[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

                              ----------                              
                                                                   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

                              ----------                              
                                                                   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.
---------------------------------------------------------------------------
    \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
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

 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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
            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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
     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.
---------------------------------------------------------------------------
    \10\ Under prior law, the maximum balance that could accumulate in 
the Boat Safety Account was $70 million.
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
     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.
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \43\ Williams v. United States, 514 U.S. 527 (1995).
---------------------------------------------------------------------------

                           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.
---------------------------------------------------------------------------
    \44\  The specified percentage was 10 percent if adjusted gross 
income was $20,000 or less. Otherwise, the specified percentage was 25 
percent.
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------
    \46\ For the purpose of this rule, a taxpayer is no longer married 
if he or she is widowed.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \47\ U.S. v. Brockamp, 519 U.S. 347 (1997).
---------------------------------------------------------------------------

                           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.
---------------------------------------------------------------------------
    \48\ This provision was modified with respect to non-corporate 
taxpayers (see sec. 3302 of the Act).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------

                           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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------

                             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.
---------------------------------------------------------------------------

                             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).
---------------------------------------------------------------------------
    \65\ 106 T.C. No. 19 (May 23, 1996).
    \66\ U.S. D. C. Nev. CV-5-94-1146-HDM(LRL) (September 26, 1996).
---------------------------------------------------------------------------

                           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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

                        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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \71\ H. Rept. 105-220, p. 374.
---------------------------------------------------------------------------

                        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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    ``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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

                        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.
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \75\ The otherwise available exceptions to the early withdrawal 
tax, e.g., for distributions after age 59\1/2\, apply.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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.
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    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------

                        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).
---------------------------------------------------------------------------

                        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).
---------------------------------------------------------------------------
    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).
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

                        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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \97\ Treas. reg. sec. 1.475(c)-1(b), issued December 23, 1996; the 
``customer paper election.''
---------------------------------------------------------------------------

                           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.
---------------------------------------------------------------------------
    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).
---------------------------------------------------------------------------

                             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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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:
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

                         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.
---------------------------------------------------------------------------
    \116\ A taxpayer may elect to forgo the carryback of an NOL.
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \117\ Special carryback rules apply to real estate investment 
trusts (no carrybacks), specified liability losses (10-year carryback), 
and excess interest losses (no carrybacks).
---------------------------------------------------------------------------

                           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.
---------------------------------------------------------------------------

                         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.
---------------------------------------------------------------------------

                         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.
---------------------------------------------------------------------------

                         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.
---------------------------------------------------------------------------

                         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\
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------

                             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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

                         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\
---------------------------------------------------------------------------

    \129\ Section 6010(c) of the 1998 IRS Restructuring Act is 
described, as clarified by this provision, in Part Two of this 
publication.
---------------------------------------------------------------------------

                         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
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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        .........  .........  .........  .........
                                                          --------------------------------------------------------------------------------------------------------------------------------------
      Subtotal: H.R. 4328................................                .........        509      1,851        -71       -838       -364       -522       -560       -493       -159       -644
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
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.