congress further intended that activities performed in
the CFC's or unit's home country by employees of a related
person (within the meaning of sec. 954(d)(3), substituting ``at
least 80 percent'' for ``more than 50 percent'') be taken into
account, to the extent that the related person is compensated
on an arm's-length basis for the services of such employees and
such compensation is includible in the related person's income
in that country for purposes of such country's tax laws. The
Congress also intended that the activities of such a related
person are not again taken into account in determining whether
another CFC or unit (e.g., the related person) satisfies the
substantial activity requirement.
In addition, with respect to a contract issued by a
qualifying insurance company or qualifying insurance company
branch that covers risks other than applicable home country
risks, the qualifying insurance company or qualifying insurance
company branch is required to perform in its home country
substantially all of the activities necessary to give rise to
the income generated by the contract.
Foreign personal holding company income with respect to insurance
The Act provides a temporary exception from foreign
personal holding company income for certain investment income
derived by a qualifying insurance company and by certain
qualifying insurance company branches.
The exception applies to income (received from a person
other than a related person) from investments made by a
qualifying insurance company or qualifying insurance company
branch of its reserves allocable to exempt contracts or 80
percent of its unearned premiums from exempt contracts. For
this purpose, an exempt contract has the meaning provided under
the Act.
In the case of exempt contracts that are property,
casualty, or health insurance contracts, unearned premiums and
reserves mean unearned premiums and reserves for losses
incurred determined using the methods and interest rates that
would be used if the qualifying insurance company or qualifying
insurance company branch were subject to tax under subchapter L
of the Code, with certain modifications. For this purpose,
unearned premiums and losses incurred are determined in
accordance with section 832(b) and 846 of the Code (as well as
any other rules applicable to a U.S. property and casualty
insurance company with respect to such amounts). However, in
applying these rules, the Act substitutes for the applicable
Federal interest rate the interest rate determined for the
functional currency of the company or branch and which (except
as provided by the Treasury Secretary) is calculated in the
same manner as the Federal mid-term rate under section 1274(d).
In addition, the Act substitutes for the loss payment pattern
under section 846 the appropriate foreign loss payment pattern
determined by the Treasury Secretary for the line of business.
In the case of health insurance contracts, the Congress
intended that appropriate foreign mortality and morbidity
tables be used for this purpose. In the case of disability
contracts (other than credit disability) which are subject to
section 846(f)(6)(A), the Congress intended that mortality and
morbidity tables reasonably reflect appropriate experience and
foreign mortality and morbidity factors.
In the case of an exempt contract that is a life insurance
or annuity contract, reserves for such contracts are determined
as follows. The reserves equal the greater of: (1) the net
surrender value of the contract (as defined in sec.
807(e)(1)(A)), including in the case of pension plan contracts;
or (2) the amount determined by applying the tax reserve method
that would apply if the qualifying insurance company were
subject to tax under Subchapter L of the Code, with the
following modifications. First, the Act substitutes for the
applicable Federal interest rate an interest rate determined
for the functional currency of the qualifying insurance
company's home country, calculated (except as provided by the
Treasury Secretary in order to address insufficient data and
similar problems) in the same manner as the mid-term applicable
Federal interest rate (``AFR'') (within the meaning of sec.
1274(d)). Second, the Act substitutes for the prevailing State
assumed rate the highest assumed interest rate permitted to be
used for purposes of determining statement reserves in the
foreign country for the contract. Third, in lieu of U.S.
mortality and morbidity tables, the Act applies mortality and
morbidity tables that reasonably reflect the current mortality
and morbidity risks in the foreign country. Fourth, the
Treasury Secretary may provide that the interest rate and
mortality and morbidity tables of a qualifying insurance
company may be used for one or more of its branches when
appropriate.
In no event may the reserve for any contract at any time
exceed the foreign statement reserve for the contract, reduced
by any catastrophe, equalization, or deficiency reserve or any
similar reserve. In the case of a contract that is a property,
casualty, or health insurance contract, the Congress intended
that this limitation applies with respect to unpaid losses by
line of business (similar to sec. 846(a)(3)). These rules apply
whether the contract is regulated as a property, casualty,
health, life insurance, annuity, or any other type of contract.
The Act also provides an exception from foreign personal
holding company income for income from investment of assets
equal to (1) one-third of premiums earned during the taxable
year on exempt contracts regulated in the country in which sold
as property, casualty, or health insurance contracts, and (2)
10 percent of reserves (determined for purposes of the
provision) for contracts regulated in the country in which sold
as life insurance or annuity contracts. In no event does the
exception from foreign personal holding company income apply to
investment income with respect to excess surplus.
To prevent the shifting of relatively high-yielding assets
to generate investment income that qualifies under this
temporary exception, the Act provides that, except as provided
by the Treasury Secretary, income is allocated to contracts as
follows. In the case of a separate account-type contract
(including a variable contract not meeting the requirements of
sec. 817), the income credited under the contract is allocable
only to that contract. Income not so allocated generally is
allocated ratably among all contracts that are not separate
account-type contracts, subject to the anti-abuse rules
(described below).
Other definitions and anti-abuse rules relating to insurance
The Act provides that the prior-law statutory definition of
a life insurance contract (under secs. 7702 or 101(f)), as well
as the distribution on death requirement of section 72(s) and
the diversification requirement of section 817(h), do not apply
for purposes of determining reserves for a life insurance or
annuity contract under sections 953 and 954 of the Code,
provided that neither the policyholders, the insureds or
annuitants, nor the beneficiaries with respect to the contract
are U.S. persons.
The Act provides a rule coordinating the exception to
insurance income with the prior-law special rule for certain
captive insurance companies (sec. 953(c)). Under the
coordination rule, the scope of the prior-law rule that related
party insurance income is treated as subpart F income is
retained. The exception under the Act from the definition of
insurance income does not include income derived from exempt
contracts that cover risks other than applicable home country
risks, for purposes of the rules of section 953(c).
The anti-abuse rules applicable under the subpart F
exceptions provided in section 954(h) (other than sec.
954(h)(7)(B)) (as added by the Act) apply to these exceptions
for insurance. In addition, the Act provides anti-abuse rules
applicable under the exceptions from subpart F income relating
to insurance.
The Act provides that there shall be disregarded any item
of income, gain, loss, or deduction of, or derived from, an
entity which is not engaged in regular and continuous
transactions with persons that are not related persons. The
Congress intended that this rule, for example, will address the
use of fronting companies or similar entities (that are not
engaged in regular and continuous transactions with persons
that are not related persons) to reinsure risks in a manner to
cause a CFC or branch to qualify as a qualifying insurance
company or qualifying insurance company branch by meeting
percentage requirements with respect to home country risks that
it would not otherwise meet.
The Act provides that there shall be disregarded any change
in the method of computing reserves or any other transaction or
transactions one of the principal purposes of which is the
acceleration or deferral of any item in order to claim the
benefits of these exceptions.
The Act also provides that a contract is not treated as an
exempt contract (as described above), if any policyholder,
insured or annuitant, or beneficiary is a resident of the
United States, the contract was marketed to the U.S. resident,
and was written to cover a risk outside the United States.
The Act also provides that a contract is not treated as an
exempt contract, if the contract covers risks located both
within and outside the United States, and the qualifying
insurance company or branch does not maintain such records, and
file such reports, with respect to the contract as the Treasury
Secretary requires. The Congress intended that documentation
that is contemporaneous with the issuance of the contract be
maintained by the qualifying insurance company or branch.
The Act also provides that the Treasury Secretary may
prescribe rules for the allocation of contracts (and income
from contracts) among two or more qualifying insurance company
branches of a qualifying insurance company in order to clearly
reflect the income of such branches.
The Act also provides that premiums from a contract are
treated as not covering home country risks (and are treated as
covering risks other than home country risks) for purposes of
the tests for 30 percent and 50 percent, respectively, of net
written premiums if the contract reinsures a contract issued or
reinsured by a related person (within the meaning of sec.
954(d)(3)).
The Act also provides that the Treasury Secretary may
prescribe regulations as may be necessary or appropriate to
carry out the purposes of the exceptions from insurance income
and foreign personal holding company income provided under
sections 953(e) and 954(i) (as added by the Act).
Other anti-abuse rules
The Act generally includes the anti-abuse rules of the
prior-law provision, with certain further refinements. Under
the Act, the anti-abuse rules provide that items with respect
to a transaction or series of transactions are disregarded if
one of the principal purposes of the transaction or
transactions is to qualify income or gain for these exceptions,
including any transaction or a series of transactions a
principal purpose of which is the acceleration or deferral of
any item in order to claim the benefits of these exceptions. In
addition, the anti-abuse rules provide that items of an entity
which is not engaged in regular and continuous transactions
with customers which are not related persons are disregarded.
Moreover, items with respect to a transaction or series of
transactions are disregarded if one of the principal purposes
of the transaction or transactions is to qualify income or gain
for these exceptions, including utilizing or doing business
with: (1) one or more entities in order to satisfy any home
country requirement, or (2) a special purpose entity or
arrangement, including a securitization or financing
arrangement or any similar entity or arrangement. Finally, the
anti-abuse rules provide that a related person, officer,
director, or employee with respect to any CFC (or QBU) which
otherwise would be treated as a customer of such corporation or
unit with respect to any transaction is not treated as a
customer, if a principal purpose of such transaction is to
satisfy any requirement for these exceptions.
Sale of assets of an active financing business
The Act includes a modification to address the treatment of
sales of assets of an active financing business. In general,
foreign personal holding company income includes net gains from
the sale or exchange of property that gives rise to dividends,
interest, royalties, rents, or annuities. The Act provides an
exception from this rule for income that qualifies for the
exception from subpart F for income derived in the active
conduct of a banking, financing, or similar business. Under the
Act, foreign personal holding company income does not include
net gains from the sale or exchange of property that gives rise
to dividends, interest, royalties, rents, or annuities if such
property gives rise to income not treated as foreign personal
holding company income for the taxable year by reason of the
exceptions under section 954(h) or (i) (as added by the Act)
for income derived in the active conduct of a banking,
financing, or similar business or in the conduct of an
insurance business. The Congress intended that this exception
applies only to the extent that, prior to its disposition, the
property was held to generate or generated income which
qualifies for the exceptions under section 954(h) or (i) (and
such property was not so held for a principal purpose of taking
advantage of such exception).
Exceptions from foreign base company services income
The prior-law provision includes a corresponding exception
from foreign base company services income for income derived by
a CFC from the performance of services that are directly
related to a transaction entered into by the CFC that gives
rise to income that is eligible for these exceptions from
subpart F. Under the Act, foreign base company services income
does not include income that is not treated as foreign personal
holding company income by reason of the exceptions under
section 954(h) or 954(i) or the securities dealer exception
under section 954(c)(2)(C)(ii), or treated as exempt insurance
income by reason of section 953(e) (as added by the Act).
Other matters
Nothing in this provision is intended to alter the Treasury
Department's agreement, as reflected in Notice 98-35, not to
finalize regulations regarding so-called hybrid entities prior
to January 1, 2000, in order to allow the Congress the
opportunity to fully consider the tax policy issues involved.
Effective Date
The provision applies only to taxable years of foreign
corporations beginning in 1999, and to taxable years of U.S.
shareholders with or within which such taxable years of foreign
corporations end.
Revenue Effect
The provision is estimated to decrease Federal fiscal year
budget receipts by $117 million in 1999 and $378 million in
2000.
F. Disclosure of Return Information to Department of Education in
Connection with Income Contingent Loans (sec. 1006 of the Act and sec.
6103(l)(13) of the Code)
Prior Law
Under section 6103(l)(13) of the Code, the Secretary of the
Treasury was authorized to disclose to the Department of
Education certain return information with respect to any
taxpayer who has received an ``applicable student loan.'' An
``applicable student loan'' is any loan made under (1) part D
of title IV of the Higher Education Act of 1965 or (2) parts B
or E of title IV of the Higher Education Act of 1965 which is
in default and has been assigned to the Department of
Education, if the loan repayment amounts are based in whole or
in part on the taxpayer's income. The Secretary was permitted
to disclose only taxpayer identity information and the adjusted
gross income of the taxpayer. The Department of Education may
use the information only to establish the appropriate income
contingent repayment amount for an applicable student loan.
The disclosure authority under section 6103(l)(13)
terminated with respect to requests made after September 30,
1998.
Reasons for Change
The Congress believed it was appropriate to extend the
disclosure authority with respect to applicable student loans
during the period in which the applicable loan programs are
extended.
Explanation of Provision
The Act reinstates the disclosure authority under section
6103(l)(13) with respect to requests made after the date of
enactment and before October 1, 2003.
Effective Date
The disclosure authority under section 6103(l)(13) applies
to requests made after the date of enactment (October 21, 1998)
and before October 1, 2003.
Revenue Effect
The provision is estimated to have a negligible effect on
Federal fiscal year budget receipts.
TITLE II. OTHER PROVISIONS
Subtitle A.--Provisions Relating to Individuals
A. Personal Credits Fully Allowed Against Regular Tax Liability During
1998 (sec. 2001 of the Act and sec. 26 of the Code)
Present and Prior Law
Present law and prior law provide for certain nonrefundable
personal tax credits (i.e., the dependent care credit, the
credit for the elderly and disabled, the adoption credit, the
child tax credit, the credit for interest on certain home
mortgages, the HOPE Scholarship and Lifetime Learning credits,
and the D.C. homebuyer's credit). Generally, these credits are
reduced or eliminated for individuals with adjusted gross
incomes above specified amounts and these credits are allowed
only to the extent that the individual's regular income tax
liability exceeds the individual's tentative minimum tax,
determined without regard to the AMT foreign tax credit (``the
sec. 26(a) limitation'').
An individual's tentative minimum tax is an amount equal to
(1) 26 percent of the first $175,000 ($87,500 in the case of a
married individual filing a separate return) of alternative
minimum taxable income (``AMTI'') in excess of a phased-out
exemption amount and (2) 28 percent of the remaining AMTI. The
maximum tax rates on net capital gain used in computing the
tentative minimum tax are the same as under the regular tax.
AMTI is the individual's taxable income adjusted to take
account of specified preferences and adjustments. The exemption
amounts are: (1) $45,000 in the case of married individuals
filing a joint return and surviving spouses; (2) $33,750 in the
case of other unmarried individuals; and (3) $22,500 in the
case of married individuals filing a separate return, estates
and trusts. The exemption amounts are phased out by an amount
equal to 25 percent of the amount by which the individual's
AMTI exceeds (1) $150,000 in the case of married individuals
filing a joint return and surviving spouses, (2) $112,500 in
the case of other unmarried individuals, and (3) $75,000 in the
case of married individuals filing separate returns or an
estate or a trust. These amounts are not indexed for inflation.
For families with three or more qualifying children, a
refundable child credit is provided, up to the amount by which
the liability for social security taxes exceeds the amount of
the earned income credit (sec. 24(d)). The refundable child
credit is reduced by the amount of the individual's minimum tax
liability (i.e., the amount by which the tentative minimum tax
exceeds the regular tax liability).
Reasons for Change
The alternative minimum tax was enacted by Congress to
ensure that no taxpayer with substantial economic income can
avoid significant tax liability by using exclusions,
deductions, and credits.105 The Congress believed
that allowing middle-income families to use the nonrefundable
personal tax credits to offset the regular tax in full would
not undermine the policy of the minimum tax, and would promote
the important social policies underlying each of the credits.
---------------------------------------------------------------------------
\105\ See H. Rept. 99-426, pp. 305-306, and S. Rept. 99-313, p.
518.
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The Congress further believed that allowing these credits
to offset the regular tax in full would result in significant
simplification. Substantially fewer taxpayers will need to
complete the minimum tax form (Form 6251) and the worksheets
accompanying the credits can be greatly simplified.
Explanation of Provision
The provision allows the nonrefundable personal credits to
offset the individual's regular tax liability in full for
taxable years beginning during 1998 (as opposed to only the
amount by which the regular tax liability exceeds the tentative
minimum tax, as under prior law).
The provision that reduces the refundable child credit by
the amount of an individual's AMT does not apply for taxable
years beginning during 1998.
The following examples illustrate the application of this
provision for taxable years beginning during 1998:
Example 1: Assume a married couple has an adjusted gross
income of $65,400, they do not itemize deductions, and they
have four dependent children. Also assume they are entitled to
an $800 child credit for two of the children, a $3,000 HOPE
scholarship credit with respect to the other two children, and
a $960 dependent care tax credit--for a total amount of tax
credits of $4,760. The couple's net tax liability under prior
law 106 and under the 1998 law are computed as
follows:
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\106\ ``Prior law'' for purposes of this discussion means the law
which would have been effective in 1998 without the amendments made by
section 2001 of the Tax and Trade Relief Extension Act of 1998 (``1998
Act''), and ``1998 law'' means the law as amended by that section.
------------------------------------------------------------------------
Prior law 1998 law
------------------------------------------------------------------------
Adjusted gross income......................... $65,400 $65,400
Less Standard deduction....................... 7,100 7,100
Less Personal exemptions (6 @ $2,700)......... 16,200 16,200
-------------------------
Taxable income............................ 42,100 42,100
Regular tax (15% of $42,100).................. 6,315 6,315
Tentative minimum tax (26% of $20,400)........ 5,304 5,304
Pre-limitation credits ($800+$3,000+ $960).... 4,760 4,760
Section 26(a) limit on nonrefundable credits:
Regular tax............................... 6,315 6,315
Less tentative minimum tax for sec.
26(a)(2)................................. 5,304 0
Maximum nonrefundable credits allowable... 1,011 6,315
Total credits allowed......................... 1,011 4,760
Net tax....................................... 5,304 1,555
-------------------------
Net tax reduction--1998 Act............... 3,749
------------------------------------------------------------------------
Example 2: Assume the same facts as Example 1, except the
couple has five dependent children, three of whom qualify for
the child tax credit, and their adjusted gross income is
$68,100. Thus, the couple is eligible for tax credits totaling
$5,160. Also assume the couple paid $5,000 in social security
taxes for purposes of determining the refundable child tax
credit for three or more qualifying children. The couple's net
tax liability under prior law and under the 1998 law are
computed as follows:
------------------------------------------------------------------------
Prior law 1998 law
------------------------------------------------------------------------
Adjusted gross income......................... $68,100 $68,100
Less Standard deduction....................... 7,100 7,100
Less Personal exemptions (7 @ $2,700)......... 18,900 18,900
-------------------------
Taxable income............................ 42,100 42,100
Regular tax (15% of $42,100).................. 6,315 6,315
Tentative minimum tax (26% of $23,100)........ 6,006 6,006
Pre-limitation credits ($1,200+$3,000+ $960).. 5,160 5,160
Section 26(a) limit on nonrefundable credits:
Regular tax............................... 6,315 6,315
Less tentative minimum tax for sec.
26(a)(2)................................. 6,006 0
Maximum nonrefundable credits allowable... 309 6,315
Total nonrefundable credits allowed........... 309 5,160
Section 24(d) refundable child credit 107..... 1,200 0
Total credits allowed......................... 1,509 5,160
Net tax....................................... 4,806 1,155
-------------------------
Net tax reduction--1998 Act............... 3,651
------------------------------------------------------------------------
107 Section 24(d) provides for a refundable child credit for families
with three or more eligible children. The section 24(d) credit is the
lesser of (1) the amount by which allowable credits would increase if
the social security taxes were added to the section 26(a) limit or (2)
the amount of the child tax credit, determined without regard to the
section 26(a) limitation. Under prior law, the section 24(d) child
credit would have been $1,200 (the lesser of $1,200 or the amount that
the total credits would have been increased if the section 26(a) limit
had been increased by the $5,000 social security taxes paid). Because
the credits are allowed in full under the section 26(a) limitation as
amended by the 1998 Act, the couple's section 24(d) child credit is
zero under the 1998 Act.
In addition to the tax savings under the 1998 Act, the
couple is no longer required to compute the tentative minimum
tax or the section 24(d) refundable child credit to determine
their net tax liability.
Example 3: Assume the same facts as Example 2, except the
couple has six dependent children, four of whom are eligible
for the child credit, and their adjusted gross income is
$70,800. Thus, the couple is eligible for tax credits totaling
$5,560. The couple's net tax liability under prior law and
under the 1998 law are computed as follows:
------------------------------------------------------------------------
Prior law 1998 law
------------------------------------------------------------------------
Adjusted gross income......................... $70,800 $70,800
Less Standard deduction....................... 7,100 7,100
Less Personal exemptions (8 @ $2,700)......... 21,600 21,600
-------------------------
Taxable income............................ 42,100 42,100
Regular tax (15% of $42,100).................. 6,315 6,315
Tentative minimum tax (26% of $25,800)........ 6,708 6,708
Minimum tax ($6,708 less $6,315).............. 393 393
Pre-limitation credits ($1,600+$3,000+ $960).. 5,560 5,560
Section 26(a) limit on nonrefundable credits:
Regular tax............................... 6,315 6,315
Less tentative minimum tax for sec.
26(a)(2)................................. 6,708 0
Maximum nonrefundable credits allowable... 0 6,315
Total nonrefundable credits allowed........... 0 5,560
Section 24(d) refundable child credit 108..... 1,207 0
Total credits allowed......................... 1,207 5,560
Net tax ($6,315 plus $393 less credits)....... 5,501 1,148
-------------------------
Net tax reduction--1998 Act............... 4,353
------------------------------------------------------------------------
108 Under prior law, the $1,207 section 24(d) refundable child credit
would have been $1,600 less the $393 minimum tax liability. Because
the credits are allowed in full under the section 26(a) limitation as
amended by the 1998 Act, the couple's section 24(d) child credit is
zero under the 1998 Act.
In addition to the tax savings under the 1998 Act, the
couple is no longer required to compute the tentative minimum
tax or the section 24(d) refundable child credit to compute
their net tax liability.
Example 4: Assume a married couple has an adjusted gross
income of $62,700, they do not itemize deductions, and they
have three dependent children who qualify for the child tax
credit. Also assume the couple is entitled to a dependent care
credit of $960. Thus, the couple is eligible for $2,160 of
credits. Also, assume the couple paid $4,000 in social security
taxes for purposes of determining the refundable child credit
for three or more qualifying children. The couple's net tax
liability under prior law and under the 1998 law are computed
as follows:
------------------------------------------------------------------------
Prior law 1998 law
------------------------------------------------------------------------
Adjusted gross income......................... $62,700 $62,700
Less Standard deduction....................... 7,100 7,100
Less Personal exemptions (5 @ $2,700)......... 13,500 13,500
-------------------------
Taxable income............................ 42,100 42,100
Regular tax (15% of $42,100).................. 6,315 6,315
Tentative minimum tax (26% of $17,700)........ 4,602 4,602
Pre-limitation credits ($1,200+$960).......... 2,160 2,160
Section 26(a) limit on nonrefundable credits:
Regular tax............................... 6,315 6,315
Less tentative minimum tax for sec.
26(a)(2)................................. 4,602 0
Maximum nonrefundable credits allowable... 1,713 6,315
Total nonrefundable credits allowed........... 1,713 2,160
Section 24(d) refundable child credit 109..... 447 0
Total credits allowed......................... 2,160 2,160
Net tax....................................... 4,155 4,155
-------------------------
Net tax reduction--1998 Act............... 0
------------------------------------------------------------------------
109 Under prior law, this would have been the amount (not in excess of
the $1,200 child tax credit) by which the nonrefundable credits would
have been increased if the social security taxes were added to the
section 26(a) limitation ($2,160 total credits less $1,713 credits
otherwise allowable).
Although there is no net tax reduction under the 1998 Act,
the couple is no longer required to compute the tentative
minimum tax or the section 24(d) refundable child credit to
determine their net tax liability.
Effective Date
The provision is effective for taxable years beginning
during 1998.
Revenue Effect
The provision is estimated to reduce Federal fiscal year
budget receipts by $474 million in 1999.
B. Increase Deduction for Health Insurance Expenses of Self-Employed
Individuals (sec. 2002 of the Act and sec. 162(l) of the Code)
Present and Prior Law
Under present and prior law, self-employed individuals are
entitled to deduct a portion of the amount paid for health
insurance, including (within certain limits) long-term care
insurance, for the self-employed individual and the
individual's spouse and dependents. The deduction for health
insurance expenses of self-employed individuals is not
available for any month in which the taxpayer is eligible to
participate in a subsidized health plan maintained by the
employer of the taxpayer or the taxpayer's
spouse.110 The deduction is available in the case of
self insurance as well as commercial insurance. The self-
insured plan must in fact be insurance (e.g., there must be
appropriate risk shifting) and not merely a reimbursement
arrangement.
---------------------------------------------------------------------------
\110\ This rule is applied separately to long-term care insurance
and other health insurance.
---------------------------------------------------------------------------
Under present and prior law, the portion of health
insurance expenses of self-employed individuals that is
deductible is 45 percent for taxable years beginning in 1998.
Under prior law, the portion of health insurance expenses of
self-employed individuals that is deductible was scheduled to
be 45 percent for taxable years beginning in 1999, 50 percent
for taxable years beginning in 2000 and 2001, 60 percent for
taxable years beginning in 2002, 80 percent for taxable years
beginning in 2003, 2004, and 2005, 90 percent for taxable years
beginning in 2006, and 100 percent for taxable years beginning
in 2007 and thereafter.
Under present and prior law, employees can exclude from
income 100 percent of employer-provided health insurance. For
an individual who has to pay for any portion of his or her
health insurance (e.g., the individual's employer does not
provide health insurance or pays only part of the premium), the
individual's cost is deductible only to the extent that all of
the individual's medical expenses exceed 7.5 percent of his or
her adjusted gross income.
Reasons for Change
The Congress believed it appropriate to accelerate the
scheduled increase in the deduction for health insurance
expenses of self-employed individuals in order to reduce the
disparity of treatment between such expenses and employer-
provided health insurance and to help make health insurance
more affordable for self-employed individuals.
Explanation of Provision
The provision increases the deduction for health insurance
expenses of self-employed individuals to 60 percent of such
expenses for taxable years beginning in 1999 through 2001, to
70 percent for taxable years beginning in 2002, and to 100
percent for taxable years beginning in 2003 and thereafter.
Effective Date
The provision is effective for taxable years beginning
after December 31, 1998.
Revenue Effect
The provision is estimated to reduce Federal fiscal year
budget receipts by $105 million in 1999, $289 million in 2000,
$235 million in 2001, $251 million in 2002, $384 million in
2003, $637 million in 2004, $680 million in 2005, $602 million
in 2006, and $257 million in 2007.
C. Modification of Individual Estimated Tax Safe Harbors
(sec. 2003 of the Act and sec. 6654 of the Code)
Present and Prior Law
Under present law, 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 he or she makes timely estimated tax payments
at least equal to: (1) 100 percent of the tax shown on the
return of the individual for the preceding year (the ``100
percent of last year's liability safe harbor'') or (2) 90
percent of the tax shown on the return for the current year.
The 100 percent of last year's liability safe harbor is
generally modified to be a 110 percent of last year's liability
safe harbor for any individual with an AGI of more than
$150,000 as shown on the return for the preceding taxable year,
except that it is 105 percent of last year's liability for
taxable years beginning in 1999, 2000, and 2001, and 112
percent of last year's liability for taxable years beginning in
2002. If a married individual files a separate return for the
year for which an estimated tax installment payment was due,
the $150,000 amount becomes $75,000.
Reasons for Change
The Congress believed it was appropriate to modify the
applicability of these rules.
Explanation of Provision
For taxable years beginning in 2000 and 2001, the 105
percent of last year's liability safe harbor for any individual
with an AGI of more than $150,000 as shown on the return for
the preceding taxable year is modified to be a 106 percent of
last year's liability safe harbor.
Effective Date
The provision is effective for taxable years beginning in
2000 and 2001.
Revenue Effect
The provision is estimated to increase Federal fiscal year
budget receipts by $525 million in 2000 and to decrease
receipts by $525 million in 2002.
Subtitle B.--Provisions Relating to Farmers
A. Permanent Extension of Income Averaging for Farmers (sec. 2011 of
the Act and sec. 1301 of the Code)
Present and Prior Law
In general, an individual taxpayer may elect to compute his
or her current year tax liability by averaging, over the prior
three-year period, all or a portion of his or her taxable
income from the trade or business of farming.
The provision operates such that an electing taxpayer (1)
designates all or a portion of his or her taxable income
attributable to any farming business 111 of the
taxpayer from the current year as ``elected farm income,''
112 (2) allocates one-third of such ``elected farm
income'' to each of the prior three taxable years, and (3)
determines his or her current year section 1 tax liability by
determining the sum of (a) his or her current year section 1
liability without the elected farm income allocated to the
three prior taxable years plus (b) the increases in the section
1 tax for each of the three prior taxable years by taking into
account the allocable share of the elected farm income for such
years.113 If a taxpayer elects the income averaging
provision for a taxable year, then the allocation of elected
farm income to the three prior taxable years shall apply for
purposes of any income averaging election in a subsequent
taxable year.
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\111\ The term ``farming business'' has the same meaning given such
term by section 263A(e)(4).
\112\ The amount of elected farm income of a taxpayer for a taxable
year may not exceed the taxable income attributable to any farming
business for the year.
\113\ The provision does not affect the individual taxpayer's
amount of adjusted gross income (either in the year the farm income is
earned or in the prior taxable years to which such income is
allocated).
---------------------------------------------------------------------------
Taxable income attributable to any farming business may
include gain from the sale or other disposition of property
(other than land) regularly used by the taxpayer in his or her
farming business for a substantial period.
The provision does not apply for employment tax purposes,
or to an estate or a trust. Further, the provision does not
apply for purposes of the alternative minimum tax under section
55. Finally, the provision does not require the recalculation
of the tax liability of any other taxpayer, including a minor
child required to use the tax rates of his or her parents under
section 1(g).
The election is in the manner prescribed by the Secretary
of the Treasury and, except as provided by the Secretary, shall
be irrevocable. In addition, the Secretary of the Treasury
shall prescribe such regulations as are necessary to carry out
the purposes of the provision.
Under prior law, the election to use the income averaging
provision would not have been available for taxable years
beginning after December 31, 2000.
Reasons for Change
Income from a farming business can fluctuate significantly
from year to year due to circumstances beyond the farmer's
control. Allowing farmers an election to average their income
over a period of years mitigates the adverse tax consequences
that could result from fluctuating income levels. The Congress
believed that the election by farmers to average their income
should be made permanent.
Explanation of Provision
The provision allowing farmers to elect income averaging is
permanently extended.
Effective Date
The provision is effective for taxable years beginning
after December 31, 2000.
Revenue Effect
The provision is estimated to reduce Federal fiscal year
budget receipts by $2 million in 2001, $21 million in 2002, $22
million in both 2003 and 2004, $23 million in 2005, and $24
million in both 2006 and 2007.
B. Farm Production Flexibility Payments (sec. 2012 of the Act)
Present and Prior Law
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.
The Federal Agriculture Improvement and Reform Act of 1996
(the ``FAIR Act'') provides for production flexibility
contracts between certain eligible owners and producers and the
Secretary of Agriculture. These contracts generally cover crop
years from 1996 through 2002. Annual payments are made under
such contracts at specific times during the Federal
government's fiscal year. Section 112(d)(2) of the FAIR Act
provides that 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.114 This option to receive
the payment on December 15 potentially would have resulted 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 was elected.
This rule applies to fiscal years after 1996. For fiscal year
1996, this payment was to be made not later than 30 days after
the production flexibility contract was entered into.
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\114\ For legislative background of this provision, see H.R. 4579,
The Taxpayer Relief Act of 1998, as reported by the House Committee on
Ways and Means on September 23, 1998, sec. 212; H. Rept. 105-739, pp.
57-59.
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The remaining one-half of the annual payment must be made
no later than September 30 of the fiscal year. The Emergency
Farm Financial Relief Act of 1998 added section 112(d)(3) to
the FAIR Act which provides that all payments for fiscal year
1999 are to be paid at such time or times during fiscal year
1999 as the recipient may specify. Thus, the one-half of the
annual amount that would otherwise be required to be paid no
later than September 30, 1999 can be specified for payment in
calendar year 1998. This potentially would have resulted in the
constructive receipt (and thus required inclusion in taxable
income) of such amounts in calendar year 1998, whether or not
the amounts actually were received or the right to their
receipt was fixed.
Reasons for Change
The Congress determined that allowing the year in which a
production flexibility contract payment is included in income
to be determined without regard to the statutory options to
accelerate the receipt of such income will provide necessary
relief for farmers, contribute to simplification and allow for
more efficient administration of the tax laws.
Explanation of Provision
The time a production flexibility contract payment under
the FAIR Act properly is includible in income is to be
determined without regard to the options granted by section
112(d)(2) (allowing receipt of one-half of the annual payment
on either December 15 or January 15 of the fiscal year) or
section 112(d)(3) (allowing the acceleration of all payments
for fiscal year 1999) of that Act.
Effective Date
The provision is effective for production flexibility
contract payments made under the FAIR Act in taxable years
ending after December 31, 1995.
Revenue Effect
The provision is estimated to have a negligible effect on
Federal fiscal year budget receipts.
C. Extend the Net Operating Loss Carryback Period for Farmers (sec.
2013 of the Act and sec. 172 of the Code) \115\
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\115\ For legislative background of this provision, see H.R. 4579,
The Taxpayer Relief Act of 1998, as reported by the House Committee on
Ways and Means on September 23, 1998, sec. 212; H. Rept. 105-739, pp.
57-59.
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Present and Prior Law
A net operating loss (``NOL'') is, generally, the amount by
which business deductions of a taxpayer exceed business gross
income. In general, an NOL may be carried back two years and
carried forward 20 years to offset taxable income in such
years.116 A carry back of an NOL results in the
refund of Federal income tax for the carryback year. A carry
forward of an NOL reduces Federal income tax for the
carryforward year.
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\116\ A taxpayer may elect to forgo the carryback of an NOL.
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In the case of an NOL (1) arising from casualty or theft
losses of individual taxpayers, or (2) attributable to
Presidentially declared disasters for taxpayers engaged in a
farming business or a small business, the NOL can be carried
back three years. Under prior law, other than the three-year
carryback period for NOLs attributable to Presidentially
declared disaster areas, there were no special carryback rules
for taxpayers who have a net operating loss attributable to a
farming business.117
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\117\ Special carryback rules apply to real estate investment
trusts (no carrybacks), specified liability losses (10-year carryback),
and excess interest losses (no carrybacks).
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Reasons for Change
The NOL carryback and carryforward rules allow taxpayers to
smooth out swings in business income (and Federal income taxes
thereon) that result from business cycle fluctuations and
unexpected financial losses. Farmers are particularly
vulnerable to such fluctuations and losses. The Congress
believed that farmers who suffer losses from their farming
business should have an extended period in which to use such
losses to offset taxable income in prior years.
Explanation of Provision
The provision provides a special five-year carryback period
for a farming loss, regardless of whether the loss was incurred
in a Presidentially declared disaster area. The carryforward
period remains at 20 years. A ``farming loss'' is defined as
the amount of any net operating loss attributable to a farming
business (as defined in sec. 263A(e)(4)). A farming loss cannot
exceed the taxpayer's NOL for the taxable year. In calculating
the amount of a taxpayer's NOL carrybacks, the portion of the
NOL that is attributable to a farming loss is treated as a
separate NOL and is taken into account after the remaining
portion of the NOL for the taxable year.
A taxpayer can elect to forgo the five-year carryback
period for a farming loss. The election to forgo the five-year
carryback period is made in the manner prescribed by the
Secretary of the Treasury and must be made by the due date of
the return (including extensions) for the year of the loss. The
election is irrevocable. If a taxpayer elects to forgo the
five-year carryback period, then the farming loss is subject to
the rules that otherwise would have applied absent the five-
year rule. The three-year carryback period continues to apply
to an NOL incurred in a Presidentially declared disaster area
if the NOL is not eligible for the five-year carryback period.
Effective Date
The provision is effective for NOLs arising in taxable
years beginning after December 31, 1997.
Revenue Effect
The provision is estimated to reduce Federal fiscal year
budget receipts by $73 million in 1999, $66 million in 2000,
$60 million in 2001, $55 million in 2002, $50 million in 2003,
$46 million in 2004, $42 million in 2005, $39 million in 2006,
and $36 million in 2007.
Subtitle C.--Miscellaneous Provisions
A. Increase State Volume Limits on Private Activity Tax-Exempt Bonds
(sec. 2021 of the Act and sec. 146 of the Code)
Present and Prior Law
Interest on bonds issued by State and local governments is
excluded from income if the proceeds of the bonds are used to
finance activities conducted and paid for by the governmental
units (Code sec. 103). Interest on bonds issued by these
governmental units to finance activities carried out and paid
for by private persons (``private activity bonds'') is taxable
unless the activities are specified in the Internal Revenue
Code. Private activity bonds on which interest may be tax-
exempt include bonds for privately operated transportation
facilities (e.g., airports, docks and wharves, mass transit,
and high speed rail facilities), privately owned and/or
provided municipal services (e.g., water, sewer, solid waste
disposal, and certain electric and heating facilities),
economic development (e.g., small manufacturing facilities and
redevelopment in economically depressed areas), and certain
social programs (e.g., low-income rental housing, qualified
mortgage bonds, student loan bonds, and exempt activities of
charitable organizations described in Code sec. 501(c)(3)).
The volume of tax-exempt private activity bonds that States
and local governments may issue for most of these purposes in
each calendar year is restricted by State-wide volume limits.
Under prior law (and, as described below, present law through
2002), the annual volume limit for any State is $50 per
resident of the State or $150 million if greater. The volume
limits do not apply to private activity bonds to finance
airports, docks and wharves, certain governmentally owned, but
privately, operated solid waste disposal facilities, certain
high speed rail facilities, or exempt activities of section
501(c)(3) organizations, and to certain types of private
activity tax-exempt bonds that are subject to other limits on
their volume (qualified veterans' mortgage bonds, certain
``new'' empowerment zone and enterprise community bonds.
Reasons for Change
The Congress believed that a delayed increase for future
years in the annual State private activity bond volume limits
to levels comparable to the dollar limits that first applied
after enactment of the Tax Reform Act of 1986 is appropriate.
Such an adjustment will assist States in meeting long-range
infrastructure needs and encouraging economic development and
will facilitate continuation of future privatization efforts
regarding municipal services such as solid waste disposal,
water, and sewer services without reversing the general policy
of limiting the use of this Federal subsidy for conduit
borrowing in transactions that distort market choice and
efficiency.
Explanation of Provision
The Act increases the annual State private activity bond
volume limits to $75 per resident of each State or $225 million
(if greater) beginning in calendar year 2007. The increase is
phased-in as follows, beginning in calendar year 2003:
Calendar year Volume limit
2003................................... $55 per resident ($165 million if greater)
2004................................... $60 per resident ($180 million if greater)
2005................................... $65 per resident ($195 million if greater)
2006................................... $70 per resident ($210 million if greater)
Effective Date
The provision is effective beginning in calendar year 2003.
Revenue Effect
The provision is estimated to reduce Federal fiscal year
budget receipts by $11 million in 2003, $44 million in 2004,
$111 million in 2005, $117 million in 2006, and $252 million in
2007.
B. Comprehensive Study of Recovery Periods and Depreciation Methods
Under Section 168 (sec. 2022 of the Act)
Present and Prior Law
A taxpayer is allowed to deduct a reasonable allowance for
the exhaustion, wear and tear, and obsolescence of property
that is used in a trade or business or is held for the
production of income. For most tangible personal and real
property placed in service after 1986, the amount of the
deductible allowance is determined using a statutorily
prescribed recovery period, depreciation method, and convention
(sec. 168).
For some types of assets, the recovery period of an asset
is provided in section 168. In other cases, the recovery period
of an asset is determined by reference to its class life. The
class life of an asset may be provided by section 168, or may
be determined with regard to the list of class lives provided
by the Treasury Department that was in effect on January 1,
1986. The Treasury Department is required to monitor and
analyze actual experience with respect to all depreciable
assets.
The depreciation method determines the rate at which the
cost of the property is recovered. In general, the depreciation
method specified in section 168 varies with the recovery period
of the property. For property with a recovery period of 10
years or less, the depreciation method is the 200 percent
declining balance method, switching to straight-line in the
first year in which that method yields a larger allowance. The
150 percent declining balance, (switching to straight-line) is
the method prescribed for property with a recovery period of 15
or 20 years, as well as for all property used in the trade or
business of farming. The straight-line method must be used for
property with a longer recovery period, as well as for certain
specified types of property.
The convention determines the point of time during the year
that the property is considered placed in service. Statutorily
prescribed conventions include the mid-year, the mid-quarter
and the mid-month conventions.
Reasons for Change
The Congress was concerned that the present-law
depreciation rules may measure income improperly, may create
competitive disadvantages, and may result in an inefficient
allocation of investment capital in certain cases. The Congress
believed that the manner in which recovery periods and methods
are determined should be examined to determine if improvements
could be made.
Explanation of Provision
The Secretary of the Treasury (or his delegate) is directed
to conduct a comprehensive study of the recovery periods and
depreciation methods under section 168 of the Code, and to
provide recommendations for determining these periods and
methods in a more rational manner. The Secretary of the
Treasury (or his delegate) is directed to submit the results of
the study and recommendations to the House Committee on Ways
and Means and the Senate Finance Committee by March 31, 2000.
Effective Date
The provision is effective on the date of enactment
(October 21, 1998).
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
C. State Election to Exempt Student Employees From Social Security
(sec. 2023 of the Act)
Present and Prior Law
The Social Security Amendments of 1972 provided an
opportunity for States to obtain exemptions from Social
Security coverage for student employees of public schools,
colleges, and universities. States choosing to opt out had to
do so prior to January 1, 1974. Most States did. Student
employees in these States do not have to pay FICA taxes on
their wages, allowing them to keep more of their earnings.
Reasons for Change
Three States chose not to seek an exemption from Social
Security coverage. The Congress believed that this provision
would provide the opportunity for all student employees to be
treated equally under Social Security law and would assist
student employees who are working to advance their education.
Explanation of Provision
The Act allows a limited window of time (January 1 through
March 31, 1999) for States to modify existing State agreements
to exempt students (including graduate assistants) from Social
Security coverage who are employed by a public school,
university, or college in a nonexempted State.
Effective Date
The provision permitting States to modify existing
agreement is effective with respect to earnings after June 30,
2000.
Revenue Effect
The provision is estimated to reduce Federal fiscal year
budget receipts by $5 million in 2000, $47 million in 2001, $49
million in 2002, $51 million in 2003, $52 million in 2004, $54
million in 2005, $56 million in 2006, and $58 million in
2007.118
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\118\ The estimate for this provision was provided by the
Congressional Budget Office.
TITLE III. REVENUE OFFSET PROVISIONS
A. Treatment of Certain Deductible Liquidating Distributions of
Regulated Investment Companies and Real Estate Investment Trusts (sec.
3001)
Present and Prior Law
Regulated investment companies (``RICs'') and real estate
investment trusts (``REITs'') are allowed a deduction for
dividends paid to their shareholders. The deduction for
dividends paid includes amounts distributed in liquidation
which are properly chargeable to earnings and profits, as well
as, in the case of a complete liquidation occurring within 24
months after the adoption of a plan of complete liquidation,
any distribution made pursuant to such plan to the extent of
earnings and profits. Rules that govern the receipt of
dividends from RICs and REITs generally provide for including
the amount of the dividend in the income of the shareholder
receiving the dividend that was deducted by the RIC or REIT.
Generally, any shareholder realizing gain from a liquidating
distribution of a RIC or REIT includes the amount of gain in
the shareholder's income. However, in the case of a liquidating
distribution to a corporation owning at least 80-percent of the
stock of the distributing corporation, a separate rule
generally provided that the distribution is tax-free to the
parent corporation. The parent corporation succeeds to the tax
attributes, including the adjusted basis of assets, of the
distributing corporation. Under these rules, a liquidating RIC
or REIT might be allowed a deduction for amounts paid to its
parent corporation, without a corresponding inclusion in the
income of the parent corporation, resulting in income being
subject to no tax.
A RIC or REIT may designate a portion of a dividend as a
capital gain dividend to the extent the RIC or REIT itself has
a net capital gain, and a RIC may designate a portion of the
dividend paid to a corporate shareholder as eligible for the
70-percent dividends-received deduction to the extent the RIC
itself received dividends from other corporations. If certain
conditions are satisfied, a RIC also is permitted to pass
through to its shareholders the tax-exempt character of the
RIC's net income from tax-exempt obligations through the
payment of ``exempt interest dividends,'' though no deduction
is allowed for such dividends.
Reasons for Change
The Congress believes that RICs and REITs are important
investment vehicles, particularly for small investors. The RIC
and REIT rules are designed to encourage investors to pool
their resources and achieve the type of investment
opportunities, subject to a single level of tax, that otherwise
would be available only to a larger investor. Nonetheless, it
appeared that some corporations had attempted to use the
``dividends paid deduction'' for a RIC or REIT in combination
with the separate rule that allows a corporate parent to
receive property from an 80 percent subsidiary without tax when
the subsidiary is liquidating, and had argued that the
combination of these two rules permitted income deducted by the
RIC or REIT and paid to the parent corporation to be entirely
tax free during the period of liquidation of the RIC or REIT.
The Congress believed that income of a RIC or REIT which is not
taxable to the RIC or REIT because of the dividends paid
deduction also should not be excluded from the income of the
RIC's or REIT's shareholders as a liquidating distribution to a
parent shareholder. The legislation would not affect the
intended beneficiaries of the RIC and REIT rules.
Explanation of Provision
Any amount which a liquidating RIC or REIT may take as a
deduction for dividends paid with respect to an otherwise tax-
free liquidating distribution to an 80-percent corporate owner
is includible in the income of the recipient corporation. The
includible amount is treated as a dividend received from the
RIC or REIT. The liquidating corporation may designate the
amount distributed as a capital gain dividend or, in the case
of a RIC, a dividend eligible for the 70-percent dividends
received deduction or an exempt interest dividend, to the
extent provided by the RIC or REIT provisions of the Code.
The provision does not otherwise change the tax treatment
of the distribution to the parent corporation or to the RIC or
REIT. Thus, for example, the liquidating corporation will not
recognize gain (if any) on the liquidating distribution and the
recipient corporation will hold the assets at a carryover
basis, even where the amount received is treated as a dividend.
Effective Date
The provision is effective for distributions on or after
May 22, 1998, regardless of when the plan of liquidation was
adopted.
No inference is intended regarding the treatment of such
transactions under prior law.
Revenue Effect
The provision is estimated to increase Federal budget
receipts by $2.425 billion in 1999, $1.109 billion in 2000,
$723 million in 2001, $640 million in 2002, $672 million in
2003, $705 million in 2004, $741 million in 2005, $778 million
in 2006, and $817 million in 2007.
B. Add Vaccines Against Rotavirus Gastroenteritis to the List of
Taxable Vaccines (sec. 3002 of the Act and sec. 4132 of the Code)
Present and Prior Law
A manufacturer's excise tax is imposed at the rate of 75
cents per dose on the following vaccines routinely recommended
for administration to children: diphtheria, pertussis, tetanus,
measles, mumps, rubella, polio, HIB (haemophilus influenza type
B), hepatitis B, and varicella (chicken pox). Amounts equal to
net revenues from this excise tax are deposited in the Vaccine
Injury Compensation Trust Fund.
Reasons for Change
Rotavirus gastroenteritis is a highly contagious disease
among young children that can lead to life-threatening
diarrhea, cramps, vomiting, and can result in death. In the
United States, more than 50,000 children are hospitalized and
more than 100 die annually from rotavirus gastroenteritis. The
Food and Drug Administration has approved a vaccine against the
disease and the Centers for Disease Control have recommended
the vaccine for routine inoculation of children. The Congress
believed American children would benefit from wide use of this
new vaccine. The Congress believed that, by including the new
vaccine with those presently covered by the Vaccine Injury
Compensation Trust Fund, greater application of the vaccine
would be promoted. The Congress, therefore, believed it was
appropriate to add the vaccine against rotavirus
gastroenteritis to the list of taxable vaccines.
Explanation of Provision
The provision expands prior law by adding any vaccine
against rotavirus gastroenteritis to the list of taxable
vaccines.119
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\119\ Title XV of the Omnibus Consolidated and Emergency
Supplemental Appropriations Act, 1999, ``The Vaccine Injury
Compensation Program Modification Act,'' included a provision that
substantially, but incorrectly, duplicated this tax provision and Code
Trust Fund amendments included in a technical correction (sec. 4003(d)
of the Tax and Trade Relief Extension Act of 1998). A further technical
correction may be needed to clarify that the provisions as included in
the Tax and Trade Relief Extension Act of 1998 are intended to become
the provisions of permanent law where in conflict.
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Effective Date
The provision is effective for vaccines sold by a
manufacturer or importer after October 21, 1998 (the date of
enactment). No floor stocks tax was imposed for amounts held
for sale on that date. For sales on or before the date of
enactment for which delivery is made after the date of
enactment, the delivery date is deemed to be the sale date.
Revenue Effect
The provision is estimated to increase Federal fiscal year
budget receipts by $1 million in 1999, $2 million in 2000, $3
million in 2001, $4 million in 2002, $5 million in 2003, $6
million in 2004, $6 million in 2005, $6 million in 2006, and $7
million in 2007.
C. Clarify and Expand Mathematical Error Procedures (sec. 3003 of the
Act and sec. 6213(g)(2) of the Code)
Present and Prior Law
Taxpayer identification numbers (``TINs'')
The IRS may deny a personal exemption for a taxpayer, the
taxpayer's spouse or the taxpayer's dependents if the taxpayer
fails to provide a correct TIN for each person for whom the
taxpayer claims an exemption. This TIN requirement also
indirectly effects other tax benefits currently conditioned on
a taxpayer being able to claim a personal exemption for a
dependent (e.g., head-of-household filing status and the
dependent care credit). Other tax benefits, including the
adoption credit, the child tax credit, the Hope Scholarship
credit and Lifetime Learning credit, and the earned income
credit also have TIN requirements. For most individuals, their
TIN is their Social Security Number (``SSN''). The mathematical
and clerical error procedure applies to the omission of a
correct TIN for purposes of personal exemptions and all of the
credits listed above except for the adoption credit.
Mathematical or clerical errors
The IRS may summarily assess additional tax due as a result
of a mathematical or clerical error without sending the
taxpayer a notice of deficiency and giving the taxpayer an
opportunity to petition the Tax Court. Where the IRS uses the
summary assessment procedure for mathematical or clerical
errors, the taxpayer must be given an explanation of the
asserted error and a period of 60 days to request that the IRS
abate its assessment. The IRS may not proceed to collect the
amount of the assessment until the taxpayer has agreed to it or
has allowed the 60-day period for objecting to expire. If the
taxpayer files a request for abatement of the assessment
specified in the notice, the IRS must abate the assessment. Any
reassessment of the abated amount is subject to the ordinary
deficiency procedures. The request for abatement of the
assessment is the only procedure a taxpayer may use prior to
paying the assessed amount in order to contest an assessment
arising out of a mathematical or clerical error. Once the
assessment is satisfied, however, the taxpayer may file a claim
for refund if he or she believes the assessment was made in
error.
Reasons for Change
The Congress believed that it was appropriate to provide
additional guidance to the Internal Revenue Service with
respect to the application of the TIN requirement. The Congress
further believed that it also would improve compliance to allow
the IRS to use date of birth data from the Social Security
Administration to determine ineligibility for the dependent
care credit, the child tax credit and the earned income credit.
Once this determination was made, the Congress believed that
the IRS should use the mathematical and clerical error
procedure to correctly assess the tax due with respect to
affected tax returns.
Explanation of Provision
The Act provides that in the application of the
mathematical and clerical error procedure, a correct TIN is a
TIN that was assigned by the Social Security Administration (or
in certain limited cases, the IRS) to the individual identified
on the return. For this purpose, the IRS is authorized to
determine that the individual identified on the tax return
corresponds in every aspect (including, name, age, date of
birth, and SSN) to the individual to whom the TIN is issued.
The IRS also is authorized to use the mathematical and clerical
error procedure to deny eligibility for the dependent care tax
credit, the child tax credit, and the earned income credit even
though a correct TIN has been supplied if the IRS determines
that the statutory age restriction for eligibility for any of
the respective credits is not satisfied (e.g., the TIN issued
for the child claimed as the basis of the child tax credit
identifies the child as over the age of 17 at the end of the
taxable year).
Effective Date
The provision is effective for taxable years ending after
the date of enactment (after October 21, 1998).
Revenue Effect
The provision is estimated to increase Federal fiscal year
budget receipts by $12 million in 1999, $25 million in 2000,
$26 million in 2001, $27 million in 2002, $28 million in 2003,
$29 million in 2004, $30 million in 2005, $31 million in 2006,
and $32 million in 2007.
D. Restrict 10-Year Net Operating Loss Carryback Rules for Specified
Liability Losses (sec. 3004 of the Act and sec. 172(f) of the Code)
Present and Prior Law
The portion of a net operating loss that qualifies as a
``specified liability loss'' may be carried back 10 years
rather than being limited to the general two-year carryback
period. A specified liability loss includes amounts allowable
as a deduction with respect to product liability, and also
certain liabilities that arise under Federal or State law or
out of any tort of the taxpayer. In the case of a liability
arising out of a Federal or State law, the act (or failure to
act) giving rise to the liability must occur at least 3 years
before the beginning of the taxable year. In the case of a
liability arising out of a tort, the liability must arise out
of a series of actions (or failures to act) over an extended
period of time a substantial portion of which occurred at least
three years before the beginning of the taxable year. A
specified liability loss cannot exceed the amount of the net
operating loss, and is only available to taxpayers that used an
accrual method of accounting throughout the period that the
acts (or failures to act) occurred.
Reasons for Change
The proper interpretation of the specified liability loss
provisions has been the subject of controversy. The Congress
considered it desirable to lessen controversy by providing a
definitive list of items for which the 10-year specified
liability loss carryback is available.
Explanation of Provision
Under the provision, specified liability losses are limited
to (1) product liability losses and (2) amounts allowable as a
deduction (other than a deduction under sec. 468(a)(1) or sec.
468A(a)) that are in satisfaction of a liability under a
Federal or State law requiring the reclamation of land,
decommissioning of a nuclear power plant (or any unit thereof),
dismantlement of a drilling platform, remediation of
environmental contamination, or a payment under any workers
compensation act (within the meaning of sec. 461(h)(2)(C)(i)),
if the act (or failure to act) giving rise to such liability
occurs at least 3 years before the beginning of the taxable
year. As under prior law, the specified liability loss (as
redefined) cannot exceed the amount of the net operating loss
and is only available to taxpayers that used an accrual method
of accounting throughout the period that the act (or failure to
act) giving rise to the liability occurred. No inference
regarding the interpretation of the specified liability loss
carryback rules under prior law is intended.
Effective Date
The provision is effective for net operating losses arising
in taxable years ending after the date of enactment (after
October 21, 1998).
Revenue Effect
The provision is estimated to increase Federal budget
receipts by $14 million in 1999, $21 million in 2000, $29
million in 2001, $39 million in 2002, $42 million in 2003, $40
million in 2004, $40 million in 2005, $40 million in 2006, and
$42 million in 2007.
E. Tax Treatment of Prizes and Awards
(sec. 5301 of the Act) \120\
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\120\ This provision is in Title V of Division J (``Tax and Trade
Relief Extension Act of 1998'') of H.R. 4328, and is a revenue offset
to the Medicare provisions of Title V.
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Present and Prior Law
A taxpayer generally is required to include an item in
income no later than the time of its actual or constructive
receipt, unless the item properly is accounted for in a
different period under the taxpayer's method of accounting. If
a taxpayer has an unrestricted right to demand the payment of
an amount, the taxpayer is in constructive receipt of that
amount whether or not the taxpayer makes the demand and
actually receives the payment.
Under the principle of constructive receipt, the winner of
a contest who is given the option of receiving either a lump-
sum distribution or an annuity is required to include the value
of the award in gross income, even if the annuity option is
exercised. Alternatively, the principle of constructive receipt
does not apply if, prior to the declaration of a winner (such
as at the time of purchase of a lottery ticket), a taxpayer
designates whether he or she chooses to receive a lump-sum
distribution or an annuity. This is the case because the
taxpayer does not have an unrestricted right to demand the
payment of the winnings, since the taxpayer has not yet in fact
won.
Explanation of Provision
The existence of a ``qualified prize option'' is
disregarded in determining the taxable year for which any
portion of a qualified prize is to be included in income. A
qualified prize option is an option that entitles a person to
receive a single cash payment in lieu of a qualified prize (or
portion thereof), provided such option is exercisable not later
than 60 days after the prize winner becomes entitled to the
prize. Thus, a qualified prize winner who is provided the
option to choose either cash or an annuity not later than 60
days after becoming entitled to the prize is not required to
include amounts in gross income immediately if the annuity
option is exercised merely by reason of having the option. This
provision applies with respect to any qualified prize to which
a person first becomes entitled after the date of enactment.
In addition, the provision also applies to any qualified
prize to which a person became entitled on or before the date
of enactment if the person has an option to receive a lump-sum
cash payment only during some portion of the 18-month period
beginning on July 1, 1999. This is intended to give previous
prize winners a one-time option to alter previous payment
arrangements.
Qualified prizes are prizes or awards from contests,
lotteries, jackpots, games or similar arrangements that provide
a series of payments over a period of at least 10 years,
provided that the prize or award does not relate to any past
services performed by the recipient and does not require the
recipient to perform any substantial \121\ future service. The
provision applies to individuals on the cash receipts and
disbursements method of accounting. Income and deductions
resulting from this provision retain their character as
ordinary, not capital. In addition, the Secretary is to provide
for the application of this provision in the case of a
partnership or other pass-through entity consisting entirely of
individuals on the cash receipts and disbursements method of
accounting.
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\121\ Appearing in advertising relating to the prize or award is
not (in and of itself) substantial.
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Any offer of a qualified prize option must include
disclosure of the methodology used to compute the single cash
payment, including the discount rate that makes equivalent the
present values of the prize to which the prize winner is
entitled (or relevant portion thereof) and the single cash
payment offered. Any offer of a qualified prize option must
also clearly indicate that the prize winner is under no
obligation to accept any offer of a single cash payment and may
continue to receive the payments to which he or she is entitled
under the terms of the qualified prize.
Effective Date
The provision applies with respect to any qualified prize
to which a person first becomes entitled after the date of
enactment (after October 21, 1998). In addition, the provision
also applies to any qualified prize to which a person became
entitled on or before the date of enactment if the person has
an option to receive a lump-sum payment only during some
portion of the 18-month period beginning on July 1, 1999.
Revenue Effect
The provision is estimated to increase Federal fiscal year
budget receipts by $170 million in 1999 and by $1,618 million
in 2000, and to reduce receipts by $99 million in 2001, $348
million in 2002, $397 million in 2003, $384 million in 2004,
$367 million in 2005, $346 million in 2006, and by $321 million
in 2007.
TITLE IV. TAX TECHNICAL CORRECTIONS
Except as otherwise provided, the technical corrections
contained in the Tax and Trade Relief Extension Act of 1998
generally are effective as if included in the originally
enacted related legislation.
A. Technical Corrections to the 1998 IRS Restructuring Act
1. Burden of proof (sec. 4002(b) of the Tax and Trade Relief Extension
Act of 1998, sec. 3001 of the 1998 IRS Restructuring Act, and
sec. 7491(a)(2)(C) of the Code) \122\
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\122\ Section 3001 of the 1998 IRS Restructuring Act is described,
as clarified by this provision, in Part Two of this publication.
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Present and Prior Law
The Treasury Secretary has the burden of proof in any court
proceeding with respect to a factual issue if the taxpayer
introduces credible evidence with respect to any factual issue
relevant to ascertaining the taxpayer's tax liability, provided
specified conditions are satisfied (sec. 7491). One of these
conditions is that corporations, trusts, and partnerships must
meet certain net worth limitations. These net worth limitations
do not apply to individuals or to estates.
Explanation of Provision
The provision removes the net worth limitation from certain
revocable trusts for the same period of time that the trust
would have been treated as part of the estate had the trust
made the election under section 645 to be treated as part of
the estate.
2. Relief for innocent spouses (sec. 4002(c) of the Tax and Trade
Relief Extension Act of 1998, sec. 3201 of the 1998 IRS
Restructuring Act, and secs. 6015(e) and 7421(a) of the Code)
\123\
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\123\ Section 3201 of the 1998 IRS Restructuring Act is described,
as clarified by this provision, in Part Two of this publication.
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Present and Prior Law
A taxpayer who is no longer married to, is separated from,
or has been living apart for at least 12 months from the person
with whom he or she originally joined in filing a joint Federal
income tax return may elect to limit his or her liability for a
deficiency arising from such joint return to the amount of the
deficiency that is attributable to items that are allocable to
such electing spouse. The election is limited to deficiency
situations and only affects the amount of the deficiency for
which the electing spouse is liable. Thus, the election cannot
be used to generate a refund, to direct a refund to one spouse
or the other, or to allocate responsibility for payment where a
balance due is reported on, but not paid with, a joint return.
In addition to the election to limit the liability for
deficiencies, a taxpayer may be eligible for innocent spouse
relief. Innocent spouse relief allows certain taxpayers who
joined in the filing of a joint return to be relieved of
liability for an understatement of tax that is attributable to
items of the other spouse to the extent that the taxpayer did
not know or have reason to know of the understatement. The
Secretary is also authorized to provide equitable relief in
situations where, taking into account all of the facts and
circumstances, it is inequitable to hold an individual
responsible for all or a part of any unpaid tax or deficiency
arising from a joint return. Under certain circumstances, it is
possible that a refund could be obtained under this authority.
Explanation of Provision
The provision clarifies that the ability to obtain a credit
or refund of Federal income tax is limited to situations where
the taxpayer qualifies for innocent spouse relief or where the
Secretary exercises his authority to provide equitable relief.
3. Interest netting (sec. 4002(d) of the Tax and Trade Relief Extension
Act of 1998 and sec. 3301(c)(2) of the 1998 IRS Restructuring
Act) \124\
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\124\ Section 3301(c)(2) of the 1998 IRS Restructuring Act is
described, as clarified by this provision, in Part Two of this
publication.
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Present and Prior Law
For calendar quarters beginning after July 22, 1998, a net
interest rate of zero applies where interest is payable and
allowable on equivalent amounts of overpayment and underpayment
of any tax imposed by the Internal Revenue Code. In addition,
the net interest rate of zero applies to periods on or before
July 22, 1998, providing (1) the statute of limitations has not
expired with respect to either the underpayment or overpayment,
(2) the taxpayer identifies the periods of underpayment and
overpayment where interest is payable and allowable for which
the net interest rate of zero would apply, and (3) on or before
December 31, 1999, the taxpayer asks the Secretary to apply the
net zero rate.
Explanation of Provision
The provision restores language originally included in the
Senate amendment that clarifies that the applicability of the
zero net interest rate for periods on or before July 22, 1998
is subject to any applicable statute of limitations not having
expired with regard to either a tax underpayment or
overpayment.
4. Effective date for elimination of 18-month holding period for
capital gains (sec. 4002(i) of the Tax and Trade Relief
Extension Act of 1998, sec. 5001 of the 1998 IRS Restructuring
Act, and sec. 1(h) of the Code) \125\
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\125\ Section 5001 of the 1998 IRS Restructuring Act is described,
as clarified by this provision, in Part Two of this publication.
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Present and Prior Law
The 1998 IRS Restructuring Act repealed the provision in
the 1997 Act providing a maximum 28-percent rate for the long-
term capital gain attributable to property held more than one
year but not more than 18 months. Instead, the 1998 IRS
Restructuring Act treated this gain in the same manner as gain
from property held more than 18 months. The provision in the
1998 IRS Restructuring Act is effective for amounts properly
taken into account after December 31, 1997. For gains taken
into account by a pass-thru entity, such as a partnership, S
corporation, trust, estate, RIC or REIT, the date that the
entity properly took the gain into account is the appropriate
date in applying this provision. Thus, for example, amounts
properly taken into account by a pass-thru entity after July
28, 1997, and before January 1, 1998, with respect to property
held more than one year but not more than 18 months which are
included in income on an individual's 1998 return are taken
into account in computing 28-percent rate gain.
Explanation of Provision
Under the provision, in the case of a capital gain dividend
made by a RIC or REIT after 1997, no amount will be taken into
account in computing the net gain or loss in the 28-percent
rate gain category by reason of property being held more than
one year but not more than 18 months. This rule does not apply
to amounts taken into account by the RIC or REIT from other
pass-thru entities (other than (1) from structures, such as a
``master-feeder structure'', in which the RIC invests a
substantial portion of its assets in one or more partnerships
holding portfolio securities and having the same taxable year
as the RIC, and (2) generally from another RIC or a REIT).
For example, if a RIC sold stock held more than one year
but not more than 18 months on November 15, 1997, for a gain,
and makes a capital gain dividend in 1998, the gain is not
taken into account in computing 28-percent rate gain for
purposes of determining the taxation of the 1998 dividend.
(Thus, all the netting and computations made by the RIC need to
be redone with respect to all post-1997 capital gain dividends,
whether or not dividends of 28-percent rate gain.) If, however,
the gain was taken into account by a RIC by reason of holding
an interest in a calendar year 1997 partnership which itself
sold the stock, the gain will not be recharacterized by reason
of this provision (unless the RIC's investment in the
partnership satisfies the exception for master-feeder
structures). If the gain was taken into account by a RIC be
reason of holding an interest in a REIT and the gain was
excluded from 28-percent rate gain by reason of the application
of this provision to the REIT, the gain will be excluded from
28-percent rate gain in determining the tax of the RIC
shareholders.
The provision also corrects a cross reference.
B. Technical Corrections to the 1997 Act
1. Treatment of interest on qualified education loans (sec. 4003(a) of
the Tax and Trade Relief Extension Act of 1998, sec. 202 of the
1997 Act, and secs. 221 and 163(h) of the Code)
Present and Prior Law
Certain individuals who have paid interest on qualified
education loans may claim an above-the-line deduction for such
interest expense, up to a maximum dollar amount per year
($1,000 for taxable years beginning in 1998), subject to
certain requirements (sec. 221). The maximum deduction is
phased out ratably for individual taxpayers with modified AGI
between $40,000 and $55,000 ($60,000 and $75,000 for joint
returns). In the case of a taxpayer other than a corporation,
no deduction is allowed for personal interest (sec. 163(h)).
For this purpose, personal interest means any interest
allowable as a deduction, other than certain types of interest
listed in the statute. This provision did not specifically
provide that otherwise deductible qualified education loan
interest is not treated as personal interest.
A qualified education loan does not include any
indebtedness owed to a person who is related (within the
meaning of sec. 267(b) or 707(b)) to the taxpayer (sec.
221(e)(1)).
Explanation of Provision
The provision clarifies that otherwise deductible qualified
education loan interest is not treated as nondeductible
personal interest.
The provision also clarifies that, for purposes of section
221, modified AGI is determined after application of section
135 (relating to income from certain U.S. saving bonds) and
section 137 (relating to adoption assistance programs).
The provision also provides that a qualified education loan
does not include any indebtedness owed to any person by reason
of a loan under any qualified employer plan (as defined in sec.
72(p)(4)) or under any contract purchased under a qualified
employer plan (as described in sec. 72(p)(5)).
2. Capital gain distributions of charitable remainder trusts (secs.
4002(i)(3) and 4003(b) of the Tax and Trade Relief Extension
Act of 1998, sec. 311 of the 1997 Act and sec. 5001 of the 1998
IRS Restructuring Act, and sec. 1(h) of the Code) \126\
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\126\ Section 5001 of the 1998 IRS Restructuring Act is described,
as clarified by this provision, in Part Two of this publication.
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Present and Prior Law
The income beneficiary of a charitable remainder trust
(``CRT'') includes the trust's capital gain in income when the
gains are distributed to the beneficiary (sec. 664(b)(2)).
Internal Revenue Service Notice 98-20 provides guidance with
respect to the categorization of long-term capital gain
distributions from a CRT under the capital gain rules enacted
by the 1997 Act. Under the Notice, long-term capital gains
properly taken into account by the trust before January 1,
1997, are treated as falling in the 20-percent group of gain
(i.e., gain not in the 28-percent rate gain or unrecaptured
sec. 1250 gain). Long-term capital gains properly taken into
account by the trust after December 31, 1996, and before May 7,
1997, are included in 28-percent rate gain. Long-term capital
gains properly taken into account by the trust after May 6,
1997, are treated as falling into the category which would
apply if the trust itself were subject to tax.
Explanation of Provision
The provision provides that, in the case of a capital gain
distribution by a CRT after December 31, 1997, with respect to
amounts properly taken into account by the trust during 1997,
amounts will not be included in the 28-percent rate gain
category solely by reason of being properly taken into account
by the trust before May 7, 1997, or by reason of the property
being held not more than 18 months. Thus, for example, gain on
the sale of stock by a CRT on February 1, 1997, will not be
taken into account in determining 28-percent rate gain where
the gain is distributed after 1997.\127\
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\127\ The Tax and Trade Relief Extension Act of 1998 contains a
similar amendment to section 1(h)(13), as amended by section 5001 of
the 1998 IRS Restructuring Act, to provide that, for purposes of taxing
the recipient of a distribution made after 1997 by a CRT, amounts will
not be taken into account in computing 28-percent rate gain by reason
of being properly taken into account before May 7, 1997, or by reason
of the property being held for not more than 18 months. Thus, no amount
distributed by a CRT after 1997 will be treated as in the 28-percent
category (other than by reason of the disposition of collectibles or
small business stock).
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Effective Date
The provision applies to taxable years beginning after
December 31, 1997.
3. Gifts may not be revalued for estate tax purposes after expiration
of statute of limitations (sec. 4003(c) of the Tax and Trade
Relief Extension Act of 1998, sec. 506 of the 1997 Act, and
sec. 2001(f)(2) of the Code)
Present and Prior Law
Basic structure of Federal estate and gift taxes.--The
Federal estate and gift taxes are unified so that a single
progressive rate schedule is applied to an individual's
cumulative gifts and bequests. The tax on gifts made in a
particular year is computed by determining the tax on the sum
of the taxable gifts made in that year and in all prior years
and then subtracting the tax on the prior years taxable gifts
and the unified credit. Similarly, the estate tax is computed
by determining the tax on the sum of the taxable estate and
prior taxable gifts and then subtracting the tax on taxable
gifts, the unified credit, and certain other credits.
This structure raises two different, but related, issues:
(1) what is the period beyond which additional gift taxes
cannot be assessed or collected--generically referred to as the
``period of limitations''--and (2) what is the period beyond
which the amount of prior transfers cannot be revalued for the
purpose of determining the amount of tax on subsequent
transfers.
Gift and estate tax period of limitations.--Section 6501(a)
provides the general rule that any tax (including gift and
estate tax) must be assessed, or a proceeding begun in a court
for the collection of such tax without assessment, within three
years after the return is filed by the taxpayer. Under section
6501(e)(2), the period for assessments of gift or estate tax is
increased to six years where there is more than a 25 percent
omission in the amount of the total gifts or gross estate
disclosed on the gift or estate tax return. Section 6501(c)(9)
provides an exception to these rules under which gift tax may
be assessed, or a proceeding in a court for collection of gift
tax may be begun, at any time unless the gift is disclosed on a
gift tax return or a statement attached to a gift tax return.
Revaluation of gifts for estate tax purposes.--The value of
a gift is its value as finally determined under the rules for
purposes of determining the applicable estate tax bracket and
available unified credit. The value of a gift is finally
determined if (1) the value of the gift is shown on a gift tax
return for that gift and that value is not contested by the
Treasury Secretary before the expiration of the period of
limitations on assessment of gift tax even where the value of
the gift as shown on the return does not result in any gift tax
being owed (e.g., through use of the unified credit), (2) the
value is specified by the Treasury Secretary pursuant to a
final notice of redetermination of value (a ``final notice'')
within the period of limitations applicable to the gift for
gift tax purposes (generally, three years) and the taxpayer
does not timely contest that value, or (3) the value is
determined by a court or pursuant of a settlement agreement
between the taxpayer and the Treasury Secretary under an
administrative appeals process whereby a taxpayer can challenge
a redetermination of value by the IRS prior to issuance of a
final notice. In the event the taxpayer and the IRS cannot
agree on the value of a gift, the 1997 Act provided the U.S.
Tax Court with jurisdiction to issue a declaratory judgment on
the value of a gift (section 7477). A taxpayer who is mailed a
final notice may challenge the redetermined value of the gift
(as contained in the final notice) by filing a motion for a
declaratory judgment with the U.S. Tax Court. The motion must
be filed on or before 90 days from the date that the final
notice was mailed. The statute of limitations is tolled during
the pendency of the Tax Court proceeding.
Revaluation of gifts for gift tax purposes.--Similarly,
under a rule applicable to the computation of the gift tax
(sec. 2504(c)), the value of gifts made in prior years is its
value as finally determined if the period of limitations for
assessment of gift tax on the prior gifts has expired.
Explanation of Provision
The Tax and Trade Relief Extension Act of 1998 clarifies
the rules relating to revaluations of prior transfers for
computation of the estate or gift tax to provide that the value
of a prior transfer cannot be redetermined after the period of
limitations if the transfer was disclosed in a statement
attached to the gift tax return, as well as on a gift tax
return, in a manner to adequately apprise the Treasury
Secretary of the nature the transfer, even if there was no gift
tax imposed on that transfer.
4. Coordinate Vaccine Injury Compensation Trust Fund expenditure
purposes with list of taxable vaccines (sec. 4003(d) of the Tax
and Trade Relief Extension Act of 1998, sec. 904 of the 1997
Act, and sec. 9510(c) of the Code) \128\
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\128\ Title III of the Tax and Trade Relief Extension Act of 1998
added any vaccine against rotavirus gastroenteritis to the list of
taxable vaccines (sec. 3002 of the Act). This technical correction also
provides that payments are permitted from the Vaccine Trust Fund for
injuries related to the administration of the rotavirus gastroenteritis
vaccine. Title XV of Division C of the Omnibus Consolidated and
Emergency Supplemental Appropriations Act, 1999, ``The Vaccine Injury
Compensation Program Modification Act,'' included a provision that
substantially, but incorrectly, duplicates this provision. A technical
correction may be needed to clarify that this provision (i.e., as
included in Title IV of the Tax and Trade Relief Extension Act of 1998)
governs.
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Present and Prior Law
A manufacturer's excise tax is imposed on certain vaccines
routinely recommended for administration to children (sec.
4131). The tax is imposed at a rate of $0.75 per dose on any
listed vaccine component. Taxable vaccine components are
vaccines against diphtheria, tetanus, pertussis, measles,
mumps, rubella, polio, HIB (haemophilus influenza type B),
hepatitis B, and varicella (chicken pox). Tax was imposed on
vaccines against diphtheria, tetanus, pertussis, measles,
mumps, rubella, and polio by the Omnibus Budget Reconciliation
Act of 1987. Tax was imposed on vaccines against HIB, hepatitis
B, and varicella by the 1997 Act.
Amounts equal to net revenues from this excise tax are
deposited in the Vaccine Injury Compensation Trust Fund
(``Vaccine Trust Fund'') to finance compensation awards under
the Federal Vaccine Injury Compensation Program for individuals
who suffer certain injuries following administration of the
taxable vaccines. Prior law provided that payments from the
Vaccine Trust Fund may be made only for vaccines eligible under
the program as of December 22, 1987 (sec. 9510(c)(1)). Thus,
payments could not be made for injuries related to the HIB,
hepatitis B or varicella vaccines.
Explanation of Provision
The provision provides that payments are permitted from the
Vaccine Trust Fund for injuries related to the administration
of the HIB, hepatitis B, and varicella vaccines. The provision
also clarifies that expenditures from the Vaccine Trust Fund
may occur only as provided in the Code and makes conforming
amendments.
5. Abatement of interest by reason of Presidentially declared disaster
(sec. 4003(e) of the Tax and Trade Relief Extension Act of
1998, sec. 915 of the 1997 Act, and sec. 6404(h) of the Code)
Present and Prior Law
The 1997 Act provided that, if the Secretary of the
Treasury extends the filing date of an individual tax return
for 1997 for individuals living in an area that has been
declared a disaster area by the President during 1997, no
interest shall be charged as a result of the failure of an
individual taxpayer to file an individual tax return, or pay
the taxes shown on such return, during the extension.
The Internal Revenue Service Restructuring and Reform Act
of 1998 (``1998 IRS Restructuring Act'') contains a similar
rule applicable to all taxpayers for tax years beginning after
1997 for disasters declared after 1997. The status of disasters
declared in 1998 but that relate to the 1997 tax year is
unclear.
Explanation of Provision
The provision amends the 1997 Act rule so that it is
available for disasters declared in 1997 or in 1998 with
respect to the 1997 tax year.
6. Treatment of certain corporate distributions (sec. 4003(f) of the
Tax and Trade Relief Extension Act of 1998, sec. 6010(c) of the
1998 IRS Restructuring Act, sec. 1012 of the 1997 Act, and
secs. 351(c) and 368(a)(2)(H) of the Code) \129\
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\129\ Section 6010(c) of the 1998 IRS Restructuring Act is
described, as clarified by this provision, in Part Two of this
publication.
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Present and Prior Law
The 1997 Act (sec. 1012(a)) requires a distributing
corporation to recognize corporate level gain on the
distribution of stock of a controlled corporation under section
355 of the Code if, pursuant to a plan or series of related
transactions, one or more persons acquire a 50-percent or
greater interest (defined as 50 percent or more of the voting
power or value of the stock) of either the distributing or
controlled corporation (Code sec. 355(e)). Certain transactions
are excepted from the definition of acquisition for this
purpose. Under the technical corrections included in the
Internal Revenue Service Restructuring and Reform Act of 1998,
in the case of acquisitions under section 355(e)(3)(A)(iv), the
acquisition of stock in the distributing corporation or any
controlled corporation is disregarded to the extent that the
percentage of stock owned directly or indirectly in such
corporation by each person owning stock in such corporation
immediately before the acquisition does not
decrease.130
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\130\ This exception (as certain other exceptions) does not apply
if the stock held before the acquisition was acquired pursuant to a
plan (or series of related transactions) to acquire a 50-percent or
greater interest in the distributing or a controlled corporation.
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In the case of a 50-percent or more acquisition of either
the distributing corporation or the controlled corporation, the
amount of gain recognized is the amount that the distributing
corporation would have recognized had the stock of the
controlled corporation been sold for fair market value on the
date of the distribution. No adjustment to the basis of the
stock or assets of either corporation is allowed by reason of
the recognition of the gain.131
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\131\ The 1997 Act does not limit the otherwise applicable Treasury
regulatory authority under section 336(e) of the Code. Nor does it
limit the otherwise applicable provisions of section 1367 with respect
to the effect on shareholder stock basis of gain recognized by an S
corporation under this provision.
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The 1997 Act (as amended by the technical corrections
contained in the Internal Revenue Service Restructuring and
Reform Act of 1998) also modified certain rules for determining
control immediately after a distribution in the case of certain
divisive transactions in which a controlled corporation is
distributed and the transaction meets the requirements of
section 355. In such cases, under section 351 and modified
section 368(a)(2)(H) with respect to reorganizations under
section 368(a)(1)(D), the fact that the shareholders of the
distributing corporation dispose of part or all of the
distributed stock shall not be taken into account.
The effective date (Act section 1012(d)(1)) states that the
relevant provisions of the 1997 Act apply to distributions
after April 16, 1997, pursuant to a plan (or series of related
transactions) which involves an acquisition occurring after
such date (unless certain transition provisions apply).
Explanation of Provision
The provision clarifies the ``control immediately after''
requirement of section 351(c) and section 368(a)(2)(H) in the
case of certain divisive transactions in which a corporation
contributes assets to a controlled corporation and then
distributes the stock of the controlled corporation in a
transaction that meets the requirements of section 355 (or so
much of section 356 as relates to section 355). In such cases,
not only the fact that the shareholders of the distributing
corporation dispose of part or all of the distributed stock,
but also the fact that the corporation whose stock was
distributed issues additional stock, shall not be taken into
account.
7. Treatment of affiliated group including formerly tax-exempt
organization (sec. 4003(g) of the Tax and Trade Relief
Extension Act of 1998 and sec. 1042 of the 1997 Act)
Present and Prior Law
An organization described in sections 501(c)(3) or (4) of
the Code is exempt from tax only if no substantial part of its
activities consists of providing commercial-type insurance.
When this rule was enacted in 1986, certain treatment applied
to Blue Cross and Blue Shield organizations providing health
insurance that were subject to this rule and that met certain
requirements. Treasury regulations were promulgated providing
rules for filing consolidated returns for affiliated groups
including such organizations (Treas. Reg. sec. 1.1502-
75(d)(5)).
The 1997 Act repealed the grandfather rules provided in
1986 (permitting the retention of tax-exempt status) that were
applicable to that portion of the business of the Teachers
Insurance Annuity Association and College Retirement Equities
Fund which is attributable to pension business and to the
portion of the business of Mutual of America which is
attributable to pension business. The 1997 Act did not
specifically provide rules for filing consolidated returns for
affiliated groups including such organizations.
The consolidated return rules provide for an election to
treat a life insurance company as an includible corporation,
and also provide that a life insurance company may not be
treated as an includible corporation for the 5 taxable years
immediately preceding the taxable year for which the
consolidated return is filed (sec. 1504(c)(2)). A corporation
that is exempt from taxation under Code section 501 is not an
includible corporation (sec. 1504(b)(1)).
Explanation of Provision
The provision provides rules for filing consolidated
returns for affiliated groups including any organization with
respect to which the grandfather rule under Code section 501(m)
was repealed by section 1042 of the 1997 Act. The provision
provides that rules similar to the rules of Treasury Regulation
section 1.1502-75(d)(5) apply in the case of such an
organization. Thus, an affiliated group including such an
organization may make the election described in section
1504(c)(2) (relating to a 5-year period) without regard to
whether the organization was previously exempt from tax under
Code section 501.
8. Treatment of net operating losses arising from certain eligible
losses (sec. 4003(h) of the Tax and Trade Relief Extension Act
of 1998, sec. 1082 of the 1997 Act, and sec. 172(b)(1)(F) of
the Code)
Present and Prior Law
The 1997 Act changed the general net operating loss
(``NOL'') carryback period of a taxpayer from three years to
two years. The three-year carryback period was retained in the
case of an NOL attributable to an eligible loss. An eligible
loss is defined as (1) a casualty or theft loss of an
individual taxpayer, or (2) an NOL attributable to a
Presidentially declared disaster area by a taxpayer engaged in
a farming business or a small business. Other special rules
apply to real estate investment trusts (REITs) (no carrybacks),
specified liability losses (10-year carryback), and excess
interest losses (no carrybacks).
Explanation of Provision
The provision coordinates the use of eligible losses with
the general rule for NOLs in the same manner as a loss arising
from a specified liability loss. Thus, an eligible loss for any
year is treated as a separate net operating loss and is taken
into account after the remaining portion of the net operating
loss for the taxable year.
9. Determination of unborrowed policy cash value under COLI pro rata
interest disallowance rules (sec. 4003(i) of the Tax and Trade
Relief Extension Act of 1998, sec. 1084 of the 1997 Act, and
sec. 264(f) of the Code)
Present and Prior Law
In the case of a taxpayer other than a natural person, no
deduction is allowed for the portion of the taxpayer's interest
expense that is allocable to unborrowed policy cash surrender
values with respect to any life insurance policy or annuity or
endowment contract issued after June 8, 1997. Interest expense
is allocable to unborrowed policy cash values based on the
ratio of (1) the taxpayer's average unborrowed policy cash
values of life insurance policies and annuity and endowment
contracts, issued after June 8, 1997, to (2) the sum of (a) in
the case of assets that are life insurance policies or annuity
or endowment contracts, the average unborrowed policy cash
values and (b) in the case of other assets the average adjusted
bases for all such other assets of the taxpayer. The unborrowed
policy cash values means the cash surrender value of the policy
or contract determined without regard to any surrender charge,
reduced by the amount of any loan with respect to the policy or
contract. The cash surrender value is to be determined without
regard to any other contractual or noncontractual arrangement
that artificially depresses the unborrowed policy cash value of
a contract.
Explanation of Provision
The provision clarifies the meaning of ``unborrowed policy
cash value'' under section 264(f)(3), with respect to any life
insurance, annuity or endowment contract. The technical
correction clarifies that under section 264(f)(3), if the cash
surrender value (determined without regard to any surrender
charges) with respect to any policy or contract does not
reasonably approximate its actual value, then the amount taken
into account for this purpose is the greater of: (1) the amount
of the insurance company's liability with respect to the policy
or contract, as determined for purposes of the company's annual
statement, (2) the amount of the insurance company's reserve
with respect to the policy or contract for purposes of such
annual statement; or such other amount as is determined by the
Treasury Secretary. No inference is intended that such amounts
may not be taken into account in determining the cash surrender
value of a policy or contract in such circumstances for
purposes of any other provision of the Code.
10. Payment of taxes by commercially acceptable means (sec. 4003(k) of
the Tax and Trade Relief Extension Act of 1998, sec. 1205 of
the 1997 Act, and sec. 6311(d)(2) of the Code)
Present and Prior Law
The Code generally permits the payment of taxes by
commercially acceptable means (such as credit cards) (sec.
6311(d)). The Treasury Secretary may not pay any fee or provide
any other consideration in connection with this provision. This
fee prohibition may have had an unintended impact on Treasury
contracts for the provision of services unrelated to the
payment of income taxes by commercially acceptable means.
Explanation of Provision
The provision clarifies that the prohibition on paying any
fees or providing any other consideration applies to the use of
credit, debit, or charge cards for the payment of income taxes.
C. Technical Corrections to the 1984 Act
1. Casualty loss deduction (sec. 4004 of the Tax and Trade Relief
Extension Act of 1998, sec. 711(c) of the 1984 Act, and secs.
172(d)(4), 67(b)(3), 68(c)(3), and 873(b) of the Code)
Present and Prior Law
The Tax Reform Act of 1984 (``1984 Act'') deleted casualty
and theft losses from property connected with a nonbusiness
transaction entered into for profit from the list of losses set
forth in section 165(c)(3). This amendment was made in order to
provide that these losses were deductible in full and not
subject to the $100 per casualty limitation or the 10-percent
adjusted gross income floor applicable to personal casualty
losses. However, the amendment inadvertently eliminated the
deduction for these losses from the computation of the net
operating loss. Also, the Tax Reform Act of 1986 provided that
casualty losses described in section 165(c)(3) are not
miscellaneous itemized deductions subject to the 2-percent
adjusted gross income floor, and the Revenue Reconciliation Act
of 1990 provided that these losses are not treated as itemized
deductions in computing the overall limitation on itemized
deductions. The losses of nonresident aliens are limited to
deductions described in section 165(c)(3). Because of the
change made by the 1984 Act, the reference to section 165(c)(3)
does not include casualty and theft losses from nonbusiness
transactions entered into for profit.
Explanation of Provision
The provision provides that all deductions for nonbusiness
casualty and theft losses are taken into account in computing
the net operating loss. Also, these deductions are not treated
as miscellaneous itemized deductions subject to the 2-percent
adjusted gross income floor, or as itemized deductions subject
to the overall limitation onitemized deductions, and are
allowed to nonresident aliens.
Effective Dates
The provision relating to the net operating loss and the
deduction for nonresident aliens applies to taxable years
beginning after December 31, 1983.
The provision relating to miscellaneous itemized deductions
applies to taxable years beginning after December 31, 1986.
The provision relating to the overall limitation on
itemized deductions applies to taxable years beginning after
December 31, 1990.
D. Perfecting Amendments Related to Withholding From Social Security
Benefits and Other Federal Payments (sec. 4005 of the Act and secs. 201
and 207 of the Social Security Act)
Present and Prior Law
The Uruguay Round Agreements Act (P.L. 103-465) contained a
provisions requiring that U.S. taxpayers who receive specified
Federal payments (including Social Security benefits) be given
the option of requiesting that the Federal agency making the
payments withhold Federal income taxes from the payments.
Explanation of Provision
Due to a drafting oversight, the Uruguay Round Agreements
Act included only the necessary changes to the Internal Revenue
Code and failed to make certain conforming changes to the
Social Security Act (specifically a section that prohibits
assignments of benefits). The provision amends the Social
Security Act anti-assignment section to allow the Internal
Revenue Code provisions to be implemented. The provision also
allocates funding for the Social Security Administration to
administer the tax-withholding provisions.
Effective Date
The provision applies to benefits paid on or after the
first day of the second month beginning after the month of
enactment.
E. Disclosure of Tax Return Information to the Department of
Agriculture (sec. 4006(a) of the Tax and Trade Relief Extension Act of
1998 and sec. 6103 (j) of the Code)
Present and Prior Law
Tax return information generally may not be disclosed,
except as specifically provided by statute. Disclosure is
permitted to the Bureau of the Census for specified purposes,
which included the responsibility of structuring, conducting,
and preparing the census of agriculture (sec. 6103(j)(1)). The
Census of Agriculture Act of 1997 (P.L. 105-113) transferred
this responsibility from the Bureau of the Census to the
Department of Agriculture.
Explanation of Provision
The provision permits the continuation of disclosure of tax
return information for the purpose of structuring, conducting,
and preparing the census of agriculture by authorizing the
Department of Agriculture to receive this information.
Effective Date
The provision is effective on the date of enactment of this
technical correction.
F. Technical Corrections to the Transportation Equity Act for the 21st
Century (sec. 4006(b) of the Tax and Trade Relief Extension Act of
1998, sec. 9004 of the Transportation Equity Act for the 21st Century,
and sec. 9503(f) of the Code)
Present and Prior Law
The Transportation Equity Act for the 21st Century
(``Transportation Equity Act'') (P.L. 105-178) extended the
Highway Trust Fund and accompanying highway excise taxes. The
Transportation Equity Act also changed the budgetary treatment
of Highway Trust Fund expenditures, including repeal of a
provision that balances maintained in the Highway Trust Fund
pending expenditure earn interest from the General Fund of the
Treasury.
Explanation of Provision
The provision clarifies that the Secretary of the Treasury
is not required to invest Highway Trust Fund balances in
interest-bearing obligations (because any interest paid to the
Trust Fund by the General Fund would be immediately returned to
the General Fund).
PART FOUR: RICKY RAY HEMOPHILIA RELIEF FUND ACT OF 1998 (Sec. 103(h) of
H.R. 1023) \132\
---------------------------------------------------------------------------
\132\ P.L. 105-369. H.R. 1023 was reported by the House Committee
on Judiciary on March 25, 1998 (H. Rept. 105-465, Part I). The bill was
reported by the House Committee on Ways and Means on May 7, 1998 (H.
Rept. 105-465, Part II). The bill was passed by the House on May 19,
1998. The Senate Committee on Labor and Human Resources reported the
bill on October 7, 1998. The Senate passed the bill on October 21,
1998. H.R. 1023 was signed by the President on November 12, 1998.
---------------------------------------------------------------------------
Present and Prior Law
Under present and prior law, gross income does not include
any damages received (whether by suit or agreement and whether
as lump sums or as periodic payments) on account of a personal
physical injury or physical sickness (Code sec. 104(a)(2)). If
an action has its origin in a physical injury or physical
sickness, then all damages (other than punitive damages) that
flow therefrom are treated as payments received on account of
physical injury or physical sickness whether or not the
recipient of the damages is the injured party. The term
``damages received whether by suit or agreement'' is defined
under Treasury regulations to mean an amount received (other an
workmen's compensation) through prosecutions of a legal suit or
action based upon tort or tort type rights, or through a
settlement agreement entered into in lieu of such prosecution.
Under prior law, payments not meeting the requirements of
section 104 were not excludable from income under that section.
Reasons for Change
The Congress clarified the tax treatment of certain
``compassionate'' payments made to individuals with blood-
clotting disorders who contracted the human immunodeficiency
virus (``HIV'') because the Congress believed that, in the
absence of such clarification, such payments generally would
not be excluded from gross income under the prior-law exclusion
for damage payments. Whether such amounts might be excluded
from income under some other provision of the Internal Revenue
Code or regulations is unclear. The Congress found the payments
under the Act to be sufficiently unusual and sympathetic to
justify clarifying that such payments are not included in gross
income. However, the Congress emphasized that it was taking
action because of the extraordinary nature of the problem that
is addressed by the Act.
Explanation of Provision
The Act provides that payments pursuant to the provisions
of the Act to certain individuals with blood-clotting disorders
who contracted HIV due to contaminated blood products are
treated for purposes of the Internal Revenue Code as damages
received on account of personal physical injury or physical
sickness described in section 104(a)(2). Thus, such payments
made to individuals are excluded from gross income.
Effective Date
The provision is effective on the date of enactment
(November 12, 1998).
=======================================================================
A P P E N D I X:
ESTIMATED BUDGET EFFECTS OF TAX LEGISLATION ENACTED IN 1998
=======================================================================
APPENDIX:
ESTIMATED BUDGET EFFECTS OF TAX LEGISLATION ENACTED IN 1998
Fiscal Years 1998-2007
[Millions of dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Provision Effective 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 1998-07
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
PART ONE: SURFACE TRANSPORTATION REVENUE ACT OF 1998
(TITLE IX OF H.R. 2400) (1)
A. Extend Highway Trust Fund motor fuels taxes, retail
truck tax, highway use tax, heavy truck tire tax and
certain exemptions through 9/30/05; extend renewable
source alcohol excise tax exemptions through 9/30/07 and
renewable source alcohol income tax credits through 12/
31/07, and reduce ethanol tax benefits from 54 cents/
gallon to 53 cents/gallon in 2001-2002, 52 cents/gallon
in 2003-2004, and 51 cents/gallon thereafter (2)........ 10/1/99 ......... ......... ......... 9 12 23 27 39 44 44 198
B. Extend and modify Highway Trust Fund and Aquatic
Resources Trust Fund expenditure authority, through 9/30/
03...................................................... 10/1/98 ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
C. Repeal 1.25 cents/gallon tax on railroad diesel fuel.. 11/1/98 ......... -24 (\3\) ......... ......... ......... ......... ......... ......... ......... -25
D. Modify purposes for which non-Amtrak States may spend
their share of Amtrak net operating loss income tax
refunds................................................. aiii TRA'97 ......... ......... ......... No Revenue or Outlay Effect ......... ......... .........
E. Delay for 2 years the requirement that terminals offer
dyed diesel fuel and kerosene........................... DOE ......... ......... ......... Negligible Revenue Effect ......... ......... .........
F. Simplify motor fuels tax refund procedures............ 10/1/98 ......... -5 (\3\) (\3\) (\3\) (\3\) (\3\) (\3\) (\3\) (\3\) -5
G. Delay indexing for all qualified transportation
benefits in 1999, allow employees to elect cash in lieu
of qualified transportation benefits (effective for
taxable years beginning after 12/31/97), allow employers
to offer up to $100 each month in qualified fringe
benefits for transit and vanpooling (effective 1/1/02),
with indexing for inflation (starting in taxable years
beginning after 12/31/02)............................... ............ ......... 3 3 4 -1 -3 -10 -7 -12 -8 -31
--------------------------------------------------------------------------------------------------------------------------------------
H. Repeal National Recreational Trails Trust Fund........ DOE ......... ......... ......... No Revenue or Outlay Effect ......... ......... .........
--------------------------------------------------------------------------------------------------------------------------------------
Subtotal: Title IX of H.R. 2400.................... ......... -26 3 13 11 20 17 32 32 36 137
======================================================================================================================================
PART TWO: INTERNAL REVENUE SERVICE RESTRUCTURING AND
REFORM ACT OF 1998 (H.R. 2676)
Title I. Reorganization of Structure and Management of
the Internal Revenue Service............................ ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
Title II. Electronic Filing.............................. ......... ......... ......... ......... No Refenue Effect ......... ......... ......... .........
Title III. Taxpayer Protections and Rights
A. Burden of Proof--apply to only income, estate and gift
taxes (permanent)....................................... eca DOE (4) -231 -256 -269 -278 -297 -311 -327 -344 -360 -2,674
B. Proceedings by Taxpayers
1. Expansion of authority to award costs and certain
fees at prevailing rate and rule 68 provision with
net worth limitation (includes outlays effects);
with modified hourly cap............................ 180da
DOE ......... -11 -12 -13 -14 -16 -18 -19 -20 -22 -145
2. Civil damages with respect to unauthoriazed
collection actions (includes outlay effects)........ aoa DOE -2 -15 -25 -50 -30 -25 -25 -25 -25 -25 -247
3. Increase size of cases permitted on small case
calendar to $50,000................................. pca DOE ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
4. Actions for refund with respect to certain estates
which have elected the installment method of payment rfa DOE ......... ......... ......... Negligible Revenue Effect ......... ......... .........
5. Extend IRS administrative appeals right to issuers
of tax-exempt bonds................................. DOE (4) -5 -2 -2 -2 -2 -2 -2 -2 -2 -21
6. Civil action for release of erroneous lien........ DOE ......... ......... ......... Negligible Revenue Effect ......... ......... .........
C. Relief for Innocent Spouses and for Taxpayers Unable
to Manage Their Financial Affairs Due to Disabilities
1. Relief for innocent spouses....................... laa & ulb
DOE -10 -131 -92 -74 -86 -121 -157 -204 -243 -288 -1,406
2. Suspension of statute of limitations on filing
refund claims during periods of disability.......... tyoo/a
DOE -10 -70 -35 -15 -16 -17 -18 -19 -20 -21 -241
D. Provisions Relating to Interest and Penalties
1. Elimination of interest rate differential on
overlapping periods of interest on income tax
overpayments and underpayments...................... tyoo/a
DOE -26 -68 -58 -61 -56 -59 -62 -65 -68 -72 -593
2. Increase refund interest rate to Applicable
Federal Rate (``AFR'') + 3 for individual taxpayers
(5)................................................. 2nd & scqa
DOE ......... -36 -54 -56 -59 -62 -65 -69 -72 -76 -549
3. Reduced penalty on individual's failure to pay
during installment agreements....................... iapma
12/31/99 ......... ......... -108 -136 -143 -152 -159 -167 -175 -185 -1,225
4. Mitigation of failure to deposit penalty.......... drma 180da
DOE ......... -47 -64 -64 -65 -66 -66 -67 -68 -68 -575
5. Suspend accrual of interest and penalties if IRS
fails to contact taxpayer within 12 months after a
timely-filed return (except for fraud and criminal
penalties): (1) for first 5 years, time period is 18
months (instead of 12 months); and (2) provide that
termination with respect to specific additional tax
liability occurs on earliest notice of such
liability........................................... tyea
DOE ......... ......... -146 -174 -196 -209 -248 -431 -435 -439 -2,278
6. Procedural requirements for imposition of
penalties and additions to tax...................... nia & paa
12/31/00 ......... ......... ......... Negligible Revenue Effect ......... ......... .........
7. Permit personal delivery of section 6672 notices.. DOE ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
8. Notice of interest charges........................ nia
12/31/00 ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
E. Protections for Taxpayers Subject to Audit or
Collection Activities
1. Due process for IRS collection actions............ caia 180da
DOE ......... -11 -7 -7 -7 -7 -7 -8 -8 -8 -70
2. Examination activities
a. Extend the attorney client privilege to
accountants and other tax practitioners, with
exception from both attorney/client privilege
and tax practitioner/client privilege for
communications relating to corporate tax
shelters........................................ cmo/a
DOE (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\7\)
b. Limitation on financial status audits......... DOE ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
c. Limitation on IRS authority to require
production of computer source code and
protections against improper disclosure......... sia & saa
DOE ......... -13 -16 -20 -22 -26 -30 -33 -36 -37 -233
d. Prohibition on improper threat of audit
activity for tip reporting...................... DOE ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
e. Allow taxpayers to quash all third-party
summonses....................................... ssa DOE ......... ......... ......... Negligible Revenue Effect ......... ......... .........
f. Permit service of summonses by mail or in
person.......................................... ssa DOE ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
g. IRS must provide general notice and periodic
reports to taxpayers before contacting third
parties regarding IRS examination or collection
activities with respect to the taxpayer......... 180da DOE ......... (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\6\) (\7\)
3. Collection activities
a. Approval process--IRS to implement approval
process for liens, levies, or seizures;
clarification of ``appropriate''................ (\8\) ......... ......... ......... Negligible Revenue Effect ......... ......... .........
b. Increase the amount exempt from levy to $6,250
for personal property and $3,125 for books and
tools of trade, indexed for inflation........... Lia DOE (\4\) -1 -1 -1 -1 -2 -2 -2 -2 -2 -13
c. Require the IRS to release a levy upon
agreement that the amount is not collectible.... lia
12/31/99 ......... ......... ......... Negligible Revenue Effect ......... ......... .........
d. Suspend collection by levy during refund suit. tyba
12/31/98 ......... ......... ......... Negligible Revenue Effect ......... ......... .........
e. Require District Counsel review of jeopardy
and termination assessments and jeopardy levies. taa & lma
DOE ......... ......... ......... Negligible Revenue Effect ......... ......... .........
f. Increase in amount of certain property on
which lien not valid............................ DOE ......... ......... ......... Negligible Revenue Effect ......... ......... .........
g. Waive the 10% early withdrawal tax when IRA or
qualified plan is levied........................ wa
12/31/99 ......... ......... -1 -3 -4 -4 -5 -5 -5 -5 -33
h. Prohibit the IRS from selling taxpayer's
property for less than the minimum bid.......... Soa DOE ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
i. Require the IRS to provide an accounting and
receipt to the taxpayer (including the amount
credited to the taxpayer's account) for property
seized and sold................................. soa DOE ......... ......... ......... Negligible Revenue Effect ......... ......... .........
j. Require the IRS to study and implement a
uniform asset disposal mechanism for sales of
seized property to prevent revenue officers from
conducting sales................................ DOE & 2
years ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
k. Codify IRS administrative procedures for
seizure of taxpayer's property.................. DOE ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
l. Procedures for seizure of residences and
businesses...................................... DOE (\4\) -3 -3 -3 -3 -3 -3 -3 -3 -3 -27
4. Provisions relating to examination and collection
activities
a. Prohibition on extension of statute of
limitations for collection beyond 10 years with
installment payment exception................... (9) ......... ......... -9 -13 -16 -18 -19 -19 -21 -24 -139
b. Offers-in-compromise.......................... generally
DOE -1 ......... 9 4 4 4 4 4 4 4 38
c. Notice of deficiency to specify deadlines for
filing Tax Court petition....................... nma
12/31/98 ......... ......... ......... Negligible Revenue Effect ......... ......... .........
d. Refund or credit of overpayments before final
determination................................... DOE ......... ......... ......... Negligible Revenue Effect ......... ......... .........
e. IRS procedures relating to appeal of
examinations and collections.................... DOE ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
f. Codify certain fair debt collection procedures DOE ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
g. Ensure availability of installment agreements. DOE ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
h. Prohibit Federal Government officers and
employees from requesting taxpayers to give up
their rights to sue............................. DOE ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
F. Disclosure to Taxpayers
1. Explanation of joint and several liability........ 180da
DOE ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
2. Explanation of taxpayers' rights in interveiws
with IRS............................................ 180da
DOE ......... -13 (4) (4) (4) (4) (4) (4) (4) (4) (10)
3. Disclosure of criteria for examination selection.. 180da
DOE ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
4. Explanations of appeals and collection process.... 180da
DOE ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
5. Require IRS to explain reason for denial for
refund.............................................. 180da
DOE ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
6. Statement to taxpayers with installment agreements 7/1/00 ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
7. Require IRS to notify all partners of any
resignation of the tax matters partner that is
required by the IRS, and of the identity of any
successor tax matters partner who was appointed to
fill the vacancy created by such resignation........ sotmpa
DPE (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) -2
8. Require information to taxpayers concerning
disclosure of their income tax return information to
parties outside the IRS............................. DOE ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
9. Disclosure of Chief Counsel advice................ ai 90da
DOE ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
G. Low-Income Taxpayer Clinics........................... DOE ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
H. Other Provisions
1. Cataloging complaints of IRS employee misconduct.. 1/1/00 ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
2. Archive of records of Internal Revenue Service.... DOE ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
3. Payment of taxes to the Treasury (5).............. DOE ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
4. Clarification of authority of Secretary relating
to the making of elections.......................... DOE ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
5. IRS employee contacts............................. 6ma
DOE ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
6. Require approval of use of pseudonyms by IRS
employees........................................... DOE ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
7. Require the IRS to end the use of the illegal tax
protestor label..................................... DOE & rdnrb
1/1/99 ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
8. Modify section 6103 to allow the tax-writing
committees to obtain data from IRS employees
regarding employee and taxpayer abuse............... DOE ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
9. Publish telephone numbers for local IRS offices... DOE ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
10. Alternative to Social Security numbers for tax
return preparers.................................... DOE ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
11. Authorize the Federal Government to offset a
Federal income tax refund to satisfy a past-due,
legally owing State income tax debt................. rpa
12/31/99 ......... ......... 2 3 3 3 3 4 4 4 26
12. Modify section 6050S to require educational
institutions to report grant amounts processed
through and refunds made be the institution; with
clarifications regarding the definition of
``qualified tuition and related expenses'' and
certain other educational institution reporting
requirements........................................ tyba
12/31/98 ......... ......... ......... Negligible Revenue Effect ......... ......... .........
I. Studies
1. Administration of penalties and interest.......... 1ya DOE ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
2. Confidentiality of tax return information......... 18ma DOE ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
3. Noncompliance with internal revenue laws by
taxpayers........................................... 1ya DOE ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
4. Payments for informants........................... 1ya DOE ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
Title IV. Congressional Accountability for the Internal
Revenue Service......................................... ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
Title V. Additional Provisions
A. Change the Holding Period for Long-Term Capital Gains
to 12 months............................................ aptiao/a
1/1/98 35 611 -312 -335 -335 -337 -341 -347 -354 -362 -2,077
B. Deductibility of Meals Provided for the Convenience of
Employer on Employer's Premises......................... tybbo/a DOE ......... -20 -33 -34 -35 -36 -38 -39 -40 -41 -316
Title VI. Tax Technical Corrections...................... ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
Title VII. Revenue Offsets
A. Overrule Schmidt Baking with Respect to Vacation Pay,
Severance Pay and Other Types of Compensation With 3-
Year Spread............................................. tyea DOE 593s 839 997 456 308 156 163 172 180 189 4,053
B. Freeze Grandfathered Status of Stapled or Paired-Share
REITs................................................... tyea
3/26/98 (\11\) 1 3 6 10 14 19 26 35 45 159
C. Make Certain Trade Receivables Ineligible for Mark-to-
Market Treatment........................................ tyea DOE 33 317 500 333 117 70 73 77 81 85 1,686
D. Disregard Minimum Distributions in Determining AGI for
IRA Conversions to a Roth IRA........................... tyba
12/31/04 ......... ......... ......... ......... ......... ......... ......... 2,362 2,854 2,812 8,028
--------------------------------------------------------------------------------------------------------------------------------------
Subtotal: H.R. 2676................................ 608 1.087 270 -535 -933 -1,218 -1,320 788 1,211 1,093 1,050
======================================================================================================================================
Other Item in H.R. 2676..................................
Abate Interest on Underpayments by Taxpayers in
Presidentially Declared Disaster Areas.............. dda
12/31/97 ......... -8 -25 -25 -25 -25 -25 -25 -25 -25 -234
PART THREE: TAX AND TRADE RELIEF ACT OF 1998 (DIVISION J
OF H.R. 4328, THE OMNIBUS CONSOLIDATED AND EMERGENCY
SUPPLEMENTAL APPROPRIATIONS ACT, 1999)
Title I. Extension of Expiring Tax Provisions
A. Extend the Research Tax Credit (through 6/30/99)...... 7/1/98 ......... -1,126 -505 -258 -184 -94 -20 ......... ......... ......... -2,187
B. Extend Work Opportunity Tax Credit (through 6/30/99).. wpoifibwa
6/30/98 ......... -191 -140 -73 -29 -10 -2 ......... ......... ......... -445
C. Extend Welfare-to-Work Tax Credit (through 6/30/99)... wpoifibwa
4/30/99 ......... -4 -10 -7 -3 -1 ......... ......... ......... ......... -25
D. Permanently Extend Contributions of Appreciated Stock
to Private Foundations; Public Inspection of Private
Foundation Annual Returns............................... 7/1/98 (12) ......... ......... -23 -56 -71 -83 -91 -95 -100 -109 -732
E. 1-Year Modified Extension of Exemption from Subpart F
for Active Financing Income............................. tybi 1999 ......... -117 -378 ......... ......... ......... ......... ......... ......... ......... -495
F. Extension of Tax Information Reporting for Income
Contingent Student Loan Program (through 9/30/03) (5)... 10/1/98 ......... ......... ......... Negligible Budget Effect ......... ......... .........
Title II. Other Tax Provisions
Subtitle A. Provisions Relating to Individuals
A. Treatment of Nonrefundable Personal Credits (child
credit, adoption credit, HOPE and Lifetime Learning
credits, etc.) Under the Alternative Individual
Minimum Tax (for 1998 only)......................... tyba
12/31/97 ......... -474 ......... ......... ......... ......... ......... ......... ......... ......... -474
B. Accelerate Self-Employed Health Insurance
Deduction--60% in 1999 through 2001, 70% in 2002,
and 100% in 2003 and thereafter (13)................ tyba
12/31/98 ......... -105 -289 -235 -251 -384 -637 -680 -602 -257 -3,439
C. Prior Year Estimated Tax Safe Harbor for
Individuals With AGI over $150,000 (106% in 2000 and
2001)............................................... tyba
12/31/99 ......... ......... 525 ......... -525 ......... ......... ......... ......... ......... .........
Subtitle B. Provisions Relating to Farmers
A. Permanent Extension of Income Averaging for
Farmers............................................. tyba
12/31/00 ......... ......... ......... -2 -21 -22 -22 -23 -24 -24 -138
B. Production Flexibility Contract Payments to Farmer
Not Included in Income Prior to Receipt............. tyea
12/31/95 ......... ......... ......... Negligible Budget Effect ......... ......... .........
C. Extend the Net Operating Loss Carryback Period for
Farm Losses......................................... NOLgi tyba
12/31/97 ......... -73 -66 -60 -55 -50 -46 -42 -39 -36 -468
Subtitle C. Miscellaneous Provisions
A. Increase Private Activity Bond Volume Cap to the
Greater of $55 Per Capita or $165 Million Staring in
2003; Phased In Ratably to the Greater of $75 Per
Capita or $225 Million in 2007...................... 1/1/03 ......... ......... ......... ......... ......... -11 -44 -111 -177 -252 -595
B. Treasury Study on Depreciation (due 3/31/00)..... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... .........
C. State Election to Except Student Employees From
Social Security (5)................................. ea
6/30/00 ......... ......... -5 -47 -49 -51 -52 -54 -56 -58 -372
Title III. Revenue Offset Provisions
A. Change the Treatment of Certain Deductible
Liquidating Distributions of RICs and REITs......... dma
5/21/98 ......... 2,425 1,109 723 640 672 705 741 778 817 8,610
B Add Vaccines Against Rotavirus Gastroenteritis to
the List of Taxable Vaccines ($0.75 per dose)....... vpa
DOE ......... 1 2 3 4 5 6 6 6 7 42
C. Claify and Expand Math Error Procedures........... tyea
DOE ......... 12 25 26 27 28 29 30 31 32 240
D. Restrict Special Net Operating Loss Carryback
Rules for Specified Liability Losses................ NOLgi tyea
DOE ......... 14 21 29 39 42 40 40 40 42 308
E. Medicare Offset: Tax Treatment of Prizes and
Awards.............................................. (\14\) ......... 170 1,618 -99 -348 -397 -384 -367 -346 -321 -474
Title IV. Tax Technical Corrections Provisions........... ......... ......... ......... ......... No Revenue Effect ......... ......... ......... .........
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Subtotal: H.R. 4328................................ ......... 509 1,851 -71 -838 -364 -522 -560 -493 -159 -644
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Joint Committee on Taxation.
Note: Details may not add to totals due to rounding.
Legend for ``Effective'' column:
ai = advice issued Lia = levies issued after taa = taxes assessed after
aiii TRA'97 = as if included in the Taxpayer lma = levies made after tyba = taxable years beginning after
Relief Act of 1997 nia = notices issued after tybbo/a = taxable years beginning before, on, or
aoa = actions occurring after nma = notice mailed after after
aptiao/a = amounts properly taken into account NOLgi = net operating losses generated in tyea = taxable years ending after
on or after paa = penalties assessed after tybi = taxable years beginning in
caia = collection actions initiated after pca = proceedings commencing after tyoo/a = taxable years open on or after
cmo/a = communications made on or after rdnrb = removal designation not required before ulb = unpaid liability before
dda = disasters declared after rfa = refunds filed after vpa = vaccines purchased after
dma = distributions made after rpa = refunds payable after wa = withdrawals after
DOE = date of enactment saa = software acquired after wpoifibwa = wages paid or incurred for
drma = deposits required to be made after scqa = succeeding calendar quarters beginning individuals beginning work after
ea = earnings after after 1ya = 1 year after
eca = examinations commencing after sia = summonses issued after 6ma = 6 months after
iapma = installment agreement payments made soa = seizures occurring after 18ma = 18 months after
after Soa = sales occurring after 90da = 90 days after
laa = liability arising after sotmpa = selections of tax matters partners after 180da = 180 days after
lia = levies imposed after ssa = summonses served after
Footnotes for Appendix:
\1\ This table provides estimates of the provisions of Title IX of H.R. 2400 (``Transportation Equity Act for the 21st Century'') only. The
Transportation Infrastructure Finance and Innovation Act program contained in another title of the bill results in revenue losses from increased
issuance of tax-exempt debt with offsetting receipts from the imposition of a credit enhancement fee. The magnitude of these effects cannot be
determined until the Congressional Budget Office determines outlay levels for the program, as included in the conference agreement.
\2\ The Congressional Budget Office revenue baseline assumes that the Highway Trust Fund excise taxes and exemptions to the taxes will remain in effect
throughout the budget window. Thus, the extension of the excise taxes and certain exemptions is scored as having no revenue effect. The table shows
the revenue effect of reducing the renewable source alcohol fuels income tax credit and excise tax exemption from 54 cents/gallon to 53 cents/gallon
in 2001-2002, 52 cents/gallon in 2003-2004, and 51 cents/gallon thereafter.
\3\ Loss of less than $500,000.
\4\ Loss of less than $1 million.
\5\ Estimate provided by the Congressional Budget Office.
\6\ Loss of less than $5 million.
\7\ Loss of less than $50 million.
\8\ Generally effective for collection actions commencing after the date of enactment; collections at ACS sites effective for levies imposed after 12/31/
00.
\9\ Effective for requests to extend the statute of limitations made after 12/31/99 and to all extensions of the statute of limitations on collections
that are open after 12/31/99.
\10\ Loss of less than $25 million.
\11\ Gain of less than $500,000.
\12\ Effective for requests made after the later of the date which is 60 days after the date on which the Treasury Department publishes regulations or
12/31/98.
\13\ Under prior law, the self-employed health insurance deduction percentages were 45% in 1998 and 1999, 50% in 2000 and 2001, 60% in 2002, 80% in 2003
through 2005, 90% in 2006, and 100% in 2007 and thereafter.
\14\ The provision applies with respect to any qualified prize to which a person first becomes entitled after the date of enactment. In addition, the
provision also applies to any qualified prize to which a person became entitled on or before the date of enactment if the person has an option to
receive a lump-sum payment only during some portion of the 18-month period beginning on 7/1/99.