[JPRT 107-2-01]
[From the U.S. Government Publishing Office]
JCS-2-01
[JOINT COMMITTEE PRINT]
GENERAL EXPLANATION OF
TAX LEGISLATION
ENACTED IN THE 106TH CONGRESS
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Prepared by the Staff
of the
JOINT COMMITTEE ON TAXATION
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13
APRIL 19, 2001
GENERAL EXPLANATION OF TAX LEGISLATION ENACTED IN THE 106TH CONGRESS
JCS-2-01
[JOINT COMMITTEE PRINT]
GENERAL EXPLANATION OF
TAX LEGISLATION
ENACTED IN THE 106TH CONGRESS
__________
Prepared by the Staff
of the
JOINT COMMITTEE ON TAXATION
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13
APRIL 19, 2001
JOINT COMMITTEE ON TAXATION
107th Congress, 1st Session
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HOUSE SENATE
WILLIAM M. THOMAS, California, CHARLES E. GRASSLEY, Iowa,
Chairman Vice Chairman
PHILIP M. CRANE, Illinois ORRIN G. HATCH, Utah
E. CLAY SHAW, Jr., Florida FRANK H. MURKOWSKI, Alaska
CHARLES B. RANGEL, New York MAX BAUCUS, Montana
FORTNEY PETE STARK, California JOHN D. ROCKEFELLER IV, West
Virginia
Lindy L. Paull, Chief of Staff
Bernard A. Schmitt, Deputy Chief of Staff
Mary M. Schmitt, Deputy Chief of Staff
SUMMARY CONTENTS
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Page
Introduction..................................................... 1
Part One: Availability of Certain Tax Benefits for Services for
Part of Operation Allied Force (Public Law 106-21)............. 3
Part Two: Miscellaneous Trade and Technical Corrections Act of
1999 (Public Law 106-36)....................................... 9
Part Three: Tax Relief Extension Act of 1999 (Public Law 106-170) 12
Part Four: Trade and Development Act of 2000 (Public Law 106-200) 75
Part Five: Amending the Internal Revenue Code to Require 527
Organizations to Disclose Their Political Activities (Public
Law 106-230)................................................... 79
Part Six: Miscellaneous Trade and Technical Corrections Act of
2000 (Public Law 106-476)...................................... 82
Part Seven: FSC Repeal and Extraterritorial Income Exclusion Act
of 2000 (Public Law 106-519)................................... 84
Part Eight: The Community Renewal Tax Relief Act of 2000 (Public
Law 106-554; H.R. 5662)........................................ 114
Part Nine: Installment Tax Correction Act of 2000 (Public Law
106-573)....................................................... 176
Appendix: Estimated Budget Effects of Tax Legislation Enacted in
the 106th Congress............................................. 179
C O N T E N T S
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Page
Introduction..................................................... 1
Part One: Availability of Certain Tax Benefits for Services for
Part of Operation Allied Force (Public Law 106-21)............. 3
Part Two: Miscellaneous Trade and Technical Corrections Act of
1999 (Public Law 106-36)....................................... 9
A. Property ``Subject to'' a Liability Treated in the
Same Manner as an Assumption of Liability (sec. 3001) 9
Part Three: Tax Relief Extension Act of 1999 (Public Law 106-170) 12
I. Extension of Expiring Tax Provisions...................... 12
A. Extend Minimum Tax Relief for Individuals (sec. 501).. 12
B. Extension of Research Tax Credit (sec. 502)........... 13
C. Subpart F Exemption for Active Financing Income (sec.
503)................................................. 16
D. Taxable Income Limit on Percentage Depletion for
Marginal Production (sec. 504)....................... 19
E. Extend the Work Opportunity Tax Credit (sec. 505)..... 21
F. Extend the Welfare-to-Work Tax Credit (sec. 505)...... 22
G. Extend Exclusion for Employer-Provided Educational
Assistance (sec. 506)................................ 23
H. Extension and Modification of Credit for Producing
Electricity From Certain Renewable Resources (sec.
507)................................................. 25
I. Extension of Authority to Issue Qualified Zone Academy
Bonds (sec. 509)..................................... 26
J. Extend the Tax Credit for First-Time D.C. Homebuyers
(sec. 510)........................................... 27
K. Extend Expensing of Environmental Remediation
Expenditures (sec. 511).............................. 28
L. Temporary Increase in Amount of Rum Excise Tax Covered
Over to Puerto Rico and the Virgin Islands (sec. 512) 29
II. Other Time-Sensitive Provisions.......................... 32
A. Prohibit Disclosure of APAs and APA Background Files
(sec. 521)........................................... 32
B. Authority to Postpone Certain Tax-Related Deadlines by
Reason of Year 2000 Failures (sec. 522).............. 37
C. Add Certain Vaccines Against Streptococcus Pneumoniae
to the List of Taxable Vaccines (sec. 523)........... 39
D. Delay in Effective Date of Requirement for Approved
Diesel or Kerosene Terminal (sec. 524)............... 41
E. Production Flexibility Contract Payments (sec. 525)... 42
III. Revenue Offsets......................................... 44
A. General Provisions.................................... 44
1. Modification of individual estimated tax safe
harbor (sec. 531)................................ 44
2. Clarify the tax treatment of income and losses on
derivatives (sec. 532)........................... 45
3. Expand reporting of cancellation of indebtedness
income (sec. 533)................................ 47
4. Limitation on conversion of character of income
from constructive ownership transactions (sec.
534)............................................. 49
5. Treatment of excess pension assets used for
retiree health benefits (sec. 535)............... 52
6. Modification of installment method and repeal of
installment method for accrual method taxpayers
(sec. 536)....................................... 55
7. Denial of charitable contribution deduction for
transfers associated with split-dollar insurance
arrangements (sec. 537).......................... 58
8. Distributions by a partnership to a corporate
partner of stock in another corporation (sec.
538)............................................. 63
B. Provisions Relating to Real Estate Investment Trusts
(secs. 541-547, 551, 561 and 566).................... 66
1. General provisions................................ 66
2. Modification of estimated tax rules for closely
held REITS......................................... 73
Part Four: Trade and Development Act of 2000 (Public Law 106-200) 75
A. Application of Denial of Foreign Tax Credit Regarding
Trade and Investment With Respect to Certain Foreign
Countries (sec. 601)................................... 75
B. Acceleration of Coverover Payments to Puerto Rico and
the Virgin Islands (sec. 602).......................... 76
Part Five: Amending the Internal Revenue Code to Require Section
527 Organizations to Disclose Their Political Activities
(Public Law 106-230)........................................... 79
Part Six: Miscellaneous Trade and Technical Corrections Act of
2000 (Public Law 106-476)...................................... 82
A. Imported Cigarette Compliance Act of 2000 (secs. 4001-
4003).................................................. 82
Part Seven: FSC Repeal and Extraterritorial Income Exclusion Act
of 2000 (Public Law 106-519)................................... 84
Part Eight: The Community Renewal Tax Relief Act of 2000 (Public
Law 106-554; H.R. 5662)........................................ 114
Title I. Community Renewal Provisions........................ 114
A. Renewal Community Provisions (secs. 101-102 of H.R.
5662).................................................. 114
B. Empowerment Zone Tax Incentives....................... 118
1. Extension and expansion of empowerment zones
(secs. 111-115 of H.R. 5662)....................... 118
2. Rollover of gain from the sale of qualified
empowerment zone investments (sec. 116 of H.R.
5662).............................................. 120
3. Increased exclusion of gain from the sale of
qualifying empowerment zone stock (sec. 117 of H.R.
5662).............................................. 121
C. New Markets Tax Credit (sec. 121 of H.R. 5662)........ 122
D. Increase the Low-Income Housing Tax Credit Cap and
Make Other Modifications (secs. 131-137 of H.R. 5662).. 125
E. Accelerate Scheduled Increase in State Volume Limits
on Tax-Exempt Private Activity Bonds (sec. 161 of H.R.
5662).................................................. 128
F. Extension and Modification to Expensing of
Environmental Remediation Costs (sec. 162 of H.R. 5662) 129
G. Expansion of District of Columbia Homebuyer Tax Credit
(sec. 163 of H.R. 5662)................................ 130
H. Extension of D.C. Enterprise Zone (sec. 164 of H.R.
5662).................................................. 131
I. Extension and Modification of Enhanced Deduction for
Corporate Donations of Computer Technology (sec. 165 of
H.R. 5662)............................................. 132
J. Treatment of Indian Tribes as Non-Profit Organizations
and State or Local Governments for Purposes of the
Federal Unemployment Tax (``FUTA'') (sec. 166 of H.R.
5662).................................................. 134
Title II. Medical Savings Accounts (``MSAs'') (secs. 201-202
of H.R. 5662).............................................. 135
Title III. Administrative and Technical Corrections
Provisions................................................. 138
Subtitle A. Administrative Provisions.................... 138
A. Exempt Certain Reports From Elimination Under the
Federal Reports Elimination and Sunset Act of 1995
(sec. 301 of H.R. 5662)............................ 138
B. Extension of Deadlines for IRS Compliance with
Certain Notice Requirements (sec. 302 of H.R. 5662) 138
C. Extension of Authority for Undercover Operations
(sec. 303 of H.R. 5662)............................ 139
D. Competent Authority and Pre-Filing Agreements
(sec. 304 of H.R. 5662)............................ 140
E. Increase Joint Committee on Taxation Refund Review
Threshold to $2 Million (sec. 305 of H.R. 5662).... 148
F. Clarify the Allowance of Certain Tax Benefits With
Respect to Kidnapped Children (sec. 306 of H.R.
5662).............................................. 149
G. Conforming Changes to Accommodate Reduced
Issuances of Certain Treasury Securities (sec. 307
of H.R. 5662)...................................... 150
H. Authorization of Agencies to Use Corrected
Consumer Price Index (sec. 308 of H.R. 5662)....... 151
I. Prevent Duplication or Acceleration of Loss
Through Assumption of Certain Liabilities (sec. 309
of H.R. 5662)...................................... 153
J. Disclosure of Return Information to the
Congressional Budget Office (sec. 310 of H.R. 5662) 156
Subtitle B. Tax Technical Corrections (secs. 311-319 of
H.R. 5662)............................................. 158
Title IV. Tax Treatment of Securities Futures Contracts (sec.
401 of H.R. 5662).......................................... 169
Part Nine: Installment Tax Correction Act of 2000 (Public Law
106-573)....................................................... 176
Appendix: Estimated Budget Effects of Tax Legislation Enacted
106th Congress................................................. 179
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
the 106th Congress. The explanation follows the chronological
order of the tax legislation as signed into law.
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\1\ This pamphlet may be cited as follows: Joint Committee on
Taxation, General Explanation of Tax Legislation Enacted in the 106th
Congress (JCS-2- 01), April 19, 2001.
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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 enacted after action by the Conference
Committee may differ significantly from the versions of the
bill reported by the House and Senate Committees and passed by
the House and Senate. The material contained in this pamphlet
is prepared so that Members of Congress, tax practitioners, and
other interested parties can have an explanation in one volume
of the final tax legislation enacted in 106th Congress.
In some instances, provisions included in legislation
enacted in the 106th Congress were not reported out of
committee before enactment. As a result, the legislative
history of such provisions does not include the reasons for
change normally included in a committee report. In the case of
such provisions, no reasons for change are included with the
explanation of the provision in this pamphlet.
Part One of the pamphlet is a explanation of the provisions
of the Availability of Certain Tax Benefits for Services for
Part of Operation Allied Force (P.L. 106-21), relating to tax
treatment of certain of military personnel and civilian
employees in the Federal Republic of Yugoslavia (Bosnia/
Montenegro), Albania, the Adriatic Sea, and the northern Ionian
Sea above the 39th parallel. Part Two is an explanation of the
revenue provisions of the Miscellaneous Trade and Technical
Corrections Act of 1999 (P.L. 106-36), relating to treatment of
certain property subject to a liability. Part Three is an
explanation of the Tax Relief Extension Act of 1999 (Title V of
the Ticket to Work and Work Incentives Improvement Act of 1999,
P.L. 106-170), relating to extension of expiring provisions and
other time-sensitive provisions, with revenue offset
provisions. Part Four is an explanation of the revenue
provisions of the Trade and Development Act of 2000 (P.L. 106-
200), relating to foreign tax credit rules and cover over
payments to Puerto Rico and the Virgin Islands. Part Five is an
explanation of provisions Amending the Internal Revenue Code to
Require 527 Organizations to Disclose their Political
Activities (P.L. 106-230), Part Six is an explanation of the
revenue provisions of the Miscellaneous Trade and Technical
Corrections Act of 2000 (P.L. 106-476), relating to imported
cigarette compliance. Part Seven is an explanation of the FSC
Repeal and Extraterritorial Income Exclusion Act of 2000 (P.L.
106-519), relating to repeal of rules for foreign sales
corporations. Part Eight is an explanation of the revenue
provisions of the Community Renewal Tax Relief Act of 2000
(P.L. 106-554, H.R. 5662), relating to community renewal,
medical savings accounts, administrative and technical
corrections, and tax treatment of securities futures contracts.
Part Nine is an explanation of the Installment Tax Correction
Act of 2000 (P.L. 106-573), relating to repeal of the
prohibition on the use of the installment method of accounting
for certain dispositions. The Appendix provides the estimated
budget effects of tax legislation enacted in the 106th
Congress.
PART ONE: AVAILABILITY OF CERTAIN TAX BENEFITS FOR SERVICES FOR PART OF
OPERATION ALLIED FORCE (PUBLIC LAW 106-21) \2\
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\2\ H.R. 1376. The bill was ordered reported by the House Committee
on Ways and Means on April 13, 1999 (H. Rep. 106-90). The House and the
Senate both passed the bill on April 15, 1999. The bill was signed by
the President on April 19, 1999.
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Present and Prior Law
General time limits for filing tax returns
Individuals generally must file their Federal income tax
returns by April 15 of the year following the close of a
taxable year (sec. 6072). The Secretary may grant reasonable
extensions of time for filing such returns (sec. 6081).
Treasury regulations provide an additional automatic two-month
extension (until June 15 for calendar-year individuals) for
United States citizens and residents in military or naval
service on duty on April 15 of the following year (the
otherwise applicable due date of the return) outside the United
States (Treas. Reg. sec. 1.6081-5(a)(6)). No action is
necessary to apply for this extension, but taxpayers must
indicate on their returns (when filed) that they are claiming
this extension. Unlike most extensions of time to file, this
extension applies to both filing returns and paying the tax
due.
Treasury regulations also provide, upon application on the
proper form, an automatic four-month extension (until August 15
for calendar-year individuals) for any individual timely filing
that form and paying the amount of tax estimated to be due
(Treas. Reg. sec. 1.6081-4).
In general, individuals must make quarterly estimated tax
payments by April 15, June 15, September 15, and January 15 of
the following taxable year. Wage withholding is considered to
be a payment of estimated taxes.
Suspension of time periods
In general, the period of time for performing various acts
under the Internal Revenue Code, such as filing tax returns,
paying taxes, or filing a claim for credit or refund of tax, is
suspended for any individual serving in the Armed Forces of the
United States in an area designated as a ``combat zone'' during
the period of combatant activities (sec. 7508). An individual
who becomes a prisoner of war is considered to continue in
active service and is therefore also eligible for these
suspension of time provisions. The suspension of time also
applies to an individual serving in support of such Armed
Forces in the combat zone, such as Red Cross personnel,
accredited correspondents, and civilian personnel acting under
the direction of the Armed Forces in support of those Forces.
The designation of a combat zone must be made by the President
in an Executive Order. The President must also designate the
period of combatant activities in the combat zone (the starting
date and the termination date of combat).
The suspension of time encompasses the period of service in
the combat zone during the period of combatant activities in
the zone, as well as (1) any time of continuous qualified
hospitalization resulting from injury received in the combat
zone \3\ or (2) time in missing in action status, plus the next
180 days.
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\3\ Two special rules apply to continuous hospitalization inside
the United States. First, the suspension of time provisions based on
continuous hospitalization inside the United States are applicable only
to the hospitalized individual; they are not applicable to the spouse
of such individual. Second, in no event do the suspension of time
provisions based on continuous hospitalization inside the United States
extend beyond five years from the date the individual returns to the
United States. These two special rules do not apply to continuous
hospitalization outside the United States.
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The suspension of time applies to the following acts:
(1) Filing any return of income, estate, or gift tax
(except employment and withholding taxes);
(2) Payment of any income, estate, or gift tax
(except employment and withholding taxes);
(3) Filing a petition with the Tax Court for
redetermination of a deficiency, or for review of a
decision rendered by the Tax Court;
(4) Allowance of a credit or refund of any tax;
(5) Filing a claim for credit or refund of any tax;
(6) Bringing suit upon any such claim for credit or
refund;
(7) Assessment of any tax;
(8) Giving or making any notice or demand for the
payment of any tax, or with respect to any liability to
the United States in respect of any tax;
(9) Collection of the amount of any liability in
respect of any tax;
(10) Bringing suit by the United States in respect of
any liability in respect of any tax; and
(11) Any other act required or permitted under the
internal revenue laws specified in regulations
prescribed under section 7508 by the Secretary of the
Treasury.
Individuals may, if they choose, perform any of these acts
during the period of suspension.
Spouses of qualifying individuals are entitled to the same
suspension of time, except that the spouse is ineligible for
this suspension for any taxable year beginning more than two
years after the date of termination of combatant activities in
the combat zone.
Exclusion for combat zone compensation
Gross income does not include certain combat zone
compensation of members of the Armed Forces (sec. 112). If
enlisted personnel serve in a combat zone during any part of
any month, military pay for that month is excluded from gross
income. In addition, if enlisted personnel are hospitalized as
a result of injuries, wounds, or disease incurred in a combat
zone, military pay for that month is also excluded from gross
income; this exclusion is limited, however, to hospitalization
during any part of any month beginning not more than two years
after the end of combat in the zone. In the case of
commissioned officers, these exclusions from income are limited
to the maximum enlisted amount \4\ of military pay.
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\4\ This is defined as the higher rate of basic pay at the highest
pay grade applicable for that month to any enlisted member of the Armed
Forces of the United States, plus, in the case of an officer entitled
to combat pay, the amount of combat pay payable to that officer for
that month. (sec. 112(c)(5)).
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Income tax withholding does not apply to military pay to
the extent that an employee (whether enlisted personnel or
commissioned officer) is entitled to the exclusion from income
for combat pay (sec. 3401(a)(1)).
Exemption from tax upon death in a combat zone
An individual in active service as a member of the Armed
Forces who dies while serving in a combat zone (or as a result
of wounds, disease, or injury received while serving in a
combat zone) is not subject to income tax for the year of death
(as well as for any prior taxable year ending on or after the
first day the individual served in the combat zone) (sec. 692).
Special computational rules apply in the case of joint returns.
A reduction in estate taxes is also provided with respect to
individuals dying under these circumstances (sec. 2201).
Special rules permit the filing of a joint return where a
spouse is in missing status as a result of service in a combat
zone (sec. 6013(f)(1)). Special rules for determining surviving
spouse status apply where the deceased spouse was in missing
status as a result of service in a combat zone (sec. 2(a)(3)).
Exemption from telephone excise tax
The telephone excise tax is not imposed on ``any toll
telephone service'' that originates in a combat zone (sec.
4253(d)).
Operation Desert Storm: Executive Order designating Persian Gulf Area
as a combat zone
On January 21, 1991, President Bush signed Executive Order
12744, designating the Persian Gulf Area as a combat zone. This
designation was retroactive to January 17, 1991, the date
combat commenced in that area, and continues in effect until
terminated by another Executive Order. An Executive Order
terminating this combat zone designation has not been issued.
Thus, individuals serving in the Persian Gulf Area are eligible
for the suspension of time provisions and military pay
exclusions (among other provisions) described above, beginning
on January 17, 1991.
The Executive Order specifies that the Persian Gulf Area is
the Persian Gulf, the Red Sea, the Gulf of Oman, part of the
Arabian Sea, the Gulf of Aden, and the entire land areas of
Iraq, Kuwait, Saudi Arabia, Oman, Bahrain, Qatar, and the
United Arab Emirates.
Operation Desert Shield: Legislative extension of time
On January 30, 1991, President Bush signed Public Law 102-
2. This Act amended section 7508 by providing that any
individual who performs Desert Shield services (and the spouse
of such an individual) is entitled to the benefits of the
suspension of time provisions of section 7508. Desert Shield
services are defined as services in the Armed Forces of the
United States (or in support of those Armed Forces) if such
services are performed in the area designated by the President
as the ``Persian Gulf Desert Shield area'' and such services
are performed during the period beginning August 2, 1990, and
ending on the date on which any portion of the area was
designated by the President as a combat zone pursuant to
section 112 (which was January 17, 1991).
Operation Joint Endeavor: Administrative extension of time
On December 12, 1995, the Internal Revenue Service
announced \5\ that it was administratively extending the time
to file tax returns until December 15, 1996, for members of the
Armed Forces ``departing 'Operation Joint Endeavor''' on or
after March 1, 1996. In addition, the IRS stated that the
penalties for failure to file tax returns and failure to pay
taxes would not be assessed with respect to these individuals.
Also, the IRS stated that it would administratively place any
balance due accounts into suspense status and suspend
examinations while the member is serving in ``Operation Joint
Endeavor.''
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\5\ Letter dated December 12, 1995, from John T. Lyons, Assistant
Commissioner (International), Internal Revenue Service, to Lt. Col.
David M. Pronchick, Armed Forces Tax Counsel, Department of Defense.
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Operation Joint Endeavor and Operation Able Sentry: Legislative
treatment as if a combat zone
Pursuant to Public Law 104-117,\6\ a qualified hazardous
duty area is treated in the same manner as if it were a combat
zone for purposes of the following provisions of the Code:
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\6\ 110 Stat. 827 (March 20, 1996).
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(1) the special rule for determining surviving spouse
status where the deceased spouse was in missing status
as a result of service in a combat zone (sec. 2(a)(3));
(2) the exclusions from income for combat pay (sec.
112);
(3) forgiveness of income taxes of members of the
Armed Forces dying in the combat zone or by reason of
combat-zone incurred wounds (sec. 692);
(4) the reduction in estate taxes for members of the
Armed Forces dying in the combat zone or by reason of
combat-zone incurred wounds (sec. 2201);
(5) the exemption from income tax withholding for
military pay for any month in which an employee is
entitled to the exclusion from income (sec.
3401(a)(1));
(6) the exemption from the telephone excise tax for
toll telephone service that originates in a combat zone
(sec. 4253(d));
(7) the special rule permitting filing of a joint
return where a spouse is in missing status as a result
of service in a combat zone (sec. 6013(f)(1)); and
(8) the suspension of time provisions (sec. 7508).
A qualified hazardous duty area means Bosnia and
Herzegovina, Croatia, or Macedonia, if, as of the date of
enactment, any member of the Armed Forces is entitled to
hostile fire/imminent danger pay for services performed in such
country. Members of the Armed Forces are in Bosnia and
Herzegovina and Croatia as part of ``Operation Joint Endeavor''
(the NATO operation).\7\ Members of the Armed Forces are in
Macedonia as part of ``Operation Able Sentry'' (the United
Nations operation). In addition, persons other than Members of
the Armed Forces who are serving in support of these operations
of the Armed Forces are eligible for the suspension of time
provisions in section 7508 of the Code.\8\ This provision was
effective on November 21, 1995 (the date the Dayton Accord was
initialed).
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\7\ Operation Joint Endeavor has been replaced by Operation Joint
Forge. The IRS has stated that personnel serving under Operation Joint
Forge will be treated the same as personnel under Operation Joint
Endeavor because Joint Forge is ``the substantive continuation'' of
Joint Endeavor. Letter dated July 17, 1998, from Tommy G. DeWeese,
District Director for the International District, Internal Revenue
Service, to LTC Thomas K. Emswiler, Armed Forces Tax Council,
Department of Defense.
\8\ In addition, persons other than Members of the Armed Forces are
eligible for some of the other seven provisions listed above, under
specified circumstances. For example, civilian employees of the United
States are eligible for the forgiveness of income tax provisions of
section 692 if they die as a result of injuries sustained overseas in
specified terroristic or military actions.
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Suspension of time provisions for other Operation Joint Endeavor
personnel
An individual who is performing services as part of
Operation Joint Endeavor outside the United States while
deployed away from the individual's permanent duty station will
qualify for the suspension of time provisions in section 7508
of the Code during the period that hostile fire/imminent danger
pay is paid in Bosnia and Herzegovina, Croatia, or Macedonia.
Announcement of intention to issue Executive Order designating Kosovo
area of operations as a combat zone
On April 12, 1999, President Clinton announced his
intention to issue an Executive Order designating the Federal
Republic of Yugoslavia (Serbia/Montenegro), Albania, the
Adriatic Sea, and the northern Ionian Sea (including all of
their air spaces) as a combat zone for purposes of the Internal
Revenue Code.
Reasons for Change
The Congress believed that it was appropriate to apply the
special tax rules applicable to combat zones to service in the
Federal Republic of Yugoslavia (Serbia/Montenegro), Albania,
the Adriatic Sea, and the Northern Ionian Sea in the same
manner as if those areas were a combat zone. In addition, the
Congress believed that it was appropriate to provide that
military personnel performing services outside of those areas
but still a part of Operation Allied Force qualify for the
suspension of time provisions in section 7508 of the Code
during the period that hostile fire/imminent danger pay is paid
with respect to those areas, provided that those services are
performed both outside the United States and while deployed
away from that individual's duty station.
Explanation of Provision
The Act contains two elements. First, the Act treats the
Federal Republic of Yugoslavia (Serbia/Montenegro), Albania,
the Adriatic Sea, and the northern Ionian Sea above the 39th
parallel (including all of their air spaces) as a qualified
hazardous duty area. Consequently, military personnel serving
in those areas are entitled to relief under all eight of the
hazardous duty area provisions listed above. Several special
rules apply to civilian personnel. Civilian personnel serving
in those areas in support of the Armed Forces are entitled to
the suspension of time provisions in section 7508 of the Code.
In addition, civilian employees of the United States serving in
those areas are entitled to (a) the special rule for
determining surviving spouse status where the deceased spouse
was in missing status as a result of service in a combat zone
(sec. 2(a)(3)); (b) forgiveness of income taxes of employees
dying in the combat zone or by reason of combat-zone incurred
wounds (sec. 692); and (c) the special rule permitting filing
of a joint return where a spouse is in missing status as a
result of service in a combat zone (sec. 6013(f)(1)).
Second, the Act also provides that military personnel
performing services outside of those areas but still a part of
Operation Allied Force qualify for the suspension of time
provisions in section 7508 of the Code during the period that
hostile fire/imminent danger pay is paid with respect to those
areas, provided that those services are performed both outside
the United States and while deployed away from that
individual's duty station.
Accordingly, the Act provides the same treatment for those
serving in (or in support of) Operation Allied Force as is
provided under present law to those serving in (or in support
of) Operation Joint Endeavor.
Effective Date
The provision is effective on March 24, 1999 (the date on
which Operation Allied Force commenced).
Revenue Effect
The provision is estimated to have a negligible effect on
Federal fiscal year budget receipts.
PART TWO: MISCELLANEOUS TRADE AND TECHNICAL CORRECTIONS ACT OF 1999
(PUBLIC LAW 106-36) \9\
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\9\ H.R. 435 was referred to the House Committee on Ways and Means
on February 2, 1999 and was passed by the House under suspension of the
rules on February 9, 1999. No separate House Report was filed.
S. 262 was reported by the Senate Committee on Finance on February
3, 1999 (S. Rep. 106-2). On May 27, 1999, the Senate passed H.R. 435,
with an amendment by Senator Snowe for Senator Roth in the nature of a
substitute (Amendment No. 481). The amendment contained provisions
similar to those of S. 262 as reported by the Senate Committee on
Finance.
Under suspension of the rules, the House concurred with the Senate
amendments to H.R. 435 on June 7, 1999.
H.R. 435 was signed by the President on June 25, 1999.
A provision substantially identical to the tax provision contained
in sec. 3001 of H.R. 435 was introduced in the House of Representatives
by Mr. Archer on October 19, 1998 (H.R. 4852) and was contained in the
Miscellaneous Trade and Technical Corrections Act of 1998 (H.R. 4856)
as passed by the House of Representatives on October 20, 1998.
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A. Property ``Subject to'' a Liability Treated in the Same Manner as an
Assumption of Liability (sec. 3001 of the Miscellaneous Trade and
Technical Corrections Act and secs. 357 and 362 of the Code)
Present and Prior Law
A transferor of property does not recognize gain or loss if
the property is exchanged solely for qualified stock in a
controlled corporation (sec. 351). The assumption by the
controlled corporation of a liability of the transferor (or the
acquisition of property ``subject to'' a liability) generally
does not cause the transferor to recognize gain. However, under
section 357(c), the transferor does recognize gain to the
extent that the sum of the assumed liabilities, together with
the liabilities to which the transferred property is subject,
exceeds the transferor's basis in the transferred property. If
the transferred property is ``subject to'' a liability,
Treasury regulations indicate that the amount of the liability
is included in the calculation regardless of whether the
underlying liability is assumed by the controlled corporation.
Similar rules apply to reorganizations described in section
368(a)(1)(D).
The gain recognition rule of section 357(c) is applied
separately to each transferor in a section 351 exchange.
The basis of the property in the hands of the controlled
corporation equals the transferor's basis in such property,
increased by the amount of gain recognized by the transferor,
including section 357(c) gain.
Reasons for Change
The tax treatment under prior law was unclear in situations
involving the transfer of certain liabilities. As a result, the
Congress was concerned that some taxpayers may be structuring
transactions to take advantage of the uncertainty. For example,
where more than one asset secures a single liability, some
taxpayers might take the position that, on a transfer of the
assets to different subsidiaries, each subsidiary counts the
entire liability in determining the basis of the asset. This
interpretation arguably might result in the duplication of tax
basis or in assets having a tax basis in excess of their value,
resulting in excessive depreciation deductions and
mismeasurement of income. The provision is intended to
eliminate the uncertainty, and to better reflect the underlying
economics of these corporate transfers.
Explanation of Provision
Under the provision, the distinction between the assumption
of a liability and the acquisition of an asset subject to a
liability generally is eliminated. First, except as provided in
Treasury regulations, a recourse liability (or any portion
thereof) is treated as having been assumed if, as determined on
the basis of all facts and circumstances, the transferee has
agreed to, and is expected to satisfy the liability or portion
thereof (whether or not the transferor has been relieved of the
liability). Thus, where more than one person agrees to satisfy
a liability or portion thereof, only one would be expected to
satisfy such liability or portion thereof. Second, except as
provided in Treasury regulations, a nonrecourse liability (or
any portion thereof) is treated as having been assumed by the
transferee of any asset that is subject to the liability.
However, this amount is reduced in cases where an owner of
other assets subject to the same nonrecourse liability agrees
with the transferee to, and is expected to, satisfy the
liability (up to the fair market value of the other assets,
determined without regard to section 7701(g)).
In determining whether any person has agreed to and is
expected to satisfy a liability, all facts and circumstances
are to be considered. In any case where the transferee does
agree to satisfy a liability, the transferee also will be
expected to satisfy the liability in the absence of facts
indicating the contrary.
In determining any increase to the basis of property
transferred to the transferee as a result of gain recognized
because of the assumption of liabilities under section 357, in
no event will the increase cause the basis to exceed the fair
market value of the property (determined without regard to sec.
7701(g)).
If gain is recognized to the transferor as the result of an
assumption by a corporation of a nonrecourse liability that
also is secured by any assets not transferred to the
corporation, and if no person is subject to Federal income tax
on such gain, then for purposes of determining the basis of
assets transferred, the amount of gain treated as recognized as
the result of such assumption of liability shall be determined
as if the liability assumed by the transferee equaled such
transferee's ratable portion of the liability, based on the
relative fair market values (determined without regard to sec.
7701(g)) of all assets subject to such nonrecourse liability.
In no event will the gain cause the resulting basis to exceed
the fair market value of the property (determined without
regard to sec. 7701(g)).
The Treasury Department has authority to prescribe such
regulations as may be necessary to carry out the purposes of
the provision. This authority includes the authority to specify
adjustments in the treatment of any subsequent transactions
involving the liability, including the treatment of payments
actually made with respect to any liability as well as
appropriate basis and other adjustments with respect to such
payments. Where appropriate, the Treasury Department also may
prescribe regulations that provide that the manner in which a
liability is treated as assumed under the provision is applied
elsewhere in the Code.
Effective Date
The provision is effective for transfers on or after
October 19, 1998. No inference regarding the tax treatment
under prior law is intended.
Revenue Effect
The provision is estimated to increase Federal fiscal year
budget receipts by $7 million in 1999, $12 million in 2000, $14
million in 2001, $16 million in 2002, $18 million in 2003, $20
million in 2004, $22 million in 2005, $24 million in 2006, $26
million in 2007, $28 million in 2008, $30 million in 2009, and
$32 million in 2010.
PART THREE: TAX RELIEF EXTENSION ACT OF 1999 (PUBLIC LAW 106-170) \10\
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\10\ The Tax Relief Extension Act was enacted as Title V of the
Ticket to Work and Work Incentives Improvement Act of 1999 (H.R. 1180).
For legislative background, see H.R. 2923, as reported by the House
Ways and Means Committee, H. Rep. 106-344 (September 28, 1999); S.
1792, as reported by the Senate Finance Committee, S. Rep. 106-201
(October 26, 1999); and Title V of H.R. 1180, H. Rep. 106-478 (Joint
Explanatory Statement of the Committee on Conference) (November 17,
1999). Reasons for change appearing in this document for the provisions
in this Act are taken from H. Rep. 106-344 or S. Rep. 106-201 unless
otherwise indicated.
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I. EXTENSION OF EXPIRING TAX PROVISIONS
A. Extend Minimum Tax Relief for Individuals (sec. 501 of the Tax
Relief Extension Act and secs. 24 and 26 of the Code)
Present and Prior Law
Present and prior law provides 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). Under prior law, except for
taxable years beginning during 1998, these credits were 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 minimum tax foreign tax
credit; for taxable years beginning during 1998, these credits
were allowed to the extent of the full amount of the
individual's regular tax (without regard to the tentative
minimum tax).
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)). Under prior law, for
taxable years beginning after 1998, the refundable child credit
was 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 Congress believed that middle-income families should be
able to use the nonrefundable credits without limitation by
reason of the minimum tax. This provision will result in
significant simplification by reducing the number of
individuals required to make AMT computations for purposes of
determining their personal credits.
Explanation of Provision
The Tax Relief Extension Act extends the provision that
allows the nonrefundable credits to offset the individual's
regular tax liability in full (as opposed to only the amount by
which the regular tax exceeds the tentative minimum tax) to
taxable years beginning in 1999. For taxable years beginning in
2000 and 2001 the personal nonrefundable credits may offset
both the regular tax and the minimum tax.\11\
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\11\ The foreign tax credit will be allowed before the personal
credits in computing the regular tax for these years.
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Under the Tax Relief Extension Act, the refundable child
credit will not be reduced by the amount of an individual's
minimum tax in taxable years beginning in 1999, 2000, and 2001.
Effective Date
The provisions apply to taxable years beginning in 1999,
2000, and 2001.
Revenue Effect
The provisions are estimated to reduce Federal fiscal year
budget receipts by $972 million in 2000, $977 million in 2001,
and $943 million in 2002.
B. Extension of Research Tax Credit (sec. 502 of the Tax Relief
Extension 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, 1999.
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 3.0 percent. Expenditures
attributable to research that is conducted outside the United
States do not enter into the credit computation.
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.
In addition, the Congress believed the alternative
incremental credit enacted in 1996 should be strengthened. The
alternative incremental research credit was enacted to respond
to the changing economic circumstances of many taxpayers, which
invest heavily in research. However, the Congress believed
that, under current law, the alternative incremental research
credit provides less of a research incentive than does the
regular research and experimentation tax credit. Therefore, the
Congress believed it was appropriate to increase the rate of
the alternative incremental research credit.
Lastly, the Congress believed that qualified research
expenditures incurred in Puerto Rico and other possessions
should qualify for purposes of determination of the research
credit, so long as such expenses are not otherwise related to
credits allowable under sec. 30A (``Puerto Rico economic
activity credit'') or under sec. 936 (``Puerto Rico and
possession tax credit'').
Explanation of Provision
The provision extends the research credit through June 30,
2004.
In addition, the provision increases the credit rate
applicable under the alternative incremental research credit by
one percentage point per step. The provision also expands the
definition of qualified research to include research undertaken
in Puerto Rico and possessions of the United States.
Research tax credits that are attributable to the period
beginning on July 1, 1999, and ending on September 30, 2000,
may not be taken into account in determining any amount
required to be paid for any purpose under the Internal Revenue
Code prior to October 1, 2000. On or after October 1, 2000,
such credits may be taken into account through the filing of an
amended return, an application for expedited refund, an
adjustment of estimated taxes, or other means that are allowed
by the Code. The prohibition on taking credits attributable to
the period beginning on July 1, 1999, and ending on September
30, 2000, into account as payments prior to October 1, 2000,
extends to the determination of any penalty or interest under
the Code. For example, the amount of tax required to be shown
on a return that is due prior to October 1, 2000 (excluding
extensions) may not be reduced by any such credits. In
addition, the Congress clarified that deductions under section
174 are reduced by credits allowable under section 41 as under
present law, not withstanding the delay in taking the credit
into account created by this provision.
Similarly, research tax credits that are attributable to
the period beginning October 1, 2000, and ending on September
30, 2001, may not be taken into account in determining any
amount required to be paid for any purpose under the Internal
Revenue Code prior to October 1, 2001. On or after October 1,
2001, such credits may be taken into account through the filing
of an amended return, an application for expedited refund, an
adjustment of estimated taxes, or other means that are allowed
by the Code. Likewise, the prohibition on taking credits
attributable to the period beginning on October 1, 2000, and
ending on September 30, 2001, into account as payments prior to
October 1, 2001, extends to the determination of any penalty or
interest under the Code.
In extending the research credit, the Congress expressed
concern that the definition of qualified research be
administered in a manner that is consistent with the intent
Congress has expressed in enacting and extending the research
credit. The Congress urged the Secretary to consider carefully
the comments he had and may receive regarding the proposed
regulations relating to the computation of the credit under
section 41(c) and the definition of qualified research under
section 41(d), particularly regarding the ``common knowledge''
standard. The Congress further noted the rapid pace of
technological advance, especially in service-related
industries, and urged the Secretary to consider carefully the
comments he had and may receive in promulgating regulations in
connection with what constitutes ``internal use'' with regard
to software expenditures. The Congress also observed that
software research, that otherwise satisfies the requirements of
section 41, which is undertaken to support the provision of a
service, should not be deemed ``internal use'' solely because
the business component involves the provision of a service.
The Congress reaffirmed that qualified research is research
undertaken for the purpose of discovering new information,
which is technological in nature. For purposes of applying this
definition, new information is information that is new to the
taxpayer, is not freely available to the general public, and
otherwise satisfies the requirements of section 41. Employing
existing technologies in a particular field or relying on
existing principles of engineering or science is qualified
research, if such activities are otherwise undertaken for
purposes of discovering information and satisfy the other
requirements under section 41.
The Congress also was concerned about unnecessary and
costly taxpayer record keeping burdens and reaffirm that
eligibility for the credit is not intended to be contingent on
meeting unreasonable record keeping requirements.
Effective Date
The extension of the research credit is effective for
qualified research expenditures paid or incurred during the
period July 1, 1999, through June 30, 2004. The increase in the
credit rate under the alternative incremental research credit
is effective for taxable years beginning after June 30, 1999.
Revenue Effect
The provision is estimated to reduce Federal fiscal year
receipts by $1,661 million in 2001, $4,082 million in 2002,
$2,541 million in 2003, $2,242 million in 2004, $1,343 million
in 2005, $708 million in 2006, $386 million in 2007, $150
million in 2008, and $26 million in 2009.
C. Subpart F Exemption for Active Financing Income (sec. 503 of the Tax
Relief Extension Act and secs. 953 and 954 of the Code)
Present and Prior Law
Under the subpart F rules, 10-percent 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. In addition, 10-percent U.S.
shareholders of a CFC 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, foreign base company services income, and insurance
income apply for subpart F purposes for certain income that is
derived in the active conduct of a banking, financing, or
similar business, or in the conduct of an insurance business
(so-called ``active financing income''). These exceptions are
applicable only for taxable years beginning in 1999.\12\
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\12\ Temporary exceptions from the subpart F provisions for certain
active financing income applied only for taxable years beginning in
1998. Those exceptions were extended and modified as part of the
present-law provision.
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With respect to income derived in the active conduct of a
banking, financing, or similar business, a CFC is required to
be predominantly engaged in such business and to conduct
substantial activity with respect to such business in order to
qualify for the exceptions. In addition, certain nexus
requirements apply, which provide that income derived by a CFC
or a qualified business unit (``QBU'') of a CFC 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. Moreover, the exceptions apply to
income derived from certain cross border transactions, provided
that certain requirements are met. Additional exceptions from
foreign personal holding company income apply for certain
income derived by a securities dealer within the meaning of
section 475 and for gain from the sale of active financing
assets.
In the case of insurance, in addition to a temporary
exception from foreign personal holding company income for
certain income of a qualifying insurance company with respect
to risks located within the CFC's country of creation or
organization, certain temporary exceptions from insurance
income and from foreign personal holding company income apply
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, additional temporary
exceptions from insurance income and from foreign personal
holding company income apply for certain income of certain CFCs
or branches with respect to risks located in a country other
than the United States, provided that the requirements for
these exceptions are met.
Reasons for Change
In the Taxpayer Relief Act of 1997, one-year temporary
exceptions from foreign personal holding company income were
enacted \13\ for income from the active conduct of an
insurance, banking, financing, or similar business. In the Tax
and Trade Relief Extension Act of 1998 (the ``1998 Act''),\14\
the Congress extended the temporary exceptions for an
additional year, with certain modifications designed to treat
various types of businesses with active financing income more
similarly to each other than did the 1997 provision. The
Congress believed that it was appropriate to extend the
temporary exceptions, as modified in the 1998 Act, for another
two years.
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\13\ The President canceled this provision in 1997 pursuant to 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).
\14\ The Tax and Trade Relief Extension Act of 1998, Division J,
Making Omnibus Consolidated and Emergency Supplemental Appropriations
for Fiscal Year 1999, P.L. 105-277, sec. 1005, 112 Stat. 2681 (1998).
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Explanation of Provision
The provision extends for two years the present-law
temporary exceptions from subpart F foreign personal holding
company income, foreign base company services income, and
insurance income for certain income that is derived in the
active conduct of a banking, financing, or similar business, or
in the conduct of an insurance business.
The Congress clarified that if the temporary exception from
subpart F insurance income does not apply for a taxable year
beginning after December 31, 2001, section 953(a) is to be
applied to such taxable year in the same manner as it would for
a taxable year beginning in 1998 (i.e., under the law in effect
before amendments to section 953(a) were made in 1998).\15\
Thus, for future periods in which the temporary exception
relating to insurance income is not in effect, the same-country
exception from subpart F insurance income applies as under
prior law.
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\15\ Id.
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Effective Date
The provision is effective for taxable years of foreign
corporations beginning after December 31, 1999, and before
January 1, 2002, and for taxable years of U.S. shareholders
with or within which such taxable years of such foreign
corporations end.
Revenue Effect
The provision is estimated to reduce Federal fiscal year
budget receipts by $187 million in 2000, $785 million in 2001,
and $744 million in 2002.
D. Taxable Income Limit on Percentage Depletion for Marginal Production
(sec. 504 of the Tax Relief Extension Act and sec. 613A of the Code)
Present Law
In general
Depletion, like depreciation, is a form of capital cost
recovery. In both cases, the taxpayer is allowed a deduction in
recognition of the fact that an asset--in the case of depletion
for oil or gas interests, the mineral reserve itself--is being
expended in order to produce income. Certain costs incurred
prior to drilling an oil or gas property are recovered through
the depletion deduction. These include costs of acquiring the
lease or other interest in the property and geological and
geophysical costs (in advance of actual drilling). Depletion is
available to any person having an economic interest in a
producing property.
Two methods of depletion are allowable under the Code: (1)
the cost depletion method, and (2) the percentage depletion
method (secs. 611-613). Under the cost depletion method, the
taxpayer deducts that portion of the adjusted basis of the
depletable property which is equal to the ratio of units sold
from that property during the taxable year to the number of
units remaining as of the end of taxable year plus the number
of units sold during the taxable year. Thus, the amount
recovered under cost depletion may never exceed the taxpayer's
basis in the property.
Under the percentage depletion method, generally, 15
percent of the taxpayer's gross income from an oil- or gas-
producing property is allowed as a deduction in each taxable
year (sec. 613A(c)). The amount deducted generally may not
exceed 100 percent of the net income from that property in any
year (the ``net-income limitation'') (sec. 613(a)). The
Taxpayer Relief Act of 1997 suspended the 100-percent-of-net-
income limitation for production from marginal wells for
taxable years beginning after December 31, 1997, and before
January 1, 2000. Additionally, the percentage depletion
deduction for all oil and gas properties may not exceed 65
percent of the taxpayer's overall taxable income (determined
before such deduction and adjusted for certain loss carrybacks
and trust distributions) (sec. 613A(d)(1)).\16\ Because
percentage depletion, unlike cost depletion, is computed
without regard to the taxpayer's basis in the depletable
property, cumulative depletion deductions may be greater than
the amount expended by the taxpayer to acquire or develop the
property.
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\16\ Amounts disallowed as a result of this rule may be carried
forward and deducted in subsequent taxable years, subject to the 65-
percent taxable income limitation for those years.
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A taxpayer is required to determine the depletion deduction
for each oil or gas property under both the percentage
depletion method (if the taxpayer is entitled to use this
method) and the cost depletion method. If the cost depletion
deduction is larger, the taxpayer must utilize that method for
the taxable year in question (sec. 613(a)).
Limitation of oil and gas percentage depletion to independent producers
and royalty owners
Generally, only independent producers and royalty owners
(as contrasted to integrated oil companies) are allowed to
claim percentage depletion. Percentage depletion for eligible
taxpayers is allowed only with respect to up to 1,000 barrels
of average daily production of domestic crude oil or an
equivalent amount of domestic natural gas (sec. 613A(c)). For
producers of both oil and natural gas, this limitation applies
on a combined basis.
In addition to the independent producer and royalty owner
exception, certain sales of natural gas under a fixed contract
in effect on February 1, 1975, and certain natural gas from
geopressured brine, are eligible for percentage depletion, at
rates of 22 percent and 10 percent, respectively. These
exceptions apply without regard to the 1,000-barrel-per-day
limitation and regardless of whether the producer is an
independent producer or an integrated oil company.
Reasons for Change
The Congress noted that oil is, and will continue to be,
vital to the American economy. The Congress observed that low
oil prices had created substantial economic hardship in the oil
industry and particularly in those communities where the
majority of jobs are related to providing this vital commodity
to the nation. Skilled workers and industry know-how will be
critical to the exploration for and production of oil and gas
in the future. The Congress, therefore, was concerned that
economic hardship in the industry could lead to business
failures and job losses.
Explanation of Provision
The provision extends the period when the 100-percent net-
income limit is suspended to include taxable years beginning
after December 31, 1999 and before January 1, 2002.
Effective Date
The provision became effective on the date of enactment
(December 17, 1999).
Revenue Effect
The provision is estimated to reduce Federal fiscal year
revenues by $23 million in 2000, by $35 million in 2001, and by
$12 million in 2002.
E. Extend the Work Opportunity Tax Credit (sec. 505 of the Tax Relief
Extension Act and sec. 51 of the Code)
Present and Prior Law
In general
The work opportunity tax credit (``WOTC''), which expired
on June 30, 1999, 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. Generally, 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.
The maximum credit per employee is $2,400 (40% 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
The credit was effective for wages paid or incurred to a
qualified individual who began work for an employer before July
1, 1999.
Reasons for Change
The Congress believed the preliminary experience of the
WOTC is promising as an incentive for employers to hire
individuals who are under-skilled, undereducated, or who
generally may be less desirable (e.g., lacking in work
experience) to employers. A temporary extension of this credit
will allow the Congress and the Treasury and Labor Departments
to continue to monitor the effectiveness of the credit. The
Congress also believed that the electronic filing of the
request for certification (the ``Form 8850'') will reduce the
administrative burden involved in claiming the credit and
encourage more employers to participate in the program.
Explanation of Provision
The Tax Relief Extension Act provides for a 30-month
extension of the work opportunity tax credit (through December
31, 2001) and includes a clarification of the definition of
first year of employment for purposes of the WOTC. Also, the
Tax Relief Extension Act directed the Secretary of the Treasury
to expedite the use of electronic filing of requests for
certification under the credit.
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, 1999, and before January 1, 2002.
Revenue Effect
The provision is estimated to reduce Federal fiscal year
budget receipts by $229 million in 2000, $321 million in 2001,
$293 million in 2002, $151 million in 2003, $58 million in
2004, $19 million in 2005, and $3 million in 2006.
F. Extend the Welfare-To-Work Tax Credit (sec. 505 of the Tax Relief
Extension Act and sec. 51A of the Code)
Present and Prior Law
The Code provided to employers a tax credit on the first
$20,000 of eligible wages paid to qualified long-term family
assistance (AFDC or its successor program) 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 has received family assistance for at
least 18 consecutive months ending on the hiring date; (2)
members of a family that has received family assistance for a
total of at least 18 months (whether or not consecutive) after
the date of enactment of this credit 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)
health plan coverage for the employee, but not more than the
applicable premium defined under section 4980B(f)(4); and (3)
dependent care assistance excludable under section 129.
The welfare to work credit was effective for wages paid or
incurred to a qualified individual who begins work for an
employer on or after January 1, 1998, and before July 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 Tax Relief Extension Act provides for a 30-month
extension of the welfare-to-work tax credit (through December
31, 2001).
Effective Date
The provision is effective for wages paid or incurred to a
qualified individual who begins work for an employer on or
after July 1, 1999, and before January 1, 2002.
Revenue Effect
The provision is estimated to reduce Federal fiscal year
budget receipts by $49 million in 2000, $77 million in 2001,
$79 million in 2002, $47 million in 2003, $19 million in 2004,
$7 million in 2005, and $2 million in 2006.
G. Extend Exclusion for Employer-Provided Educational Assistance (sec.
506 of the Tax Relief Extension Act and sec. 127 of the Code)
Present and Prior Law
Educational expenses paid by an employer for the employer's
employees are generally deductible to the employer.
Employer-paid educational expenses are excludable from the
gross income and wages of an employee if provided under a
section 127 educational assistance plan or if the expenses
qualify as a working condition fringe benefit under section
132. Section 127 provides an exclusion of $5,250 annually for
employer-provided educational assistance. Under prior law, the
exclusion expired with respect to graduate-level courses
beginning after June 30, 1996. With respect to undergraduate-
level courses, the exclusion for employer-provided educational
assistance expired under prior law with respect to courses
beginning on or after June 1, 2000.
In order for the exclusion to apply, certain requirements
must be satisfied. The educational assistance must be provided
pursuant to a separate written plan of the employer. The
educational assistance program must not discriminate in favor
of highly compensated employees. In addition, not more than 5
percent of the amounts paid or incurred by the employer during
the year for educational assistance under a qualified
educational assistance plan can be provided for the class of
individuals consisting of more than 5-percent owners of the
employer (and their spouses and dependents).
Educational expenses that do not qualify for the section
127 exclusion may be excludable from income as a working
condition fringe benefit.\17\ In general, education qualifies
as a working condition fringe benefit if the employee could
have deducted the education expenses under section 162 if the
employee paid for the education. In general, education expenses
are deductible by an individual under section 162 if the
education (1) maintains or improves a skill required in a trade
or business currently engaged in by the taxpayer, or (2) meets
the express requirements of the taxpayer's employer, applicable
law or regulations imposed as a condition of continued
employment. However, education expenses are generally not
deductible if they relate to certain minimum educational
requirements or to education or training that enables a
taxpayer to begin working in a new trade or business.\18\
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\17\ These rules also apply in the event that section 127 expires
and is not reinstated.
\18\ In the case of an employee, education expenses (if not
reimbursed by the employer) may be claimed as an itemized deduction
only if such expenses, along with other miscellaneous deductions,
exceed 2 percent of the taxpayer's AGI. The 2-percent floor limitation
is disregarded in determining whether an item is excludable as a
working condition fringe benefit.
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Reasons for Change
The Congress believed that the exclusion for employer-
provided educational assistance has enabled millions of workers
to advance their education and improve their job skills without
incurring additional taxes and a reduction in take-home pay. In
addition, the exclusion lessens the complexity of the tax laws.
Without the special exclusion, a worker receiving educational
assistance from his or her employer is subject to tax on the
assistance, unless the education is related to the worker's
current job. Because the determination of whether particular
educational assistance is job-related is based on the facts and
circumstances, it may be difficult to determine with certainty
whether the educational assistance is excludable from income.
This uncertainty may lead to disputes between taxpayers and the
Internal Revenue Service.
The past experience of allowing the exclusion to expire and
subsequently retroactively extending it has created burdens for
employers and employees. Employees may have difficulty planning
for their educational goals if they do not know whether their
tax bills will increase. For employers, the fits and starts of
the legislative history of the provision have caused severe
administrative problems. The Congress believed that uncertainty
about the exclusion's future may discourage some employers from
providing educational benefits. Thus, the Congress believed it
appropriate to extend the provisions so that employers and
employees can plan for some time into the future.
Explanation of Provision
The Tax Relief Extension Act extends the exclusion for
employer-provided educational assistance through December 31,
2001. The exclusion does not apply with respect to graduate-
level courses.
Effective Date
The provision is effective with respect to courses
beginning after May 31, 2000, and before January 1, 2002.
Revenue Effect
The provision is estimated to reduce Federal fiscal year
budget receipts by $134 million in 2000, $318 million in 2001,
and $132 million in 2002.
H. Extension and Modification of Credit for Producing Electricity From
Certain Renewable Resources (sec. 507 of the Tax Relief Extension Act
and sec. 45 of the Code)
Present and Prior Law
An income tax credit is allowed for the production of
electricity from either qualified wind energy or qualified
``closed-loop'' biomass facilities (sec. 45).
The credit applies to electricity produced by a qualified
wind energy facility placed in service after December 31, 1993,
and before July 1, 1999, and to electricity produced by a
qualified closed-loop biomass facility placed in service after
December 31, 1992, and before July 1, 1999. The credit is
allowable for production during the 10-year period after a
facility is originally placed in service.
Closed-loop biomass is the use of plant matter, where the
plants are grown for the sole purpose of being used to generate
electricity. It does not include the use of waste materials
(including, but not limited to, scrap wood, manure, and
municipal or agricultural waste). The credit also is not
available to taxpayers who use standing timber to produce
electricity. In order to claim the credit, a taxpayer must own
the facility and sell the electricity produced by the facility
to an unrelated party.
The credit for electricity produced from wind or closed-
loop biomass is a component of the general business credit
(sec. 28(b)(1)). This credit, when combined with all other
components of the general business credit, generally may not
exceed for any taxable year the excess of the taxpayer's net
income tax over the greater of (1) 25 percent of net regular
tax liability above $25,000 or (2) the tentative minimum tax.
An unused general business credit generally may be carried back
one taxable year and carried forward 20 taxable years (sec.
39).
Reasons for Change
The Congress believed that the credit provided under
section 45 has been important to the development of
environmentally friendly, renewable wind power and that
extending the placed in service date will increase the further
development of wind resources.
The Congress observed, however, that there is organic waste
that is disposed of in an uncontrolled manner. Such organic
waste can be a fuel source that, if utilized, can promote a
cleaner environment. The Congress believed that providing a
credit to utilize these organic fuel sources can help produce
needed electricity while providing environmental benefits for
communities and the nation.
Explanation of Provision
The provision extends the present-law tax credit for
electricity produced by wind and closed-loop biomass for
facilities placed in service after June 30, 1999, and before
January 1, 2002. The provision also modifies the tax credit to
include electricity produced from poultry litter, for
facilities placed in service after December 31, 1999, and
before January 1, 2002. In addition, the provision clarifies
which wind facilities are eligible for the credit.
Effective Date
The provision is effective on the date of enactment
(December 17, 1999).
Revenue Effect
The provision is estimated to reduce Federal fiscal year
receipts by $9 million in 2000, $25 million in 2001, $33
million in 2002, $33 million in 2003, $34 million in 2004, $35
million in 2005, $36 million in 2006, $37 million in 2007, $38
million in 2008, $38 million in 2009, and $39 million in 2010.
I. Extension of Authority to Issue Qualified Zone Academy Bonds (sec.
509 of the Tax Relief Extension Act and sec. 1397E of the Code)
Present and Prior Law
Tax-exempt bonds
Interest on State and local governmental bonds generally is
excluded from gross income for Federal income tax purposes if
the proceeds of the bonds are used to finance direct activities
of these governmental units or if the bonds are repaid with
revenues of the governmental units, including the financing of
public schools (sec. 103).
Qualified zone academy bonds
As an alternative to traditional tax-exempt bonds, States
and local governments are given the authority to issue
``qualified zone academy bonds'' (``QZABs'') (sec. 1397E). A
total of $400 million of qualified zone academy bonds could be
issued in each of 1998 and 1999. The $400 million aggregate
bond cap is allocated each year to the States according to
their respective populations of individuals below the poverty
line. Each State, in turn, allocates the credit authority to
qualified zone academies within such State. Under prior law, a
State could carry over any unused allocation indefinitely into
subsequent years.
Certain financial institutions that hold qualified zone
academy bonds are entitled to a nonrefundable tax credit in an
amount equal to a credit rate multiplied by the face amount of
the bond. A taxpayer holding a qualified zone academy bond on
the credit allowance date is entitled to a credit. The credit
is includable in gross income (as if it were a taxable interest
payment on the bond), and may be claimed against regular income
tax and AMT liability.
The Treasury Department sets the credit rate at a rate
estimated to allow issuance of qualified zone academy bonds
without discount and without interest cost to the issuer. The
maximum term of the bond is determined by the Treasury
Department, so that the present value of the obligation to
repay the bond is 50 percent of the face value of the bond.
``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'' and (2) private entities have
promised to contribute to the qualified zone academy certain
equipment, technical assistance or training, employee services,
or other property or services with a value equal to at least 10
percent of the bond proceeds.
A school is a ``qualified zone academy'' if (1) the school
is a public school that provides education and training below
the college level, (2) the school operates a special academic
program in cooperation with businesses to enhance the academic
curriculum and increase graduation and employment rates, and
(3) either (a) the school is located in an empowerment zones
enterprise community designated under the Code, or (b) it is
reasonably expected that at least 35 percent of the students at
the school will be eligible for free or reduced-cost lunches
under the school lunch program established under the National
School Lunch Act.
Explanation of Provision
The provision authorized up to $400 million of qualified
zone academy bonds to be issued in each of calendar years 2000
and 2001. Unused QZAB authority arising in 1998 and 1999 may be
carried forward by the State or local government entity to
which it is (or was) allocated for up to three years after the
year in which the authority originally arose. Unused QZAB
authority arising in 2000 and 2001 may be carried forward for
two years after the year in which it arises. Each issuer is
deemed to use the oldest QZAB authority that has been allocated
to it first when new bonds are issued.
Effective Date
The provision became effective on the date of enactment
(December 17, 1999).
Revenue Effect
The provision is estimated to reduce Federal fiscal year
revenues by $3 million in 2000, $11 million in 2001, $20
million in 2002, $28 million in 2003, $30 million annually in
2004 through 2010.
J. Extend the Tax Credit for First-Time D.C. Homebuyers (sec. 510 of
the Tax Relief Extension Act and sec. 1400C of the Code)
Present and Prior Law
First-time homebuyers of a principal residence in the
District of Columbia are eligible for a nonrefundable tax
credit of up to $5,000 of the amount of the purchase price. The
$5,000 maximum credit applies both to individuals and married
couples. Married individuals filing separately can claim a
maximum credit of $2,500 each. The credit phases out for
individual taxpayers with adjusted gross income between $70,000
and $90,000 ($110,000-$130,000 for joint filers). For purposes
of eligibility, a ``first-time homebuyer'' means any individual
if such individual did not have a present ownership interest in
a principal residence in the District of Columbia in the one-
year period ending on the date of the purchase of the residence
to which the credit applies. Under prior law, the credit was
scheduled to expire for residences purchased after December 31,
2000.
Explanation of Provision
The provision extends the tax credit for first-time D.C.
homebuyers for one year (so that it applies to residences
purchased on or before December 31, 2001).\19\
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\19\ A subsequent provision described below in Part Eight (sec. 164
of H.R. 5662, The Community Renewal Tax Relief Act of 2000) extends the
D.C. homebuyer credit for an additional two years (through December 31,
2003).
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Effective Date
The provision is effective for residences purchased after
December 31, 2000 and before January 1, 2002.
Revenue Effect
The provision is estimated to reduce Federal fiscal year
budget receipts by $5 million in 2001, $15 million in 2002, and
less than $500,000 in each of the years 2003 through 2010.
K. Extend Expensing of Environmental Remediation Expenditures (sec. 511
of the Tax Relief Extension Act and sec. 198 of the Code)
Present and Prior Law
Taxpayers can elect to treat certain environmental
remediation expenditures that would otherwise be chargeable to
capital account as deductible in the year paid or incurred
(sec. 198). The deduction applies for both regular and
alternative minimum tax purposes. The expenditure must be
incurred in connection with the abatement or control of
hazardous substances at a qualified contaminated site.
A ``qualified contaminated site'' generally is any property
that (1) is held for use in a trade or business, for the
production of income, or as inventory; (2) is certified by the
appropriate State environmental agency to be located within a
targeted area; and (3) contains (or potentially contains) a
hazardous substance (so-called ``brownfields''). Targeted areas
are defined as: (1) empowerment zones and enterprise
communities as designated under present law; (2) sites
announced before February, 1997, as being subject to one of the
76 Environmental Protection Agency (``EPA'') Brownfields
Pilots; (3) any population census tract with a poverty rate of
20 percent or more; and (4) certain industrial and commercial
areas that are adjacent to tracts described in (3) above.
However, sites that are identified on the national priorities
list under the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980 cannot qualify as
targeted areas.
Eligible expenditures are those paid or incurred before
January 1, 2001.
Reasons for Change
Report of Senate Committee on Finance \20\
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\20\ H.R. 1180 as passed by the House and amended by the Senate did
not contain any provision relating to sec. 198. However, S. 1792, as
passed by the Senate, would have eliminated the targeted area
requirement, thereby, expanding eligible sites to include any site
containing (or potentially containing) a hazardous substance that is
certified by the appropriate State environmental agency, but not those
sites that are identified on the national priorities list under the
Comprehensive Environmental Response, Compensation, and Liability Act
of 1980. The conference agreement did not adopt the provision of S.
1792, but, as explained below, extended the date by which qualifying
expenditures are to be incurred. The reasons for change reported here
reprint the reasons for change reported in the committee report
accompanying S. 1792 (S. Rep. 106-201, 17).
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The Committee would like to see more so-called
``brownfield'' sites brought back into productive use in the
economy. Cleaning up such sites mitigates potential harms to
public health and can help revitalize affected communities. The
Committee seeks to encourage the clean up of contaminated
sites. To achieve this goal, the Committee believes it is
necessary to expand the set of brownfield sites that may claim
the tax benefits of expending beyond the relatively narrow
class of sites identified in the Taxpayer Relief Act of 1997.
Explanation of Provision
The provision extends the present-law expiration date for
sec. 198 to include those expenditures paid or incurred before
January 1, 2002.
Effective Date
The provision to extend the expiration date is effective
upon the date of enactment (December 17, 1999).
Revenue Effect
The provision is estimated to increase Federal fiscal year
budget receipts by $11 million in 2000, to reduce Federal
fiscal year budget receipts by $43 million in 2001, $59 million
in 2002, $20 million in 2003, $2 million in 2004, $1 million in
2005, and to increase Federal fiscal year budget receipts by $2
million in 2006, $5 million in 2007, $6 million in 2008, $8
million in 2009, and $10 million in 2010.
L. Temporary Increase in Amount of Rum Excise Tax Covered Over to
Puerto Rico and the Virgin Islands (sec. 512 of the Tax Relief
Extension Act and sec. 7652 of the Code)
Present and Prior Law
A $13.50 per proof gallon \21\ excise tax is imposed on
distilled spirits produced in, or imported or brought into, the
United States (sec. 5001). The excise tax does not apply to
distilled spirits that are exported from the United States or
to distilled spirits that are consumed in U.S. possessions
(e.g., Puerto Rico and the Virgin Islands).
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\21\ A proof gallon is a liquid gallon consisting of 50 percent
alcohol.
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Under present and prior law the Code provides for payment
(``coverover'') of $10.50 per proof gallon of the excise tax
imposed on rum imported (or brought) into the United States
(without regard to the country of origin) to Puerto Rico and
the Virgin Islands (sec. 7652). During the five-year period
ending on September 30, 1998, the amount covered over was
$11.30 per proof gallon. This temporary increase was enacted in
1993 as transitional relief accompanying a reduction in certain
tax benefits for corporations operating in Puerto Rico and the
Virgin Islands (sec. 936).
Amounts covered over to Puerto Rico and the Virgin Islands
are deposited in the treasuries of the two possessions for use
as those possessions determine.
Reasons for Change
The Congress found that the fiscal needs of Puerto Rico and
the Virgin Islands remained substantial and, therefore, found
it appropriate to increase and extend the coverover of excise
tax receipts to Puerto Rico and the Virgin Islands.
Explanation of Provision
The provision increases the rum excise tax coverover to a
rate of $13.25 per proof gallon during the period from July 1,
1999, through December 31, 2001.
The provision also includes a special rule for payment of
the $2.75 per proof gallon increase in the coverover rate for
Puerto Rico and the Virgin Islands. The rule applies to
payments that otherwise would have been made in Fiscal Year
2000. Under this rule, amounts attributable to the increase in
the coverover rate that would have been transferred to Puerto
Rico and the Virgin Islands after June 30, 1999 and before the
date of the provision's enactment, were to be paid on the date
which was 15 days after the date of enactment. However, the
total amount of this initial payment (aggregated for both
possessions) could not exceed $20 million.\22\
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\22\ This limitation subsequently was repealed by the Trade and
Development Act of 2000.
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The next payment to Puerto Rico and the Virgin Islands with
respect to the $2.75 increase in the coverover rate was to be
made on October 1, 2000. This payment was to equal the total
amount attributable to the increase that otherwise would have
be transferred to Puerto Rico and the Virgin Islands before
October 1, 2000 (less the payment of up to $20 million made 15
days after the date of enactment).
Payments for the remainder of the period through December
31, 2001, are to be paid as provided under the present- and
prior-law rules for the $10.50 per proof gallon coverover rate.
The special payment rule does not affect payments to Puerto
Rico and the Virgin Islands with respect to the permanent
$10.50 per proof gallon coverover rate.
Effective Date
The provision became effective on the date of enactment
(December 17, 1999).
Revenue Effect
The provision is estimated to increase Federal fiscal year
budget outlays by $21 million in 2000, $115 million in 2002,
and $15 million in 2003.
II. OTHER TIME-SENSITIVE PROVISIONS
A. Prohibit Disclosure of APAs and APA Background Files (sec. 521 of
the Tax Relief Extension Act and secs. 6103 and 6110 of the Code)
Present and Prior Law
Section 6103
Under present and prior law, returns and return information
are confidential and cannot be disclosed unless authorized by
the Internal Revenue Code.
The Code defines ``return information'' broadly. Under
present and prior law, return information includes:
(1) a taxpayer's identity, the nature, source or
amount of income, payments, receipts, deductions,
exemptions, credits, assets, liabilities, net worth,
tax liability, tax withheld, deficiencies,
overassessments, or tax payments;
(2) whether the taxpayer's return was, is being, or
will be examined or subject to other investigation or
processing; or
(3) any other data, received by, recorded by,
prepared by, furnished to, or collected by the
Secretary with respect to a return or with respect to
the determination of the existence, or possible
existence, of liability (or the amount thereof) of any
person under this title for any tax, penalty, interest,
fine, forfeiture, or other imposition, or offense,\23\
and
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\23\ Sec. 6103(b)(2)(A).
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(4) any part of any written determination or any
background file document relating to such written
determination which is not open to public inspection
under section 6110.\24\
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\24\ Sec. 6103(b)(2)(B).
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Section 6110 and the Freedom of Information Act
With certain exceptions, present and prior law makes the
text of any written determination the Internal Revenue Service
(``IRS'') issues available for public inspection. Once the IRS
makes the written determination publicly available, the
background file documents associated with such written
determination are available for public inspection upon written
request. The Code defines ``background file documents'' as any
written material submitted in support of the request.
Background file documents also include any communications
between the IRS and persons outside the IRS concerning such
written determination that occur before the IRS issues the
determination.
Before making them available for public inspection, section
6110 requires the IRS to delete specific categories of
sensitive information from the written determination and
background file documents.\25\ It also provides judicial and
administrative procedures to resolve disputes over the scope of
the information the IRS will disclose. In addition, Congress
has also wholly exempted certain matters from section 6110's
public disclosure requirements.\26\ Any part of a written
determination or background file that is not disclosed under
section 6110 constitutes ``return information.'' \27\
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\25\ Sec. 6110(c) provides for the deletion of identifying
information, trade secrets, confidential commercial and financial
information and other material.
\26\ Sec. 6110(l).
\27\ Sec. 6103(b)(2)(B) (``The term `return information' means . .
. any part of any written determination or any background file document
relating to such written determination (as such terms are defined in
section 6110(b)) which is not open to public inspection under section
6110'').
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The Freedom of Information Act (FOIA) lists categories of
information that a federal agency must make available for
public inspection.\28\ It establishes a presumption that agency
records are accessible to the public. The FOIA, however, also
provides nine exemptions from public disclosure. One of those
exemptions is for matters specifically exempted from disclosure
by a statute other than the FOIA if the exempting statute meets
certain requirements.\29\ Section 6103 qualifies as an
exempting statute under this FOIA provision. Thus, returns and
return information that section 6103 deems confidential are
exempt from disclosure under the FOIA.
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\28\ Unless published promptly and offered for sale, an agency must
provide for public inspection and copying: (1) final opinions as well
as orders made in the adjudication of cases; (2) statements of policy
and interpretations not published in the Federal Register; (3)
administrative staff manuals and instructions to staff that affect a
member of the public; and (4) agency records which have been or the
agency expects to be, the subject of repetitive FOIA requests. 5 U.S.C.
sec. 552(a)(2). An agency must also publish in the Federal Register:
the organizational structure of the agency and procedures for obtaining
information under the FOIA; statements describing the functions of the
agency and all formal and informal procedures; rules of procedure,
descriptions of forms and statements describing all papers, reports and
examinations; rules of general applicability and statements of general
policy; and amendments, revisions and repeals of the foregoing. 5
U.S.C. sec. 552(a)(1). All other agency records can be sought by FOIA
request; however, some records may be exempt from disclosure.
\29\ Exemption 3 of the FOIA provides that an agency is not
required to disclose matters that are:
(3) specifically exempted from disclosure by statute (other than
section 552b of this title) provided that such statute (A) requires
that the matters be withheld from the public in such a manner as to
leave no discretion on the issue, or (B) establishes particular
criteria for withholding or refers to particular types of matters to be
withheld; . . .
5 U.S.C. 552(b)(3).
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Section 6110 is the exclusive means for the public to view
IRS written determinations.\30\ If section 6110 covers the
written determination, then the public cannot use the FOIA to
obtain that determination.
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\30\ Sec. 6110(m).
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Advance Pricing Agreements
The Advanced Pricing Agreement (``APA'') program is an
alternative dispute resolution program conducted by the IRS,
which resolves international transfer pricing issues prior to
the filing of the corporate tax return. Specifically, an APA is
an advance agreement establishing an approved transfer pricing
methodology entered into among the taxpayer, the IRS, and a
foreign tax authority. The IRS and the foreign tax authority
generally agree to accept the results of such approved
methodology. Alternatively, an APA also may be negotiated
between just the taxpayer and the IRS; such an APA establishes
an approved transfer pricing methodology for U.S. tax purposes.
The APA program focuses on identifying the appropriate transfer
pricing methodology; it does not determine a taxpayer's tax
liability. Taxpayers voluntarily participate in the program.
To resolve the transfer pricing issues, the taxpayer
submits detailed and confidential financial information,
business plans and projections to the IRS for consideration.
Resolution involves an extensive analysis of the taxpayer's
functions and risks.
Pending in the U.S. District Court for the District of
Columbia were three consolidated lawsuits asserting that, under
prior law, APAs were subject to public disclosure under either
section 6110 or the FOIA.\31\ Prior to this litigation and
since the inception of the APA program, the IRS held the
position that APAs were confidential return information
protected from disclosure by section 6103.\32\ On January 11,
1999, the IRS conceded that APAs are ``rulings'' and therefore
are ``written determinations'' for purposes of section
6110.\33\ Although the court had not issued a ruling in the
case, the IRS announced its plan to publicly release both
existing and future APAs. The IRS then transmitted existing
APAs to the respective taxpayers with proposed deletions. It
received comments from some of the affected taxpayers. Where
appropriate, foreign tax authorities also received copies of
the relevant APAs for comment on the proposed deletions. No
APAs were released to the public.
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\31\ BNA v. IRS, Nos. 96-376, 96-2820, and 96-1473 (D.D.C.). The
Bureau of National Affairs, Inc. (BNA) publishes matters of interest
for use by its subscribers. BNA contended that APAs were not return
information as they are prospective in application. Thus, at the time
they are entered into, they do not relate to ``the determination of the
existence, or possible existence, of liability or amount thereof . .
.''
\32\ The IRS contended that information received or generated as
part of the APA process pertains to a taxpayer's liability and
therefore was return information as defined in sec. 6103(b)(2)(A).
Thus, the information was subject to section 6103's restrictions on the
dissemination of returns and return information. Rev. Proc. 91-22, sec.
11, 1991-1 C.B. 526, 534 and Rev. Proc. 96-53, sec. 12, 1996-2 C.B.
375, 386.
\33\ IR 1999-05.
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Some taxpayers asserted that the IRS erred in adopting the
position under prior law that APAs are subject to section 6110
public disclosure. Several had sought to participate as amici
in the lawsuit to block the release of APAs. They were
concerned that release under section 6110 could expose them to
expensive litigation to defend the deletion of the confidential
information from their APAs. They were also concerned that the
section 6110 procedures are insufficient to protect the
confidentiality of their trade secrets and other financial and
commercial information.
Reasons for Change
The APA program has been a successful mechanism for
resolving transfer pricing issues, not only for future years,
but, in some instances, for prior open years as well
(rollbacks). It reduces protracted disputes and costly
litigation between taxpayers and the government. The program
involves not only taxpayers and the IRS, but also foreign
taxing authorities.
As part of the program, the taxpayer voluntarily provides
substantial, sensitive information to the IRS. The proprietary
information necessary to support a claim of comparability may
be among a company's most closely guarded trade secrets.
Similarly, information regarding production costs and customer
pricing may also be extremely sensitive information.
From the program's inception, the IRS had assured taxpayers
and foreign governments that the information received or
generated in the APA process would be protected as confidential
return information. Such assurances were based on published IRS
materials.
The APA process is based on taxpayers' cooperation and
voluntary disclosure to the IRS of sensitive information. The
Congress believed that the continued confidentiality of this
information was vital to the APA program. Otherwise, the
Congress believed that some taxpayers may refuse to participate
in this successful program, causing a decline in its
usefulness.
The Congress must balance the need for confidentiality with
the general public's need for practical tax guidance. Some
members of the public have expressed concern that the APA
program has led to the development of a body of ``secret law,''
known only to a few members of the tax profession. In addition,
some members of the public contend that taxpayers have received
APAs permitting the use of transfer pricing methodologies not
contemplated in the section 482 regulations. They also contend
that APAs have provided interpretations of law not available to
taxpayers that do not participate in the APA process. Such
concerns could undermine the public's confidence in the IRS's
ability to enforce fairly the transfer pricing rules. Thus, the
provision requires the Department of the Treasury to prepare
and publish an annual report regarding APAs, which will provide
extensive information regarding the program, while clarifying
that existing and future APAs and related background
information continue to be confidential return information.
Explanation of Provision
The provision amends section 6103 to provide that APAs and
related background information are confidential return
information under section 6103. Related background information
includes: the request for an APA, any material submitted in
support of the request, and any communication (written or
otherwise) prepared or received by the Secretary in connection
with an APA, regardless of when such communication is prepared
or received. Protection is not limited to agreements actually
executed; it includes material received and generated in the
APA process that does not result in an executed agreement.
Further, APAs and related background information are not
``written determinations'' as that term is defined in section
6110. Therefore, the public inspection requirements of section
6110 do not apply to APAs and related background information. A
document's incorporation in a background file, however, is not
intended to be grounds for not disclosing an otherwise
disclosable document from a source other than a background
file.
The provision statutorily requires that the Treasury
Department prepare and publish an annual report on the status
of APAs. The annual report is to contain the following
information:
(1) Information about the structure, composition and,
operation of the APA program office;
(2) A copy of each current model APA;
(3) Statistics regarding the amount of time to
complete new and renewal APAs;
(4) The number of APA applications filed during such
year;
(5) The number of APAs executed to date and for the
year;
(6) The number of APA renewals issued to date and for
the year;
(7) The number of pending APA requests;
(8) The number of pending APA renewals;
(9) The number of APAs executed and pending
(including renewals and renewal requests) that are
unilateral, bilateral and multilateral, respectively;
(10) The number of APAs revoked or canceled, and the
number of withdrawals from the APA program, to date and
for the year;
(11) The number of finalized new APAs and renewals by
industry.\34\
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\34\ This information was previously released in IRS Publication
3218, ``IRS Report on Application and Administration of I.R.C. Section
482.''
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In addition, the annual report is to contain general
descriptions of:
(1) the nature of the relationships between the
related organizations, trades, or businesses covered by
APAs;
(2) the related organizations, trades, or businesses
whose prices or results are tested to determine
compliance with the transfer pricing methodology
prescribed in the APA;
(3) the covered transactions and the functions
performed and risks assumed by the related
organizations, trades or businesses involved;
(4) methodologies used to evaluate tested parties and
transactions and the circumstances leading to the use
of those methodologies;
(5) critical assumptions;
(6) sources of comparables;
(7) comparable selection criteria and the rationale
used in determining such criteria;
(8) the nature of adjustments to comparables and/or
tested parties;
(9) the nature of any range agreed to, including
information such as whether no range was used and why,
whether an inter-quartile range was used, or whether
there was a statistical narrowing of the comparables;
(10) adjustment mechanisms provided to rectify
results that fall outside of the agreed upon APA range;
(11) the various term lengths for APAs, including
rollback years, and the number of APAs with each such
term length;
(12) the nature of documentation required; and
(13) approaches for sharing of currency or other
risks.
In addition, the provision requires the Treasury Department
to describe, in each annual report, its efforts to ensure
compliance with existing APA agreements. The first report is to
cover the period January 1, 1991, through the calendar year
including the date of enactment. The Treasury Department cannot
include any information in the report which would have been
deleted under section 6110(c) if the report were a written
determination as defined in section 6110. Additionally, the
report cannot include any information which can be associated
with or otherwise identify, directly or indirectly, a
particular taxpayer. The Secretary is expected to obtain input
from taxpayers to ensure proper protection of taxpayer
information and, if necessary, utilize its regulatory authority
to implement appropriate processes for obtaining this input.
For purposes of section 6103, the report requirement is treated
as part of Title 26.
While the provision statutorily requires an annual report,
it is not intended to discourage the Treasury Department from
issuing other forms of guidance, such as regulations or revenue
rulings, consistent with the confidentiality provisions of the
Code.
Effective Date
The provision is effective on the date of enactment;
accordingly, no APAs, regardless of whether executed before or
after enactment, or related background file documents, can be
released to the public after the date of enactment (December
17, 1999). It required the Treasury Department to publish the
first annual report no later than March 30, 2000.\35\
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\35\ The first APA report was released on March 30, 2000. Internal
Revenue Service, Announcement and Report Concerning Advance Pricing
Agreements, 2000-16 IRB 1. A second APA report was released on March
30, 2001. Internal Revenue Service, Announcement 2001-32, Announcement
and Report Concerning Advance Pricing Agreements, 2001-17 IRB 1.
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Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
B. Authority to Postpone Certain Tax-Related Deadlines by Reason of
Year 2000 Failures (sec. 522 of the Tax Relief Extension Act)
Present and Prior Law
There were no specific provisions in prior law that
permitted the Secretary of the Treasury to postpone tax-related
deadlines by reason of Year 2000 (also known as ``Y2K'')
failures. The Secretary is, however, permitted (under present
and prior law) to postpone tax-related deadlines for other
reasons. For example, the Secretary may specify that certain
deadlines are postponed for a period of up to 90 days in the
case of a taxpayer determined to be affected by a
Presidentially declared disaster. The deadlines that may be
postponed are the same as are postponed by reason of service in
a combat zone. The provision does not apply for purposes of
determining interest on any overpayment or underpayment.
The suspension of time applies to the following acts: (1)
filing any return of income, estate, or gift tax (except
employment and withholding taxes); (2) payment of any income,
estate, or gift tax (except employment and withholding taxes);
(3) filing a petition with the Tax Court for a redetermination
of deficiency, or for review of a decision rendered by the Tax
Court; (4) allowance of a credit or refund of any tax; (5)
filing a claim for credit or refund of any tax; (6) bringing
suit upon any such claim for credit or refund; (7) assessment
of any tax; (8) giving or making any notice or demand for
payment of any tax, or with respect to any liability to the
United States in respect of any tax; (9) collection of the
amount of any liability in respect of any tax; (10) bringing
suit by the United States in respect of any liability in
respect of any tax; and (11) any other act required or
permitted under the internal revenue laws specified in
regulations prescribed under section 7508 by the Secretary.
Reasons for Change
Although the Congress anticipated that Y2K compliance would
be high and that widespread failures would be unlikely, the
Congress believed that it was appropriate to provide the
Secretary with discretion to provide relief to affected
taxpayers. The Congress believed that delegating this authority
to the Secretary was appropriate, because any Y2K failures
likely would have occurred while the Congress was not in
session. Therefore, the Congress believed that it was
appropriate to give the Secretary the authority to provide
relief by postponing tax-related deadlines for those taxpayers
who, despite have made good faith and reasonable efforts to
avoid any such failures, were affected by an actual Y2K
failure.
Explanation of Provision
The provision permits the Secretary to postpone, on a
taxpayer-by-taxpayer basis, certain tax-related deadlines for a
period of up to 90 days in the case of a taxpayer that the
Secretary determines to have been affected by an actual Y2K
related failure. In order to be eligible for relief, taxpayers
must have made good faith, reasonable efforts to avoid any Y2K
related failures. The relief is similar to that granted under
the Presidentially declared disaster and combat zone
provisions, except that employment and withholding taxes also
are eligible for relief. The relief permits the abatement of
both penalties and interest.
The relief may apply to the following acts: (1) filing of
any return of income, estate, or gift tax, including employment
and withholding taxes; (2) payment of any income, estate, or
gift tax, including employment and withholding taxes; (3)
filing a petition with the Tax Court; (4) allowance of a credit
or refund of any tax; (5) filing a claim for credit or refund
of any tax; (6) bringing suit upon any such claim for credit or
refund; (7) assessment of any tax; (8) giving or making any
notice or demand for payment of any tax, or with respect to any
liability to the United States in respect of any tax; (9)
collection of the amount of any liability in respect of any
tax; (10) bringing suit by the United States in respect of any
liability in respect of any tax; and (11) any other act
required or permitted under the internal revenue laws specified
or prescribed by the Secretary.
Effective Date
The provision is effective on the date of enactment
(December 17, 1999).
Revenue Effect
The provision is estimated to have a negligible effect on
Federal fiscal year budget receipts.
C. Add Certain Vaccines Against Streptococcus Pneumoniae to the List of
Taxable Vaccines (sec. 523 of the Tax Relief Extension Act and secs.
4131 and 4132 of the Code)
Prior Law
A manufacturer's excise tax is imposed at the rate of 75
cents per dose (sec. 4131) on the following vaccines
recommended for routine administration to children: diphtheria,
pertussis, tetanus, measles, mumps, rubella, polio, HIB
(haemophilus influenza type B), hepatitis B, varicella (chicken
pox), and rotavirus gastroenteritis. The tax applied to any
vaccine that is a combination of vaccine components equals 75
cents times the number of components in the combined vaccine.
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. This program provides a substitute Federal,
``no fault'' insurance system for the State-law tort and
private liability insurance systems otherwise applicable to
vaccine manufacturers and physicians. All persons immunized
after September 30, 1988, with covered vaccines must pursue
compensation under this Federal program before bringing civil
tort actions under State law.
Reasons for Change
Streptococcus pneumoniae (often referred to as
pneumococcus) is a bacteria that can cause bacterial
meningitis, a brain or spinal cord infection, bacteremia, a
bloodstream infection, and otitis media (ear infection). The
Congress understood that each year in the United States,
pneumococcal disease accounts for an estimated 3,000 cases of
bacterial meningitis, 50,000 cases of bacteremia, 500,000 cases
of pneumonia, and 7 million cases of otitis media among all age
groups. The Congress understood that, while there currently was
a vaccine effective in preventing pneumococcal diseases in
adults, that vaccine, a polysaccaride vaccine, did not induce
an adequate immune response in young children and therefore did
not protect children against these diseases. The Congress
further understood that the Food and Drug Administration's (the
``FDA'') was expected to approve a new, sugar protein conjugate
vaccine against the disease and the Centers for Disease Control
were expected to recommend this conjugate 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 Trust Fund, greater
application of the vaccine will be promoted. The Congress,
therefore, believed it is appropriate to add the conjugate
vaccine against streptococcus pneumoniae to the list of taxable
vaccines.
The Congress was aware that the Vaccine Trust Fund had a
current cash-flow surplus in excess of $1.3 billion
dollars.\36\ However, the Congress thought was it prudent to
gather more detailed information on the operation of the
Vaccine Injury Compensation Program and likely future claims to
assess the adequacy of the Vaccine Trust Fund. Therefore, the
Congress found it appropriate to direct the Comptroller General
of the United States to report on the operation and management
of expenditures from the Vaccine Trust Fund and to advise the
Congress on the adequacy of the Vaccine Trust Fund to meet
future claims under the Federal Vaccine Injury Compensation
Program.
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\36\ Joint Committee on Taxation, Schedule of Present Federal
Excise Taxes (as of January 1, 1999) (JCS-2-99), March 29, 1999, p. 48.
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Explanation of Provision
The provision adds any conjugate vaccine against
streptococcus pneumoniae to the list of taxable vaccines. The
provision also changes the effective date enacted in Public Law
105-277 and certain other conforming amendments to expenditure
purposes to enable certain payments to be made from the Trust
Fund.
In addition, the provision directs the General Accounting
Office (``GAO'') to report to the House Committee on Ways and
Means and the Senate Committee on Finance on the operation and
management of expenditures from the Vaccine Trust Fund and to
advise the Committees on the adequacy of the Vaccine Trust Fund
to meet future claims under the Federal Vaccine Injury
Compensation Program.
Within its report, to the greatest extent possible, the
Congress requested a thorough statistical report of the number
of claims submitted annually, the number of claims settled
annually, and the value of settlements. The Congress requested
analysis of the statistical distribution of settlements,
including the mean and median values of settlements, and the
extent to which the value of settlements varies with an injury
attributed to an identifiable vaccine. The Congress also
requested analysis of the settlement process, including a
statistical distribution of the amount of time required from
the initial filing of a claim to a final resolution.
The Code provides that certain administrative expenses may
be charged to the Vaccine Trust Fund. The Congress intended
that the GAO report include an analysis of the overhead and
administrative expenses charged to the Vaccine Trust Fund.
The GAO is directed to report its findings to the House
Committee on Ways and Means and the Senate Committee on Finance
by January 31, 2000.\37\
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\37\ The GAO delivered its report on March 31, 2000. See, United
States General Accounting Office, Vaccine Injury Trust Fund Revenue
Exceeds Current Need for Paying Claims, GAO/HEHS-00-67, March 2000.
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Effective Date
The provision is effective for vaccine sales beginning on
the day after the date of enactment (December 17, 1999). No
floor stocks tax is to be collected for amounts held for sale
on that date. For sales on or before that date for which
delivery is made after such date, the delivery date is deemed
to be the sale date. The addition of conjugate streptococcus
pneumoniae vaccines to the list of taxable vaccines is
contingent upon the inclusion in this legislation of the
modifications to Public Law 105-277.
Revenue Effect
The provision is estimated to increase Federal fiscal year
budget receipts by $4 million in 2000, $7 million in 2001, $9
million in 2002, $10 million in 2003, $10 million in 2004, $10
million in 2005, $10 million in 2006, $10 million in 2007, $10
million in 2008, $11 million in 2009, and $11 million in 2010.
D. Delay in Effective Date of Requirement for Approved Diesel or
Kerosene Terminal (sec. 524 of the Tax Relief Extension Act and sec.
4101 of the Code)
Present and Prior Law
Excise taxes are imposed on highway motor fuels, including
gasoline, diesel fuel, and kerosene, to finance the Highway
Trust Fund programs. Subject to limited exceptions, these taxes
are imposed on all such fuels when they are removed from
registered pipeline or barge terminal facilities, with any tax-
exemptions being accomplished by means of refunds to consumers
of the fuel.\38\ One such exception allows removal of diesel
fuel without payment of tax if the fuel is destined for a
nontaxable use (e.g., use as heating oil) and is indelibly
dyed.
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\38\ Tax is imposed before that point if the motor fuel is
transferred (other than in bulk) from a refinery or if the fuel is sold
to an unregistered party while still held in the refinery or bulk
distribution system (e.g., in a pipeline or terminal facility).
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Terminal facilities are not permitted to receive and store
non-tax-paid motor fuels unless they are registered with the
Internal Revenue Service. Under present law, a prerequisite to
registration is that if the terminal offers for sale diesel
fuel, it must offer both dyed and undyed diesel fuel.
Similarly, if the terminal offers for sale kerosene, it must
offer both dyed and undyed kerosene. This ``dyed-fuel mandate''
was enacted in 1997, to be effective on July 1, 1998.
Subsequently, the effective date was delayed until July 1,
2000.
Reasons for Change
When the rules governing taxation of kerosene used as a
highway motor fuel were enacted in 1997, the Congress was
concerned that dyed kerosene (destined for nontaxable use)
might not be available in markets where that fuel was commonly
used (e.g., as heating oil). To ensure availability of untaxed
kerosene for these uses, the Congress included a requirement
that terminals offer both dyed and undyed kerosene and diesel
fuel (if they offered the fuels for sale at all) as a condition
of receiving untaxed fuels. Since that time, markets have
provided dyed kerosene and diesel fuel for nontaxable uses in
markets where there is a demand for such fuel even in the
absence of a statutory mandate for such fuels. The Congress
found that a further delay in this registration requirement was
appropriate to allow a more complete evaluation before a
decision is made on whether to repeal or retain the mandate.
Explanation of Provision
The provision delayed the effective date of the diesel fuel
and kerosene-dyeing mandate through December 31, 2001. No other
changes were made to the highway motor fuels excise tax rules.
Effective Date
The provision became effective on the date of enactment
(December 17, 1999).
Revenue Effect
The provision is estimated to have a negligible effect on
Federal fiscal year budget receipts.
E. Production Flexibility Contract Payments (sec. 525 of the Tax Relief
Extension 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.\39\ 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.
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\39\ This rule applies to fiscal years after 1996. For fiscal year
1996, this payment was to be made not later than 30 days after the
production flexibility contract was entered into.
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These options potentially would have resulted in the
constructive receipt (and thus inclusion in income) of the
payments to which they relate at the time they could have been
exercised, whether or not they were in fact exercised. However,
section 2012 of the Tax and Trade Relief Extension Act of 1998
provided that the time a production flexibility contract
payment under the FAIR Act properly is includible in income is
to be determined without regard to either option, effective for
production flexibility contract payments made under the FAIR
Act in taxable years ending after December 31, 1995.
Reasons for Change \40\
The Congress did not believe that farmers should be
required to accelerate the recognition of income on production
flexibility contract payments solely because Congress creates
an option for the accelerated receipt of such payments.
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\40\ The conference report to H.R. 1180 indicates that there was
neither a House bill provision nor a Senate amendment provision.
However, it refers to a provision included as section 711 of the
conference agreement to H.R. 2488, the ``Taxpayer Refund and Relief Act
of 1999'' (H. Rep. 106-289, Aug. 4, 1999), which was vetoed by
President Clinton. The provision was reported by the House Ways and
Means Committee as section 711 of H.R. 2488, the ``Financial Freedom
Act of 1999'' (H. Rep. 106-238, July 16, 1999), from which these
reasons for change are reproduced.
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Explanation of Provision
The provision provides that any option to accelerate the
receipt of any payment under a production flexibility contract
which is payable under the FAIR Act, as in effect on the date
of enactment of the provision, is to be disregarded in
determining the taxable year in which such payment is properly
included in gross income. Options to accelerate payments that
are enacted in the future are covered by this rule, providing
the payment to which they relate is mandated by the FAIR Act as
in effect on the date of enactment of this Act.
The provision does not delay the inclusion of any amount in
gross income beyond the taxable period in which the amount is
received.
Effective Date
The provision is effective on the date of enactment
(December 17, 1999).
Revenue Effect
The provision is estimated to have a negligible effect on
Federal fiscal year budget receipts.
III. REVENUE OFFSETS
A. General Provisions
1. Modification of individual estimated tax safe harbor (sec. 531 of
the Tax Relief Extension Act and sec. 6654 of the Code)
Present and Prior 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) 90 percent of the tax shown on the current year's return or
(2) 100 percent of the prior year's tax. For taxpayers with a
prior year's AGI above $150,000,\41\ however, the rule that
allows payment of 100 percent of prior year's tax is modified.
Those taxpayers with AGI above $150,000 generally must make
estimated payments based on either (1) 90 percent of the tax
shown on the current year's return or (2) 110 percent of the
prior year's tax.
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\41\ $75,000 for married taxpayers filing separately.
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For taxpayers with a prior year's AGI above $150,000, the
prior year's tax safe harbor is modified for estimated tax
payments made for taxable years through 2002. Under prior law,
for such taxpayers making estimated tax payments based on prior
year's tax, payments must be made based on 105 percent of prior
year's tax for taxable years beginning in 1999, 106 percent of
prior year's tax for taxable years beginning in 2000 and 2001,
and 112 percent of prior year's tax for taxable years beginning
in 2002.
Reasons for Change
The Congress believed that is appropriate to modify the
applicability of the estimated tax safe harbor.
Explanation of Provision
The provision provides that taxpayers with prior year's AGI
above $150,000 who make estimated tax payments based on prior
year's tax must do so based on 108.6 percent of prior year's
tax for estimated tax payments made for taxable year 2000.
Taxpayers with prior year's AGI above $150,000 who make
estimated tax payments based on prior year's tax must do so
based on 110 percent of prior year's tax for estimated tax
payments made for taxable year 2001. The Act does not change
the modified safe harbor percentage for estimated tax payments
made for any taxable years other than 2000 and 2001.
Effective Date
The provision is effective for estimated tax payments made
for taxable years beginning after December 31, 1999, and before
January 1, 2002.
Revenue Effect
The provision is estimated to increase Federal fiscal year
budget receipts by $1,560 million in 2000 and $840 million in
2001, and to reduce Federal fiscal year budget receipts by
$2,400 million in 2002.
2. Clarify the tax treatment of income and losses on derivatives (sec.
532 of the Tax Relief Extension Act and sec. 1221 of the Code)
Present and Prior Law
Capital gain treatment applies to gain on the sale or
exchange of a capital asset. Capital assets include property
other than (1) stock in trade or other types of assets
includible in inventory, (2) property used in a trade or
business that is real property or property subject to
depreciation, (3) accounts or notes receivable acquired in the
ordinary course of a trade or business, (4) certain copyrights
(or similar property), and (5) U.S. government publications.
Gain or loss on such assets generally is treated as ordinary,
rather than capital, gain or loss. Certain other Code sections
also treat gains or losses as ordinary. For example, the gains
or losses of securities dealers or certain electing commodities
dealers or electing traders in securities or commodities that
are subject to ``mark-to-market'' accounting are treated as
ordinary (sec. 475).
Under case law in a number of Federal courts prior to 1988,
business hedges generally were treated as giving rise to
ordinary, rather than capital, gain or loss. In 1988, the U.S.
Supreme Court rejected this interpretation in Arkansas Best v.
Commissioner which, relying on the statutory definition of a
capital asset described above, held that a loss realized on a
sale of stock was capital even though the stock was purchased
for a business, rather than an investment, purpose.\42\
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\42\ 485 U.S. 212 (1988).
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Treasury regulations (which were finalized in 1994) under
prior law require ordinary character treatment for most
business hedges and provide timing rules requiring that gains
or losses on hedging transactions be taken into account in a
manner that matches the income or loss from the hedged item or
items. The regulations apply to hedges that meet a standard of
``risk reduction'' with respect to ordinary property held (or
to be held) or certain liabilities incurred (or to be incurred)
by the taxpayer and that meet certain identification and other
requirements (Treas. Reg. sec. 1.1221-2).
Reasons for Change
Absent an election by a commodities derivatives dealer to
be treated the same as a dealer in securities under section
475, the character of the gains and losses with respect to
commodities derivative financial instruments entered into by
such a dealer may have been unclear under prior law. The
Congress was concerned that this uncertainty (i.e., the
potential for capital treatment of the commodities derivatives
financial instruments) could inhibit commodities derivatives
dealers from entering into transactions with respect to
commodities derivative financial instruments that qualify as
``hedging transactions'' within the meaning of the Treasury
regulations under section 1221. The Congress believes that
commodities derivatives financial instruments are integrally
related to the ordinary course of the trade or business of
commodities derivatives dealers and, therefore, such assets
should be treated as ordinary assets.
The Congress further believes that ordinary character
treatment is proper for business hedges with respect to
ordinary property. The Congress believes that the approach
taken in the Treasury regulations under prior law with respect
to the character of hedging transactions generally should be
codified as an appropriate interpretation of prior law. Those
Treasury regulations, however, modeled the definition of a
hedging transaction after the prior-law definition contained in
section 1256, which generally required that a hedging
transaction ``reduces'' a taxpayer's risk. The Congress
believes that a ``risk management'' standard better describes
modern business hedging practices that should be accorded
ordinary character treatment.\43\
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\43\ The Congress believed that the Treasury regulations under
prior law appropriately interpret ``risk reduction'' flexibly within
the constraints of prior law. For example, the regulations recognize
that certain transactions that economically convert an interest rate or
price from a fixed rate or price to a floating rate or price may
qualify as hedging transactions (Treas. Reg. sec. 1.1221-
2(c)(1)(ii)(B)). Similarly, the regulations provide hedging treatment
for certain written call options, hedges of aggregate risk, ``dynamic
hedges'' (under which a taxpayer can more frequently manage or adjust
its exposure to identified risk), partial hedges, ``recycled'' hedges
(using a position entered into to hedge one asset or liability to hedge
another asset or liability), and hedges of aggregate risk (Treas. Reg.
sec. 1.1221-2(c)). The Congress believed that (depending on the facts)
treatment of such transactions as hedging transactions was appropriate
and that it also was appropriate to modernize the definition of a
hedging transaction by providing risk management as the standard.
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In adopting a risk management standard, however, the
Congress did not intend that speculative transactions or other
transactions not entered into in the normal course of a
taxpayer's trade or business should qualify for ordinary
character treatment, and risk management should not be
interpreted so broadly as to cover such transactions. In
addition, to minimize whipsaw potential, the Congress believes
that it is essential for hedging transactions to be properly
identified by the taxpayer when the hedging transaction is
entered into.
Finally, because hedging status under prior law and present
law is dependent upon the ordinary character of the property
being hedged, an issue arises with respect to hedges of certain
supplies, sales of which could give rise to capital gain, but
which are generally consumed in the ordinary course of a
taxpayer's trade or business and that would give rise to
ordinary deductions. For purposes of defining a hedging
transaction, Treasury regulations treat such supplies as
ordinary property.\44\ The Congress believes that it was
appropriate to confirm this treatment by specifying that such
supplies are ordinary assets.
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\44\ Treas. Reg. sec. 1.1221-2(c)(5)(ii).
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Explanation of Provision
The provision adds three categories to the list of assets
the gain or loss on which is treated as ordinary (sec. 1221).
The new categories are: (1) commodities derivative financial
instruments entered into by commodities derivatives dealers;
(2) hedging transactions; and (3) supplies of a type regularly
consumed by the taxpayer in the ordinary course of a taxpayer's
trade or business.
For this purpose, a commodities derivatives dealer is any
person that regularly offers to enter into, assume, offset,
assign or terminate positions in commodities derivative
financial instruments with customers in the ordinary course of
a trade or business. A commodities derivative financial
instrument means a contract or financial instrument with
respect to commodities, the value or settlement price of which
is calculated by reference to any combination of a fixed rate,
price, or amount, or a variable rate, price, or amount, which
is based on current, objectively determinable financial or
economic information. This includes swaps, caps, floors,
options, futures contracts, forward contracts, and similar
financial instruments with respect to commodities. It does not
include shares of stock in a corporation; a beneficial interest
in a partnership or trust; a note, bond, debenture, or other
evidence of indebtedness; or a contract to which section 1256
applies.
In defining a hedging transaction, the provision generally
codifies the approach taken by the Treasury regulations under
prior law, but modifies the rules. The ``risk reduction''
standard of the regulations is broadened to ``risk management''
with respect to ordinary property held (or to be held) or
certain liabilities incurred (or to be incurred). In addition,
the Treasury Secretary is granted authority to treat
transactions that manage other risks as hedging transactions.
As under the prior-law Treasury regulations, the transaction
must be identified as a hedge of specified property. It is
intended that this be the exclusive means through which the
gains or losses with respect to a hedging transaction are
treated as ordinary. Authority is provided for Treasury
regulations that would address improperly identified or non-
identified hedging transactions. The Treasury Secretary is also
given authority to apply these rules to related parties.
Effective Date
The provision is effective for any instrument held,
acquired or entered into, any transaction entered into, and
supplies held or acquired on or after the date of enactment
(December 17, 1999).
Revenue Effect
The provision is estimated to increase Federal fiscal year
budget receipts by less than $500,000 for 2000, and $1 million
in each of the years 2001 through 2010.
3. Expand reporting of cancellation of indebtedness income (sec. 533 of
the Tax Relief Extension Act and sec. 6050P of the Code)
Present and Prior Law
Under section 61(a)(12), a taxpayer's gross income includes
income from the discharge of indebtedness. Section 6050P
requires ``applicable entities'' to file information returns
with the Internal Revenue Service (IRS) regarding any discharge
of indebtedness of $600 or more.
The information return must set forth the name, address,
and taxpayer identification number of the person whose debt was
discharged, the amount of debt discharged, the date on which
the debt was discharged, and any other information that the IRS
requires to be provided. The information return must be filed
in the manner and at the time specified by the IRS. The same
information also must be provided to the person whose debt is
discharged by January 31 of the year following the discharge.
Under prior law, ``applicable entities'' included only: (1)
the Federal Deposit Insurance Corporation (FDIC), the
Resolution Trust Corporation (RTC), the National Credit Union
Administration, and any successor or subunit of any of them;
(2) any financial institution (as described in sec. 581
(relating to banks) or sec. 591(a) (relating to savings
institutions)); (3) any credit union; (4) any corporation that
is a direct or indirect subsidiary of an entity described in
(2) or (3) which, by virtue of being affiliated with such
entity, is subject to supervision and examination by a Federal
or State agency regulating such entities; and (5) an executive,
judicial, or legislative agency (as defined in 31 U.S.C. sec.
3701(a)(4)).
Failures to file correct information returns with the IRS
or to furnish statements to taxpayers with respect to these
discharges of indebtedness are subject to the same general
penalty that is imposed with respect to failures to provide
other types of information returns. Accordingly, the penalty
for failure to furnish statements to taxpayers is generally $50
per failure, subject to a maximum of $100,000 for any calendar
year. These penalties are not applicable if the failure is due
to reasonable cause and not to willful neglect.
Reasons for Change
The Congress believed that it was appropriate to treat
discharges of indebtedness that are made by similar entities in
a similar manner. Accordingly, the Congress believed that it
was appropriate to extend the scope of this information
reporting provision to include indebtedness discharged by any
organization a significant trade or business of which is the
lending of money (such as finance companies and credit card
companies whether or not affiliated with financial
institutions).
Explanation of Provision
The provision requires information reporting on
indebtedness discharged by any organization a significant trade
or business of which is the lending of money (such as finance
companies and credit card companies whether or not affiliated
with financial institutions).
Effective Date
The provision is effective with respect to discharges of
indebtedness after December 31, 1999.
Revenue Effect
The provision is estimated to increase Federal fiscal year
budget receipts by $7 million in each of the years 2001 through
2010.
4. Limitation on conversion of character of income from constructive
ownership transactions (sec. 534 of the Tax Relief Extension
Act and new sec. 1260 of the Code)
Present and Prior Law
The maximum individual income tax rate on ordinary income
and short-term capital gain is 39.6 percent, while the maximum
individual income tax rate on long-term capital gain generally
is 20 percent. Long-term capital gain means gain from the sale
or exchange of a capital asset held more than one year. For
this purpose, gain from the termination of a right with respect
to property which would be a capital asset in the hands of the
taxpayer is treated as capital gain.\45\
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\45\ Section 1234A, as amended by the Taxpayer Relief Act of 1997.
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A pass-thru entity (such as a partnership) generally is not
subject to Federal income tax. Rather, each owner includes its
share of a pass-thru entity's income, gain, loss, deduction or
credit in its taxable income. Generally, the character of the
item is determined at the entity level and flows through to the
owners. Thus, for example, the treatment of an item of income
by a partnership as ordinary income, short-term capital gain,
or long-term capital gain retains its character when reported
by each of the partners.
Investors could enter into forward contracts, notional
principal contracts, and other similar arrangements with
respect to property that provided the investor with the same or
similar economic benefits as owning the property directly but
with potentially different tax consequences (as to the
character and timing of any gain).
Reasons for Change
The Congress was concerned with the use of derivative
contracts by taxpayers in arrangements that are primarily
designed to convert what otherwise would be ordinary income and
short-term capital gain into long-term capital gain. Of
particular concern were derivative contracts with respect to
partnerships and other pass-thru entities. The use of such
derivative contracts could result in the taxpayer being taxed
in a more favorable manner than had the taxpayer actually
acquired an ownership interest in the entity. The rules
designed to prevent the conversion of ordinary income into
capital gain (sec. 1258) only apply to transactions where the
taxpayer's expected return is attributable solely to the time
value of the taxpayer's net investment.
One example of a conversion transaction involving a
derivative contract is when a taxpayer enters into an
arrangement with a securities dealer \46\ whereby the dealer
agrees to pay the taxpayer any appreciation with respect to a
notional investment in a hedge fund. In return, the taxpayer
agrees to pay the securities dealer any depreciation in the
value of the notional investment. The arrangement lasts for
more than one year. The taxpayer is substantially in the same
economic position as if he or she owned the interest in the
hedge fund. However, the taxpayer may treat any appreciation
resulting from the contractual arrangement as long-term capital
gain. Moreover, any tax attributable to such gain is deferred
until the arrangement is terminated.
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\46\ Assuming the securities dealer purchases the financial asset,
the dealer would mark both the financial asset and the contractual
arrangement to market under Code sec. 475, and the economic (and tax)
consequences of the two positions would offset each other.
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Explanation of Provision
The provision limits the amount of long-term capital gain a
taxpayer can recognize from certain derivative contracts
(''constructive ownership transactions'') with respect to
certain financial assets. The amount of long-term capital gain
is limited to the amount of such gain the taxpayer would have
recognized if the taxpayer held the financial asset directly
during the term of the derivative contract. Any gain in excess
of this amount is treated as ordinary income. An interest
charge is imposed on the amount of gain that is treated as
ordinary income. The provision does not alter the tax treatment
of the long-term capital gain that is not treated as ordinary
income.
A taxpayer is treated as having entered into a constructive
ownership transaction if the taxpayer (1) holds a long position
under a notional principal contract with respect to the
financial asset, (2) enters into a forward contract to acquire
the financial asset, (3) is the holder of a call option, and
the grantor of a put option, with respect to a financial asset,
and the options have substantially equal strike prices and
substantially contemporaneous maturity dates, or (4) to the
extent provided in regulations, enters into one or more
transactions, or acquires one or more other positions, that
have substantially the same effect as any of the transactions
described. Treasury regulations, when issued, are expected to
provide specific standards for determining when other types of
financial transactions, like those specified in the provision,
have substantially the same effect of replicating the economic
benefits of direct ownership of a financial asset without a
significant change in the risk-reward profile with respect to
the underlying transaction.\47\
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\47\ It is not expected that leverage in a constructive ownership
transaction would change the risk-reward profile with respect to the
underlying transaction.
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A ``financial asset'' is defined as (1) any equity interest
in a pass-thru entity, and (2) to the extent provided in
regulations, any debt instrument and any stock in a corporation
that is not a pass-thru entity. A ``pass-thru entity'' refers
to (1) a regulated investment company, (2) a real estate
investment trust, (3) a real estate mortgage investment
conduit, (4) an S corporation, (5) a partnership, (6) a trust,
(7) a common trust fund, (8) a passive foreign investment
company,\48\ (9) a foreign personal holding company, and (10) a
foreign investment company.
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\48\ For this purpose, a passive foreign investment company
includes an investment company that is also a controlled foreign
corporation.
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The amount of recharacterized gain is calculated as the
excess of the amount of long-term capital gain the taxpayer
would have had absent this provision over the ``net underlying
long-term capital gain'' attributable to the financial asset.
The net underlying long-term capital gain is the amount of net
capital gain the taxpayer would have realized if it had
acquired the financial asset for its fair market value on the
date the constructive ownership transaction was opened and sold
the financial asset on the date the transaction was closed
(only taking into account gains and losses that would have
resulted from a deemed ownership of the financial asset).\49\
The long-term capital gains rate on the net underlying long-
term capital gain is determined by reference to the individual
capital gains rates in section 1(h).
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\49\ A taxpayer must establish the amount of the net underlying
long-term capital gain with clear and convincing evidence; otherwise,
the amount is deemed to be zero. To the extent that the economic
positions of the taxpayer and the counterparty do not equally offset
each other, the amount of the net underlying long-term capital gain may
be difficult to establish.
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Example 1: On January 1, 2000, Taxpayer enters into a
three- year notional principal contract (a constructive
ownership transaction) with a securities dealer whereby, on the
settlement date, the dealer agrees to pay Taxpayer the amount
of any increase in the notional value of an interest in an
investment partnership (the financial asset). After three
years, the value of the notional principal contract increased
by $200,000, of which $150,000 is attributable to ordinary
income and net short-term capital gain ($50,000 is attributable
to net long-term capital gains). The amount of the net
underlying long-term capital gains is $50,000, and the amount
of gain that is recharacterized as ordinary income is $150,000
(the excess of $200,000 of long-term gain over the $50,000 of
net underlying long-term capital gain).
An interest charge is imposed on the underpayment of tax
for each year that the constructive ownership transaction was
open. The interest charge is the amount of interest that would
be imposed under section 6601 had the recharacterized gain been
included in the taxpayer's gross income during the term of the
constructive ownership transaction. The recharacterized gain is
treated as having accrued such that the gain in each successive
year is equal to the gain in the prior year increased by a
constant growth rate \50\ during the term of the constructive
ownership transaction.
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\50\ The accrual rate is the applicable Federal rate on the day the
transaction closed.
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Example 2: Same facts as in example 1, and assume the
applicable Federal rate on December 31, 2002, is six percent.
For purposes of calculating the interest charge, Taxpayer must
allocate the $150,000 of recharacterized ordinary income to the
three year-term of the constructive ownership transaction as
follows: $47,116.47 is allocated to year 2000, $49,943.46 is
allocated to year 2001, and $52,940.07 is allocated to year
2002.
A taxpayer is treated as holding a long position under a
notional principal contract with respect to a financial asset
if the person (1) has the right to be paid (or receive credit
for) all or substantially all of the investment yield
(including appreciation) on the financial asset for a specified
period, and (2) is obligated to reimburse (or provide credit)
for all or substantially all of any decline in the value of the
financial asset. A forward contract is a contract to acquire in
the future (or provide or receive credit for the future value
of) any financial asset.
If the constructive ownership transaction is closed by
reason of taking delivery of the underlying financial asset,
the taxpayer is treated as having sold the contract, option, or
other position that is part of the transaction for its fair
market value on the closing date. However, the amount of gain
that is recognized as a result of having taken delivery is
limited to the amount of gain that is treated as ordinary
income by reason of this provision (with appropriate basis
adjustments for such gain).
The provision does not apply to any constructive ownership
transaction if all of the positions that are part of the
transaction are marked to market under the Code or regulations.
The Treasury Department is authorized to prescribe regulations
as necessary to carry out the purposes of the provision,
including to (1) permit taxpayers to mark to market
constructive ownership transactions in lieu of the provision,
and (2) exclude certain forward contracts that do not convey
substantially all of the economic return with respect to a
financial asset.
No inference is intended as to the proper treatment of a
constructive ownership transaction entered into prior to the
effective date of this provision.
Effective Date
The provision applies to transactions entered into on or
after July 12, 1999. For this purpose, it is expected that a
contract, option or any other arrangement that is entered into
or exercised on or after July 12, 1999, which extends or
otherwise modifies the terms of a transaction entered into
prior to such date will be treated as a transaction entered
into on or after July 12, 1999, unless a party to the
transaction other than the taxpayer has, as of July 12, 1999,
the exclusive right to extend the terms of the transaction, and
the length of such extension does not exceed the first business
day following a period of five years from the original
termination date under the transaction.
Revenue Effect
The provision is estimated to increase Federal fiscal year
budget receipts by $15 million in 2000, $45 million in 2001,
$47 million in 2002, $49 million in 2003, $51 million in 2004,
$54 million in 2005, $58 million in 2006, $62 million in 2007,
$66 million in 2008, $70 million in 2009, and $74 million in
2010.
5. Treatment of excess pension assets used for retiree health benefits
(sec. 535 of the Tax Relief Extension Act, sec. 420 of the
Code, and secs. 101, 403, and 408 of ERISA)
Present and Prior Law
Defined benefit pension plan assets generally may not
revert to an employer prior to the termination of the plan and
the satisfaction of all plan liabilities. A reversion prior to
plan termination may constitute a prohibited transaction and
may result in disqualification of the plan. Certain limitations
and procedural requirements apply to a reversion upon plan
termination. Any assets that revert to the employer upon plan
termination are includible in the gross income of the employer
and subject to an excise tax. The excise tax rate, which may be
as high as 50 percent of the reversion, varies depending upon
whether or not the employer maintains a replacement plan or
makes certain benefit increases. Upon plan termination, the
accrued benefits of all plan participants are required to be
100-percent vested.
A pension plan may provide medical benefits to retired
employees through a section 401(h) account that is a part of
such plan. A qualified transfer of excess assets of a defined
benefit pension plan (other than a multiemployer plan) into a
section 401(h) account that is a part of such plan does not
result in plan disqualification and is not treated as a
reversion to the employer or a prohibited transaction.
Therefore, the transferred assets are not includible in the
gross income of the employer and are not subject to the excise
tax on reversions.
Qualified transfers are subject to amount and frequency
limitations, use requirements, deduction limitations, and
vesting requirements. Under prior law, qualified transfers were
also subject to minimum benefit requirements.
Excess assets transferred in a qualified transfer may not
exceed the amount reasonably estimated to be the amount that
the employer will pay out of such account during the taxable
year of the transfer for qualified current retiree health
liabilities. No more than one qualified transfer with respect
to any plan may occur in any taxable year.
The transferred assets (and any income thereon) must be
used to pay qualified current retiree health liabilities
(either directly or through reimbursement) for the taxable year
of the transfer. Transferred amounts generally must benefit all
pension plan participants, other than key employees, who are
entitled upon retirement to receive retiree medical benefits
through the section 401(h) account. Retiree health benefits of
key employees may not be paid (directly or indirectly) out of
transferred assets. Amounts not used to pay qualified current
retiree health liabilities for the taxable year of the transfer
are to be returned at the end of the taxable year to the
general assets of the plan. These amounts are not includible in
the gross income of the employer, but are treated as an
employer reversion and are subject to a 20-percent excise tax.
No deduction is allowed for (1) a qualified transfer of
excess pension assets into a section 401(h) account, (2) the
payment of qualified current retiree health liabilities out of
transferred assets (and any income thereon) or (3) a return of
amounts not used to pay qualified current retiree health
liabilities to the general assets of the pension plan.
In order for the transfer to be qualified, accrued
retirement benefits under the pension plan generally must be
100-percent vested as if the plan terminated immediately before
the transfer.
Under prior law, the minimum benefit requirement required
each group health plan under which applicable health benefits
were provided to provide substantially the same level of
applicable health benefits for the taxable year of the transfer
and the following 4 taxable years. The level of benefits that
were required to be maintained was based on benefits provided
in the year immediately preceding the taxable year of the
transfer. Applicable health benefits are health benefits or
coverage that are provided to (1) retirees who, immediately
before the transfer, are entitled to receive such benefits upon
retirement and who are entitled to pension benefits under the
plan and (2) the spouses and dependents of such retirees.
Under prior law, the provision permitting a qualified
transfer of excess pension assets to pay qualified current
retiree health liabilities expired for taxable years beginning
after December 31, 2000.\51\
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\51\ Title I of the Employee Retirement Income Security Act of
1974, as amended (``ERISA''), provides that plan participants, the
Secretaries of Treasury and the Department of Labor, the plan
administrator, and each employee organization representing plan
participants must be notified 60 days before a qualified transfer of
excess assets to a retiree health benefits account occurs (ERISA sec.
103(e)). ERISA also provides that a qualified transfer is not a
prohibited transaction under ERISA (ERISA sec. 408(b)(13)) or a
prohibited reversion of assets to the employer (ERISA sec. 403(c)(1)).
For purposes of these provisions, a qualified transfer was generally
defined under prior law as a transfer pursuant to section 420 of the
Internal Revenue Code, as in effect on January 1, 1995.
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Reasons for Change
The Congress believed that it is appropriate to provide a
temporary extension of the rule permitting an employer to make
a qualified transfer of excess pension assets to a section
401(h) account for retiree health benefits as long as the
security of employees' pension benefits is not threatened by
the transfer. In light of the increasing cost of retiree health
benefits, the Congress also believed that it is appropriate to
replace the minimum benefit requirement applicable to qualified
transfers under prior law with a minimum cost requirement.
Explanation of Provision
The Tax Relief Extension Act extends the provision
permitting qualified transfers of excess defined benefit
pension plan assets to provide retiree health benefits under a
section 401(h) account through December 31, 2005.\52\ In
addition, the Tax Relief Extension Act replaces the prior-law
minimum benefit requirement with the minimum cost requirement
that applied to qualified transfers before December 9, 1994, to
section 401(h) accounts. Therefore, each group health plan or
arrangement under which applicable health benefits are provided
is required to provide a minimum dollar level of retiree health
expenditures for the taxable year of the transfer and the
following 4 taxable years. The minimum dollar level is the
higher of the applicable employer costs for each of the 2
taxable years immediately preceding the taxable year of the
transfer. The applicable employer cost for a taxable year is
determined by dividing the employer's qualified current retiree
health liabilities by the number of individuals to whom
coverage for applicable health benefits was provided during the
taxable year. The modification of the minimum benefit
requirement is effective with respect to transfers after the
date of enactment. The Secretary of the Treasury is directed to
prescribe such regulations as may be necessary to prevent an
employer who significantly reduces retiree health coverage
during the cost maintenance period from being treated as
satisfying the minimum cost requirement. In addition, the Tax
Relief Extension Act contains a transition rule regarding the
minimum cost requirement. Under this rule, an employer must
satisfy the minimum benefit requirement with respect to a
qualified transfer that occurs after the date of enactment
during the portion of the cost maintenance period of such
transfer that overlaps the benefit maintenance period of a
qualified transfer that occurs on or before the date of
enactment. For example, suppose an employer (with a calendar
year taxable year) made a qualified transfer in 1998. The
minimum benefit requirement must be satisfied for calendar
years 1998, 1999, 2000, 2001, and 2002. Suppose the employer
also makes a qualified transfer in 2000. Then, the employer is
required to satisfy the minimum benefit requirement in 2000,
2001, and 2002, and is required to satisfy the minimum cost
requirement in 2003 and 2004.
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\52\ The Tax Relief Extension Act modifies the corresponding
provisions of ERISA.
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Effective Date
The provision is effective with respect to qualified
transfers of excess defined benefit pension plan assets to
section 401(h) accounts after December 31, 2000, and before
January 1, 2006. The modification of the minimum benefit
requirement is effective with respect to transfers after the
date of enactment. In addition, the provision contains a
transition rule regarding the minimum cost requirement. Under
this rule, an employer must satisfy the minimum benefit
requirement with respect to a qualified transfer that occurs
after the date of enactment during the portion of the cost
maintenance period of such transfer that overlaps the benefit
maintenance period of a qualified transfer that occurs on or
before the date of enactment. For example, suppose an employer
(with a calendar year taxable year) made a qualified transfer
in 1998. The minimum benefit requirement must be satisfied for
calendar years 1998, 1999, 2000, 2001, and 2002. Suppose the
employer also makes a qualified transfer in 2000. Then, the
employer is required to satisfy the minimum benefit requirement
in 2000, 2001, and 2002, and is required to satisfy the minimum
cost requirement in 2003 and 2004.
Revenue Effect
The provision is estimated to increase Federal fiscal year
budget receipts by $19 million in 2001, $38 million in 2002,
$39 million in 2003, $40 million in 2004, $43 million in 2005,
and $23 million in 2006.
6. Modification of installment method and repeal of installment method
for accrual method taxpayers (sec. 536 of the Tax Relief
Extension Act and sections 453 and 453A of the Code)
Present and Prior Law
An accrual method taxpayer is generally required to
recognize income when all the events have occurred that fix the
right to the receipt of the income and the amount of the income
can be determined with reasonable accuracy. The installment
method of accounting provides an exception to this general
principle of income recognition by allowing a taxpayer to defer
the recognition of income from the disposition of certain
property until payment is received. Sales to customers in the
ordinary course of business are not eligible for the
installment method, except for sales of property that is used
or produced in the trade or business of farming and sales of
timeshares and residential lots if an election to pay interest
under section 453(l)(2)(B) is made.
A pledge rule provides that if an installment obligation is
pledged as security for any indebtedness, the net proceeds \53\
of such indebtedness are treated as a payment on the
obligation, triggering the recognition of income. Actual
payments received on the installment obligation subsequent to
the receipt of the loan proceeds are not taken into account
until such subsequent payments exceed the loan proceeds that
were treated as payments. The pledge rule does not apply to
sales of property used or produced in the trade or business of
farming, to sales of timeshares and residential lots where the
taxpayer elects to pay interest under section 453(l)(2)(B), or
to dispositions where the sales price does not exceed $150,000.
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\53\ The net proceeds equal the gross loan proceeds less the direct
expenses of obtaining the loan.
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An additional rule requires the payment of interest on the
deferred tax that is attributable to most large installment
sales.
Reasons for Change
The Congress believed that the installment method is
inconsistent with the use of an accrual method of accounting
and should not be allowed in situations where the disposition
of property would otherwise be reported using the accrual
method. The Congress was concerned that the continued use of
the installment method in such situations would allow a
deferral of gain that is inconsistent with the requirement of
the accrual method that income be reported in the period it is
earned, rather than the period it is received.
The Congress also believed that the installment method,
where its use is appropriate, should not serve to defer the
recognition of gain beyond the time when funds are received.
Accordingly, the Congress believed that proceeds of a loan
should be treated in the same manner as a payment on an
installment obligation if the loan is dependent on the
existence of the installment obligation, such as where the loan
is secured by the installment obligation or can be satisfied by
the delivery of the installment obligation.
Explanation of Provision
Repeal of the installment method for accrual method taxpayers \54\
The Act generally prohibits the use of the installment
method of accounting for dispositions of property that would
otherwise be reported for Federal income tax purposes using an
accrual method of accounting. The provision does not change
present law regarding the availability of the installment
method for dispositions of property used or produced in the
trade or business of farming. The provision also does not
change present law regarding the availability of the
installment method for dispositions of timeshares or
residential lots if the taxpayer elects to pay interest under
section 453(l).
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\54\ The Installment Tax Correction Act of 2000 (P.L. 106-573)
subsequently repealed the prohibition of the use of the installment
method for accrual method taxpayers as if it had not been enacted. The
Installment Tax Correction Act of 2000 left unchanged the modifications
made by this provision to the pledge rule.
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The provision does not change the ability of a cash method
taxpayer to use the installment method. For example, a cash
method individual owns all of the stock of a closely held
accrual method corporation. This individual sells his stock for
cash, a ten-year note, and a percentage of the gross revenues
of the company for next ten years. The provision does not
change the ability of this individual to use the installment
method in reporting the gain on the sale of the stock.
Modifications to the pledge rule
The Act modifies the pledge rule to provide that entering
into any arrangement that gives the taxpayer the right to
satisfy an obligation with an installment note will be treated
in the same manner as the direct pledge of the installment
note. For example, a taxpayer disposes of property for an
installment note. The disposition is properly reported using
the installment method. The taxpayer only recognizes gain as it
receives the deferred payment. However, were the taxpayer to
pledge the installment note as security for a loan, the
taxpayer would be required to treat the proceeds of such loan
as a payment on the installment note, and recognize the
appropriate amount of gain. Under the provision, the taxpayer
would also be required to treat the proceeds of a loan as
payment on the installment note to the extent the taxpayer had
the right to ``put'' or repay the loan by transferring the
installment note to the taxpayer's creditor. Other arrangements
that have a similar effect would be treated in the same manner.
The modification of the pledge rule applies only to
installment sales where the pledge rule of present law applies.
Accordingly, the provision does not apply to (1) installment
method sales made by a dealer in timeshares and residential
lots where the taxpayer elects to pay interest under section
453(l)(2)(B), (2) sales of property used or produced in the
trade or business of farming, or (3) dispositions where the
sales price does not exceed $150,000, since such sales are not
subject to the pledge rule under present law.
Effective Date
The provision is effective for sales or other dispositions
entered into on or after the date of enactment (December 17,
1999).
Revenue Effect
The provision is estimated to increase Federal fiscal year
budget receipts by $489 million in 2000, $694 million in 2001,
$416 million in 2002, $257 million in 2003, $72 million in
2004, $10 million in 2005, $21 million in 2006, $35 million in
2007, $48 million in 2008, $62 million in 2009, and $78 million
in 2010.
7. Denial of charitable contribution deduction for transfers associated
with split-dollar insurance arrangements (sec. 537 of the Tax
Relief Extension Act and new sec. 501(c)(28) of the Code)
Present and Prior Law
Under present and prior law, in computing taxable income, a
taxpayer who itemizes deductions generally is allowed to deduct
charitable contributions paid during the taxable year. The
amount of the deduction allowable for a taxable year with
respect to any charitable contribution depends on the type of
property contributed, the type of organization to which the
property is contributed, and the income of the taxpayer (secs.
170(b) and 170(e)). A charitable contribution is defined to
mean a contribution or gift to or for the use of a charitable
organization or certain other entities (sec. 170(c)). The term
``contribution or gift'' is not defined by statute, but
generally is interpreted to mean a voluntary transfer of money
or other property without receipt of adequate consideration and
with donative intent. If a taxpayer receives or expects to
receive a quid pro quo in exchange for a transfer to charity,
the taxpayer may be able to deduct the excess of the amount
transferred over the fair market value of any benefit received
in return, provided the excess payment is made with the
intention of making a gift.\55\
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\55\ United States v. American Bar Endowment, 477 U.S. 105 (1986).
Treas. Reg. sec. 1.170A-1(h).
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In general, no charitable contribution deduction is allowed
for a transfer to charity of less than the taxpayer's entire
interest (i.e., a partial interest) in any property (sec.
170(f)(3)). In addition, no deduction is allowed for any
contribution of $250 or more unless the taxpayer obtains a
contemporaneous written acknowledgment from the donee
organization that includes a description and good faith
estimate of the value of any goods or services provided by the
donee organization to the taxpayer in consideration, whole or
part, for the taxpayer's contribution (sec. 170(f)(8)).
Reasons for Change
The Congress was concerned about an abusive scheme \56\
referred to as charitable split-dollar life insurance, and the
provision is designed to stop the spread of this scheme. Under
this scheme, taxpayers typically transfer money to a charity,
which the charity then uses to pay premiums for cash value life
insurance on the transferor or another person. The
beneficiaries under the life insurance contract typically
include members of the transferor's family (either directly or
through a family trust or family partnership). Having passed
the money through a charity, the transferor claims a charitable
contribution deduction for money that is actually being used to
benefit the transferor and his or her family. If the transferor
or the transferor's family paid the premium directly, the
payment would not be deductible. Although the charity
eventually may get some of the benefit under the life insurance
contract, it does not have unfettered use of the transferred
funds.
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\56\ ``A Popular Tax Shelter for `Angry Affluent' Prompts Ire of
Others,'' Wall Street Journal, Jan. 22, 1999, p. A1; ``U.S. Treasury
Officials Investigating Charitable Split-Dollar Insurance Plan,'' Wall
Street Journal, Jan. 29, 1999, p. B5; ``Brilliant Deduction?,'' The
Chronicle of Philanthropy, Aug. 13, 1998, p. 24; ``Charitable Reverse
Split-Dollar: Bonanza or Booby Trap,'' Journal of Gift Planning, 2nd
quarter 1998.
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The Congress was concerned that this type of transaction
represents an abuse of the charitable contribution deduction.
The Congress was also concerned that the charity often gets
relatively little benefit from this type of scheme, and serves
merely as a conduit or accommodation party, which the Congress
did not view as appropriate for an organization with tax-exempt
status. In substance, the charity receives a transfer of a
partial interest in an insurance policy, for which no
charitable contribution deduction is allowed. While there was
no basis under prior law for allowing a charitable contribution
deduction in these circumstances, the Congress intended that
the provision stop the marketing of these transactions
immediately.
Therefore, the provision clarifies prior law by
specifically denying a charitable contribution deduction for a
transfer to a charity if the charity directly or indirectly
pays or paid any premium on a life insurance, annuity or
endowment contract in connection with the transfer, and any
direct or indirect beneficiary under the contract is the
transferor, any member of the transferor's family, or any other
noncharitable person chosen by the transferor. In addition, the
provision clarifies prior law by specifically denying the
deduction for a charitable contribution if, in connection with
a transfer to the charity, there is an understanding or
expectation that any person will directly or indirectly pay any
premium on any such contract.
The provision provides that certain persons are not treated
as indirect beneficiaries, in certain cases in which a
charitable organization purchases an annuity contract to fund
an obligation to pay a charitable gift annuity. The provision
also provides that a person is not treated as an indirect
beneficiary solely by reason of being a noncharitable recipient
of an annuity or unitrust amount paid by a charitable remainder
trust that holds a life insurance, annuity or endowment
contract. The rationale for these rules is that the amount of
the charitable contribution deduction is limited under prior
and present law to the value of the charitable organization's
interest. Congress had previously enacted rules designed to
prevent a charitable contribution deduction for the value of
any personal benefit to the donor in these circumstances, and
the Congress expected that the personal benefit to the donor be
appropriately valued.
Further, the provision imposes an excise tax on the
charity, equal to the amount of the premiums paid by the
charity. Finally, the provision requires a charity to report
annually to the Internal Revenue Service the amount of premiums
subject to this excise tax and information about the
beneficiaries under the contract.
Explanation of Provision
Deduction denial
The provision \57\ restates prior law to provide that no
charitable contribution deduction is allowed for purposes of
Federal tax, for a transfer to or for the use of an
organization described in section 170(c) of the Internal
Revenue Code, if in connection with the transfer (1) the
organization directly or indirectly pays, or has previously
paid, any premium on any ``personal benefit contract'' with
respect to the transferor, or (2) there is an understanding or
expectation that any person will directly or indirectly pay any
premium on any ``personal benefit contract'' with respect to
the transferor. It is intended that an organization be
considered as indirectly paying premiums if, for example,
another person pays premiums on its behalf.
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\57\ The provision is similar to H.R. 630, introduced by Mr. Archer
and Mr. Rangel (106th Cong., 1st Sess.).
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A personal benefit contract with respect to the transferor
is any life insurance, annuity, or endowment contract, if any
direct or indirect beneficiary under the contract is the
transferor, any member of the transferor's family, or any other
person (other than a section 170(c) organization) designated by
the transferor. For example, such a beneficiary would include a
trust having a direct or indirect beneficiary who is the
transferor or any member of the transferor's family, and would
include an entity that is controlled by the transferor or any
member of the transferor's family. It is intended that a
beneficiary under the contract include any beneficiary under
any side agreement relating to the contract. If a transferor
contributes a life insurance contract to a section 170(c)
organization and designates one or more section 170(c)
organizations as the sole beneficiaries under the contract,
generally, it is not intended that the deduction denial rule
under the provision apply. If, however, there is an outstanding
loan under the contract upon the transfer of the contract, then
the transferor is considered as a beneficiary. The fact that a
contract also has other direct or indirect beneficiaries
(persons who are not the transferor or a family member, or
designated by the transferor) does not prevent it from being a
personal benefit contract. The provision is not intended to
affect situations in which an organization pays premiums under
a legitimate fringe benefit plan for employees.
It is intended that a person be considered as an indirect
beneficiary under a contract if, for example, the person
receives or will receive any economic benefit as a result of
amounts paid under or with respect to the contract. For this
purpose, as described below, an indirect beneficiary is not
intended to include a person that benefits exclusively under a
bona fide charitable gift annuity (within the meaning of sec.
501(m)).
In the case of a charitable gift annuity, if the charitable
organization purchases an annuity contract issued by an
insurance company to fund its obligation to pay the charitable
gift annuity, a person receiving payments under the charitable
gift annuity is not treated as an indirect beneficiary,
provided certain requirements are met. The requirements are
that (1) the charitable organization possess all of the
incidents of ownership (within the meaning of Treas. Reg. sec.
20.2042-1(c)) under the annuity contract purchased by the
charitable organization; (2) the charitable organization be
entitled to all the payments under the contract; and (3) the
timing and amount of payments under the contract be
substantially the same as the timing and amount of payments to
each person under the organization's obligation under the
charitable gift annuity (as in effect at the time of the
transfer to the charitable organization).
Under the provision, an individual's family consists of the
individual's grandparents, the grandparents of the individual's
spouse, the lineal descendants of such grandparents, and any
spouse of such a lineal descendant.
In the case of a charitable gift annuity obligation that is
issued under the laws of a State that requires, in order for
the charitable gift annuity to be exempt from insurance
regulation by that State, that each beneficiary under the
charitable gift annuity be named as a beneficiary under an
annuity contract issued by an insurance company authorized to
transact business in that State, then the foregoing
requirements (1) and (2) are treated as if they are met,
provided that certain additional requirements are met. The
additional requirements are that the State law requirement was
in effect on February 8, 1999, each beneficiary under the
charitable gift annuity is a bona fide resident of the State at
the time the charitable gift annuity was issued, the only
persons entitled to payments under the annuity contract issued
by the insurance company are persons entitled to payments under
the charitable gift annuity when it was issued, and (as
required by clause (iii) of subparagraph (D) of the provision)
the timing and amount of payments under the annuity contract to
each person are substantially the same as the timing and amount
of payments to the person under the charitable organization's
obligation under the charitable gift annuity (as in effect at
the time of the transfer to the charitable organization).
In the case of a charitable remainder annuity trust or
charitable remainder unitrust (as defined in section 664(d))
that holds a life insurance, endowment or annuity contract
issued by an insurance company, a person is not treated as an
indirect beneficiary under the contract held by the trust,
solely by reason of being a recipient of an annuity or unitrust
amount paid by the trust, provided that the trust possesses all
of the incidents of ownership under the contract and is
entitled to all the payments under such contract. No inference
is intended as to the applicability of other provisions of the
Code with respect to the acquisition by the trust of a life
insurance, endowment or annuity contract, or the
appropriateness of such an investment by a charitable remainder
trust.
Nothing in the provision is intended to suggest that a life
insurance, endowment, or annuity contract would be a personal
benefit contract, solely because an individual who is a
recipient of an annuity or unitrust amount paid by a charitable
remainder annuity trust or charitable remainder unitrust uses
such a payment to purchase a life insurance, endowment or
annuity contract, and a beneficiary under the contract is the
recipient, a member of his or her family, or another person he
or she designates.
Excise tax
The provision imposes on any organization described in
section 170(c) of the Code an excise tax, equal to the amount
of the premiums paid by the organization on any life insurance,
annuity, or endowment contract, if the premiums are paid in
connection with a transfer for which a deduction is not
allowable under the deduction denial rule of the provision
(without regard to when the transfer to the charitable
organization was made). The excise tax does not apply if all of
the direct and indirect beneficiaries under the contract
(including any related side agreement) are organizations
described in section 170(c). Under the provision, payments are
treated as made by the organization, if they are made by any
other person pursuant to an understanding or expectation of
payment. The excise tax is to be applied taking into account
rules ordinarily applicable to excise taxes in chapter 41 or 42
of the Code (e.g., statute of limitation rules).
Reporting
The provision requires that the charitable organization
annually report the amount of premiums that is paid during the
year and that is subject to the excise tax imposed under the
provision, and the name and taxpayer identification number of
each beneficiary under the life insurance, annuity or endowment
contract to which the premiums relate, as well as other
information required by the Secretary of the Treasury. For this
purpose, it is intended that a beneficiary include any
beneficiary under any side agreement to which the section
170(c) organization is a party (or of which it is otherwise
aware). Penalties applicable to returns required under Code
section 6033 apply to returns under this reporting requirement.
Returns required under this provision are to be furnished at
such time and in such manner as the Secretary shall by forms or
regulations require.
Regulations
The provision provides for the promulgation of regulations
necessary or appropriate to carry out the purposes of the
provisions, including regulations to prevent the avoidance of
the purposes of the provision. For example, it is intended that
regulations prevent avoidance of the purposes of the provision
by inappropriate or improper reliance on the limited exceptions
provided for certain beneficiaries under bona fide charitable
gift annuities and for certain noncharitable recipients of an
annuity or unitrust amount paid by a charitable remainder
trust.
Effective Date
The deduction denial provision applies to transfers after
February 8, 1999 (as provided in H.R. 630). The excise tax
provision applies to premiums paid after the date of enactment.
The reporting provision applies to premiums paid after February
8, 1999 (determined as if the excise tax imposed under the
provision applied to premiums paid after that date).
No inference is intended that a charitable contribution
deduction was allowed under prior law with respect to a
charitable split-dollar insurance arrangement. The provision
does not change the rules with respect to fraud or criminal or
civil penalties under prior or present law; thus, actions
constituting fraud or that are subject to penalties under prior
or present law would still constitute fraud or be subject to
the penalties after enactment of the provision.
Revenue Effect
The provision is estimated to have a negligible effect on
Federal fiscal year budget receipts.
8. Distributions by a partnership to a corporate partner of stock in
another corporation (sec. 538 of the Tax Relief Extension Act
and new sec. 732(f) of the Code)
Present and Prior Law
Present and prior law generally provide that no gain or
loss is recognized on the receipt by a corporation of property
distributed in complete liquidation of another corporation in
which it holds 80 percent of the stock (by vote and value)
(sec. 332). The basis of property received by a corporate
distributee in the distribution in complete liquidation of the
80-percent-owned subsidiary is a carryover basis, i.e., the
same as the basis in the hands of the subsidiary (provided no
gain or loss is recognized by the liquidating corporation with
respect to the distributed property) (sec. 334(b)).
Present and prior law provide two different rules for
determining a partner's basis in distributed property,
depending on whether or not the distribution is in liquidation
of the partner's interest in the partnership. Generally, a
substituted basis rule applies to property distributed to a
partner in liquidation. Thus, the basis of property distributed
in liquidation of a partner's interest is equal to the
partner's adjusted basis in its partnership interest (reduced
by any money distributed in the same transaction) (sec.
732(b)).
By contrast, generally, a carryover basis rule applies to
property distributed to a partner other than in liquidation of
its partnership interest, subject to a cap (sec. 732(a)). Thus,
in a non-liquidating distribution, the distributee partner's
basis in the property is equal to the partnership's adjusted
basis in the property immediately before the distribution, but
not to exceed the partner's adjusted basis in its partnership
interest (reduced by any money distributed in the same
transaction). In a non-liquidating distribution, the partner's
basis in its partnership interest is reduced by the amount of
the basis to the distributee partner of the property
distributed and is reduced by the amount of any money
distributed (sec. 733).
If corporate stock is distributed by a partnership to a
corporate partner with a low basis in its partnership interest,
the basis of the stock is reduced in the hands of the partner
so that the stock basis equals the distributee partner's
adjusted basis in its partnership interest. Under prior law, no
comparable reduction was made in the basis of the corporation's
assets, however. Under prior law, the effect of reducing the
stock basis could be negated by a subsequent liquidation of the
corporation under section 332.\58\
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\58\ In a similar situation involving the purchase of stock of a
subsidiary corporation as replacement property following an involuntary
conversion, the Code generally requires the basis of the assets held by
the subsidiary to be reduced to the extent that the basis of the stock
in the replacement corporation itself is reduced (sec. 1033).
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Reasons for Change
The Congress was concerned that the downward adjustment to
the basis of property distributed by a partnership may be
nullified if the distributed property is corporate stock. The
distributed corporation could be liquidated by the corporate
partner, so that the stock basis adjustment would have no
effect. Similarly, if the corporations file a consolidated
return, their taxable income may be computed without reference
to the downward adjustment to the basis of the stock. These
results could occur either if the partnership has contributed
property to the distributed corporation, or if the property was
held by the corporation before the distribution. Therefore, the
provision requires a basis reduction to the property of the
distributed corporation.
Explanation of Provision
In general
The provision provides for a basis reduction to assets of a
corporation, if stock in that corporation is distributed by a
partnership to a corporate partner. The reduction applies if,
after the distribution, the corporate partner controls the
distributed corporation.
Amount of the basis reduction
Under the provision, the amount of the reduction in basis
of property of the distributed corporation generally equals the
amount of the excess of (1) the partnership's adjusted basis in
the stock of the distributed corporation immediately before the
distribution, over (2) the corporate partner's basis in that
stock immediately after the distribution.
The provision limits the amount of the basis reduction in
two respects. First, the amount of the basis reduction may not
exceed the amount by which (1) the sum of the aggregate
adjusted bases of the property and the amount of money of the
distributed corporation exceeds (2) the corporate partner's
adjusted basis in the stock of the distributed corporation.
Thus, for example, if the distributed corporation has cash of
$300 and other property with a basis of $600 and the corporate
partner's basis in the stock of the distributed corporation is
$400, then the amount of the basis reduction could not exceed
$500 (i.e., ($300 + $600) - $400 = $500).
Second, the amount of the basis reduction may not exceed
the adjusted basis of the property of the distributed
corporation. Thus, the basis of property (other than money) of
the distributed corporation could not be reduced below zero
under the provision, even though the total amount of the basis
reduction would otherwise be greater.
The provision provides that the corporate partner
recognizes long-term capital gain to the extent the amount of
the basis reduction exceeds the basis of the property (other
than money) of the distributed corporation. In addition, the
corporate partner's adjusted basis in the stock of the
distribution is increased in the same amount. For example, if
the amount of the basis reduction were $400, and the
distributed corporation has money of $200 and other property
with an adjusted basis of $300, then the corporate partner
would recognize a $100 capital gain under the provision. The
corporate partner's basis in the stock of the distributed
corporation is also increased by $100 in this example, under
the provision.
The basis reduction is allocated among assets of the
controlled corporation in accordance with the rules provided
under section 732(c).
Partnership distributions resulting in control
The basis reduction generally applies with respect to a
partnership distribution of stock if the corporate partner
controls the distributed corporation immediately after the
distribution or at any time thereafter. For this purpose, the
term control means ownership of stock meeting the requirements
of section 1504(a)(2) (generally, an 80-percent vote and value
requirement).\59\
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\59\ Note that a technical correction to this provision was enacted
in The Community Renewal Tax Relief Act of 2000 (106th Cong., 2d Sess.,
P.L. 106-554) (described in this volume). Section 311(c) of H.R. 5662
as incorporated in that Act provides that the rule in the consolidated
return regulations (Treas. Reg. sec. 1.1502-34) aggregating stock
ownership for purposes of section 332 (relating to complete liquidation
of a subsidiary that is a controlled corporation) also applies for
purposes of section 732(f) (relating to basis adjustments to assets of
a controlled corporation received in a partnership distribution).
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The provision applies to reduce the basis of any property
held by the distributed corporation immediately after the
distribution, or, if the corporate partner does not control the
distributed corporation at that time, then at the time the
corporate partner first has such control. The provision does
not apply to any distribution if the corporate partner does not
have control of the distributed corporation immediately after
the distribution and establishes that the distribution was not
part of a plan or arrangement to acquire control.
For purposes of the provision, if a corporation acquires
(other than in a distribution from a partnership) stock the
basis of which is determined (by reason of being distributed
from a partnership) in whole or in part by reference to section
732(a)(2) or (b), then the corporation is treated as receiving
a distribution of stock from a partnership. For example, if a
partnership distributes property other than stock (such as real
estate) to a corporate partner, and that corporate partner
contributes the real estate to another corporation in a section
351 transaction, then the stock received in the section 351
transaction is not treated as distributed by a partnership, and
the basis reduction under this provision does not apply. As
another example, if a partnership distributes stock to two
corporate partners, neither of which have control of the
distributed corporation, and the two corporate partners merge
and the survivor obtains control of the distributed
corporation, the stock of the distributed corporation that is
acquired as a result of the merger is treated as received in a
partnership distribution; the basis reduction rule of the
provision applies.
In the case of tiered corporations, a special rule provides
that if the property held by a distributed corporation is stock
in a corporation that the distributed corporation controls,
then the provision is applied to reduce the basis of the
property of that controlled corporation. The provision is also
reapplied to any property of any controlled corporation that is
stock in a corporation that it controls. Thus, for example, if
stock of a controlled corporation is distributed to a corporate
partner, and the controlled corporation has a subsidiary, the
amount of the basis reduction allocable to stock of the
subsidiary is applied again to reduce the basis of the assets
of the subsidiary, under the special rule.
The provision also provides for regulations, including
regulations to avoid double counting and to prevent the abuse
of the purposes of the provision. It is intended that
regulations prevent the avoidance of the purposes of the
provision through the use of tiered partnerships.
Effective Date
The provision is effective generally for distributions made
after July 14, 1999. However, in the case of a corporation that
is a partner in a partnership as of July 14, 1999, the
provision is effective for any distribution made (or treated as
made) to that partner from that partnership after June 30,
2001. In the case of any such distribution after the date of
enactment and before July 1, 2001, the rule of the preceding
sentence does not apply unless that partner makes an election
to have the rule apply to the distribution on the partner's
return of Federal income tax for the taxable year in which the
distribution occurs.
No inference is intended that distributions that are not
subject to the provision achieve a particular tax result under
present law, and no inference is intended that enactment of the
provision limits the application of tax rules or principles
under present or prior law.
Revenue Effect
The provision is estimated to increase Federal fiscal year
budget receipts by $2 million in 2000, $4 million in 2001, $7
million in 2002, and $10 million in each of the years 2003
through 2010.
B. Provisions Relating to Real Estate Investment Trusts (sec. 541-547,
551, 556, 561, 566, and 571 of the Tax Relief Extension Act and secs.
852, 856, 857, and 6655 of the Code)
1. General provisions
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 requirements for REIT
status, 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 an annual 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 from
real property, dividends, interest, and certain other passive
sources (the ``95 percent test''). In addition, at least 75
percent of its gross income generally must be from real estate
sources, including rents from real property and interest on
mortgages secured by real property. For purposes of the 95 and
75 percent tests, qualified income includes amounts received
from certain ``foreclosure property,'' treated as such for 3
years after the property is acquired by the REIT in foreclosure
after a default (or imminent default) on a lease of such
property or on indebtedness which such property secured.
In general, for purposes of the 95 percent and 75 percent
tests, rents from real property do not include amounts for
services to tenants or for managing or operating real property.
However, there are some exceptions. Qualified rents include
amounts received for services that are ``customarily furnished
or rendered'' in connection with the rental of real property,
so long as the services are furnished through an independent
contractor from whom the REIT does not derive any income.
Amounts received for services that are not ``customarily
furnished or rendered'' are not qualified rents.
An independent contractor is defined as a person who does
not own, directly or indirectly, more than 35 percent of the
shares of the REIT. Also, no more than 35 percent of the total
shares of stock of an independent contractor (or of the
interests in assets or net profits, if not a corporation) can
be owned directly or indirectly by persons owning 35 percent or
more of the interests in the REIT. In addition, a REIT cannot
derive any income from an independent contractor.
Rents for certain personal property leased in connection
with real property are treated as rents from real property if
the adjusted basis of the personal property does not exceed 15
percent of the aggregate adjusted bases of the real and the
personal property.
In general, rents from real property do not include amounts
received from any corporation if the REIT owns 10 percent or
more of the voting power or of the total number of shares of
all classes of stock of such corporation. Similarly, in the
case of other entities, rents are not qualified if the REIT
owns 10 percent of more in the assets or net profits of such
person.
At the close of each quarter of the taxable year, at least
75 percent of the value of total REIT assets must be
represented by real estate assets, cash and cash items, and
Government securities. Also, a REIT cannot own securities
(other than Government securities and certain real estate
assets) in an amount greater than 25 percent of the value of
REIT assets. In addition, under prior law, a REIT could not own
securities of any one issuer representing more than 5 percent
of the total value of REIT assets or more than 10 percent of
the voting securities of any corporate issuer. Securities for
purposes of these rules are defined by reference to the
Investment Company Act of 1940.\60\
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\60\ 15 U.S.C. 80a-1 and following. See Code section 856(c)(5)(F).
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Under an exception to the ownership rule, a REIT is
permitted to have a wholly owned subsidiary corporation, but
the assets and items of income and deduction of such
corporation are treated as those of the REIT, and thus can
affect the qualification of the REIT under the income and asset
tests.
A REIT generally is required to distribute 95 percent of
its income before the end of its taxable year, as deductible
dividends paid to shareholders. This rule is similar to a rule
for regulated investment companies (``RICs'') that requires
distribution of 90 percent of income. Both REITS and RICs can
make certain ``deficiency dividends'' after the close of the
taxable year, and have these treated as made before the end of
the year. The regulations applicable to REITS state that a
distribution will be treated as a ``deficiency dividend'' (and,
thus, as made before the end of the prior taxable year) only to
the extent the earnings and profits for that year exceed the
amount of distributions actually made during the taxable
year.\61\
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\61\ Treas. Reg. sec. 1.858-1(b)(2).
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A REIT that has been or has combined with a C corporation
\62\ will be disqualified if, as of the end of its taxable
year, it has accumulated earnings and profits from a non-REIT
year. A similar rule applies to regulated investment companies
(``RICs''). In the case of a REIT, any distribution made in
order to comply with this requirement is treated as being first
from pre-REIT accumulated earnings and profits. RICs do not
have a similar ordering rule.
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\62\ A ``C corporation'' is a corporation that is subject to
taxation under the rules of subchapter C of the Internal Revenue Code,
which generally provides for a corporate level tax on corporate income.
Thus, a C corporation is not a pass-through entity. Earnings and
profits of a C corporation, when distributed to shareholders, are taxed
to the shareholders as dividends.
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In the case of a RIC, any distribution made within a
specified period after determination that the investment
company did not qualify as a RIC for the taxable year will be
treated as applying to the RIC for the non-RIC year, ``for
purposes of applying [the earnings and profits rule that
forbids a RIC to have non-RIC earnings and profits] to
subsequent taxable years.'' The REIT rules do not specify any
particular separate treatment of distributions made after the
end of the taxable year for purposes of the earnings and
profits rule. Treasury regulations under the REIT provisions
state that ``distribution procedures similar to those . . . for
regulated investment companies apply to non-REIT earnings and
profits of a real estate investment trust.'' \63\
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\63\ Treas. Reg. sec. 1.857-11(c).
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Reasons for Change
The Congress was concerned that nonqualified income of a
REIT might be avoided under prior law through transactions with
entities that engaged in activities producing nonqualified
income and that were effectively owned by the REIT. For
example, a REIT might invest in an entity in which it owned
virtually all the value (e.g., through preferred stock) even
though it owned only a small amount of the vote. The remainder
of the voting power might be held by persons related to the
REIT such as its officers, directors, or employees. The REIT
might effectively be a beneficiary of virtually all the
earnings of the entity, through its preferred stock ownership.
Also, the REIT might hold significant debt in the entity, and
receive significant interest income that reduced the entity's
taxable income (subject to corporate level tax if the entity is
a C corporation) while producing permissible income to the
REIT.
Similarly, if the entity was a partnership engaged in
activities that would generate nonqualified income for the REIT
if done directly, the REIT might use a significant debt
investment in the partnership combined with a small equity
interest, to reduce the amount of nonqualified income the REIT
would report from the partnership through its partnership
interest, while still receiving a significant income stream
through the debt.
As a result of these concerns, the Congress believed that a
10-percent value, as well as a 10-percent vote test, generally
is appropriate to test the permitted relationship of a REIT to
the entities in which it invests.
The Congress believed however, that certain types of
activities that relate to the REIT's real estate investments
should be permitted to be performed under the control of the
REIT, through the establishment of a ``taxable REIT
subsidiary'' where there are rules which limit the amount of
the subsidiary's income that can be reduced through
transactions with the REIT. A limit on the amount of REIT asset
value that can be represented by investment in such
subsidiaries was also desirable. In addition, the Congress
believed it is desirable to obtain information regarding the
extent of use of the new taxable REIT subsidiaries and the
amount of corporate Federal income tax that such subsidiaries
are paying. One type of activity is the provision of tenant
services that the REIT wishes to provide in order to remain
competitive that might not be considered customary because they
are relatively new or ``cutting-edge''. The Congress believed
that provision of tenant services by taxable REIT subsidiaries
will simplify such rental operations since uncertainty whether
a particular service provided by a subsidiary is ``customary''
will not affect the parent's qualification as a REIT. Another
type of activity that the Congress believed appropriate for a
subsidiary is management and operation of the real estate in
which a REIT has developed expertise with respect to its own
properties that it also would like to provide to third parties.
The Congress believed that allowing operation of health
care facilities directly by a REIT for a limited period of time
is appropriate to assure continuous provision of health care
services where the facilities are acquired by the REIT upon
termination of a lease (as upon foreclosure) where there may
not be enough time to obtain a new independent provider of such
health care services.
Finally, the Congress believed that a number of other
simplifying changes are desirable, including simplifying the
determination whether a publicly traded entity is an
independent contractor and modifying and conforming certain RIC
and REIT distribution rules.
Explanation of Provision
Investment limitations and taxable REIT subsidiaries
Investment limitations
General rule.--Under the provision, a REIT generally cannot
own more than 10 percent of the total value of securities of a
single issuer, in addition to the prior law rule that a REIT
cannot own more than 10 percent of the outstanding voting
securities of a single issuer. In addition, no more than 20
percent of the value of a REIT's assets can be represented by
securities (as defined in the Investment Company Act of 1940)
of taxable REIT subsidiaries that are permitted under the Act.
Exception for safe-harbor debt.--For purposes of the new
10-percent value test, securities generally are defined to
exclude safe harbor ``straight debt'' owned by a REIT (as
defined in Code sections 1361(c)(5)(B)(i) and (ii)) if the
issuer is an individual, or if the REIT (and any taxable REIT
subsidiary of such REIT) owns no other securities of the
issuer. However, in the case of a REIT that owns securities of
a partnership, safe harbor debt is excluded from the definition
of securities only if the REIT owns at least 20-percent or more
of the profits interest in the partnership. The purpose of the
partnership rule requiring a 20 percent profits interest is to
assure that if the partnership produces income that would be
disqualified income to the REIT, the REIT will be treated as
receiving a significant portion of that income directly through
its partnership interest, even though it also may derive
qualified interest income through its safe harbor debt
interest.
Exception for taxable REIT subsidiaries
In general.--An exception to the limitations on ownership
of securities of a single issuer applies in the case of a
``taxable REIT subsidiary'' that meets certain requirements.
However, securities (as defined in the Investment Company Act
of 1940) of taxable REIT subsidiaries cannot not exceed 20
percent of the total value of a REIT's assets.
Joint election requirement.--To qualify as a taxable REIT
subsidiary, both the REIT and the subsidiary corporation must
join in an election. In addition, any corporation (other than a
REIT or a qualified REIT subsidiary under section 856(i) that
does not properly elect with the REIT to be a taxable REIT
subsidiary) of which a taxable REIT subsidiary owns, directly
or indirectly, more than 35 percent of the vote or value is
automatically treated as a taxable REIT subsidiary.
Permitted activities of a taxable REIT subsidiary.--A
taxable REIT subsidiary can engage in certain business
activities that under prior law could disqualify the REIT
because, but for the provision, the taxable REIT subsidiary's
activities and relationship with the REIT would have prevented
certain income from qualifying as rents from real property.
Specifically, the subsidiary can provide services to tenants of
REIT property (even if such services were not considered
services customarily furnished in connection with the rental of
real property), and can manage or operate properties, generally
for third parties, without causing amounts received or accrued
directly or indirectly by the REIT for such activities to fail
to be treated as rents from real property. However, rents paid
to a REIT generally are not qualified rents if the REIT owns
more than 10 percent of the value (as well as of the vote) of a
corporation paying the rents. The only exceptions are for rents
that are paid by taxable REIT subsidiaries and that also meet a
limited rental exception (where 90 percent of space is leased
to third parties at comparable rents) and an exception for
rents from certain lodging facilities (operated by an
independent contractor).
However, the subsidiary cannot directly or indirectly
operate or manage a lodging or healthcare facility.
Nevertheless, it can lease a qualified lodging facility (e.g.,
a hotel) from the REIT (provided no gambling revenues were
derived by the hotel or on its premises); and the rents paid
are treated as rents from real property so long as the lodging
facility was operated by an independent contractor for a fee.
The subsidiary can bear all expenses of operating the facility
and receive all the net revenues, minus the independent
contractor's fee.
For purposes of the rule that an independent contractor may
operate a qualified lodging facility, an independent contractor
will qualify so long as, at the time it enters into the
management agreement with the taxable REIT subsidiary, it is
actively engaged in the trade or business of operating
qualified lodging facilities for any person who is not related
to the REIT or the taxable REIT subsidiary. The REIT may
receive income from such an independent contractor with respect
to certain pre-existing leases.
Also, the subsidiary generally cannot provide to any person
rights to any brand name under which hotels or healthcare
facilities are operated. An exception applies to rights
provided to an independent contractor to operate or manage a
lodging facility, if the rights are held by the subsidiary as
licensee or franchisee, and the lodging facility is owned by
the subsidiary or leased to it by the REIT.
Special rules to limit income of taxable REIT subsidiary
going to REIT.--Interest paid by a taxable REIT subsidiary to
the related REIT is subject to the earnings stripping rules of
section 163(j). Thus the taxable REIT subsidiary cannot deduct
interest in any year that would exceed 50 percent of the
subsidiary's adjusted gross income.
If any amount of interest, rent, or other deductions of the
taxable REIT subsidiary for amounts paid to the REIT is
determined to be other than at arm's length (``redetermined''
items), an excise tax of 100 percent is imposed on the portion
that was excessive. ``Safe harbors'' are provided for certain
rental payments where (1) the amounts are de minimis, (2) there
is specified evidence that charges to unrelated parties are
substantially comparable, (3) certain charges for services from
the taxable REIT subsidiary are separately stated, or (4) the
subsidiary's gross income from the service is not less than 150
percent of the subsidiary's direct cost in furnishing the
service.\64\
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\64\ A technical correction described below (sec. 311(b) of H.R.
5662) clarified that redetermined rent does not include any amount
received from a taxable REIT subsidiary that would be excluded from
unrelated business taxable income (under section 512(b)(3)).
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In determining whether rents are arm's length rents, the
fact that such rents do not meet the requirements of the
specified safe harbors shall not be taken into account. In
addition, rent received by a REIT shall not fail to qualify as
rents from real property by reason of the fact that all or any
portion of such rent is redetermined for purposes of the excise
tax.
Treasury study of taxable REIT subsidiaries.--The Treasury
Department is to conduct a study to determine how many taxable
REIT subsidiaries are in existence and the aggregate amount of
taxes paid by such subsidiaries and shall submit a report to
the Congress describing the results of such study.
Health care REITS
The provision permits a REIT to own and operate a health
care facility for at least two years, and treat it as permitted
``foreclosure'' property, if the facility is acquired by the
termination or expiration of a lease of the property.
Extensions of the 2-year period can be granted.
Conformity with regulated investment company rules
Under the provision, the REIT distribution requirements are
modified to conform to the rules for regulated investment
companies. Specifically, a REIT is required to distribute only
90 percent, rather than 95 percent, of its income.
Definition of independent contractor
If any class of stock of the REIT or the person being
tested as an independent contractor is regularly traded on an
established securities market, only persons who directly or
indirectly own 5 percent or more of such class of stock shall
be counted in determining whether the 35 percent ownership
limitations have been exceeded.
Modification of earnings and profits rules for RICs and REITS
The rule allowing a RIC to make a distribution after a
determination that it had failed RIC status, and thus meet the
requirement of no non-RIC earnings and profits in subsequent
years, is modified to clarify that, when the sole reason for
the determination is that the RIC had non-RIC earnings and
profits in the initial year (i.e. because it was determined not
to have distributed all C corporation earnings and profits),
the procedure would apply to permit RIC qualification in the
initial year to which such determination applied, in addition
to subsequent years.
The provision modifies both the RIC and REIT earnings and
profits rules to provide a more specific ordering rule, similar
to the present-law REIT rule. The new ordering rule treats a
distribution to meet the requirement of no non-RIC or non-REIT
earnings and profits as coming, on a first-in, first-out basis,
from earnings and profits which, if not distributed, would
result in a failure to meet such requirement. Thus, such
earnings and profits are deemed distributed first from earnings
and profits that would cause such a failure, starting with the
earliest RIC or REIT year for which such failure would occur.
In addition, the REIT deficiency dividend rules are modified to
take account of this ordering rule.
Provision regarding rental income from certain personal property
The provision modifies the rule permitting certain rents
from personal property to be treated as real estate rental
income if such personal property did not exceed 15 percent of
the aggregate of real and personal property. The provision
replaces the prior law comparison of the adjusted bases of
properties with a comparison based on fair market values.
Effective Date
In general.--The provision is effective for taxable years
beginning after December 31, 2000. The provision with respect
to modification of earnings and profits rules is effective for
distributions after December 31, 2000.
Transition rules.--The new rules forbidding a REIT to own
more than 10 percent of the value of securities of a single
issuer do not apply to a REIT with respect to securities held
directly or indirectly by such REIT on July 12, 1999, or
acquired pursuant to the terms of a written binding contract in
effect on that date and at all times thereafter until the
acquisition. Securities received in a tax-free exchange or
reorganization, with respect to or in exchange for such
grandfathered securities, are also grandfathered.
The grandfathering of securities ceases to apply if the
REIT acquires additional securities of that issuer after July
12,1999, other than pursuant to a binding contract in effect on
that date and at all times thereafter, or in a reorganization
with another corporation the securities of which are
grandfathered.
This transition also ceases to apply to securities of a
corporation as of the first day after July 12, 1999, on which
such corporation engages in a substantial new line of business,
or acquires any substantial asset, other than pursuant to a
binding contract in effect on such date and at all times
thereafter, or in a reorganization or transaction in which gain
or loss is not recognized by reason of section 1031 or 1033 of
the Code. If a corporation makes an election to become a
taxable REIT subsidiary, effective before January 1, 2004, and
at a time when the REIT's ownership is grandfathered under
these rules, the election is treated as a reorganization under
section 368(a)(1)(A) of the Code.
Qualified rents.--The new 10 percent of value limitation
for purposes of defining qualified rents is effective for
taxable years beginning after December 31, 2000. There is an
exception for rents paid under a lease or pursuant to a binding
contract in effect on July 12, 1999, and at all times
thereafter.
Revenue Effect
The provision is estimated to increase Federal fiscal year
budget receipts by $46 million in 2001, $136 million in 2002,
$49 million in 2003, and $24 million in 2004, and is estimated
to reduce Federal fiscal year budget receipts by $4 million in
2005, $34 million in 2006, $67 million in 2007, $101 million in
2008, $140 million in 2009, and $182 million in 2010.
2. Modification of estimated tax rules for closely held REITs
Present and Prior Law
If a person has a direct interest or a partnership interest
in assets that produce income throughout the year (including
mortgages or other securities), that person's estimated tax
payments must reflect the quarterly amounts expected from the
asset. However, under prior law, a dividend distribution of
earnings from a real estate investment trust (``REIT'') was
considered for estimated tax purposes to produce income when
the dividend is paid.
Reasons for Change
The Congress was concerned that REITs might be used to
defer estimated taxes. Income producing property might be
acquired in or transferred to a REIT, and a dividend paid from
the REIT only at the end of the year. So long as the dividend
was paid by year end (or within a certain period after year
end), the REIT pays no tax on the dividend, while the
shareholder of the REIT did not include the payment in income
until the dividend is paid. Thus, the income from the assets
was not counted in the earlier quarters of the year, for
purposes of the shareholder's estimated tax.
The Congress was concerned that this type of situation was
most likely to occur in cases where a REIT is relatively
closely held and might be used to structure payments for the
benefit of significant shareholders. In such situations, the
Congress believed that persons who are significant shareholders
in the REIT should be able to obtain sufficient information
regarding the quarterly income of the REIT to determine their
share of that income for estimated tax purposes.
Explanation of Provision
Under the provision, in the case of a REIT that is closely
held, any person owning at least 10 percent of the vote or
value of the REIT is required to accelerate the recognition of
year-end dividends attributable to the closely held REIT, for
purposes of such person's estimated tax payments. A closely
held REIT is defined as one in which at least 50 percent of the
vote or value is owed by five or fewer persons. Attribution
rules apply to determine ownership.
No inference is intended regarding the treatment of any
transaction prior to the effective date.
Effective Date
The provision is effective for estimated tax payments due
on or after December 15, 1999.
Revenue Effect
The provision is estimated to increase Federal fiscal year
budget receipts by $40 million in 2000, and $1 million for each
of the years 2001 through 2010.
PART FOUR: TRADE AND DEVELOPMENT ACT OF 2000 (PUBLIC LAW 106-200) \65\
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\65\ H.R. 434 (``Trade and Development Act of 2000''); P.L. 106-
200. On November 3, 1999, the Senate passed a version of H.R. 434
(''Trade and Development Act of 1999'') which included provisions
relating to the waiver of denial of foreign tax credits under section
901(j) and the acceleration of rum cover over payments to Puerto Rico
and the Virgin Islands. The Senate amendment to H.R. 434 relating to
the waiver of denial of foreign tax credits under section 901(j) is
similar to a provision included in the conference agreement to H.R.
2488 (``Taxpayer Refund and Relief Act of 1999'') (H. Rep. 106-289).
The Senate amendment to H.R. 434 relating to the rum cover over
payments to Puerto Rico and the Virgin Islands is the same as a
provision included in H.R. 984 (``Caribbean and Central America Relief
and Economic Stabilization Act'') as reported by the House Committee on
Ways and Means on March 13, 2000 (H. Rep. 106-519, Part 1). The
conference agreement to H.R. 434 was reported on May 4, 2000 (H. Rep.
106-606). The conference agreement to H.R. 434 was passed by the House
on May 4, 2000 and by the Senate on May 11, 2000. H.R. 434 was signed
by the President on May 18, 2000.
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A. Application of Denial of Foreign Tax Credit Regarding Trade and
Investment With Respect to Certain Foreign Countries (sec. 601 of the
Trade and Development Act and sec. 901(j) of the Code)
Present and Prior Law
In general, U.S. persons may credit foreign taxes against
U.S. tax on foreign-source income. The amount of foreign tax
credits that can be claimed in a year is subject to a
limitation that prevents taxpayers from using foreign tax
credits to offset U.S. tax on U.S.-source income. Separate
limitations are applied to specific categories of income.
Pursuant to special rules applicable to taxes paid to
certain foreign countries, no foreign tax credit is allowed for
income, war profits, or excess profits taxed paid, accrued, or
deemed paid to a country which satisfies specified criteria, to
the extent that the taxes are with respect to income
attributable to a period during which such criteria were
satisfied (sec. 901(j)). Section 901(j) applies with respect to
any foreign country: (1) the government of which the United
States does not recognize, unless such government is otherwise
eligible to purchase defense articles or services under the
Arms Export Control Act, (2) with respect to which the United
States has severed diplomatic relations, (3) with respect to
which the United States has not severed diplomatic relations
but does not conduct such relations, or (4) which the Secretary
of State has, pursuant to section 6(j) of the Export
Administration Act of 1979, as amended, designated as a foreign
country which repeatedly provides support for acts of
international terrorisms (a ``section 901(j) foreign
country''). The denial of credits applies to any foreign
country during the period beginning on the later of January 1,
1987, or six months after such country becomes a section 901(j)
country, and ending on the date the Secretary of State
certifies to the Secretary of the Treasury that such country is
no longer a section 901(j) country.
Taxes treated as noncreditable under section 901(j)
generally are permitted to be deducted notwithstanding the fact
that the taxpayer elects use of the foreign tax credit for the
taxable year with respect to other taxes. In addition, income
for which foreign tax credits are denied generally cannot be
sheltered from U.S. tax by other creditable foreign taxes.
Under the rules of subpart F, U.S. 10-percent shareholders
of a controlled foreign corporation (``CFC'') are required to
include in income currently certain types of income of the CFC,
whether or not such income is actually distributed currently to
the shareholders (referred to as ``subpart F income''). Subpart
F income includes income derived from any foreign country
during a period in which the taxes imposed by that country are
denied eligibility for the foreign tax credit under section
901(j) (sec. 952(a)(5)).
Reasons for Change \66\
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\66\ The legislative history of this provision did not include a
reasons for change section. The reasons for change reported here are
drawn from the reasons for change reported in a House Committee on Ways
and Means report to H.R. 2488 (``Financial Freedom Act of 1999'') with
respect to a similar provision concerning the waiver of denial of
foreign tax credits under section 901(j). See H. Rep. 106-238 at 255-
256 (1999).
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The Congress has observed that the automatic denial of
foreign tax credits under section 901(j) with respect to a
foreign country may in certain cases conflict with other policy
interests of the United States. The Congress believed that it
is appropriate to provide a mechanism for the waiver of the
denial of foreign tax credits in certain cases.
Explanation of Provision
The provision provides that section 901(j) no longer
applies with respect to a foreign country if: (1) the President
determines that a waiver of the application of section 901(j)
to such foreign country is in the national interest of the
United States and will expand trade and investment
opportunities for U.S. companies in such foreign country, and
(2) the President reports to Congress, not less than 30 days
before the waiver is granted, the intention to grant such a
waiver and the reason for such waiver.
Effective Date
The provision is effective on or after February 1, 2001.
Revenue Effect
The provision is estimated to have no effect on Federal
fiscal year budget receipts.
B. Acceleration of Coverover Payments to Puerto Rico and the Virgin
Islands (sec. 602 of the Trade and Development Act and sec. 7652 of the
Code)
Present and Prior Law
A $13.50 per proof gallon \67\ excise tax is imposed on
distilled spirits produced in, or imported or brought into, the
United States. The excise tax does not apply to distilled
spirits that are exported from the United States or to
distilled spirits that are consumed in U.S. possessions (e.g.,
Puerto Rico and the Virgin Islands).
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\67\ A proof gallon is a liquid gallon consisting of 50 percent
alcohol.
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The Code provides for coverover (payment) of $13.25 per
proof gallon of the excise tax imposed on rum imported (or
brought) into the United States (without regard to the country
of origin) to Puerto Rico and the Virgin Islands during the
period July 1, 1999 through December 31, 2001. Effective on
January 1, 2002, the coverover rate is scheduled to return to
its permanent level of $10.50 per proof gallon. Under prior
law, the maximum amount attributable to the increased coverover
rate over the permanent rate of $10.50 per proof gallon that
could be paid to Puerto Rico and the Virgin Islands before
October 1, 2000 was $20 million. Payment of this amount was
made on January 3, 2000.\68\ Any remaining amounts attributable
to the increased coverover rate were to be paid on October 1,
2000.
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\68\ The Department of the Interior, which administers the
coverover for rum imported into the United States from the U.S. Virgin
Islands, erroneously authorized full payment to the Virgin Islands of
the increased coverover rate on that rum notwithstanding the statutory
limit on these transfers for periods before October 1, 2000. The Bureau
of Alcohol, Tobacco, and Firearms, which administers the coverover
payments for the Virgin Islands' portion of tax collected on rum
imported from other countries, complied with the statutory limit.
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Amounts covered over to Puerto Rico and the Virgin Islands
are deposited into the treasuries of the two possessions for
use as those possessions determine.
Explanation of Provision
The provision provides that unpaid amounts attributable to
the increase in the coverover rate to $13.25 per proof gallon
for the period from July 1, 1999 through the last day of the
month prior to the date of enactment would be paid on the first
monthly payment date following the date of enactment.\69\ With
respect to amounts attributable to the period beginning with
the month of the provision's enactment, payments are based on
the full $13.25 per proof gallon rate.
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\69\ Thus, this provision applies only to payments to Puerto Rico
and to payments of the Virgin Islands' portion of tax on rum imported
from other countries because the Interior Department erroneously has
already paid in full amounts attributable to rum imported from the
Virgin Islands.
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The provision further includes two clarifications to the
rules governing coverover payments. First, clarification is
provided that payments to the Virgin Islands with respect to
rum imported from that possession are to be made annually in
advance (base