[JPRT 108-1-03]
[From the U.S. Government Publishing Office]



                        [JOINT COMMITTEE PRINT]
 
                         GENERAL EXPLANATION OF
                            TAX LEGISLATION
                     ENACTED IN THE 107TH CONGRESS

                               __________

                         Prepared by the Staff

                                 of the

                      JOINT COMMITTEE ON TAXATION


              [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]


                            JANUARY 24, 2003




                           U.S. GOVERNMENT PRINTING OFFICE
83-912                         WASHINGTON : 2003              JCS-1-03
_________________________________________________________________________










                      JOINT COMMITTEE ON TAXATION

                      107th Congress, 2nd Session

                                 ------                                
               SENATE                               HOUSE
MAX BAUCUS, Montana,                 WILLIAM M. THOMAS, California,
  Chairman                             Vice Chairman
JOHN D. ROCKEFELLER IV, West         PHILIP M. CRANE, Illinois
    Virginia                         E. CLAY SHAW, Jr., Florida
TOM DASCHLE, South Dakota            CHARLES B. RANGEL, New York
CHARLES E. GRASSLEY, Iowa            FORTNEY PETE STARK, California
ORRIN G. HATCH, Utah
                     Lindy L. Paull, Chief of Staff
               Bernard A. Schmitt, Deputy Chief of Staff
                 Mary M. Schmitt, Deputy Chief of Staff












                            SUMMARY CONTENTS


                                                                   Page
Part One: The Fallen Hero Survivor Benefit Fairness Act of 2001 
  (Public Law 107-15)............................................     3

Part Two: Economic Growth and Tax Relief Reconciliation Act of 
  2001 (Public Law 107-16).......................................     5

Part Three: An Act To Amend the Internal Revenue Code of 1986 To 
  Rename The Education Individual Retirement Accounts as the 
  Coverdell Education Savings Accounts (Public Law 107-22).......   173

Part Four: The Revenue Provisions of the Railroad Retirement and 
  Survivors' Improvement Act of 2001 (Public Law 107-90).........   175

Part Five: The Revenue Provisions of an Act Making Appropriations 
  for the Departments of Labor, Health and Human Services, and 
  Education, and Related Agencies for the Fiscal Year Ending 
  September 30, 2002, and for Other Purposes (Public Law 107-116)   179

Part Six: An Act To Amend the Internal Revenue Code of 1986 To 
  Simplify the Reporting Requirements Relating to Higher 
  Education Tuition and Related Expenses (Public Law 107-131)....   181

Part Seven: Victims of Terrorism Tax Relief Act of 2001 (Public 
  Law 107-134)...................................................   183

Part Eight: Job Creation and Worker Assistance Act of 2002 
  (Public Law 107-147)...........................................   217

Part Nine: The Clergy Housing Allowance Clarification Act of 2002 
  (Public Law 107-181)...........................................   285

Part Ten: Revenue Provision of the Trade Adjustment Assistance 
  Reform Act of 2002 (Public Law 107-210)........................   287

Part Eleven: An Act Relating to Political Organizations Described 
  in Section 527 of the Internal Revenue Code (Public Law 107-
  276)...........................................................   293

Part Twelve: The Revenue Provisions of the Homeland Security Act 
  of 2002 (Public Law 107-296)...................................   300

Part Thirteen: The Revenue Provisions of the Veterans Benefits 
  Improvement Act of 2002 (Public Law 107-330)...................   302

Part Fourteen: The Holocaust Restitution Tax Fairness Act of 2002 
  (Public Law 107-358)...........................................   304

Appendix: Estimated Budget Effects of Tax Legislation Enacted in 
  the 107th Congress.............................................   307











                            C O N T E N T S

                              ----------                              
                                                                   Page
Introduction.....................................................     1

Part One: The Fallen Hero Survivor Benefit Fairness Act of 2001 
  (Public Law 107-15)............................................     3

Part Two: Economic Growth and Tax Relief Reconciliation Act of 
  2001 (Public Law 107-16).......................................     5

  I. Marginal Tax Rate Reduction......................................5

          A. Individual Income Tax Rate Structure (sec. 101 of 
              the Act and sec. 1 of the Code)....................     5

          B. Phased-in Repeal of the Phase-Out of Itemized 
              Deductions (sec. 102 of the Act and sec. 68 of the 
              Code)..............................................    12

          C. Phased-in Repeal of the Personal Exemption Phaseout 
              (sec. 103 of the Act and sec. 151(d)(3) of the 
              Code)..............................................    13

 II. Tax Benefits Relating to Children...............................16

          A. Increase and Expand the Child Tax Credit (sec. 201 
              of the Act and sec. 24 of the Code)................    16

          B. Extension and Expansion of Adoption Tax Benefits 
              (secs. 202 and 203 of the Act and secs. 23 and 137 
              of the Code).......................................    18

          C. Expansion of Dependent Care Tax Credit (sec. 204 of 
              the Act and sec. 21 of the Code)...................    21

          D. Tax Credit for Employer-Provided Child Care 
              Facilities (sec. 303 of the Act and new sec. 45D of 
              the Code)..........................................    23

III. Marriage Penalty Relief Provisions..............................25

          A. Standard Deduction Marriage Penalty Relief (sec. 301 
              of the Act and sec. 63 of the Code)................    25

          B. Expansion of the 15-Percent Rate Bracket For Married 
              Couples Filing Joint Returns (sec. 302 of the Act 
              and sec. 1 of the Code)............................    27

          C. Marriage Penalty Relief and Simplification Relating 
              to the Earned Income Credit (sec. 303 of the Act 
              and sec. 32 of the Code)...........................    28

 IV. Affordable Education Provisions.................................35

          A. Education Individual Retirement Accounts (sec. 401 
              of the Act and sec. 530 of the Code)...............    35

          B. Private Prepaid Tuition Programs; Exclusion From 
              Gross Income of Education Distributions From 
              Qualified Tuition Programs (sec. 402 of the Act and 
              sec. 529 of the Code)..............................    40

          C. Exclusion for Employer-Provided Educational 
              Assistance (sec. 411 of the Act and sec. 127 of the 
              Code)..............................................    45

          D. Modifications to Student Loan Interest Deduction 
              (sec. 412 of the Act and sec. 221 of the Code).....    46

          E. Eliminate Tax on Awards Under the National Health 
              Service Corps Scholarship Program and the F. Edward 
              Hebert Armed Forces Health Professions Scholarship 
              and Financial Assistance Program (sec. 413 of the 
              Act and sec. 117 of the Code)......................    48

          F. Liberalization of Tax-Exempt Financing Rules for 
              Public School Construction (secs. 421-422 of the 
              Act and secs. 142 and 146-148 of the Code).........    49

          G. Deduction for Qualified Higher Education Expenses 
              (sec. 431 of the Act and new sec. 222 of the Code).    54

  V. Estate, Gift, and Generation-Skipping Transfer Tax Provisions...57

          A. Phaseout and Repeal of Estate and Generation-
              Skipping Transfer Taxes; Increase in Gift Tax 
              Unified Credit Effective Exemption (secs. 501, 511, 
              521, 531, 532, 541 and 542 of the Act, secs. 121, 
              684, 1014, 1040, 1221, 2001-2210, 2501, 2502, 2503, 
              2505, 2511, 2601-2663, 4947, 6018, 6019, and 7701 
              of the Code, and new secs. 1022, 2058, 2210, 2664, 
              and 6716 of the Code)..............................    57

          B. Expand Estate Tax Rule for Conservation Easements 
              (sec. 551 of the Act and sec. 2031 of the Code)....    72

          C. Modify Generation-Skipping Transfer Tax Rules.......    73

              1. Deemed allocation of the generation-skipping 
                  transfer tax exemption to lifetime transfers to 
                  trusts that are not direct skips (sec. 561 of 
                  the Act and sec. 2632 of the Code).............    73
              2. Retroactive allocation of the generation-
                  skipping transfer tax exemption (sec. 561 of 
                  the Act and sec. 2632 of the Code).............    76
              3. Severing of trusts holding property having an 
                  inclusion ratio of greater than zero (sec. 562 
                  of the Act and sec. 2642 of the Code)..........    78
              4. Modification of certain valuation rules (sec. 
                  563 of the Act and sec. 2642 of the Code)......    79
              5. Relief from late elections (sec. 564 of the Act 
                  and sec. 2642 of the Code).....................    80
              6. Substantial compliance (sec. 564 of the Act and 
                  sec. 2642 of the Code).........................    81

          D. Expand and Modify Availability of Installment 
              Payment of Estate Tax for Closely-Held Businesses 
              (secs. 571, 572 and 573 of the Act and sec. 6166 of 
              the Code)..........................................    82

          E. Waiver of Statute of Limitations for Refunds of 
              Recapture of Estate Tax (sec. 581 of the Act and 
              sec. 2032A of the Code)............................    84

 VI. Pension and Individual Retirement Arrangement Provisions........86

          A. Individual Retirement Arrangements (``IRAs'') (secs. 
              601-602 of the Act and secs. 219, 408, and 408A of 
              the Code)..........................................    86

          B. Pension Provisions..................................    89
              1. Expanding coverage..............................    89
                  (a) Increase in benefit and contribution limits 
                      (sec. 611 of the Act and secs. 401(a)(17), 
                      401(c)(2), 402(g), 408(p), 415 and 457 of 
                      the Code)..................................    89
                  (b) Plan loans for S corporation shareholders, 
                      partners, and sole proprietors (sec. 612 of 
                      the Act and sec. 4975 of the Code).........    93
                  (c) Modification of top-heavy rules (sec. 613 
                      of the Act and sec. 416 of the Code).......    95
                  (d) Elective deferrals not taken into account 
                      for purposes of deduction limits (sec. 614 
                      of the Act and sec. 404 of the Code).......    99
                  (e) Repeal of coordination requirements for 
                      deferred compensation plans of state and 
                      local governments and tax-exempt 
                      organizations (sec. 615 of the Act and sec. 
                      457 of the Code)...........................   100
                  (f) Deduction limits (sec. 616 of the Act and 
                      sec. 404 of the Code)......................   101
                  (g) Option to treat elective deferrals as 
                      after-tax contributions (sec. 617 of the 
                      Act and new sec. 402A of the Code).........   103
                  (h) Nonrefundable credit to certain individuals 
                      for elective deferrals and IRA 
                      contributions (sec. 618 of the Act and new 
                      sec. 25B of the Code)......................   106
                  (i) Small business tax credit for new 
                      retirement plan expenses (sec. 619 of the 
                      Act and new sec. 45E of the Code)..........   108
                  (j) Eliminate IRS user fees for certain 
                      determination letter requests regarding 
                      employer plans (sec. 620 of the Act).......   109
                  (k) Certain nonresident aliens excluded in 
                      applying minimum coverage requirements 
                      (sec. 621 of the Act and secs. 410(b)(3) 
                      and 861(a)(3) of the Code).................   111
              2. Enhancing fairness for women....................   112
                  (a) Additional salary reduction catch-up 
                      contributions (sec. 631 of the Act and sec. 
                      414 of the Code)...........................   112
                  (b) Equitable treatment for contributions of 
                      employees to defined contribution plans 
                      (sec. 632 of the Act and secs. 403(b), 415, 
                      and 457 of the Code).......................   114
                  (c) Faster vesting of employer matching 
                      contributions (sec. 633 of the Act and sec. 
                      411 of the Code)...........................   117
                  (d) Modifications to minimum distribution rules 
                      (sec. 634 of the Act and sec. 401(a)(9) of 
                      the Code)..................................   118
                  (e) Clarification of tax treatment of division 
                      of section 457 plan benefits upon divorce 
                      (sec. 635 of the Act and secs. 414(p) and 
                      457 of the Code)...........................   120
                  (f) Provisions relating to hardship withdrawals 
                      (sec. 636 of the Act and secs. 401(k) and 
                      402 of the Code)...........................   121
                  (g) Pension coverage for domestic and similar 
                      workers (sec. 637 of the Act and sec. 
                      4972(c)(6) of the Code)....................   123
              3. Increasing portability for participants.........   125
                  (a) Rollovers of retirement plan and IRA 
                      distributions (secs. 641-643 and 649 of the 
                      Act and secs. 401, 402, 403(b), 408, 457, 
                      and 3405 of the Code)......................   125
                  (b) Waiver of 60-day rule (sec. 644 of the Act 
                      and secs. 402 and 408 of the Code).........   129
                  (c) Treatment of forms of distribution (sec. 
                      645 of the Act and sec. 411(d)(6) of the 
                      Code)......................................   130
                  (d) Rationalization of restrictions on 
                      distributions (sec. 646 of the Act and 
                      secs. 401(k), 403(b), and 457 of the Code).   133
                  (e) Purchase of service credit under 
                      governmental pension plans (sec. 647 of the 
                      Act and secs. 403(b) and 457 of the Code)..   135
                  (f) Employers may disregard rollovers for 
                      purposes of cash-out rules (sec. 648 of the 
                      Act and sec. 411(a)(11) of the Code).......   136
                  (g) Minimum distribution and inclusion 
                      requirements for section 457 plans (sec. 
                      649 of the Act and sec. 457 of the Code)...   137
              4. Strengthening pension security and enforcement..   138
                  (a) Phase in repeal of 160 percent of current 
                      liability funding limit; deduction for 
                      contributions to fund termination liability 
                      (secs. 651-652 of the Act and secs. 
                      404(a)(1), 412(c)(7), and 4972(c) of the 
                      Code)......................................   138
                  (b) Excise tax relief for sound pension funding 
                      (sec. 653 of the Act and sec. 4972 of the 
                      Code)......................................   140
                  (c) Modifications to section 415 limits for 
                      multiemployer plans (sec. 654 of the Act 
                      and sec. 415 of the Code)..................   141
                  (d) Investment of employee contributions in 
                      401(k) plans (sec. 655 of the Act and sec. 
                      1524(b) of the Taxpayer Relief Act of 1997)   142
                  (e) Prohibited allocations of stock in an S 
                      corporation ESOP (sec. 656 of the Act and 
                      secs. 409 and 4979A of the Code)...........   144
                  (f) Automatic rollovers of certain mandatory 
                      distributions (sec. 657 of the Act and 
                      secs. 401(a)(31) and 402(f)(1) of the Code 
                      and sec. 404(c) of ERISA)..................   147
                  (g) Clarification of treatment of contributions 
                      to a multiemployer plan (sec. 658 of the 
                      Act).......................................   149
                  (h) Notice of significant reduction in plan 
                      benefit accruals (sec. 659 of the Act and 
                      new sec. 4980F of the Code)................   150
              5. Reducing regulatory burdens.....................   153
                  (a) Modification of timing of plan valuations 
                      (sec. 661 of the Act and sec. 412 of the 
                      Code)......................................   153
                  (b) ESOP dividends may be reinvested without 
                      loss of dividend deduction (sec. 662 of the 
                      Act and sec. 404 of the Code)..............   154
                  (c) Repeal transition rule relating to certain 
                      highly compensated employees (sec. 663 of 
                      the Act and sec. 1114(c)(4) of the Tax 
                      Reform Act of 1986)........................   156
                  (d) Employees of tax-exempt entities (sec. 664 
                      of the Act)................................   157
                  (e) Treatment of employer-provided retirement 
                      advice (sec. 665 of the Act and sec. 132 of 
                      the Code)..................................   158
                  (f) Repeal of the multiple use test (sec. 666 
                      of the Act and sec. 401(m) of the Code)....   159

          C. Tax Treatment of Electing Alaska Native Settlement 
              Trusts (sec. 671 of the Act and new sections 646 
              and 6039H of the Code, modifying Code sections 
              including 1(e), 301, 641, 651, 661, and 6034A).....   161

VII. Alternative Minimum Tax........................................166

          A. Individual Alternative Minimum Tax Relief (sec. 701 
              of the Act and sec. 55 of the Code)................   166

VIII.Other Provisions...............................................168


          A. Modification to Corporate Estimated Tax Requirements 
              (sec. 801 of the Act)..............................   168

          B. Authority to Postpone Certain Tax-Related Deadlines 
              by Reason of Presidentially Declared Disaster (sec. 
              802 of the Act and sec. 7508A of the Code).........   168

          C. Income Tax Treatment of Certain Restitution Payments 
              to Holocaust Victims (sec. 803 of the Act).........   169

 IX. Compliance With Congressional Budget Act (Sec. 901 of the Act).171

Part Three: An Act to Amend the Internal Revenue Code of 1986 To 
  Rename the Education Individual Retirement Accounts as the 
  Coverdell Education Savings Accounts (Public Law 107-22).......   173

    A. Education Individual Retirement Accounts (sec. 1 of the 
        Act and sec. 530 of the Code)............................   173

Part Four: The Revenue Provisions of the Railroad Retirement and 
  Survivors' Improvement Act of 2001 (Public Law 107-90).........   175

    A. Amendments to the Internal Revenue Code of 1986 (secs. 
        201-204 of the Act and secs. 501, 3201, 3211, 3221, and 
        3241 of the Code)........................................   175

Part Five: The Revenue Provisions of an Act Making Appropriations 
  for the Departments of Labor, Health and Human Services, and 
  Education, and Related Agencies for the Fiscal Year Ending 
  September 30, 2002, and for Other Purposes (Public Law 107-116)   179

    A. Tax on Failure to Comply with Mental Health Parity 
        Requirements (sec. 701 of the Act and sec. 9812(f) of the 
        Code)....................................................   179

Part Six: An Act to Amend the Internal Revenue Code of 1986 to 
  Simplify the Reporting Requirements Relating to Higher 
  Education Tuition and Related Expenses (Public Law 107-131)....   181

    A. Simplify the Reporting Requirements Relating to Higher 
        Education Tuition and Related Expenses (sec. 1 of the Act 
        and sec. 6050S of the Code)..............................   181

Part Seven: Victims of Terrorism Tax Relief Act of 2001 (Public 
  Law 107-134)...................................................   183

  I. Relief Provisions for Victims of Specific Terrorist Attacks....183

          A. Reasons for Change..................................   183

          B. Income Taxes of Victims of Terrorist Attacks (sec. 
              101 of the Act and sec. 692 of the Code)...........   184

          C. Exclusion of Certain Death Benefits (sec. 102 of the 
              Act and sec. 101 of the Code)......................   186

          D. Estate Tax Reduction (sec. 103 of the Act and sec. 
              2201 of the Code)..................................   187

          E. Payments by Charitable Organizations Treated as 
              Exempt Payments (sec. 104 of the Act and secs. 501 
              and 4941 of the Code)..............................   189

          F. Exclusion for Certain Cancellations of Indebtedness 
              (sec. 105 of the Act)..............................   191

 II. Other Relief Provisions........................................194

          A. Reasons for Change..................................   194

          B. Exclusion of Disaster Relief Payments (sec. 111 of 
              the Act and new sec. 139 of the Code)..............   194

          C. Authority to Postpone Certain Deadlines and Required 
              Actions (sec. 122 of the Act, sec. 7508A of the 
              Code, and new sec. 518 and sec. 4002 of the 
              Employee Retirement Income Security Act of 1974)...   200

          D. Application of Certain Provisions to Terroristic or 
              Military Actions (sec. 113 of the Act and secs. 104 
              and 692 of the Code)...............................   202

          E. Clarification that the Special Deposit Rules 
              Provided Under the Air Transportation Safety and 
              Stabilization Act Do Not Apply to Employment Taxes 
              (sec. 114 of the Act and sec. 301 of the Air 
              Transportation Safety and Stabilization Act).......   203

          F. Treatment of Purchase of Structured Settlements 
              (sec. 115 of the Act and new sec. 5891 of the Code)   204

          G. Personal Exemption Deduction for Certain Disability 
              Trusts (sec. 116 of the Act and sec. 642 of the 
              Code)..............................................   206

III. Disclosure of Tax Information in Terrorism and National Security 
     Investigations (sec. 201 of the Act and sec. 6103 of the Code).209

 IV. No Impact on Social Security Trust Funds (sec. 301 of the Act).216

Part Eight: Job Creation and Worker Assistance Act of 2002 
  (Public Law 107-147)...........................................   217

Title I. Business Provisions.....................................   217

    A. Special Depreciation Allowance for Certain Property (sec. 
        101 of the Act and sec. 168 of the Code).................   217

    B. Five-Year Carryback of Net Operating Losses (sec. 102 of 
        the Act and secs. 172 and 56 of the Code)................   220

Title II. Tax Benefits for Area of New York City Damaged in 
  Terrorist Attacks on September 11, 2001........................   223

    A. Expansion of Work Opportunity Tax Credit Targeted 
        Categories to Include Certain Employees in New York City 
        (sec. 301 of the Act and new sec. 1400L(a) of the Code)..   223

    B. Special Depreciation Allowance for Certain Property (sec. 
        301 of the Act and new sec. 1400L(b) of the Code)........   225

    C. Treatment of Qualified Leasehold Improvement Property 
        (sec. 301 of the Act and new sec. 1400L of the Code).....   228

    D. Authorize Issuance of Tax-Exempt Private Activity Bonds 
        for Rebuilding the Portion of New York City Damaged in 
        the September 11, 2001, Terrorist Attack (sec. 301 of the 
        Act and new sec. 1400L(d) of the Code)...................   229

    E. Allow One Additional Advance Refunding for Certain 
        Previously Refunded Bonds for Facilities Located in New 
        York City (sec. 301 of the Act and sec. 1400L(d) of the 
        Code)....................................................   233

    F. Increase in Expensing Treatment for Business Property Used 
        in the New York Liberty Zone (sec. 301 of the Act and new 
        sec. 1400L of the Code)..................................   235

    G. Extension of Replacement Period for Certain Property 
        Involuntarily Converted in the New York Liberty Zone 
        (sec. 301 of the Act and new sec. 1400L of the Code).....   236

Title III. Miscellaneous and Technical Provisions................   238
Subtitle A--General Miscellaneous Provisions.....................   238

    A. Allowance of Electronic Forms 1099 (sec. 401 of the Act)..   238

    B. Discharge of Indebtedness of an S Corporation (sec. 402 of 
        the Act and sec. 108 of the Code)........................   238

    C. Limitation on Use of Non-Accrual Experience Method of 
        Accounting (sec. 403 of the Act and sec. 448 of the Code)   240

    D. Expansion of the Exclusion from Income for Qualified 
        Foster Care Payments (sec. 404 of the Act and sec. 131 of 
        the Code)................................................   243

    E. Interest Rate Used in Determining Additional Required 
        Contributions to Defined Benefit Plans and PBGC Variable 
        Rate Premiums (sec. 405 of the Act, sec. 412 of the Code, 
        and secs. 302 and 4006 of ERISA).........................   244

    F. Adjusted Gross Income Determined by Taking into Account 
        Certain Expenses of Elementary and Secondary School 
        Teachers (sec. 406 of the Act and sec. 62 of the Code)...   246

Subtitle B--Tax Technical and Additional Corrections.............   247

    A. Amendments to the Economic Growth and Tax Relief 
        Reconciliation Act of 2001 (sec. 411(a)-(h) of the Act)..   248
        1. Section 6428 credit interaction with refundable child 
            tax credit...........................................   248
        2. Child tax credit......................................   248
        3. Transition rule for adoption tax credit...............   248
        4. Dollar amount of credit for special needs adoptions...   248
        5. Employer-provided adoption assistance exclusion with 
            respect to special needs adoptions...................   248
        6. Credit for employer expenses for child care assistance   249
        7. Elimination of marriage penalty in standard deduction.   249
        8. Education IRAs; non-application of 10-percent 
            additional tax with respect to amounts for which HOPE 
            credit is claimed....................................   249
        9. Transfers in trust....................................   249
        10. Recovery of taxes claimed as credit (State death tax 
            credit)..............................................   250

    B. Pension-Related Amendments to the Economic Growth and Tax 
        Relief Reconciliation Act of 2001 (sec. 411(i)-(w) of the 
        Act).....................................................   250
        1. Individual Retirement Arrangements (``IRAs'').........   250
        2. Increase in benefit and contribution limits...........   250
        3. Modification of top-heavy rules.......................   251
        4. Elective deferrals not taken into account for 
            deduction limits.....................................   251
        5. Deduction limits......................................   251
        6. Nonrefundable credit for certain individuals for 
            elective deferrals and IRA contributions.............   251
        7. Small business tax credit for new retirement plan 
            expenses.............................................   252
        8. Additional salary reduction catch-up contributions....   252
        9. Equitable treatment for contributions of employees to 
            defined contribution plans...........................   252
        10. Rollovers of retirement plan and IRA distributions...   253
        11. Employers may disregard rollovers for purposes of 
            cash-out amounts.....................................   253
        12. Notice of significant reduction in plan benefit 
            accruals.............................................   253
        13. Modification of timing of plan valuation.............   254
        14. ESOP dividends may be reinvested without loss of 
            dividend deduction...................................   254

    C. Amendments to the Community Renewal Tax Relief Act of 2000 
        (sec. 412 of the Act)....................................   254
        1. Phaseout of $25,000 amount for certain rental real 
            estate under passive loss rules......................   254
        2. Treatment of missing children.........................   255
        3. Basis of property in an exchange by a corporation 
            involving assumption of liabilities..................   255
        4. Tax treatment of securities futures contracts.........   255

    D. Amendment to the Tax Relief Extension Act of 1999 (sec. 
        413 of the Act)..........................................   256
        1. Taxable REIT subsidiaries--100 percent tax on 
            improperly allocated amounts.........................   256

    E. Amendments to the Taxpayer Relief Act of 1997 (sec. 414 of 
        the Act).................................................   256
        1. Election to recognize gain on assets held on January 
            1, 2001; treatment of gain on sale of principal 
            residence............................................   256
        2. Election to recognize gain on assets held on January 
            1, 2001; treatment of disposition of interest in 
            passive activity.....................................   256

    F. Amendment to the Balanced Budget Act of 1997 (sec. 415 of 
        the Act).................................................   256
        1. Medicare+Choice MSA...................................   256

    G. Amendment to other Acts (sec. 416 of the Act).............   257
        1. Advance payments of earned income credit..............   257
        2. Coordination of wash sale rules and section 1256 
            contracts............................................   257
        3. Disclosure by the Social Security Administration to 
            Federal child support enforcement agencies...........   257
        4. Treatment of settlements under partnership audit rules   257
        5. Clarification of permissible extension of limitations 
            period for installment agreements....................   258
        6. Determination of whether a life insurance contract is 
            a modified endowment contract........................   258

    H. Clerical Amendments (sec. 417 of the Act).................   259

    I. Additional Corrections (sec. 418 of the Act)..............   259
        1. Adoption credit and employer-provided adoption 
            assistance exclusion rounding rules..................   259
        2. Dependent care credit.................................   259

Title IV. No Impact on Social Security Trust Funds (Sec. 501 of 
  the Act).......................................................   260

Title V. Emergency Designation (Sec. 502 of the Act).............   261

Title VI. Extensions of Expiring Provisions......................   262

    A. Extend Alternative Minimum Tax Relief for Individuals 
        (sec. 601 of the Act and sec. 26 of the Code)............   262

    B. Extend Credit for Purchase of Qualified Electric Vehicles 
        (sec. 602 of the Act and secs. 30 and 280F of the Code)..   263

    C. Extend Section 45 Credit for Production of Electricity 
        from Wind, Closed Loop Biomass, and Poultry Litter (sec. 
        603 of the Act and sec. 45 of the Code)..................   264

    D. Extend the Work Opportunity Tax Credit (sec. 604 of the 
        Act and sec. 51 of the Code).............................   265

    E. Extend the Welfare-To-Work Tax Credit (sec. 605 of the Act 
        and sec. 51A of the Code)................................   266

    F. Extend Deduction for Qualified Clean-Fuel Vehicle Property 
        and Qualified Clean-Fuel Vehicle Refueling Property (sec. 
        606 of the Act and secs. 179A and 280F of the Code)......   268

    G. Taxable Income Limit on Percentage Depletion for Marginal 
        Production (sec. 607 of the Act and sec. 613A of the 
        Code)....................................................   269

    H. Extension of Authority to Issue Qualified Zone Academy 
        Bonds (sec. 608 of the Act and sec. 1397E of the Code)...   271

    I. Extension of Increased Coverover Payments to Puerto Rico 
        and the Virgin Islands (sec. 609 of the Act and sec. 7652 
        of the Code).............................................   272

    J. Tax on Failure to Comply with Mental Health Parity 
        Requirements (sec. 610 of the Act and sec. 9812(f) of the 
        Code)....................................................   273

    K. Suspension of Reduction of Deductions for Mutual Life 
        Insurance Companies (sec. 611 of the Act and sec. 809 of 
        the Code)................................................   274

    L. Extension of Archer Medical Savings Accounts (``MSAs'') 
        (sec. 612 of the Act and sec. 220 of the Code)...........   275

    M. Extension of Tax Incentives for Investment on Indian 
        Reservations (sec. 613 of the Act and secs. 45A and 
        168(j) of the Code)......................................   278

    N. Extension and Modification of Exceptions under Subpart F 
        for Active Financing Income (sec. 614 of the Act, and 
        secs. 953 and 954 of the Code)...........................   279

    O. Repeal of Dyed-Fuel Requirement for Registered Diesel or 
        Kerosene Terminals (sec. 615 of the Act and sec. 4101 of 
        the Code)................................................   283

Part Nine: The Clergy Housing Allowance Clarification Act of 2002 
  (Public Law 107-181)...........................................   285

Part Ten: Revenue Provisions of the Trade Adjustment Assistance 
  Reform Act of 2002 (Public Law 107-210)........................   287

  I. Refundable Credit for Health Insurance Costs of Eligible 
     Individuals (Secs. 201(a), 202 and 203 of the Act and new secs. 
     35, 6050T, 6103(l)(18), and 7527 of the Code)..................287

Part Eleven: An Act Relating to Political Organizations Described 
  in Section 527 of the Internal Revenue Code (Public Law 107-
  276)...........................................................   293

Part Twelve: The Revenue Provisions of the Homeland Security Act 
  of 2002 (Public Law 107-296)...................................   300

    A. Transfer of Certain Functions of the Bureau of Alcohol, 
        Tobacco and Firearms to the Department of Justice (secs. 
        1111 and 1112 of the Act and secs. 6103, 7801, chapter 53 
        and chapters 61 through 80 of the Code)..................   300

Part Thirteen: The Revenue Provisions of the Veterans Benefits 
  Improvement Act of 2002 (Public Law 107-330)...................   302

    A. Disclosure of Tax Return Information for Administration of 
        Certain Veterans Programs (sec. 306 of the Act and sec. 
        6103(l) of the Code).....................................   302

Part Fourteen: The Holocaust Restitution Tax Fairness Act of 2002 
  (Public Law 107-358)...........................................   304

Appendix: Estimated Budget Effects of Tax Legislation Enacted in 
  the 107th Congress.............................................   307










                              INTRODUCTION

    This document,\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 107th Congress. The explanation follows the chronological 
order of the tax legislation as signed into law.
---------------------------------------------------------------------------
    \1\ This pamphlet may be cited as follows: Joint Committee on 
Taxation, General Explanation of Tax Legislation Enacted in the 107th 
Congress (JCS-1-03), January 24, 2003.
---------------------------------------------------------------------------
    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 document 
is prepared so that Members of Congress, tax practitioners, and 
other interested parties can have an explanation in one 
document of the final tax legislation enacted in 107th 
Congress.
    In some instances, provisions included in legislation 
enacted in the 107th 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 document.
    Part One of the document is an explanation of the 
provisions of the Fallen Hero Survivor Benefit Tax Fairness Act 
of 2001 (Pub. L. No. 107-15), relating to consistent tax 
treatment of survivor benefits for public safety officers 
killed in the line of duty. Part Two is an explanation of the 
Economic Growth and Tax Relief Reconciliation Act of 2001 (Pub. 
L. No. 107-16) relating to individual income tax relief, 
affordable education revenue provisions, estate, gift and 
generation skipping transfer tax repeal, pension and individual 
retirement arrangement provisions, alternative minimum tax 
relief and other revenue provisions. Part Three is an 
explanation of the revenue provision renaming education 
individual retirement accounts as the Coverdell educational 
savings accounts (Pub. L. No. 107-22). Part Four is an 
explanation of the revenue provisions of the Railroad 
Retirement and Survivors' Improvement Act of 2001 (Pub. L. No. 
107-90), relating to an act to modernize the railroad 
retirement and to provide enhanced benefits to employees and 
beneficiaries. Part Five is an explanation of the excise tax 
provision relating to the mental health parity requirements 
included in the Fiscal Year 2002 Appropriation for the 
Departments of Labor, Health and Human Services, and Education 
(Pub. L. No. 107-116). Part Six is an explanation of the Act to 
simplify the reporting requirements relating to higher 
education tuition and related expenses (Pub. L. No. 107-131). 
Part Seven is an explanation of the Victims of Terrorism Tax 
Relief Act of 2001 (Pub. L. No. 107-134), relating to tax 
relief provisions for victims of terrorist attacks and other 
purposes. Part Eight is an explanation of the revenue 
provisions of the Job Creation and Worker Assistance Act of 
2002 (Pub. L. No. 107-147), relating to provide incentives to 
general economic recovery, tax incentives for New York City and 
distresses areas, general miscellaneous provisions, tax 
technical corrections, and the extension of certain expiring 
provisions. Part Nine is an explanation of the Clergy Housing 
Allowance Clarification Act of 2002 (Pub. L. No. 107-181), 
relating to the parsonage allowance exclusion. Part Ten is the 
revenue provision of the Trade Adjustment Assistance Reform Act 
of 2002 (Pub. L. No. 107-210), relating to the credit for 
health insurance costs of eligible individuals. Part Eleven is 
an explanation of provisions of an Act amending section 527 of 
the Internal Revenue Code (the ``Code'') to eliminate 
notification and return requirements for State and local party 
committees and candidate committees and to avoid duplicate 
reporting by certain State and local political committees of 
information required to be reported and made publicly available 
under State law (Pub. L. No. 107-276). Part Twelve is the 
revenue provisions of the Homeland Security Act of 2002 (Pub. 
L. No. 107-296) relating to the transfer of the Bureau of 
Alcohol, Tobacco and Firearms to the Department of Justice. 
Part Thirteen is the revenue provisions of the Veterans' 
Benefits Act of 2002 (Pub. L. No. 107-330) relating to the 
extension of the disclosure of certain tax return information 
for the administration of certain veterans programs. Part 
Fourteen is the Holocaust Restitution Tax Fairness Act of 2002 
(Pub. L. No. 107-358). The Appendix provides the estimated 
budget effects of tax legislation enacted in the 107th 
Congress.















PART ONE: THE FALLEN HERO SURVIVOR BENEFIT FAIRNESS ACT OF 2001 (PUBLIC 
                            LAW 107-15) \2\

                         Present and Prior Law

    The Taxpayer Relief Act of 1997 provided that an amount 
paid as a survivor annuity on account of the death of a public 
safety officer who is killed in the line of duty is excludable 
from income to the extent the survivor annuity is attributable 
to the officer's service as a law enforcement officer. The 
survivor annuity must be provided under a governmental plan to 
the surviving spouse (or former spouse) of the public safety 
officer or to a child of the officer. Public safety officers 
include law enforcement officers, firefighters, rescue squad or 
ambulance crew. The provision does not apply with respect to 
the death of a public safety officer if it is determined by the 
appropriate supervising authority that (1) the death was caused 
by the intentional misconduct of the officer or by the 
officer's intention to bring about the death, (2) the officer 
was voluntarily intoxicated at the time of death, (3) the 
officer was performing his or her duties in a grossly negligent 
manner at the time of death, or (4) the actions of the 
individual to whom payment is to be made were a substantial 
contributing factor to the death of the officer.
---------------------------------------------------------------------------
    \2\ H.R. 1727. The House Committee on Ways and Means marked up the 
bill on May 9, 2001, and reported the bill, as amended, on May 15, 2001 
(H.R. Rep. No. 107-65). The House passed the bill under a motion to 
suspend the rules and pass the bill on May 15, 2001. The Senate passed 
the bill by unanimous consent on May 22, 2001. The President signed the 
bill on June 5, 2001.
---------------------------------------------------------------------------
    The exclusion applies to amounts received in taxable years 
beginning after December 31, 1996, with respect to individuals 
dying after that date.

                           Reasons for Change

    The Congress believed that survivors of public safety 
officers killed in the line of duty should all receive the same 
tax treatment, regardless of when the officer died.

                        Explanation of Provision

    The Act extends the exclusion of survivor annuities with 
respect to public safety officers killed in the line of duty 
with respect to individuals dying on or before December 31, 
1996.

                             Effective Date

    The provision is effective with respect to payments 
received after December 31, 2001.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $4 million in 2002, $5 million annually in 
2003 through 2008, and $4 million annually in 2009 through 
2012.

  PART TWO: ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001 
                        (PUBLIC LAW 107-16) \3\

                     I. MARGINAL TAX RATE REDUCTION

A. Individual Income Tax Rate Structure (sec. 101 of the Act and sec. 1 
                              of the Code)

                         Present and Prior Law

    Under the Federal individual income tax system, an 
individual who is a citizen or a resident of the United States 
generally is subject to tax on worldwide taxable income. 
Taxable income is total gross income less certain exclusions, 
exemptions, and deductions. An individual may claim either a 
standard deduction or itemized deductions.
---------------------------------------------------------------------------
    \3\ H.R. 1836; hereinafter referred to as ``EGTRRA''. EGTRRA passed 
the House on May 16, 2001. Provisions in H.R. 1836 were reported as 
separate legislation by the House Committee on Ways and Means and were 
passed by the House. These bills include H.R. 3 (``Economic Growth and 
Tax Relief Act of 2001'') (H.R. Rep. 107-7), H.R. 6 (``Marriage Penalty 
and Family Tax Relief Act of 2001'') (H.R. Rep. 107-29), H.R. 8 
(``Death Tax Elimination Act of 2001'') (H.R. Rep. 107-37), H.R. 10 
(``Comprehensive Retirement Security and Pension Reform Act of 2001'') 
(H.R. Rep. 107-51, Parts 1 and 2), and H.R. 622 (``Hope for Children 
Act'') (H.R. Rep. 107-64).
    The Senate Committee on Finance reported S. 896 (``Restoring 
Earnings to Lift Individuals and Empower Families (RELIEF) Act of 
2001'') on May 16, 2001 (S. Prt. 107-30). The Senate passed H.R. 1836, 
as amended with the provisions of S. 896, on May 23, 2001.
    The conference report was filed on the bill on May 26, 2001 (H.R. 
Rep. No. 107-84), and was passed by the House and the Senate on May 26, 
2001. The President signed the bill on June 7, 2001.
---------------------------------------------------------------------------
    An individual's income tax liability is determined by 
computing his or her regular income tax liability and, if 
applicable, alternative minimum tax liability.
Regular income tax liability
    Regular income tax liability is determined by applying the 
regular income tax rate schedules (or tax tables) to the 
individual's taxable income. This tax liability is then reduced 
by any applicable tax credits. The regular income tax rate 
schedules are divided into several ranges of income, known as 
income brackets, and the marginal tax rate increases as the 
individual's income increases. The income bracket amounts are 
adjusted annually for inflation. Separate rate schedules apply 
based on filing status: single individuals (other than heads of 
households and surviving spouses), heads of households, married 
individuals filing joint returns (including surviving spouses), 
married individuals filing separate returns, and estates and 
trusts. Lower rates may apply to capital gains.
    For 2001, the regular income tax rate schedules for 
individuals are shown in Table 1, below. The rate bracket 
breakpoints for married individuals filing separate returns are 
exactly one-half of the rate brackets for married individuals 
filing joint returns. A separate, compressed rate schedule 
applies to estates and trusts.

         Table 1.--Individual Regular Income Tax Rates for 2001
------------------------------------------------------------------------
                                         But not     Then regular income
     If taxable income is over:           over:          tax equals:
------------------------------------------------------------------------
                           Single individuals
$0..................................      $27,050   15% of taxable
                                                     income.
$27,050.............................      $65,550   $4,057.50, plus 28%
                                                     of the amount over
                                                     $27,050.
$65,550.............................     $136,750   $14,837.50, plus 31%
                                                     of the amount over
                                                     $65,550.
$136,750............................     $297,350   $36,909.50, plus 36%
                                                     of the amount over
                                                     $136,750.
Over $297,350.......................  ............  $94,725.50, plus
                                                     39.6% of the amount
                                                     over $297,350.

                           Heads of households

$0..................................      $36,250   15% of taxable
                                                     income.
$36,250.............................      $93,650   $5,437.50, plus 28%
                                                     of the amount over
                                                     $36,250.
$93,650.............................     $151,650   $21,509.50, plus 31%
                                                     of the amount over
                                                     $93,650.
$151,650............................     $297,350   $39,489.50, plus 36%
                                                     of the amount over
                                                     $151,650.
Over $297,350.......................  ............  $91,941.50, plus
                                                     39.6% of the amount
                                                     over $297,350.

                Married individuals filing joint returns

$0..................................      $45,200   15% of taxable
                                                     income.
$45,200.............................     $109,250   $6,780.00, plus 28%
                                                     of the amount over
                                                     $45,200.
$109,250............................     $166,500   $24,714.50, plus 31%
                                                     of the amount over
                                                     $109,250.
$166,500............................     $297,350   $42,461.50, plus 36%
                                                     of the amount over
                                                     $166,500.
Over $297,350.......................  ............  $89,567.50, plus
                                                     39.6% of the amount
                                                     over $297,350.
------------------------------------------------------------------------

                           Reasons for Change

    The Congress believed that providing tax relief to the 
American people is appropriate for a number of reasons. The 
Congressional Budget Office (``CBO'') projected budget 
surpluses of $5.6 trillion over the next 10 fiscal years (2001-
2010). Federal revenues have been rising as a share of the 
gross domestic product (``GDP''). CBO projected that, during 
the fiscal year 2001-2010 period, Federal revenues will be more 
than 20 percent of the GDP annually. By contrast, during the 
early 1990's, Federal revenues generally were only 17-18 
percent of the GDP. Individual income taxes account for most of 
the recent rise in revenues as a percentage of GDP. Federal 
individual income tax revenues rose to over 10 percent of GDP 
in fiscal year 2000 for the first time in history and were 
projected by the CBO to exceed 10 percent of GDP for each of 
the fiscal years 2001-2010. The CBO projected that the growth 
of Federal revenues would, for fiscal year 2001, outstrip the 
growth of GDP for the ninth consecutive year. Moreover, the CBO 
stated that ``[t]he most significant source of the growth of 
income taxes relative to GDP was the increase in the effective 
tax rate.''\4\
---------------------------------------------------------------------------
    \4\ Congressional Budget Office, Congress of the United States, The 
Budget and Economic Outlook: Fiscal Years 2002-2011, January 2001, at 
56.
---------------------------------------------------------------------------
    The Federal income tax is intended to collect revenues to 
fund the programs of the Federal government. If more tax 
revenues are collected than are needed to fund the government, 
the Congress believed that at least a portion of the excess 
should be returned to the taxpayers who are paying Federal 
income taxes. A portion of the surplus could be returned while 
still retaining enough to pay down the public debt, fund 
priorities such as education and defense, and secure the future 
of Social Security and Medicare. Thus, the Congress believed 
that it was appropriate to provide relief from the high 
individual income tax rates of prior law. The Congress believed 
that this provision provides the appropriate level of tax 
relief without threatening funding for other national 
priorities. Finally, the Congress believed that the lower rates 
provided by this provision were a fair means to provide tax 
relief for all taxpayers.
    The Congress believed that high marginal individual income 
tax rates reduce incentives for taxpayers to work, to save, and 
to invest and, thereby, have a negative effect on the long-term 
health of the economy. The higher that marginal tax rates are, 
the greater is the disincentive for individuals to increase 
their work effort. In addition, the Congress received testimony 
from tax experts that high marginal tax rates lead to reduced 
confidence in the Federal tax system and lower rates of 
voluntary compliance by taxpayers. Lower marginal tax rates 
provide greater incentives to taxpayers to be entrepreneurial 
risk takers; the Congress believed that the high marginal tax 
rates of prior law discourage success. EGTRRA provides tax 
relief to more than 100 million income tax returns of 
individuals, including at least 16 million returns of 
individuals who are owners of businesses (sole proprietorships, 
and S corporations). The Congress believed that this tax cut 
would lead to increased investment by these businesses, 
promoting long-term growth and stability in the economy and 
rewarding the businessmen and women who provide a foundation 
for our country's success.
    In addition, lower marginal tax rates help remove the 
barriers that lower-income families face as they try to enter 
the middle class. The lower the marginal tax rates for those 
taxpayers in the lowest income tax brackets, the greater is the 
incentive to work. The new 10-percent rate bracket in EGTRRA 
delivers more benefit as a percentage of income to low-income 
taxpayers than high-income taxpayers and provides an incentive 
for these taxpayers to increase their work effort.
    EGTRRA provides immediate tax relief to American taxpayers 
in the form of a new rate bracket for the first $6,000 of 
taxable income for single individuals and the first $12,000 of 
taxable income for married couples filing a joint return. This 
new 10-percent rate bracket is effective this year. The 
Congress believed that such immediate tax relief may encourage 
short-term growth in the economy by providing individuals with 
additional cash to spend. Also, the new 10-percent rate bracket 
in the Act delivers more benefit as a percentage of income to 
low-income taxpayers than high-income taxpayers.
    The Congress also believed that it is appropriate to repeal 
the 10-percent surtax imposed in 1993 to cut the deficit. This 
10-percent surtax on top of the 36-percent rate resulted in a 
39.6-percent marginal tax rate for those in the highest income 
tax bracket. Because the Congressional Budget Office was 
projecting budget surpluses over the next ten years, the 
Congress believed that it is appropriate to repeal this 
deficit-era surtax.
    Finally, there were signs that the economy was slowing. The 
Congress believed that immediate tax relief could encourage 
short-term growth in the economy by providing individuals with 
additional cash to spend. However, the Congress recognized that 
it was important to act quickly so that taxpayers are aware of 
the commitment of the President and the Congress to enact this 
tax cut and to adjust income tax withholding tables. It was 
important that taxpayers immediately see the benefits of this 
tax relief in the form of more money in their pockets.

                        Explanation of Provision

In general
    EGTRRA creates a new 10-percent regular income tax bracket 
for a portion of taxable income that is currently taxed at 15 
percent, effective for taxable years beginning after December 
31, 2000. EGTRRA also reduces the other regular income tax 
rates, effective July 1, 2001. By 2006, the present-law regular 
income tax rates (28 percent, 31 percent, 36 percent and 39.6 
percent) will be lowered to 25 percent, 28 percent, 33 percent, 
and 35 percent, respectively.
New low-rate bracket
    EGTRRA establishes a new 10-percent income tax rate bracket 
for a portion of taxable income that is currently taxed at 15 
percent. The 10-percent rate bracket applies to the first 
$6,000 of taxable income for single individuals, $10,000 of 
taxable income for heads of households, and $12,000 for married 
couples filing joint returns. This $6,000 increases to $7,000 
and this $12,000 increases to $14,000 for 2008 and thereafter.
    The taxable income levels for the new low-rate bracket will 
be adjusted annually for inflation for taxable years beginning 
after December 31, 2008. The new low-rate bracket for joint 
returns and head of household returns will be rounded down to 
the nearest $50. The bracket for single individuals and married 
individuals filing separately will be one-half for joint 
returns (after adjustment of that bracket for inflation).
Rate reduction credit for 2001
    EGTRRA includes a rate reduction credit for 2001 to more 
immediately achieve one of the purposes behind the new bottom 
rate bracket for 2001. The Congress chose to utilize this 
credit mechanism (and the issuance of checks described below) 
because it delivers economic stimulus to the economy more 
rapidly than would implementation of a new 10-percent rate 
bracket, even if that were accompanied by an immediate 
implementation of new wage withholding tables. Accordingly, 
this rate reduction credit operates in lieu of the new 10-
percent income tax rate bracket for 2001.
    This credit is computed in the following manner. Taxpayers 
are entitled to a credit in tax year 2001 of 5 percent (the 
difference between the 15-percent rate and the 10-percent rate) 
of the amount of income that would have been eligible for the 
new 10-percent rate. Taxpayers may not receive a credit in 
excess of their income tax liability (determined after 
nonrefundable credits).
    Most taxpayers will receive this credit in the form of a 
check issued by the Department of the Treasury. The amount of 
the check is computed in the same manner as the credit, except 
that it will be done on the basis of tax returns filed for 2000 
(instead of 2001). The Congress anticipated that the Department 
of the Treasury would make every effort to issue all checks 
before October 1, 2001, to taxpayers who timely filed their 
2000 tax returns. Taxpayers who filed late or pursuant to 
extensions would receive their checks later in that fall.
    Taxpayers would reconcile the amount of the credit with the 
check they receive in the following manner. They would complete 
a worksheet calculating the amount of the credit based on their 
2001 tax return. They would then subtract from the credit the 
amount of the check they received. For many taxpayers, these 
two amounts would be the same. If, however, the result is a 
positive number (because, for example, the taxpayer paid no tax 
in 2000 but is paying tax in 2001), the taxpayer may claim that 
amount as a credit against 2001 tax liability. If, however, the 
result is negative (because, for example, the taxpayer paid tax 
in 2000 but owes no tax for 2001), the taxpayer is not required 
to repay that amount to the Treasury. Otherwise, the checks 
have no effect on tax returns filed in 2001; the amount is not 
includible in gross income and it does not otherwise reduce the 
amount of withholding. In no event may the Department of the 
Treasury issue checks after December 31, 2001.\5\ This is 
designed to prevent errors by taxpayers who might claim the 
full amount of the credit on their 2001 tax returns and file 
those returns early in 2002, at the same time the Treasury 
check might be mailed to them. Payment of the credit (or the 
check) is treated, for all purposes of the Code,\6\ as a 
payment of tax. As such, the credit or the check is subject to 
the refund offset provisions, such as those applicable to past-
due child support under section 6402 of the Code.
---------------------------------------------------------------------------
    \5\ For administrative reasons, it was understood that the 
Department of the Treasury may need to establish an earlier termination 
date in order to fully implement the intent of this provision.
    \6\ A special rule provides that no interest will be paid with 
respect to the checks.
---------------------------------------------------------------------------
    In general, taxpayers eligible for the credit (and the 
check) are individuals other than estates or trusts, 
nonresident aliens, or dependents. The determination of this 
status for the relevant year is made on the basis of the 
information filed on the tax return.
    The Congress understood that, in light of the large number 
of checks that would be issued, the issuance of checks would 
take several months.\7\ Accordingly, no interest will be paid 
with respect to these checks. Checks were to be issued in the 
order of the last two digits of the taxpayer identification 
number (which is generally a taxpayer's social security 
number), from lowest to highest. Payment by check is the only 
mechanism for receiving the payment prior to filing the 2001 
tax return; taxpayers may not file either amended returns or 
claims for tentative refunds for tax year 2000 to claim these 
amounts.
---------------------------------------------------------------------------
    \7\ The Congress investigated the possibility of utilizing 
electronic means, instead of paper checks, to deliver these amounts 
even more rapidly, but doing so was not possible because of limitations 
on available data on individual's banking accounts.
---------------------------------------------------------------------------
    It was anticipated that the IRS would send notices to most 
taxpayers approximately one month after enactment. The notices 
were to inform taxpayers of the computation of their checks and 
the approximate date by which they can expect to receive their 
check. This information was intended to decrease the number of 
telephone calls made by taxpayers to the IRS inquiring when 
their check will be issued.

Modification of 15-percent bracket

    The 15-percent regular income tax bracket is modified to 
begin at the end of the new low-rate regular income tax 
bracket. The 15-percent regular income tax bracket ends at the 
same level as under present law. EGTRRA also makes other 
changes to the 15-percent rate bracket.\8\
---------------------------------------------------------------------------
    \8\ See discussion of the provisions regarding marriage penalty 
relief in the 15-percent bracket, Part Two, Section III. A., of this 
document.
---------------------------------------------------------------------------

Reduction of other rates and consolidation of rate brackets

    The prior law regular income tax rates of 28 percent, 31 
percent, 36 percent, and 39.6 percent are to be phased down 
over six years to 25 percent, 28 percent, 33 percent, and 35 
percent, effective after June 30, 2001. Accordingly, for 
taxable years beginning during 2001, the rate reduction will 
come in the form of a blended tax rate. The taxable income 
levels for the new rates in all taxable years are the same as 
the taxable income levels that apply under the prior-law rates.
    Table 2, below, shows the schedule of regular income tax 
rate reductions.

              Table 2.--Regular Income Tax Rate Reductions
------------------------------------------------------------------------
                                                                 39.6%
                               28% rate   31% rate   36% rate     rate
        Calendar year          reduced    reduced    reduced    reduced
                                  to         to         to         to
------------------------------------------------------------------------
2001\1\-2003................         27         30         35       38.6
2004-2005...................         26         29         34       37.6
2006 and later..............         25         28         33        35
------------------------------------------------------------------------
\1\ Effective July 1, 2001.

Projected regular income tax rate schedules under EGTRRA

    Table 3, below, shows the projected individual regular 
income tax rate schedules when the rate reductions are fully 
phased in (i.e., for 2006). As under present law, the rate 
brackets for married taxpayers filing separate returns under 
the bill are one half the rate brackets for married individuals 
filing joint returns. In addition, appropriate adjustments are 
made to the separate, compressed rate schedule for estates and 
trusts.

   Table 3.--Individual Regular Income Tax Rates for 2006 (Projected)
------------------------------------------------------------------------
                                         But not     Then regular income
        If taxable income is:             over:          tax equals:
------------------------------------------------------------------------
                           Single individuals

$0..................................       $6,000   10 percent of
                                                     taxable income.
$6,000..............................      $30,950   $600, plus 15% of
                                                     the amount over
                                                     $6,000.
$30,950.............................      $74,950   $4,342.50, plus 25%
                                                     of the amount over
                                                     $30,950.
$74,950.............................     $156,300   $15,342.50, plus 28%
                                                     of the amount over
                                                     $74,950.
$156,300............................     $339,850   $38,120.50, plus 33%
                                                     of the amount over
                                                     $156,300.
Over $339,850.......................  ............  $98,692, plus 35% of
                                                     the amount over
                                                     $339,850.

                           Heads of households

$0..................................      $10,000   10 percent of
                                                     taxable income.
$10,000.............................      $41,450   $1,000, plus 15% of
                                                     the amount over
                                                     $10,000.
$41,450.............................     $107,000   $5,717.50, plus 25%
                                                     of the amount over
                                                     $41,450.
$107,000............................     $173,300   $22,105, plus 28% of
                                                     the amount over
                                                     $107,000.
$173,300............................     $339,850   $40,669, plus 33% of
                                                     the amount over
                                                     $173,300.
Over $339,850.......................  ............  $95,630.50, plus 35%
                                                     of the amount over
                                                     $339,850.

                Married individuals filing joint returns

$0..................................      $12,000   10 percent of
                                                     taxable income.
$12,000.............................   $57,850\9\   $1,200, plus 15% of
                                                     the amount over
                                                     $12,000.
$57,850.............................     $124,900   $8,077.50, plus 25%
                                                     of the amount over
                                                     $57,850.
$124,900............................     $190,300   $24,840, plus 28% of
                                                     the amount over
                                                     $124,900.
$190,300............................     $339,850   $43,152, plus 33% of
                                                     the amount over
                                                     $190,300.
Over $339,850.......................  ............  $92,503.50, plus 35%
                                                     of the amount over
                                                     $339,850.
\9\ The end point of the 15-percent
 rate bracket for married
 individuals filing joint returns
 also reflects the phase-in of the
 increase in the size of the 15-
 percent bracket. See Part Two,
 Section III. B. of this document.
------------------------------------------------------------------------

Revised wage withholding for 2001

    Under present and prior law, the Secretary of the Treasury 
is authorized to prescribe appropriate income tax withholding 
tables or computational procedures for the withholding of 
income taxes from wages paid by employers. The Secretary was 
expected to make appropriate revisions to the wage withholding 
tables to reflect the rate reduction effective beginning July 
1, 2001, as expeditiously as possible.

                             Effective Date

    The provisions of EGTRRA generally apply to taxable years 
beginning after December 31, 2000. The reductions in the tax 
rates, other than the new 10-percent rate, are effective after 
June 30, 2001. The conforming amendments to certain withholding 
provisions under EGTRRA are effective for amounts paid more 
than 60 days after the date of enactment.

                             Revenue Effect

    The provisions to create a new 10 percent rate bracket and 
a credit with advanced payment in lieu of the new rate for 2001 
are estimated to reduce Federal fiscal year budget receipts by 
$38,186 million in 2001, $33,421 million in 2002, $40,223 
million in 2003, $40,336 million in 2004, $40,201 million in 
2005, $40,203 million in 2006, $40,065 million in 2007, $43,422 
million in 2008, $45,359 million in 2009, $46,034 million in 
2010, and $13,871 million in 2011.
    The provision to reduce the other various income tax rates 
and brackets is estimated to reduce Federal fiscal year budget 
receipts by $2,005 million in 2001, $21,100 million in 2002, 
$21,256 million in 2003, $29,049 million in 2004, $32,774 
million in 2005, $50,924 million in 2006, $59,378 million in 
2007, $60,401 million in 2008, $61,652 million in 2009, $63,033 
million in 2010, and $19,035 million in 2011.

 B. Phased-in Repeal of the Phase-Out of Itemized Deductions (sec. 102 
                  of the Act and sec. 68 of the Code)


                         Present and Prior Law


Itemized deductions

    Taxpayers may choose to claim either the basic standard 
deduction (and additional standard deductions, if applicable) 
or itemized deductions (subject to certain limitations) for 
certain expenses incurred during the taxable year. Among these 
deductible expenses are unreimbursed medical expenses, 
investment interest, casualty and theft losses, wagering 
losses, charitable contributions, qualified residence interest, 
State and local income and property taxes, unreimbursed 
employee business expenses, and certain other miscellaneous 
expenses.

Overall limitation on itemized deductions (``Pease'' limitation)

    Under present and prior law, the total amount of otherwise 
allowable itemized deductions (other than medical expenses, 
investment interest, and casualty, theft, or wagering losses) 
is reduced by three percent of the amount of the taxpayer's 
2001 adjusted gross income in excess of $132,950 ($66,475 for 
married couples filing separate returns). These amounts are 
adjusted annually for inflation. In computing this reduction of 
total itemized deductions, all present and prior law 
limitations applicable to such deductions (such as the separate 
floors) are first applied and, then, the otherwise allowable 
total amount of itemized deductions is reduced in accordance 
with this provision. Under present and prior law, the otherwise 
allowable itemized deductions may not be reduced by more than 
80 percent.

                           Reasons for Change

    The Congress believed that the overall limitation on 
itemized deductions is an unnecessarily complex way to impose 
taxes and that the ``hidden'' way in which the limitation 
raises marginal tax rates undermines respect for the tax laws. 
The staff of the Joint Committee on Taxation recommended the 
elimination of certain phase-outs, including the overall 
limitation on itemized deductions, in a recent study containing 
recommendations for simplification of the Code.\10\ The overall 
limitation on itemized deductions requires a 10-line worksheet. 
Moreover, the first line of that worksheet requires the adding 
up of seven line items from Schedule A of the Form 1040, and 
the second line requires the adding up of four line items of 
Schedule A of the Form 1040. The Congress believed that 
reducing the application of the overall limitation on itemized 
deductions would significantly reduce complexity for affected 
taxpayers.
---------------------------------------------------------------------------
    \10\ Joint Committee on Taxation, Study of the Overall State of the 
Federal Tax System and Recommendations for Simplification, Pursuant to 
section 8022(3)(B) of the Internal Revenue Code of 1986 (JCS-3-01), 
April 2001.
---------------------------------------------------------------------------

                        Explanation of Provision

    EGTRRA repeals the overall limitation on itemized 
deductions for all taxpayers. The repeal is phased-in over five 
years, as follows. The otherwise applicable overall limitation 
on itemized deductions is reduced by one-third in taxable years 
beginning in 2006 and 2007, and by two-thirds in taxable years 
beginning in 2008 and 2009. The overall limitation is repealed 
for taxable years beginning after December 31, 2009.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2005.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $1,265 million in 2006, $2,566 million in 
2007, $4,003 million in 2008, $5,414 million in 2009, $7,168 
million in 2010, and $4,456 million in 2011.

C. Phased-in Repeal of the Personal Exemption Phaseout (sec. 103 of the 
                  Act and sec. 151(d)(3) of the Code)


                         Present and Prior Law

    In order to determine taxable income, an individual reduces 
adjusted gross income by any personal exemptions, deductions, 
and either the applicable standard deduction or itemized 
deductions. Personal exemptions generally are allowed for the 
taxpayer, his or her spouse, and any dependents. For 2001, the 
amount deductible for each personal exemption is $2,900. This 
amount is adjusted annually for inflation.
    Under present law, the deduction for personal exemptions is 
phased-out ratably for taxpayers with adjusted gross income 
over certain thresholds. The applicable thresholds for 2001 are 
$132,950 for single individuals, $199,450 for married 
individuals filing a joint return, $166,200 for heads of 
households, and $99,725 for married individuals filing separate 
returns. These thresholds are adjusted annually for inflation.
    The total amount of exemptions that may be claimed by a 
taxpayer is reduced by two percent for each $2,500 (or portion 
thereof) by which the taxpayer's adjusted gross income exceeds 
the applicable threshold. The phase-out rate is two percent for 
each $1,250 for married taxpayers filing separate returns. 
Thus, the personal exemptions claimed are phased-out over a 
$122,500 range ($61,250 for married taxpayers filing separate 
returns), beginning at the applicable threshold. The size of 
these phase-out ranges ($122,500/$61,250) is not adjusted for 
inflation. For 2001, the point at which a taxpayer's personal 
exemptions are completely phased-out is $255,450 for single 
individuals, $321,950 for married individuals filing a joint 
return, $288,700 for heads of households, and $160,975 for 
married individuals filing separate returns.

                           Reasons for Change

    The Congress believed that the personal exemption phase-out 
is an unnecessarily complex way to impose income taxes and that 
the ``hidden'' way in which the phase-out raises marginal tax 
rates undermines respect for the tax laws. The staff of the 
Joint Committee on Taxation recommended the elimination of 
certain phase-outs, including the personal exemption phase-out, 
in a recent study containing recommendations for simplification 
of the Code.\11\ Furthermore, the Congress believed that the 
phase-out imposes excessively high effective marginal tax rates 
on families with children. The repeal of the personal exemption 
phase-out will restore the full exemption amount to all 
taxpayers and will simplify the tax laws.
---------------------------------------------------------------------------
    \11\ Id.
---------------------------------------------------------------------------

                        Explanation of Provision

    EGTRRA provides for a five-year phase-in of the repeal of 
the personal exemption phase-out. Under the five-year phase-in, 
the otherwise applicable personal exemption phase-out is 
reduced by one-third in taxable years beginning in 2006 and 
2007, and is reduced by two-thirds in taxable years beginning 
in 2008 and 2009. The repeal is fully effective for taxable 
years beginning after December 31, 2009.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2005.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $473 million in 2006, $955 million in 2007, 
$1,382 million in 2008, $1,793 million in 2009, $2,216 million 
in 2010, and $1,323 million in 2011.

                 II. TAX BENEFITS RELATING TO CHILDREN

 A. Increase and Expand the Child Tax Credit (sec. 201 of the Act and 
                          sec. 24 of the Code)

                         Present and Prior Law

In general
    Under present law, an individual may claim a $500 tax 
credit for each qualifying child under the age of 17. In 
general, a qualifying child is an individual for whom the 
taxpayer can claim a dependency exemption and who is the 
taxpayer's son or daughter (or descendent of either), stepson 
or stepdaughter, or eligible foster child.
    The child tax credit is phased-out for individuals with 
income over certain thresholds. Specifically, the otherwise 
allowable child tax credit is reduced by $50 for each $1,000 
(or fraction thereof) of modified adjusted gross income over 
$75,000 for single individuals or heads of households, $110,000 
for married individuals filing joint returns, and $55,000 for 
married individuals filing separate returns. Modified adjusted 
gross income is the taxpayer's total gross income plus certain 
amounts excluded from gross income (i.e., excluded income of 
U.S. citizens or residents living abroad (section 911); 
residents of Guam, American Samoa, and the Northern Mariana 
Islands (section 931); and residents of Puerto Rico (section 
933)). The length of the phase-out range depends on the number 
of qualifying children. For example, the phase-out range for a 
single individual with one qualifying child is between $75,000 
and $85,000 of modified adjusted gross income. The phase-out 
range for a single individual with two qualifying children is 
between $75,000 and $95,000.
    The child tax credit is not adjusted annually for 
inflation.
Refundability
    In general, the child tax credit is nonrefundable. However, 
for families with three or more qualifying children, the child 
tax credit is refundable up to the amount by which the 
taxpayer's social security taxes exceed the taxpayer's earned 
income credit.
Alternative minimum tax liability
    An individual's alternative minimum tax liability reduces 
the amount of the refundable earned income credit and, for 
taxable years beginning after December 31, 2001, the amount of 
the refundable child credit for families with three or more 
children. This is known as the alternative minimum tax offset 
of refundable credits.
    Through 2001, an individual generally may reduce his or her 
tentative alternative minimum tax liability by nonrefundable 
personal tax credits (such as the $500 child tax credit and the 
adoption tax credit). For taxable years beginning after 
December 31, 2001, nonrefundable personal tax credits may not 
reduce an individual's income tax liability below his or her 
tentative alternative minimum tax.

                           Reasons for Change

    The Congress believed that a tax credit for families with 
children recognizes the importance of helping families raise 
children. This provision doubles the child tax credit in order 
to provide additional tax relief to families to help offset the 
significant costs of raising a child. Further, the Congress 
believed that in order to extend some of the benefit of the 
child credit to families who currently do not benefit, the 
refundable child credit should be made available to families 
regardless of the number of children (rather than only families 
with three or more children). Additionally, the Congress 
believed that the child credit should be allowed to offset the 
alternative minimum tax. The provision also repeals the prior-
law provision reducing the refundable child credit by the 
amount of the alternative minimum tax in order to ensure that 
no taxpayer will face an increase in net income tax liability 
as a result of the interaction of the alternative minimum tax 
with the regular income tax reductions in EGTRRA.

                        Explanation of Provision

In general
    EGTRRA increases the child tax credit to $1,000, phased-in 
over ten years, effective for taxable years beginning after 
December 31, 2000.
    Table 4, below, shows the increase of the child tax credit.

               Table 4.--Increase of the Child Tax Credit
------------------------------------------------------------------------
                                                           Credit amount
                      Calendar year                          per child
------------------------------------------------------------------------
2001-2004...............................................            $600
2005-2008...............................................            $700
2009....................................................            $800
2010 and later..........................................          $1,000
------------------------------------------------------------------------

Refundability
    EGTRRA makes the child credit refundable to the extent of 
10 percent of the taxpayer's earned income in excess of $10,000 
for calendar years 2001-2004. The percentage is increased to 15 
percent for calendar years 2005 and thereafter. The $10,000 
amount is indexed for inflation beginning in 2002. Families 
with three or more children are allowed a refundable credit for 
the amount by which the taxpayer's social security taxes exceed 
the taxpayer's earned income credit (the present and prior-law 
rule), if that amount is greater than the refundable credit 
based on the taxpayer's earned income in excess of $10,000. 
EGTRRA also provides that the refundable portion of the child 
credit does not constitute income and shall not be treated as 
resources for purposes of determining eligibility or the amount 
or nature of benefits or assistance under any Federal program 
or any State or local program financed with Federal funds.
Alternative minimum tax
    EGTRRA provides that the refundable child credit will no 
longer be reduced by the amount of the alternative minimum tax. 
In addition, EGTRRA allows the child credit to the extent of 
the full amount of the individual's regular income tax and 
alternative minimum tax.

                             Effective Date

    The provision generally is effective for taxable years 
beginning after December 31, 2000. The provision relating to 
allowing the child tax credit against alternative minimum tax 
is effective for taxable years beginning after December 31, 
2001.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $518 million in 2001, $9,291 million in 
2002, $9,927 million in 2003, $10,602 million in 2004, $12,786 
million in 2005, $18,320 million in 2006, $19,000 million in 
2007, $19,408 million in 2008, $20,532 million in 2009, $25,200 
million in 2010, and $26,197 million in 2011.

B. Extension and Expansion of Adoption Tax Benefits (secs. 202 and 203 
              of the Act and secs. 23 and 137 of the Code)

                         Present and Prior Law

Tax credit
            In general
    A tax credit is allowed for qualified adoption expenses 
paid or incurred by a taxpayer. The maximum credit was $5,000 
per eligible child ($6,000 for a special needs child) for 
taxable years beginning before January 1, 2002. An eligible 
child is an individual: (1) who has not attained age 18 or (2) 
is physically or mentally incapable of caring for himself or 
herself. A special needs child is an eligible child who is a 
citizen or resident of the United States whom a State has 
determined: (1) cannot or should not be returned to the home of 
the birth parents; and (2) has a specific factor or condition 
(such as the child's ethnic background, age, or membership in a 
minority or sibling group, or the presence of factors such as 
medical conditions, or physical, mental, or emotional 
handicaps) because of which the child cannot be placed with 
adoptive parents without adoption assistance.
    Qualified adoption expenses are reasonable and necessary 
adoption fees, court costs, attorneys fees, and other expenses 
that are: (1) directly related to, and the principal purpose of 
which is for, the legal adoption of an eligible child by the 
taxpayer; (2) not incurred in violation of State or Federal 
law, or in carrying out any surrogate parenting arrangement; 
(3) not for the adoption of the child of the taxpayer's spouse; 
and (4) not reimbursed (e.g., by an employer).
    Under present and prior law, qualified adoption expenses 
may be incurred in one or more taxable years, but the prior law 
credit could not exceed $5,000 per adoption ($6,000 for a 
special needs child). The adoption credit is phased out ratably 
for taxpayers with modified adjusted gross income between 
$75,000 and $115,000 for taxable years beginning before January 
1, 2002. Under present and prior law, modified adjusted gross 
income is the sum of the taxpayer's adjusted gross income plus 
amounts excluded from income under Code sections 911, 931, and 
933 (relating to the exclusion of income of U.S. citizens or 
residents living abroad; residents of Guam, American Samoa, and 
the Northern Mariana Islands; and residents of Puerto Rico, 
respectively).
    Under present and prior law, the adoption credit for 
special needs children is permanent. Under prior law, the 
adoption credit with respect to other children did not apply to 
expenses paid or incurred after December 31, 2001.
            Alternative minimum tax
    Under prior law through 2001, the adoption credit generally 
reduced the individual's regular income tax and alternative 
minimum tax. Under prior law, for taxable years beginning after 
December 31, 2001, the otherwise allowable adoption credit was 
allowed only to the extent that the individual's regular income 
tax liability exceeded the individual's tentative minimum tax, 
determined without regard to the minimum tax foreign tax 
credit.
Exclusion from income
    Under prior law, a maximum $5,000 exclusion from the gross 
income of an employee was allowed for qualified adoption 
expenses paid or reimbursed by an employer under an adoption 
assistance program. The maximum excludible amount was $6,000 
for special needs adoptions under prior law. Under prior law, 
the exclusion was phased out ratably for taxpayers with 
modified adjusted gross income between $75,000 and $115,000 for 
taxable years beginning before January 1, 2002. Under present 
and prior law, modified adjusted gross income is the sum of the 
taxpayer's adjusted gross income plus amounts excluded from 
income under Code sections 911, 931, and 933 (relating to the 
exclusion of income of U.S. citizens or residents living 
abroad; residents of Guam, American Samoa, and the Northern 
Mariana Islands; and residents of Puerto Rico, respectively). 
Under present and prior law, for purposes of this exclusion, 
modified adjusted gross income also includes all employer 
payments and reimbursements for adoption expenses whether or 
not they are taxable to the employee. Under present and prior 
law, the exclusion does not apply for purposes of payroll 
taxes. Under present and prior law, adoption expenses paid or 
reimbursed by the employer under an adoption assistance program 
are not eligible for the adoption credit. Under present and 
prior law, a taxpayer may be eligible for the adoption credit 
(with respect to qualified adoption expenses he or she incurs) 
and also for the exclusion (with respect to different qualified 
adoption expenses paid or reimbursed by his or her employer).
    Under prior law, the exclusion from income did not apply to 
amounts paid or expenses incurred after December 31, 2001.

                           Reasons for Change

    The Congress believed that the adoption credit and 
exclusion have been successful in reducing the after-tax cost 
of adoption to affected taxpayers. For this reason, the 
Congress believed that both these benefits should be extended 
permanently. The Congress noted that almost 50 percent of the 
tax returns filed in 1998 that received income tax benefits for 
adoption expenses reported total adoption expenses (including 
employer reimbursements) in excess of $5,000. Further, 
approximately 25 percent of the tax returns filed in 1998 that 
received income tax benefits for adoption expenses reported 
total adoption expenses (including employer reimbursements) in 
excess of $10,000. In the case of special needs adoptions, 
approximately 29 percent of the tax returns filed in 1998 that 
received income tax benefits for adoption expenses reported 
total adoption expenses (including employer reimbursements) in 
excess of $6,000. The Congress believed that increasing the 
size of both the adoption credit and exclusion and expanding 
the number of taxpayers who qualify for the tax benefits will 
encourage more adoptions and allow more families to afford 
adoption. The Congress, however, was aware that families 
adopting special needs children may incur continuing expenses, 
after the adoption is finalized, that are not eligible for 
these tax benefits. The Congress will continue to search for 
ways to help alleviate these post-adoption expenses. Finally, 
the Congress believed that the alternative minimum tax should 
not be allowed to reduce the ability of adopting families to 
claim the adoption credit.

                        Explanation of Provision

Tax credit
    EGTRRA makes the adoption credit permanent. The maximum 
credit is increased to $10,000 per eligible child. The 
beginning point of the income phase-out range is increased to 
$150,000 of modified adjusted gross income. Therefore, the 
adoption credit is phased-out for taxpayers with modified 
adjusted gross income of $190,000 or more. Finally, the 
adoption credit is allowed against the alternative minimum tax.
    EGTRRA also provides that for a special needs adoption 
finalized during a taxable year, the adoption expenses taken 
into account are increased by the excess, if any, of $10,000 
over the aggregate qualified adoption expenses with respect to 
the adoption for the taxable year the adoption becomes final 
and all prior taxable years.\12\
---------------------------------------------------------------------------
    \12\ A technical correction was enacted in section 411 of the Job 
Creation and Worker Assistance Act of 2002 described in Part Eight of 
this document to provide this clarification.
---------------------------------------------------------------------------
    The dollar limits and income limitations of the adoption 
credit are adjusted for inflation in taxable years beginning 
after December 31, 2002.\13\
---------------------------------------------------------------------------
    \13\ A technical correction was enacted in section 418 of the Job 
Creation and Worker Assistance Act of 2002 described in Part Eight of 
this document to provide uniform rounding rules (to the nearest 
multiple of $10) for the inflation adjusted amounts in the adoption 
credit and employer-provided adoption assistance exclusion.
---------------------------------------------------------------------------
Exclusion from income
    EGTRRA makes the exclusion from income for employer-
provided adoption assistance permanent. The maximum exclusion 
is increased to $10,000 per eligible child. The beginning point 
of the income phase-out range is increased to $150,000 of 
modified adjusted gross income. Therefore, the exclusion is not 
available to taxpayers with modified adjusted gross income of 
$190,000 or more.
    EGTRRA also provides that the adoption assistance in the 
case of a special needs adoption is increased by the excess, if 
any, of $10,000 over the aggregate qualified adoption expenses 
with respect to the adoption for the taxable year the adoption 
becomes final and all prior taxable years.\14\
---------------------------------------------------------------------------
    \14\ A technical correction was enacted in section 411 of the Job 
Creation and Worker Assistance Act of 2002 described in Part Eight of 
this document to provide this clarification.
---------------------------------------------------------------------------
    The dollar limits and income limitations of the employer-
provided adoption assistance exclusion are adjusted for 
inflation in taxable years beginning after December 31, 
2002.\15\
---------------------------------------------------------------------------
    \15\ A technical correction was enacted in section 418 of the Job 
Creation and Worker Assistance Act of 2002 described in Part Eight of 
this document to provide uniform rounding rules (to the nearest 
multiple of $10) for the inflation adjusted amounts in the adoption 
credit and employer-provided adoption assistance exclusion.
---------------------------------------------------------------------------

                             Effective Date

    The provisions generally are effective for taxable years 
beginning after December 31, 2001. The provisions that allow 
the tax credit and exclusion from income for special needs 
adoptions regardless of whether the taxpayer has qualified 
adoption expenses are effective for taxable years beginning 
after December 31, 2002. Qualified expenses paid or incurred in 
taxable years beginning on or before December 31, 2001, remain 
subject to the prior-law dollar limits.\16\
---------------------------------------------------------------------------
    \16\ A technical correction was enacted in section 411 of the Job 
Creation and Worker Assistance Act of 2002 described in Part Eight of 
this document to provide this clarification.
---------------------------------------------------------------------------

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $51 million in 2002, $191 million in 2003, 
$252 million in 2004, $293 million in 2005, $325 million in 
2006, $349 million in 2007, $375 million in 2008, $403 million 
in 2009, $432 million in 2010, $464 million in 2011 and, $222 
million in 2012.

C. Expansion of Dependent Care Tax Credit (sec. 204 of the Act and sec. 
                            21 of the Code)

                         Present and Prior Law

Dependent care tax credit
    A taxpayer who maintains a household that includes one or 
more qualifying individuals may claim a nonrefundable credit 
against income tax liability for up to 30 percent of a limited 
amount of employment-related expenses. Under prior law, 
eligible employment-related expenses were limited to $2,400 if 
there was one qualifying individual or $4,800 if there were two 
or more qualifying individuals. Thus, the maximum credit was 
$720 if there was one qualifying individual and $1,440 if there 
were two or more qualifying individuals. The applicable dollar 
limit ($2,400/$4,800) of otherwise eligible employment-related 
expenses was reduced by any amount excluded from income under 
an employer-provided dependent care assistance program. For 
example, a taxpayer with one qualifying individual who had 
$2,400 of otherwise eligible employment-related expenses but 
who excluded $1,000 of dependent care assistance had to reduce 
the dollar limit of eligible employment-related expenses for 
the dependent care tax credit by the amount of the exclusion to 
$1,400 ($2,400-$1,000 = $1,400).
    Under present and prior law, a qualifying individual is (1) 
a dependent of the taxpayer under the age of 13 for whom the 
taxpayer is eligible to claim a dependency exemption, (2) a 
dependent of the taxpayer who is physically or mentally 
incapable of caring for himself or herself, or (3) the spouse 
of the taxpayer; if the spouse is physically or mentally 
incapable of caring for himself or herself.
    Under prior law, the 30 percent credit rate was reduced, 
but not below 20 percent, by 1 percentage point for each $2,000 
(or fraction thereof) of adjusted gross income above $10,000. 
The credit was not available to married taxpayers unless they 
filed a joint return.
Exclusion for employer-provided dependent care 
    Under present and prior law, amounts paid or incurred by an 
employer for dependent care assistance provided to an employee 
generally are excluded from the employee's gross income and 
wages if the assistance is furnished under a program meeting 
certain requirements. These requirements include that the 
program be described in writing, satisfy certain 
nondiscrimination rules, and provide for notification to all 
eligible employees. Dependent care assistance expenses eligible 
for the exclusion are defined the same as employment-related 
expenses with respect to a qualifying individual under the 
dependent care tax credit.
    Under prior law, the dependent care exclusion was limited 
to $5,000 per year, except that a married taxpayer filing a 
separate return could exclude only $2,500. Dependent care 
expenses excluded from income were not eligible for the 
dependent care tax credit (section 21(c)).

                        Explanation of Provision

    EGTRRA increases the maximum amount of eligible employment-
related expenses from $2,400 to $3,000, if there is one 
qualifying individual (from $4,800 to $6,000, if there are two 
or more qualifying individuals). EGTRRA also increases the 
maximum credit from 30 percent to 35 percent. Thus, the maximum 
credit is $1,050, if there is one qualifying individual and 
$2,100, if there are two or more qualifying individuals. 
Finally, EGTRRA modifies the phase-down of the credit. Under 
EGTRRA, the 35-percent credit rate is reduced, but not below 20 
percent, by 1 percentage point for each $2,000 (or fraction 
thereof) of adjusted gross income above $15,000. Therefore, the 
credit percentage is reduced to 20 percent for taxpayers with 
adjusted gross income over $43,000.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2002.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $336 million in 2003, $432 million in 2004, 
$413 million in 2005, $393 million in 2006, $380 million in 
2007, $352 million in 2008, $317 million in 2009, $296 million 
in 2010, $73 million in 2011, and less than $500,000 in 2012.

D. Tax Credit for Employer-Provided Child Care Facilities (sec. 303 of 
                 the Act and new sec. 45D of the Code)

                         Present and Prior Law

    Prior law did not provide a tax credit to employers for 
supporting child care or child care resource and referral 
services. Under present and prior law, an employer may be able 
to deduct such expenses as ordinary and necessary business 
expenses. Alternatively, the employer may be required to 
capitalize the expenses and claim depreciation deductions over 
time.

                        Explanation of Provision

    Under EGTRRA, taxpayers receive a tax credit equal to 25 
percent of qualified expenses for employee child care and 10 
percent of qualified expenses for child care resource and 
referral services. The maximum total credit that may be claimed 
by a taxpayer cannot exceed $150,000 per taxable year.
    Qualified child care expenses include costs paid or 
incurred: (1) to acquire, construct, rehabilitate or expand 
property that is to be used as part of the taxpayer's qualified 
child care facility; \17\ (2) for the operation of the 
taxpayer's qualified child care facility, including the costs 
of training and certain compensation for employees of the child 
care facility, and scholarship programs; or (3) under a 
contract with a qualified child care facility to provide child 
care services to employees of the taxpayer. To be a qualified 
child care facility, the principal use of the facility must be 
for child care (unless it is the principal residence of the 
taxpayer), and the facility must meet all applicable State and 
local laws and regulations, including any licensing laws. A 
facility is not treated as a qualified child care facility with 
respect to a taxpayer unless: (1) it has open enrollment to the 
employees of the taxpayer; (2) use of the facility (or 
eligibility to use such facility) does not discriminate in 
favor of highly compensated employees of the taxpayer (within 
the meaning of section 414(q) of the Code; and (3) at least 30 
percent of the children enrolled in the center are dependents 
of the taxpayer's employees, if the facility is the principal 
trade or business of the taxpayer. Qualified child care 
resource and referral expenses are amounts paid or incurred 
under a contract to provide child care resource and referral 
services to the employees of the taxpayer. Qualified child care 
services and qualified child care resource and referral 
expenditures must be provided (or be eligible for use) in a way 
that does not discriminate in favor of highly compensated 
employees of the taxpayer (within the meaning of section 414(q) 
of the Code.
---------------------------------------------------------------------------
    \17\ In addition, a depreciation deduction (or amortization in lieu 
of depreciation) must be allowable with respect to the property and the 
property must not be part of the principal residence of the taxpayer or 
any employee of the taxpayer.
---------------------------------------------------------------------------
    Any amounts for which the taxpayer may otherwise claim a 
tax deduction are reduced by the amount of these credits. 
Similarly, if the credits are taken for expenses of acquiring, 
constructing, rehabilitating, or expanding a facility, the 
taxpayer's basis in the facility is reduced by the amount of 
the credits.
    Credits taken for the expenses of acquiring, constructing, 
rehabilitating, or expanding a qualified facility are subject 
to recapture for the first ten years after the qualified child 
care facility is placed in service. The amount of recapture is 
reduced as a percentage of the applicable credit over the ten-
year recapture period. Recapture takes effect if the taxpayer 
either ceases operation of the qualified child care facility or 
transfers its interest in the qualified child care facility 
without securing an agreement to assume recapture liability for 
the transferee. The recapture tax is not treated as a tax for 
purposes of determining the amount of other credits or 
determining the amount of the alternative minimum tax. \18\ 
Other rules apply.
---------------------------------------------------------------------------
    \18\ A technical correction was enacted in section 411 of the Job 
Creation and Worker Assistance Act of 2002 described in Part Eight of 
this document to provide this clarification.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2001.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $48 million in 2002, $108 million in 2003, 
$129 million in 2004, $142 million in 2005, $156 million in 
2006, $169 million in 2007, $178 million in 2008, $188 million 
in 2009, $196 million in 2010, $90 million in 2011 and, less 
than $500,000 in 2012.

                III. MARRIAGE PENALTY RELIEF PROVISIONS

A. Standard Deduction Marriage Penalty Relief (sec. 301 of the Act and 
                          sec. 63 of the Code)

                         Present and Prior Law

Marriage penalty
    A married couple generally is treated as one tax unit that 
must pay tax on the couple's total taxable income. Although 
married couples may elect to file separate returns, the rate 
schedules and other provisions are structured so that filing 
separate returns usually results in a higher tax than filing a 
joint return. Other rate schedules apply to single persons and 
to single heads of households.
    A ``marriage penalty'' exists when the combined tax 
liability of a married couple filing a joint return is greater 
than the sum of the tax liabilities of each individual computed 
as if they were not married. A ``marriage bonus'' exists when 
the combined tax liability of a married couple filing a joint 
return is less than the sum of the tax liabilities of each 
individual computed as if they were not married.
Basic standard deduction
    Taxpayers who do not itemize deductions may choose the 
basic standard deduction (and additional standard deductions, 
if applicable), \19\ which is subtracted from adjusted gross 
income (``AGI'') in arriving at taxable income. The size of the 
basic standard deduction varies according to filing status and 
is adjusted annually for inflation. For 2001, the basic 
standard deduction amount for single filers is 60 percent of 
the basic standard deduction amount for married couples filing 
joint returns. Thus, two unmarried individuals have standard 
deductions whose sum exceeds the standard deduction for a 
married couple filing a joint return.
---------------------------------------------------------------------------
    \19\ Additional standard deductions are allowed with respect to any 
individual who is elderly (age 65 or over) or blind.
---------------------------------------------------------------------------

                           Reasons for Change

    The Congress was concerned about the inequity that arises 
when two working single individuals marry and experience a tax 
increase solely by reason of their marriage. Any attempt to 
address the marriage tax penalty involves the balancing of 
several competing principles, including equal tax treatment of 
married couples with equal incomes, the determination of 
equitable relative tax burdens of single individuals and 
married couples with equal incomes, and the goal of simplicity 
in compliance and administration. The Congress believed that an 
increase in the standard deduction for married couples filing a 
joint return in conjunction with the other provisions of EGTRRA 
was a responsible reduction of the marriage tax penalty.

                        Explanation of Provision

    EGTRRA increases the basic standard deduction for a married 
couple filing a joint return to twice the basic standard 
deduction for an unmarried individual filing a single return. 
The basic standard deduction for a married taxpayer filing 
separately will continue to equal one-half of the basic 
standard deduction for a married couple filing jointly; thus, 
the basic standard deduction for unmarried individuals filing a 
single return and for married couples filing separately will be 
the same.
    The increase in the standard deduction is phased-in over 
five years beginning in 2005 and would be fully phased-in for 
2009 and thereafter. Table 5, below, shows the standard 
deduction for married couples filing a joint return as a 
percentage of the standard deduction for single individuals 
during the phase-in period. \20\
---------------------------------------------------------------------------
    \20\ A technical correction was enacted in section 411 of the Job 
Creation and Worker Assistance Act of 2002 described in Part eight of 
this document to: (1) allow certain married taxpayers to file separate 
returns during the transition years; and (2) retain the rounding rules 
generally applicable to the amounts of standard deductions in section 
63 of the Code.

Table 5.--Phase-In of Increase of Standard Deduction for Married Couples
                          Filing Joint Returns
------------------------------------------------------------------------
                                                 Standard Deduction for
                                                    Joint Returns as
                 Calendar year                   Percentage of Standard
                                                  Deduction for Single
                                                   Returns  (percent)
------------------------------------------------------------------------
2005..........................................                      174
2006..........................................                      184
2007..........................................                      187
2008..........................................                      190
2009 and later................................                      200
------------------------------------------------------------------------

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2004.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $685 million in 2005, $1,954 million in 
2006, $2,580 million in 2007, $2,772 million in 2008, $3,164 
million in 2009, $2,932 million in 2010, and $831 million in 
2011.

B. Expansion of the 15-Percent Rate Bracket For Married Couples Filing 
       Joint Returns (sec. 302 of the Act and sec. 1 of the Code)

                         Present and Prior Law

In general
    Under the Federal individual income tax system, an 
individual who is a citizen or resident of the United States 
generally is subject to tax on worldwide taxable income. 
Taxable income is total gross income less certain exclusions, 
exemptions, and deductions. An individual may claim either a 
standard deduction or itemized deductions.
    An individual's income tax liability is determined by 
computing his or her regular income tax liability and, if 
applicable, alternative minimum tax liability.
Regular income tax liability
    Regular income tax liability is determined by applying the 
regular income tax rate schedules (or tax tables) to the 
individual's taxable income and then is reduced by any 
applicable tax credits. The regular income tax rate schedules 
are divided into several ranges of income, known as income 
brackets, and the marginal tax rate increases as the 
individual's income increases. The income bracket amounts are 
adjusted annually for inflation. Separate rate schedules apply 
based on filing status: single individuals (other than heads of 
households and surviving spouses), heads of households, married 
individuals filing joint returns (including surviving spouses), 
married individuals filing separate returns, and estates and 
trusts. Lower rates may apply to capital gains.
    In general, the bracket breakpoints for single individuals 
are approximately 60 percent of the rate bracket breakpoints 
for married couples filing joint returns. \21\ The rate bracket 
breakpoints for married individuals filing separate returns are 
exactly one-half of the rate brackets for married individuals 
filing joint returns. A separate, compressed rate schedule 
applies to estates and trusts.
---------------------------------------------------------------------------
    \21\ The rate bracket breakpoint for the 39.6 percent marginal tax 
rate is the same for single individuals and married couples filing 
joint returns.
---------------------------------------------------------------------------

                           Reasons for Change

    The Congress believed that the expansion of the 15-percent 
rate bracket for married couples filing joint returns, in 
conjunction with the other provisions of EGTRRA, would 
alleviate the effects of the present-law marriage tax penalty. 
These provisions significantly reduce the most widely 
applicable marriage penalties in present and prior law.

                        Explanation of Provision

    EGTRRA increases the size of the 15-percent regular income 
tax rate bracket for a married couple filing a joint return to 
twice the size of the corresponding rate bracket for an 
unmarried individual filing a single return. The increase is 
phased-in over four years, beginning in 2005. Therefore, this 
provision is fully effective (i.e., the size of the 15-percent 
regular income tax rate bracket for a married couple filing a 
joint return would be twice the size of the 15-percent regular 
income tax rate bracket for an unmarried individual filing a 
single return) for taxable years beginning after December 31, 
2007. Table 6, below, shows the increase in the size of the 15-
percent bracket during the phase-in period.

    Table 6.--Increase in Size of 15-Percent Rate Bracket for Married
                      Couples Filing a Joint Return
------------------------------------------------------------------------
                                                 End point of 15-percent
                                                rate bracket for married
                                                   couple filing joint
                                                 return as percentage of
                 Taxable year                    end point of 15-percent
                                                    rate bracket for
                                                  unmarried individuals
                                                        (percent)
------------------------------------------------------------------------
2005..........................................                      180
2006..........................................                      187
2007..........................................                      193
2008 and thereafter...........................                      200
------------------------------------------------------------------------

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2004.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $4,208 million in 2005, $6,204 million in 
2006, $6,559 million in 2007, $5,876 million in 2008, $4,737 
million in 2009, $4,001 million in 2010, and $1,150 million in 
2011.

 C. Marriage Penalty Relief and Simplification Relating to the Earned 
      Income Credit (sec. 303 of the Act and sec. 32 of the Code)


                         Present and Prior Law


In general

    Eligible low-income workers are able to claim a refundable 
earned income credit. The amount of the credit an eligible 
taxpayer may claim depends upon the taxpayer's income and 
whether the taxpayer has one, more than one, or no qualifying 
children.
    Under present and prior law, the earned income credit was 
not available to married individuals who filed separate 
returns. Under present and prior law, no earned income credit 
is allowed if the taxpayer has disqualified income in excess of 
$2,450 (for 2001) for the taxable year.\22\ In addition, under 
present and prior law, no earned income credit is allowed if an 
eligible individual is the qualifying child of another 
taxpayer.\23\
---------------------------------------------------------------------------
    \22\ Section 32(i). Disqualified income is the sum of: (1) interest 
and dividends includible in gross income for the taxable year; (2) tax-
exempt income received or accrued in the taxable year; (3) net income 
from rents and royalties for the taxable year not derived in the 
ordinary course of business; (4) capital gain net income of the 
taxpayer for the taxable year; and (5) net passive income for the 
taxable year. Sec. 32(i)(2).
    \23\ Section 32(c)(1)(B).
---------------------------------------------------------------------------

Definition of qualifying child and tie-breaker rules

    To claim the earned income credit, a taxpayer must either: 
(1) have a qualifying child or (2) meet the requirements for 
childless adults. Under present and prior law, a qualifying 
child must meet a relationship test, an age test, and a 
residence test. Under prior law, the qualifying child must have 
been the taxpayer's child, stepchild, adopted child, 
grandchild, or foster child. Under present and prior law, the 
child must be under age 19 (or under age 24 if a full-time 
student) or permanently and totally disabled regardless of age. 
The child must live with the taxpayer in the United States for 
more than half the year (under prior law, a full year for 
foster children).
    Under prior law, an individual satisfied the relationship 
test under the earned income credit if the individual was the 
taxpayer's: (1) son or daughter or a descendant of either; \24\ 
(2) stepson or stepdaughter; or (3) eligible foster child. 
Under prior law, an eligible foster child was an individual: 
(1) who was a brother, sister, stepbrother, or stepsister of 
the taxpayer (or a descendant of any such relative), or who was 
placed with the taxpayer by an authorized placement agency, and 
(2) who the taxpayer cared for as her or his own child. Under 
present and prior law, a married child of the taxpayer is not 
treated as meeting the relationship test unless the taxpayer is 
entitled to a dependency exemption with respect to the married 
child (e.g., the support test is satisfied) or would be 
entitled to the exemption if the taxpayer had not waived the 
exemption to the noncustodial parent.\25\
---------------------------------------------------------------------------
    \24\ A child who was legally adopted or placed with the taxpayer 
for adoption by an authorized adoption agency was treated as the 
taxpayer's own child. Sec. 32(c)(3)(B)(iv).
    \25\ Section 32(c)(3)(B)(ii).
---------------------------------------------------------------------------
    Under prior law, if a child otherwise qualified with 
respect to more than one person, the child was treated as a 
qualifying child only of the person with the highest modified 
adjusted gross income.
    Under prior law, ``modified adjusted gross income'' meant 
adjusted gross income determined without regard to certain 
losses and increased by certain amounts not includible in gross 
income.\26\ The losses disregarded were: (1) net capital losses 
(up to $3,000); (2) net losses from estates and trusts; (3) net 
losses from nonbusiness rents and royalties; and (4) 75 percent 
of the net losses from businesses, computed separately with 
respect to sole proprietorships (other than farming), farming 
sole proprietorships, and other businesses. The amounts added 
to adjusted gross income to arrive at modified adjusted gross 
income included: (1) tax-exempt interest; and (2) nontaxable 
distributions from pensions, annuities, and individual 
retirement plans (but not nontaxable rollover distributions or 
trustee-to-trustee transfers).
---------------------------------------------------------------------------
    \26\ Section 32(c)(5).
---------------------------------------------------------------------------

Definition of earned income

    To claim the earned income credit, the taxpayer must have 
earned income. Under present and prior law, earned income 
consists of wages, salaries, other employee compensation, and 
net earnings from self employment.\27\ Under prior law, 
employee compensation included anything of value received by 
the taxpayer from the employer in return for services of the 
employee, including nontaxable earned income. Nontaxable forms 
of compensation treated as earned income under prior law 
included the following: (1) elective deferrals under a cash or 
deferred arrangement or section 403(b) annuity (section 
402(g)); (2) employer contributions for nontaxable fringe 
benefits, including contributions for accident and health 
insurance (section 106), dependent care (section 129), adoption 
assistance (section 137), educational assistance (section 127), 
and miscellaneous fringe benefits (section 132); (3) salary 
reduction contributions under a cafeteria plan (section 125); 
(4) meals and lodging provided for the convenience of the 
employer (section 119); and (5) housing allowance or rental 
value of a parsonage for the clergy (section 107).\28\ Some of 
these items are not required to be reported on the Wage and Tax 
Statement (Form W-2).
---------------------------------------------------------------------------
    \27\ Section 32(c)(2)(A).
    \28\ The excludable amount of clergy housing allowances was 
modified by the Clergy Housing Allowance Clarification Act of 2002, 
described in Part Nine of this document.
---------------------------------------------------------------------------

Calculation of the credit

    The maximum earned income credit is phased in as an 
individual's earned income increases. The credit phases out for 
individuals with earned income (or, under prior law, modified 
adjusted gross income, if greater) over certain levels. Under 
present and prior law, in the case of a married individual who 
had filed a joint return, the earned income credit both for the 
phase-in and phase-out was calculated based on the couple's 
combined income.
    The credit is determined by multiplying the credit rate by 
the taxpayer's earned income up to a specified earned income 
amount. The maximum amount of the credit is the product of the 
credit rate and the earned income amount. The maximum credit 
amount applies to taxpayers with (1) earnings at or above the 
earned income amount and (2) under prior law, modified adjusted 
gross income (or earnings, if greater) at or below the phase-
out threshold level.
    Under prior law, for taxpayers with modified adjusted gross 
income (or earned income, if greater) in excess of the phase-
out threshold, the credit amount was reduced by the phase-out 
rate multiplied by the amount of earned income (or modified 
adjusted gross income, if greater) in excess of the phase-out 
threshold. In other words, the credit amount was reduced, 
falling to $0 at the ``breakeven'' income level, the point 
where a specified percentage of ``excess'' income above the 
phase-out threshold offset exactly the maximum amount of the 
credit. Under present and prior law, the earned income amount 
and the phase-out threshold are adjusted annually for 
inflation. Table 7, below, shows the earned income credit 
parameters for taxable year 2001.\29\
---------------------------------------------------------------------------
    \29\ The table is based on Rev. Proc. 2001-13.

            Table 7.--Earned Income Credit Parameters (2001)
------------------------------------------------------------------------
                                   Two or more      One           No
                                    qualifying   qualifying   qualifying
                                     children      child       children
------------------------------------------------------------------------
Credit rate (percent)............       40.00%       34.00%        7.65%
Earned income amount.............      $10,020       $7,140       $4,760
Maximum credit...................       $4,008       $2,428         $364
Phase-out begins.................      $13,090      $13,090       $5,950
Phase-out rate (percent).........       21.06%       15.98%        7.65%
Phase-out ends...................      $32,121      $28,281      $10,710
------------------------------------------------------------------------

    Under prior law, an individual's alternative minimum tax 
liability reduced the amount of the refundable earned income 
credit.\30\
---------------------------------------------------------------------------
    \30\ Section 32(h).
---------------------------------------------------------------------------

                           Reasons for Change

    The Congress believed that the prior-law earned income 
amount penalized some individuals because they received a 
smaller earned income credit if they were married than if they 
were not married. The Congress believed increasing the phase-
out amount for married taxpayers who filed a joint return would 
help to alleviate this penalty.
    EGTRRA repeals the prior-law provision reducing the earned 
income credit by the amount of the alternative minimum tax. 
EGTRRA ensures that no taxpayer will face an increase in net 
income tax liability as a result of the interaction of the 
alternative minimum tax with the regular income tax reductions 
in the bill.
    The Congress believed that providing tax relief to 
Americans was a top priority. In addition, the Congress 
believed that simplification of our tax laws was important to 
alleviate the burdens on American taxpayers. As required by the 
IRS Restructuring and Reform Act of 1998, the staff of the 
Joint Committee on Taxation released a simplification 
study.\31\ The study contains recommendations for 
simplification reaching all areas of the Federal tax laws. As a 
first step toward simplification, the Congress believed it 
should consider simplification to the extent possible in the 
context of fulfilling the priority of providing needed tax 
relief. Thus, the Congress adopted three of the proposals 
recommended by the Joint Committee staff relating to the earned 
income credit: (1) the definition of earned income, (2) 
replacement of the prior-law tie-breaker rules, and (3) 
uniformity in the definition of a qualifying child.
---------------------------------------------------------------------------
    \31\ Joint Committee on Taxation, Study of the Overall State of the 
Federal Tax System and Recommendations for Simplification, Pursuant to 
Section 8022(3)(B) of the Internal Revenue Code of 1986 (JCS-3-01), 
April 2001.
---------------------------------------------------------------------------
    The definition of earned income was a source of complexity 
insofar as it included nontaxable forms of employee 
compensation. Prior law required both the IRS and taxpayers to 
keep track of nontaxable amounts for determining earned income 
credit eligibility even though such amounts are generally not 
necessary for other tax purposes. Further, not all forms of 
nontaxable earned income are reported on Form W-2. As a result, 
a taxpayer may not know the correct amount of nontaxable earned 
income received during the year. Further, the IRS cannot easily 
determine such amounts. The Congress believed that significant 
simplification would result from redefining earned income to 
exclude amounts not includable in gross income.
    The prior-law tie-breaker rules also resulted in 
significant complexity. When a qualifying child lived with more 
than one adult who appeared to qualify to claim the child for 
earned income credit purposes, under prior law, the adult with 
the highest modified adjusted gross income was to claim the 
child. In a recent study, the IRS found that the second largest 
amount of errors, 17.1 percent of overclaims, was attributable 
to the person with the lower modified adjusted gross income 
claiming the child.\32\ The Congress believed it was 
appropriate to replace the prior-law tie-breaker rules with a 
more simplified rule that applies only in the case of competing 
claims.
---------------------------------------------------------------------------
    \32\ Internal Revenue Service, Compliance Estimates for Earned 
Income Tax Credit Claimed on 1997 Returns (September 2000), at 10.
---------------------------------------------------------------------------
    The Congress applied the definition of qualifying child 
recommended by the staff of the Joint Committee for purposes of 
the earned income credit as a first step toward broader 
simplification efforts. The Congress believed that the 
distinctions among familial relationships drawn by prior law in 
defining a qualifying child added to the complexity of the 
earned income credit. For example, a taxpayer's son or daughter 
was a qualifying child if he or she had lived with the taxpayer 
for more than six months, while the taxpayer's niece or nephew 
was required to have lived with the taxpayer for the entire 
year, even though the taxpayer cared for the child as his or 
her own. In addition, foster children must have resided with 
the taxpayer for the entire year as opposed to the general rule 
of six months. The Congress believed that applying a uniform 
rule that requires any qualifying child to reside with the 
taxpayer for more than six months would alleviate some of the 
complexity in this area.
    The National Taxpayer Advocate recommended the elimination 
of the use of modified adjusted gross income as a means to 
simplify the earned income credit.\33\ The Congress believed 
that replacing modified adjusted gross income with adjusted 
gross income would reduce the number of calculations required, 
thereby simplifying the credit.
---------------------------------------------------------------------------
    \33\ Internal Revenue Service, National Taxpayer Advocate's FY2000 
Annual Report to Congress, Publication 2104 (December 2000) at 74.
---------------------------------------------------------------------------
    The IRS reported that more than a quarter of earned income 
credit claims in 1997, $7.8 billion, were paid erroneously.\34\ 
The IRS found that the most common error involved taxpayers 
claiming children who did not meet the eligibility criteria. 
The IRS attributed most of these errors to taxpayers claiming 
the earned income credit for children who do not meet the 
residency requirement.\35\ Recently, the IRS began receiving 
data from the Department of Health and Human Services' Federal 
Case Registry of Child Support Orders, a Federal database 
containing state information on child support payments. This 
data assists the IRS in identifying erroneous earned income 
credit claims by noncustodial parents. The Congress believed 
that giving the IRS authority to deny questionable claims filed 
by noncustodial parents would reduce the erroneous filing and 
payment of earned income credit claims. The Congress, however, 
desired further information regarding the accuracy of the 
Federal Case Registry of Child Support Orders, its usefulness 
to the IRS in detecting erroneous or fraudulent claims, and the 
appropriateness of using math error procedures based on this 
data.
---------------------------------------------------------------------------
    \34\ Internal Revenue Service, Compliance Estimates for Earned 
Income Tax Credit Claimed on 1997 Returns (September 2000), at 3.
    \35\ Id. at 10.
---------------------------------------------------------------------------

                        Explanation of Provision

    For married taxpayers who file a joint return, EGTRRA 
increases the beginning and ending of the earned income credit 
phase-out as follows: by $1,000 in the case of taxable years 
beginning in 2002, 2003, and 2004; by $2,000 in the case of 
taxable years beginning in 2005, 2006, and 2007; and by $3,000 
in the case of taxable years beginning after 2007. The $3,000 
amount is to be adjusted annually for inflation after 2008.
    EGTRRA simplifies the definition of earned income by 
excluding nontaxable employee compensation from the definition 
of earned income for earned income credit purposes. Thus, under 
EGTRRA, earned income includes wages, salaries, tips, and other 
employee compensation, if includible in gross income for the 
taxable year, plus net earnings from self employment.
    EGTRRA repeals the prior-law provision that reduces the 
earned income credit by the amount of an individual's 
alternative minimum tax.
    EGTRRA simplifies the calculation of the earned income 
credit by replacing modified adjusted gross income with 
adjusted gross income.
    EGTRRA provides that the relationship test is met if the 
individual is the taxpayer's son, daughter, stepson, 
stepdaughter, or a descendant of any such individuals.\36\ A 
brother, sister, stepbrother, stepsister, or a descendant of 
such individuals, also qualifies if the taxpayer cares for such 
individual as his or her own child. A foster child satisfies 
the relationship test as well. A foster child is defined as an 
individual who is placed with the taxpayer by an authorized 
placement agency and who the taxpayer cares for as his or her 
own child. In order to be a qualifying child, in all cases the 
child must have the same principal place of abode as the 
taxpayer for over one-half of the taxable year.
---------------------------------------------------------------------------
    \36\ As under prior law, an adopted child is treated as a child of 
the taxpayer by blood.
---------------------------------------------------------------------------
    EGTRRA changes the prior-law tie-breaking rule. Under the 
provision, if an individual would be a qualifying child with 
respect to more than one taxpayer, and more than one taxpayer 
claims the earned income credit with respect to that child, 
then the following tie-breaking rules apply. First, if one of 
the individuals claiming the child is the child's parent (or 
parents who file a joint return), then the child is considered 
the qualifying child of the parent (or parents). Second, if 
both parents claim the child and the parents do not file a 
joint return together, then the child is considered a 
qualifying child first of the parent with whom the child 
resided for the longest period of time during the year, and 
second of the parent with the highest adjusted gross income. 
Finally, if none of the taxpayers claiming the child as a 
qualifying child is the child's parent, the child is considered 
a qualifying child with respect to the taxpayer with the 
highest adjusted gross income.
    EGTRRA authorizes the IRS, beginning in 2004, to use math 
error authority to deny the earned income credit if the Federal 
Case Registry of Child Support Orders indicates that the 
taxpayer is the noncustodial parent of the child with respect 
to whom the credit is claimed.
    It was the intent of Congress that by September 2002, the 
Department of the Treasury, in consultation with the National 
Taxpayer Advocate, deliver to the Senate Committee on Finance 
and the House Committee on Ways and Means a study of the 
Federal Case Registry database. The study was to cover (1) the 
accuracy and timeliness of the data in the Federal Case 
Registry, (2) the efficacy of using math error authority in 
this instance in reducing costs due to erroneous or fraudulent 
claims, and (3) the implications of using math error authority 
in this instance, given the findings on the accuracy and 
timeliness of the data.
    The Congress realized that the expansion of the earned 
income credit may create a financial hardship on U.S. 
possessions with mirror codes and that further study of such 
effects is necessary.

                             Effective Date

    The provision generally is effective for taxable years 
beginning after December 31, 2001. The provision to authorize 
the IRS to use math error authority if the Federal Case 
Registry of Child Support Orders indicates the taxpayer is the 
noncustodial parent is effective beginning in 2004.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $8 million in 2002, $847 million in 2003, 
$1,277 million in 2004, $1,243 million in 2005, $1,817 million 
in 2006, $1,819 million in 2007, $1,787 million in 2008, $2,258 
million in 2009, $2,240 million in 2010, $2,348 million in 2011 
and, less than $500,000 in 2012.

                  IV. AFFORDABLE EDUCATION PROVISIONS

 A. Education Individual Retirement Accounts (sec. 401 of the Act and 
                       sec. 530 of the Code) \37\

                         Present and Prior Law

In general
    Section 530 of the Code provides tax-exempt status to 
education individual retirement accounts (``education IRAs''), 
meaning certain trusts or custodial accounts which are created 
or organized in the United States exclusively for the purpose 
of paying the qualified higher education expenses of a 
designated beneficiary. Contributions to education IRAs may be 
made only in cash.\38\ Annual contributions to education IRAs 
may not exceed $500 per beneficiary (except in cases involving 
certain tax-free rollovers, as described below) and may not be 
made after the designated beneficiary reaches age 18.
---------------------------------------------------------------------------
    \37\ Education individual retirement accounts are now referred to 
as Coverdell education savings accounts pursuant to Pub. L. No. 107-22 
described in Part Three of this document.
    \38\ Special estate and gift tax rules apply to contributions made 
to and distributions made from education IRAs.
---------------------------------------------------------------------------
Phase-out of contribution limit
    The $500 annual contribution limit for education IRAs is 
generally phased-out ratably for contributors with modified 
adjusted gross income between $95,000 and $110,000. The phase-
out range for married taxpayers filing a joint return is 
$150,000 to $160,000 of modified adjusted gross income. 
Individuals with modified adjusted gross income above the 
phase-out range are not allowed to make contributions to an 
education IRA established on behalf of any individual.
Treatment of distributions
    Earnings on contributions to an education IRA generally are 
subject to tax when withdrawn. However, distributions from an 
education IRA are excludable from the gross income of the 
beneficiary to the extent that the total distribution does not 
exceed the ``qualified higher education expenses'' incurred by 
the beneficiary during the year the distribution is made.
    If the qualified higher education expenses of the 
beneficiary for the year are less than the total amount of the 
distribution (i.e., contributions and earnings combined) from 
an education IRA, then the qualified higher education expenses 
are deemed to be paid from a pro-rata share of both the 
principal and earnings components of the distribution. Thus, in 
such a case, only a portion of the earnings are excludable 
(i.e., the portion of the earnings based on the ratio that the 
qualified higher education expenses bear to the total amount of 
the distribution) and the remaining portion of the earnings is 
includible in the beneficiary's gross income.
    The earnings portion of a distribution from an education 
IRA that is includible in income is also subject to an 
additional 10-percent tax. The 10-percent additional tax does 
not apply if a distribution is made on account of the death or 
disability of the designated beneficiary, on account of a 
scholarship received by the designated beneficiary, or if the 
distribution is included in income solely because the HOPE (or 
Lifetime Learning) credit is claimed for those expenses.
    Under prior law the additional 10-percent tax also does not 
apply to the distribution of any contribution to an education 
IRA made during the taxable year if such distribution is made 
on or before the date that a return is required to be filed 
(including extensions of time) by the beneficiary for the 
taxable year during which the contribution was made (or, if the 
beneficiary is not required to file such a return, April 15th 
of the year following the taxable year during which the 
contribution was made).
    Present and prior law allows tax-free transfers or 
rollovers of account balances from one education IRA benefiting 
one beneficiary to another education IRA benefiting another 
beneficiary (as well as redesignations of the named 
beneficiary), provided that the new beneficiary is a member of 
the family of the old beneficiary and is under age 30.
    Any balance remaining in an education IRA is deemed to be 
distributed within 30 days after the date that the beneficiary 
reaches age 30 (or, if earlier, within 30 days of the date that 
the beneficiary dies).
Qualified higher education expenses
    The term ``qualified higher education expenses'' includes 
tuition, fees, books, supplies, and equipment required for the 
enrollment or attendance of the designated beneficiary at an 
eligible education institution, regardless of whether the 
beneficiary is enrolled at an eligible educational institution 
on a full-time, half-time, or less than half-time basis. 
Qualified higher education expenses include expenses with 
respect to undergraduate or graduate-level courses. In 
addition, qualified higher education expenses include amounts 
paid or incurred to purchase tuition credits (or to make 
contributions to an account) under a qualified State tuition 
program, as defined in section 529, for the benefit of the 
beneficiary of the education IRA.
    Moreover, qualified higher education expenses include, 
within limits, room and board expenses for any academic period 
during which the beneficiary is at least a half-time student. 
Room and board expenses that may be treated as qualified higher 
education expenses are limited to the minimum room and board 
allowance applicable to the student in calculating costs of 
attendance for Federal financial aid programs under section 472 
of the Higher Education Act of 1965, as in effect on the date 
of enactment of the Small Business Job Protection Act of 1996 
(August 20, 1996). Thus, room and board expenses cannot exceed 
the following amounts: (1) for a student living at home with 
parents or guardians, $1,500 per academic year; (2) for a 
student living in housing owned or operated by the eligible 
education institution, the institution's ``normal'' room and 
board charge; and (3) for all other students, $2,500 per 
academic year.
    Qualified higher education expenses generally include only 
out-of-pocket expenses. Such qualified higher education 
expenses do not include expenses covered by educational 
assistance for the benefit of the beneficiary that is 
excludable from gross income. Thus, total qualified higher 
education expenses are reduced by scholarship or fellowship 
grants excludable from gross income under present-law section 
117, as well as any other tax-free educational benefits, such 
as employer-provided educational assistance that is excludable 
from the employee's gross income under section 127.
    Present and prior law also provides that if any qualified 
higher education expenses are taken into account in determining 
the amount of the exclusion for a distribution from an 
education IRA, then no deduction (e.g., for trade or business 
expenses), exclusion (e.g., for interest on education savings 
bonds) or credit is allowed with respect to such expenses.
    Eligible educational institutions are defined by reference 
to section 481 of the Higher Education Act of 1965. Such 
institutions generally are accredited post-secondary 
educational institutions offering credit toward a bachelor's 
degree, an associate's degree, a graduate-level or professional 
degree, or another recognized post-secondary credential. 
Certain proprietary institutions and post-secondary vocational 
institutions also are eligible institutions. The institution 
must be eligible to participate in Department of Education 
student aid programs.
Time for making contributions
    Contributions to an education IRA for a taxable year are 
taken into account in the taxable year in which they are made.
Coordination with HOPE and Lifetime Learning credits
    If an exclusion from gross income is allowed for 
distributions from an education IRA with respect to an 
individual, then neither the HOPE nor Lifetime Learning credit 
may be claimed in the same taxable year with respect to the 
same individual. However, an individual may elect to waive the 
exclusion with respect to distributions from an education IRA. 
If such a waiver is made, then the HOPE or Lifetime Learning 
credit may be claimed with respect to the individual for the 
taxable year.
Coordination with qualified tuition programs
    An excise tax is imposed on contributions to an education 
IRA for a year if contributions are made by anyone to a 
qualified State tuition program on behalf of the same 
beneficiary in the same year. The excise tax is equal to 6 
percent of the contributions to the education IRA. The excise 
tax is imposed each year after the contribution is made, unless 
the contributions are withdrawn.

                           Reasons for Change

    Education IRAs were intended to help families plan for 
their children's education. However, the Congress believed that 
the prior-law limits on contributions to education IRAs do not 
permit taxpayers to save adequately. Therefore, EGTRRA 
increased the contribution limits to education IRAs.
    The Congress believed that education IRAs should be 
expanded to provide greater flexibility to families in 
providing for their children's education at all levels of 
education. Thus, EGTRRA allows education IRAs to be used for 
certain expenses related to elementary and secondary education.
    The Congress believed that other modifications would also 
improve the attractiveness and operation of education IRAs, 
thus improving the effectiveness of education IRAs in assisting 
families in paying for education. Such modifications included 
more flexible rules for education IRAs for special needs 
beneficiaries and relaxation of the rules restricting the use 
of education IRAs and other tax benefits for education in the 
same year.

                        Explanation of Provision

Annual contribution limit
    EGTRRA increases the annual limit on contributions to 
education IRAs from $500 to $2,000. Thus, aggregate 
contributions that may be made by all contributors to one (or 
more) education IRAs established on behalf of any particular 
beneficiary is limited to $2,000 for each year.
Qualified education expenses
    EGTRRA expands the definition of qualified education 
expenses that may be paid tax-free from an education IRA to 
include ``qualified elementary and secondary school expenses,'' 
meaning expenses for: (1) tuition, fees, academic tutoring, 
special need services, books, supplies, and other equipment 
incurred in connection with the enrollment or attendance of the 
beneficiary at a public, private, or religious school providing 
elementary or secondary education (kindergarten through grade 
12) as determined under State law, (2) room and board, 
uniforms, transportation, and supplementary items or services 
(including extended day programs) required or provided by such 
a school in connection with such enrollment or attendance of 
the beneficiary, and (3) the purchase of any computer 
technology or equipment (as defined in section 170(e)(6)(F)(i)) 
or Internet access and related services, if such technology, 
equipment, or services are to be used by the beneficiary and 
the beneficiary's family during any of the years the 
beneficiary is in elementary or secondary school. Computer 
software primarily involving sports, games, or hobbies is not 
considered a qualified elementary and secondary school expense 
unless the software is predominantly educational in nature.
Phase-out of contribution limit
    EGTRRA increases the phase-out range for married taxpayers 
filing a joint return so that it is twice the range for single 
taxpayers. Thus, the phase-out range for married taxpayers 
filing a joint return is $190,000 to $220,000 of modified 
adjusted gross income.
Special needs beneficiaries
    EGTRRA provides that the rule prohibiting contributions to 
an education IRA after the beneficiary attains 18 does not 
apply in the case of a special needs beneficiary (as defined by 
Treasury Department regulations). In addition, a deemed 
distribution of any balance in an education IRA does not occur 
when a special needs beneficiary reaches age 30. Finally, the 
age 30 limitation does not apply in the case of a rollover 
contribution for the benefit of a special needs beneficiary or 
a change in beneficiaries to a special needs beneficiary. The 
Congress intends that Treasury regulations will define a 
special needs beneficiary to include an individual who because 
of a physical, mental, or emotional condition (including 
learning disability) requires additional time to complete his 
or her education.
Contributions by persons other than individuals
    EGTRRA clarifies that corporations and other entities 
(including tax-exempt organizations) are permitted to make 
contributions to education IRAs, regardless of the income of 
the corporation or entity during the year of the contribution.
Contributions permitted until April 15
    Under EGTRRA, individual contributors to education IRAs are 
deemed to have made a contribution on the last day of the 
preceding taxable year if the contribution is made on account 
of such taxable year and is made not later than the time 
prescribed by law for filing the individual's Federal income 
tax return for such taxable year (not including extensions). 
Thus, individual contributors generally may make contributions 
for a year until April 15 of the following year.
Qualified room and board expenses
    EGTRRA modifies the definition of room and board expenses 
considered to be qualified higher education expenses. This 
modification is described with the provisions relating to 
qualified tuition programs, section 402 of EGTRRA, below.
Coordination with HOPE and Lifetime Learning credits
    EGTRRA allows a taxpayer to claim a HOPE credit or Lifetime 
Learning credit for a taxable year and to exclude from gross 
income amounts distributed (both the contributions and the 
earnings portions) from an education IRA on behalf of the same 
student as long as the distribution is not used for the same 
educational expenses for which a credit was claimed. As under 
prior law, a taxpayer could still use funds from an education 
IRA to pay for the same expenses for which a HOPE (or Lifetime 
Learning) credit was claimed. The earnings on the education IRA 
would be includable in income, but no 10-percent penalty tax 
would be due.\39\
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    \39\ A technical correction was enacted in Section 411 of the Job 
Creation and Worker Assistance Act of 2002 described in Part Eight of 
this document to provide this clarification.
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Coordination with qualified tuition programs
    EGTRRA repeals the excise tax on contributions made by any 
person to an education IRA on behalf of a beneficiary during 
any taxable year in which any contributions are made by anyone 
to a qualified State tuition program on behalf of the same 
beneficiary.
    If distributions from education IRAs and qualified tuition 
programs exceed the beneficiary's qualified higher education 
expenses for the year (after reduction by amounts used in 
claiming the HOPE or Lifetime Learning credit), the beneficiary 
is required to allocate the expenses between the distributions 
to determine the amount includible in income.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2001.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $203 million in 2002, $365 million in 2003, 
$461 million in 2004, $561 million in 2005, $667 million in 
2006, $778 million in 2007, $892 million in 2008, $1,013 
million in 2009, $1,136 million in 2010, and $295 million in 
2011.

  B. Private Prepaid Tuition Programs; Exclusion From Gross Income of 
 Education Distributions From Qualified Tuition Programs (sec. 402 of 
                   the Act and sec. 529 of the Code)

                         Present and Prior Law

    Section 529 of the Code provides tax-exempt status to 
``qualified State tuition programs,'' meaning certain programs 
established and maintained by a State (or agency or 
instrumentality thereof) under which persons may (1) purchase 
tuition credits or certificates on behalf of a designated 
beneficiary that entitle the beneficiary to a waiver or payment 
of qualified higher education expenses of the beneficiary, or 
(2) make contributions to an account that is established for 
the purpose of meeting qualified higher education expenses of 
the designated beneficiary of the account (a ``savings account 
plan''). The term ``qualified higher education expenses'' 
generally has the same meaning as does the term for purposes of 
education IRAs (as described above in Section 401 of EGTRRA) 
and, thus, includes expenses for tuition, fees, books, 
supplies, and equipment required for the enrollment or 
attendance at an eligible educational institution,\40\ as well 
as certain room and board expenses for any period during which 
the student is at least a half-time student.
---------------------------------------------------------------------------
    \40\ An ``eligible education institution'' is defined the same for 
purposes of education IRAs (described in Section 401 of EGTRRA above) 
and qualified State tuition programs.
---------------------------------------------------------------------------
    No amount is included in the gross income of a contributor 
to, or a beneficiary of, a qualified State tuition program with 
respect to any distribution from, or earnings under, such 
program, except that: (1) amounts distributed or educational 
benefits provided to a beneficiary are included in the 
beneficiary's gross income (unless excludable under another 
Code section) to the extent such amounts or the value of the 
educational benefits exceed contributions made on behalf of the 
beneficiary, and (2) amounts distributed to a contributor 
(e.g., when a parent receives a refund) are included in the 
contributor's gross income to the extent such amounts exceed 
contributions made on behalf of the beneficiary.\41\
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    \41\ Distributions from qualified State tuition programs are 
treated as representing a pro-rata share of the contributions and 
earnings in the account.
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    A qualified State tuition program is required to provide 
that purchases or contributions only be made in cash.\42\ 
Contributors and beneficiaries are not allowed to direct the 
investment of contributions to the program (or earnings 
thereon). The program is required to maintain a separate 
accounting for each designated beneficiary. A specified 
individual must be designated as the beneficiary at the 
commencement of participation in a qualified State tuition 
program (i.e., when contributions are first made to purchase an 
interest in such a program), unless interests in such a program 
are purchased by a State or local government or a tax-exempt 
charity described in section 501(c)(3) as part of a scholarship 
program operated by such government or charity under which 
beneficiaries to be named in the future will receive such 
interests as scholarships.
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    \42\ Special estate and gift tax rules apply to contributions made 
to and distributions made from qualified State tuition programs.
---------------------------------------------------------------------------
    A transfer of credits (or other amounts) from one account 
benefiting one designated beneficiary to another account 
benefiting a different beneficiary is considered a distribution 
(as is a change in the designated beneficiary of an interest in 
a qualified State tuition program), unless the beneficiaries 
are members of the same family and the transfer is completed 
within 60 days. For this purpose, the term ``member of the 
family'' means: (1) the spouse of the beneficiary; (2) a son or 
daughter of the beneficiary or a descendent of either; (3) a 
stepson or stepdaughter of the beneficiary; (4) a brother, 
sister, stepbrother or stepsister of the beneficiary; (5) the 
father or mother of the beneficiary or an ancestor of either; 
(6) a stepfather or stepmother of the beneficiary; (7) a son or 
daughter of a brother or sister of the beneficiary; (8) a 
brother or sister of the father or mother of the beneficiary; 
(9) a son-in-law, daughter-in-law, father-in-law, mother-in-
law, brother-in-law, or sister-in-law of the beneficiary; or 
(10) the spouse of any person described in (2)-(9).
    Earnings on an account may be refunded to a contributor or 
beneficiary, but the State or instrumentality must impose a 
more than de minimis monetary penalty unless the refund is: (1) 
used for qualified higher education expenses of the 
beneficiary, (2) made on account of the death or disability of 
the beneficiary, (3) made on account of a scholarship received 
by the beneficiary, or (4) a rollover distribution.
    To the extent that a distribution from a qualified State 
tuition program is used to pay for qualified tuition and 
related expenses (as defined in section 25A(f)(1)), the 
beneficiary (or another taxpayer claiming the beneficiary as a 
dependent) may claim the HOPE credit or Lifetime Learning 
credit with respect to such tuition and related expenses 
(assuming that the other requirements for claiming the HOPE 
credit or Lifetime Learning credit are satisfied and the 
modified AGI phase-out for those credits does not apply).

                           Reasons for Change

    The Congress believed that distributions from qualified 
State tuition programs should not be subject to Federal income 
tax to the extent that such distributions are used to pay for 
qualified higher education expenses of undergraduate or 
graduate students who are attending college, university, or 
certain vocational schools. In addition, the Congress believed 
that the prior-law rules governing qualified tuition programs 
should be expanded to permit private educational institutions 
to maintain certain prepaid tuition programs. The Congress 
believed that the amount of room and board expenses that can be 
paid with tax-free distributions from qualified tuition 
programs should reflect current costs.

                        Explanation of Provision


Qualified tuition programs

    EGTRRA expands the definition of ``qualified tuition 
program'' to include certain prepaid tuition programs 
established and maintained by one or more eligible educational 
institutions (which may be private institutions) that satisfy 
the requirements under section 529 (other than the otherwise 
applicable State sponsorship rule). In the case of a qualified 
tuition program maintained by one or more private eligible 
educational institutions, persons are able to purchase tuition 
credits or certificates on behalf of a designated beneficiary 
(as set forth in sec. 529(b)(1)(A)(i)), but are not able to 
make contributions to a savings account plan (as described in 
section 529(b)(1)(A)(ii)). Except to the extent provided in 
regulations, a tuition program maintained by a private 
institution is not treated as qualified unless it has received 
a ruling or determination from the IRS that the program 
satisfies applicable requirements. Additionally, in order for a 
tuition program of a private eligible education institution to 
be a qualified tuition program, assets of the program must be 
held in a trust created or organized in the United States for 
the exclusive benefit of designated beneficiaries that complies 
with the requirements under section 408(a)(2) and (5) of the 
Code. Under these rules, the trustee must be a bank or other 
person who demonstrates that it will administer the trust in 
accordance with applicable requirements and the assets of the 
trust may not be commingled with other property except in a 
common trust fund or common investment fund.

Exclusion from gross income

    Under EGTRRA, an exclusion from gross income is provided 
for distributions made in taxable years beginning after 
December 31, 2001, from qualified State tuition programs to the 
extent that the distribution is used to pay for qualified 
higher education expenses. This exclusion from gross income is 
extended to distributions from qualified tuition programs 
established and maintained by an entity other than a State (or 
agency or instrumentality thereof) for distributions made in 
taxable years beginning after December 31, 2003.

Qualified higher education expenses

    EGTRRA provides that, for purposes of the exclusion for 
distributions from qualified tuition programs, the maximum room 
and board allowance is the amount applicable to the student in 
calculating costs of attendance for Federal financial aid 
programs under section 472 of the Higher Education Act of 1965, 
as in effect on the date of enactment, or, in the case of a 
student living in housing owned or operated by an eligible 
educational institution, the actual amount charged the student 
by the educational institution for room and board.\43\
---------------------------------------------------------------------------
    \43\ This definition also applies to distributions from education 
IRAs.
---------------------------------------------------------------------------
    EGTRRA modifies the definition of qualified higher 
education expenses to include expenses of a special needs 
beneficiary that are necessary in connection with his or her 
enrollment or attendance at the eligible education 
institution.\44\ A special needs beneficiary is defined as 
under the provisions relating to education IRAs, described 
above in section 401 of EGTRRA.
---------------------------------------------------------------------------
    \44\ This definition also applies to distributions from education 
IRAs.
---------------------------------------------------------------------------

Coordination with HOPE and Lifetime Learning credits

    EGTRRA allows a taxpayer to claim a HOPE credit or Lifetime 
Learning credit for a taxable year and to exclude from gross 
income amounts distributed (both the principal and the earnings 
portions) from a qualified tuition program on behalf of the 
same student as long as the distribution is not used for the 
same qualified expenses for which a credit was claimed.

Rollovers for benefit of same beneficiary

    EGTRRA provides that a transfer of credits (or other 
amounts) from one qualified tuition program for the benefit of 
a designated beneficiary to another qualified tuition program 
for the benefit of the same beneficiary is not considered a 
distribution, provided the transfer is made within 60 days of 
the distribution from the initial program. This rollover 
treatment does not apply to more than one transfer within any 
12-month period with respect to the same beneficiary. The 
Congress intends that this provision will allow, for example, 
transfers between a prepaid tuition program and a savings 
program maintained by the same State and between a State 
program and a private prepaid tuition program.

Member of family

    EGTRRA provides that, for purposes of tax-free rollovers 
and changes of designated beneficiaries, a ``member of the 
family'' includes first cousins of the original beneficiary.

Penalty for withdrawals not used for qualified education expenses

    EGTRRA repeals the prior-law rule that a qualified State 
tuition program must impose a more than de minimis monetary 
penalty on any refund of earnings not used for qualified higher 
education expenses of the beneficiary (except in certain 
circumstances). Instead, EGTRRA imposes an additional 10-
percent tax on the amount of a distribution from a qualified 
tuition program that is includible in gross income (like the 
additional tax that applies to such distributions from 
education IRAs). The same exceptions that apply to the 10-
percent additional tax with respect to education IRAs apply. A 
special rule applies because the exclusion for earnings on 
distributions used for qualified higher education expenses does 
not apply to qualified tuition programs of private institutions 
until 2004. Under the special rule, the additional 10-percent 
tax does not apply to any payment in a taxable year beginning 
before January 1, 2004, which is includible in gross income but 
used for qualified higher education expenses. Thus, for 
example, the earnings portion of a distribution from a 
qualified tuition program of a private institution that is made 
in 2003 and that is used for qualified higher education 
expenses is not subject to the additional tax, even though the 
earnings portion is includible in gross income. Conforming the 
penalty to the education IRA provisions will make it easier for 
taxpayers to allocate expenses between the various education 
tax incentives.\45\ For example, under EGTRRA, a taxpayer who 
receives distributions from an education IRA and a qualified 
tuition program in the same year is required to allocate 
qualified expenses in order to determine the amount excludable 
from income. Other interactions between the various provisions 
also arise. For example, a taxpayer may need to know the amount 
excludable from income due to a distribution from a qualified 
tuition program in order to determine the amount of expenses 
eligible for the tuition deduction. The Congress expects that 
the Secretary will exercise the existing authority under 
sections 529(d) and 530(h) to require appropriate reporting, 
e.g., of the amount of distributions and the earnings portions 
of distributions (taxable and nontaxable), to facilitate the 
provisions.
---------------------------------------------------------------------------
    \45\ The Congress also believed that this change was appropriate in 
light of the expansion of qualified tuition programs to include 
programs maintained by private institutions.
---------------------------------------------------------------------------

                             Effective Date

    The provisions are effective for taxable years beginning 
after December 31, 2001, except that the exclusion from gross 
income for certain distributions from a qualified tuition 
program established and maintained by an entity other than a 
State (or agency or instrumentality thereof) is effective for 
taxable years beginning after December 31, 2003.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $24 million in 2002, $53 million in 2003, 
$81 million in 2004, $111 million in 2005, $141 million in 
2006, $170 million in 2007, $200 million in 2008, $234 million 
in 2009, $256 million in 2010, and $64 million in 2011.

C. Exclusion for Employer-Provided Educational Assistance (sec. 411 of 
                   the Act and sec. 127 of the Code)


                         Present and Prior Law

    Educational expenses paid by an employer for its employees 
are generally deductible by the employer.
    Employer-paid educational expenses are excludable from the 
gross income and wages of an employee if provided under a Code 
section 127 educational assistance plan or if the expenses 
qualify as a working condition fringe benefit under Code 
section 132. Code section 127 provides an exclusion of $5,250 
annually for employer-provided educational assistance. The 
exclusion did not apply to graduate courses beginning after 
June 30, 1996. Under prior law the exclusion for employer-
provided educational assistance for undergraduate courses would 
have expired with respect to courses beginning after December 
31, 2001.
    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 
five 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 five percent owners of the 
employer (and their spouses and dependents).
    Educational expenses that do not qualify for the Code 
section 127 exclusion may be excludable from income as a 
working condition fringe benefit.\46\ In general, education 
qualifies as a working condition fringe benefit if the employee 
could have deducted the education expenses under Code section 
162 if the employee paid for the education. In general, 
education expenses are deductible by an individual under Code 
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.\47\
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    \46\ These rules also apply in the event that Code section 127 
expires.
    \47\ 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 expenses, exceed 
two percent of the taxpayer's AGI. An individual's total deductions may 
also be reduced by the overall limitation on itemized deductions under 
Code section 68. These limitations do not apply in determining whether 
an item is excludable from income as a working condition fringe 
benefit.
---------------------------------------------------------------------------

                           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 Congress believed that reinstating the exclusion for 
graduate-level employer-provided educational assistance will 
enable more individuals to seek higher education, and that 
further extension of the exclusion is important.
    The past experience of allowing the exclusion to expire and 
later extending it retroactively 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 lack of permanence 
of the provision has caused severe administrative problems. 
Uncertainty about the exclusion's future may discourage some 
employers from providing educational benefits.

                        Explanation of Provision

    EGTRRA extends the exclusion for employer-provided 
educational assistance to graduate education and makes the 
exclusion (as applied to both undergraduate and graduate 
education) permanent.

                             Effective Date

    The provision is effective with respect to courses 
beginning after December 31, 2001.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $519 million in 2002, $720 million in 2003, 
$760 million in 2004, $804 million in 2005, $852 million in 
2006, $904 million in 2007, $958 million in 2008, $1,012 
million in 2009, $1,068 million in 2010, and $267 million in 
2011.

 D. Modifications to Student Loan Interest Deduction (sec. 412 of the 
                     Act and sec. 221 of the Code)


                         Present and Prior Law

    Certain individuals may claim an above-the-line deduction 
for interest paid on qualified education loans, subject to a 
maximum annual deduction limit. Under prior law the deduction 
was allowed only with respect to interest paid on a qualified 
education loan during the first 60 months in which interest 
payments are required. Required payments of interest generally 
did not include voluntary payments, such as interest payments 
made during a period of loan forbearance under prior law. 
Months during which interest payments are not required because 
the qualified education loan is in deferral or forbearance do 
not count against the 60-month period. No deduction is allowed 
to an individual if that individual is claimed as a dependent 
on another taxpayer's return for the taxable year.
    A qualified education loan generally is defined as any 
indebtedness incurred solely to pay for certain costs of 
attendance (including room and board) of a student (who may be 
the taxpayer, the taxpayer's spouse, or any dependent of the 
taxpayer as of the time the indebtedness was incurred) who is 
enrolled in a degree program on at least a half-time basis at: 
(1) an accredited post-secondary educational institution 
defined by reference to section 481 of the Higher Education Act 
of 1965, or (2) an institution conducting an internship or 
residency program leading to a degree or certificate from an 
institution of higher education, a hospital, or a health care 
facility conducting postgraduate training.
    The maximum allowable annual deduction was $2,500 under 
prior law. Under prior law the deduction was phased-out ratably 
for single taxpayers with modified adjusted gross income 
between $40,000 and $55,000 and for married taxpayers filing 
joint returns with modified adjusted gross income between 
$60,000 and $75,000. The income ranges will be adjusted for 
inflation after 2002.

                           Reasons for Change

    The Congress believed that it was appropriate to expand the 
deduction for individuals who pay interest on qualified 
education loans by repealing the limitation that the deduction 
is allowed only with respect to interest paid during the first 
60 months in which interest payments are required. In addition, 
the repeal of the 60-month limitation lessens complexity and 
administrative burdens for taxpayers, lenders, loan servicing 
agencies, and the Internal Revenue Service. The Congress also 
believed it appropriate to increase the income phase-out ranges 
applicable to the student loan interest deduction to make the 
deduction available to more taxpayers and to reduce the 
potential marriage penalty caused by the phase-out ranges.

                        Explanation of Provision

    EGTRRA increases the income phase-out ranges for 
eligibility for the student loan interest deduction to $50,000 
to $65,000 for single taxpayers and to $100,000 to $130,000 for 
married taxpayers filing joint returns. These income phase-out 
ranges are adjusted annually for inflation after 2002.
    EGTRRA repeals both the limit on the number of months 
during which interest paid on a qualified education loan is 
deductible and the restriction that voluntary payments of 
interest are not deductible.

                             Effective Date

    The provision is effective for interest paid on qualified 
education loans after December 31, 2001.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $170 million in 2002, $245 million in 2003, 
$262 million in 2004, $277 million in 2005, $289 million in 
2006, $305 million in 2007, $321 million in 2008, $338 million 
in 2009, $356 million in 2010, and $89 million in 2011.

  E. Eliminate Tax on Awards Under the National Health Service Corps 
   Scholarship Program and the F. Edward Hebert Armed Forces Health 
 Professions Scholarship and Financial Assistance Program (sec. 413 of 
                   the Act and sec. 117 of the Code)


                         Present and Prior Law

    Code section 117 excludes from gross income amounts 
received as a qualified scholarship by an individual who is a 
candidate for a degree and used for tuition and fees required 
for the enrollment or attendance (or for fees, books, supplies, 
and equipment required for courses of instruction) at a 
primary, secondary, or post-secondary educational institution. 
The tax-free treatment provided by Code section 117 does not 
extend to scholarship amounts covering regular living expenses, 
such as room and board. In addition to the exclusion for 
qualified scholarships, Code section 117 provides an exclusion 
from gross income for qualified tuition reductions for certain 
education provided to employees (and their spouses and 
dependents) of certain educational organizations.
    The exclusion for qualified scholarships and qualified 
tuition reductions does not apply to any amount received by a 
student that represents payment for teaching, research, or 
other services by the student required as a condition for 
receiving the scholarship or tuition reduction.
    The National Health Service Corps Scholarship Program (the 
``NHSC Scholarship Program'') and the F. Edward Hebert Armed 
Forces Health Professions Scholarship and Financial Assistance 
Program (the ``Armed Forces Scholarship Program'') provide 
education awards to participants on the condition that the 
participants provide certain services. In the case of the NHSC 
Program, the recipient of the scholarship is obligated to 
provide medical services in a geographic area (or to an 
underserved population group or designated facility) identified 
by the Public Health Service as having a shortage of health 
care professionals. In the case of the Armed Forces Scholarship 
Program, the recipient of the scholarship is obligated to serve 
a certain number of years in the military at an armed forces 
medical facility. Because the recipients are required to 
perform services in exchange for the education awards, the 
awards used to pay higher education expenses are taxable income 
to the recipient.

                           Reasons for Change

    The Congress believed it was appropriate to provide tax-
free treatment for scholarships received by medical, dental, 
nursing, and physician assistant students under the NHSC 
Scholarship Program and the Armed Forces Scholarship Program.

                        Explanation of Provision

    EGTRRA provides that amounts received by an individual 
under the NHSC Scholarship Program or the Armed Forces 
Scholarship Program are eligible for tax-free treatment as 
qualified scholarships under Code section 117, without regard 
to any service obligation by the recipient. As with other 
qualified scholarships under Code section 117, the tax-free 
treatment does not apply to amounts received by students for 
regular living expenses, including room and board.

                             Effective Date

    The provision is effective for education awards received 
after December 31, 2001.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $1 million annually in 2002-2010, and less 
than $500,000 million in 2011.

   F. Liberalization of Tax-Exempt Financing Rules for Public School 
Construction (secs. 421-422 of the Act and secs. 142 and 146-148 of the 
                                 Code)


                         Present and Prior Law


Tax-exempt bonds

            In general
    Interest on debt \48\ incurred by States or local 
governments is excluded from income if the proceeds of the 
borrowing are used to carry out governmental functions of those 
entities or the debt is repaid with governmental funds (section 
103).\49\ Like other activities carried out or paid for by 
States and local governments, the construction, renovation, and 
operation of public schools is an activity eligible for 
financing with the proceeds of tax-exempt bonds.
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    \48\ Hereinafter referred to as ``State or local government 
bonds.''
    \49\ Interest on this debt is included in calculating the 
``adjusted current earnings'' preference of the corporate alternative 
minimum tax.
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    Interest on bonds that nominally are issued by States or 
local governments, but the proceeds of which are used (directly 
or indirectly) by a private person and payment of which is 
derived from funds of such a private person is taxable unless 
the purpose of the borrowing is approved specifically in the 
Code or in a non-Code provision of a revenue Act. These bonds 
are called ``private activity bonds.'' \50\ The term ``private 
person'' includes the Federal Government and all other 
individuals and entities other than States or local 
governments.
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    \50\ Interest on private activity bonds (other than qualified 
501(c)(3) bonds) is a preference item in calculating the alternative 
minimum tax.
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            Private activities eligible for financing with tax-exempt 
                    private activity bonds
    Present and prior law includes several exceptions 
permitting States or local governments to act as conduits 
providing tax-exempt financing for private activities. Both 
capital expenditures and limited working capital expenditures 
of charitable organizations described in section 501(c)(3) of 
the Code--including elementary, secondary, and post-secondary 
schools--may be financed with tax-exempt private activity bonds 
(``qualified 501(c)(3) bonds'').
    States or local governments may issue tax-exempt ``exempt-
facility bonds'' to finance property for certain private 
businesses. Business facilities eligible for this financing 
include transportation (airports, ports, local mass commuting, 
and high speed intercity rail facilities); privately owned and/
or privately operated public works facilities (sewage, solid 
waste disposal, local district heating or cooling, and 
hazardous waste disposal facilities); privately-owned and/or 
operated low-income rental housing; and certain private 
facilities for the local furnishing of electricity or gas. A 
further provision allows tax-exempt financing for 
``environmental enhancements of hydro-electric generating 
facilities.'' Tax-exempt financing also is authorized for 
capital expenditures for small manufacturing facilities and 
land and equipment for first-time farmers (``qualified small-
issue bonds''), local redevelopment activities (``qualified 
redevelopment bonds''), and eligible empowerment zone and 
enterprise community businesses. Tax-exempt private activity 
bonds also may be issued to finance limited non-business 
purposes: certain student loans and mortgage loans for owner-
occupied housing (``qualified mortgage bonds'' and ``qualified 
veterans'' mortgage bonds'').
    Private activity tax-exempt bonds may not be issued to 
finance schools for private, for-profit businesses.
    In most cases, the aggregate volume of private activity 
tax-exempt bonds is restricted by annual aggregate volume 
limits imposed on bonds issued by issuers within each State. 
For calendar year 2002, these annual volume limits were equal 
to the greater of $75 per resident of the State or $225 
million. After 2002, the volume limits will be indexed annually 
for inflation.
            Arbitrage restrictions on tax-exempt bonds
    The Federal income tax does not apply to the income of 
States and local governments that is derived from the exercise 
of an essential governmental function. To prevent these tax-
exempt entities from issuing more Federally subsidized tax-
exempt bonds than is necessary for the activity being financed 
or from issuing such bonds earlier than needed for the purpose 
of the borrowing, the Code includes arbitrage restrictions 
limiting the ability to profit from investment of tax-exempt 
bond proceeds. In general, arbitrage profits may be earned only 
during specified periods (e.g., defined ``temporary periods'' 
before funds are needed for the purpose of the borrowing) or on 
specified types of investments (e.g., ``reasonably required 
reserve or replacement funds''). Subject to limited exceptions, 
profits that are earned during these periods or on such 
investments must be rebated to the Federal Government.
    Present and prior law includes three exceptions to the 
arbitrage rebate requirements applicable to education-related 
bonds. First, issuers of all types of tax-exempt bonds are not 
required to rebate arbitrage profits if all of the proceeds of 
the bonds are spent for the purpose of the borrowing within six 
months after issuance.\51\
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    \51\ In the case of governmental bonds (including bonds to finance 
public schools), the six-month expenditure exception is treated as 
satisfied if at least 95 percent of the proceeds is spent within six 
months and the remaining five percent is spent within 12 months after 
the bonds are issued.
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    Second, in the case of bonds to finance certain 
construction activities, including school construction and 
renovation, the six-month period is extended to 24 months. 
Arbitrage profits earned on construction proceeds are not 
required to be rebated if all such proceeds (other than certain 
retainage amounts) are spent by the end of the 24-month period 
and prescribed intermediate spending percentages are 
satisfied.\52\ Issuers qualifying for this ``construction 
bond'' exception may elect to be subject to a fixed penalty 
payment regime in lieu of rebate if they fail to satisfy the 
spending requirements.
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    \52\ Retainage amounts are limited to no more than five percent of 
the bond proceeds, and these amounts must be spent for the purpose of 
the borrowing no later than 36 months after the bonds are issued.
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    Third, governmental bonds issued by ``small'' governments 
are not subject to the rebate requirement. Small governments 
are defined as general purpose governmental units that issue no 
more than $5 million of tax-exempt governmental bonds in a 
calendar year. The $5 million limit is increased to $10 million 
if at least $5 million of the bonds are used to finance public 
schools.

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.'' Under present and prior law, 
a total of $400 million of qualified zone academy bonds may be 
issued in each of 1998 through 2003.\53\ The $400 million 
aggregate bond authority 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 to 
qualified zone academies within such State. A State may carry 
over any unused allocation for up to two years (three years for 
authority arising before 2000).
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    \53\ The Job Creation and Worker Assistance Act of 2002 (Pub. L. 
No. 107-147, March 9, 2002) extended qualified zone academy bonds as 
modified by this provision for two additional years (i.e., 2002 and 
2003), described in Part Eight of this document.
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    Certain financial institutions (i.e., banks, insurance 
companies, and corporations actively engaged in the business of 
lending money) that hold qualified zone academy bonds are 
entitled to a nonrefundable tax credit in an amount equal to a 
credit rate multiplied by the face amount of the bond. An 
eligible financial institution holding a qualified zone academy 
bond on the credit allowance date (i.e., each one-year 
anniversary of the issuance of the bond) is entitled to a 
credit. The credit amount is includible in gross income (as if 
it were a taxable interest payment on the bond), and the credit 
may be claimed against regular income tax and alternative 
minimum tax liability.
    The Treasury Department sets the credit rate daily 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 bonds also 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 bonds 
issued by a State or local government, provided that: (1) at 
least 95 percent of the proceeds is 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 a designated 
empowerment zone or a designated enterprise community, 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.

                           Reasons for Change

    The policy underlying the arbitrage rebate exception for 
bonds of small governmental units is to reduce complexity for 
these entities because they may not have in-house financial 
staff to engage in the expenditure and investment tracking 
necessary for rebate compliance. The exception further is 
justified by the limited potential for arbitrage profits at 
small issuance levels and limitation of the provision to 
governmental bonds, which typically require voter approval 
before issuance. The Congress believed that a limited increase 
of $5 million per year for public school construction bonds 
will more accurately conform this prior-law exception to 
current school construction costs.
    Further, the Congress wished to encourage public-private 
partnerships to improve educational opportunities. To permit 
public-private partnerships to reap the benefit of the implicit 
subsidy to capital costs provided through tax-exempt financing, 
the Congress determined that it is appropriate to allow the 
issuance of tax-exempt private activity bonds for public school 
facilities.

                        Explanation of Provision


Increase amount of governmental bonds that may be issued by governments 
        qualifying for the ``small governmental unit'' arbitrage rebate 
        exception

    The additional amount of governmental bonds for public 
schools that small governmental units may issue without being 
subject to the arbitrage rebate requirements is increased from 
$5 million to $10 million. Thus, these governmental units may 
issue up to $15 million of governmental bonds in a calendar 
year provided that at least $10 million of the bonds are used 
to finance public school construction expenditures.

Allow issuance of tax-exempt private activity bonds for public school 
        facilities

    The private activities for which tax-exempt bonds may be 
issued are expanded to include elementary and secondary public 
school facilities which are owned by private, for-profit 
corporations pursuant to public-private partnership agreements 
with a State or local educational agency. For this purpose, 
ownership is determined based on the holding of legal title to 
facilities, without regard to tax ownership. The term school 
facility includes school buildings and functionally related and 
subordinate land (including stadiums or other athletic 
facilities primarily used for school events) \54\ and 
depreciable personal property used in the school facility. The 
school facilities for which these bonds are issued must be 
operated by a public educational agency as part of a system of 
public schools.
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    \54\ The present and prior-law limit on the amount of the proceeds 
of a private activity bond issue that may be used to finance land 
acquisition does not apply to these bonds.
---------------------------------------------------------------------------
    A public-private partnership agreement is defined as an 
arrangement pursuant to which the for-profit corporate party 
constructs, rehabilitates, refurbishes or equips a school 
facility for a public school agency (typically pursuant to a 
lease arrangement). The agreement must provide that, at the end 
of the contract term, ownership of the bond-financed property 
is transferred to the public school agency party to the 
agreement for no additional consideration.
    Issuance of these bonds is subject to a separate annual 
per-State private activity bond volume limit equal to $10 per 
resident ($5 million, if greater) in lieu of the present and 
prior-law State private activity bond volume limits. As with 
the present and prior-law State private activity bond volume 
limits, States can decide how to allocate the bond authority to 
State and local government agencies. Bond authority that is 
unused in the year in which it arises may be carried forward 
for up to three years for public school projects under rules 
similar to the carryforward rules of the present and prior-law 
private activity bond volume limits.

                             Effective Date

    The provisions are effective for bonds issued after 
December 31, 2001.

                             Revenue Effect

    The provision to increase the arbitrage rebate exception 
for governmental bonds used to finance qualified school 
construction is estimated to reduce Federal fiscal year budget 
receipts by less than $500,000 in 2002, $3 million in 2003, $5 
million in 2004, $6 million in 2005, $11 million in 2006, $15 
million in 2007, $16 million in 2008, $17 million in 2009, $18 
million in 2010, $19 million in 2011 and, $17 million in 2012.
    The provision to issue tax-exempt private activity bonds 
for qualified educational facilities is estimated to reduce 
Federal fiscal year budget receipts by $5 million in 2002, $19 
million in 2003, $38 million in 2004, $61 million in 2005, $88 
million in 2006, $120 million in 2007, $155 million in 2008, 
$191 million in 2009, $227 million in 2010, $251 million in 
2011 and $249 million in 2012.

 G. Deduction for Qualified Higher Education Expenses (sec. 431 of the 
                   Act and new sec. 222 of the Code)


                         Present and Prior Law


Deduction for education expenses

    Under present and prior law, an individual taxpayer 
generally may not deduct the education and training expenses of 
the taxpayer or the taxpayer's dependents. However, a deduction 
for education expenses generally is allowed under Code section 
162 if the education or training: (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, or requirements of applicable law or 
regulations, imposed as a condition of continued employment 
(Treas. Reg. section 1.162-5). Education expenses are 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. 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 meet the above described criteria for 
deductibility under Code section 162 and only to the extent 
that the expenses, along with other miscellaneous deductions, 
exceed 2 percent of the taxpayer's adjusted gross income.

HOPE and Lifetime Learning credits

            HOPE credit
    Under present and prior law, individual taxpayers are 
allowed to claim a nonrefundable credit, the ``HOPE'' credit, 
against Federal income taxes of up to $1,500 per student per 
year for qualified tuition and related expenses paid for the 
first two years of the student's post secondary education in a 
degree or certificate program. The HOPE credit rate is 100 
percent on the first $1,000 of qualified tuition and related 
expenses, and 50 percent on the next $1,000 of qualified 
tuition and related expenses.\55\ The qualified tuition and 
related expenses must be incurred on behalf of the taxpayer, 
the taxpayer's spouse, or a dependent of the taxpayer. The HOPE 
credit is available with respect to an individual student for 
two taxable years, provided that the student has not completed 
the first two years of post-secondary education before the 
beginning of the second taxable year.\56\ The HOPE credit that 
a taxpayer may otherwise claim is phased-out ratably for 
taxpayers with modified AGI between $40,000 and $50,000 
($80,000 and $100,000 for joint returns). For taxable years 
beginning after 2001, the $1,500 maximum HOPE credit amount and 
the AGI phase-out ranges are indexed for inflation.
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    \55\ Thus, an eligible student who incurs $1,000 of qualified 
tuition and related expenses is eligible (subject to the AGI phase-out) 
for a $1,000 HOPE credit. If an eligible student incurs $2,000 of 
qualified tuition and related expenses, then he or she is eligible for 
a $1,500 HOPE credit.
    \56\ The HOPE credit may not be claimed against a taxpayer's 
alternative minimum tax liability.
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    The HOPE credit is available for ``qualified tuition and 
related expenses,'' which include tuition and fees required to 
be paid to an eligible educational institution as a condition 
of enrollment or attendance of an eligible student at the 
institution. Charges and fees associated with meals, lodging, 
insurance, transportation, and similar personal, living, or 
family expenses are not eligible for the credit. The expenses 
of education involving sports, games, or hobbies are not 
qualified tuition and related expenses unless this education is 
part of the student's degree program.
    Qualified tuition and related expenses generally include 
only out-of-pocket expenses. Qualified tuition and related 
expenses do not include expenses covered by employer-provided 
educational assistance and scholarships that are not required 
to be included in the gross income of either the student or the 
taxpayer claiming the credit. Thus, total qualified tuition and 
related expenses are reduced by any scholarship or fellowship 
grants excludable from gross income under Code section 117 and 
any other tax free educational benefits received by the student 
(or the taxpayer claiming the credit) during the taxable year.
            Lifetime Learning credit
    Individual taxpayers are allowed to claim a nonrefundable 
credit, the Lifetime Learning credit, against Federal income 
taxes equal to 20 percent of qualified tuition and related 
expenses incurred during the taxable year on behalf of the 
taxpayer, the taxpayer's spouse, or any dependents. For 
expenses paid after June 30, 1998, and prior to January 1, 
2003, up to $5,000 of qualified tuition and related expenses 
per taxpayer return are eligible for the Lifetime Learning 
credit (i.e., the maximum credit per taxpayer return is 
$1,000). For expenses paid after December 31, 2002, up to 
$10,000 of qualified tuition and related expenses per taxpayer 
return will be eligible for the Lifetime Learning credit (i.e., 
the maximum credit per taxpayer return will be $2,000).
    In contrast to the HOPE credit, a taxpayer may claim the 
Lifetime Learning credit for an unlimited number of taxable 
years. Also in contrast to the HOPE credit, the maximum amount 
of the Lifetime Learning credit that may be claimed on a 
taxpayer's return will not vary based on the number of students 
in the taxpayer's family--that is, the HOPE credit is computed 
on a per student basis, while the Lifetime Learning credit is 
computed on a family wide basis. The Lifetime Learning credit 
amount that a taxpayer may otherwise claim is phased-out 
ratably for taxpayers with modified AGI between $40,000 and 
$50,000 ($80,000 and $100,000 for joint returns). The phase-out 
ranges are adjusted for inflation for taxable years beginning 
after 2001.

                           Reasons for Change

    The Congress recognized that in some cases a deduction for 
education expenses may provide greater tax relief than the 
present-law credits. The Congress wished to maximize tax 
benefits for education, and provide greater choice for 
taxpayers in determining which tax benefit is most appropriate 
for them.

                        Explanation of Provision

    EGTRRA permits taxpayers an above-the-line deduction for 
qualified higher education expenses paid by the taxpayer during 
a taxable year. Qualified higher education expenses are defined 
in the same manner as for purposes of the HOPE credit.
    In 2002 and 2003, taxpayers with adjusted gross income \57\ 
that does not exceed $65,000 ($130,000 in the case of married 
couples filing joint returns) are entitled to a maximum 
deduction of $3,000 per year. Taxpayers with adjusted gross 
income above these thresholds would not be entitled to a 
deduction. In 2004 and 2005, taxpayers with adjusted gross 
income that does not exceed $65,000 ($130,000 in the case of 
married taxpayers filing joint returns) are entitled to a 
maximum deduction of $4,000 and taxpayers with adjusted gross 
income that does not exceed $80,000 ($160,000 in the case of 
married taxpayers filing joint returns) are entitled to a 
maximum deduction of $2,000.
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    \57\ The provision contains ordering rules for use in determining 
adjusted gross income for purposes of the deduction.
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    Taxpayers are not eligible to claim the deduction and a 
HOPE or Lifetime Learning Credit in the same year with respect 
to the same student. A taxpayer may claim in the same year the 
deduction, the exclusion for distributions from an education 
individual retirement account, and the exclusion for interest 
on education savings bonds, as long as the deductions and 
exclusion are not claimed with respect to the same expenses. A 
taxpayer may also claim, in the same year, both the deduction 
and an exclusion for distributions from a qualified tuition 
program. Additionally, a taxpayer may claim the deduction with 
respect to the same expenses that are used to claim an 
exclusion for a distribution from a qualified tuition program, 
but only to the extent of the amount of the distribution 
representing a return of contributions.

                             Effective Date

    The provision is effective for payments made in taxable 
years beginning after December 31, 2001, and before January 1, 
2006.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $1,535 million in 2002, $2,063 million in 
2003, $2,683 million in 2004, $2,911 million in 2005 and $730 
million in 2006.

    V. ESTATE, GIFT, AND GENERATION-SKIPPING TRANSFER TAX PROVISIONS

   A. Phaseout and Repeal of Estate and Generation-Skipping Transfer 
 Taxes; Increase in Gift Tax Unified Credit Effective Exemption (secs. 
501, 511, 521, 531, 532, 541 and 542 of the Act, secs. 121, 684, 1014, 
 1040, 1221, 2001-2210, 2501, 2502, 2503, 2505, 2511, 2601-2663, 4947, 
6018, 6019, and 7701 of the Code, and new secs. 1022, 2058, 2210, 2664, 
                         and 6716 of the Code)

                         Present and Prior Law

Estate and gift tax rules
            In general
    Under present and prior law, a gift tax is imposed on 
lifetime transfers and an estate tax is imposed on transfers at 
death. The gift tax and the estate tax are unified so that a 
single graduated rate schedule applies to cumulative taxable 
transfers made by a taxpayer during his or her lifetime and at 
death. Under prior law, the unified estate and gift tax rates 
began at 18 percent on the first $10,000 of cumulative taxable 
transfers and reached 55 percent on cumulative taxable 
transfers over $3 million. Also, under prior law, a 5-percent 
surtax was imposed on cumulative taxable transfers between $10 
million and $17,184,000, which had the effect of phasing out 
the benefit of the graduated rates. Thus, these estates were 
subject to a top marginal rate of 60 percent. Under prior law, 
estates over $17,184,000 were subject to a flat rate of 55 
percent on all amounts exceeding the unified credit effective 
exemption amount, as the benefit of the graduated rates had 
been phased out.
            Gift tax annual exclusion
    Under present and prior law, donors of lifetime gifts are 
provided an annual exclusion of $10,000 (indexed for inflation 
occurring after 1997; the inflation-adjusted amount for 2001 
remained at $10,000) on transfers of present interests in 
property to any one donee during the taxable year. If the non-
donor spouse consents to split the gift with the donor spouse, 
then the annual exclusion is $20,000 (subject to the inflation 
adjustments mentioned above.) Unlimited transfers between 
spouses are permitted without imposition of a gift tax.
            Unified credit
    Under present and prior law, a unified credit is available 
with respect to taxable transfers by gift and at death. Under 
prior law, the unified credit amount effectively exempted from 
tax transfers totaling $675,000 in 2001, $700,000 in 2002 and 
2003, $850,000 in 2004, $950,000 in 2005, and $1 million in 
2006 and thereafter. The benefit of the unified credit applies 
at the lowest estate and gift tax rates. For example, in 2001, 
the unified credit applied between the 18-percent and 37-
percent estate and gift tax rates. Thus, in 2001, taxable 
transfers, after application of the unified credit, were 
effectively subject to estate and gift tax rates beginning at 
37 percent.
            Transfers to a surviving spouse
    In general.--Under present and prior law, a 100-percent 
marital deduction generally is permitted for the value of 
property transferred between spouses. In addition, transfers of 
a ``qualified terminable interest'' also are eligible for the 
marital deduction. A ``qualified terminable interest'' is 
property: (1) which passes from the decedent, (2) in which the 
surviving spouse has a ``qualifying income interest for life,'' 
and (3) to which an election under these rules applies. A 
``qualifying income interest for life'' exists if: (1) the 
surviving spouse is entitled to all the income from the 
property (payable annually or at more frequent intervals) or 
the right to use property during the spouse's life, and (2) no 
person has the power to appoint any part of the property to any 
person other than the surviving spouse.
    Transfers to surviving spouses who are not U.S. citizens.--
Under present and prior law, a marital deduction generally is 
denied for property passing to a surviving spouse who is not a 
citizen of the United States. A marital deduction is permitted, 
however, for property passing to a qualified domestic trust of 
which the noncitizen surviving spouse is a beneficiary. A 
qualified domestic trust is a trust that has as its trustee at 
least one U.S. citizen or U.S. corporation. No corpus may be 
distributed from a qualified domestic trust unless the U.S. 
trustee has the right to withhold any estate tax imposed on the 
distribution.
    There is an estate tax imposed on (1) any distribution from 
a qualified domestic trust before the date of the death of the 
noncitizen surviving spouse and (2) the value of the property 
remaining in a qualified domestic trust on the date of death of 
the noncitizen surviving spouse. The tax is computed as an 
additional estate tax on the estate of the first spouse to die.
            Expenses, indebtedness, and taxes
    Under present and prior law, an estate tax deduction is 
allowed for funeral expenses and administration expenses of an 
estate. An estate tax deduction also is allowed for claims 
against the estate and unpaid mortgages on, or any indebtedness 
in respect of, property for which the value of the decedent's 
interest therein, undiminished by the debt, is included in the 
value of the gross estate.
    If the total amount of claims and debts against the estate 
exceeds the value of the property to which the claims relate, 
an estate tax deduction for the excess is allowed, provided 
such excess is paid before the due date of the estate tax 
return. A deduction for claims against the estate generally is 
permitted only if the claim is allowable by the law of the 
jurisdiction under which the estate is being administered.
    A deduction also is allowed for the full unpaid amount of 
any mortgage upon, or of any other indebtedness in respect of, 
any property included in the gross estate (including interest 
which has accrued thereon to the date of the decedent's death), 
provided that the full value of the underlying property is 
included in the decedent's gross estate.
            Basis of property received
    In general.--Gain or loss, if any, on the disposition of 
the property is measured by the taxpayer's amount realized 
(i.e., gross proceeds received) on the disposition, less the 
taxpayer's basis in such property. Basis generally represents a 
taxpayer's investment in property with certain adjustments 
required after acquisition. For example, basis is increased by 
the cost of capital improvements made to the property and 
decreased by depreciation deductions taken with respect to the 
property.
    Under present and prior law, property received from a donor 
of a lifetime gift takes a carryover basis. ``Carryover basis'' 
means that the basis in the hands of the donee is the same as 
it was in the hands of the donor. The basis of property 
transferred by lifetime gift also is increased, but not above 
fair market value, by any gift tax paid by the donor. The basis 
of a lifetime gift, however, generally cannot exceed the 
property's fair market value on the date of the gift. If the 
basis of the property is greater than the fair market value of 
the property on the date of gift, then, for purposes of 
determining loss, the basis is the property's fair market value 
on the date of gift.
    Under present and prior law, property passing from a 
decedent's estate generally takes a stepped-up basis. 
``Stepped-up basis'' for estate tax purposes means that the 
basis of property passing from a decedent's estate generally is 
the fair market value on the date of the decedent's death (or, 
if the alternate valuation date is elected, the earlier of six 
months after the decedent's death or the date the property is 
sold or distributed by the estate). This step up (or step down) 
in basis eliminates the recognition of income on any 
appreciation of the property that occurred prior to the 
decedent's death, and has the effect of eliminating the tax 
benefit from any unrealized loss.
    Special rule for community property.--In community property 
states, a surviving spouse's one-half share of community 
property held by the decedent and the surviving spouse (under 
the community property laws of any State, U.S. possession, or 
foreign country) generally is treated as having passed from the 
decedent, and thus is eligible for stepped-up basis. Under 
present and prior law, this rule applies if at least one-half 
of the whole of the community interest is includible in the 
decedent's gross estate.
    Special rules for interests in certain foreign entities.--
Under present and prior law, stepped-up basis treatment 
generally is denied to certain interests in foreign entities. 
Stock or securities in a foreign personal holding company take 
a carryover basis, and stock in a passive foreign investment 
company (including those for which a mark-to-market election 
has been made) generally takes a carryover basis, except that a 
passive foreign investment company for which a decedent 
shareholder had made a qualified electing fund election is 
allowed a stepped-up basis. Stock in a foreign investment 
company takes a stepped up basis reduced by the decedent's 
ratable share of the company's accumulated earnings and 
profits, and stock owned by a decedent in a domestic 
international sales corporation (or former domestic 
international sales corporation) takes a stepped-up basis 
reduced by the amount (if any) which would have been included 
in gross income under section 995(c) as a dividend if the 
decedent had lived and sold the stock at its fair market value 
on the estate tax valuation date (i.e., generally the date of 
the decedent's death unless an alternate valuation date is 
elected).
            Provisions affecting small and family-owned businesses and 
                    farms
    Special-use valuation.--Under present and prior law, an 
executor can elect to value for estate tax purposes certain 
``qualified real property'' used in farming or another 
qualifying closely-held trade or business at its current-use 
value, rather than its fair market value. The maximum reduction 
in value for such real property is $750,000 (adjusted for 
inflation occurring after 1997; the inflation-adjusted amount 
for 2001 was $800,000). Real property generally can qualify for 
special-use valuation if at least 50 percent of the adjusted 
value of the decedent's gross estate consists of a farm or 
closely-held business assets in the decedent's estate 
(including both real and personal property) and at least 25 
percent of the adjusted value of the gross estate consists of 
farm or closely-held business property. In addition, the 
property must be used in a qualified use (e.g., farming) by the 
decedent or a member of the decedent's family for five of the 
eight years before the decedent's death.
    If, after a special-use valuation election is made, the 
heir who acquired the real property ceases to use it in its 
qualified use within 10 years of the decedent's death, an 
additional estate tax is imposed in order to recapture the 
entire estate-tax benefit of the special-use valuation.
    Family-owned business deduction.--Under present and prior 
law, an estate is permitted to deduct the adjusted value of a 
qualified-family owned business interest of the decedent, up to 
$675,000.\58\ A qualified family-owned business interest is 
defined as any interest in a trade or business (regardless of 
the form in which it is held) with a principal place of 
business in the United States if the decedent's family owns at 
least 50 percent of the trade or business, two families own 70 
percent, or three families own 90 percent, as long as the 
decedent's family owns at least 30 percent of the trade or 
business. An interest in a trade or business does not qualify 
if any interest in the business (or a related entity) was 
publicly-traded at any time within three years of the 
decedent's death. An interest in a trade or business also does 
not qualify if more than 35 percent of the adjusted ordinary 
gross income of the business for the year of the decedent's 
death was personal holding company income. In the case of a 
trade or business that owns an interest in another trade or 
business (i.e., ``tiered entities''), special look-through 
rules apply. The value of a trade or business qualifying as a 
family-owned business interest is reduced to the extent the 
business holds passive assets or excess cash or marketable 
securities.
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    \58\ The qualified family-owned business deduction and the unified 
credit effective exemption amount are coordinated. If the maximum 
deduction amount of $675,000 is elected, then the unified credit 
effective exemption amount is $625,000, for a total of $1.3 million. If 
the qualified family-owned business deduction is less than $675,000, 
then the unified credit effective exemption amount is equal to 
$625,000, increased by the difference between $675,000 and the amount 
of the qualified family-owned business deduction. However, the unified 
credit effective exemption amount cannot be increased above such amount 
in effect for the taxable year.
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    To qualify for the exclusion, the decedent (or a member of 
the decedent's family) must have owned and materially 
participated in the trade or business for at least five of the 
eight years preceding the decedent's date of death. In 
addition, at least one qualified heir (or member of the 
qualified heir's family) is required to materially participate 
in the trade or business for at least 10 years following the 
decedent's death.
    The qualified family-owned business rules provide a 
graduated recapture based on the number of years after the 
decedent's death in which the disqualifying event occurred. 
Under the provision, if the disqualifying event occurred within 
six years of the decedent's death, then 100 percent of the tax 
is recaptured. The remaining percentage of recapture based on 
the year after the decedent's death in which a disqualifying 
event occurs is as follows: the disqualifying event occurs 
during the seventh year after the decedent's death, 80 percent; 
during the eighth year after the decedent's death, 60 percent; 
during the ninth year after the decedent's death, 40 percent; 
and during the tenth year after the decedent's death, 20 
percent. For purposes of the qualified family-owned business 
deduction, the contribution of a qualified conservation 
easement is not considered a disposition that would trigger 
recapture of estate tax.
    In general, there is no requirement that the qualified heir 
(or members of his or her family) continue to hold or 
participate in the trade or business more than 10 years after 
the decedent's death. However, the 10-year recapture period can 
be extended for a period of up to two years if the qualified 
heir does not begin to use the property for a period of up to 
two years after the decedent's death.
    An estate can claim the benefits of both the qualified 
family-owned business deduction and special-use valuation. For 
purposes of determining whether the value of the trade or 
business exceeds 50 percent of the decedent's gross estate, 
then the property's special-use value is used if the estate 
claimed special-use valuation.
            State death tax credit
    Under present and prior law, a credit is allowed against 
the Federal estate tax for any estate, inheritance, legacy, or 
succession taxes actually paid to any State or the District of 
Columbia with respect to any property included in the 
decedent's gross estate. Under prior law, the maximum amount of 
credit allowable for State death taxes was determined under a 
graduated rate table, the top rate of which was 16 percent, 
based on the size of the decedent's adjusted taxable estate. 
Most States impose a ``pick-up'' or ``soak-up'' estate tax, 
which serves to impose a State tax equal to the maximum Federal 
credit allowed.
            Estate and gift taxation of nonresident noncitizens
    Under present and prior law, nonresident noncitizens are 
subject to gift tax with respect to certain transfers by gift 
of U.S.-situated property. Such property includes real estate 
and tangible property located within the United States. 
Nonresident noncitizens generally are not subject to U.S. gift 
tax on the transfer of intangibles, such as stock or 
securities, regardless of where such property is situated.
    Estates of nonresident noncitizens generally are taxed at 
the same estate tax rates applicable to U.S. citizens, but the 
taxable estate includes only property situated within the 
United States that is owned by the decedent at death. This 
includes the value at death of all property, real or personal, 
tangible or intangible, situated in the United States. Special 
rules apply which treat certain property as being situated 
within and without the United States for these purposes.
    Unless modified by a treaty, a nonresident who is not a 
U.S. citizen generally is allowed a unified credit of $13,000, 
which effectively exempts $60,000 in assets from estate tax.
Generation-skipping transfer tax
    Under present and prior law, a generation-skipping transfer 
tax generally is imposed on transfers, either directly or 
through a trust or similar arrangement, to a ``skip person'' 
(i.e., a beneficiary in a generation more than one generation 
below that of the transferor). Transfers subject to the 
generation-skipping transfer tax include direct skips, taxable 
terminations, and taxable distributions. Under prior law, the 
generation-skipping transfer tax was imposed at a flat rate of 
55 percent (i.e., the top estate and gift tax rate) on 
cumulative generation-skipping transfers in excess of $1 
million (indexed for inflation occurring after 1997; the 
inflation-adjusted amount for 2001 is $1,060,000).
Selected income tax provisions
            Transfers to certain foreign trusts and estates
    Under present and prior law, a transfer (during life or at 
death) by a U.S. person to a foreign trust or estate generally 
is treated as a sale or exchange of the property for an amount 
equal to the fair market value of the transferred property. 
Under prior law, the amount of gain that had to be recognized 
by the transferor was equal to the excess of the fair market 
value of the property transferred over the adjusted basis (for 
purposes of determining gain) of such property in the hands of 
the transferor.
            Net operating loss and capital loss carryovers
    Under present and prior law, a capital loss and net 
operating loss from business operations sustained by a decedent 
during his last taxable year are deductible only on the final 
return filed in his or her behalf. Such losses are not 
deductible by his or her estate.
            Transfers of property in satisfaction of a pecuniary 
                    bequest
    Under prior law, gain or loss was recognized on the 
transfer of property in satisfaction of a pecuniary bequest 
(i.e., a bequest of a specific dollar amount) to the extent 
that the fair market value of the property at the time of the 
transfer exceeded the basis of the property, which generally 
was the basis stepped up to fair market value on the date of 
the decedent's death.
            Income tax exclusion for the gain on the sale of a 
                    principal residence
    Under present and prior law, a taxpayer generally can 
exclude up to $250,000 ($500,000 if married filing a joint 
return) of gain realized on the sale or exchange of a principal 
residence. The exclusion is allowed each time a taxpayer sells 
or exchanges a principal residence that meets the eligibility 
requirements, but generally no more frequently than once every 
two years.
    Generally a taxpayer must have owned the residence and 
occupied it as a principal residence for at least two of the 
five years prior to the sale or exchange. A taxpayer who fails 
to meet these requirements by reason of a change of place of 
employment, health, or certain unforeseen circumstances 
prescribed by regulation is able to exclude the fraction of the 
$250,000 ($500,000 if married filing a joint return) equal to 
the fraction of two years that these requirements are met.

Excise tax on non-exempt trusts

    Under present and prior law, non-exempt split-interest 
trusts are subject to certain restrictions that are applicable 
to private foundations if an income, estate, or gift tax 
charitable deduction was allowed with respect to the trust. A 
non-exempt split-interest trust subject to these rules is 
prohibited from engaging in self-dealing, retaining any excess 
business holdings, and from making certain investments or 
taxable expenditures. Failure to comply with these restrictions 
would subject the trust to certain excise taxes imposed on 
private foundations, which include excise taxes on self-
dealing, excess business holdings, investments which jeopardize 
charitable purposes, and certain taxable expenditures.

                           Reasons for Change

    The Congress found the estate and generation-skipping 
transfer taxes unduly burdensome on affected taxpayers, and 
particularly decedents' estates, decedents' heirs, and 
businesses, such as small businesses, family-owned businesses, 
and farming businesses. The Congress believed further that it 
was inappropriate to impose a tax by reason of death of the 
taxpayer. In addition, the Congress believed that increasing 
the gift tax unified credit effective exemption amount and 
reducing gift tax rates would lessen the burden that gift taxes 
impose on all taxpayers and promote simplification for those 
taxpayers who would no longer be subject to the gift tax.

                        Explanation of Provision


Reduction in estate, gift, and generation-skipping transfer taxes; 
        repeal of estate and generation-skipping transfer taxes

            In general
    Under the provision, the estate, gift, and generation-
skipping transfer taxes are reduced between 2002 and 2009, and 
the estate and generation-skipping transfer taxes are repealed 
in 2010.
    Beginning in 2002, the 5-percent surtax (which phases out 
the benefit of the graduated rates) and the rates in excess of 
50 percent are repealed. In addition, in 2002, the unified 
credit effective exemption amount (for both estate and gift tax 
purposes) is increased to $1 million. In 2003, the estate and 
gift tax rates in excess of 49 percent are repealed. In 2004, 
the estate and gift tax rates in excess of 48 percent are 
repealed, and the unified credit effective exemption amount for 
estate tax purposes is increased to $1.5 million. (The unified 
credit effective exemption amount for gift tax purposes remains 
at $1 million as increased in 2002.) In addition, in 2004, the 
family-owned business deduction is repealed. In 2005, the 
estate and gift tax rates in excess of 47 percent are repealed. 
In 2006, the estate and gift tax rates in excess of 46 percent 
are repealed, and the unified credit effective exemption amount 
for estate tax purposes is increased to $2 million. In 2007, 
the estate and gift tax rates in excess of 45 percent are 
repealed. In 2009, the unified credit effective exemption 
amount is increased to $3.5 million. In 2010, the estate and 
generation-skipping transfer taxes are repealed.
    From 2002 through 2009, the estate and gift tax rates and 
unified credit effective exemption amount for estate tax 
purposes are as follows:

Table 8.--Unified Credit Exemption Equivalent Amount and Estate and Gift
                         Tax Rates for 2002-2009
------------------------------------------------------------------------
                                                      Highest estate and
          Calendar year           Estate and GST tax    gift tax rates
                                  transfer exemption       (percent)
------------------------------------------------------------------------
2002............................  $1 million........  50
2003............................  $1 million........  49
2004............................  $1.5 million......  48
2005............................  $1.5 million......  47
2006............................  $2 million........  46
2007............................  $2 million........  45
2008............................  $2 million........  45
2009............................  $3.5 million......  45
2010............................  N/A (taxes          Top individual
                                   repealed).          income tax rate
                                                       (gift tax only).
------------------------------------------------------------------------

    The generation-skipping transfer tax exemption for a given 
year (prior to repeal) is equal to the unified credit effective 
exemption amount for estate tax purposes. The generation-
skipping transfer tax rate for a given year will be the highest 
estate and gift tax rate in effect for such year.
            Repeal of estate and generation-skipping transfer taxes; 
                    modifications to gift tax
    In 2010, the estate and generation-skipping transfer taxes 
are repealed. Also in 2010, the top gift tax rate will be the 
otherwise applicable top individual income tax rate, and, 
except as provided in regulations, certain transfers in trust 
are treated as transfers of property by gift, unless the trust 
is treated as wholly owned by the donor or the donor's spouse 
under the grantor trust provisions of the Code.\59\
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    \59\ EGTRRA's Conference Report (H.R. Rep. 107-84) stated that a 
transfer in trust will be treated as a taxable gift. Section 411 of The 
``Job Creation and Worker Assistance Act of 2002'' described in Part 
Eight of this document; includes a technical correction to clarify that 
the effect of section 511(e) of EGTRRA the Act (effective for gifts 
made after 2009) is to treat certain transfers in trust as transfers of 
property by gift. The result of the clarification is that the gift tax 
annual exclusion and the marital and charitable deductions may apply to 
such transfers. Under the provision as clarified, certain amounts 
transferred in trust will be treated as transfers of property by gift, 
despite the fact that such transfers would be regarded as incomplete 
gifts or would not be treated as transferred under the law applicable 
to gifts made prior to 2010. For example, if in 2010 an individual 
transfers property in trust to pay the income to one person for life, 
remainder to such persons and in such portions as the settlor may 
decide, then the entire value of the property will be treated as being 
transferred by gift under the provision, even though the transfer of 
the remainder interest in the trust would not be treated as a completed 
gift under current Treas. Reg. Sec. 25.2511-2(c). Similarly, if in 2010 
an individual transfers property in trust to pay the income to one 
person for life, and makes no transfer of a remainder interest, the 
entire value of the property will be treated as being transferred by 
gift under the provision.
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            Reduction in State death tax credit; deduction for State 
                    death taxes paid
    Under the provision, from 2002 through 2004, the State 
death tax credit allowable under prior law is reduced as 
follows: in 2002, the State death tax credit is reduced by 25 
percent (from prior law amounts); in 2003, the State death tax 
credit is reduced by 50 percent (from prior law amounts); and 
in 2004, the State death tax credit is reduced by 75 percent 
(from prior law amounts). In 2005, the State death tax credit 
is repealed, after which there will be a deduction for death 
taxes (e.g., any estate, inheritance, legacy, or succession 
taxes) actually paid to any State or the District of Columbia, 
in respect of property included in the gross estate of the 
decedent. Such State taxes must have been paid and claimed 
before the later of: (1) four years after the filing of the 
estate tax return; or (2) (a) 60 days after a decision of the 
U.S. Tax Court determining the estate tax liability becomes 
final, (b) the expiration of the period of extension to pay 
estate taxes over time under section 6166, or (c) the 
expiration of the period of limitations in which to file a 
claim for refund or 60 days after a decision of a court in 
which such refund suit has become final.

Basis of property acquired from a decedent

            In general
    In 2010, after repeal of the estate tax, the present and 
prior-law rules providing for a fair market value basis for 
property acquired from a decedent are repealed. Instead, a 
modified carryover basis regime generally takes effect. 
Recipients of property transferred at the decedent's death will 
receive a basis equal to the lesser of the adjusted basis of 
the decedent or the fair market value of the property on the 
date of the decedent's death.
    Under the provision, the modified carryover basis rules 
apply to property acquired by bequest, devise, or inheritance, 
or property acquired by the decedent's estate from the 
decedent, property passing from the decedent to the extent such 
property passed without consideration, and certain other 
property to which the prior law rules apply.\60\
---------------------------------------------------------------------------
    \60\ Section 1014(b)(2) and (3).
---------------------------------------------------------------------------
    Property acquired from a decedent is treated as if the 
property had been acquired by gift. Thus, the character of gain 
on the sale of property received from a decedent's estate is 
carried over to the heir. For example, real estate that has 
been depreciated and would be subject to recapture if sold by 
the decedent will be subject to recapture if sold by the heir.
            Property to which the modified carryover basis rules apply
    The modified carryover basis rules apply to property 
acquired from the decedent. Property acquired from the decedent 
is: (1) property acquired by bequest, devise, or inheritance, 
(2) property acquired by the decedent's estate from the 
decedent, (3) property transferred by the decedent during his 
or her lifetime in trust to pay the income for life to or on 
the order or direction of the decedent, with the right reserved 
to the decedent at all times before his death to revoke the 
trust,\61\ (4) property transferred by the decedent during his 
lifetime in trust to pay the income for life to or on the order 
or direction of the decedent with the right reserved to the 
decedent at all times before his death to make any change to 
the enjoyment thereof through the exercise of a power to alter, 
amend, or terminate the trust,\62\ (5) property passing from 
the decedent by reason of the decedent's death to the extent 
such property passed without consideration (e.g., property held 
as joint tenants with right of survivorship or as tenants by 
the entireties), and (6) the surviving spouse's one-half share 
of certain community property held by the decedent and the 
surviving spouse as community property.
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    \61\ This is the same property the basis of which is stepped up to 
date of death fair market value under prior law section 1014(b)(2).
    \62\ This is the same property the basis of which is stepped up to 
date of death fair market value under prior-law section 1014(b)(3).
---------------------------------------------------------------------------
            Basis increase for certain property
    Amount of basis increase.--The provision allows an executor 
to increase (i.e., step up) the basis in assets owned by the 
decedent and acquired by the beneficiaries at death. Under this 
rule, each decedent's estate generally is permitted to increase 
(i.e., step up) the basis of assets transferred by up to a 
total of $1.3 million. The $1.3 million is increased by the 
amount of unused capital losses, net operating losses, and 
certain ``built-in'' losses of the decedent. In addition, the 
basis of property transferred to a surviving spouse can be 
increased by an additional $3 million. Thus, the basis of 
property transferred to surviving spouses can be increased by a 
total of $4.3 million. Nonresidents who are not U.S. citizens 
will be allowed to increase the basis of property by up to 
$60,000. The $60,000, $1.3 million, and $3 million amounts are 
adjusted annually for inflation occurring after 2010.
    Property eligible for basis increase.--In general, the 
basis of property may be increased above the decedent's 
adjusted basis in that property only if the property is owned, 
or is treated as owned, by the decedent at the time of the 
decedent's death. In the case of property held as joint tenants 
or tenants by the entireties with the surviving spouse, one-
half of the property is treated having been owned by the 
decedent and is thus eligible for the basis increase. In the 
case of property held jointly with a person other than the 
surviving spouse, the portion of the property attributable to 
the decedent's consideration furnished is treated has having 
been owned by the decedent and will be eligible for a basis 
increase. The decedent also is treated as the owner of property 
(which will be eligible for a basis increase) if the property 
was transferred by the decedent during his lifetime to a 
revocable trust that pays all of its income during the 
decedent's life to the decedent or at the direction of the 
decedent. The decedent also is treated as having owned the 
surviving spouse's one-half share of community property (which 
will be eligible for a basis increase) if at least one-half of 
the property was owned by, and acquired from, the decedent.\63\ 
The decedent shall not, however, be treated as owning any 
property solely by reason of holding a power of appointment 
with respect to such property.
---------------------------------------------------------------------------
    \63\ Thus, similar to the prior-law rule in section 1014(b)(6), 
both the decedent's and the surviving spouse's share of community 
property could be eligible for a basis increase.
---------------------------------------------------------------------------
    Property not eligible for a basis increase includes: (1) 
property that was acquired by the decedent by gift (other than 
from his or her spouse) during the three-year period ending on 
the date of the decedent's death; (2) property that constitutes 
a right to receive income in respect of a decedent; (3) stock 
or securities of a foreign personal holding company; (4) stock 
of a domestic international sales corporation (or former 
domestic international sales corporation); (5) stock of a 
foreign investment company; and (6) stock of a passive foreign 
investment company (except for which a decedent shareholder had 
made a qualified electing fund election).
    Rules applicable to basis increase.--Basis increase will be 
allocable on an asset-by-asset basis (e.g., basis increase can 
be allocated to a share of stock or a block of stock). However, 
in no case can the basis of an asset be adjusted above its fair 
market value. If the amount of basis increase is less than the 
fair market value of assets whose bases are eligible to be 
increased under these rules, the executor will determine which 
assets and to what extent each asset receives a basis increase.

Reporting requirements

            Lifetime gifts
    A donor is required to provide to recipients of property by 
gift the information relating to the property (e.g. the fair 
market value and basis of property) that was reported on the 
donor's gift tax return with respect to such property.
            Transfers at death
    For transfers at death of non-cash assets in excess of $1.3 
million and for appreciated property received by a decedent via 
reportable gift within three years of death, the executor of 
the estate (or the trustee of a revocable trust) would report 
to the IRS:
           The name and taxpayer identification number 
        of the recipient of the property,
           An accurate description of the property,
           The adjusted basis of the property in the 
        hands of the decedent and its fair market value at the 
        time of death,
           The decedent's holding period for the 
        property,
           Sufficient information to determine whether 
        any gain on the sale of the property would be treated 
        as ordinary income,
           The amount of basis increase allocated to 
        the property, and
           Any other information as the Treasury 
        Secretary may prescribe.
            Penalties for failure to comply with the reporting 
                    requirements
    Any donor required to provide to recipients of property by 
gift the information relating to the property that was reported 
on the donor's gift tax return (e.g., the fair market value and 
basis of property) with respect to such property who fails to 
do so is liable for a penalty of $50 for each failure to report 
such information to a donee.
    Any person required to report to the IRS transfers at death 
of non-cash assets in excess of $1.3 million in value who fails 
to do so is liable for a penalty of $10,000 for the failure to 
report such information. Any person required to report to the 
IRS the receipt by a decedent of appreciated property acquired 
by the decedent within three years of death for which a gift 
tax return was required to have been filed by the donor who 
fails to do so is liable for a penalty of $500 for the failure 
to report such information to the IRS. There also is a penalty 
of $50 for each failure to report such information to a 
beneficiary.
    No penalty is imposed with respect to any failure that is 
due to reasonable cause. If any failure to report to the IRS or 
a beneficiary under EGTRRA is due to intentional disregard of 
the rules, then the penalty is five percent of the fair market 
value of the property for which reporting was required, 
determined at the date of the decedent's death (for property 
passing at death) or determined at the time of gift (for a 
lifetime gift).

Certain tax benefits extending past the date for repeal of the estate 
        tax

            In general
    Prior to repeal of the estate tax, many estates may have 
claimed certain estate tax benefits which, upon certain events, 
may trigger a recapture tax. Because repeal of the estate tax 
is effective for decedents dying after December 31, 2010, these 
estate tax recapture provisions will continue to apply to 
estates of decedents dying before January 1, 2011.
    There will be (1) an additional estate tax for those with a 
retained development right with respect to property for which a 
conservation easement was claimed, (2) an additional estate tax 
imposed under the special-use valuation rules, (3) an 
additional tax imposed under the qualified family-owned 
business deduction rules, and (4) an acceleration of tax under 
the installment payment of estate tax provisions.
    There will also be an estate tax imposed on (1) any 
distribution prior to January 1, 2021, from a qualified 
domestic trust before the date of the death of the noncitizen 
surviving spouse and (2) the value of the property remaining in 
a qualified domestic trust on the date of death of the 
noncitizen surviving spouse if such surviving spouse dies 
before January 1, 2010.
            Qualified conservation easements
    A donor may have retained a development right in the 
conveyance of a conservation easement that qualified for the 
estate tax exclusion. Those with an interest in the land may 
later execute an agreement to extinguish the right. If an 
agreement to extinguish development rights is not entered into 
within the earlier of (1) two years after the date of the 
decedent's death or (2) the date of the sale of such land 
subject to the conservation easement, then those with an 
interest in the land are personally liable for an additional 
tax. This provision is retained after repeal of the estate tax, 
which will ensure that those persons with an interest in the 
land who fail to execute the agreement remain liable for any 
additional tax which may be due after repeal.
            Special-use valuation
    Property may have qualified for special-use valuation prior 
to repeal of the estate tax. If such property ceases to qualify 
for special-use valuation, for example, because an heir ceases 
to use the property in its qualified use within 10 years of the 
decedent's death, then the estate tax benefit is required to be 
recaptured. The recapture provision is retained after repeal of 
the estate tax, which will ensure that those estates that 
claimed this benefit prior to repeal of the estate tax will be 
subject to recapture if a disqualifying event occurs after 
repeal.
            Qualified family-owned business deduction
    Property may have qualified for the family-owned business 
deduction prior to repeal of the estate tax. If such property 
ceases to qualify for the family-owned business deduction, for 
example, because an heir ceases to use the property in its 
qualified use within 10 years of the decedent's death, then the 
estate-tax benefit is required to be recaptured. The recapture 
provision is retained after repeal of the estate tax, which 
will ensure that those estates that claimed this benefit prior 
to repeal of the estate tax would be subject to recapture if a 
disqualifying event occurs after repeal.
            Installment payment of estate tax for estates with an 
                    interest in a closely-held business
    The present and prior-law installment payment rules are 
retained so that those estates that entered into an installment 
payment arrangement prior to repeal of the estate tax will 
continue to make their payments past the date for repeal. A 
more complete description of the present and prior law 
installment payment rules is included in the discussion of 
secs. 571 and 572 of EGTRRA, below.
    If more than 50 percent of the value of the closely-held 
business is distributed, sold, exchanged, or otherwise disposed 
of, the unpaid portion of the tax payable in installments must 
be paid upon notice and demand from the Treasury Secretary. 
This rule is retained after repeal of the estate tax, which 
will ensure that such dispositions that occur after repeal of 
the estate tax will continue to subject the estate to the 
unpaid portion of the tax upon notice and demand.

Transfers to foreign trusts, estates, and nonresidents who are not U.S. 
        citizens

    The prior-law rule providing that transfers by a U.S. 
person to a foreign trust or estate generally is treated as a 
sale or exchange is expanded. Under EGTRRA, beginning in 2010, 
a transfer by a U.S. person's estate (i.e., by a U.S. person at 
death) to a nonresident who is not a U.S. citizen is treated as 
a sale or exchange of the property for an amount equal to the 
fair market value of the transferred property. The amount of 
gain that must be recognized by the transferor is equal to the 
excess of the fair market value of the property transferred 
over the adjusted basis of such property in the hands of the 
transferor.

Transfers of property in satisfaction of a pecuniary bequest

    Under EGTRRA, gain or loss on the transfer of property in 
satisfaction of a pecuniary bequest is recognized only to the 
extent that the fair market value of the property at the time 
of the transfer exceeds the fair market value of the property 
on the date of the decedent's death (not the property's 
carryover basis).

Transfer of property subject to a liability

    EGTRRA clarifies that gain is not recognized at the time of 
death when the estate or heir acquires from the decedent 
property subject to a liability that is greater than the 
decedent's basis in the property. Similarly, no gain is 
recognized by the estate on the distribution of such property 
to a beneficiary of the estate by reason of the liability.

Income tax exclusion for the gain on the sale of a principal residence

    Under EGTRRA, the income tax exclusion of up to $250,000 of 
gain on the sale of a principal residence is extended to 
estates and heirs. Under the provision, if the decedent's 
estate or an heir sells the decedent's principal residence, 
$250,000 of gain can be excluded on the sale of the residence, 
provided the decedent used the property as a principal 
residence for two or more years during the five-year period 
prior to the sale. In addition, if an heir occupies the 
property as a principal residence, the decedent's period of 
ownership and occupancy of the property as a principal 
residence can be added to the heir's subsequent ownership and 
occupancy in determining whether the property was owned and 
occupied for two years as a principal residence.
    The income tax exclusion for the gain on the sale of a 
principal residence also applies to property sold by a trust 
that was a qualified revocable trust under section 645 of the 
Code immediately prior to the decedent's death. The decedent's 
period of occupancy of the property as a principal residence 
can be added to an heir's subsequent ownership and occupancy in 
determining whether the property was owned and occupied for two 
years as a principal residence, regardless of whether the 
residence was owned by such trust during the decedent's 
occupancy.

Excise tax on nonexempt trusts

    Under EGTRRA, split-interest trusts are subject to certain 
restrictions that are applicable to private foundations if an 
income tax charitable deduction, including an income tax 
charitable deduction by an estate or trust, was allowed with 
respect to transfers to the trust.\64\
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    \64\ Text of footnote intentionally deleted.
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                             Effective Date

    The estate and gift rate reductions, increases in the 
estate tax unified credit exemption equivalent amounts and 
generation-skipping transfer tax exemption amount, and 
reductions in and repeal of the state death tax credit are 
phased-in over time, beginning with estates of decedents dying 
and gifts and generation-skipping transfers after December 31, 
2001. The repeal of the qualified family-owned business 
deduction is effective for estates of decedents dying after 
December 31, 2003.
    The estate and generation-skipping transfer taxes are 
repealed, and the carryover basis regime takes effect for 
estates of decedents dying and generation-skipping transfers 
after December 31, 2009. The provisions relating to recognition 
of gain on transfers by the estate of a U.S. person (i.e., at 
death) to nonresidents who are not U.S. citizens is effective 
for transfers made after December 31, 2009.
    The top gift tax rate will be the top otherwise applicable 
individual income tax rate, and transfers to trusts generally 
will be treated as a taxable gift unless the trust is treated 
as wholly owned by the donor or the donor's spouse, effective 
for gifts made after December 31, 2009.
    An estate tax on distributions made from a qualified 
domestic trust before the date of the death of the surviving 
spouse will no longer apply for distributions made after 
December 31, 2020. An estate tax on the value of property 
remaining in a qualified domestic trust on the date of death of 
the surviving spouse will no longer apply after December 31, 
2009.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
revenues by $6,383 million in 2003, $5,031 million in 2004, 
$7,054 million in 2005, $4,051 million in 2006, $9,695 million 
in 2007, $11,862 million in 2008, $12,701 million in 2009, 
$23,036 million in 2010, and $53,422 million in 2011.

 B. Expand Estate Tax Rule for Conservation Easements (sec. 551 of the 
                     Act and sec. 2031 of the Code)


                         Present and Prior Law


In general

    Under present and prior law, an executor can elect to 
exclude from the taxable estate 40 percent of the value of any 
land subject to a qualified conservation easement, up to a 
maximum exclusion of $100,000 in 1998, $200,000 in 1999, 
$300,000 in 2000, $400,000 in 2001, and $500,000 in 2002 and 
thereafter (section 2031(c)). The exclusion percentage is 
reduced by 2 percentage points for each percentage point (or 
fraction thereof) by which the value of the qualified 
conservation easement is less than 30 percent of the value of 
the land (determined without regard to the value of such 
easement and reduced by the value of any retained development 
right).
    Under prior law, a qualified conservation easement was one 
that met the following requirements: (1) the land was located 
within 25 miles of a metropolitan area (as defined by the 
Office of Management and Budget) or a national park or 
wilderness area, or within 10 miles of an Urban National Forest 
(as designated by the Forest Service of the U.S. Department of 
Agriculture); (2) the land had been owned by the decedent or a 
member of the decedent's family at all times during the three-
year period ending on the date of the decedent's death; and (3) 
a qualified conservation contribution (within the meaning of 
section 170(h)) of a qualified real property interest (as 
generally defined in section 170(h)(2)(C)) was granted by the 
decedent or a member of his or her family. Under present and 
prior law, preservation of a historically important land area 
or a certified historic structure does not qualify as a 
conservation purpose.
    Under present and prior law, in order to qualify for the 
exclusion, a qualifying easement must have been granted by the 
decedent, a member of the decedent's family, the executor of 
the decedent's estate, or the trustee of a trust holding the 
land, no later than the date of the election. To the extent 
that the value of such land is excluded from the taxable 
estate, the basis of such land acquired at death is a carryover 
basis (i.e., the basis is not stepped-up to its fair market 
value at death). Property financed with acquisition 
indebtedness is eligible for this provision only to the extent 
of the net equity in the property.

Retained development rights

    Under present and prior law, the exclusion for land subject 
to a conservation easement does not apply to any development 
right retained by the donor in the conveyance of the 
conservation easement. An example of such a development right 
is the right to extract minerals from the land. If such 
development rights exist, then the value of the conservation 
easement must be reduced by the value of any retained 
development right.
    If the donor or holders of the development rights agree in 
writing to extinguish the development rights in the land, then 
the value of the easement need not be reduced by the 
development rights. In such case, those persons with an 
interest in the land must execute the agreement no later than 
the earlier of (1) two years after the date of the decedent's 
death or (2) the date of the sale of such land subject to the 
conservation easement. If such agreement is not entered into 
within this time, then those with an interest in the land are 
personally liable for an additional tax, which is the amount of 
tax which would have been due on the retained development 
rights subject to the termination agreement.

                           Reasons for Change

    The Congress believed that expanding the availability of 
qualified conservation easements would further ease existing 
pressures to develop or sell environmentally significant land 
in order to raise funds to pay estate taxes and would, thereby, 
advance the preservation of such land. The Congress also 
believed it was appropriate to clarify the date for determining 
easement compliance.

                        Explanation of Provision

    EGTRRA expands the availability of qualified conservation 
easements by eliminating the requirement that the land be 
located within a certain distance from a metropolitan area, 
national park, wilderness area, or Urban National Forest. A 
qualified conservation easement may be claimed with respect to 
any land that is located in the United States or its 
possessions. The provision also clarifies that the date for 
determining easement compliance is the date on which the 
donation is made.

                             Effective Date

    The provisions are effective for estates of decedents dying 
after December 31, 2000.

                             Revenue Effect

    The provision is estimated to reduce fiscal year budget 
receipts by $3 million in 2002, $19 million in 2003, $28 
million in 2004, $29 million in 2005, $30 million in 2006, $32 
million in 2007, $34 million in 2008, $36 million in 2009, $39 
million in 2010, and $42 million in 2011.

            C. Modify Generation-Skipping Transfer Tax Rules


1. Deemed allocation of the generation-skipping transfer tax exemption 
        to lifetime transfers to trusts that are not direct skips (sec. 
        561 of the Act and sec. 2632 of the Code)

                         Present and Prior Law

    A generation-skipping transfer tax generally is imposed on 
transfers, either directly or through a trust or similar 
arrangement, to a ``skip person'' (i.e., a beneficiary in a 
generation more than one generation below that of the 
transferor). Transfers subject to the generation-skipping 
transfer tax include direct skips, taxable terminations, and 
taxable distributions. An exemption of $1 million (indexed 
beginning in 1999; the inflation-adjusted amount for 2001 was 
$1,060,000) is provided for each person making generation-
skipping transfers. The exemption can be allocated by a 
transferor (or his or her executor) to transferred property.
    A direct skip is any transfer subject to estate or gift tax 
of an interest in property to a skip person. A skip person may 
be a natural person or certain trusts. All persons assigned to 
the second or more remote generation below the transferor are 
skip persons (e.g., grandchildren and great-grandchildren). 
Trusts are skip persons if (1) all interests in the trust are 
held by skip persons, or (2) no person holds an interest in the 
trust and at no time after the transfer may a distribution 
(including distributions and terminations) be made to a non-
skip person.
    A taxable termination is a termination (by death, lapse of 
time, release of power, or otherwise) of an interest in 
property held in trust unless, immediately after such 
termination, a non-skip person has an interest in the property, 
or unless at no time after the termination may a distribution 
(including a distribution upon termination) be made from the 
trust to a skip person. A taxable distribution is a 
distribution from a trust to a skip person (other than a 
taxable termination or direct skip).
    The tax rate on generation-skipping transfers is a flat 
rate of tax equal to the maximum estate and gift tax rate in 
effect at the time of the transfer (55 percent under prior law) 
multiplied by the ``inclusion ratio.'' The inclusion ratio with 
respect to any property transferred in a generation-skipping 
transfer indicates the amount of ``generation-skipping transfer 
tax exemption'' allocated to a trust. The allocation of 
generation-skipping transfer tax exemption reduces the 55-
percent tax rate on a generation-skipping transfer.
    If an individual makes a direct skip during his or her 
lifetime, any unused generation-skipping transfer tax exemption 
is automatically allocated to a direct skip to the extent 
necessary to make the inclusion ratio for such property equal 
to zero. An individual can elect out of the automatic 
allocation for lifetime direct skips.
    Under prior law, for lifetime transfers made to a trust 
that were not direct skips, the transferor had to allocate 
generation-skipping transfer tax exemption--the allocation was 
not automatic. If generation-skipping transfer tax exemption 
was allocated on a timely-filed gift tax return, then the 
portion of the trust which was exempt from generation-skipping 
transfer tax was based on the value of the property at the time 
of the transfer. If, however, the allocation was not made on a 
timely-filed gift tax return, then the portion of the trust 
which was exempt from generation-skipping transfer tax was 
based on the value of the property at the time the allocation 
of generation-skipping transfer tax exemption was made.
    Treasury Regulations \65\ further provides that any unused 
generation-skipping transfer tax exemption, which has not been 
allocated to transfers made during an individual's life, is 
automatically allocated on the due date for filing the 
decedent's estate tax return. Unused generation-skipping 
transfer tax exemption is allocated pro rata on the basis of 
the value of the property as finally determined for estate tax 
purposes, first to direct skips treated as occurring at the 
transferor's death. The balance, if any, of unused generation-
skipping transfer tax exemption is allocated pro rata, on the 
basis of the estate tax value of the nonexempt portion of the 
trust property (or in the case of trusts that are not included 
in the gross estate, on the basis of the date of death value of 
the trust) to trusts with respect to which a taxable 
termination may occur or from which a taxable distribution may 
be made.
---------------------------------------------------------------------------
    \65\ Treas. Reg. sec. 26.2632-1(d).
---------------------------------------------------------------------------

                           Reasons for Change

    The Congress recognized that there are situations where a 
taxpayer would desire allocation of generation-skipping 
transfer tax exemption, yet the taxpayer had missed allocating 
generation-skipping transfer tax exemption to an indirect skip, 
e.g., because the taxpayer or the taxpayer's advisor 
inadvertently omitted making the election on a timely-filed 
gift tax return or the taxpayer submitted a defective election. 
The Congress believed that automatic allocation is appropriate 
for transfers to a trust from which generation-skipping 
transfers are likely to occur.

                        Explanation of Provision

    EGTRRA provides that generation-skipping transfer tax 
exemption will be automatically allocated to transfers made 
during life that are ``indirect skips.'' An indirect skip is 
any transfer of property (that is not a direct skip) subject to 
the gift tax that is made to a generation-skipping transfer 
trust.
    A generation-skipping transfer trust is defined as a trust 
that could have a generation-skipping transfer with respect to 
the transferor (e.g., a taxable termination or taxable 
distribution), unless:
           The trust instrument provides that more than 
        25 percent of the trust corpus must be distributed to 
        or may be withdrawn by one or more individuals who are 
        non-skip persons (a) before the date that the 
        individual attains age 46, (b) on or before one or more 
        dates specified in the trust instrument that will occur 
        before the date that such individual attains age 46, or 
        (c) upon the occurrence of an event that, in accordance 
        with regulations prescribed by the Treasury Secretary, 
        may reasonably be expected to occur before the date 
        that such individual attains age 46;
           The trust instrument provides that more than 
        25 percent of the trust corpus must be distributed to 
        or may be withdrawn by one or more individuals who are 
        non-skip persons and who are living on the date of 
        death of another person identified in the instrument 
        (by name or by class) who is more than 10 years older 
        than such individuals;
           The trust instrument provides that, if one 
        or more individuals who are non-skip persons die on or 
        before a date or event described in clause (1) or (2), 
        more than 25 percent of the trust corpus either must be 
        distributed to the estate or estates of one or more of 
        such individuals or is subject to a general power of 
        appointment exercisable by one or more of such 
        individuals;
           The trust is a trust any portion of which 
        would be included in the gross estate of a non-skip 
        person (other than the transferor) if such person died 
        immediately after the transfer;
           The trust is a charitable lead annuity trust 
        or a charitable remainder annuity trust or a charitable 
        remainder unitrust; or
           The trust is a trust with respect to which a 
        deduction was allowed under section 2522 of the Code 
        for the amount of an interest in the form of the right 
        to receive annual payments of a fixed percentage of the 
        net fair market value of the trust property (determined 
        yearly) and which is required to pay principal to a 
        non-skip person if such person is alive when the yearly 
        payments for which the deduction was allowed terminate.
    Under EGTRRA, if any individual makes an indirect skip 
during the individual's lifetime, then any unused portion of 
such individual's generation-skipping transfer tax exemption is 
allocated to the property transferred to the extent necessary 
to produce the lowest possible inclusion ratio for such 
property.
    An individual can elect not to have the automatic 
allocation rules apply to an indirect skip, and such elections 
will be deemed timely if filed on a timely-filed gift tax 
return for the calendar year in which the transfer was made or 
deemed to have been made or on such later date or dates as may 
be prescribed by the Treasury Secretary. An individual can 
elect not to have the automatic allocation rules apply to any 
or all transfers made by such individual to a particular trust 
and can elect to treat any trust as a generation-skipping 
transfer trust with respect to any or all transfers made by the 
individual to such trust, and such election can be made on a 
timely-filed gift tax return for the calendar year for which 
the election is to become effective.

                             Effective Date

    The provision applies to transfers subject to estate or 
gift tax made after December 31, 2000, and to estate tax 
inclusion periods ending after December 31, 2000.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $1 million in 2002, $3 million in 2003, and 
$4 million annually in 2004 through 2011.

2. Retroactive allocation of the generation-skipping transfer tax 
        exemption (sec. 561 of the Act and sec. 2632 of the Code)

                         Present and Prior Law

    A taxable termination is a termination (by death, lapse of 
time, release of power, or otherwise) of an interest in 
property held in trust unless, immediately after such 
termination, a non-skip person has an interest in the property, 
or unless at no time after the termination may a distribution 
(including a distribution upon termination) be made from the 
trust to a skip person. A taxable distribution is a 
distribution from a trust to a skip person (other than a 
taxable termination or direct skip). If a transferor allocates 
generation-skipping transfer tax exemption to a trust prior to 
the taxable termination or taxable distribution, generation-
skipping transfer tax may be avoided.
    Under present and prior law, a transferor likely will not 
allocate generation-skipping transfer tax exemption to a trust 
that the transferor expects will benefit only non-skip persons. 
However, if a taxable termination occurs because, for example, 
the transferor's child unexpectedly dies such that the trust 
terminates in favor of the transferor's grandchild, and 
generation-skipping transfer tax exemption had not been 
allocated to the trust, then, under prior law, generation-
skipping transfer tax was due even if the transferor had unused 
generation-skipping transfer tax exemption.

                           Reasons for Change

    The Congress recognized that when a transferor does not 
expect the second generation (e.g., the transferor's child) to 
die before the termination of the trust, the transferor likely 
will not allocate generation-skipping transfer tax exemption to 
the transfer to the trust. If the transferor knew, however, 
that the transferor's child might predecease the transferor and 
that there could be a taxable termination as a result thereof, 
the transferor likely would have allocated generation-skipping 
transfer tax exemption at the time of the transfer to the 
trust. The Congress believed it was appropriate to provide that 
when there is an unnatural order of death (e.g., when the 
second generation dies before the first generation transferor), 
the transferor can allocate generation-skipping transfer tax 
exemption retroactively to the date of the respective transfer 
to the trust.

                        Explanation of Provision

    EGTRRA provides that generation-skipping transfer tax 
exemption can be allocated retroactively when there is an 
unnatural order of death. If a lineal descendant of the 
transferor predeceases the transferor, then the transferor can 
allocate any unused generation-skipping transfer exemption to 
any previous transfer or transfers to the trust on a 
chronological basis. EGTRRA allows a transferor to 
retroactively allocate generation-skipping transfer exemption 
to a trust where a beneficiary: (a) is a non-skip person, (b) 
is a lineal descendant of the transferor's grandparent or a 
grandparent of the transferor's spouse, (c) is a generation 
younger than the generation of the transferor, and (d) dies 
before the transferor. Exemption is allocated under this rule 
retroactively, and the applicable fraction and inclusion ratio 
would be determined based on the value of the property on the 
date that the property was transferred to trust.

                             Effective Date

    The provision applies to deaths of non-skip persons 
occurring after December 31, 2000.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $1 million in 2002, $4 million in 2003, and 
$6 million annually in 2004 through 2011. This estimate 
includes the combined revenue effects related to this provision 
and the provisions relating to the severing of trusts holding 
property having an inclusion ratio greater than zero, the 
modification of certain valuation rules, the relief from late 
elections, and the provision relating to substantial 
compliance.

3. Severing of trusts holding property having an inclusion ratio of 
        greater than zero (sec. 562 of the Act and sec. 2642 of the 
        Code)

                         Present and Prior Law

    A generation-skipping transfer tax generally is imposed on 
transfers, either directly or through a trust or similar 
arrangement, to a ``skip person'' (i.e., a beneficiary in a 
generation more than one generation below that of the 
transferor). Transfers subject to the generation-skipping 
transfer tax include direct skips, taxable terminations, and 
taxable distributions. An exemption of $1 million (indexed 
beginning in 1999; the inflation-adjusted amount for 2001 was 
$1,060,000) is provided for each person making generation-
skipping transfers. The exemption can be allocated by a 
transferor (or his or her executor) to transferred property.
    If the value of transferred property exceeds the amount of 
the generation-skipping transfer tax exemption allocated to 
that property, then the generation-skipping transfer tax 
generally is determined by multiplying a flat tax rate equal to 
the highest estate tax rate (which is 55 percent for 2001) by 
the ``inclusion ratio'' and the value of the taxable property 
at the time of the taxable event. The ``inclusion ratio'' is 
the number one minus the ``applicable fraction.'' The 
applicable fraction is a fraction calculated by dividing the 
amount of the generation-skipping transfer tax exemption 
allocated to the property by the value of the property.
    Under Treasury regulations \66\ a trust may be severed into 
two or more trusts (e.g., one with an inclusion ratio of zero 
and one with an inclusion ratio of one) only if (1) the trust 
is severed according to a direction in the governing instrument 
or (2) the trust is severed pursuant to the trustee's 
discretionary powers, but only if certain other conditions are 
satisfied (e.g., the severance occurs or a reformation 
proceeding begins before the estate tax return is due). Under 
prior law, pursuant to Treasury regulations, a trustee could 
not establish inclusion ratios of zero and one by severing a 
trust that was subject to the generation-skipping transfer tax 
after the trust had been created.
---------------------------------------------------------------------------
    \66\ Treas. Reg. sec. 26.2654-1(b).
---------------------------------------------------------------------------

                           Reasons for Change

    The Congress recognized that complexity could be reduced if 
a generation-skipping transfer trust is treated as two separate 
trusts for generation-skipping transfer tax purposes--one with 
an inclusion ratio of zero and one with an inclusion ratio of 
one. It was possible to achieve this result by drafting complex 
documents in order to meet the specific requirements of 
severance. The Congress believed that it was appropriate to 
make the rules regarding severance less burdensome and less 
complex.

                        Explanation of Provision

    The provision provides that a trust can be severed in a 
``qualified severance.'' A qualified severance is defined as 
the division of a single trust and the creation of two or more 
trusts if: (1) the single trust was divided on a fractional 
basis, and (2) the terms of the new trusts, in the aggregate, 
provide for the same succession of interests of beneficiaries 
as are provided in the original trust. If a trust has an 
inclusion ratio of greater than zero and less than one, a 
severance is a qualified severance only if the single trust is 
divided into two trusts, one of which receives a fractional 
share of the total value of all trust assets equal to the 
applicable fraction of the single trust immediately before the 
severance. In such case, the trust receiving such fractional 
share shall have an inclusion ratio of zero and the other trust 
shall have an inclusion ratio of one. Under EGTRRA, a trustee 
may elect to sever a trust in a qualified severance at any 
time.

                             Effective Date

    The provision is effective for severances of trusts 
occurring after December 31, 2000.

                             Revenue Effect

    The estimated revenue effect of this provision is included 
in the estimates for the retroactive allocation of the 
generation-skipping tax exemption.

4. Modification of certain valuation rules (sec. 563 of the Act and 
        sec. 2642 of the Code)

                         Present and Prior Law

    Under present and prior law, the inclusion ratio is 
determined using gift tax values for allocations of generation-
skipping transfer tax exemption made on timely filed gift tax 
returns. The inclusion ratio generally is determined using 
estate tax values for allocations of generation-skipping 
transfer tax exemption made to transfers at death. Treasury 
regulations \67\ provides that, with respect to taxable 
terminations and taxable distributions, the inclusion ratio 
becomes final on the later of the period of assessment with 
respect to the first transfer using the inclusion ratio or the 
period for assessing the estate tax with respect to the 
transferor's estate.
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    \67\ Treas. Reg. sec. 26.2642-5(b).
---------------------------------------------------------------------------

                           Reasons for Change

    The Congress believed it was appropriate to clarify the 
valuation rules relating to timely and automatic allocations of 
generation-skipping transfer tax exemption.

                        Explanation of Provision

    EGTRRA provides that in connection with timely and 
automatic allocations of generation-skipping transfer tax 
exemption, the value of the property for purposes of 
determining the inclusion ratio shall be its finally determined 
gift tax value or estate tax value depending on the 
circumstances of the transfer. In the case of a generation-
skipping transfer tax exemption allocation deemed to be made at 
the conclusion of an estate tax inclusion period, the value for 
purposes of determining the inclusion ratio shall be its value 
at that time.

                             Effective Date

    The provision is effective for transfers subject to estate 
or gift tax made after December 31, 2000.

                             Revenue Effect

    The estimated revenue effect of this provision is included 
in the estimates for the retroactive allocation of the 
generation-skipping tax exemption.

5. Relief from late elections (sec. 564 of the Act and sec. 2642 of the 
        Code)

                         Present and Prior Law

    Under present and prior law, an election to allocate 
generation-skipping transfer tax exemption to a specific 
transfer may be made at any time up to the time for filing the 
transferor's estate tax return. If an allocation is made on a 
gift tax return filed timely with respect to the transfer to 
trust, then the value on the date of transfer to the trust is 
used for determining generation-skipping transfer tax exemption 
allocation. However, if the allocation relating to a specific 
transfer is not made on a timely-filed gift tax return, then 
the value on the date of allocation must be used. Under prior 
law, there was no statutory provision allowing relief for an 
inadvertent failure to make an election on a timely-filed gift 
tax return to allocate generation-skipping transfer tax 
exemption.

                           Reasons for Change

    The Congress believed it was appropriate for the Treasury 
Secretary to grant extensions of time to make an election to 
allocate generation-skipping transfer tax exemption and to 
grant exceptions to the statutory time requirement in 
appropriate circumstances, e.g., when the taxpayer intended to 
allocate generation-skipping transfer tax exemption and failure 
to timely allocate generation-skipping transfer tax exemption 
was inadvertent.

                        Explanation of Provision

    Under EGTRRA, the Treasury Secretary is authorized and 
directed to grant extensions of time to make the election to 
allocate generation-skipping transfer tax exemption and to 
grant exceptions to the time requirement, without regard to 
whether any period of limitations has expired. If such relief 
is granted, then the gift tax or estate tax value of the 
transfer to trust would be used for determining generation-
skipping transfer tax exemption allocation.
    In determining whether to grant relief for late elections, 
the Treasury Secretary is directed to consider all relevant 
circumstances, including evidence of intent contained in the 
trust instrument or instrument of transfer and such other 
factors as the Treasury Secretary deems relevant. For purposes 
of determining whether to grant relief, the time for making the 
allocation (or election) is treated as if not expressly 
prescribed by statute.

                             Effective Date

    The provision applies to requests pending on, or filed 
after, December 31, 2000. No inference is intended with respect 
to the availability of relief from late elections prior to the 
effective date of the provision.

                             Revenue Effect

    The estimated revenue effect of this provision is included 
in the estimates for the retroactive allocation of the 
generation-skipping tax exemption.

6. Substantial compliance (sec. 564 of the Act and sec. 2642 of the 
        Code)

                         Present and Prior Law

    Under prior law, there was no statutory rule which provided 
that substantial compliance with the statutory and regulatory 
requirements for allocating generation-skipping transfer tax 
exemption would suffice to establish that generation-skipping 
transfer tax exemption was allocated to a particular transfer 
or trust.

                           Reasons for Change

    The Congress recognized that the rules and regulations 
regarding the allocation of the generation-skipping transfer 
tax are complex. Thus, it is often difficult for taxpayers to 
comply with the technical requirement for making a proper 
election to allocate generation-skipping transfer tax 
exemption. The Congress therefore believed it was appropriate 
to provide that generation-skipping transfer tax exemption will 
be allocated when a taxpayer substantially complies with the 
rules and regulations for allocating generation skipping 
transfer tax exemption.

                        Explanation of Provision

    EGTRRA provides that substantial compliance with the 
statutory and regulatory requirements for allocating 
generation-skipping transfer tax exemption will suffice to 
establish that generation-skipping transfer tax exemption was 
allocated to a particular transfer or a particular trust. If a 
taxpayer demonstrates substantial compliance, then so much of 
the transferor's unused generation-skipping transfer tax 
exemption will be allocated to the extent it produces the 
lowest possible inclusion ratio. In determining whether there 
has been substantial compliance, all relevant circumstances 
will be considered, including evidence of intent contained in 
the trust instrument or instrument of transfer and such other 
factors as the Treasury Secretary deems appropriate.

                             Effective Date

    The provision applies to transfers subject to estate or 
gift tax made after December 31, 2000. No inference is intended 
with respect to the availability of a rule of substantial 
compliance prior to the effective date of the provision.

                             Revenue Effect

    The estimated revenue effect of this provision is included 
in the estimates for the retroactive allocation of the 
generation-skipping tax exemption.

D. Expand and Modify Availability of Installment Payment of Estate Tax 
for Closely-Held Businesses (secs. 571, 572 and 573 of the Act and sec. 
                           6166 of the Code)


                         Present and Prior Law

    Under present and prior law, the estate tax generally is 
due within nine months of a decedent's death. However, an 
executor generally may elect to pay estate tax attributable to 
an interest in a closely-held business in two or more 
installments (but no more than 10). An estate is eligible for 
payment of estate tax in installments if the value of the 
decedent's interest in a closely-held business exceeds 35 
percent of the decedent's adjusted gross estate (i.e., the 
gross estate less certain deductions). If the election is made, 
the estate may defer payment of principal and pay only interest 
for the first five years, followed by up to 10 annual 
installments of principal and interest. This provision 
effectively extends the time for paying estate tax by 14 years 
from the original due date of the estate tax.\68\ A special 
two-percent interest rate applies to the amount of deferred 
estate tax attributable to the first $1 million (adjusted 
annually for inflation occurring after 1998; the inflation-
adjusted amount for 2001 is $1,060,000) in taxable value of a 
closely-held business. The interest rate applicable to the 
amount of estate tax attributable to the taxable value of the 
closely-held business in excess of $1 million is equal to 45 
percent of the rate applicable to underpayments of tax under 
section 6621 of the Code (i.e., 45 percent of the Federal 
short-term rate plus 3 percentage points). Interest paid on 
deferred estate taxes is not deductible for estate or income 
tax purposes.
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    \68\ For example, assume estate tax is due in 2001. If interest 
only is paid each year for the first five years (2001 through 2005), 
and if 10 installments of both principal and interest are paid for the 
10 years thereafter (2006 through 2015), then payment of the estate tax 
would be extended by 14 years from the original due date of 2001.
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    Under prior law, for purposes of these rules, an interest 
in a closely-held business was: (1) an interest as a proprietor 
in a sole proprietorship, (2) an interest as a partner in a 
partnership carrying on a trade or business if 20 percent or 
more of the total capital interest of such partnership was 
included in the decedent's gross estate or the partnership had 
15 or fewer partners, and (3) stock in a corporation carrying 
on a trade or business if 20 percent or more of the value of 
the voting stock of the corporation was included in the 
decedent's gross estate or such corporation had 15 or fewer 
shareholders.
    Under present and prior law, the decedent may own the 
interest directly or, in certain cases, ownership may be 
indirect, through a holding company. If ownership is through a 
holding company, the stock must be non-readily tradable. If 
stock in a holding company is treated as business company stock 
for purposes of the installment payment provisions, the five-
year deferral for principal and the 2-percent interest rate do 
not apply. The value of any interest in a closely-held business 
does not include the value of that portion of such interest 
attributable to passive assets held by such business.

                           Reasons for Change

    The Congress found that the prior-law installment payment 
of estate tax provisions were restrictive and prevented estates 
of decedents who otherwise held an interest in a closely-held 
business at death from claiming the benefits of installment 
payment of the estate tax. The Congress wished to expand and 
modify availability of the provision to enable more estates of 
decedents with an interest in a closely-held business to claim 
the benefits of installment payment of estate tax.

                        Explanation of Provision

    EGTRRA expands the definition of a closely-held business 
for purposes of installment payment of estate tax. EGTRRA 
increases from 15 to 45 the number of partners in a partnership 
and shareholders in a corporation that is considered a closely-
held business in which a decedent held an interest, and thus 
will qualify the estate for installment payment of estate tax.
    EGTRRA also expands availability of the installment payment 
provisions by providing that an estate of a decedent with an 
interest in a qualifying lending and financing business is 
eligible for installment payment of the estate tax. EGTRRA 
provides that an estate with an interest in a qualifying 
lending and financing business that claims installment payment 
of estate tax must make installment payments of estate tax 
(which will include both principal and interest) relating to 
the interest in a qualifying lending and financing business 
over five years.
    EGTRRA clarifies that the installment payment provisions 
require that only the stock of holding companies, not that of 
operating subsidiaries, must be non-readily tradable in order 
to qualify for installment payment of the estate tax. EGTRRA 
provides that an estate with a qualifying property interest 
held through holding companies that claims installment payment 
of estate tax must make all installment payments of estate tax 
(which will include both principal and interest) relating to a 
qualifying property interest held through holding companies 
over five years.
    No inference is intended as to whether one or more of the 
specified activities of a qualified lending and financing 
business would be a trade or business eligible for installment 
payment of estate tax under prior law.

                             Effective Date

    The provision is effective for decedents dying after 
December 31, 2001.

                             Revenue Effect

    The provision to increase from 15 to 45 the number of 
partners a partnership or shareholders in a corporation 
eligible for installment payments of estate tax is estimated to 
reduce Federal fiscal year revenues by $285 million in 2003, 
$297 million in 2004, $330 million in 2005, $364 million in 
2006, $394 million in 2007, $383 million in 2008, $381 million 
in 2009, $371 million in 2010, and $358 million in 2011.
    The provision to expand the availability of installment 
payments of estate tax to qualified lending and finance 
business interest is estimated to reduce Federal fiscal year 
budget receipts by $103 million in 2003, $84 million in 2004, 
$64 million in 2005, $43 million in 2006, $21 million in 2007, 
$22 million in 2008, $24 million in 2009, $25 million in 2010, 
and $27 million in 2011.
    The provision clarifying the treatment of certain holding 
company stock is estimated to reduce Federal fiscal year budget 
receipts by $171 million in 2003, $140 million in 2004, $107 
million in 2005, $72 million in 2006, $34 million in 2007, $47 
million in 2008, $49 million in 2009, $42 million in 2010, and 
$45 million in 2011.

E. Waiver of Statute of Limitations for Refunds of Recapture of Estate 
        Tax (sec. 581 of the Act and sec. 2032A of the Code)\69\


                         Present and Prior Law

    For estate tax purposes, real property ordinarily must be 
included in a decedent's gross estate at its fair market value 
based upon its highest and best use. If certain requirements 
are met, however, family farms and real property used in other 
closely held businesses may be included in a decedent's estate 
at their current use value, rather than full fair market value 
(section 2032A). Under present and prior law, family farms and 
real property are given qualified use treatment even if a 
surviving spouse or lineal descendent of the decedent enter 
into a net cash lease on such property with their respective 
family members (section 2032A(c)(7)(E)).
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    \69\ This was a Senate floor amendment and was not described in 
EGTRRA's Conference Report (H.R. Rep. No. 107-84).
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                        Explanation of Provision

    If a refund or credit of any overpayment of tax resulting 
from the application of Code section 2032A(c)(7)(E) is barred 
by any law or rule of law, the refund or credit of such 
overpayment shall, nevertheless, be made or allowed if the 
taxpayer files a claim up until 1 year after the date of 
enactment of EGTRRA.

                             Effective Date

    This provision is effective on the date of enactment of 
EGTRRA for any time up until 1 year after such date of 
enactment.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $100 million in 2002 and $25 million in 
2003.

      VI. PENSION AND INDIVIDUAL RETIREMENT ARRANGEMENT PROVISIONS

A. Individual Retirement Arrangements (``IRAs'') (secs. 601-602 of the 
             Act and secs. 219, 408, and 408A of the Code)

                         Present and Prior Law

In general
    There are two general types of individual retirement 
arrangements (``IRAs'') under present and prior law: 
traditional IRAs, to which both deductible and nondeductible 
contributions may be made, and Roth IRAs. The Federal income 
tax rules regarding each type of IRA (and IRA contribution) 
differ.
Traditional IRAs
    Under present and prior law, an individual may make 
deductible contributions to an IRA up to the lesser of a dollar 
limit ($2,000 under prior law) or the individual's compensation 
if neither the individual nor the individual's spouse is an 
active participant in an employer-sponsored retirement plan. In 
the case of a married couple, deductible IRA contributions of 
up to the dollar limit can be made for each spouse (including, 
for example, a homemaker who does not work outside the home), 
if the combined compensation of both spouses is at least equal 
to the contributed amount. If the individual (or the 
individual's spouse) is an active participant in an employer-
sponsored retirement plan, the deduction limit is phased out 
for taxpayers with adjusted gross income (``AGI'') over certain 
levels for the taxable year.
    The AGI phase-out limits for taxpayers who are active 
participants in employer-sponsored plans are as follows.


             Taxable years beginning in:                Phase-out range:

                            Single taxpayers

2001.................................................     $33,000-43,000
2002.................................................      34,000-44,000
2003.................................................      40,000-50,000
2004.................................................      45,000-55,000
2005 and thereafter..................................      50,000-60,000

                              Joint returns

2001.................................................     $53,000-63,000
2002.................................................      54,000-64,000
2003.................................................      60,000-70,000
2004.................................................      65,000-75,000
2005.................................................      70,000-80,000
2006.................................................      75,000-85,000
2007 and thereafter..................................    $80,000-100,000


    The AGI phase-out range for married taxpayers filing a 
separate return is $0 to $10,000.
    If the individual is not an active participant in an 
employer-sponsored retirement plan, but the individual's spouse 
is, the deduction limit is phased out for taxpayers with AGI 
between $150,000 and $160,000.
    To the extent an individual cannot or does not make 
deductible contributions to an IRA or contributions to a Roth 
IRA, the individual may make nondeductible contributions to a 
traditional IRA.
    Amounts held in a traditional IRA are includible in income 
when withdrawn (except to the extent the withdrawal is a return 
of nondeductible contributions). Includible amounts withdrawn 
prior to attainment of age 59\1/2\ are subject to an additional 
10-percent early withdrawal tax, unless the withdrawal is due 
to death or disability, is made in the form of certain periodic 
payments, is used to pay medical expenses in excess of 7.5 
percent of AGI, is used to purchase health insurance of an 
unemployed individual, is used for education expenses, or is 
used for first-time homebuyer expenses of up to $10,000.
Roth IRAs
    Individuals with AGI below certain levels may make 
nondeductible contributions to a Roth IRA. The maximum annual 
contribution that may be made to a Roth IRA is the lesser of a 
dollar limit ($2,000 under prior law) or the individual's 
compensation for the year. The contribution limit is reduced to 
the extent an individual makes contributions to any other IRA 
for the same taxable year. As under the rules relating to IRAs 
generally, a contribution of up to the dollar limit for each 
spouse may be made to a Roth IRA provided the combined 
compensation of the spouses is at least equal to the 
contributed amount. The maximum annual contribution that can be 
made to a Roth IRA is phased out for single individuals with 
AGI between $95,000 and $110,000 and for joint filers with AGI 
between $150,000 and $160,000.
    Taxpayers with modified AGI of $100,000 or less generally 
may convert a traditional IRA into a Roth IRA. The amount 
converted is includible in income as if a withdrawal had been 
made, except that the 10-percent early withdrawal tax does not 
apply and, if the conversion occurred in 1998, the income 
inclusion may be spread ratably over four years. Married 
taxpayers who file separate returns cannot convert a 
traditional IRA into a Roth IRA.
    Amounts held in a Roth IRA that are withdrawn as a 
qualified distribution are not includible in income, or subject 
to the additional 10-percent tax on early withdrawals. A 
qualified distribution is a distribution that: (1) is made 
after the five-taxable year period beginning with the first 
taxable year for which the individual made a contribution to a 
Roth IRA, and (2) is made after attainment of age 59\1/2\, on 
account of death or disability, or is made for first-time 
homebuyer expenses of up to $10,000.
    Distributions from a Roth IRA that are not qualified 
distributions are includible in income to the extent 
attributable to earnings, and subject to the 10-percent early 
withdrawal tax (unless an exception applies).\70\ The same 
exceptions to the early withdrawal tax that apply to IRAs apply 
to Roth IRAs.
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    \70\ Early distribution of converted amounts may also accelerate 
income inclusion of converted amounts that are taxable under the four-
year rule applicable to 1998 conversions.
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                           Reasons for Change

    The Congress was concerned about the low national savings 
rate, and that individuals may not be saving adequately for 
retirement. The prior-law IRA contribution limits had not been 
increased since 1981. The Congress believed that the limits 
should be raised in order to allow greater savings 
opportunities.
    The Congress understood that, for a variety of reasons, 
older individuals may not have been saving sufficiently for 
retirement. For example, some individuals, especially women, 
may have left the workforce temporarily in order to care for 
children. Such individuals may have missed retirement savings 
options that would have been available had they remained in the 
workforce.

                        Explanation of Provision


Increase in annual contribution limits

    EGTRRA increases the maximum annual dollar contribution 
limit for IRA contributions from $2,000 to $3,000 for 2002 
through 2004, $4,000 for 2005 through 2007, and $5,000 for 
2008. After 2008, the limit is adjusted annually for inflation 
in $500 increments.

Additional catch-up contributions

    EGTRRA provides that individuals who have attained age 50 
may make additional catch-up IRA contributions. The otherwise 
maximum contribution limit (before application of the AGI 
phase-out limits) for an individual who has attained age 50 
before the end of the taxable year is increased by $500 for 
2002 through 2005, and $1,000 for 2006 and thereafter.

Deemed IRAs under employer plans \71\

    EGTRRA provides that, if a qualified employer plan permits 
employees to make voluntary employee contributions to a 
separate account or annuity that: (1) is established under the 
plan, and (2) meets the requirements applicable to either 
traditional IRAs or Roth IRAs, then the separate account or 
annuity is deemed a traditional IRA or a Roth IRA, as 
applicable, for all purposes of the Code. For example, the 
reporting requirements applicable to IRAs apply. The deemed 
IRA, and contributions thereto, are not subject to the Code 
rules pertaining to the qualified employer plan. In addition, 
the deemed IRA, and contributions thereto, are not taken into 
account in applying such rules to any other contributions under 
the plan. The deemed IRA, and contributions thereto, are 
subject to the exclusive benefit, fiduciary duty, and 
administration and enforcement rules of the Employee Retirement 
Income Security Act of 1974 (``ERISA''), which are to be 
applied in a manner similar to their application to a 
simplified employee pension (a ``SEP''). The deemed IRA, and 
contributions thereto, are not subject to the ERISA reporting 
and disclosure, participation, vesting, funding, and 
enforcement requirements applicable to the eligible retirement 
plan.\72\ For purposes of the provision, a qualified employer 
plan is a qualified retirement plan (section 401(a)), a 
qualified annuity plan (section 403(a)), a tax-sheltered 
annuity (section 403(b)), or a governmental eligible deferred 
compensation plan (section 457).
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    \71\ A technical correction was enacted in section 411(i) of the 
Job Creation and Worker Assistance Act of 2002, described in Part Eight 
of this document, to clarify the plans to which the EGTRRA provision 
applies.
    \72\ EGTRRA does not specify the treatment of deemed IRAs for 
purposes other than the Code and ERISA.
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                             Effective Date

    These provisions are generally effective for taxable years 
beginning after December 31, 2001. The provision relating to 
deemed IRAs under employer plans is effective for plan years 
beginning after December 31, 2002.

                             Revenue Effect

    These provisions are estimated to reduce Federal fiscal 
year budget receipts by $437 million in 2002, $998 million in 
2003, $1,228 million in 2004, $1,869 million in 2005, $2,571 
million in 2006, $2,875 million in 2007, $3,400 million in 
2008, $4,028 million in 2009, $4,477 million in 2010, $3,215 
million in 2011, and $1,768 million in 2012.

                         B. Pension Provisions


1. Expanding coverage

            (a) Increase in benefit and contribution limits (sec. 611 
                    of the Act and secs. 401(a)(17), 401(c)(2), 402(g), 
                    408(p), 415 and 457 of the Code)

                         Present and Prior Law


In general

    Present and prior law imposes limits on contributions and 
benefits under qualified plans (section 415), the amount of 
compensation that may be taken into account under a plan for 
determining benefits (section 401(a)(17)), the amount of 
elective deferrals that an individual may make to a salary 
reduction plan or tax sheltered annuity (section 402(g)), and 
deferrals under an eligible deferred compensation plan of a 
tax-exempt organization or a State or local government (section 
457).

Limitations on contributions and benefits

    Under present and prior law, the limits on contributions 
and benefits under qualified plans are based on the type of 
plan. Under a defined contribution plan, the qualification 
rules limit the annual additions to the plan with respect to 
each plan participant to the lesser of: (1) 25 percent of 
compensation or (2) a certain dollar amount ($35,000 for 2001 
under prior law). Annual additions are the sum of employer 
contributions, employee contributions, and forfeitures with 
respect to an individual under all defined contribution plans 
of the same employer. Under prior law, the dollar limit was 
indexed for cost-of-living adjustments in $5,000 increments.
    Under a defined benefit plan, the maximum annual benefit 
payable at retirement is generally the lesser of: (1) 100 
percent of average compensation, or (2) a certain dollar amount 
($140,000 for 2001 under prior law). Under present and prior 
law, the dollar limit is adjusted for cost-of-living increases 
in $5,000 increments.
    Under prior law, in general, the dollar limit on annual 
benefits was reduced if benefits under the plan begin before 
the social security retirement age (currently, age 65) and 
increased if benefits begin after the social security 
retirement age.

Compensation limitation

    Under prior law, the annual compensation of each 
participant that could be taken into account for purposes of 
determining contributions and benefits under a plan, applying 
the deduction rules, and for nondiscrimination testing purposes 
was limited to $170,000 (for 2001), indexed for cost-of-living 
adjustments in $10,000 increments.
    In general, contributions to qualified plans and IRAs are 
based on compensation. For a self-employed individual, 
compensation generally means net earnings subject to self-
employment taxes (``SECA taxes''). Members of certain religious 
faiths may elect to be exempt from SECA taxes on religious 
grounds. Because the net earnings of such individuals are not 
subject to SECA taxes, these individuals are considered to have 
no compensation on which to base contributions to a retirement 
plan. Under an exception to this rule, net earnings of such 
individuals are treated as compensation for purposes of making 
contributions to an IRA.

Elective deferral limitations

    Under present and prior law, under certain salary reduction 
arrangements, an employee may elect to have the employer make 
payments as contributions to a plan on behalf of the employee, 
or to the employee directly in cash. Contributions made at the 
election of the employee are called elective deferrals.
    The maximum annual amount of elective deferrals that an 
individual may make to a qualified cash or deferred arrangement 
(a ``section 401(k) plan''), a tax-sheltered annuity (``section 
403(b) annuity'') or a salary reduction simplified employee 
pension plan (``SEP'') is subject to a dollar limit ($10,500 
for 2001 under prior law). The maximum annual amount of 
elective deferrals that an individual may make to a SIMPLE plan 
is also subject to a dollar limit ($6,500 for 2001 under prior 
law). Under present and prior law, these limits are indexed for 
inflation in $500 increments.

Section 457 plans

    The maximum annual deferral under a deferred compensation 
plan of a State or local government or a tax-exempt 
organization (a ``section 457 plan'') is the lesser of (1) a 
dollar amount ($8,500 for 2001 under prior law) or (2) 33\1/3\ 
percent of compensation. Under present and prior law, the 
dollar limit is increased for inflation in $500 increments. 
Under a special catch-up rule, the section 457 plan may provide 
that, for one or more of the participant's last three years 
before retirement, the otherwise applicable limit is increased 
to the lesser of (1) a dollar amount ($15,000 under prior law) 
or (2) the sum of the otherwise applicable limit for the year 
plus the amount by which the limit applicable in preceding 
years of participation exceeded the deferrals for that year.

                           Reasons for Change

    The tax benefits provided under qualified plans are a 
departure from the normally applicable income tax rules. The 
special tax benefits for qualified plans are generally 
justified on the ground that they serve an important social 
policy objective, i.e., the provision of retirement benefits to 
a broad group of employees. The limits on contributions and 
benefits, elective deferrals, and compensation that may be 
taken into account under a qualified plan all serve to limit 
the tax benefits associated with such plans. The level at which 
to place such limits involves a balancing of different policy 
objectives and a judgment as to what limits are most likely to 
best further policy goals.
    One of the factors that may influence the decision of an 
employer, particularly a small employer, to adopt a plan is the 
extent to which the owners of the business, the decision-
makers, or other highly compensated employees will benefit 
under the plan. The Congress believed that increasing the 
dollar limits on qualified plan contributions and benefits 
would encourage employers to establish qualified plans for 
their employees.
    The Congress understood that, in recent years, section 
401(k) plans have become increasingly more prevalent. The 
Congress believed it was important to increase the amount of 
employee elective deferrals allowed under such plans, and other 
plans that allow deferrals, to better enable plan participants 
to save for their retirement.

                        Explanation of Provision


Limits on contributions and benefits

    EGTRRA increases the $35,000 limit on annual additions to a 
defined contribution plan to $40,000.\73\ This amount is 
indexed in $1,000 increments for years after 2002.
---------------------------------------------------------------------------
    \73\ The 25 percent of compensation limitation is increased to 100 
percent of compensation under section 632 of EGTRRA.
---------------------------------------------------------------------------
    EGTRRA increases the $140,000 annual benefit limit under a 
defined benefit plan to $160,000. This amount is indexed in 
$5,000 increments (as under prior law) for years after 
2002.\74\ The dollar limit is reduced for benefit commencement 
before age 62 and increased for benefit commencement after age 
65.\75\ In adopting rules regarding the application of the 
increase in the defined benefit plan limits under EGTRRA, it is 
intended that the Secretary will apply rules similar to those 
adopted in Notice 99-44 regarding benefit increases due to the 
repeal of the combined plan limit under former section 
415(e).75A Thus, for example, a defined benefit plan 
could provide for benefit increases to reflect the provisions 
of EGTRRA for a current or former employee who has commenced 
benefits under the plan prior to the effective date of the 
provision if the employee or former employee has an accrued 
benefit under the plan (other than an accrued benefit resulting 
from a benefit increase solely as a result of the increases in 
the section 415 limits under the provision). As under the 
notice, the maximum amount of permitted increase is generally 
the amount that could have been provided had the provisions of 
EGTRRA been in effect at the time of the commencement of 
benefit. In no case may benefits reflect increases that could 
not be paid prior to the effective date because of the limits 
in effect under prior law. In addition, in no case may plan 
amendments providing increased benefits under the relevant 
provision of EGTRRA be effective prior to the effective date of 
the provision.
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    \74\ A technical correction was enacted in Section 411(j) of the 
Job Creation and Worker Assistance Act of 2002, described in Part Eight 
of this document, that made conforming changes to provisions relating 
to the dollar amounts used to determine eligibility to participate in a 
SEP and to determine the proper period for distributions from an 
employee stock ownership plan (``ESOP''), which are indexed using the 
same method. Section 3(b) of the Tax Technical Corrections Act of 2002, 
introduced on November 13, 2002, as H.R. 5713 in the House of 
Representatives and S. 3153 in the Senate, would clarify that the 
prior-law $5,000 rounding rule continues to apply for purposes of other 
Code provisions that refer to the method by which the limits on 
contributions and benefits are indexed and do not contain a specific 
rounding rule.
    \75\ Section 654 of EGTRRA modifies the defined benefit plan limits 
for multiemployer plans.
    \75A\ Rev. Rul. 2001-51, 2001-45 I.R.B. 427, provides guidance 
regarding the increased limits.
---------------------------------------------------------------------------

Compensation limitation

    EGTRRA increases the limit on compensation that may be 
taken into account under a plan to $200,000. This amount is 
indexed in $5,000 increments (as under prior law) for years 
after 2002. EGTRRA also amends the definition of compensation 
for purposes of all qualified plans and IRAs (including SIMPLE 
arrangements) to include an individual's net earnings that 
would be subject to SECA taxes but for the fact that the 
individual is covered by a religious exemption.

Elective deferral limitations

    EGTRRA increases the dollar limit on annual elective 
deferrals under section 401(k) plans, section 403(b) annuities 
and salary reduction SEPs to $11,000 in 2002. In 2003 and 
thereafter, the limits are increased in $1,000 annual 
increments until the limits reach $15,000 in 2006, with 
indexing in $500 increments thereafter. EGTRRA increases the 
maximum annual elective deferrals that may be made to a SIMPLE 
plan to $7,000 in 2002. In 2003 and thereafter, the SIMPLE plan 
deferral limit is increased in $1,000 annual increments until 
the limit reaches $10,000 in 2005. Beginning after 2005, the 
$10,000 dollar limit is indexed in $500 increments.

Section 457 plans

    EGTRRA increases the dollar limit on deferrals under a 
section 457 plan to conform to the elective deferral 
limitation. Thus, the limit is $11,000 in 2002, and is 
increased in $1,000 annual increments thereafter until the 
limit reaches $15,000 in 2006. The limit is indexed thereafter 
in $500 increments. The limit is twice the otherwise applicable 
dollar limit in the three years prior to retirement.\76\
---------------------------------------------------------------------------
    \76\ Section 632 of EGTRRA increases the 33-1/3 percentage of 
compensation limit to 100 percent.
---------------------------------------------------------------------------

                             Effective Date

    The provisions are generally effective for years beginning 
after December 31, 2001. The provisions relating to limits on 
benefits under a defined benefit plan are effective for years 
ending after December 31, 2001.\77\
---------------------------------------------------------------------------
    \77\ A technical correction was enacted in section 411(j) of the 
Job Creation and Worker Assistance Act of 2002, described in Part Eight 
of this document, to provide that in the case of a plan that, on June 
7, 2001 (the date of enactment of EGTRRA), incorporated the benefit 
limits by reference, the employer was permitted to amend such a plan by 
June 30, 2002, to reduce benefits to the level that applied before the 
enactment of EGTRRA without violating the anticutback rules that 
generally apply to plan amendments.
---------------------------------------------------------------------------

                             Revenue Effect

    The provisions are estimated to reduce Federal fiscal year 
budget receipts by $127 million in 2002, $371 million in 2003, 
$651 million in 2004, $875 million in 2005, $1,029 million in 
2006, $1,133 million in 2007, $1,196 million in 2008, $1,273 
million in 2009, $1,385 million in 2010, $677 million in 2011, 
and $358 million in 2012.
            (b) Plan loans for S corporation shareholders, partners, 
                    and sole proprietors (sec. 612 of the Act and sec. 
                    4975 of the Code)

                         Present and Prior Law

    The Internal Revenue Code prohibits certain transactions 
(``prohibited transactions'') between a qualified plan and a 
disqualified person in order to prevent persons with a close 
relationship to the qualified plan from using that relationship 
to the detriment of plan participants and beneficiaries.\78\ 
Certain types of transactions are exempted from the prohibited 
transaction rules, including loans from the plan to plan 
participants, if certain requirements are satisfied. In 
addition, the Secretary of Labor can grant an administrative 
exemption from the prohibited transaction rules if the 
Secretary finds the exemption is administratively feasible, in 
the interest of the plan and plan participants and 
beneficiaries, and protective of the rights of participants and 
beneficiaries of the plan. Pursuant to this exemption process, 
the Secretary of Labor grants exemptions both with respect to 
specific transactions and classes of transactions.
---------------------------------------------------------------------------
    \78\ Title I of ERISA also contains prohibited transaction rules. 
The Code and ERISA provisions are substantially similar, although not 
identical.
---------------------------------------------------------------------------
    Under prior law, the statutory exemptions to the prohibited 
transaction rules do not apply to certain transactions in which 
the plan makes a loan to an owner-employee.\79\ Under present 
and prior law, loans to participants other than owner-employees 
are permitted if loans are available to all participants on a 
reasonably equivalent basis, are not made available to highly 
compensated employees in an amount greater than made available 
to other employees, are made in accordance with specific 
provisions in the plan, bear a reasonable rate of interest, and 
are adequately secured. In addition, the Code places limits on 
the amount of loans and repayment terms.
---------------------------------------------------------------------------
    \79\ Certain transactions involving a plan and S corporation 
shareholders are permitted.
---------------------------------------------------------------------------
    For purposes of the prohibited transaction rules, an owner-
employee means: (1) a sole proprietor, (2) a partner who owns 
more than 10 percent of either the capital interest or the 
profits interest in the partnership, (3) an employee or officer 
of a Subchapter S corporation who owns more than five percent 
of the outstanding stock of the corporation, and (4) the owner 
of an individual retirement arrangement (``IRA''). The term 
owner-employee also includes certain family members of an 
owner-employee and certain corporations owned by an owner-
employee.
    Under the Internal Revenue Code, a two-tier excise tax is 
imposed on disqualified persons who engage in a prohibited 
transaction. The first level tax is equal to 15 percent of the 
amount involved in the transaction. The second level tax is 
imposed if the prohibited transaction is not corrected within a 
certain period, and is equal to 100 percent of the amount 
involved.

                           Reasons for Change

    The Congress believed that the prior-law prohibited 
transaction rules regarding loans unfairly discriminated 
against the owners of unincorporated businesses and S 
corporations. For example, under prior law, the sole 
shareholder of a C corporation could take advantage of the 
statutory exemption to the prohibited transaction rules for 
loans, but an individual doing business as a sole proprietor 
could not.

                        Explanation of Provision

    EGTRRA generally eliminates the special prior-law rules 
relating to plan loans made to an owner-employee (other than 
the owner of an IRA). Thus, the general statutory exemption 
applies to such transactions. Prior law continues to apply with 
respect to IRAs. The Congress intends that the Secretary of the 
Treasury and the Secretary of Labor will waive any penalty or 
excise tax in situations where a loan made prior to the 
effective date of the provision was exempt when initially made 
(treating any refinancing as a new loan) and the loan would 
have been exempt throughout the period of the loan if the 
provision had been in effect during the period of the loan.

                             Effective Date

    The provision is effective with respect to years beginning 
after December 31, 2001.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $21 million in 2002, $32 million in 2003, 
$34 million in 2004, $36 million in 2005, $39 million in 2006, 
$41 million in 2007, $44 million in 2008, $47 million in 2009, 
$49 million in 2010, $19 million in 2011, and $8 million in 
2012.
            (c) Modification of top-heavy rules (sec. 613 of the Act 
                    and sec. 416 of the Code)

                         Present and Prior Law


In general

    Under present and prior law, additional qualification 
requirements apply to plans that primarily benefit an 
employer's key employees (``top-heavy plans''). These 
additional requirements provide: (1) more rapid vesting for 
plan participants who are nonkey employees and (2) minimum 
nonintegrated employer contributions or benefits for plan 
participants who are non-key employees.

Definition of top-heavy plan

    A defined benefit plan is a top-heavy plan if more than 60 
percent of the cumulative accrued benefits under the plan are 
for key employees. A defined contribution plan is top heavy if 
the sum of the account balances of key employees is more than 
60 percent of the total account balances under the plan. For 
each plan year, the determination of top-heavy status generally 
is made as of the last day of the preceding plan year (``the 
determination date'').
    For purposes of determining whether a plan is a top-heavy 
plan, benefits derived both from employer and employee 
contributions, including employee elective contributions, are 
taken into account. In addition, under prior law, the accrued 
benefit of a participant in a defined benefit plan and the 
account balance of a participant in a defined contribution plan 
includes any amount distributed within the five-year period 
ending on the determination date.
    Under prior law, an individual's accrued benefit or account 
balance is not taken into account in determining whether a plan 
is top-heavy if the individual has not performed services for 
the employer during the five-year period ending on the 
determination date.
    In some cases, two or more plans of a single employer must 
be aggregated for purposes of determining whether the group of 
plans is top-heavy. The following plans must be aggregated: (1) 
plans which cover a key employee (including collectively 
bargained plans); and (2) any plan upon which a plan covering a 
key employee depends for purposes of satisfying the Code's 
nondiscrimination rules. The employer may be required to 
include terminated plans in the required aggregation group. In 
some circumstances, an employer may elect to aggregate plans 
for purposes of determining whether they are top heavy.
    SIMPLE plans are not subject to the top-heavy rules.

Definition of key employee

    Under prior law, a key employee is an employee who, during 
the plan year that ends on the determination date or any of the 
four preceding plan years, is: (1) an officer earning over one-
half of the defined benefit plan dollar limitation of section 
415 ($70,000 for 2001), (2) a five-percent owner of the 
employer, (3) a one-percent owner of the employer earning over 
$150,000, or (4) one of the 10 employees earning more than the 
defined contribution plan dollar limit ($35,000 for 2001) with 
the largest ownership interests in the employer. A family 
ownership attribution rule applies to the determination of one-
percent owner status, five-percent owner status, and largest 
ownership interest. Under this attribution rule, an individual 
is treated as owning stock owned by the individual's spouse, 
children, grandchildren, or parents.

Minimum benefit for non-key employees

    A minimum benefit generally must be provided to all non-key 
employees in a top-heavy plan. In general, a top-heavy defined 
benefit plan must provide a minimum benefit equal to the lesser 
of: (1) two percent of compensation multiplied by the 
employee's years of service, or (2) 20 percent of compensation. 
A top-heavy defined contribution plan must provide a minimum 
annual contribution equal to the lesser of: (1) three percent 
of compensation, or (2) the percentage of compensation at which 
contributions were made for key employees (including employee 
elective contributions made by key employees and employer 
matching contributions).
    For purposes of the minimum benefit rules, only benefits 
derived from employer contributions (other than amounts 
employees have elected to defer) to the plan are taken into 
account, and an employee's social security benefits are 
disregarded (i.e., the minimum benefit is nonintegrated). Under 
prior law, employer matching contributions may be used to 
satisfy the minimum contribution requirement; however, in such 
a case the contributions are not treated as matching 
contributions for purposes of applying the special 
nondiscrimination requirements applicable to employee elective 
contributions and matching contributions under sections 401(k) 
and (m). Thus, such contributions would have to meet the 
general nondiscrimination test of section 401(a)(4).\80\
---------------------------------------------------------------------------
    \80\ Treas. Reg. sec. 1.416-1 Q&A M-19.
---------------------------------------------------------------------------

Top-heavy vesting

    Benefits under a top-heavy plan must vest at least as 
rapidly as under one of the following schedules: (1) three-year 
cliff vesting, which provides for 100 percent vesting after 
three years of service; and (2) two-six year graduated vesting, 
which provides for 20 percent vesting after two years of 
service, and 20 percent more each year thereafter so that a 
participant is fully vested after six years of service.\81\
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    \81\ Benefits under a plan that is not top heavy must vest at least 
as rapidly as under one of the following schedules: (1) five-year cliff 
vesting; and (2) three-seven year graded vesting, which provides for 20 
percent vesting after three years and 20 percent more each year 
thereafter so that a participant is fully vested after seven years of 
service.
---------------------------------------------------------------------------

Qualified cash or deferred arrangements

    Under a qualified cash or deferred arrangement (a ``section 
401(k) plan''), an employee may elect to have the employer make 
payments as contributions to a qualified plan on behalf of the 
employee, or to the employee directly in cash. Contributions 
made at the election of the employee are called elective 
deferrals. A special nondiscrimination test applies to elective 
deferrals under cash or deferred arrangements, which compares 
the elective deferrals of highly compensated employees with 
elective deferrals of nonhighly compensated employees. (This 
test is called the actual deferral percentage test or the 
``ADP'' test). Employer matching contributions under qualified 
defined contribution plans are also subject to a similar 
nondiscrimination test. (This test is called the actual 
contribution percentage test or the ``ACP'' test.)
    Under a design-based safe harbor, a cash or deferred 
arrangement is deemed to satisfy the ADP test if the plan 
satisfies one of two contribution requirements and satisfies a 
notice requirement. A plan satisfies the contribution 
requirement under the safe harbor rule for qualified cash or 
deferred arrangements if the employer either: (1) satisfies a 
matching contribution requirement or (2) makes a nonelective 
contribution to a defined contribution plan of at least three 
percent of an employee's compensation on behalf of each 
nonhighly compensated employee who is eligible to participate 
in the arrangement without regard to the permitted disparity 
rules (section 401(1)). A plan satisfies the matching 
contribution requirement if, under the arrangement: (1) the 
employer makes a matching contribution on behalf of each 
nonhighly compensated employee that is equal to (a) 100 percent 
of the employee's elective deferrals up to three percent of 
compensation and (b) 50 percent of the employee's elective 
deferrals from three to five percent of compensation; and (2), 
the rate of match with respect to any elective contribution for 
highly compensated employees is not greater than the rate of 
match for nonhighly compensated employees. Matching 
contributions that satisfy the design-based safe harbor for 
cash or deferred arrangements are deemed to satisfy the ACP 
test. Certain additional matching contributions are also deemed 
to satisfy the ACP test.

                           Reasons for Change

    The top-heavy rules primarily affect the plans of small 
employers. While the top-heavy rules were intended to provide 
additional minimum benefits to rank-and-file employees, the 
Congress was concerned that in some cases the top-heavy rules 
may act as a deterrent to the establishment of a plan by a 
small employer. The Congress believed that simplification of 
the top-heavy rules would help alleviate the additional 
administrative burdens the rules place on small employers. The 
Congress also believed that, in applying the top-heavy minimum 
benefit rules, the employer should receive credit for all 
contributions the employer makes, including matching 
contributions.
    The Congress understood that some employers may have been 
discouraged from adopting a safe harbor section 401(k) plan due 
to concerns about the top-heavy rules. The Congress believed 
that facilitating the adoption of such plans would broaden 
coverage. Thus, the Congress believed it appropriate to provide 
that such plans are not subject to the top-heavy rules.

                        Explanation of Provision


Definition of top-heavy plan

    EGTRRA provides that a plan consisting of a cash-or-
deferred arrangement that satisfies the design-based safe 
harbor for such plans and matching contributions that satisfy 
the safe harbor rule for such contributions is not a top-heavy 
plan. Matching or nonelective contributions provided under such 
a plan may be taken into account in satisfying the minimum 
contribution requirements applicable to top-heavy plans.\82\
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    \82\ This provision is not intended to preclude the use of 
nonelective contributions that are used to satisfy the safe harbor 
rules from being used to satisfy other qualified retirement plan 
nondiscrimination rules, including those involving cross-testing.
---------------------------------------------------------------------------
    In determining whether a plan is top-heavy, distributions 
during the year ending on the date the top-heavy determination 
is being made are taken into account. The present-law five-year 
rule applies with respect to in-service distributions.\83\ 
Similarly, EGTRRA provides that an individual's accrued benefit 
or account balance is not taken into account if the individual 
has not performed services for the employer during the one-year 
period ending on the date the top-heavy determination is being 
made.
---------------------------------------------------------------------------
    \83\ A technical correction was enacted in Section 411(k) of the 
Job Creation and Worker Assistance Act of 2002 described in Part Eight 
of this document, that clarified that distributions made after 
severance from employment (rather than separation from service) are 
taken into account for only one year in determining top-heavy status.
---------------------------------------------------------------------------

Definition of key employee

    Under EGTRRA, an employee is considered a key employee if, 
during the prior year, the employee was (1) an officer with 
compensation in excess of $130,000 (adjusted for inflation in 
$5,000 increments), (2) a five-percent owner, or (3) a one-
percent owner with compensation in excess of $150,000. EGTRRA 
repeals the four-year lookback rule for determining key 
employee status and provides that an employee is a key employee 
only if he or she is a key employee during the preceding plan 
year. The present and prior-law limits on the number of 
officers treated as key employees under (1) continue to apply.

Minimum benefit for nonkey employees

    Under EGTRRA, matching contributions are taken into account 
in determining whether the minimum benefit requirement has been 
satisfied.\84\ In addition, in determining the minimum benefit 
required under a defined benefit plan, a year of service does 
not include any year in which no key employee or former key 
employee benefits under the plan (as determined under section 
410).
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    \84\ Thus, this provision overrides the provision in Treasury 
regulations that, if matching contributions are used to satisfy the 
minimum benefit requirement, then they are not treated as matching 
contributions for purposes of the section 401(m) nondiscrimination 
rules.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective for years beginning after 
December 31, 2001.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $4 million in 2002, $8 million in 2003, $10 
million in 2004, $11 million in 2005, $13 million in 2006, $14 
million in 2007, $16 million in 2008, $17 million in 2009, $19 
million in 2010, $10 million in 2011, and $5 million in 2012.
            (d) Elective deferrals not taken into account for purposes 
                    of deduction limits (sec. 614 of the Act and sec. 
                    404 of the Code)

                         Present and Prior Law

    Employer contributions to one or more qualified retirement 
plans are deductible subject to certain limits. In general, the 
deduction limit depends on the kind of plan.
    In the case of a defined benefit pension plan or a money 
purchase pension plan, the employer generally may deduct the 
amount necessary to satisfy the minimum funding cost of the 
plan for the year. If a defined benefit pension plan has more 
than 100 participants, the maximum amount deductible is at 
least equal to the plan's unfunded current liabilities.\85\
---------------------------------------------------------------------------
    \85\ Section 652 of EGTRRA extends this rule to other defined 
benefit plans.
---------------------------------------------------------------------------
    In some cases, the amount of deductible contributions is 
limited by compensation. Under prior law, in the case of a 
profit-sharing or stock bonus plan, the employer generally may 
deduct an amount equal to 15 percent of compensation of the 
employees covered by the plan for the year.\86\
---------------------------------------------------------------------------
    \86\ Section 616 of EGTRRA increases this deduction limit to 25 
percent of compensation.
---------------------------------------------------------------------------
    If an employer sponsors both a defined benefit pension plan 
and a defined contribution plan that covers some of the same 
employees (or a money purchase pension plan and another kind of 
defined contribution plan), the total deduction for all plans 
for a plan year generally is limited to the greater of: (1) 25 
percent of compensation or (2) the contribution necessary to 
meet the minimum funding requirements of the defined benefit 
pension plan for the year (or the amount of the plan's unfunded 
current liabilities, in the case of a plan with more than 100 
participants).
    For purposes of the deduction limits, employee elective 
deferral contributions to a section 401(k) plan are treated as 
employer contributions and, thus, are subject to the generally 
applicable deduction limits.
    Subject to certain exceptions, nondeductible contributions 
are subject to a 10-percent excise tax.

                           Reasons for Change

    Subjecting elective deferrals to the normally applicable 
deduction limits may cause employers to restrict the amount of 
elective deferrals an employee may make or to restrict employer 
contributions to the plan, thereby reducing participants' 
ultimate retirement benefits and their ability to save 
adequately for retirement. The Congress believed that the 
amount of elective deferrals otherwise allowable should not be 
further limited through application of the deduction rules.

                        Explanation of Provision

    Under EGTRRA, elective deferral contributions are not 
subject to the deduction limits, and the application of a 
deduction limitation to any other employer contribution to a 
qualified retirement plan does not take into account elective 
deferral contributions.\87\
---------------------------------------------------------------------------
    \87\ A technical correction was enacted in Section 411(l) of the 
Job Creation and Worker Assistance Act of 2002, described in Part Eight 
of this document, to provide a clarification that the provision applies 
also to elective deferrals to a SEP and that the combined deduction 
limit of 25 percent of compensation for qualified defined benefit and 
defined contribution plans does not apply if the only amounts 
contributed to the defined contribution plan are elective deferrals.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective for years beginning after 
December 31, 2001.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $47 million in 2002, $88 million in 2003, 
$103 million in 2004, $111 million in 2005, $119 million in 
2006, $127 million in 2007, $135 million in 2008, $144 million 
in 2009, $152 million in 2010, $103 million in 2011, and $50 
million in 2012.
            (e) Repeal of coordination requirements for deferred 
                    compensation plans of state and local governments 
                    and tax-exempt organizations (sec. 615 of the Act 
                    and sec. 457 of the Code)

                         Present and Prior Law

    Compensation deferred under an eligible deferred 
compensation plan of a tax-exempt or State and local government 
employer (a ``section 457 plan'') is not includible in gross 
income until paid or made available. Under prior law, the 
maximum permitted annual deferral under such a plan is 
generally the lesser of: (1) $8,500 (in 2001) or (2) 33\1/3\ 
percent of compensation. The $8,500 limit is increased for 
inflation in $500 increments. Under a special catch-up rule, a 
section 457 plan may provide that, for one or more of the 
participant's last three years before retirement, the otherwise 
applicable limit is increased to the lesser of: (1) $15,000 or 
(2) the sum of the otherwise applicable limit for the year plus 
the amount by which the limit applicable in preceding years of 
participation exceeded the deferrals for that year.
    Under prior law, the $8,500 limit (as modified under the 
catch-up rule) applies to all deferrals under all section 457 
plans in which the individual participates. In addition, in 
applying the $8,500 limit, contributions under a tax-sheltered 
annuity (``section 403(b) annuity''), elective deferrals under 
a qualified cash or deferred arrangement (``section 401(k) 
plan''), salary reduction contributions under a simplified 
employee pension plan (``SEP''), and contributions under a 
SIMPLE plan are taken into account under prior law. Further, 
under prior law, the amount deferred under a section 457 plan 
is taken into account in applying a special catch-up rule for 
section 403(b) annuities.

                           Reasons for Change

    The Congress believed that individuals participating in a 
section 457 plan should also be able to fully participate in a 
section 403(b) annuity or section 401(k) plan of the employer. 
Eliminating the coordination rule may also encourage the 
establishment of section 403(b) or 401(k) plans by tax-exempt 
and governmental employers (to the extent permitted under 
present and prior law).

                        Explanation of Provision

    The provision repeals the rules coordinating the section 
457 dollar limit with contributions under other types of 
plans.\88\
---------------------------------------------------------------------------
    \88\ The limits on deferrals under a section 457 plan are modified 
under sections 611, 631, and 632 of EGTRRA, above.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective for years beginning after 
December 31, 2001.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $16 million in 2002, $27 million annually in 
2003 and 2004, $25 million in 2005, $23 million in 2006, $24 
million annually in 2007 through 2010, $14 million in 2011, and 
$7 million in 2012.
            (f) Deduction limits (sec. 616 of the Act and sec. 404 of 
                    the Code)

                         Present and Prior Law

    Employer contributions to one or more qualified retirement 
plans are deductible subject to certain limits. In general, the 
deduction limit depends on the kind of plan. Subject to certain 
exceptions, nondeductible contributions are subject to a 10-
percent excise tax.
    In the case of a defined benefit pension plan or a money 
purchase pension plan, the employer generally may deduct the 
amount necessary to satisfy the minimum funding cost of the 
plan for the year. If a defined benefit pension plan has more 
than 100 participants, the maximum amount deductible is at 
least equal to the plan's unfunded current liabilities.\89\
---------------------------------------------------------------------------
    \89\ Section 652 of EGTRRA extends this rule to other defined 
benefit plans.
---------------------------------------------------------------------------
    In some cases, the amount of deductible contributions is 
limited by compensation. Under prior law, in the case of a 
profit-sharing or stock bonus plan, the employer generally may 
deduct an amount equal to 15 percent of compensation of the 
employees covered by the plan for the year.
    If an employer sponsors both a defined benefit pension plan 
and a defined contribution plan that covers some of the same 
employees (or a money purchase pension plan and another kind of 
defined contribution plan), the total deduction for all plans 
for a plan year generally is limited to the greater of: (1) 25 
percent of compensation or (2) the contribution necessary to 
meet the minimum funding requirements of the defined benefit 
pension plan for the year (or the amount of the plan's unfunded 
current liabilities, in the case of a plan with more than 100 
participants).
    In the case of an employee stock ownership plan (``ESOP''), 
principal payments on a loan used to acquire qualifying 
employer securities are deductible up to 25 percent of 
compensation.
    For purposes of the deduction limits, employee elective 
deferral contributions to a qualified cash or deferred 
arrangement (``section 401(k) plan'') are treated as employer 
contributions and, thus, are subject to the generally 
applicable deduction limits.\90\
---------------------------------------------------------------------------
    \90\ Section 614 of EGTRRA, above, provides that elective deferrals 
are not subject to the deduction limits.
---------------------------------------------------------------------------
    For purposes of the deduction limits, compensation means 
the compensation otherwise paid or accrued during the taxable 
year to the beneficiaries under the plan, and the beneficiaries 
under a profit-sharing or stock bonus plan are the employees 
who benefit under the plan with respect to the employer's 
contribution.\91\ An employee who is eligible to make elective 
deferrals under a section 401(k) plan is treated as benefitting 
under the arrangement even if the employee elects not to 
defer.\92\
---------------------------------------------------------------------------
    \91\ Rev. Rul. 65-295, 1965-2 C.B. 148.
    \92\ Treas. Reg. sec. 1.410(b)-3.
---------------------------------------------------------------------------
    Under prior law, for purposes of the deduction rules, 
compensation generally includes only taxable compensation, and 
thus does not include salary reduction amounts, such as 
elective deferrals under a section 401(k) plan or a tax-
sheltered annuity (``section 403(b) annuity''), elective 
contributions under a deferred compensation plan of a tax-
exempt organization or a State or local government (``section 
457 plan''), and salary reduction contributions under a section 
125 cafeteria plan. Under present and prior law, for purposes 
of the contribution limits under section 415, compensation does 
include such salary reduction amounts.

                           Reasons for Change

    The Congress believed that compensation unreduced by 
employee elective contributions is a more appropriate measure 
of compensation for qualified retirement plan purposes, 
including deduction limits, than the prior-law rule. Applying 
the same definition for deduction purposes as is generally used 
for other plan purposes also simplifies application of the 
qualified plan rules. The Congress also believed that the 15-
percent of compensation limit might restrict the amount of 
employer contributions to the plan, thereby reducing 
participants' ultimate retirement benefits and their ability to 
adequately save for retirement.

                        Explanation of Provision

    Under EGTRRA, the definition of compensation for purposes 
of the deduction rules includes salary reduction amounts 
treated as compensation under section 415. In addition, the 
annual limitation on the amount of deductible contributions to 
a profit-sharing or stock bonus plan is increased from 15 
percent to 25 percent of compensation of the employees covered 
by the plan for the year.\93\ Also, except to the extent 
provided in regulations, a money purchase pension plan is 
treated like a profit-sharing or stock bonus plan for purposes 
of the deduction rules.
---------------------------------------------------------------------------
    \93\ A technical correction was enacted in Section 411(l) of the 
Job Creation and Worker Assistance Act of 2002, described in Part Eight 
of this document, that made a conforming change to a rule that limits 
the amount of deductible SEP contributions that may be made for a 
particular employee.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective for years beginning after 
December 31, 2001.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $8 million in 2002, $17 million in 2003, $19 
million in 2004, $21 million in 2005, $22 million in 2006, $25 
million in 2007, $27 million in 2008, $28 million in 2009, $30 
million in 2010, $16 million in 2011, $7 million in 2012.
            (g) Option to treat elective deferrals as after-tax 
                    contributions (sec. 617 of the Act and new sec. 
                    402A of the Code)

                            Present and Law

    A qualified cash or deferred arrangement (``section 401(k) 
plan'') or a tax-sheltered annuity (``section 403(b) annuity'') 
may permit a participant to elect to have the employer make 
payments as contributions to the plan or to the participant 
directly in cash. Contributions made to the plan at the 
election of a participant are elective deferrals. Elective 
deferrals must be nonforfeitable and are subject to an annual 
dollar limitation (section 402(g)) and distribution 
restrictions. In addition, elective deferrals under a section 
401(k) plan are subject to special nondiscrimination rules. 
Elective deferrals (and earnings attributable thereto) are not 
includible in a participant's gross income until distributed 
from the plan.
    Elective deferrals for a taxable year that exceed the 
annual dollar limitation (``excess deferrals'') are includible 
in gross income for the taxable year. If an employee makes 
elective deferrals under a plan (or plans) of a single employer 
that exceed the annual dollar limitation (``excess 
deferrals''), then the plan may provide for the distribution of 
the excess deferrals, with earnings thereon. If the excess 
deferrals are made to more than one plan of unrelated 
employers, then the plan may permit the individual to allocate 
excess deferrals among the various plans, no later than the 
March 1 (April 15 under the applicable regulations) following 
the end of the taxable year. If excess deferrals are 
distributed not later than April 15 following the end of the 
taxable year, along with earnings attributable to the excess 
deferrals, then the excess deferrals are not again includible 
in income when distributed. The earnings are includible in 
income in the year distributed. If excess deferrals (and income 
thereon) are not distributed by the applicable April 15, then 
the excess deferrals (and income thereon) are includible in 
income when received by the participant. Thus, excess deferrals 
that are not distributed by the applicable April 15th are 
taxable both in the taxable year when the deferral was made and 
in the year the participant receives a distribution of the 
excess deferral.
    Individuals with adjusted gross income below certain levels 
generally may make nondeductible contributions to a Roth IRA 
and may convert a deductible or nondeductible IRA into a Roth 
IRA. Amounts held in a Roth IRA that are withdrawn as a 
qualified distribution are not includible in income, nor 
subject to the additional 10-percent tax on early withdrawals. 
A qualified distribution is a distribution that: (1) is made 
after the five-taxable year period beginning with the first 
taxable year for which the individual made a contribution to a 
Roth IRA, and (2) is made after attainment of age 59\1/2\, is 
made on account of death or disability, or is a qualified 
special purpose distribution (i.e., for first-time homebuyer 
expenses of up to $10,000). A distribution from a Roth IRA that 
is not a qualified distribution is includible in income to the 
extent attributable to earnings, and is subject to the 10-
percent tax on early withdrawals (unless an exception 
applies).\94\
---------------------------------------------------------------------------
    \94\ Early distributions of converted amounts may also accelerate 
income inclusion of converted amounts that are taxable under the four-
year rule applicable to 1998 conversions.
---------------------------------------------------------------------------

                           Reasons for Change

    The Roth IRA provisions enacted in 1997 provided 
individuals with another form of tax-favored retirement 
savings. For a variety of reasons, some individuals may prefer 
to save through a Roth IRA rather than a traditional deductible 
IRA. The Congress believed that similar savings choices should 
be available to participants in section 401(k) plans and tax-
sheltered annuities.

                        Explanation of Provision

    A section 401(k) plan or a section 403(b) annuity is 
permitted to include a ``qualified Roth contribution program'' 
that permits a participant to elect to have all or a portion of 
the participant's elective deferrals under the plan treated as 
designated Roth contributions. Designated Roth contributions 
are elective deferrals that the participant designates (at such 
time and in such manner as the Secretary may prescribe) \95\ as 
not excludable from the participant's gross income.
---------------------------------------------------------------------------
    \95\ It is intended that the Secretary generally will not permit 
retroactive designations of elective deferrals as designated Roth 
contributions.
---------------------------------------------------------------------------
    The annual dollar limitation on a participant's designated 
Roth contributions is the section 402(g) annual limitation on 
elective deferrals, reduced by the participant's elective 
deferrals that the participant does not designate as designated 
Roth contributions. Designated Roth contributions are treated 
as any other elective deferral for purposes of 
nonforfeitability requirements and distribution 
restrictions.\96\ Under a section 401(k) plan, designated Roth 
contributions also are treated as any other elective deferral 
for purposes of the special nondiscrimination requirements.\97\
---------------------------------------------------------------------------
    \96\ Similarly, designated Roth contributions to a section 403(b) 
annuity are treated the same as other salary reduction contributions to 
the annuity (except that designated Roth contributions are includible 
in income).
    \97\ It is intended that the Secretary provide ordering rules 
regarding the return of excess contributions under the special 
nondiscrimination rules (pursuant to sec. 401(k)(8)) in the event a 
participant makes both regular elective deferrals and designated Roth 
contributions. It is intended that such rules will generally permit a 
plan to allow participants to designate which contributions are 
returned first or to permit the plan to specify which contributions are 
returned first. It is also intended that the Secretary will provide 
ordering rules to determine the extent to which a distribution consists 
of excess Roth contributions.
---------------------------------------------------------------------------
    The plan is required to establish a separate account (a 
``designated Roth contribution account''), and maintain 
separate recordkeeping, for a participant's designated Roth 
contributions (and earnings allocable thereto). A qualified 
distribution from a participant's designated Roth contributions 
account is not includible in the participant's gross income. A 
qualified distribution is a distribution that is made after the 
end of a specified nonexclusion period and that is: (1) made on 
or after the date on which the participant attains age 59\1/2\, 
(2) made to a beneficiary (or to the estate of the participant) 
on or after the death of the participant, or (3) attributable 
to the participant's being disabled. \98\ The nonexclusion 
period is the five-year-taxable period beginning with the 
earlier of: (1) the first taxable year for which the 
participant made a designated Roth contribution to any 
designated Roth contribution account established for the 
participant under the plan, or (2) if the participant has made 
a rollover contribution to the designated Roth contribution 
account that is the source of the distribution from a 
designated Roth contribution account established for the 
participant under another plan, the first taxable year for 
which the participant made a designated Roth contribution to 
the previously established account.
---------------------------------------------------------------------------
    \98\ A qualified special purpose distribution, as defined under the 
rules relating to Roth IRAs, does not qualify as a tax-free 
distribution from a designated Roth contributions account.
---------------------------------------------------------------------------
    A distribution from a designated Roth contributions account 
that is a corrective distribution of an elective deferral (and 
income allocable thereto) that exceeds the section 402(g) 
annual limit on elective deferrals or a corrective distribution 
of an excess contribution under the special nondiscrimination 
rules (pursuant to section 401(k)(8) (and income allocable 
thereto) is not a qualified distribution. In addition, the 
treatment of excess designated Roth contributions is similar to 
the treatment of excess deferrals attributable to non-
designated Roth contributions. If excess designated Roth 
contributions (including earnings thereon) are distributed no 
later than the April 15th following the taxable year, then the 
designated Roth contributions is not includible in gross income 
as a result of the distribution, because such contributions are 
includible in gross income when made. Earnings on such excess 
designated Roth contributions are treated the same as earnings 
on excess deferrals distributed no later than April 15th, i.e., 
they are includible in income when distributed. If excess 
designated Roth contributions are not distributed by the 
applicable April 15th, then such contributions (and earnings 
thereon) are taxable when distributed. Thus, as is the case 
with excess elective deferrals that are not distributed by the 
applicable April 15th, the contributions are includible in 
income in the year when made and again when distributed from 
the plan. Earnings on such contributions are taxable when 
received.
    A participant is permitted to roll over a distribution from 
a designated Roth contributions account only to another 
designated Roth contributions account or a Roth IRA of the 
participant.
    The Secretary of the Treasury is directed to require the 
plan administrator of each section 401(k) plan or section 
403(b) annuity that permits participants to make designated 
Roth contributions to make such returns and reports regarding 
designated Roth contributions to the Secretary, plan 
participants and beneficiaries, and other persons that the 
Secretary may designate.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2005.

                             Revenue Effect

    The provision is estimated to increase Federal fiscal year 
budget receipts by $185 million in 2006, $236 million in 2007, 
$172 million in 2008, and $90 million in 2009 and to reduce 
Federal fiscal year budget receipts by $5 million in 2010, $358 
million in 2011, and $365 million in 2012.
            (h) Nonrefundable credit to certain individuals for 
                    elective deferrals and IRA contributions (sec. 618 
                    of the Act and new sec. 25B of the Code)

                         Present and Prior Law

    Present and prior law provides favorable tax treatment for 
a variety of retirement savings vehicles, including employer-
sponsored retirement plans and individual retirement 
arrangements (``IRAs'').
    Several different types of tax-favored employer-sponsored 
retirement plans exist, such as section 401(a) qualified plans 
(including plans with a section 401(k) qualified cash-or-
deferred arrangement), section 403(a) qualified annuity plans, 
section 403(b) annuities, section 408(k) simplified employee 
pensions (``SEPs''), section 408(p) SIMPLE retirement accounts, 
and section 457(b) eligible deferred compensation plans. In 
general, an employer and, in certain cases, employees, 
contribute to the plan. Taxation of the contributions and 
earnings thereon is generally deferred until benefits are 
distributed from the plan to participants or their 
beneficiaries. \99\ Contributions and benefits under tax-
favored employer-sponsored retirement plans are subject to 
specific limitations.
---------------------------------------------------------------------------
    \99\ In the case of after-tax employee contributions, only earnings 
are taxed upon withdrawal.
---------------------------------------------------------------------------
    Coverage and nondiscrimination rules also generally apply 
to tax-favored employer-sponsored retirement plans to ensure 
that plans do not disproportionately cover higher-paid 
employees and that benefits provided to moderate- and lower-
paid employees are generally proportional to those provided to 
higher-paid employees.
    IRAs include both traditional IRAs and Roth IRAs. In 
general, an individual makes contributions to an IRA, and 
investment earnings on those contributions accumulate on a tax-
deferred basis. Total annual IRA contributions per individual 
are limited to a dollar amount (or the compensation of the 
individual or the individual's spouse, if smaller). 
Contributions to a traditional IRA may be deducted from gross 
income if an individual's adjusted gross income (``AGI'') is 
below certain levels or the individual is not an active 
participant in certain employer-sponsored retirement plans. 
Contributions to a Roth IRA are not deductible from gross 
income, regardless of adjusted gross income. A distribution 
from a traditional IRA is includible in the individual's gross 
income except to the extent of individual contributions made on 
a nondeductible basis. A qualified distribution from a Roth IRA 
is excludable from gross income.
    Taxable distributions made from employer retirement plans 
and IRAs before the employee or individual has reached age 
59\1/2\ are subject to a 10-percent additional tax, unless an 
exception applies.

                           Reasons for Change

    The Congress recognized that the rate of private savings in 
the United States is low; in particular many low- and middle-
income individuals have inadequate savings or no savings at 
all. A key reason for these low levels of saving is that lower-
income families are likely to be more budget constrained with 
competing needs such as food, clothing, shelter, and medical 
care taking a larger portion of their income. The Congress 
believed providing an additional tax incentive for low- and 
middle-income individuals will enhance their ability to save 
adequately for retirement.

                        Explanation of Provision

    EGTRRA provides a temporary nonrefundable tax credit for 
contributions made by eligible taxpayers to a qualified plan. 
The maximum annual contribution eligible for the credit is 
$2,000. The credit rate depends on the adjusted gross income 
(``AGI'') of the taxpayer. Only joint returns with AGI of 
$50,000 or less, head of household returns of $37,500 or less, 
and single returns of $25,000 or less are eligible for the 
credit. The AGI limits applicable to single taxpayers apply to 
married taxpayers filing separate returns. The credit is in 
addition to any deduction or exclusion that would otherwise 
apply with respect to the contribution. The credit offsets 
minimum tax liability as well as regular tax liability. The 
credit is available to individuals who are 18 or over, other 
than individuals who are full-time students or claimed as a 
dependent on another taxpayer's return.
    The credit is available with respect to elective 
contributions to a section 401(k) plan, section 403(b) annuity, 
or eligible deferred compensation arrangement of a State or 
local government (a ``section 457 plan''), SIMPLE, or SEP, 
contributions to a traditional or Roth IRA, and voluntary 
after-tax employee contributions to a qualified retirement 
plan. The present and prior-law rules governing such 
contributions continue to apply.
    The amount of any contribution eligible for the credit is 
reduced by distributions of taxable or after-tax amounts \100\ 
received by the taxpayer and his or her spouse from any savings 
arrangement described above or any other qualified retirement 
plan during the taxable year for which the credit is claimed, 
the two taxable years prior to the year the credit is claimed, 
and during the period after the end of the taxable year and 
prior to the due date for filing the taxpayer's return for the 
year. In the case of a distribution from a Roth IRA, this rule 
applies to any such distributions, whether or not taxable.
---------------------------------------------------------------------------
    \100\ A technical correction was enacted in Section 411(m) of the 
Job Creation and Worker Assistance Act of 2002, described in Part Eight 
of this document, to clarify that the amount of contributions taken 
into account in determining the credit is reduced by the amount of 
contributions taken into account in determining the credit is reduced 
by the amount of a distribution that consists of after-tax 
contributions. Distributions that are rolled over to another retirement 
plan do not affect the credit.
---------------------------------------------------------------------------
    The credit rates based on AGI are provided in Table 9, 
below.

                                       Table 9.--Credit Rates Based on AGI
----------------------------------------------------------------------------------------------------------------
                                                                                                     Credit rate
              Joint filers                    Heads of households            All other filers         (percent)
----------------------------------------------------------------------------------------------------------------
$0-$30,000..............................  $0-$22,500.................  $0-$15,000.................           50
$30,000-$32,500.........................  $22,500-$24,375............  $15,000-$16,250............           20
$32,500-$50,000.........................  $24,375-$37,500............  $16,250-$25,000............           10
Over $50,000............................  Over $37,500...............  Over $25,000...............            0
----------------------------------------------------------------------------------------------------------------

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2001, and before January 1, 2007.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $1,036 million in 2002, $2,096 million in 
2003, $1,963 million in 2004, $1,856 million in 2005, $1,746 
million in 2006, $920 million in 2007, $102 million in 2008, 
$91 million in 2009, $89 million in 2010, $86 million in 2011, 
and $82 million in 2012.
            (i) Small business tax credit for new retirement plan 
                    expenses (sec. 619 of the Act and new sec. 45E of 
                    the Code)

                         Present and Prior Law

    The costs incurred by an employer related to the 
establishment and maintenance of a retirement plan (e.g., 
payroll system changes, investment vehicle set-up fees, 
consulting fees) generally are deductible by the employer as 
ordinary and necessary expenses in carrying on a trade or 
business.

                           Reasons for Change

    One of the reasons some small employers may not adopt a 
tax-favored retirement plan is the administrative costs 
associated with such plans. The Congress believed that 
providing a tax credit for certain administrative costs would 
reduce one of the barriers to retirement plan coverage.

                        Explanation of Provision

    EGTRRA provides a nonrefundable income tax credit for 50 
percent of the administrative and retirement-education expenses 
for any small business that adopts a new qualified defined 
benefit or defined contribution plan (including a section 
401(k) plan), SIMPLE plan, or simplified employee pension 
(``SEP''). The credit applies to 50 percent of the first $1,000 
in administrative and retirement-education expenses for the 
plan for each of the first three years of the plan.
    The credit is available to an employer that did not employ, 
in the preceding year, more than 100 employees with 
compensation in excess of $5,000. In order for an employer to 
be eligible for the credit, the plan must cover at least one 
nonhighly compensated employee. In addition, if the credit is 
for the cost of a payroll deduction IRA arrangement, the 
arrangement must be made available to all employees of the 
employer who have worked with the employer for at least three 
months.
    The credit is a general business credit. \101\ The 50 
percent of qualifying expenses that are effectively offset by 
the tax credit are not deductible; the other 50 percent of the 
qualifying expenses (and other expenses) are deductible to the 
extent permitted under present and prior law.
---------------------------------------------------------------------------
    \101\ The credit cannot be carried back to years before the 
effective date.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective with respect to costs paid or 
incurred in taxable years beginning after December 31, 2001, 
with respect to plans first effective after such date. \102\
---------------------------------------------------------------------------
    \102\ A technical correction was enacted in Section 411(n) of the 
Job Creation and Worker Assistance Act of 2002, described in Part Eight 
of this document, to clarify that the credit is available if a plan is 
first effective after December 31, 2001, even if adopted on or before 
that date.
---------------------------------------------------------------------------

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $3 million in 2002, $12 million in 2003, $21 
million in 2004, $29 million annually in 2005 through 2007, $27 
million in 2008, $26 million in 2009, $25 million in 2010, $22 
million in 2011, and $8 million in 2012.
            (j) Eliminate IRS user fees for certain determination 
                    letter requests regarding employer plans (sec. 620 
                    of the Act)

                         Present and Prior Law

    An employer that maintains a retirement plan for the 
benefit of its employees may request from the IRS a 
determination as to whether the form of the plan satisfies the 
requirements applicable to tax-qualified plans (section 
401(a)). In order to obtain from the IRS a determination letter 
on the qualified status of the plan, the employer must pay a 
user fee. The Secretary determines the user fee applicable for 
various types of requests, subject to statutory minimum 
requirements for average fees based on the category of the 
request. The user fee may range from $125 to $1,250, depending 
upon the scope of the request and the type and format of the 
plan. \103\
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    \103\ Authorization for the user fees was originally enacted in 
section 10511 of the Revenue Act of 1987 (Pub. L. No. 100-203, December 
22, 1987). The authorization was extended through September 30, 2003, 
by Pub. L. No. 104-117 (An Act to provide that members of the Armed 
Forces performing services for the peacekeeping efforts in Bosnia and 
Herzegovina, Croatia, and Macedonia shall be entitled to tax benefits 
in the same manner as if such services were performed in a combat zone, 
and for other purposes (March 20, 1996)).
---------------------------------------------------------------------------
    Present and prior law provides that plans that do not meet 
the qualification requirements will be treated as meeting such 
requirements if appropriate retroactive plan amendments are 
made during the remedial amendment period. In general, the 
remedial amendment period ends on the due date for the 
employer's tax return (including extensions) for the taxable 
year in which the event giving rise to the disqualifying 
provision occurred (e.g., a plan amendment or a change in the 
law). The Secretary may provide for general extensions of the 
remedial amendment period or for extensions in certain cases. 
For example, the remedial amendment period with respect to 
amendments relating to the qualification requirements affected 
by the General Agreements on Tariffs and Trade, the Uniformed 
Services Employment and Reemployment Rights Act of 1994, the 
Small Business Job Protection Act of 1996, the Taxpayer Relief 
Act of 1997, and the Internal Revenue Service Restructuring and 
Reform Act of 1998 generally ends on the later of February 28, 
2002, or the last day of the first plan year beginning on or 
after January 1, 2001. \104\
---------------------------------------------------------------------------
    \104\ Rev. Proc. 2001-55, 2001-2 C.B. 552.
---------------------------------------------------------------------------

                           Reasons for Change

    One of the factors affecting the decision of a small 
employer to adopt a plan is the level of administrative costs 
associated with the plan. The Congress believed that reducing 
administrative costs, such as IRS user fees, would help further 
the establishment of qualified plans by small employers.

                        Explanation of Provision

    An eligible employer is not required to pay a user fee for 
a determination letter request with respect to the qualified 
status of a retirement plan that the employer maintains if the 
request is made before the later of: (1) the last day of the 
fifth plan year of the plan or (2) the end of any applicable 
remedial amendment period with respect to the plan that begins 
before the end of the fifth plan year of the plan. In addition, 
determination letter requests for which user fees are not 
required under the provision are not taken into account in 
determining average user fees. An employer is eligible under 
the provision if the employer has no more than 100 employees 
and has at least one nonhighly compensated employee who is 
participating in the plan. The provision applies only to 
requests by employers for determination letters concerning the 
qualified retirement plans they maintain. Therefore, a sponsor 
of a prototype plan is required to pay a user fee for a request 
for a notification letter, opinion letter, or similar ruling. A 
small employer that adopts a prototype plan, however, is not 
required to pay a user fee for a determination letter request 
with respect to the employer's plan.

                             Effective Date

    The provision is effective for determination letter 
requests made after December 31, 2001.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $7 million in 2002 and $10 million in 2003.
            (k) Certain nonresident aliens excluded in applying minimum 
                    coverage requirements (sec. 621 of the Act and 
                    secs. 410(b)(3) and 861(a)(3) of the Code)

                         Present and Prior Law

    Under the minimum coverage requirements (section 410(b)), a 
qualified plan must benefit a minimum number of the employer's 
nonhighly compensated employees. In applying the minimum 
coverage requirements, employees who are nonresident aliens are 
disregarded if they have no earned income from sources within 
the United States (``U.S. source income'').
    Generally, compensation for services performed in the 
United States is treated as U.S. source income. Under a special 
rule, compensation is not treated as U.S. source income if the 
compensation is paid for labor or services performed by a 
nonresident alien in connection with the individual's temporary 
presence in the United States as a regular member of the crew 
of a foreign vessel engaged in transportation between the 
United States and a foreign country or a possession of the 
United States. However, under prior law, this special rule does 
not apply for purposes of qualified retirement plans (including 
the minimum coverage and nondiscrimination requirements 
applicable to such plans), employer-provided group-term life 
insurance, or employer-provided accident and health plans. As a 
result, such compensation is treated as U.S. source income for 
purposes of such plans, including the application of the 
qualified retirement plan minimum coverage and 
nondiscrimination requirements. As a result, such nonresident 
aliens must be taken into account in determining whether the 
plan satisfies the minimum coverage requirements.

                           Reasons for Change

    The Congress believed that nonresident aliens who are in 
the United States temporarily as crew members of foreign 
vessels engaged in transportation between the United States and 
a foreign country or a possession of the United States and who 
otherwise have no U.S. source income for Federal tax purposes 
should be disregarded in applying the nondiscrimination and 
other requirements applicable to employee benefit plans.

                        Explanation of Provision

    Under EGTRRA, the special rule relating to compensation 
paid for labor or services performed by a nonresident alien in 
connection with the individual's temporary presence in the 
United States as a regular member of the crew of a foreign 
vessel engaged in transportation between the United States and 
a foreign country or a possession of the United States 
compensation is extended in order to apply for purposes of 
qualified retirement plans, employer-provided group-term life 
insurance, and employer-provided accident and health plans. 
Therefore, such compensation is not treated as U.S. source 
income for any purpose under such plans, including the 
application of the qualified retirement plan minimum coverage 
and nondiscrimination requirements.

                             Effective Date

    The provision is effective with respect to plan years 
beginning after December 31, 2001.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $2 million in 2002, $7 million annually in 
2003 through 2005, $8 million annually in 2006 through 2010, 
and $5 million in 2011.

2. Enhancing fairness for women

            (a) Additional salary reduction catch-up contributions 
                    (sec. 631 of the Act and sec. 414 of the Code)

                         Present and Prior Law


Elective deferral limitations

    Under present and prior law, under certain salary reduction 
arrangements, an employee may elect to have the employer make 
payments as contributions to a plan on behalf of the employee, 
or to the employee directly in cash. Contributions made at the 
election of the employee are called elective deferrals.
    Under prior law, the maximum annual amount of elective 
deferrals that an individual may make to a qualified cash or 
deferred arrangement (a ``401(k) plan''), a tax-sheltered 
annuity (``section 403(b) annuity'') or a salary reduction 
simplified employee pension plan (``SEP'') is $10,500 (for 
2001). The maximum annual amount of elective deferrals that an 
individual may make to a SIMPLE plan is $6,500 (for 2001). 
These limits are indexed for inflation in $500 increments.

Section 457 plans

    Under prior law, the maximum annual deferral under a 
deferred compensation plan of a State or local government or a 
tax-exempt organization (a ``section 457 plan'') is the lesser 
of: (1) $8,500 (for 2001) or (2) 33\1/3\ percent of 
compensation. The $8,500 dollar limit is increased for 
inflation in $500 increments. Under a special catch-up rule, 
the section 457 plan may provide that, for one or more of the 
participant's last three years before retirement, the otherwise 
applicable limit is increased to the lesser of: (1) $15,000 or 
(2) the sum of the otherwise applicable limit for the year plus 
the amount by which the limit applicable in preceding years of 
participation exceeded the deferrals for that year.

                           Reasons for Change

    Although the Congress believes that individuals should be 
saving for retirement throughout their working lives, as a 
practical matter, many individuals simply do not focus on the 
amount of retirement savings they need until they near 
retirement. In addition, many individuals may have difficulty 
saving more in earlier years, e.g., because an employee leaves 
the workplace to care for a family. Some individuals may have a 
greater ability to save as they near retirement.
    The Congress believes that the pension laws should assist 
individuals who are nearing retirement to save more for their 
retirement.

                     Explanation of Provision \105\

    EGTRRA provides that the otherwise applicable dollar limit 
on elective deferrals under a section 401(k) plan, section 
403(b) annuity, SEP, or SIMPLE, or deferrals under a 
governmental section 457 plan is increased to allow additional 
elective deferrals (``catch-up contributions'') for individuals 
who will attain age 50 by the end of the taxable year.\106\ The 
catch-up contribution provision does not apply to after-tax 
employee contributions or to contributions to a defined benefit 
plan.
---------------------------------------------------------------------------
    \105\ Technical corrections were enacted in section 411(o) of the 
Job Creation and Worker Assistance Act of 2002, described in Part Eight 
of this document, to clarify this EGTRRA provision.
    \106\ Section 611 of EGTRRA increases the dollar limit on elective 
deferrals under such arrangements.
---------------------------------------------------------------------------
    Catch-up contributions may be made by an individual who 
will attain age 50 by the end of the taxable year and with 
respect to whom no other elective deferrals may otherwise be 
made to the plan for the year because of the application of any 
limitation of the Code (e.g., the annual limit on elective 
deferrals) or of the plan. Under EGTRRA, the additional amount 
of elective contributions that may be made by an eligible 
individual participating in such a plan is the lesser of: (1) 
the applicable dollar amount or (2) the participant's 
compensation for the year reduced by any other elective 
deferrals of the participant for the year.\107\ The applicable 
dollar amount under a section 401(k) plan, section 403(b) 
annuity, SEP, or section 457 plan is $1,000 for 2002, $2,000 
for 2003, $3,000 for 2004, $4,000 for 2005, and $5,000 for 2006 
and thereafter. The applicable dollar amount under a SIMPLE is 
$500 for 2002, $1,000 for 2003, $1,500 for 2004, $2,000 for 
2005, and $2,500 for 2006 and thereafter. The $5,000 and $2,500 
amounts are adjusted for inflation in $500 increments in 2007 
and thereafter.
---------------------------------------------------------------------------
    \107\ In the case of a section 457 plan, a participant may make 
catch-up contributions in an amount equal to the greater of the amount 
permitted under the new catch-up rule and the amount permitted under 
the special catch-up rule for such a plan.
---------------------------------------------------------------------------
    A plan may not permit catch-up contributions in excess of 
the applicable limit. For this purpose, the limit applies to 
all qualified retirement plans, tax-sheltered annuity plans, 
SEPs and SIMPLE plans maintained by the same employer on an 
aggregated basis, as if all plans were a single plan. The limit 
applies also to all section 457 plans of a government employer 
on an aggregated basis.
    Catch-up contributions up to the specified limit are 
excluded from an individual's income. The total amount that an 
individual may exclude from income as catch-up contributions 
for a year cannot exceed the catch-up contribution limit for 
that year and for that type of plan (e.g., a qualified 
retirement plan or a section 457 plan), without regard to 
whether the individual made catch-up contributions under plans 
maintained by more than one employer.
    Catch-up contributions made under the provision are not 
subject to any other contribution limits and are not taken into 
account in applying other contribution limits. In addition, 
such contributions are not subject to applicable 
nondiscrimination rules. However, a plan fails to meet the 
applicable nondiscrimination requirements under section 
401(a)(4) with respect to benefits, rights, and features unless 
the plan allows all eligible individuals participating in the 
plan to make the same election with respect to catch-up 
contributions. For purposes of this rule, all plans of related 
employers are treated as a single plan. In addition, the 
special nondiscrimination rule for mergers and acquisitions 
applies for this purpose.
    An employer is permitted to make matching contributions 
with respect to catch-up contributions. Any such matching 
contributions are subject to the normally applicable rules.
    The following examples illustrate the application of the 
provision, after the catch-up is fully phased-in.
    Example 1: Employee A is a highly compensated employee who 
is over 50 and who participates in a section 401(k) plan 
sponsored by A's employer. The maximum annual deferral limit 
(without regard to the provision) is $15,000. After application 
of the special nondiscrimination rules applicable to section 
401(k) plans, the maximum elective deferral A may make for the 
year is $8,000. Under the provision, A is able to make 
additional catch-up salary reduction contributions of $5,000.
    Example 2: Employee B, who is over 50, is a participant in 
a section 401(k) plan. B's compensation for the year is 
$30,000. The maximum annual deferral limit (without regard to 
the provision) is $15,000. Under the terms of the plan, the 
maximum permitted deferral is 10 percent of compensation or, in 
B's case, $3,000. Under the provision, B can contribute up to 
$8,000 for the year ($3,000 under the normal operation of the 
plan, and an additional $5,000 under the provision).

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2001.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $124 million in 2002, $243 million in 2003, 
$234 million in 2004, $164 million in 2005, $100 million in 
2006, $84 million in 2007, $76 million in 2008, $63 million in 
2009, $57 million in 2010, $38 million in 2011, and $18 million 
in 2012.
            (b) Equitable treatment for contributions of employees to 
                    defined contribution plans (sec. 632 of the Act and 
                    secs. 403(b), 415, and 457 of the Code)

                         Present and Prior Law

    Present and prior law imposes limits on the contributions 
that may be made to tax-favored retirement plans.

Defined contribution plans

    Under prior law, in the case of a tax-qualified defined 
contribution plan, the limit on annual additions that can be 
made to the plan on behalf of an employee is the lesser of 
$35,000 (for 2001) or 25 percent of the employee's compensation 
(section 415(c)). Annual additions include employer 
contributions, including contributions made at the election of 
the employee (i.e., employee elective deferrals), after-tax 
employee contributions, and any forfeitures allocated to the 
employee. For this purpose, compensation means taxable 
compensation of the employee, plus elective deferrals, and 
similar salary reduction contributions. A separate limit 
applies to benefits under a defined benefit plan.
    For years before January 1, 2000, an overall limit applied 
if an employee was a participant in both a defined contribution 
plan and a defined benefit plan of the same employer.

Tax-sheltered annuities

    Under prior law, in the case of a tax-sheltered annuity (a 
``section 403(b) annuity''), the annual contribution generally 
cannot exceed the lesser of the exclusion allowance or the 
section 415(c) defined contribution limit. The exclusion 
allowance for a year is equal to 20 percent of the employee's 
includible compensation, multiplied by the employee's years of 
service, minus excludable contributions for prior years under 
qualified plans, tax-sheltered annuities or section 457 plans 
of the employer.
    In addition to this general rule, employees of nonprofit 
educational institutions, hospitals, home health service 
agencies, health and welfare service agencies, and churches may 
elect application of one of several special rules that increase 
the amount of the otherwise permitted contributions. The 
election of a special rule is irrevocable; an employee may not 
elect to have more than one special rule apply.
    Under one special rule, in the year the employee separates 
from service, the employee may elect to contribute up to the 
exclusion allowance, without regard to the 25 percent of 
compensation limit under section 415. Under this rule, the 
exclusion allowance is determined by taking into account no 
more than 10 years of service.
    Under a second special rule, the employee may contribute up 
to the lesser of: (1) the exclusion allowance; (2) 25 percent 
of the participant's includible compensation; or (3) $15,000.
    Under a third special rule, the employee may elect to 
contribute up to the section 415(c) limit, without regard to 
the exclusion allowance. If this option is elected, then 
contributions to other plans of the employer are also taken 
into account in applying the limit.
    For purposes of determining the contribution limits 
applicable to section 403(b) annuities, includible compensation 
means the amount of compensation received from the employer for 
the most recent period which may be counted as a year of 
service under the exclusion allowance. In addition, includible 
compensation includes elective deferrals and similar salary 
reduction amounts.
    Treasury regulations include provisions regarding 
application of the exclusion allowance in cases where the 
employee participates in a section 403(b) annuity and a defined 
benefit plan. The Taxpayer Relief Act of 1997 directed the 
Secretary of the Treasury to revise these regulations, 
effective for years beginning after December 31, 1999, to 
reflect the repeal of the overall limit on contributions and 
benefits.

Section 457 plans

    Compensation deferred under an eligible deferred 
compensation plan of a tax-exempt or State and local 
governmental employer (a ``section 457 plan'') is not 
includible in gross income until paid or made available. In 
general, under prior law, the maximum permitted annual deferral 
under such a plan is the lesser of: (1) $8,500 (in 2001) or (2) 
33\1/3\ percent of compensation. The $8,500 limit is increased 
for inflation in $500 increments.

                           Reasons for Change

    The Congress believes that the prior-law rules that limited 
contributions to defined contribution plans by a percentage of 
compensation reduced the amount that lower- and middle-income 
workers can save for retirement. The prior-law limits might not 
allow such workers to accumulate adequate retirement benefits, 
particularly if a defined contribution plan is the only type of 
retirement plan maintained by the employer.
    Conforming the contribution limits for tax-sheltered 
annuities to the limits applicable to retirement plans 
simplifies the administration of the pension laws, and provides 
more equitable treatment for participants in similar types of 
plans.

                        Explanation of Provision


Increase in defined contribution plan limit

    EGTRRA increases the 25 percent of compensation limitation 
on annual additions under a defined contribution plan to 100 
percent.\108\ With respect to the increase in the defined 
contribution plan limit, it is intended that the Secretary of 
the Treasury will use the Secretary's existing authority to 
address situations where qualified nonelective contributions 
are targeted to certain participants with lower compensation in 
order to increase the average deferral percentage of nonhighly 
compensated employees.
---------------------------------------------------------------------------
    \108\ Section 611 of EGTRRA increases the defined contribution plan 
dollar limit.
---------------------------------------------------------------------------

Conforming limits on tax-sheltered annuities

    EGTRRA repeals the exclusion allowance applicable to 
contributions to tax-sheltered annuities. Thus, such annuities 
are subject to the limits applicable to tax-qualified 
plans.\109\
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    \109\ A technical correction was enacted in section 411(p) of the 
Job Creation and Worker Assistance Act of 2002, described in Part Eight 
of this document, clarifying the operation of this provision and 
restoring special rules for ministers and lay employees of churches and 
for foreign missionaries that were inadvertently eliminated by the 
EGTRRA provision.
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    For taxable years beginning after December 31, 1999, a plan 
may disregard the regulations requirement under section 403(b) 
that contributions to a defined benefit plan be treated as 
previously excluded amounts for purposes of the exclusion 
allowance.

Section 457 plans

    EGTRRA increases the 33\1/3\ percent of compensation 
limitation on deferrals under a section 457 plan to 100 percent 
of compensation.\110\
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    \110\ A technical correction was enacted in section 411(p) of the 
Job Creation and Worker Assistance Act of 2002, described in Part Eight 
of this document, that conformed the definition of compensation used in 
applying this limit to a section 457 plan to the definition used for 
qualified defined contribution plans.
---------------------------------------------------------------------------

                             Effective Date

    The provision is generally effective for years beginning 
after December 31, 2001. The provision regarding the 
regulations under section 403(b) is effective on the date of 
enactment.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $45 million in 2002, $84 million in 2003, 
$98 million in 2004, $106 million in 2005, $113 million in 
2006, $121 million in 2007, $129 million in 2008, $136 million 
in 2009, $144 million in 2010, $75 million in 2011, and $36 
million in 2012.
            (c) Faster vesting of employer matching contributions (sec. 
                    633 of the Act and sec. 411 of the Code)

                         Present and Prior Law

    Under present and prior law, a plan is not a qualified plan 
unless a participant's employer-provided benefit vests at least 
as rapidly as under one of two alternative minimum vesting 
schedules. A plan satisfies the first schedule if a participant 
acquires a nonforfeitable right to 100 percent of the 
participant's accrued benefit derived from employer 
contributions upon the completion of five years of service. A 
plan satisfies the second schedule if a participant has a 
nonforfeitable right to at least 20 percent of the 
participant's accrued benefit derived from employer 
contributions after three years of service, 40 percent after 
four years of service, 60 percent after five years of service, 
80 percent after six years of service, and 100 percent after 
seven years of service.\111\
---------------------------------------------------------------------------
    \111\ The minimum vesting requirements are also contained in Title 
I of ERISA.
---------------------------------------------------------------------------

                           Reasons for Change

    The Congress understood that many employees, particularly 
lower- and middle-income employees, do not take full advantage 
of the retirement savings opportunities provided by their 
employer's section 401(k) plan. The Congress believed that 
providing faster vesting for matching contributions will make 
section 401(k) plans more attractive for employees, 
particularly lower- and middle-income employees, and would 
encourage employees to save more for their own retirement. In 
addition, faster vesting for matching contributions enables 
short-service employees to accumulate greater retirement 
savings.

                        Explanation of Provision

    EGTRRA applies faster vesting schedules to employer 
matching contributions. Under EGTRRA, employer matching 
contributions are required to vest at least as rapidly as under 
one of the following two alternative minimum vesting schedules. 
A plan satisfies the first schedule if a participant acquires a 
nonforfeitable right to 100 percent of employer matching 
contributions upon the completion of three years of service. A 
plan satisfies the second schedule if a participant has a 
nonforfeitable right to 20 percent of employer matching 
contributions for each year of service beginning with the 
participant's second year of service and ending with 100 
percent after six years of service.

                             Effective Date

    The provision is effective for contributions for plan years 
beginning after December 31, 2001, with a delayed effective 
date for plans maintained pursuant to a collective bargaining 
agreement. The provision does not apply to any employee until 
the employee has an hour of service after the effective date. 
In applying the new vesting schedule, service before the 
effective date is taken into account.

                             Revenue Effect

    The provision is estimated to have a negligible effect on 
Federal fiscal year budget receipts.
            (d) Modifications to minimum distribution rules (sec. 634 
                    of the Act and sec. 401(a)(9) of the Code)

                         Present and Prior Law


In general

    Minimum distribution rules apply to all types of tax-
favored retirement arrangements, including qualified retirement 
plans and annuities, individual retirement arrangements 
(``IRAs''), tax-sheltered annuity plans (``section 403(b) 
plans''), and eligible deferred compensation plans of tax-
exempt and State and local government employers (``section 457 
plans''). In general, under these rules, distribution of 
minimum benefits must begin no later than the required 
beginning date. Minimum distribution rules also apply to 
benefits payable with respect to a plan participant who has 
died. Failure to comply with the minimum distribution rules 
results in an excise tax imposed on the individual plan 
participant equal to 50 percent of the required minimum 
distribution not distributed for the year. The excise tax may 
be waived if the individual establishes to the satisfaction of 
the Secretary of the Treasury that the shortfall in the amount 
distributed was due to reasonable error and reasonable steps 
are being taken to remedy the shortfall. Under certain 
circumstances following the death of a participant, the excise 
tax is automatically waived under Treasury regulations.

Distributions prior to the death of the individual

    In the case of distributions prior to the death of the plan 
participant, the minimum distribution rules are satisfied if 
either: (1) the participant's entire interest in the plan is 
distributed by the required beginning date, or (2) the 
participant's interest in the plan is to be distributed (in 
accordance with regulations), beginning not later than the 
required beginning date, over a permissible period. The 
permissible periods are: (1) the life of the participant, (2) 
the lives of the participant and a designated beneficiary, (3) 
the life expectancy of the participant, or (4) the joint life 
and last survivor expectancy of the participant and a 
designated beneficiary. In calculating minimum required 
distributions from account-type arrangements (e.g., a defined 
contribution plan or an individual retirement account), life 
expectancies of the participant and the participant's spouse 
generally may be recomputed annually.
    In the case of qualified retirement plans and annuities, 
section 403(b) plans, and section 457 plans, the required 
beginning date generally is April 1 of the calendar year 
following the later of (1) the calendar year in which the 
participant attains age 70\1/2\ or (2) the calendar year in 
which the participant retires. However, in the case of a five-
percent owner of the employer, distributions generally are 
required to begin no later than April 1 of the calendar year 
following the year in which the five-percent owner attains age 
70\1/2\. If commencement of distributions from a defined 
benefit plan is delayed beyond age 70\1/2\ (i.e., in the case 
of a participant who has not retired), then the accrued benefit 
of the participant must be actuarially increased to take into 
account the period after age 70\1/2\ in which the participant 
was not receiving benefits under the plan.\112\ In the case of 
distributions from an IRA other than a Roth IRA, the required 
beginning date is the April 1 of the calendar year following 
the calendar year in which the IRA owner attains age 70\1/2\. 
The pre-death minimum distribution rules do not apply to Roth 
IRAs.
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    \112\ State and local government plans and church plans are not 
required to actuarially increase benefits that begin after age 70\1/2\.
---------------------------------------------------------------------------
    In general, under Treasury regulations, in order to satisfy 
the minimum distribution rules, annuity payments under a 
defined benefit plan must be paid in periodic payments made at 
intervals not longer than one year over a permissible period, 
and must be nonincreasing, or increase only as a result of the 
following: (1) cost-of-living adjustments; (2) cash refunds of 
employee contributions; (3) benefit increases under the plan; 
or (4) an adjustment due to death of the employee's 
beneficiary. In the case of a defined contribution plan, the 
minimum required distribution is determined by dividing the 
employee's benefit by an amount from the uniform table provided 
in the regulations.

Distributions after the death of the plan participant

    The minimum distribution rules also apply to distributions 
to beneficiaries of deceased participants. In general, if the 
participant dies after minimum distributions have begun, the 
remaining interest must be distributed at least as rapidly as 
under the minimum distribution method being used as of the date 
of death. If the participant dies before minimum distributions 
have begun, then the entire remaining interest must generally 
be distributed within five years of the participant's death. 
The five-year rule does not apply if distributions begin within 
one year of the participant's death and are payable over the 
life of a designated beneficiary or over the life expectancy of 
a designated beneficiary. A surviving spouse beneficiary is not 
required to begin distribution until the date the deceased 
participant would have attained age 70\1/2\.

                           Reasons for Change

    For many years, the minimum distribution rules have been 
among the most complex of the rules relating to tax-favored 
arrangements. On January 17, 2001, the Secretary of the 
Treasury issued revised proposed regulations relating to the 
minimum distribution rules. The Congress believed that the 
implementation of these revised proposed regulations, along 
with additional statutory modifications of the minimum 
distribution rules, would result in significant simplification 
for individuals and plan administrators.

                        Explanation of Provision

    EGTRRA directs the Treasury to revise the life expectancy 
tables under the applicable regulations to reflect current life 
expectancy.\113\
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    \113\ The Secretary of the Treasury issued final regulations, 
including revised life expectancy tables, on April 17, 2002.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective on the date of enactment.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by less than $500,000 in 2002, $1 million 
annually in 2003 and 2004, $2 million annually in 2005 through 
2009, $3 million annually in 2010 and 2011, and $1 million in 
2012.
            (e) Clarification of tax treatment of division of section 
                    457 plan benefits upon divorce (sec. 635 of the Act 
                    and secs. 414(p) and 457 of the Code)

                         Present and Prior Law

    Under present and prior law, benefits provided under a 
qualified retirement plan for a participant may not be assigned 
or alienated to creditors of the participant, except in very 
limited circumstances. One exception to the prohibition on 
assignment or alienation rule is a qualified domestic relations 
order (``QDRO''). A QDRO is a domestic relations order that 
creates or recognizes a right of an alternate payee to any plan 
benefit payable with respect to a participant, and that meets 
certain procedural requirements.
    Under present and prior law, a distribution from a 
governmental plan or a church plan is treated as made pursuant 
to a QDRO if it is made pursuant to a domestic relations order 
that creates or recognizes a right of an alternate payee to any 
plan benefit payable with respect to a participant. Such 
distributions are not required to meet the procedural 
requirements that apply with respect to distributions from 
qualified plans.
    Under present and prior law, amounts distributed from a 
qualified plan generally are taxable to the participant in the 
year of distribution. However, if amounts are distributed to 
the spouse (or former spouse) of the participant by reason of a 
QDRO, the benefits are taxable to the spouse (or former 
spouse). Amounts distributed pursuant to a QDRO to an alternate 
payee other than the spouse (or former spouse) are taxable to 
the plan participant.
    Section 457 of the Internal Revenue Code provides rules for 
deferral of compensation by an individual participating in an 
eligible deferred compensation plan (``section 457 plan'') of a 
tax-exempt or State and local government employer. Under prior 
law, the QDRO rules do not apply to section 457 plans.

                           Reasons for Change

    The Congress believed that the rules regarding qualified 
domestic relations orders should apply to all types of 
employer-sponsored retirement plans.

                        Explanation of Provision

    EGTRRA applies the taxation rules for qualified plan 
distributions pursuant to a QDRO to distributions made pursuant 
to a domestic relations order from a section 457 plan. In 
addition, a section 457 plan does not violate the restrictions 
on distributions from such plans due to payments to an 
alternate payee under a QDRO. The special rule applicable to 
governmental plans and church plans applies for purposes of 
determining whether a distribution is pursuant to a QDRO.

                             Effective Date

    The provision relating to tax treatment of distributions 
made pursuant to a domestic relations order from a section 457 
plan is effective for transfers, distributions, and payments 
made after December 31, 2001.

                             Revenue Effect

    The provision is estimated to have a negligible effect on 
Federal fiscal year budget receipts.
            (f) Provisions relating to hardship withdrawals (sec. 636 
                    of the Act and secs. 401(k) and 402 of the Code)

                         Present and Prior Law

    Elective deferrals under a qualified cash or deferred 
arrangement (a ``section 401(k) plan'') may not be 
distributable prior to the occurrence of one or more specified 
events. One event upon which distribution is permitted is the 
financial hardship of the employee. Applicable Treasury 
regulations \114\ provide that a distribution is made on 
account of hardship only if the distribution is made on account 
of an immediate and heavy financial need of the employee and is 
necessary to satisfy the heavy need.
---------------------------------------------------------------------------
    \114\ Treas. Reg. sec. 1.401(k)-1.
---------------------------------------------------------------------------
    The Treasury regulations provide a safe harbor under which 
a distribution may be deemed necessary to satisfy an immediate 
and heavy financial need. One requirement of this safe harbor 
is that the employee be prohibited from making elective 
contributions and employee contributions to the plan and all 
other plans maintained by the employer for at least 12 months 
after receipt of the hardship distribution.
    Under present and prior law, hardship withdrawals of 
elective deferrals from a qualified cash or deferred 
arrangement (or 403(b) annuity) are not eligible rollover 
distributions. Other types of hardship distributions, e.g., 
employer matching contributions distributed on account of 
hardship, are eligible rollover distributions. Different 
withholding rules apply to distributions that are eligible 
rollover distributions and to distributions that are not 
eligible rollover distributions. Eligible rollover 
distributions that are not directly rolled over are subject to 
withholding at a flat rate of 20 percent. Distributions that 
are not eligible rollover distributions are subject to elective 
withholding. Periodic distributions are subject to withholding 
as if the distribution were wages; nonperiodic distributions 
are subject to withholding at a rate of 10 percent. In either 
case, the individual may elect not to have withholding apply.

                           Reasons for Change

    Although the Congress believed that it is appropriate to 
restrict the circumstances in which an in-service distribution 
from a 401(k) plan is permitted and to encourage participants 
to take such distributions only when necessary to satisfy an 
immediate and heavy financial need, the Congress was concerned 
about the impact of a 12-month suspension of contributions on 
the retirement savings of a participant who experiences a 
hardship. The Congress believed that the combination of a six-
month contribution suspension and the other elements of the 
regulatory safe harbor would provide an adequate incentive for 
a participant to seek sources of funds other than his or her 
401(k) plan account balance in order to satisfy financial 
hardships.
    The prior-law rules regarding the ability to rollover 
hardship distributions created administrative burdens for plan 
administrators and confusion on the part of plan participants. 
The Congress believed that providing a uniform rule for all 
hardship distributions would simplify application of the 
rollover rules.

                        Explanation of Provision

    The Secretary of the Treasury is directed to revise the 
applicable regulations to reduce from 12 months to six months 
the period during which an employee must be prohibited from 
making elective contributions and employee contributions in 
order for a distribution to be deemed necessary to satisfy an 
immediate and heavy financial need. The revised regulations are 
to be effective for years beginning after December 31, 2001.
    In addition, any distribution made upon hardship of an 
employee is not an eligible rollover distribution. Thus, such 
distributions may not be rolled over, and are subject to the 
withholding rules applicable to distributions that are not 
eligible rollover distributions. EGTRRA does not modify the 
rules under which hardship distributions may be made. For 
example, as under present and prior law, hardship distributions 
of qualified employer matching contributions are only permitted 
under the rules applicable to elective deferrals.
    EGTRRA is intended to clarify that all assets distributed 
as a hardship withdrawal, including assets attributable to 
employee elective deferrals and those attributable to employer 
matching or nonelective contributions, are ineligible for 
rollover. This rule is intended to apply to all hardship 
distributions from any tax qualified plan, including those made 
pursuant to standards set forth in section 401(k)(2)(B)(i)(IV) 
(which are applicable to section 401(k) plans and section 
403(b) annuities) and to those treated as hardship 
distributions under any profit-sharing plan (whether or not in 
accordance with the standards set forth in section 
401(k)(2)(B)(i)(IV)). For this purpose, a distribution that 
could be made either under the hardship provisions of a plan or 
under other provisions of the plan (such as provisions 
permitting in-service withdrawal of assets attributable to 
employer matching or nonelective contributions after a fixed 
period of years) could be treated as made upon hardship of the 
employee if the plan treats it that way. For example, if a plan 
makes an in-service distribution that consists of assets 
attributable to both elective deferrals (in circumstances where 
those assets could be distributed only upon hardship) and 
employer matching or nonelective contributions (which could be 
distributed in nonhardship circumstances under the plan), the 
plan is permitted to treat the distribution in its entirety as 
made upon hardship of the employee.

                             Effective Date

    The provision directing the Secretary to revise the rules 
relating to safe harbor hardship distributions is effective on 
the date of enactment. The provision that hardship 
distributions are not eligible rollover distributions is 
effective for distributions made after December 31, 2001. The 
Secretary has the authority to issue transitional guidance with 
respect to the provision that hardship distributions are not 
eligible rollover distributions to provide sufficient time for 
plans to implement the new rule.

                             Revenue Effect

    The provision is estimated to have a negligible effect on 
Federal fiscal year budget receipts.
            (g) Pension coverage for domestic and similar workers (sec. 
                    637 of the Act and sec. 4972(c)(6) of the Code)

                         Present and Prior Law

    Under present and prior law, within limits, employers may 
make deductible contributions to qualified retirement plans for 
employees. Subject to certain exceptions, a 10-percent excise 
tax applies to nondeductible contributions to such plans.
    Employers of household workers may establish a pension plan 
for their employees. Contributions to such plans are not 
deductible because they are not made in connection with a trade 
or business of the employer.

                           Reasons for Change

    Under prior law, individuals who employ domestic and 
similar workers could be discouraged from providing pension 
plan coverage for such employees because of the possible 
adverse tax consequences from making nondeductible 
contributions. As a result, such workers, who are typically 
lower income, might be denied the opportunity for tax-favored 
retirement savings. The Congress believed that individuals who 
employ such workers should be encouraged to provide pension 
coverage.

                        Explanation of Provision

    The 10-percent excise tax on nondeductible contributions 
does not apply to contributions to a SIMPLE plan or a SIMPLE 
IRA that are nondeductible solely because the contributions are 
not a trade or business expense under section 162 because they 
are not made in connection with a trade or business of the 
employer. Thus, for example, employers of household workers are 
able to make contributions to such plans without imposition of 
the excise tax.\115\ As under present and prior law, the 
contributions are not deductible. The present and prior-law 
rules applicable to such plans, e.g., contribution limits and 
nondiscrimination rules, continue to apply. EGTRRA does not 
apply with respect to contributions on behalf of the individual 
and members of his or her family.
---------------------------------------------------------------------------
    \115\ Section 3(c) of the Tax Technical Corrections Act of 2002, 
introduced on November 13, 2002, as H.R. 5713 in the House of 
Representatives and S. 3153 in the Senate, would revise the definition 
of compensation for purposes of determining contributions to a SIMPLE 
plan or a SIMPLE IRA to include wages paid to household workers, even 
though such amounts are not subject to income tax withholding.
---------------------------------------------------------------------------
    No inference is intended with respect to the application of 
the excise tax under prior law to contributions that are not 
deductible because they are not made in connection with a trade 
or business of the employer.
    As under present and prior law, a plan covering domestic 
workers is not qualified unless the coverage rules are 
satisfied by aggregating all employees of family members taken 
into account under the attribution rules in section 414(c), but 
disregarding employees employed by a controlled group of 
corporations or a trade or business.
    It is intended that this exception to the 100 percent 
excise tax is restricted to contributions made by employers of 
household workers with respect to whom all applicable 
employment taxes have been and are being paid.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2001.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by less than $500,000 annually in 2002 and 
2003, $1 million in 2004, $2 million in 2005, $4 million in 
2006, $6 million in 2007, $8 million in 2008, $10 million in 
2009, $12 million in 2010, $14 million in 2011, and $5 million 
2012.

3. Increasing portability for participants

            (a) Rollovers of retirement plan and IRA distributions 
                    (secs. 641-643 and 649 of the Act and secs. 401, 
                    402, 403(b), 408, 457, and 3405 of the Code)

                         Present and Prior Law


In general

    Present and prior law permit the rollover of funds from a 
tax-favored retirement plan to another tax-favored retirement 
plan. The rules that apply depend on the type of plan involved. 
Similarly, the rules regarding the tax treatment of amounts 
that are not rolled over depend on the type of plan involved.

Distributions from qualified plans

    Under present and prior law, an ``eligible rollover 
distribution'' from a tax-qualified employer-sponsored 
retirement plan may be rolled over tax free to a traditional 
individual retirement arrangement (``IRA'') \116\ or another 
qualified plan.\117\ An ``eligible rollover distribution'' 
means any distribution to an employee of all or any portion of 
the balance to the credit of the employee in a qualified plan, 
except the term does not include: (1) any distribution which is 
one of a series of substantially equal periodic payments made 
(a) for the life (or life expectancy) of the employee or the 
joint lives (or joint life expectancies) of the employee and 
the employee's designated beneficiary, or (b) for a specified 
period of 10 years or more, (2) any distribution to the extent 
such distribution is required under the minimum distribution 
rules, and (3) certain hardship distributions. Under prior law, 
the maximum amount that could be rolled over is the amount of 
the distribution includible in income, i.e., after-tax employee 
contributions cannot be rolled over. Qualified plans are not 
required to accept rollovers.
---------------------------------------------------------------------------
    \116\ A ``traditional'' IRA refers to IRAs other than Roth IRAs or 
SIMPLE IRAs.
    \117\ An eligible rollover distribution may either be rolled over 
by the distributee within 60 days of the date of the distribution or, 
as described below, directly rolled over by the distributing plan.
---------------------------------------------------------------------------

Distributions from tax-sheltered annuities

    Under prior law, eligible rollover distributions from a 
tax-sheltered annuity (``section 403(b) annuity'') could be 
rolled over only into an IRA or another section 403(b) annuity. 
Distributions from a section 403(b) annuity could not be rolled 
over into a tax-qualified plan. Section 403(b) annuities are 
not required to accept rollovers.

IRA distributions

    Under prior law, distributions from a traditional IRA, 
other than minimum required distributions, could be rolled over 
into another traditional IRA.\118\ In general, distributions 
from an IRA could not be rolled over into a qualified plan or 
section 403(b) annuity. An exception to this rule applies in 
the case of so-called a traditional ``conduit IRAs.'' Under the 
conduit IRA rule, amounts can be rolled from a qualified plan 
into IRA and then subsequently rolled back to another qualified 
plan if the amounts in the IRA are attributable solely to 
rollovers from a qualified plan. Similarly, an amount may be 
rolled over from a section 403(b) annuity to a traditional IRA 
and subsequently rolled back into a section 403(b) annuity if 
the amounts in the IRA are attributable solely to rollovers 
from a section 403(b) annuity.
---------------------------------------------------------------------------
    \118\ Distributions from a Roth IRA may be rolled over only to 
another Roth IRA.
---------------------------------------------------------------------------

Distributions from section 457 plans

    A ``section 457 plan'' is an eligible deferred compensation 
plan of a State or local government or tax-exempt employer that 
meets certain requirements. In some cases, different rules 
apply under section 457 to governmental plans and plans of tax-
exempt employers. For example, governmental section 457 plans 
are like qualified plans in that plan assets are required to be 
held in a trust for the exclusive benefit of plan participants 
and beneficiaries. In contrast, benefits under a section 457 
plan of a tax-exempt employer are unfunded, like nonqualified 
deferred compensation plans of private employers.
    Under prior law, section 457 benefits could be transferred 
only to another section 457 plan. Distributions from a section 
457 plan cannot be rolled over to another section 457 plan, a 
qualified plan, a section 403(b) annuity, or an IRA.

Rollovers by surviving spouses

    Under prior law, a surviving spouse that receives an 
eligible rollover distribution could roll over the distribution 
into a traditional IRA, but not a qualified plan or section 
403(b) annuity.

Direct rollovers and withholding requirements

    Qualified plans and section 403(b) annuities are required 
to provide that a plan participant has the right to elect that 
an eligible rollover distribution be directly rolled over to 
another eligible retirement plan. If the plan participant does 
not elect the direct rollover option, then withholding is 
required on the distribution at a 20-percent rate.\119\
---------------------------------------------------------------------------
    \119\ Distributions from qualified plans and section 403(b) 
annuities that are not eligible rollover distributions are subject to 
elective withholding. Periodic distributions are subject to withholding 
as if the distribution were wages; nonperiodic distributions are 
subject to withholding at a rate of 10 percent. In either case, the 
individual may elect not to have withholding apply.
---------------------------------------------------------------------------

Notice of eligible rollover distribution

    The plan administrator of a qualified plan or a section 
403(b) annuity is required to provide a written explanation of 
rollover rules to individuals who receive a distribution 
eligible for rollover. In general, the notice is to be provided 
within a reasonable period of time before making the 
distribution and is to include an explanation of: (1) the 
provisions under which the individual may have the distribution 
directly rolled over to another eligible retirement plan, (2) 
the provision that requires withholding if the distribution is 
not directly rolled over, (3) the provision under which the 
distribution may be rolled over within 60 days of receipt, and 
(4) if applicable, certain other rules that may apply to the 
distribution. The Treasury Department has provided more 
specific guidance regarding timing and content of the notice.

Taxation of distributions

    As is the case with the rollover rules, different rules 
regarding taxation of benefits apply to different types of tax-
favored arrangements. In general, distributions from a 
qualified plan, section 403(b) annuity, or IRA are includible 
in income in the year received (except to the extent the amount 
received constitutes a return of after-tax contributions or a 
qualified distribution from a Roth IRA). In certain cases, 
distributions from qualified plans are eligible for capital 
gains treatment and averaging. These rules do not apply to 
distributions from another type of plan. Includible 
distributions from a qualified plan, IRA, and section 403(b) 
annuity generally are subject to an additional 10-percent early 
withdrawal tax if made before age 59\1/2\. There are a number 
of exceptions to the early withdrawal tax. Some of the 
exceptions apply to all three types of plans, and others apply 
only to certain types of plans. For example, the 10-percent 
early withdrawal tax does not apply to IRA distributions for 
educational expenses, but does apply to similar distributions 
from qualified plans and section 403(b) annuities. Benefits 
under a section 457 plan are generally includible in income 
when paid or made available. The 10-percent early withdrawal 
tax does not apply to section 457 plans.

                           Reasons for Change

    Present and prior law encourages individuals who receive 
distributions from qualified plans and similar arrangements to 
save those distributions for retirement by facilitating tax-
free rollovers to an IRA or another qualified plan. The 
Congress believed that expanding the rollover options for 
individuals in employer-sponsored retirement plans and owners 
of IRAs would provide further incentives for individuals to 
continue to accumulate funds for retirement. The Congress 
believed it appropriate to extend the same rollover rules to 
governmental section 457 plans; like qualified plans, such 
plans are required to hold plan assets in trust for employees.

                        Explanation of Provision


In general

    EGTRRA provides that eligible rollover distributions from 
qualified retirement plans, section 403(b) annuities, and 
governmental section 457 plans generally can be rolled over to 
any of such plans or arrangements.\120\ Similarly, 
distributions from a traditional IRA (or a Simple IRA in which 
the individual has participated for two years or more) 
generally are permitted to be rolled over into a qualified 
plan, section 403(b) annuity, or governmental section 457 plan. 
The direct rollover and withholding rules are extended to 
distributions from a governmental section 457 plan, and such 
plans are required to provide the written notification 
regarding eligible rollover distributions.\121\ The rollover 
notice (with respect to all plans) is required to include a 
description of the provisions under which distributions from 
the plan to which the distribution is rolled over may be 
subject to restrictions and tax consequences different than 
those applicable to distributions from the distributing plan. 
Qualified plans, section 403(b) annuities, and governmental 
section 457 plans may, but are not required to, accept 
rollovers.
---------------------------------------------------------------------------
    \120\ Under section 636 of EGTRRA, hardship distributions are not 
considered eligible rollover distributions.
    \121\ The elective withholding rules applicable to distributions 
from qualified plans and section 403(b) annuities that are not eligible 
rollover distributions are also extended to distributions from 
governmental section 457 plans. Thus, periodic distributions from 
governmental section 457 plans that are not eligible rollover 
distributions are subject to withholding as if the distribution were 
wages and nonperiodic distributions from such plans that are not 
eligible rollover distributions are subject to withholding at a 10-
percent rate. In either case, the individual may elect not to have 
withholding apply.
---------------------------------------------------------------------------
    Some special rules apply in certain cases. A distribution 
from a qualified plan is not eligible for capital gains or 
averaging treatment if there was a rollover to the plan that 
would not have been permitted under prior law. Thus, in order 
to preserve capital gains and averaging treatment for a 
qualified plan distribution that is rolled over, the rollover 
would have to be made to a ``conduit IRA'' as under prior law, 
and then rolled back into a qualified plan. Amounts distributed 
from a governmental section 457 plan are subject to the early 
withdrawal tax to the extent the distribution consists of 
amounts attributable to rollovers from another type of plan. 
Governmental section 457 plans are required to separately 
account for such amounts.

Rollover of after-tax contributions

    EGTRRA provides that employee after-tax contributions may 
be rolled over into another qualified plan or a traditional 
IRA. In the case of a rollover from a qualified plan to another 
qualified plan, the rollover is permitted to be accomplished 
only through a direct rollover. In addition, a qualified plan 
is not permitted to accept rollovers of after-tax contributions 
unless the plan provides separate accounting for such 
contributions (and earnings thereon).\122\
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    \122\ A technical correction was enacted in section 411(q) of the 
Job Creation and Worker Assistance Act of 2002, described in Part Eight 
of this document, to clarify that a qualified plan must provide for the 
direct rollover of after-tax contributions only to a qualified defined 
contribution plan or a traditional IRA and that, if a distribution 
includes both pretax and after-tax amounts, the portion of the 
distribution that is rolled over is treated as consisting first of 
pretax amounts.
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    After-tax contributions (including nondeductible 
contributions to a traditional IRA) are not permitted to be 
rolled over from an IRA into a qualified plan, tax-sheltered 
annuity, or section 457 plan. In the case of a distribution 
from a traditional IRA that is rolled over into an eligible 
rollover plan that is not an IRA, the distribution is 
attributed first to amounts other than after-tax contributions.

Expansion of spousal rollovers

    EGTRRA provides that surviving spouses may roll over 
distributions to a qualified plan, section 403(b) annuity, or 
governmental section 457 plan in which the surviving spouse 
participates.

Treasury regulations

    The Secretary is directed to prescribe rules necessary to 
carry out these provisions. Such rules may include, for 
example, reporting requirements and mechanisms to address 
mistakes relating to rollovers. It is anticipated that the IRS 
will develop forms to assist individuals who roll over after-
tax contributions to an IRA in keeping track of such 
contributions. Such forms could, for example, expand Form 
8606--Nondeductible IRAs, to include information regarding 
after-tax contributions.

                             Effective Date

    The provision is effective for distributions made after 
December 31, 2001. It is intended that the Secretary will 
revise the safe harbor rollover notice that plans may use to 
satisfy the rollover requirements. No penalty is imposed on a 
plan for a failure to provide the information required under 
the provision with respect to any distribution made before the 
date that is 90 days after the date the Secretary issues a new 
safe harbor rollover notice, if the plan administrator makes a 
reasonable attempt to comply with such notice 
requirement.122A For example, the provision requires 
that the rollover notice include a description of the 
provisions under which distributions from the eligible 
retirement plan receiving the distribution may be subject to 
restrictions and tax consequences which are different from 
those applicable to distributions from the plan making the 
distribution. A plan is treated as making a reasonable good 
faith effort to comply with this requirement if the notice 
states that distributions from the plan to which the rollover 
is made may be subject to different restrictions and tax 
consequences from those that apply to distributions from the 
plan from which the rollover is made.

                             Revenue Effect

    The provisions are estimated to increase Federal fiscal 
year budget receipts by $27 million in 2002, and to reduce 
Federal fiscal year budget receipts by $4 million annually in 
2003 and 2004, $5 million annually in 2005 through 2007, $6 
million annually in 2008 and 2009, $7 million in 2010, $43 
million in 2011, and $3 million in 2012.
            (b) Waiver of 60-day rule (sec. 644 of the Act and secs. 
                    402 and 408 of the Code)

                         Present and Prior Law

    Under present and prior law, amounts received from an IRA 
or qualified plan may be rolled over tax free if the rollover 
is made within 60 days of the date of the distribution. Under 
prior law, the Secretary does not have the authority to waive 
the 60-day requirement, except during military service in a 
combat zone or by reason of a Presidentially declared disaster. 
The Secretary has issued regulations postponing the 60-day rule 
in such cases.

                           Reasons for Change

    The inability of the Secretary to waive the 60-day rollover 
period may result in adverse tax consequences for individuals. 
The Congress believed such harsh results are inappropriate and 
that providing for waivers of the rule would help facilitate 
rollovers.
---------------------------------------------------------------------------
    \122A\ Notice 2002-3, 2002-2 I.R.B. 289, provides a new safe harbor 
rollover notice.
---------------------------------------------------------------------------

                        Explanation of Provision

    EGTRRA provides that the Secretary may waive the 60-day 
rollover period if the failure to waive such requirement would 
be against equity or good conscience, including cases of 
casualty, disaster, or other events beyond the reasonable 
control of the individual subject to such requirement. For 
example, the Secretary may issue guidance that includes 
objective standards for a waiver of the 60-day rollover period, 
such as waiving the rule due to military service in a combat 
zone or during a Presidentially declared disaster (both of 
which are provided for under present and prior law), or for a 
period during which the participant has received payment in the 
form of a check, but has not cashed the check, or for errors 
committed by a financial institution, or in cases of inability 
to complete a rollover due to death, disability, 
hospitalization, incarceration, restrictions imposed by a 
foreign country, or postal error.

                             Effective Date

    The provision applies to distributions made after December 
31, 2001.

                             Revenue Effect

    The provision is estimated to have a negligible effect on 
Federal fiscal year budget receipts.
            (c) Treatment of forms of distribution (sec. 645 of the Act 
                    and sec. 411(d)(6) of the Code)

                         Present and Prior Law

    An amendment of a qualified retirement plan may not 
decrease the accrued benefit of a plan participant. An 
amendment is treated as reducing an accrued benefit if, with 
respect to benefits accrued before the amendment is adopted, 
the amendment has the effect of either (1) eliminating or 
reducing an early retirement benefit or a retirement-type 
subsidy, or (2) except as provided by Treasury regulations, 
eliminating an optional form of benefit (section 
411(d)(6).\123\
---------------------------------------------------------------------------
    \123\ A similar provision is contained in Title I of ERISA.
---------------------------------------------------------------------------
    Under regulations issued by the Secretary,\124\ this 
prohibition against the elimination of an optional form of 
benefit does not apply in the case of (1) a defined 
contribution plan that offers a lump sum at the same time as 
the form being eliminated if the participant receives at least 
90 days' advance notice of the elimination, or (2) a voluntary 
transfer between defined contribution plans, subject to the 
requirements that a transfer from a money purchase pension 
plan, an ESOP, or a section 401(k) plan must be to a plan of 
the same type and that the transfer be made in connection with 
certain corporate mergers, acquisitions, or similar 
transactions or changes in employment status.
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    \124\ Treas. Reg. sec. 1.411(d)-4, Q&A-2(e) and Q&A-(3)(b).
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                           Reasons for Change

    The Congress understood that the application of the 
prohibition against the elimination of any optional form of 
benefit frequently resulted in complexity and confusion, 
especially in the context of business acquisitions and similar 
transactions, and maked it difficult for participants to 
understand their benefit options and make choices that are 
best-suited to their needs. The Congress believed that it 
appropriate to permit the elimination of duplicative benefit 
options that develop following plan mergers and similar events 
while ensuring that meaningful early retirement benefit payment 
options and subsidies may not be eliminated. In addition, the 
Congress understood that a defined contribution plan 
participant who is entitled to receive a single sum 
distribution generally may roll over such a distribution to an 
IRA and control the manner of distribution from the IRA, thus 
reducing the need to prohibit the elimination of all optional 
forms of benefits.

                        Explanation of Provision

    A defined contribution plan to which benefits are 
transferred will not be treated as reducing a participant's or 
beneficiary's accrued benefit even though it does not provide 
all of the forms of distribution previously available under the 
transferor plan if: (1) the plan receives from another defined 
contribution plan a direct transfer of the participant's or 
beneficiary's benefit accrued under the transferor plan, or the 
plan results from a merger or other transaction that has the 
effect of a direct transfer (including consolidations of 
benefits attributable to different employers within a multiple 
employer plan), (2) the terms of both the transferor plan and 
the transferee plan authorize the transfer, (3) the transfer 
occurs pursuant to a voluntary election by the participant or 
beneficiary that is made after the participant or beneficiary 
received a notice describing the consequences of making the 
election, and (4) the transferee plan allows the participant or 
beneficiary to receive distribution of his or her benefit under 
the transferee plan in the form of a single sum distribution.
    Except to the extent provided by the Secretary of the 
Treasury in regulations, a defined contribution plan is not 
treated as reducing a participant's accrued benefit if: (1) a 
plan amendment eliminates a form of distribution previously 
available under the plan, (2) a single sum distribution is 
available to the participant at the same time or times as the 
form of distribution eliminated by the amendment, and (3) the 
single sum distribution is based on the same or greater portion 
of the participant's accrued benefit as the form of 
distribution eliminated by the amendment.
    Furthermore, the provision directs the Secretary of the 
Treasury to provide by regulations that the prohibitions 
against eliminating or reducing an early retirement benefit, a 
retirement-type subsidy, or an optional form of benefit do not 
apply to plan amendments that eliminate or reduce early 
retirement benefits, retirement-type subsidies, and optional 
forms of benefit that create significant burdens and 
complexities for a plan and its participants, but only if such 
an amendment does not adversely affect the rights of any 
participant in more than a de minimis manner.
    It is intended that the factors to be considered in 
determining whether an amendment has more than a de minimis 
adverse effect on any participant will include: (1) all of the 
participant's early retirement benefits, retirement-type 
subsidies, and optional forms of benefits that are reduced or 
eliminated by the amendment, (2) the extent to which early 
retirement benefits, retirement-type subsidies, and optional 
forms of benefit in effect with respect to a participant after 
the amendment effective date provide rights that are comparable 
to the rights that are reduced or eliminated by the plan 
amendment, (3) the number of years before the participant 
attains normal retirement age under the plan (or early 
retirement age, as applicable), (4) the size of the 
participant's benefit that is affected by the plan amendment, 
in relation to the amount of the participant's compensation, 
and (5) the number of years before the plan amendment is 
effective.
    This provision of EGTRRA does not affect the rules relating 
to involuntary cash outs (section 411(a)(11)) or survivor 
annuity requirements (section 417). Further, as under present 
and prior law, a plan that is a transferee of a plan subject to 
the joint and survivor rules is also subject to those rules. 
Accordingly, if a participant is entitled to protections of the 
joint and survivor rules, those protections may not be 
eliminated. The intent of the provision authorizing regulations 
is solely to permit the elimination of early retirement 
benefits, retirement-type subsidies, or optional forms of 
benefit that have no more than a de minimis effect on any 
participant but create disproportionate burdens and 
complexities for a plan and its participants.
    For example, assume the following. Employer A acquires 
employer B and merges B's defined benefit plan into A's defined 
benefit plan. The defined benefit plan maintained by B before 
the merger provides an early retirement subsidy for individuals 
age 55 with a specified number of years of service. E1 and E2 
are were employees of B and who transfer to A in connection 
with the merger. E1 is 25 years old and has compensation of 
$40,000. The present value of E1's early retirement subsidy 
under B's plan is $75. E2 is 50 years old and also has 
compensation of $40,000. The present value of E2's early 
retirement subsidy under B's plan is $10,000.
    Assume that A's plan has an early retirement subsidy for 
individuals who have attained age 50 with a specified number of 
years of service, but the subsidy is not the same as under B's 
plan. Under A's plan, the present value of E2's early 
retirement subsidy is $9,850. Maintenance of both subsidies 
after the plan merger would create burdens for the plan and 
complexities for the plan and its participants.
    Treasury regulations could permit E1's early retirement 
subsidy under B's plan to be eliminated entirely (i.e., even if 
A's plan did not have an early retirement subsidy). Taking into 
account all relevant factors, including the value of the 
benefit, E1's compensation, and the number of years until E1 
would be eligible to receive the subsidy, the subsidy is de 
minimis. Treasury regulations could permit E2's early 
retirement subsidy under B's plan to be eliminated and to be 
replaced by the subsidy under A's plan, because the difference 
in the subsidies is de minimis. However, E2's subsidy could not 
be entirely eliminated.
    The Secretary is directed to issue, not later than December 
31, 2003, final regulations under section 411(d)(6), including 
regulations required under the provision.

                             Effective Date

    The provision is effective for years beginning after 
December 31, 2001, except that the direction to the Secretary 
is effective on the date of enactment.

                             Revenue Effect

    The provision is estimated to have a negligible effect on 
Federal fiscal year budget receipts.
            (d) Rationalization of restrictions on distributions (sec. 
                    646 of the Act and secs. 401(k), 403(b), and 457 of 
                    the Code)

                         Present and Prior Law

    Elective deferrals under a qualified cash or deferred 
arrangement (``section 401(k) plan''), tax-sheltered annuity 
(``section 403(b) annuity''), or an eligible deferred 
compensation plan of a tax-exempt organization or State or 
local government (``section 457 plan''), may not be 
distributable prior to the occurrence of one or more specified 
events. Under prior law, these permissible distributable events 
include ``separation from service.''
    A separation from service occurs only upon a participant's 
death, retirement, resignation or discharge, and not when the 
employee continues on the same job for a different employer as 
a result of the liquidation, merger, consolidation or other 
similar corporate transaction. A severance from employment 
occurs when a participant ceases to be employed by the employer 
that maintains the plan. Under a so-called ``same desk rule,'' 
a participant's severance from employment does not necessarily 
result in a separation from service.\125\
---------------------------------------------------------------------------
    \125\ Rev. Rul. 79-336, 1979-2 C.B. 187.
---------------------------------------------------------------------------
    Under prior law, in addition to separation from service and 
other events, a section 401(k) plan that is maintained by a 
corporation may permit distributions to certain employees who 
experience a severance from employment with the corporation 
that maintains the plan but do not experience a separation from 
service because the employees continue on the same job for a 
different employer as a result of a corporate transaction. If 
the corporation disposes of substantially all of the assets 
used by the corporation in a trade or business, a distributable 
event occurs with respect to the accounts of the employees who 
continue employment with the corporation that acquires the 
assets. If the corporation disposes of its interest in a 
subsidiary, a distributable event occurs with respect to the 
accounts of the employees who continue employment with the 
subsidiary. Under a recent IRS ruling, a person is generally 
deemed to have separated from service if that person is 
transferred to another employer in connection with a sale of 
less than substantially all the assets of a trade or 
business.\126\
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    \126\ Rev. Rul. 2000-27, 2000-21 I.R.B. 1016.
---------------------------------------------------------------------------

                           Reasons for Change

    The Congress believed that application of the ``same desk'' 
rule was inappropriate because it hindered portability of 
retirement benefits, created confusion for employees, and 
resulted in significant administrative burdens for employers 
that engage in business acquisition transactions.

                        Explanation of Provision

    EGTRRA modifies the distribution restrictions applicable to 
section 401(k) plans, section 403(b) annuities, and section 457 
plans to provide that distribution may occur upon severance 
from employment rather than separation from service. In 
addition, the provisions for distribution from a section 401(k) 
plan based upon a corporation's disposition of its assets or a 
subsidiary are repealed; this special rule is no longer 
necessary under the provision.
    It is intended that a plan may provide that certain 
specified types of severance from employment do not constitute 
distributable events. For example, a plan could provide that a 
severance from employment is not a distributable event if it 
would not have constituted a ``separation from service'' under 
the law in effect prior to a specified date. Also, if a plan 
describes distributable events by reference to section 
401(k)(2), the plan may be amended to restrict distributable 
events to fewer than all events that constitute a severance 
from employment. Thus, for example, if a plan sponsor had 
employees who experienced a severance from employment in the 
past that the ``same desk rule'' prevented from being treated 
as a distributable event, the plan sponsor would have the 
option of providing in the plan that such severance from 
employment would, or would not, be treated as a distributable 
event under the plan.
    It is intended that, as under present and prior law, if 
there is a transfer of plan assets and liabilities relating to 
any portion of an employee's benefit under a plan of the 
employee's former employer to a plan being maintained or 
created by the employee's new employer (other than a rollover 
or elective transfer), then that employee has not experienced a 
severance from employment with the employer maintaining the 
plan that covers the employee.

                             Effective Date

    The provision is effective for distributions after December 
31, 2001, regardless of when the severance of employment 
occurred.

                             Revenue Effect

    The provision is estimated to have a negligible effect on 
Federal fiscal year budget receipts.
            (e) Purchase of service credit under governmental pension 
                    plans (sec. 647 of the Act and secs. 403(b) and 457 
                    of the Code)

                         Present and Prior Law

    A qualified retirement plan maintained by a State or local 
government employer may provide that a participant may make 
after-tax employee contributions in order to purchase 
permissive service credit, subject to certain limits (section 
415). Permissive service credit means credit for a period of 
service recognized by the governmental plan only if the 
employee voluntarily contributes to the plan an amount (as 
determined by the plan) that does not exceed the amount 
necessary to fund the benefit attributable to the period of 
service and that is in addition to the regular employee 
contributions, if any, under the plan.
    In the case of any repayment of contributions and earnings 
to a governmental plan with respect to an amount previously 
refunded upon a forfeiture of service credit under the plan (or 
another plan maintained by a State or local government employer 
within the same State), any such repayment is not taken into 
account for purposes of the section 415 limits on contributions 
and benefits. Also, service credit obtained as a result of such 
a repayment is not considered permissive service credit for 
purposes of the section 415 limits.
    Under prior law, a participant may not use a rollover or 
direct transfer of benefits from a tax-sheltered annuity 
(``section 403(b) annuity'') or an eligible deferred 
compensation plan of a tax-exempt organization or a State or 
local government (``section 457 plan'') to purchase permissive 
service credits or repay contributions and earnings with 
respect to a forfeiture of service credit.

                           Reasons for Change

    The Congress understood that many employees work for 
multiple State or local government employers during their 
careers. The Congress believed that allowing such employees to 
use their section 403(b) annuity and governmental section 457 
plan accounts to purchase permissive service credits or make 
repayments with respect to forfeitures of service credit would 
result in more significant retirement benefits for employees 
who would not otherwise be able to afford such credits or 
repayments.

                        Explanation of Provision

    A participant in a State or local governmental plan is not 
required to include in gross income a direct trustee-to-trustee 
transfer to a governmental defined benefit plan from a section 
403(b) annuity or a governmental section 457 plan if the 
transferred amount is used: (1) to purchase permissive service 
credits under the plan, or (2) to repay contributions and 
earnings with respect to an amount previously refunded under a 
forfeiture of service credit under the plan (or another plan 
maintained by a State or local government employer within the 
same State).

                             Effective Date

    The provision is effective for transfers after December 31, 
2001.

                             Revenue Effect

    The provision is estimated to have a negligible effect on 
Federal fiscal year budget receipts.
            (f) Employers may disregard rollovers for purposes of cash-
                    out rules (sec. 648 of the Act and sec. 411(a)(11) 
                    of the Code)

                         Present and Prior Law

    If an qualified retirement plan participant ceases to be 
employed by the employer that maintains the plan, the plan may 
distribute the participant's nonforfeitable accrued benefit 
without the consent of the participant and, if applicable, the 
participant's spouse, if the present value of the benefit does 
not exceed $5,000. If such an involuntary distribution occurs 
and the participant subsequently returns to employment covered 
by the plan, then service taken into account in computing 
benefits payable under the plan after the return need not 
include service with respect to which a benefit was 
involuntarily distributed unless the employee repays the 
benefit.\127\
---------------------------------------------------------------------------
    \127\ A similar provision is contained in Title I of ERISA.
---------------------------------------------------------------------------
    Generally, a participant may roll over an involuntary 
distribution from a qualified plan to an IRA or to another 
qualified plan.\128\
---------------------------------------------------------------------------
    \128\ Section 641 of EGTRRA expands the kinds of plans to which 
benefits may be rolled over.
---------------------------------------------------------------------------

                           Reasons for Change

    The cash-out rule reflects a balancing of various policies. 
On the one hand is the desire to assist individuals to save for 
retirement by making it easier to keep retirement funds in tax-
favored vehicles. On the other hand is the recognition that 
keeping track of small account balances of former employees 
creates administrative burdens for plans.
    The Congress was concerned that, in some cases, the cash-
out rule might discourage plans from accepting rollovers 
because the rollover would increase participants' benefits to 
above the cash-out amount, and increase administrative burdens. 
The Congress believed that disregarding rollovers for purposes 
of the cash-out rule would further the intent of the cash-out 
rule by removing a possible disincentive for plans to accept 
rollovers.

                        Explanation of Provision

    For purposes of the cash-out rule, a plan is permitted to 
provide that the present value of a participant's 
nonforfeitable accrued benefit is determined without regard to 
the portion of such benefit that is attributable to rollover 
contributions (and any earnings allocable thereto).\129\
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    \129\ A technical correction was enacted in section 411(r) of the 
Job Creation and Worker Assistance Act of 2002, described in Part Eight 
of this document, to clarify that rollover amounts may be disregarded 
also in determining whether a spouse must consent to the cash-out of 
the benefit.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective for distributions after December 
31, 2001.

                             Revenue Effect

    The provision is estimated to have a negligible effect on 
Federal fiscal year budget receipts.
            (g) Minimum distribution and inclusion requirements for 
                    section 457 plans (sec. 649 of the Act and sec. 457 
                    of the Code)

                         Present and Prior Law

    A ``section 457 plan'' is an eligible deferred compensation 
plan of a State or local government or tax-exempt employer that 
meets certain requirements. For example, amounts deferred under 
a section 457 plan cannot exceed certain limits. Under prior 
law, amounts deferred under a section 457 plan were generally 
includible in income when paid or made available. Under present 
and prior law, amounts deferred under a plan of deferred 
compensation of a State or local government or tax-exempt 
employer that does not meet the requirements of section 457 are 
includible in income when the amounts are not subject to a 
substantial risk of forfeiture, regardless of whether the 
amounts have been paid or made available.\130\
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    \130\ This rule of inclusion does not apply to amounts deferred 
under a tax-qualified retirement plan or similar plans.
---------------------------------------------------------------------------
    Section 457 plans are subject to the minimum distribution 
rules applicable to tax-qualified pension plans. In addition, 
under prior law, such plans were subject to additional minimum 
distribution rules (section 457(d)(2)(B)).

                           Reasons for Change

    The Congress believed that the rules for timing of 
inclusion of benefits under a governmental section 457 plan 
should be conformed to the rules relating to qualified plans. 
The Congress also believed that section 457 plans should be 
subject to the same minimum distribution rules applicable to 
qualified plans.

                        Explanation of Provision

    EGTRRA provides that amounts deferred under a section 457 
plan of a State or local government are includible in income 
when paid. EGTRRA also repeals the special minimum distribution 
rules applicable to section 457 plans. Thus, such plans are 
subject to the minimum distribution rules applicable to 
qualified plans.

                             Effective Date

    The provision is effective for distributions after December 
31, 2001.

                             Revenue Effect

    The estimated revenue effect of this provision is 
considered in the estimated revenue effect of other provisions 
of Title VI of EGTRRA.

4. Strengthening pension security and enforcement

            (a) Phase in repeal of 160 percent of current liability 
                    funding limit; deduction for contributions to fund 
                    termination liability (secs. 651-652 of the Act and 
                    secs. 404(a)(1), 412(c)(7), and 4972(c) of the 
                    Code)

                         Present and Prior Law

    Under present and prior law, defined benefit pension plans 
are subject to minimum funding requirements designed to ensure 
that pension plans have sufficient assets to pay benefits. A 
defined benefit pension plan is funded using one of a number of 
acceptable actuarial cost methods.
    No contribution is required under the minimum funding rules 
in excess of the full funding limit. Under prior law, the full 
funding limit is generally defined as the excess, if any, of: 
(1) the lesser of (a) the accrued liability under the plan 
(including normal cost) or (b) 160 percent of the plan's 
current liability, over (2) the value of the plan's assets 
(section 412(c)(7)).\131\ In general, current liability is all 
liabilities to plan participants and beneficiaries accrued to 
date, whereas the accrued liability full funding limit is based 
on projected benefits. Under prior law, the current liability 
full funding limit is scheduled to increase as follows: 165 
percent for plan years beginning in 2003 and 2004, and 170 
percent for plan years beginning in 2005 and thereafter.\132\ 
In no event is a plan's full funding limit less than 90 percent 
of the plan's current liability over the value of the plan's 
assets.
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    \131\ The minimum funding requirements, including the full funding 
limit, are also contained in title I of ERISA.
    \132\  As originally enacted in the Pension Protection Act of 1997, 
the current liability full funding limit was 150 percent of current 
liability. The Taxpayer Relief Act of 1997 increased the current 
liability full funding limit to 155 percent in 1999 and 2000, 160 
percent in 2001 and 2002, and adopted the scheduled increases described 
in the text.
---------------------------------------------------------------------------
    An employer sponsoring a defined benefit pension plan 
generally may deduct amounts contributed to satisfy the minimum 
funding standard for the plan year. Contributions in excess of 
the full funding limit generally are not deductible. Under a 
special prior-law rule, an employer that sponsors a defined 
benefit pension plan (other than a multiemployer plan) which 
has more than 100 participants for the plan year may deduct 
amounts contributed of up to 100 percent of the plan's unfunded 
current liability.

                           Reasons for Change

    The Congress was concerned that the current liability full 
funding limit, which focuses on current but not projected 
benefits, may result in inadequate funding of pension plans and 
thus jeopardize pension security. The Congress believed that 
repealing the current liability full funding limit will 
encourage responsible pension funding and help ensure that plan 
participants receive promised benefits. Also, the Congress 
believed that the special deduction rule should be expanded to 
give more plan sponsors incentives to adequately fund their 
plans.

                        Explanation of Provision


Current liability full funding limit

    The provision gradually increases and then repeals the 
current liability full funding limit. Under the provision, the 
current liability full funding limit is 165 percent of current 
liability for plan years beginning in 2002, and 170 percent for 
plan years beginning in 2003. The current liability full 
funding limit is repealed for plan years beginning in 2004 and 
thereafter. Thus, in 2004 and thereafter, the full funding 
limit is the excess, if any, of (1) the accrued liability under 
the plan (including normal cost), over (2) the value of the 
plan's assets.

Deduction for contributions to fund termination liability

    The special rule allowing a deduction for unfunded current 
liability generally is extended to all defined benefit pension 
plans, i.e., the special rule applies to multiemployer plans 
and plans with 100 or fewer participants. In the case of a plan 
with less than 100 participants for the plan year, unfunded 
current liability does not include the liability attributable 
to benefit increases for highly compensated employees resulting 
from a plan amendment which was made or became effective, 
whichever is later, within the last two years.
    The provision also amends the special rule by providing 
that, in the case of a plan that is covered by the Pension 
Benefit Guaranty Corporation (``PBGC'') termination insurance 
program \133\ and terminates within the plan year, the 
deduction is for up to 100 percent of unfunded termination 
liability.\134\
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    \133\ The PBGC termination insurance program does not cover plans 
of professional service employers that have fewer than 25 participants.
    \134\ A technical correction was enacted in section 411(s) of the 
Job Creation and Worker Assistance Act of 2002, described in Part Eight 
of this document, to clarify this provision.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective for plan years beginning after 
December 31, 2001.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $14 million in 2002, $20 million in 2003, 
$36 million annually in 2004 and 2005, $38 million annually in 
2006 and 2007, $39 million in 2008, $41 million in 2009, $42 
million in 2010, $22 million in 2011, and less than $5 million 
in 2012.
            (b) Excise tax relief for sound pension funding (sec. 653 
                    of the Act and sec. 4972 of the Code)

                         Present and Prior Law

    Under present and prior law, defined benefit pension plans 
are subject to minimum funding requirements designed to ensure 
that pension plans have sufficient assets to pay benefits. A 
defined benefit pension plan is funded using one of a number of 
acceptable actuarial cost methods.
    No contribution is required under the minimum funding rules 
in excess of the full funding limit. Under prior law, the full 
funding limit is generally defined as the excess, if any, of: 
(1) the lesser of (a) the accrued liability under the plan 
(including normal cost) or (b) 160 percent of the plan's 
current liability, over (2) the value of the plan's assets 
(section 412(c)(7)). In general, current liability is all 
liabilities to plan participants and beneficiaries accrued to 
date, whereas the accrued liability full funding limit is based 
on projected benefits. Under prior law, the current liability 
full funding limit is scheduled to increase as follows: 165 
percent for plan years beginning in 2003 and 2004, and 170 
percent for plan years beginning in 2005 and thereafter.\135\ 
In no event is a plan's full funding limit less than 90 percent 
of the plan's current liability over the value of the plan's 
assets.
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    \135\ As originally enacted in the Pension Protection Act of 1997, 
the current liability full funding limit was 150 percent of current 
liability. The Taxpayer Relief Act of 1997 increased the current 
liability full funding limit to 155 percent in 1999 and 2000, 160 
percent in 2001 and 2002, and adopted the scheduled increases described 
in the text. Section 651 of EGTRRA gradually increases and then repeals 
the current liability full funding limit.
---------------------------------------------------------------------------
    An employer sponsoring a defined benefit pension plan 
generally may deduct amounts contributed to satisfy the minimum 
funding standard for the plan year. Contributions in excess of 
the full funding limit generally are not deductible. Under a 
special rule, an employer that sponsors a defined benefit 
pension plan (other than a multiemployer plan) which has more 
than 100 participants for the plan year may deduct amounts 
contributed of up to 100 percent of the plan's unfunded current 
liability.\136\
---------------------------------------------------------------------------
    \136\ Section 652 of EGTRRA extends this special rule to other 
defined benefit plans.
---------------------------------------------------------------------------
    Present and prior law also provides that contributions to 
defined contribution plans are deductible, subject to certain 
limitations.
    Subject to certain exceptions, an employer that makes 
nondeductible contributions to a plan is subject to an excise 
tax equal to 10 percent of the amount of the nondeductible 
contributions for the year. The 10-percent excise tax does not 
apply to contributions to certain terminating defined benefit 
plans. The 10-percent excise tax also does not apply to 
contributions of up to six percent of compensation to a defined 
contribution plan for employer matching and employee elective 
deferrals.

                           Reasons for Change

    The Congress believed that employers should be encouraged 
to adequately fund their pension plans. Therefore, the Congress 
did not believe that an excise tax should be imposed on 
employer contributions that do not exceed the accrued liability 
full funding limit.

                        Explanation of Provision

    In determining the amount of nondeductible contributions, 
the employer is permitted to elect not to take into account 
contributions to a defined benefit pension plan except to the 
extent they exceed the accrued liability full funding limit. 
Thus, if an employer elects, contributions in excess of the 
current liability full funding limit are not subject to the 
excise tax on nondeductible contributions. An employer making 
such an election for a year is not permitted to take advantage 
of the present-law exceptions for certain terminating plans and 
certain contributions to defined contribution plans. EGTRRA 
applies to terminated plans as well as ongoing plans.

                             Effective Date

    The provision is effective for years beginning after 
December 31, 2001.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $2 million in 2002, $3 million annually in 
2003 through 2011, and less than $500,000 in 2012.
            (c) Modifications to section 415 limits for multiemployer 
                    plans (sec. 654 of the Act and sec. 415 of the 
                    Code)

                         Present and Prior Law

    Under present and prior law, limits apply to contributions 
and benefits under qualified plans (section 415). The limits on 
contributions and benefits under qualified plans depend on 
whether the plan is a defined benefit plan or a defined 
contribution plan.
    Under a defined benefit plan, the maximum annual benefit 
payable at retirement is generally the lesser of: (1) 100 
percent of average compensation for the highest three years, or 
(2) a dollar amount ($140,000 for 2001).\137\ The dollar limit 
is adjusted for cost-of-living increases in $5,000 increments.
---------------------------------------------------------------------------
    \137\ Section 611 of EGTRRA increases the dollar limits on benefits 
for years after 2001.
---------------------------------------------------------------------------
    In applying the limits on contributions and benefits, plans 
of the same employer are aggregated. That is, all defined 
benefit plans of the same employer are treated as a single 
plan, and all defined contribution plans of the same employer 
are treated as a single plan. Under Treasury regulations, 
multiemployer plans are not aggregated with other multiemployer 
plans. However, if an employer maintains both a plan that is 
not a multiemployer plan and a mulitemployer plan, the plan 
that is not a multiemployer plan is aggregated with the 
multiemployer plan to the extent that benefits provided under 
the multiemployer plan are provided with respect to a common 
participant.\138\
---------------------------------------------------------------------------
    \138\ Treas. Reg. section 1.415-8(e).
---------------------------------------------------------------------------

                           Reasons for Change

    The Congress understood that, because pension benefits 
under multiemployer plans are typically based upon factors 
other than compensation, the section 415 benefit limits 
frequently resulted in benefit reductions for employees in 
industries in which wages vary annually.

                        Explanation of Provision

    Under EGTRRA, the 100 percent of compensation defined 
benefit plan limit does not apply to multiemployer plans. With 
respect to aggregation of multiemployer plans with other plans, 
EGTRRA provides that multiemployer plans are not aggregated 
with single-employer defined benefit plans maintained by an 
employer contributing to the multiemployer plan for purposes of 
applying the 100 percent of compensation limit to such single-
employer plan.

                             Effective Date

    The provision is effective for years beginning after 
December 31, 2001.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $3 million in 2002, $5 million annually in 
2003 through 2006, $6 million annually in 2007 through 2010, $4 
million in 2011, and less than $500,000 in 2012.
            (d) Investment of employee contributions in 401(k) plans 
                    (sec. 655 of the Act and sec. 1524(b) of the 
                    Taxpayer Relief Act of 1997)

                         Present and Prior Law

    The Employee Retirement Income Security Act of 1974, as 
amended (``ERISA'') prohibits certain employee benefit plans 
from acquiring securities or real property of the employer who 
sponsors the plan if, after the acquisition, the fair market 
value of such securities and property exceeds 10 percent of the 
fair market value of plan assets. The 10-percent limitation 
does not apply to any ``eligible individual account plans'' 
that specifically authorize such investments. Generally, 
eligible individual account plans are defined contribution 
plans, including plans containing a cash or deferred 
arrangement (``401(k) plans'').
    Under the Taxpayer Relief Act of 1997, the term ``eligible 
individual account plan'' does not include the portion of a 
plan that consists of elective deferrals (and earnings on the 
elective deferrals) made under section 401(k) if elective 
deferrals equal to more than one percent of any employee's 
eligible compensation are required to be invested in employer 
securities and employer real property. Eligible compensation is 
compensation that is eligible to be deferred under the plan. 
The portion of the plan that consists of elective deferrals 
(and earnings thereon) is still treated as an individual 
account plan, and the 10-percent limitation does not apply, as 
long as elective deferrals (and earnings thereon) are not 
required to be invested in employer securities or employer real 
property.
    The rule excluding elective deferrals (and earnings 
thereon) from the definition of individual account plan does 
not apply if individual account plans are a small part of the 
employer's retirement plans. In particular, that rule does not 
apply to an individual account plan for a plan year if the 
value of the assets of all individual account plans maintained 
by the employer do not exceed 10 percent of the value of the 
assets of all pension plans maintained by the employer 
(determined as of the last day of the preceding plan year). 
Multiemployer plans are not taken into account in determining 
whether the value of the assets of all individual account plans 
maintained by the employer exceed 10 percent of the value of 
the assets of all pension plans maintained by the employer. The 
rule excluding elective deferrals (and earnings thereon) from 
the definition of individual account plan does not apply to an 
employee stock ownership plan as defined in section 4975(e)(7) 
of the Internal Revenue Code.
    The rule excluding elective deferrals (and earnings 
thereon) from the definition of individual account plan applies 
to elective deferrals for plan years beginning after December 
31, 1998 (and earnings thereon). It does not apply with respect 
to earnings on elective deferrals for plan years beginning 
before January 1, 1999.

                           Reasons for Change

    The Congress believed that the effective date provided in 
the Taxpayer Relief Act of 1997 with respect to the rule 
excluding elective deferrals (and earnings thereon) from the 
definition of eligible individual account plan has produced 
unintended results.

                        Explanation of Provision

    EGTRRA modifies the effective date of the rule excluding 
certain elective deferrals (and earnings thereon) from the 
definition of eligible individual account plan by providing 
that the rule does not apply to any elective deferral used to 
acquire an interest in the income or gain from employer 
securities or employer real property acquired: (1) before 
January 1, 1999, or (2) after such date pursuant to a written 
contract which was binding on such date and at all times 
thereafter.

                             Effective Date

    The provision is effective as if included in the section of 
the Taxpayer Relief Act of 1997 that contained the rule 
excluding certain elective deferrals (and earnings thereon) 
from the definition of eligible individual account plan.

                             Revenue Effect

    The provision is estimated to have a negligible effect on 
Federal fiscal year budget receipts.
            (e) Prohibited allocations of stock in an S corporation 
                    ESOP (sec. 656 of the Act and secs. 409 and 4979A 
                    of the Code)

                         Present and Prior Law

    The Small Business Job Protection Act of 1996 allowed 
qualified retirement plan trusts described in section 401(a) to 
own stock in an S corporation. That Act treated the plan's 
share of the S corporation's income (and gain on the 
disposition of the stock) as includible in full in the trust's 
unrelated business taxable income (``UBTI'').
    The Tax Relief Act of 1997 repealed the provision treating 
items of income or loss of an S corporation as UBTI in the case 
of an employee stock ownership plan (``ESOP''). Thus, the 
income of an S corporation allocable to an ESOP is not subject 
to current taxation.
    Present and prior law provides a deferral of income on the 
sales of certain employer securities to an ESOP (section 1042). 
A 50-percent excise tax is imposed on certain prohibited 
allocations of securities acquired by an ESOP in a transaction 
to which section 1042 applies. In addition, such allocations 
are currently includible in the gross income of the individual 
receiving the prohibited allocation.

                           Reasons for Change

    In enacting the 1996 Act provision allowing ESOPs to be 
shareholders of S corporations, the Congress intended to 
encourage employee ownership of closely-held businesses, and to 
facilitate the establishment of ESOPs by S corporations. At the 
same time, the Congress provided that all income flowing 
through to an ESOP (or other tax-exempt S shareholder), and 
gains and losses from the disposition of the stock, was treated 
as unrelated business taxable income. This treatment was 
consistent with the premise underlying the S corporation rules 
that all income of an S corporation (including all gains of the 
sale of the stock of the corporation) should be subject to a 
shareholder-level tax.
    In enacting the present and prior-law rule relating to S 
corporation ESOPs in 1997, the Congress was concerned that the 
1996 Act rule imposed double taxation on such ESOPs and ESOP 
participants. The Congress believed such a result was 
inappropriate. Since the enactment of the 1997 Act, however, 
the Congress became aware that the present-law rules allow 
inappropriate deferral and possibly tax avoidance in some 
cases.
    The Congress continues to believe that S corporations 
should be able to encourage employee ownership through an ESOP. 
The Congress does not believe, however, that ESOPs should be 
used by S corporations owners to obtain inappropriate tax 
deferral or avoidance.
    Specifically, the Congress believes that the tax deferral 
opportunities provided by an S corporation ESOP should be 
limited to those situations in which there is broad-based 
employee coverage under the ESOP and the ESOP benefits rank-
and-file employees as well as highly compensated employees and 
historical owners.

                        Explanation of Provision


In general

    Under EGTRRA, if there is a nonallocation year with respect 
to an ESOP maintained by an S corporation: (1) the amount 
allocated in a prohibited allocation to an individual who is a 
disqualified person is treated as distributed to such 
individual (i.e., the value of the prohibited allocation is 
includible in the gross income of the individual receiving the 
prohibited allocation); (2) an excise tax is imposed on the S 
corporation equal to 50 percent of the amount involved in a 
prohibited allocation; and (3) an excise tax is imposed on the 
S corporation with respect to any synthetic equity owned by a 
disqualified person.\139\ 
---------------------------------------------------------------------------
    \139\ The plan is not disqualified merely because an excise tax is 
imposed under the provision.
---------------------------------------------------------------------------
    It is intended that EGTRRA will limit the establishment of 
ESOPs by S corporations to those that provide broad-based 
employee coverage and that benefit rank-and-file employees as 
well as highly compensated employees and historical owners.

Definition of nonallocation year

    A nonallocation year means any plan year of an ESOP holding 
shares in an S corporation if, at any time during the plan 
year, disqualified persons own at least 50 percent of the 
number of outstanding shares of the S corporation.
    A person is a disqualified person if the person is either: 
(1) a member of a ``deemed 20-percent shareholder group'' or 
(2) a ``deemed 10-percent shareholder.'' A person is a member 
of a ``deemed 20-percent shareholder group'' if the aggregate 
number of deemed-owned shares of the person and his or her 
family members is at least 20 percent of the number of deemed-
owned shares of stock in the S corporation.\140\ A person is a 
deemed 10-percent shareholder if the person is not a member of 
a deemed 20-percent shareholder group and the number of the 
person's deemed-owned shares is at least 10 percent of the 
number of deemed-owned shares of stock of the corporation.
---------------------------------------------------------------------------
    \140\ A family member of a member of a ``deemed 20-percent 
shareholder group'' with deemed owned shares is also treated as a 
disqualified person.
---------------------------------------------------------------------------
    In general, ``deemed-owned shares'' means: (1) stock 
allocated to the account of an individual under the ESOP, and 
(2) an individual's share of unallocated stock held by the 
ESOP. An individual's share of unallocated stock held by an 
ESOP is determined in the same manner as the most recent 
allocation of stock under the terms of the plan.
    For purposes of determining whether there is a 
nonallocation year, ownership of stock generally is attributed 
under the rules of section 318,\141\ except that: (1) the 
family attribution rules are modified to include certain other 
family members, as described below, (2) option attribution does 
not apply (but instead special rules relating to synthetic 
equity described below apply), and (3) ``deemed-owned shares'' 
held by the ESOP are treated as held by the individual with 
respect to whom they are deemed owned.
---------------------------------------------------------------------------
    \141\ These attribution rules also apply to stock treated as owned 
by reason of the ownership of synthetic equity.
---------------------------------------------------------------------------
    Under EGTRRA, family members of an individual include (1) 
the spouse \142\ of the individual, (2) an ancestor or lineal 
descendant of the individual or his or her spouse, (3) a 
sibling of the individual (or the individual's spouse) and any 
lineal descendant of the brother or sister, and (4) the spouse 
of any person described in (2) or (3).
---------------------------------------------------------------------------
    \142\ As under section 318, an individual's spouse is not treated 
as a member of the individual's family if the spouses are legally 
separated.
---------------------------------------------------------------------------
    EGTRRA contains special rules applicable to synthetic 
equity interests. Except to the extent provided in regulations, 
stock on which a synthetic equity interest is based is treated 
as outstanding stock of the S corporation and as deemed-owned 
shares of the person holding the synthetic equity interest if 
such treatment will result in the treatment of any person as a 
disqualified person or the treatment of any year as a 
nonallocation year. Thus, for example, disqualified persons for 
a year include those individuals who are disqualified persons 
under the general rule (i.e., treating only those shares held 
by the ESOP as deemed-owned shares) and those individuals who 
are disqualified individuals if synthetic equity interests are 
treated as deemed-owned shares.
    ``Synthetic equity'' means any stock option, warrant, 
restricted stock, deferred issuance stock right, or similar 
interest that gives the holder the right to acquire or receive 
stock of the S corporation in the future. Except to the extent 
provided in regulations, synthetic equity also includes a stock 
appreciation right, phantom stock unit, or similar right to a 
future cash payment based on the value of such stock or 
appreciation in such value.\143\
---------------------------------------------------------------------------
    \143\ The provisions relating to synthetic equity do not modify the 
rules relating to S corporations, e.g., the circumstances in which 
options or similar interests are treated as creating a second class of 
stock.
---------------------------------------------------------------------------
    Ownership of synthetic equity is attributed in the same 
manner as stock is attributed under the provision. In addition, 
ownership of synthetic equity is attributed under the rules of 
section 318(a)(2) and (3) in the same manner as stock.

Definition of prohibited allocation

    An ESOP of an S corporation is required to provide that no 
portion of the assets of the plan attributable to (or allocable 
in lieu of) S corporation stock may, during a nonallocation 
year, accrue (or be allocated directly or indirectly under any 
qualified plan of the S corporation) for the benefit of a 
disqualified person. A ``prohibited allocation'' refers to 
violations of this provision. A prohibited allocation occurs, 
for example, if income on S corporation stock held by an ESOP 
is allocated to the account of an individual who is a 
disqualified person.

Application of excise tax

    In the case of a prohibited allocation, the S corporation 
is liable for an excise tax equal to 50 percent of the amount 
of the allocation. For example, if S corporation stock is 
allocated in a prohibited allocation, the excise tax is equal 
to 50 percent of the fair market value of such stock.
    A special rule applies in the case of the first 
nonallocation year, regardless of whether there is a prohibited 
allocation. In that year, the excise tax also applies to the 
fair market value of the deemed-owned shares of any 
disqualified person held by the ESOP, even though those shares 
are not allocated to the disqualified person in that year.
    As mentioned above, the S corporation also is liable for an 
excise tax with respect to any synthetic equity interest owned 
by any disqualified person in a nonallocation year. The excise 
tax is 50 percent of the value of the shares on which synthetic 
equity is based.

Treasury regulations

    The Treasury Department is given the authority to prescribe 
such regulations as may be necessary to carry out the purposes 
of the provision and to determine, by regulation or other 
guidance of general applicability, that a nonallocation year 
occurs in any case in which the principal purpose of the 
ownership structure of an S corporation constitutes, in 
substance, an avoidance or evasion of the prohibited allocation 
rules. For example, this might apply if more than 10 
independent businesses are combined in an S corporation owned 
by an ESOP in order to take advantage of the income tax 
treatment of S corporations owned by an ESOP.

                             Effective Date

    The provision generally is effective with respect to plan 
years beginning after December 31, 2004. In the case of an ESOP 
established after March 14, 2001, or an ESOP established on or 
before such date if the employer maintaining the plan was not 
an S corporation on such date, the provision is effective with 
respect to plan years ending after March 14, 2001.

                             Revenue Effect

    The provision is estimated to increase Federal fiscal year 
budget receipts by $3 million in 2002, $5 million in 2003, $6 
million in 2004, $8 million annually in 2005 and 2006, $9 
million in 2007, $10 million annually in 2008 through 2010, $11 
million in 2011, and less than $500,000 in 2012.
            (f) Automatic rollovers of certain mandatory distributions 
                    (sec. 657 of the Act and secs. 401(a)(31) and 
                    402(f)(1) of the Code and sec. 404(c) of ERISA)

                         Present and Prior Law

    If a qualified retirement plan participant ceases to be 
employed by the employer that maintains the plan, the plan may 
distribute the participant's nonforfeitable accrued benefit 
without the consent of the participant and, if applicable, the 
participant's spouse, if the present value of the benefit does 
not exceed $5,000. If such an involuntary distribution occurs 
and the participant subsequently returns to employment covered 
by the plan, then service taken into account in computing 
benefits payable under the plan after the return need not 
include service with respect to which a benefit was 
involuntarily distributed unless the employee repays the 
benefit.
    Generally, a participant may roll over an involuntary 
distribution from a qualified plan to an IRA or to another 
qualified plan.\144\ Before making a distribution that is 
eligible for rollover, a plan administrator must provide the 
participant with a written explanation of the ability to have 
the distribution rolled over directly to an IRA or another 
qualified plan and the related tax consequences.
---------------------------------------------------------------------------
    \144\ Section 641 of EGTRRA expands the kinds of plans to which 
benefits may be rolled over.
---------------------------------------------------------------------------

                           Reasons for Change

    The Congress believed that prior law did not adequately 
encourage rollovers of involuntary distribution amounts. 
Failure to roll over these amounts can significantly reduce the 
retirement income that would otherwise be accumulated by 
workers who change jobs frequently. The Congress believed that 
making a direct rollover the default option for involuntary 
distributions will increase the preservation of retirement 
savings.

                     Explanation of Provision \145\

    EGTRRA makes a direct rollover the default option for 
involuntary distributions that exceed $1,000 and that are 
eligible rollover distributions from qualified retirement 
plans. The distribution must be rolled over automatically to a 
designated IRA, unless the participant affirmatively elects to 
have the distribution transferred to a different IRA or a 
qualified plan or to receive it directly.
---------------------------------------------------------------------------
    \145\ A technical correction was enacted in section 411(t) of the 
Job Creation and Worker Assistance Act of 2002, described in Part Eight 
of this document, to clarify this provision.
---------------------------------------------------------------------------
    The written explanation provided by the plan administrator 
is required to explain that an automatic direct rollover will 
be made unless the participant elects otherwise. The plan 
administrator is also required to notify the participant in 
writing (as part of the general written explanation or 
separately) that the distribution may be transferred without 
cost to another IRA.
    EGTRRA amends the fiduciary rules of ERISA so that, in the 
case of an automatic direct rollover, the participant is 
treated as exercising control over the assets in the IRA upon 
the earlier of: (1) the rollover of any portion of the assets 
to another IRA, or (2) one year after the automatic rollover.
    EGTRRA directs the Secretary of Labor to issue safe harbors 
under which the designation of an institution and investment of 
funds in accordance with the provision are deemed to satisfy 
the requirements of section 404(a) of ERISA. In addition, the 
Secretary of the Treasury and the Secretary of Labor are 
authorized and directed to give consideration to providing 
special relief with respect to the use of low-cost individual 
retirement plans for purposes of the provision and for other 
uses that promote the preservation of tax-qualified retirement 
assets for retirement income purposes.

                             Effective Date

    The provision applies to distributions that occur after the 
Secretary of Labor has adopted final regulations implementing 
the provision. The provision directs the Secretary of Labor to 
adopt final regulations implementing the provision not later 
than three years after the date of enactment.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $7 million in 2004, $29 million in 2005, $30 
million in 2006, $32 million in 2007, $33 million annually in 
2008 and 2009, $34 million in 2010, $26 million in 2011, and 
$10 million in 2012.
            (g) Clarification of treatment of contributions to a 
                    multiemployer plan (sec. 658 of the Act)

                         Present and Prior Law

    Employer contributions to one or more qualified retirement 
plans are deductible subject to certain limits. In general, 
contributions are deductible for the taxable year of the 
employer in which the contributions are made. Under a special 
rule, an employer may be deemed to have made a contribution on 
the last day of the preceding taxable year if the contribution 
is on account of the preceding taxable year and is made not 
later than the time prescribed by law for filing the employer's 
income tax return for that taxable year (including 
extensions).\146\
---------------------------------------------------------------------------
    \146\ Section 404(a)(6).
---------------------------------------------------------------------------
    A change in method of accounting includes a change in the 
overall plan of accounting for gross income or deductions or a 
change in the treatment of any material item used in such 
overall plan. A material item is any item that involves the 
proper time for the inclusion of the item in income or taking 
of a deduction.\147\ A change in method of accounting does not 
include correction of mathematical or posting errors, or errors 
in the computation of tax liability. Also, a change in method 
of accounting does not include adjustment of any item of income 
or deduction that does not involve the proper time for the 
inclusion of the item of income or the taking of a deduction. A 
change in method of accounting also does not include a change 
in treatment resulting from a change in underlying facts.
---------------------------------------------------------------------------
    \147\ Treas. Reg. sec. 1.446-1(e)(2)(ii)(a).
---------------------------------------------------------------------------

                           Reasons for Change

    The Congress was aware that the interaction of the rules 
regarding employer contributions to qualified retirement plans 
and the rules regarding what constitutes a method of accounting 
has resulted in some uncertainty for taxpayers. Specifically, 
there was some uncertainty regarding whether the determination 
of whether a contribution to a multiemployer pension plan is on 
account of a prior year under section 404(a)(6) is considered a 
method of accounting. The uncertainty regarding this issue has 
resulted in disputes between taxpayers and the IRS that the 
Congress believed could be avoided by eliminating the 
uncertainty.

                        Explanation of Provision

    EGTRRA clarifies that a determination of whether 
contributions to multiemployer pension plans are on account of 
a prior year under section 404(a)(6) is not a method of 
accounting. Thus, any taxpayer that begins to deduct 
contributions to multiemployer plans as provided in section 
404(a)(6) has not changed its method of accounting and is not 
subject to an adjustment under section 481. The provision is 
intended to respect, not disturb, the effect of the statute of 
limitations. The provision is not intended to permit, as of the 
end of the taxable year, aggregate deductions for contributions 
to a qualified plan in excess of the amounts actually 
contributed or deemed contributed to the plan by the taxpayer. 
The Secretary of the Treasury is authorized to promulgate 
regulations to clarify that, in the aggregate, no taxpayer will 
be permitted deductions in excess of amounts actually 
contributed to multiemployer plans, taking into account the 
provisions of section 404(a)(6).
    No inference is intended regarding whether the 
determination of whether a contribution to a multiemployer 
pension plan on account of a prior year under section 404(a)(6) 
is a method of accounting prior to the effective date of the 
provision.

                             Effective Date

    The provision is effective after the date of enactment.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $11 million in 2003, $19 million in 2004, 
$32 million in 2005, $38 million in 2006, $35 million in 2007, 
$30 million in 2008, $26 million in 2009, $19 million in 2010, 
$14 million in 2011, and $3 million in 2012.
            (h) Notice of significant reduction in plan benefit 
                    accruals (sec. 659 of the Act and new sec. 4980F of 
                    the Code)

                         Present and Prior Law

    Under present and prior law, section 204(h) of Title I of 
ERISA provides that a defined benefit pension plan or a money 
purchase pension plan may not be amended so as to provide for a 
significant reduction in the rate of future benefit accrual 
unless certain notice requirements are met. Under prior law, 
after adoption of the plan amendment and not less than 15 days 
before the effective date of the plan amendment, the plan 
administrator must provide a written notice (``section 204(h) 
notice''), setting forth the plan amendment (or a summary of 
the amendment written in a manner calculated to be understood 
by the average plan participant) and its effective date. The 
plan administrator must provide the section 204(h) notice to 
each plan participant, each alternate payee under an applicable 
qualified domestic relations order (``QDRO''), and each 
employee organization representing participants in the plan. 
The applicable Treasury regulations \148\ provide, however, 
that a plan administrator need not provide the section 204(h) 
notice to any participant or alternate payee whose rate of 
future benefit accrual is reasonably expected not to be reduced 
by the amendment, nor to an employee organization that does not 
represent a participant to whom the section 204(h) notice must 
be provided. In addition, the regulations provide that the rate 
of future benefit accrual is determined without regard to 
optional forms of benefit, early retirement benefits, 
retirement-type subsidiaries, ancillary benefits, and certain 
other rights and features.
---------------------------------------------------------------------------
    \148\ Treas. Reg. sec. 1.411(d)-6.
---------------------------------------------------------------------------
    A covered amendment generally will not become effective 
with respect to any participants and alternate payees whose 
rate of future benefit accrual is reasonably expected to be 
reduced by the amendment but who do not receive a section 
204(h) notice. An amendment will become effective with respect 
to all participants and alternate payees to whom the section 
204(h) notice was required to be provided if the plan 
administrator: (1) has made a good faith effort to comply with 
the section 204(h) notice requirements, (2) has provided a 
section 204(h) notice to each employee organization that 
represents any participant to whom a section 204(h) notice was 
required to be provided, (3) has failed to provide a section 
204(h) notice to no more than a de minimis percentage of 
participants and alternate payees to whom a section 204(h) 
notice was required to be provided, and (4) promptly upon 
discovering the oversight, provides a section 204(h) notice to 
each omitted participant and alternate payee.
    Under prior law, the Internal Revenue Code does not require 
any notice concerning a plan amendment that provides for a 
significant reduction in the rate of future benefit accrual.

                           Reasons for Change

    The Congress was aware of recent significant publicity 
concerning conversions of traditional defined benefit pension 
plans to ``cash balance'' plans, with particular focus on the 
impact such conversions have on affected workers. Several 
legislative proposals were introduced to address some of the 
issues relating to such conversions.
    The Congress believed that employees are entitled to 
meaningful disclosure concerning plan amendments that may 
result in reductions of future benefit accruals. The Congress 
determined that prior law did not require employers to provide 
such disclosure, particularly in cases where traditional 
defined benefit plans are converted to cash balance plans. The 
Congress also believed that any disclosure requirements 
applicable to plan amendments should strike a balance between 
providing meaningful disclosure and avoiding the imposition of 
unnecessary administrative burdens on employers, and that this 
balance may best be struck through the regulatory process with 
an opportunity for input from affected parties.

                     Explanation of Provision \149\

    EGTRRA adds to the Internal Revenue Code a requirement that 
the plan administrator of a qualified defined benefit plan or a 
money purchase pension plan furnish a written notice concerning 
a plan amendment that provides for a significant reduction in 
the rate of future benefit accrual, including any elimination 
or reduction of a significant early retirement benefit or 
retirement-type subsidy. The plan administrator is required to 
provide in this notice, in a manner calculated to be understood 
by the average plan participant, sufficient information (as 
defined in Treasury regulations) to allow participants to 
understand the effect of the amendment.
---------------------------------------------------------------------------
    \149\ A technical correction was enacted in section 411(u) of the 
Job Creation and Worker Assistance Act of 2002, described in Part Eight 
of this document, to clarify this provision.
---------------------------------------------------------------------------
    The notice requirement does not apply to governmental plans 
or church plans with respect to which an election to have the 
qualified plan participation, vesting, and funding rules apply 
has not been made (section 410(d)). EGTRRA authorizes the 
Secretary of the Treasury to provide a simplified notice 
requirement or an exemption from the notice requirement for 
plans with less than 100 participants and to allow any notice 
required under the provision to be provided by using new 
technologies. EGTRRA also authorizes the Secretary to provide a 
simplified notice requirement or an exemption from the notice 
requirement if participants are given the option to choose 
between benefits under the new plan formula and the old plan 
formula. In such cases, the provision will have no effect on 
the fiduciary rules applicable to pension plans that may 
require appropriate disclosure to participants, even if no 
disclosure is required under the provision.
    The plan administrator is required to provide this notice 
to each affected participant, each affected alternate payee, 
and each employee organization representing affected 
participants. For purposes of the provision, an affected 
participant or alternate payee is a participant or alternate 
payee whose rate of future benefit accrual may reasonably be 
expected to be significantly reduced by the plan amendment.
    Except to the extent provided by Treasury regulations, the 
plan administrator is required to provide the notice within a 
reasonable time before the effective date of the plan 
amendment. EGTRRA permits a plan administrator to provide any 
notice required under the provision to a person designated in 
writing by the individual to whom it would otherwise be 
provided.
    EGTRRA imposes on a plan administrator that fails to comply 
with the notice requirement an excise tax equal to $100 per day 
per omitted participant and alternate payee. No excise tax is 
imposed during any period during which any person subject to 
liability for the tax did not know that the failure existed and 
exercised reasonable diligence to meet the notice requirement. 
In addition, no excise tax is imposed on any failure if any 
person subject to liability for the tax exercised reasonable 
diligence to meet the notice requirement and such person 
provides the required notice during the 30-day period beginning 
on the first date such person knew, or exercising reasonable 
diligence would have known, that the failure existed. Also, if 
the person subject to liability for the excise tax exercised 
reasonable diligence to meet the notice requirement, the total 
excise tax imposed during a taxable year of the employer will 
not exceed $500,000. Furthermore, in the case of a failure due 
to reasonable cause and not to willful neglect, the Secretary 
of the Treasury is authorized to waive the excise tax to the 
extent that the payment of the tax would be excessive relative 
to the failure involved.
    EGTRRA also modifies the present-law notice requirement 
contained in section 204(h) of Title I of ERISA to require 
notice similar to the notice required under the Internal 
Revenue Code. In the case of an egregious failure by the plan 
administrator to comply with the notice requirement, the 
provisions of an applicable pension plan are to be applied as 
if the plan amendment entitled all affected individuals to the 
greater of: (1) the benefits to which they would have been 
entitled without regard to the amendment and (2) the benefits 
under the plan with regard to the amendment. In addition, the 
provision expands the current ERISA notice requirement 
regarding significant reductions in normal retirement benefit 
accrual rates to early retirement benefits and retirement-type 
subsidies.
    It is intended under the provision that the Secretary issue 
the necessary regulations with respect to disclosure within 90 
days of enactment. It is also intended that such guidance may 
be relatively detailed because of the need to provide for 
alternative disclosures rather than a single disclosure 
methodology that may not fit all situations, and the need to 
consider the complex actuarial calculations and assumptions 
involved in providing necessary disclosures.

                             Effective Date

    The provision is effective for plan amendments taking 
effect on or after the date of enactment. The period for 
providing any notice required under the provision will not end 
before the last day of the three-month period following the 
date of enactment. Prior to the issuance of Treasury 
regulations, a plan is treated as meeting the requirements of 
the provision if the plan makes a good faith effort to comply 
with such requirements. The notice requirement under the 
provision does not apply to any plan amendment taking effect on 
or after the date of enactment if, before April 25, 2001, 
notice was provided to participants and beneficiaries adversely 
affected by the plan amendment (or their representatives) that 
was reasonably expected to notify them of the nature and 
effective date of the plan amendment.

                             Revenue Effect

    The provision is estimated to have a negligible effect on 
Federal fiscal year budget receipts.

5. Reducing regulatory burdens

            (a) Modification of timing of plan valuations (sec. 661 of 
                    the Act and sec. 412 of the Code)

                         Present and Prior Law

    Under present and prior law, plan valuations are generally 
required annually for plans subject to the minimum funding 
rules. Under proposed Treasury regulations, except as provided 
by the Commissioner, the valuation must be as of a date within 
the plan year to which the valuation refers or within the month 
prior to the beginning of that year.\150\
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    \150\  Prop. Treas. Reg. sec. 1.412(c)(9)-1(b)(1).
---------------------------------------------------------------------------

                           Reasons for Change

    While plan valuations are necessary to ensure adequate 
funding of defined benefit pension plans, they also create 
administrative burdens for employers. The Congress believed 
that permitting limited elections to use as the valuation date 
for a plan year any date within the immediately preceding plan 
year in the case of well-funded plans strikes an appropriate 
balance between funding concerns and employer concerns about 
plan administrative burdens.

                        Explanation of Provision

    EGTRRA incorporates into the statute the proposed 
regulation regarding the date of valuations. EGTRRA also 
provides, as an exception to this general rule, that the 
valuation date with respect to a plan year may be any date 
within the immediately preceding plan year if, as of such date, 
plan assets are not less than 100 percent of the plan's current 
liability. Information determined as of such date is required 
to be adjusted actuarially, in accordance with Treasury 
regulations, to reflect significant differences in plan 
participants. A change in funding method to take advantage of 
the exception to the general rule may not be made unless, as of 
such date, plan assets are not less than 125 percent of the 
plan's current liability. The Secretary is directed to 
automatically approve changes in funding method to use a prior 
year valuation date if the change is within the first three 
years that the plan is eligible to make the change.\151\
---------------------------------------------------------------------------
    \151\ A technical correction was enacted in section 411(v) of the 
Job Creation and Worker Assistance Act of 2002, described in Part Eight 
of this document to clarify this provision.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective for plan years beginning after 
December 31, 2001.

                             Revenue Effect

    The provision is estimated to have a negligible effect on 
Federal fiscal year budget receipts.
            (b) ESOP dividends may be reinvested without loss of 
                    dividend deduction (sec. 662 of the Act and sec. 
                    404 of the Code)

                         Present and Prior Law

    An employer is entitled to deduct certain dividends paid in 
cash during the employer's taxable year with respect to stock 
of the employer that is held by an employee stock ownership 
plan (``ESOP''). The deduction is allowed with respect to 
dividends that, in accordance with plan provisions, are: (1) 
paid in cash directly to the plan participants or their 
beneficiaries, (2) paid to the plan and subsequently 
distributed to the participants or beneficiaries in cash no 
later than 90 days after the close of the plan year in which 
the dividends are paid to the plan, or (3) used to make 
payments on loans (including payments of interest as well as 
principal) that were used to acquire the employer securities 
(whether or not allocated to participants) with respect to 
which the dividend is paid.
    The Secretary may disallow the deduction for any ESOP 
dividend if he determines that the dividend constitutes, in 
substance, an evasion of taxation (section 404(k)(5)).

                           Reasons for Change

    The Congress believed it appropriate to provide incentives 
for the accumulation of retirement benefits and expansion of 
employee ownership. The Congress determined that the prior-law 
rules concerning the deduction of dividends on employer stock 
held by an ESOP discouraged employers from permitting such 
dividends to be reinvested in employer stock and accumulated 
for retirement purposes.

                        Explanation of Provision

    In addition to the deductions permitted under prior law for 
dividends paid with respect to employer securities that are 
held by an ESOP, an employer is entitled to deduct dividends 
that, at the election of plan participants or their 
beneficiaries, are: (1) payable in cash directly to plan 
participants or beneficiaries, (2) paid to the plan and 
subsequently distributed to the participants or beneficiaries 
in cash no later than 90 days after the close of the plan year 
in which the dividends are paid to the plan, or (3) paid to the 
plan and reinvested in qualifying employer securities.\152\
---------------------------------------------------------------------------
    \152\ A technical correction enacted in section 411(w) of the Job 
Creation and Worker Assistance Act of 2002, described in Part Eight of 
this document, to clarify that, with respect to dividends that are 
reinvested at the election of participants, the dividends are 
deductible for the taxable year in which the later of the reinvestment 
or the election occurs and the dividends must be nonforfeitable.
---------------------------------------------------------------------------
    EGTRRA permits the Secretary to disallow the deduction for 
any ESOP dividend if the Secretary determines that the dividend 
constitutes, in substance, the avoidance or evasion of 
taxation. This includes authority to disallow a deduction of 
unreasonable dividends. For purposes of the dividends 
reinvested at the election of participants or beneficiaries, a 
dividend paid on common stock that is primarily and regularly 
traded on an established securities market would be reasonable. 
In addition, for this purpose in the case of employers with no 
common stock (determined on a controlled group basis) that is 
primarily and regularly traded on an established securities 
market, the reasonableness of a dividend is determined by 
comparing the dividend rate on stock held by the ESOP with the 
dividend rate for common stock of comparable corporations whose 
stock is primarily and regularly traded on an established 
securities market. Whether a corporation is comparable is 
determined by comparing relevant corporate characteristics such 
as industry, corporate size, earnings, debt-equity structure 
and dividend history.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2001.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $20 million in 2002, $49 million in 2003, 
$59 million in 2004, $63 million in 2005, $66 million in 2006, 
$69 million in 2007, $71 million in 2008, $74 million in 2009, 
$77 million in 2010, $39 million in 2011, and less than $5 
million in 2012.
            (c) Repeal transition rule relating to certain highly 
                    compensated employees (sec. 663 of the Act and sec. 
                    1114(c)(4) of the Tax Reform Act of 1986)

                         Present and Prior Law

    Under present and prior law, for purposes of the rules 
relating to qualified plans, a highly compensated employee is 
generally defined as an employee \153\ who (1) was a five-
percent owner of the employer at any time during the year or 
the preceding year or (2) either (a) had compensation for the 
preceding year in excess of $85,000 (for 2001) or (b) at the 
election of the employer, had compensation in excess of $85,000 
for the preceding year and was in the top 20 percent of 
employees by compensation for such year.
---------------------------------------------------------------------------
    \153\ An employee includes a self-employed individual.
---------------------------------------------------------------------------
    Under a rule enacted in the Tax Reform Act of 1986, a 
special definition of highly compensated employee applies for 
purposes of the nondiscrimination rules relating to qualified 
cash or deferred arrangements (``section 401(k) plans'') and 
matching contributions. This special definition applies to an 
employer incorporated on December 15, 1924, that meets certain 
specific requirements.

                           Reasons for Change

    The Congress believed it appropriate to repeal the special 
definition of highly compensated employee in light of the 
substantial modification of the general definition of highly 
compensated employee in the Small Business Job Protection Act 
of 1996.

                        Explanation of Provision

    The provision repeals the special definition of highly 
compensated employee under the Tax Reform Act of 1986. Thus, 
the generally applicable definition applies in all cases.

                             Effective Date

    The provision is effective for plan years beginning after 
December 31, 2001.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $2 million in 2002, $3 million annually in 
2003 through 2006, $4 million annually in 2007 through 2010, $2 
million in 2011, and less than $500,000 in 2012.

       (d) Employees of tax-exempt entities (sec. 664 of the Act)


                         Present and Prior Law

    The Tax Reform Act of 1986 provided that nongovernmental 
tax-exempt employers were not permitted to maintain a qualified 
cash or deferred arrangement (``section 401(k) plan''). This 
prohibition was repealed, effective for years beginning after 
December 31, 1996, by the Small Business Job Protection Act of 
1996.
    Treasury regulations provide that, in applying the 
nondiscrimination rules to a section 401(k) plan (or a section 
401(m) plan that is provided under the same general arrangement 
as the section 401(k) plan), the employer may treat as 
excludable those employees of a tax-exempt entity who could not 
participate in the arrangement due to the prohibition on 
maintenance of a section 401(k) plan by such entities. Such 
employees may be disregarded only if more than 95 percent of 
the employees who could participate in the section 401(k) plan 
benefit under the plan for the plan year.\154\
---------------------------------------------------------------------------
    \154\ Treas. Reg. sec. 1.410(b)-6(g).
---------------------------------------------------------------------------
    Tax-exempt charitable organizations may maintain a tax-
sheltered annuity (a ``section 403(b) annuity'') that allows 
employees to make salary reduction contributions.

                           Reasons for Change

    The Congress believed it appropriate to modify the special 
rule regarding the treatment of certain employees of a tax-
exempt organization as excludable for section 401(k) plan 
nondiscrimination testing purposes in light of the provision of 
the Small Business Job Protection Act of 1996 that permits such 
organizations to maintain section 401(k) plans.

                        Explanation of Provision

    The Treasury Department is directed to revise its 
regulations under section 410(b) to provide that employees of a 
tax-exempt charitable organization who are eligible to make 
salary reduction contributions under a section 403(b) annuity 
may be treated as excludable employees for purposes of testing 
a section 401(k) plan, or a section 401(m) plan that is 
provided under the same general arrangement as the section 
401(k) plan of the employer if: (1) no employee of such tax-
exempt entity is eligible to participate in the section 401(k) 
or 401(m) plan and (2) at least 95 percent of the employees who 
are not employees of the charitable employer are eligible to 
participate in such section 401(k) plan or section 401(m) plan.
    The revised regulations are to be effective for years 
beginning after December 31, 1996.

                             Effective Date

    The provision is effective on the date of enactment.

                             Revenue Effect

    The provision is estimated to have a negligible effect on 
Federal fiscal year budget receipts.
            (e) Treatment of employer-provided retirement advice (sec. 
                    665 of the Act and sec. 132 of the Code)

                         Present and Prior Law

    Under present and prior law, certain employer-provided 
fringe benefits are excludable from gross income (section 132) 
and wages for employment tax purposes. These excludable fringe 
benefits include working condition fringe benefits and de 
minimis fringes. In general, a working condition fringe benefit 
is any property or services provided by an employer to an 
employee to the extent that, if the employee paid for such 
property or services, such payment would be allowable as a 
deduction as a business expense. A de minimis fringe benefit is 
any property or services provided by the employer the value of 
which, after taking into account the frequency with which 
similar fringes are provided, is so small as to make accounting 
for it unreasonable or administratively impracticable.
    In addition, if certain requirements are satisfied, up to 
$5,250 annually of employer-provided educational assistance is 
excludable from gross income (section 127) and wages. Under 
prior law, this exclusion did not apply with respect to 
graduate-level courses and expired with respect to courses 
beginning after December 31, 2001.\155\ Education not 
excludable under section 127 may be excludable as a working 
condition fringe.
---------------------------------------------------------------------------
    \155\ Section 411 of EGTRRA, also described in Part Two of this 
document, provides for the: (1) permanent extension of the exclusion 
for employer-provided educational assistance; and (2) expansion of the 
exclusion to graduate education. These changes are effective with 
respect to courses beginning after December 31, 2001.
---------------------------------------------------------------------------
    There is no specific exclusion under prior law for 
employer-provided retirement planning services. However, such 
services may be excludable as employer-provided educational 
assistance or a fringe benefit.

                           Reasons for Change

    In order to plan adequately for retirement, individuals 
must anticipate retirement income needs and understand how 
their retirement income goals can be achieved. Employer-
sponsored plans are a key part of retirement income planning. 
The Congress believed that employers sponsoring retirement 
plans should be encouraged to provide retirement planning 
services for their employees in order to assist them in 
preparing for retirement.

                        Explanation of Provision

    Qualified retirement planning services provided to an 
employee and his or her spouse by an employer maintaining a 
qualified plan are excludable from income and wages. The 
exclusion does not apply with respect to highly compensated 
employees unless the services are available on substantially 
the same terms to each member of the group of employees 
normally provided education and information regarding the 
employer's qualified plan. ``Qualified retirement planning 
services'' are retirement planning advice and information. The 
exclusion is not limited to information regarding the qualified 
plan, and, thus, for example, applies to advice and information 
regarding retirement income planning for an individual and his 
or her spouse and how the employer's plan fits into the 
individual's overall retirement income plan. On the other hand, 
the exclusion does not apply to services that may be related to 
retirement planning, such as tax preparation, accounting, legal 
or brokerage services.
    It is intended that the provision will clarify the 
treatment of retirement advice provided in a nondiscriminatory 
manner. It is intended that the Secretary, in determining the 
application of the exclusion to highly compensated employees, 
may permit employers to take into consideration employee 
circumstances other than compensation and position in providing 
advice to classifications of employees. Thus, for example, the 
Secretary may permit employers to limit certain advice to 
individuals nearing retirement age under the plan.

                             Effective Date

    The provision is effective with respect to years beginning 
after December 31, 2001.

                             Revenue Effect

    The provision is estimated to have a negligible effect on 
Federal fiscal year budget receipts.
            (f) Repeal of the multiple use test (sec. 666 of the Act 
                    and sec. 401(m) of the Code)

                         Present and Prior Law

    Under present and prior law, elective deferrals under a 
qualified cash or deferred arrangement (``section 401(k) 
plan'') are subject to a special annual nondiscrimination test 
(``ADP test''). The ADP test compares the actual deferral 
percentages (``ADPs'') of the highly compensated employee group 
and the nonhighly compensated employee group. The ADP for each 
group generally is the average of the deferral percentages 
separately calculated for the employees in the group who are 
eligible to make elective deferrals for all or a portion of the 
relevant plan year. Each eligible employee's deferral 
percentage generally is the employee's elective deferrals for 
the year divided by the employee's compensation for the year.
    The plan generally satisfies the ADP test if the ADP of the 
highly compensated employee group for the current plan year is 
either: (1) not more than 125 percent of the ADP of the 
nonhighly compensated employee group for the prior plan year, 
or (2) not more than 200 percent of the ADP of the nonhighly 
compensated employee group for the prior plan year and not more 
than two percentage points greater than the ADP of the 
nonhighly compensated employee group for the prior plan year.
    Employer matching contributions and after-tax employee 
contributions under a defined contribution plan also are 
subject to a special annual nondiscrimination test (``ACP 
test''). The ACP test compares the actual deferral percentages 
(``ACPs'') of the highly compensated employee group and the 
nonhighly compensated employee group. The ACP for each group 
generally is the average of the contribution percentages 
separately calculated for the employees in the group who are 
eligible to make after-tax employee contributions or who are 
eligible for an allocation of matching contributions for all or 
a portion of the relevant plan year. Each eligible employee's 
contribution percentage generally is the employee's aggregate 
after-tax employee contributions and matching contributions for 
the year divided by the employee's compensation for the year.
    The plan generally satisfies the ACP test if the ACP of the 
highly compensated employee group for the current plan year is 
either: (1) not more than 125 percent of the ACP of the 
nonhighly compensated employee group for the prior plan year, 
or (2) not more than 200 percent of the ACP of the nonhighly 
compensated employee group for the prior plan year and not more 
than two percentage points greater than the ACP of the 
nonhighly compensated employee group for the prior plan year.
    Under prior law, for any year in which: (1) at least one 
highly compensated employee is eligible to participate in an 
employer's plan or plans that are subject to both the ADP test 
and the ACP test, (2) the plan subject to the ADP test 
satisfies the ADP test but the ADP of the highly compensated 
employee group exceeds 125 percent of the ADP of the nonhighly 
compensated employee group, and (3) the plan subject to the ACP 
test satisfies the ACP test but the ACP of the highly 
compensated employee group exceeds 125 percent of the ACP of 
the nonhighly compensated employee group, an additional special 
nondiscrimination test (``multiple use test'') applies to the 
elective deferrals, employer matching contributions, and after-
tax employee contributions. The plan or plans generally satisfy 
the multiple use test if the sum of the ADP and the ACP of the 
highly compensated employee group does not exceed the greater 
of: (1) the sum of (A) 1.25 times the greater of the ADP or the 
ACP of the nonhighly compensated employee group, and (B) two 
percentage points plus (but not more than two times) the lesser 
of the ADP or the ACP of the nonhighly compensated employee 
group, or (2) the sum of (A) 1.25 times the lesser of the ADP 
or the ACP of the nonhighly compensated employee group, and (B) 
two percentage points plus (but not more than two times) the 
greater of the ADP or the ACP of the nonhighly compensated 
employee group.

                           Reasons for Change

    The Congress believed that the ADP test and the ACP test 
are adequate to prevent discrimination in favor of highly 
compensated employees under 401(k) plans and determined that 
the multiple use test unnecessarily complicates 401(k) plan 
administration.

                        Explanation of Provision

    EGTRRA repeals the multiple use test.

                             Effective Date

    The provision is effective for years beginning after 
December 31, 2001.

                             Revenue Effect

    The estimated revenue effect of this provision is 
considered in the estimated revenue effect of other provisions 
of Title VI of EGTRRA.

C. Tax Treatment of Electing Alaska Native Settlement Trusts (sec. 671 
 of the Act, secs. 1(e), 301, 641, 651, 661, and 6034A of the Code and 
                  new secs. 646 and 6039H of the Code)


                         Present and Prior Law

    An Alaska Native Settlement Corporation (``ANC'') may 
establish a Settlement Trust (``Trust'') under section 39 of 
the Alaska Native Claims Settlement Act (``ANCSA'') \156\ and 
transfer money or other property to such Trust for the benefit 
of beneficiaries who constitute all or a class of the 
shareholders of the ANC, to promote the health, education and 
welfare of the beneficiaries and preserve the heritage and 
culture of Alaska Natives.
---------------------------------------------------------------------------
    \156\ 43 U.S.C. 1601 et. seq. A Settlement Trust is subject to 
certain limitations under ANCSA, including that it may not operate a 
business. 43 U.S.C. 1629e(b).
---------------------------------------------------------------------------
    With certain exceptions, once an ANC has made a conveyance 
to a Trust, the assets conveyed shall not be subject to 
attachment, distraint, or sale or execution of judgment, except 
with respect to the lawful debts and obligations of the Trust.
    The Internal Revenue Service (``IRS'') has indicated that 
contributions to a Trust constitute distributions to the 
beneficiary-shareholders at the time of the contribution and 
are treated as dividends to the extent of earnings and profits 
as provided under section 301 of the Code.\157\ Also, a Trust 
and its beneficiaries are generally taxed subject to applicable 
trust rules.\158\
---------------------------------------------------------------------------
    \157\ See, e.g., Priv. Ltr. Rul. 9824014; Priv. Ltr. Rul. 9433021; 
Priv. Ltr. Rul. 9329026 and Priv. Ltr. Rul. 9326019.
    \158\ See Subchapter J of the Code (sections 641 et. seq.); Treas. 
Reg. sec. 1.301.7701-4.
---------------------------------------------------------------------------

                           Reasons for Change

    Congress was concerned that prior law might inhibit many 
ANCs from establishing Settlement Trusts, due to the IRS 
treatment of a contribution by an ANC to a Trust as a dividend 
to the extent the ANC has current or accumulated earnings and 
profits in the year of the contribution. So long as the ANC 
shareholders or beneficiaries of the Trust do not receive the 
money or other property that is contributed to the Trust, 
Congress believed it appropriate to allow the transfer to the 
Trust without causing dividend treatment.
    Congress also believed it appropriate for a Settlement 
Trust to be able to accumulate its earnings at the lowest 
individual tax rate rather than the higher rates that generally 
apply to trusts, and to distribute earnings taxed at that rate 
to Alaska Native beneficiaries without additional taxation to 
the beneficiaries.
    At the same time, Congress believed it appropriate to 
require a Settlement Trust to elect to obtain the benefits of 
the new provisions, and to provide safeguards for such electing 
Trusts that prevent the benefits from being used by persons 
other than Alaska Natives, or from being used to circumvent 
basic tax law provisions in an unintended manner.

                        Explanation of Provision

    EGTRRA allows an election under which special rules will 
apply in determining the income tax treatment of an electing 
Trust and of its beneficiaries. An electing Trust will pay tax 
on its income at the lowest rate specified for ordinary income 
of an individual (or corresponding lower capital gains rate). 
EGTRRA also specifies the treatment of distributions by an 
electing Trust to beneficiaries, the reporting requirements 
associated with such an election, and the consequences of 
disqualification for these benefits due to the allowance of 
certain impermissible dispositions of Trust interests or ANC 
stock.
    Under EGTRRA, a trust that is a Settlement Trust 
established by an Alaska Native Corporation under section 39 of 
ANCSA may make an election for its first taxable year ending 
after the date of enactment of the provision to be subject to 
the rules of the provision rather than otherwise applicable 
income tax rules. If the election is in effect, no amount will 
be included in the gross income of a beneficiary of such Trust 
by reason of a contribution to the Trust.\159\ In addition, 
ordinary income of the electing Trust, whether accumulated or 
distributed, will be taxed only to the Trust (and not to 
beneficiaries) at the lowest individual tax rate for ordinary 
income. Capital gains of the electing Trust will similarly be 
taxed to the Trust at the capital gains rate applicable to 
individuals subject to such lowest rate. These rates will 
apply, rather than the higher rates generally applicable to 
trusts or to higher tax bracket beneficiaries. The election is 
made on a one-time basis only. The benefits of the election 
will terminate, however, and other special rules will apply, if 
the electing Trust or the sponsoring ANC fail to satisfy the 
restrictions on transferability of Trust beneficial interests 
or of ANC stock. A Trust that makes the election remains 
subject to the generally applicable requirements for 
classification and taxation as a trust, in order to obtain the 
benefits of the provision.
---------------------------------------------------------------------------
    \159\ If the ANC transfers appreciated property to the Trust, 
section 311(b) of the Code will apply to the ANC, as under present law, 
so that the ANC will recognize gain as if it had sold the property for 
fair market value. The Trust takes the property with a fair market 
value basis, pursuant to section 301(d) of the Code.
---------------------------------------------------------------------------
    The treatment to beneficiaries of amounts distributed by an 
electing Trust depends upon the amount of the distribution. 
Solely for purposes of determining what amount has been 
distributed and thus which treatment applies under these rules, 
the amount of any distribution of property is the fair market 
value of the property at the time of the distribution.\160\
---------------------------------------------------------------------------
    \160\ Section 661 of the Code, which provides a deduction to the 
trust for certain distributions, does not apply to an electing Trust 
under the provision unless the election is terminated by 
disqualification. Similarly, the inclusion provisions of section 662 of 
the Code, relating to amounts to be included in income of 
beneficiaries, also do not apply to a qualified electing Trust.
---------------------------------------------------------------------------
    Amounts distributed by an electing Trust during any taxable 
year are excludable from the gross income of the recipient 
beneficiary to the extent of: (1) the taxable income of the 
Trust for the taxable year and all prior taxable years for 
which an election was in effect (decreased by any income tax 
paid by the Trust with respect to the income) plus (2) any 
amounts excluded from gross income of the Trust under section 
103 for those periods.\161\
---------------------------------------------------------------------------
    \161\ In the case of any such excludable distribution that involves 
a distribution of property other than cash, the basis of such property 
in the hands of the recipient beneficiary will generally be the 
adjusted basis of the property in the hands of the Trust, unless the 
Trust makes an election to pay tax, in which case the basis in the 
hands of the beneficiary would be the fair market value of the 
property. See Code sections 643(e) and 643(e)(3).
---------------------------------------------------------------------------
    If distributions to beneficiaries exceed the excludable 
amounts described above, then such excess distributions are 
reported and taxed to beneficiaries as if distributed by the 
ANC in the year of the distribution by the electing Trust to 
the extent the ANC then has current or accumulated earnings and 
profits, and are treated as dividends to beneficiaries.\162\ 
Additional distributions in excess of the current or 
accumulated earnings and profits of the ANC are treated by the 
beneficiaries as distributions by the Trust in excess of the 
distributable net income of the Trust for such year.\163\
---------------------------------------------------------------------------
    \162\ The treatment of such amounts distributed by an electing 
Trust as a dividend applies even if all or any part of the 
contributions by an ANC to a Trust would not have been dividends at the 
time of the contribution under present law; for example, because the 
ANC had no current or accumulated earnings and profits, or because the 
contribution was made from Alaska Native Fund amounts that may not have 
been taxable. See 43 U.S.C. 1605.
    \163\ Such distributions would not be taxable to the beneficiaries. 
In the case of any such nontaxable distribution that involves a 
distribution of property other than cash, the basis of such property in 
the hands of the recipient beneficiary will generally be the adjusted 
basis of the property in the hands of the Trust, unless the Trust makes 
an election to pay tax, in which case the basis in the hands of the 
beneficiary will be the fair market value of the property. See Code 
sections 643(e) and 643(e)(3).
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    The fiduciary of an electing Trust must report to the IRS, 
with the Trust tax return, the amount of distributions to each 
beneficiary, and the tax treatment to the beneficiary of such 
distributions under the provision (either as exempt from tax to 
the beneficiary, or as a distribution deemed made by the ANC). 
The electing Trust must also furnish such information to the 
ANC. In the case of distributions that are treated as if made 
by the ANC, the ANC must then report such amounts to the 
beneficiaries and must indicate whether they are dividends or 
not, in accordance with the earnings and profits of the ANC. 
The reporting thus required by an electing Trust will be in 
lieu of, and will satisfy, the reporting requirements of 
section 6034A (and such other reporting requirements as the 
Secretary of the Treasury may deem appropriate).
    The earnings and profits of an ANC will not be reduced by 
the amount of its contributions to an electing Trust at the 
time of the contributions. However, the ANC earnings and 
profits will be reduced as and when distributions are 
thereafter made by the electing Trust that are taxed to 
beneficiaries under the provision as dividends from the ANC to 
the Trust beneficiaries.
    If in any taxable year the beneficial interests in the 
electing Trust may be disposed of to a person in a manner that 
would not be permitted under ANCSA if the interests were 
Settlement Common Stock (generally, to a person other than an 
Alaska Native),\164\ then the special provisions applicable to 
electing Trusts, including the favorable ordinary income tax 
rate and corresponding lower capital gains tax rate, cease to 
apply as of the beginning of such taxable year. The 
distributable net income of the Trust is increased up to the 
amount of current and accumulated earnings and profits of the 
ANC as of the end of that year, but such increase shall not 
exceed the fair market value of the assets of the Trust as of 
the date the beneficial interests of the Trust became 
disposable.\165\ Thereafter, the Trust and its beneficiaries 
are generally subject to the rules of subchapter J and to the 
generally applicable trust income tax rates. Thus, the increase 
in distributable net income will result in the Trust being 
taxed at regular trust rates to the extent the recomputed 
distributable net income is not distributed to beneficiaries; 
and beneficiaries will be taxed to the extent there are 
distributions. Normal reporting rules applicable to trusts and 
their beneficiaries will apply. The basis of any property 
distributed to beneficiaries will also be determined under 
normal trust rules. The same rules apply if any stock of the 
ANC may be disposed of to a person in a manner that would not 
be permitted under ANCSA if the stock were Settlement Common 
Stock and the ANC makes a transfer to the Trust.\166\
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    \164\ Under ANSCA, Settlement Common Stock is subject to 
restrictions on transferability. If changes are made to permit 
additional transferability of such stock, then the Settlement Common 
Stock is cancelled and Replacement Common Stock is issued. See 43 
U.S.C. 1602(p), 1606(h) and 1629c.
    \165\ To the extent the earnings and profits of the ANC increase 
distributable net income of the Trust under this provision, the ANC 
will have a corresponding adjustment reducing its earnings and profits.
    \166\ The restrictions on transfer of stock or beneficial interests 
under the provision are those that would apply to Settlement Common 
Stock under section 7(h) of ANSCA (43 U.S.C. 1606(h)), whether or not 
the interest or stock in question is in fact Settlement Common Stock. 
To the extent section 7(h) of ANSCA permits certain transfers of 
Settlement Common stock on death or in other special circumstances, 
those are also permitted under the provision. Also, the mere 
transferability of ANC stock in manner that would not be permitted for 
Settlement Common Stock (but without such transferability of any Trust 
interests) will not destroy the beneficial treatment of an existing 
electing Trust unless and until the ANC thereafter makes a transfer to 
the Trust. The surrender of an interest in an ANC or an electing Trust 
in order to accomplish the whole or partial redemption of the interest 
of a shareholder or beneficiary in such ANC or Trust, or to accomplish 
the whole or partial liquidation of such ANC or Trust, is deemed to be 
a transfer permitted by section 7(h) of ANSCA for purposes of the 
provision.
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    EGTRRA contains a special loss disallowance rule that 
reduces any loss that would otherwise be recognized by a 
shareholder upon the disposition of a share of stock of a 
sponsoring ANC by a ``per share loss adjustment factor.'' This 
factor reflects the aggregate of all contributions to all 
electing Trusts sponsored by such ANC made on or after the 
first day such Trust is treated as an electing Trust, expressed 
on a per share basis and determined as of the day of each such 
contribution.
    The special loss disallowance rule is intended to prevent 
the allowance of noneconomic losses if the ANC stock owned by 
beneficiaries ever becomes transferable in any type of 
transaction that could cause the recognition of taxable gain or 
loss, (including a redemption by the ANC) where the basis of 
the stock in the hands of the beneficiary (or in the hands of 
any transferee of a beneficiary) fails to reflect the allocable 
reduction in corporate value attributable to amounts 
transferred by the ANC into the Trust.

                             Effective Date

    The provision is effective for taxable years of Settlement 
Trusts, their beneficiaries, and sponsoring Alaska Native 
Corporations ending after the date of enactment, and to 
contributions made to electing Settlement Trusts during such 
year and thereafter.
    The general sunset date is effective for taxable years 
beginning after December 31, 2010. For such taxable years, the 
tax consequences of any election previously made under the 
provision, and any right to make a future election, shall be 
terminated. Thus, for taxable years beginning after December 
31, 2010, any electing Trust then in existence, its 
beneficiaries, and the sponsoring ANC shall be taxed under the 
provisions of law in effect immediately prior to the enactment 
of this provision.

                             Revenue Effect

    The provision is estimated to reduce fiscal year budget 
receipts by $4 million annually in 2002 and 2003, $3 million 
annually in 2004 through 2008, $4 million annually in 2009 and 
2010, and $1 million in 2011.

                      VII. ALTERNATIVE MINIMUM TAX

 A. Individual Alternative Minimum Tax Relief (sec. 701 of the Act and 
                          sec. 55 of the Code)

                         Present and Prior Law

    Prior and present law impose an alternative minimum tax 
(``AMT'') on individuals to the extent that the tentative 
minimum tax exceeds the regular tax. An individual's tentative 
minimum tax generally is an amount equal to the sum of: (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 an exemption amount and 
(2) 28 percent of the remaining AMTI. AMTI is the individual's 
taxable income adjusted to take account of specified 
preferences and adjustments.
    Under prior law, the AMT exemption amounts were: (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. Under 
present and prior law, 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. The exemption amounts, the 
threshold phase-out amounts, and rate brackets are not indexed 
for inflation.

                           Reasons for Change

    The Congress was concerned about the projected increase in 
the number of individuals who will be affected by the 
individual alternative minimum tax in future years. The 
provision will reduce the number of individuals who would 
otherwise be affected by the minimum tax.

                        Explanation of Provision

    EGTRRA increases the AMT exemption amount for married 
couples filing a joint return and surviving spouses by $4,000. 
The AMT exemption amounts for other individuals (i.e., 
unmarried individuals and married individuals filing separate 
returns) are increased by $2,000.

                             Effective Date

    The provision applies to taxable years beginning after 
December 31, 2000, and before January 1, 2005.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $178 million in 2001, $2,311 million in 
2002, $3,161 million in 2003, $4,605 million in 2004, and 
$3,646 in 2005.

                         VIII. OTHER PROVISIONS

 A. Modification to Corporate Estimated Tax Requirements (sec. 801 of 
                                the Act)

                         Present and Prior Law

    In general, corporations are required to make quarterly 
estimated tax payments of their income tax liability (section 
6655). For a corporation whose taxable year is a calendar year, 
these estimated tax payments must be made by April 15, June 15, 
September 15, and December 15.

                           Reasons for Change

    The Congress believed that it was appropriate to modify 
these corporate estimated tax requirements.

                        Explanation of Provision

    With respect to corporate estimated tax payments due on 
September 17, 2001,\167\ 100 percent is required to be paid by 
October 1, 2001. With respect to corporate estimated tax 
payments due on September 15, 2004, 80 percent is required to 
be paid by September 15, 2004, and 20 percent is required to be 
paid by October 1, 2004.
---------------------------------------------------------------------------
    \167\ September 15, 2001 was a Saturday. Under present and prior 
law, payments required to be made on a Saturday must be made no later 
than the next banking day.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective on the date of enactment.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $32,921 million in 2001, increase Federal 
fiscal year budget receipts by $32,921 million in 2002, have no 
effect on Federal fiscal year budget receipts in 2003, reduce 
Federal fiscal year budget receipts by $6,606 million in 2004, 
and increase Federal fiscal year budget receipts by $6,606 
million in 2005.

  B. Authority to Postpone Certain Tax-Related Deadlines by Reason of 
Presidentially Declared Disaster (sec. 802 of the Act and sec. 7508A of 
                               the Code)

                         Present and Prior Law

    The Secretary of the Treasury may specify that certain 
deadlines are postponed for a period of time in the case of a 
taxpayer determined to be affected by a Presidentially declared 
disaster.\168\ The deadlines that may be postponed are the same 
as the deadlines postponed by reason of service in a combat 
zone. If the Secretary extends the period of time for filing 
income tax returns and for paying income tax, the Secretary 
must abate related interest for that same period of time.\169\ 
Under prior law, the Secretary of the Treasury had the 
authority to specify that certain deadlines are postponed for a 
period of up to 90 days.
---------------------------------------------------------------------------
    \168\ Section 7508A.
    \169\ Section 6404(h).
---------------------------------------------------------------------------

                           Reasons for Change

    The Congress believed that increasing the maximum time 
period for which the Secretary may postpone certain deadlines 
in the case of a taxpayer determined to be affected by a 
Presidentially declared disaster will help taxpayers in dealing 
with disasters.

                        Explanation of Provision

    EGTRRA expands the period of time with respect to which the 
Secretary may postpone certain deadlines from 90 days to 120 
days.

                             Effective Date

    The provision is effective on the date of enactment.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by less than $500,000 in 2002, and by less than 
$1 million annually in 2003 through 2012.

 C. Income Tax Treatment of Certain Restitution Payments to Holocaust 
                     Victims (sec. 803 of the Act)

                         Present and Prior Law

    Under the Code, gross income means ``income from whatever 
source derived'' except for certain items specifically exempt 
or excluded by statute (section 61). There is no explicit 
statutory exception from gross income provided for amounts 
received due to status as a Holocaust victim or heir thereof.

                        Explanation of Provision

    EGTRRA provides that excludable restitution payments made 
to an eligible individual (or the individual's heirs or estate) 
are: (1) excluded from gross income; and (2) not taken into 
account for any provision of the Code which takes into account 
excludable gross income in computing adjusted gross income 
(e.g., taxation of Social Security benefits).
    The basis of any property received by an eligible 
individual (or the individual's heirs or estate) that is 
excluded under this provision is the fair market value of such 
property at the time of receipt by the eligible individual (or 
the individual's heirs or estate).
    Eligible restitution payments are any payment or 
distribution made to an eligible individual (or the 
individual's heirs or estate) which: (1) is payable by reason 
of the individual's status as an eligible individual (including 
any amount payable by any foreign country, the United States, 
or any foreign or domestic entity or fund established by any 
such country or entity, any amount payable as a result of a 
final resolution of legal action, and any amount payable under 
a law providing for payments or restitution of property); (2) 
constitutes the direct or indirect return of, or compensation 
or reparation for, assets stolen or hidden, or otherwise lost 
to, the individual before, during, or immediately after World 
War II by reason of the individual's status as an eligible 
individual (including any proceeds of insurance under policies 
issued on eligible individuals by European insurance companies 
immediately before and during World War II); or (3) interest 
payable as part of any payment or distribution described in (1) 
or (2), above. An eligible individual is a person who was 
persecuted for racial or religious reasons or on the basis of 
physical or mental disability or sexual orientation by Nazi 
Germany, or any other Axis regime, or any other Nazi-controlled 
or Nazi-allied country.
    EGTRRA also provides that interest earned by enumerated 
escrow or settlement funds are excluded from tax.

                             Effective Date

    The provision is effective for any amounts received on or 
after January 1, 2000. No inference is intended with respect to 
the income tax treatment of any amount received before January 
1, 2000.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $3 million annually in 2003-2011.

   IX. COMPLIANCE WITH CONGRESSIONAL BUDGET ACT (Sec. 901 of the Act)

                         Present and Prior Law

    There are no general sunset provisions provided in other 
tax legislation. One is provided in EGTRRA to ensure compliance 
with the reconciliation rules.
    Reconciliation is a procedure under the Congressional 
Budget Act of 1974 (the ``Budget Act'') by which Congress 
implements spending and tax policies contained in a budget 
resolution. The Budget Act contains numerous rules enforcing 
the scope of items permitted to be considered under the budget 
reconciliation process. One such rule, the so-called ``Byrd 
rule,'' was incorporated into the Budget Act in 1990. The Byrd 
rule, named after its principal sponsor, Senator Robert C. 
Byrd, is contained in section 313 of the Budget Act. The Byrd 
rule generally permits members to raise a point of order 
against extraneous provisions (those which are unrelated to the 
goals of the reconciliation process) from either a 
reconciliation bill or a conference report on such bill.
    Under the Byrd rule, a provision is considered to be 
extraneous if it falls under one or more of the following six 
definitions:
          (1) It does not produce a change in outlays or 
        revenues;
          (2) It produces an outlay increase or revenue 
        decrease when the instructed committee is not in 
        compliance with its instructions;
          (3) It is outside of the jurisdiction of the 
        committee that submitted the title or provision for 
        inclusion in the reconciliation measure;
          (4) It produces a change in outlays or revenues which 
        is merely incidental to the nonbudgetary components of 
        the provision;
          (5) It would increase the deficit for a fiscal year 
        beyond those covered by the reconciliation measure; and
          (6) It recommends changes in Social Security.

                        Explanation of Provision

Sunset of provisions
    To ensure compliance with the Budget Act (see definition 
number 5 of the Byrd rule, above), EGTRRA provides that the 
provisions of, and amendments made by, the Act that are in 
effect on September 30, 2011, shall cease to apply as of the 
close of September 30, 2011, except that all provisions of, and 
amendments made by, the bill generally do not apply for 
taxable, plan or limitation years beginning after December 31, 
2010. With respect to the estate, gift, and generation-skipping 
provisions of the bill, the provisions do not apply to estates 
of decedents dying, gifts made, or generation skipping 
transfers, after December 31, 2010. The Code and the Employee 
Retirement Income Security Act of 1974 are applied to such 
years, estates, gifts and transfers after December 31, 2010, as 
if the provisions of and amendments made by the bill had never 
been enacted.

                             Effective Date

    This provision is effective on the date of enactment (June 
7, 2001).

                             Revenue Effect

    The revenue effects of this provision are incorporated in 
the revenue effects of each provision of EGTRRA, as described 
above.

PART THREE: AN ACT TO AMEND THE INTERNAL REVENUE CODE OF 1986 TO RENAME 
THE EDUCATION INDIVIDUAL RETIREMENT ACCOUNTS AS THE COVERDELL EDUCATION 
               SAVINGS ACCOUNTS (PUBLIC LAW 107-22)\170\
---------------------------------------------------------------------------

    \170\ S. 1190. The bill was introduced in, and passed by, the 
Senate on July 18, 2001. S. 1190 was discharged by the House Committee 
on Ways and Means and passed by the House on July 23, 2001. The 
President signed the bill on July 26, 2001. The bill was not reported 
by any Committee of the House of Representatives or the Senate. 
Therefore, the bill does not have any formal legislative history. This 
description of the provisions of the bill was prepared by the staff of 
the Joint Committee on Taxation.
---------------------------------------------------------------------------

A. Education Individual Retirement Accounts (sec. 1 of the Act and sec. 
                            530 of the Code)

                         Present and Prior Law

    Section 530 of the Code provides tax-exempt status to 
education individual retirement accounts (``education IRAs''), 
meaning certain trusts or custodial accounts that are created 
or organized in the United States exclusively for the purpose 
of paying the qualified education expenses of a designated 
beneficiary. Contributions to education IRAs may be made only 
in cash.\171\ Annual contributions to education IRAs may not 
exceed $2,000 per beneficiary (except in cases involving 
certain tax-free rollovers) and may not be made after the 
designated beneficiary reaches age 18.
---------------------------------------------------------------------------
    \171\ Special estate and gift tax rules apply to qualified tuition 
programs and education IRAs.
---------------------------------------------------------------------------
    Earnings on contributions to an education IRA generally are 
subject to tax when withdrawn. However, distributions from an 
education IRA are excludable from the gross income of the 
distributee to the extent that the total distribution does not 
exceed the qualified education expenses incurred by the 
beneficiary during the year the distribution is made.
    If the qualified education expenses of the beneficiary for 
the year are less than the total amount of the distribution 
from an education IRA, then the qualified education expenses 
are deemed to be paid from a pro-rata share of both the 
principal and earnings components of the distribution. In such 
a case, only a portion of the earnings is excludable (i.e., the 
portion of the earnings based on the ratio that the qualified 
education expenses bear to the total amount of the 
distribution) and the remaining portion of the earnings is 
includible in the beneficiary's gross income.
    The earnings portion of a distribution from an education 
IRA that is includible in income is generally subject to an 
additional 10-percent tax. The 10-percent additional tax does 
not apply if a distribution is made on account of the death or 
disability of the designated beneficiary, or on account of a 
scholarship received by the designated beneficiary (to the 
extent it does not exceed the amount of the scholarship).

                        Explanation of Provision

    The provision renames education individual retirement 
accounts as Coverdell education savings accounts.

                             Effective Date

    The provision is effective on the date of enactment (July 
26, 2001).

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

   PART FOUR: THE REVENUE PROVISIONS OF THE RAILROAD RETIREMENT AND 
      SURVIVORS' IMPROVEMENT ACT OF 2001 (PUBLIC LAW 107-90) \172\

   A. Amendments to the Internal Revenue Code of 1986 (the ``Code'') 
(secs. 201-204 of the Act and secs. 501, 3201, 3211, 3221, and 3241 of 
                               the Code)

                         Present and Prior Law

In general
    Present and prior law also imposes a tier 1 tax on railroad 
employers, employees, and employee representatives. This tax is 
essentially equivalent to Social Security taxes, and is used 
primarily to fund tier 1 benefits, which are essentially 
equivalent to Social Security benefits. Tier 2 railroad 
retirement benefits are funded primarily through a tier 2 
payroll tax. Prior law also imposed a supplemental annuity tax, 
which was used to finance supplemental annuity benefits, as 
well as some tier 2 benefits.
---------------------------------------------------------------------------
    \172\ H.R. 10. H.R. 1140, the ``Railroad Retirement and Survivors' 
Improvement Act of 2001,'' was referred to the House Committee on 
Transportation and Infrastructure, which reported the bill by a voice 
vote (H.R. Rep. 107-82) and House Committee on Ways and Means which 
discharged the bill. The House passed the bill on July 31, 2001 on a 
motion to suspend the rules and pass the bill. The bill was referred to 
the Senate Committee on Finance. The text of H.R. 1140 was substituted 
into H.R. 10 on the Senate floor and passed on December 5, 2001. The 
bill as amended by the Senate passed the House on December 11, 2001, on 
a motion to suspend the rules and pass the bill. The bill was signed by 
the President on December 21, 2001.
---------------------------------------------------------------------------
Tier 2 payroll taxes
    Present and prior law imposes a tier 2 payroll tax on 
railroad employers, employees, and employee representatives. 
The tax on employers was equal to 16.1 percent of covered 
compensation for 2001. The employee-level tax was equal to 4.9 
percent of covered compensation for 2001.\173\ The tier 2 tax 
on railroad employee representatives was equal to 14.75 percent 
of covered compensation for 2001.
---------------------------------------------------------------------------
    \173\ Like tier 1 and Social Security taxes, the employee-level 
tier 2 tax is deducted from the employee's compensation and remitted by 
the employer.
---------------------------------------------------------------------------
    The maximum amount of compensation taken into account for 
tier 2 payroll tax purposes is $59,700 (for 2001).
Supplemental annuity tax
    A cents-per-hour tax was imposed on railroad employers and 
employee representatives to fund supplemental annuity benefits. 
The rate of tax was determined quarterly by the Railroad 
Retirement Board based on the level necessary to fund current 
benefits, plus administrative costs. The rate of tax was 26.5 
cents per hour. Special rules applied in the case of an 
employer with respect to employees covered by a supplemental 
pension plan established pursuant to collective bargaining.

                        Reasons for Change \174\

    The Act reduced the tier 2 payroll tax rate paid by 
employers and employee representatives and provides a tax 
adjustment mechanism for years after 2003. According to the 
Railroad Retirement Board, the assets of the Railroad 
Retirement Account at the end of 2001 would be sufficient to 
pay more than 5 years of benefits. As a result, the tier 2 tax 
rate could be lowered over the next two years (2002-2003) 
without impacting the ability to pay benefits. After 2003, the 
tax rate would be set each calendar year pursuant to a 
statutory formula based on the average benefit ratio. If the 
program becomes underfunded, the tax rate would automatically 
increase to bolster the system's income, placing the burden and 
investment risk on the industry rather than the general 
taxpayer. Alternatively, if the trust fund balance increases to 
a certain level relative to benefit payments, tax rates would 
decrease. The automatic tax adjustment mechanism allows the tax 
rate to be more responsive to the system's financing needs.
---------------------------------------------------------------------------
    \174\ See H.R. 4844, the ``Railroad Retirement and Survivor's 
Improvement Act of 2000,'' which was reported by the Senate Committee 
on Finance on October 3, 2000 (S. Rep. No. 106-475) during the 106th 
Congress. The revenue provisions of that bill are substantially similar 
to the revenue provisions of the Railroad Retirement and Survivor's 
Improvement Act of 2001.
---------------------------------------------------------------------------

                        Explanation of Provision

In general
    The Act makes the following changes to the Code: (1) lowers 
the tier 2 payroll tax rates for employers and employee 
representatives in 2002 and 2003 and provides a modified method 
of calculating the rate of all tier 2 taxes after 2003; (2) 
repeals the supplemental annuity tax; and (3) provides tax-
exempt status for the railroad retirement investment trust (the 
``Trust'') created by the Act. The Trust for tier 2 benefits 
has the authority to invest the assets of the Trust on behalf 
of the Railroad Retirement Board and to transfer the funds to a 
qualified financial institution appointed as a disbursing agent 
for the payment of railroad retirement benefits.
Payroll taxes
    The Act lowers the tier 2 tax rate on employers to 15.6 
percent of covered compensation in 2002 and 14.2 percent in 
calendar year 2003. The Act lowers the tier 2 tax rate for 
employee representatives to 14.75 percent of covered 
compensation in 2002 and 14.2 percent in calendar year 2003. 
The Act does not change the tier 2 tax on employees for 2002 
and 2003.
    Beginning in calendar year 2004, the Act provides for 
automatic modifications in the tier 2 tax rates for employers, 
employee representatives, and employees based on the ratio of 
certain asset balances to the sum of benefits and 
administrative expenses (the ``average account benefits 
ratio''). The average account benefits ratio is the sum of the 
account benefits ratio for the previous 10 fiscal years divided 
by 10. The account benefits ratio is determined by dividing the 
sum of the fair market value of the assets in the railroad 
retirement account and the Trust at the close of the fiscal 
year by the sum of total benefit payments and administrative 
expenses of the Trust for such fiscal year. Because the average 
account benefits ratio is expected to be between 4.0 and 6.1 in 
2004, the table is designed to produce a 13.10 tax rate for 
employers and employee representatives and a 4.9 tax rate for 
employees in calendar year 2004. The Secretary of the Treasury 
is to use the following table to make adjustments to the tier 2 
tax rates.

----------------------------------------------------------------------------------------------------------------
                           Average account benefits ratio                               Applicable    Applicable
------------------------------------------------------------------------------------  percentage for  percentage
                                                                                       employer and       for
                                                                                         employee      employee
                              At least                                But less than   representative    tier 2
                                                                                       tier 2 taxes      taxes
                                                                                        (percent)      (percent)
----------------------------------------------------------------------------------------------------------------
                                                                                2.5            22.1     4.9
2.5................................................................             3.0            18.1     4.9
3.0................................................................             3.5            15.1     4.9
3.5................................................................             4.0            14.1     4.9
4.0................................................................             6.1            13.1     4.9
6.1................................................................             6.5            12.6     4.4
6.5................................................................             7.0            12.1     3.9
7.0................................................................             7.5            11.6     3.4
7.5................................................................             8.0            11.1     2.9
8.0................................................................             8.5            10.1     1.9
8.5................................................................             9.0             9.1     0.9
9.0................................................................          ......             8.2       0
----------------------------------------------------------------------------------------------------------------

Supplemental annuity tax
    The Act repeals the supplemental annuity tax.\175\ 
Supplemental annuity benefits are not affected by the 
elimination of the supplemental annuity tax.
---------------------------------------------------------------------------
    \175\ The funds in the supplemental annuity account were to be 
transferred to the Fund and the account was to be eliminated by the 
Railroad Retirement Board as soon as possible after December 31, 2001.
---------------------------------------------------------------------------
Tax exemption for the Trust
    The Act provides tax-exempt status for the newly created 
Trust under Code section 501(c).

                             Effective Date

    The provisions generally are effective for calendar years 
beginning after December 31, 2001. The provision relating to 
the tax-exempt status of the Trust is effective on the date of 
enactment.

                             Revenue Effect

    The provision to repeal the supplemental annuity tax is 
estimated to reduce Federal fiscal year budget receipts by $59 
million in 2002, $79 million in 2003, $81 million in 2004, $79 
million in 2005, $77 million in 2006, $76 million in 2007, $75 
million in 2008, $75 million in 2009, $74 million annually in 
2010, 2011, and 2012.\176\
---------------------------------------------------------------------------
    \176\ Estimate provided by the Congressional Budget Office.
---------------------------------------------------------------------------
    The provision to adjust the tier 2 tax rate is estimated to 
reduce Federal fiscal year budget receipts by $59 million in 
2002, $198 million in 2003, $329 million in 2004, $362 million 
in 2005, $366 million in 2006, $374 million in 2007, $379 
million in 2008, $383 million in 2009, $384 million in 2010, 
$386 million in 2011 and $390 million in 2012.\177\
---------------------------------------------------------------------------
    \177\ Estimate provided by the Congressional Budget Office.

 PART FIVE: THE REVENUE PROVISIONS OF AN ACT MAKING APPROPRIATIONS FOR 
THE DEPARTMENTS OF LABOR, HEALTH AND HUMAN SERVICES, AND EDUCATION, AND 
RELATED AGENCIES FOR THE FISCAL YEAR ENDING SEPTEMBER 30, 2002, AND FOR 
               OTHER PURPOSES (PUBLIC LAW 107-116) \178\

  A. Tax on Failure to Comply with Mental Health Parity Requirements 
           (sec. 701 of the Act and sec. 9812(f) of the Code)

                         Present and Prior Law

    The Mental Health Parity Act of 1996 amended ERISA and the 
Public Health Service Act to provide that group health plans 
that provide both medical and surgical benefits and mental 
health benefits cannot impose aggregate lifetime or annual 
dollar limits on mental health benefits that are not imposed on 
substantially all medical and surgical benefits. The provisions 
of the Mental Health Parity Act are effective with respect to 
plan years beginning on or after January 1, 1998, and expired 
with respect to benefits for services furnished on or after 
September 30, 2001.
---------------------------------------------------------------------------
    \178\ H.R. 3061. The House Committee on Appropriations reported the 
bill as an original measure on October 9, 2001 (H. R. Rep. No. 107-
229). The House passed the bill with amendments on October 11, 2001. 
The Senate passed the bill with an amendment on November 6, 2001. A 
Conference report was filed on the bill on December 19, 2001 (H. R. 
Rep. No. 107-342). The House agreed to the Conference report on 
December 19, 2001. The Senate agreed to the Conference report on 
December 20, 2001. The President signed the bill on January 10, 2002.
---------------------------------------------------------------------------
    The Taxpayer Relief Act of 1997 added to the Internal 
Revenue Code the requirements imposed under the Mental Health 
Parity Act, and imposed an excise tax on group health plans 
that fail to meet the requirements. The excise tax is equal to 
$100 per day during the period of noncompliance and is imposed 
on the employer sponsoring the plan if the plan fails to meet 
the requirements. The maximum tax that can be imposed during a 
taxable year cannot exceed the lesser of 10 percent of the 
employer's group health plan expenses for the prior year or 
$500,000. No tax is imposed if the Secretary determines that 
the employer did not know, and exercising reasonable diligence 
would not have known, that the failure existed. The excise tax 
is applicable with respect to plan years beginning on or after 
January 1, 1998, and under prior law expired with respect to 
benefits for services provided on or after September 30, 2001.

                        Explanation of Provision

    The excise tax (and the mental health parity requirements) 
are restored retroactively to September 30, 2001, and will 
expire with respect to benefits provided for services on or 
after December 31, 2002.\179\
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    \179\ Section 610 of the Job Creation and Worker Assistance Act of 
2002, described in Part Eight of this document, subsequently amended 
the Internal Revenue Code provision so that the excise tax on failures 
to comply with mental health parity requirements applies to benefits 
for such services provided on or after January 10, 2002, and before 
January 1, 2004. Pub. L. No. 107-313, the Mental Health Parity 
Reauthorization Act of 2002, enacted December 2, 2002, amends ERISA and 
the Public Health Service Act to extend the mental health parity 
requirements through December 31, 2003.
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                             Effective Date

    The provision is effective September 30, 2001.

                             Revenue Effect

    The provision will have a negligible effect on excise tax 
receipts.

PART SIX: AN ACT TO AMEND THE INTERNAL REVENUE CODE OF 1986 TO SIMPLIFY 
  THE REPORTING REQUIREMENTS RELATING TO HIGHER EDUCATION TUITION AND 
              RELATED EXPENSES (PUBLIC LAW 107-131) \180\

  A. Simplify the Reporting Requirements Relating to Higher Education 
 Tuition and Related Expenses (sec. 1 of the Act and sec. 6050S of the 
                                 Code)

                               Prior Law

    Section 6050S  of the Code imposes reporting requirements, 
related to higher education tax benefits, on eligible 
educational institutions and certain other persons. Under prior 
law, an eligible educational institution is subject to the 
reporting requirements if the institution receives payments for 
qualified tuition and related expenses with respect to any 
individual for any calendar year, or makes reimbursements or 
refunds (or similar amounts) of qualified tuition and related 
expenses to any individual. The information a person subject to 
the reporting requirements is required to provide includes the 
following: (1) the name, address, and taxpayer identification 
number of an individual with respect to whom payments were 
received; (2) the name, address, and taxpayer identification 
number of any individual certified by the individual described 
in (1) as the taxpayer who will claim the individual as a 
dependent for the year; and (3) the aggregate amount of 
payments for qualified tuition and related expenses received 
with respect to the individual during the calendar year, the 
aggregate amount of reimbursements or refunds (or similar 
amounts) paid to such individual during the calendar year by 
the person making the return, and the amount of any grant 
received by such individual for payment of costs of attendance 
and processed by the person making the return.
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    \180\ H.R. 3346. The bill was introduced November 27, 2001, and 
passed by the House on December 4, 2001 on a motion to suspend the 
rules and pass the bill. The Senate passed the bill without amendment 
by unanimous consent on December 20, 2001. The bill was signed by the 
President on January 16, 2002. The bill was not reported by any 
Committee of the House of Representatives or the Senate. Therefore, the 
bill does not have any formal legislative history. This description of 
the provisions of the bill was prepared by the staff of the Joint 
Committee on Taxation.
---------------------------------------------------------------------------

                        Explanation of Provision

    The Act makes a number of changes to these reporting 
requirements. First, the Act replaces the rule described above 
regarding whether an educational institution is subject to the 
reporting requirements with a rule that provides that eligible 
educational institutions are subject to the reporting 
requirements if the institution enrolls any individual for any 
academic period. Second, the Act replaces the requirement in 
(1) above with a requirement that the information return 
include the name, address, and taxpayer identification number 
of any individual (a) who is or has been enrolled at an 
eligible education institution and with respect to whom certain 
transactions are made or (b) with respect to whom certain 
payments were made or received. Third, the Act eliminates the 
reporting requirement with respect to the information described 
in (2), above (relating to the taxpayer who will claim the 
individual as a dependent). Finally, the Act replaces the 
requirement described in (3) above, with a requirement that the 
following information be provided: (a) the aggregate amount of 
payments received or the aggregate amount billed for qualified 
tuition and related expenses during the calendar year; (b) the 
aggregate amount of grants received by the individual for 
payment of costs of attendance that are administered and 
processed by the institution during the calendar year; and (c) 
the amount of any adjustments to the aggregate amounts reported 
under (a) or (b) with respect to the individual for a prior 
calendar year.

                             Effective Date

    The provision applies to expenses paid or assessed after 
December 31, 2002 (in taxable years ending after such date), 
for education furnished in academic periods beginning after 
such date.

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

  PART SEVEN: VICTIMS OF TERRORISM TAX RELIEF ACT OF 2001 (PUBLIC LAW 
                             107-134) \181\

     I. RELIEF PROVISIONS FOR VICTIMS OF SPECIFIC TERRORIST ATTACKS

                      A. Reasons for Change \182\

Relief for victims of April 19, 1995, and September 11, 2001, terrorist 
        attacks
    The Congress believed that it was appropriate to provide 
tax relief to the victims of the terrorist attacks against the 
United States on September 11, 2001, and April 19, 1995 (the 
bombing of the Alfred P. Murrah Federal Building in Oklahoma 
City).
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    \181\ H.R. 2884. The bill was referred to the House Committee on 
Ways and Means. The bill was discharged from committee and considered 
by the House under unanimous consent. The House passed the bill on 
September 13, 2001. The bill was referred to the Senate Committee on 
Finance. The bill was discharged from the Finance Committee by 
unanimous consent. The Senate passed the bill with amendment on 
November 16, 2001 by unanimous consent. The House passed the bill with 
the Senate amendment and a further House amendment on December 13, 
2001. The Senate concurred to the House bill with a further amendment 
in the nature of a substitute on December 20, 2001 by unanimous 
consent. The House agreed without objection to the bill on December 20, 
2001. The bill was signed by the President on January 23, 2002.
    \182\ The legislative history for H.R. 2884 does not include 
reasons for change. The reasons for change reported here are adapted 
from the Description of the Economic Recovery and Assistance for 
American Workers Act of 2001--Technical Explanation of Provisions 
Approved by the Committee on November 8, 2001 (S. Prt. No. 107-49). The 
Senate Finance Committee produced this report in connection with H.R. 
3090 which contained certain provisions similar to those enacted in 
Pub. L. No. 107-134.
---------------------------------------------------------------------------
    Under present and prior law, tax relief from income and 
employment taxes is afforded to members of the Armed Forces on 
death. Present and prior law also provided a reduction in 
Federal estate tax for members of the U.S Armed Forces who are 
killed in action while serving in a combat zone. The Congress 
believed that similar tax benefits should be afforded to 
victims of the September 11, 2001, and April 19, 1995, 
terrorist attacks.
    For the victims of the September 11, 2001, terrorist 
attacks, the Congress also found it appropriate to provide an 
exclusion from gross income for amounts that would otherwise be 
includible in gross income by reason of indebtedness of a 
individual that is discharged as a result of the individual's 
death in the terrorist attack. In light of the numerous 
charitable organizations making payments as a result of the 
September 11, 2001, terrorist attacks, the Congress believed it 
appropriate to provide that qualified payments made by 
charitable organizations are exempt payments.

 B. Income Taxes of Victims of Terrorist Attacks (sec. 101 of the Act 
                       and sec. 692 of the Code)

                         Present and Prior Law

    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 or self-employment 
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) (section 692(a)(1)). Special computational 
rules apply in the case of joint returns. Military and civilian 
employees of the United States are entitled to a similar 
exemption if they die as a result of wounds or injury which was 
incurred outside the United States in terrorist or military 
action (section 692(c)).
    The exemption applies not only to the tax liability of the 
individual attributable to income received before the date of 
death and reported on the decedent's final return. The 
exemption applies also to the liability of another person to 
the extent the liability is attributable to an amount received 
after the individual's death which would have been includable 
in the individual's income for the taxable year in which the 
date of death falls (determined as if the individual had 
survived).\183\ For example, the individual's final wage 
payment, or interest or dividends payable in the year of death 
with respect to the individual's assets, are exempt from income 
tax when paid to another person or the individual's estate 
after the date of death but before the end of the taxable year 
of the decedent (determined without regard to the death).
---------------------------------------------------------------------------
    \183\ Treas. Reg. sec. 1.692-1(a)(2)(ii).
---------------------------------------------------------------------------
    This exemption is available for the year of death and for 
prior taxable years beginning with the taxable year prior to 
the taxable year in which the wounds or injury were incurred. 
Thus, for example, if someone is injured and dies in the year 
the injury occurred, the exemption applies for the year of 
death and the prior taxable year. Similarly, if someone is 
injured and dies two years later, this exemption is available 
for the taxable year of death as well as the three prior 
taxable years (i.e., the year preceding the injury, the year of 
the injury, and the two years following the year of the 
injury).

                        Explanation of Provision

Application of relief to victims of September 11, 2001, April 19, 1995, 
        and anthrax attacks
    The Act extends relief similar to the prior and present-law 
treatment of military or civilian employees of the United 
States who die as a result of terrorist or military activity 
outside the United States to individuals who die as a result of 
wounds or injury which were incurred as a result of the 
terrorist attacks that occurred on September 11, 2001, or April 
19, 1995, and individuals who die as a result of illness 
incurred due to an attack involving anthrax that occurs on or 
after September 11, 2001, and before January 1, 2002. Under the 
Act, such individuals generally are exempt from income tax for 
the year of death and for prior taxable years beginning with 
the taxable year prior to the taxable year in which the wounds 
or injury occurred.\184\ The exemption applies to these 
individuals whether killed in an attack (e.g., in the case of 
the September 11, 2001, attack in one of the four airplanes or 
on the ground) or in rescue or recovery operations.
---------------------------------------------------------------------------
    \184\ The Act does not provide relief from self-employment tax 
liability.
---------------------------------------------------------------------------
    The provision provides a minimum tax relief benefit of 
$10,000 to each eligible individual regardless of the income 
tax liability of the individual for the eligible tax years. If 
an eligible individual's income tax for years eligible for the 
exclusion under the provision is less than $10,000, the 
individual is treated as having made a tax payment for such 
individual's last taxable year in an amount equal to the excess 
of $10,000 over the amount of tax not imposed under the 
provision.
    Subject to rules prescribed by the Secretary, the exemption 
from tax does not apply to the tax attributable to: (1) 
deferred compensation which would have been payable after death 
if the individual had died other than as a specified terrorist 
victim, or (2) amounts payable in the taxable year which would 
not have been payable in such taxable year but for an action 
taken after September 11, 2001. Thus, for example, the 
exemption does not apply to amounts payable from a qualified 
plan or individual retirement arrangement to the beneficiary or 
estate of the individual. Similarly, amounts payable only as 
death or survivor's benefits pursuant to deferred compensation 
preexisting arrangements that would have been paid if the death 
had occurred for another reason are not covered by the 
exemption. In addition, if the individual's employer makes 
adjustments to a plan or arrangement to accelerate the vesting 
of restricted property or the payment of nonqualified deferred 
compensation after the date of the particular attack, the 
exemption does not apply to income received as a result of that 
action.\185\ Also, if the individual's beneficiary cashed in 
savings bonds of the decedent, the exemption does not apply. On 
the other hand, the exemption does apply, for example, to a 
final paycheck of the individual or dividends on stock held by 
the individual when paid to another person or the individual's 
estate after the date of death but before the end of the 
taxable year of the decedent (determined without regard to the 
death). The exemption also applies to payments of an 
individual's accrued vacation and accrued sick leave.
---------------------------------------------------------------------------
    \185\ Such amounts may, however, be excludable from gross income 
under the death benefit exclusion provided in section 102 of the Act.
---------------------------------------------------------------------------
    The provision does not apply to any individual identified 
by the Attorney General to have been a participant or 
conspirator in any terrorist attack to which the provision 
applies, or a representative of such individual.
Simplified refund procedures
    It is intended that the Secretary will establish procedures 
to simplify refunds of these amounts, including expanding the 
directions in Revenue Procedure 85-35 to include specific 
instructions for Form 1041.

                             Effective Date

    The provision is effective for taxable years ending before, 
on, or after September 11, 2001.
    A special rule extends the period of limitations to permit 
the filing of a claim for refund resulting from this provision 
until one year after the date of enactment, if that period 
would otherwise have expired before that date.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $151 million in 2002 and $20 million in 
2003.

 C. Exclusion of Certain Death Benefits (sec. 102 of the Act and sec. 
                            101 of the Code)


                         Present and Prior Law

    In general, gross income includes income from whatever 
source derived (section 61), including payments made as a 
result of the death of an individual. Certain exceptions to 
this general rule of inclusion may apply to such payments in 
certain cases.
    For example, gross income generally does not include the 
amount of any damages (other than punitive damages) received 
(whether by suit or agreement and whether as lump sums or as 
periodic payments) on account of personal physical injury 
(including death) or sickness (section 104(a)(2)). Further, 
gross income does not include amounts received (whether in a 
single sum or otherwise) under a life insurance contract if 
such amounts are paid by reason of the death of the insured 
(section 101(a)).
    In addition, gifts are not includable in gross income 
(section 102). However, with very limited exceptions, payments 
made by an employer to, or for the benefit of, an employee are 
not excluded from gross income as gifts (section 102(c)). In 
business contexts in which section 102(c) does not apply, 
payments are excludable as gifts only if objective inquiry 
demonstrates that the payments were made out of ``detached and 
disinterested generosity'' and not in return for past or future 
services or from motives of anticipated benefit.\186\
---------------------------------------------------------------------------
    \186\ Comm'r v. Duberstein, 363 U.S. 278 (1960).
---------------------------------------------------------------------------

                        Explanation of Provision

    The Act generally provides an exclusion from gross income 
for amounts received if such amounts are paid by an employer 
(whether in a single sum or otherwise) \187\ by reason of the 
death of an employee who dies as a result of wounds or injury 
which were incurred as a result of the terrorist attacks that 
occurred on September 11, 2001, or April 19, 1995, or as a 
result of illness incurred due to an attack involving anthrax 
that occurs on or after September 11, 2001, and before January 
1, 2002. Subject to rules prescribed by the Secretary, the 
exclusion does not apply to amounts that would have been 
payable if the individual had died for a reason other than the 
attack. For example, the provision does not apply to payments 
by an employer under a nonqualified deferred compensation plan 
\188\ to the extent that the amounts would have been payable if 
the death had occurred for another reason. The exclusion does 
apply, however, to death benefits provided under a qualified 
plan that satisfy the incidental benefit rule.
---------------------------------------------------------------------------
    \187\ Thus, for example, payments made over a period of years could 
qualify for the exclusion.
    \188\ The provision does not apply to amounts received under a 
qualified plan because such payments are not made by the employer.
---------------------------------------------------------------------------
    For purposes of the exclusion, self-employed individuals 
are treated as employees. Thus, for example, payments by a 
partnership to the surviving spouse of a partner who died as a 
result of the September 11, 2001, attacks may be excludable 
under the provision.
    The provision does not apply to any individual identified 
by the Attorney General to have been a participant or 
conspirator in any terrorist attack to which the provision 
applies, or a representative of such individual.
    No change to prior and present law is intended as to the 
deductibility of death benefits paid by the employer or 
otherwise merely because the payments are excludable by the 
recipient. Thus, it is intended that payments excludable from 
income under the provision are deductible to the same extent 
they would be if they were includable in income.
    The Act is not intended to narrow the scope of any 
applicable exclusion under prior or present law. Accordingly, 
payments that are not specifically excludable under the Act 
remain excludable to the same extent provided under prior and 
present law.
    In connection with the September 11, 2001, terrorist 
attacks, insurance companies may pay death benefits under a 
life insurance contract even if the contract terms provide for 
an exclusion for death occurring as a result of an act of 
terrorism or act of war. It is understood that such a death 
benefit payment would fall within the prior and present-law 
exclusion (under section 101(a)) for payments made under the 
contract if it otherwise meets the requirements of the prior 
and present-law exclusion.

                             Effective Date

    The provision is effective for taxable years ending before, 
on, or after September 11, 2001.
    A special rule extends the period of limitations to permit 
the filing of a claim for refund resulting from this provision 
until one year after the date of enactment, if that period 
would otherwise have expired before that date.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $25 million annually in 2002 and 2003.

D. Estate Tax Reduction (sec. 103 of the Act and sec. 2201 of the Code)


                         Present and Prior Law

    Prior and present law provides a reduction in Federal 
estate tax for taxable estates of U.S. citizens or residents 
who are active members of the U.S. Armed Forces and who are 
killed in action while serving in a combat zone (section 2201). 
This provision also applies to active service members who die 
as a result of wounds, disease, or injury suffered while 
serving in a combat zone by reason of a hazard to which the 
service member was subjected as an incident of such service.
    In general, the effect of section 2201 is to replace the 
Federal estate tax that would otherwise be imposed with a 
Federal estate tax equal to 125 percent of the maximum State 
death tax credit determined under section 2011(b). Credits 
against the tax, including the unified credit of section 2010 
and the State death tax credit of section 2011, then apply to 
reduce (or eliminate) the amount of the estate tax payable.
    The reduction in Federal estate taxes under section 2201 is 
equal in amount to the ``additional estate tax'' with respect 
to the estates of decedents dying before January 1, 2005. The 
additional estate tax is the difference between the Federal 
estate tax imposed by section 2001 and 125 percent of the 
maximum State death tax credit determined under section 
2011(b). With respect to the estates of decedents dying after 
December 31, 2004, section 2201 provides that the additional 
estate tax is the difference between the Federal estate tax 
imposed by section 2001 and 125 percent of the maximum state 
death tax credit determined under section 2011(b) as in effect 
prior to its repeal by the Economic Growth and Tax Relief 
Reconciliation Act of 2001.

                        Explanation of Provision

    The Act generally treats individuals who die from wounds or 
injury incurred as a result of the terrorist attacks that 
occurred on September 11, 2001, or April 19, 1995, or as a 
result of illness incurred due to an attack involving anthrax 
that occurred on or after September 11, 2001, and before 
January 1, 2002, in the same manner as if they were active 
members of the U.S. Armed Forces killed in action while serving 
in a combat zone or dying as a result of wounds or injury 
suffered while serving in a combat zone for purposes of section 
2201. Consequently, the estates of these individuals are 
eligible for the reduction in Federal estate tax provided by 
section 2201. The provision does not apply to any individual 
identified by the Attorney General to have been a participant 
or conspirator in any terrorist attack to which the provision 
applies, or a representative of such individual.
    The Act also changes the general operation of section 2201, 
as it applies to both the estates of service members who 
qualify for special estate tax treatment under present and 
prior law and to the estates of individuals who qualify for the 
special treatment only under the Act. Under the Act, the 
Federal estate tax is determined in the same manner for all 
estates that are eligible for Federal estate tax reduction 
under section 2201. In addition, the executor of an estate that 
is eligible for special estate tax treatment under section 2201 
may elect not to have section 2201 apply to the estate. Thus, 
in the event that an estate may receive more favorable 
treatment without the application of section 2201 in the year 
of death than it would under section 2201, the executor may 
elect not to apply the provisions of section 2201, and the 
estate tax owed (if any) would be determined pursuant to the 
generally applicable rules.
    Under the Act, section 2201 no longer reduces Federal 
estate tax by the amount of the additional estate tax. Instead, 
the Act provides that the Federal estate tax liability of 
eligible estates is determined under section 2001 (or section 
2101, in the case of decedents who were neither residents nor 
citizens of the United States), using a rate schedule that is 
equal to 125 percent of the present-law maximum State death tax 
credit amount. This rate schedule is used to compute the tax 
under section 2001(b) or section 2101(b) (i.e., both the 
tentative tax under section 2001(b)(1) and section 2101(b), and 
the hypothetical gift tax under section 2001(b)(2) are computed 
using this rate schedule). As a result of this provision, the 
estate tax is unified with the gift tax for purposes of section 
2201 so that a single graduated (but reduced) rate schedule 
applies to transfers made by the individual at death, based 
upon the cumulative taxable transfers made both during lifetime 
and at death.
    In addition, while the Act provides an alternative reduced 
rate table for purposes of determining the tax under section 
2001(b) or section 2101(b), the amount of the unified credit 
nevertheless is determined as if section 2201 did not apply, 
based upon the unified credit as in effect on the date of 
death. For example, in the case of victims of the September 11, 
2001, terrorist attack, the applicable unified credit amount 
under section 2010(c) would be determined by reference to the 
actual section 2001(c) rate table.
    As a conforming amendment, the Act repeals section 2011(d) 
because it no longer will have any application to taxpayers.

                             Effective Date

    The provision applies to estates of decedents dying on or 
after September 11, 2001, or, in the case of victims of the 
Oklahoma City terrorist attack, estates of decedents dying on 
or after April 19, 1995.
    A special rule extends the period of limitations to permit 
the filing of a claim for refund resulting from this provision 
until one year after the date of enactment, if that period 
would otherwise have expired before that date.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $3 million in 2002, $45 million in 2003, $8 
million in 2004, and less than $1 million annually in 2005-
2010.

  E. Payments by Charitable Organizations Treated as Exempt Payments 
        (sec. 104 of the Act and secs. 501 and 4941 of the Code)


                         Present and Prior Law

    In general, organizations described in section 501(c)(3) of 
the Code are exempt from taxation. Contributions to such 
organizations generally are tax deductible (section 170). 
Section 501(c)(3) organizations must be organized and operated 
exclusively for exempt purposes and no part of the net earnings 
of such organizations may inure to the benefit of any private 
shareholder or individual. An organization is not organized or 
operated exclusively for one or more exempt purposes unless the 
organization serves a public rather than a private interest. 
Thus, an organization described in section 501(c)(3) generally 
must serve a charitable class of persons that is indefinite or 
of sufficient size.
    Tax-exempt private foundations are a type of organization 
described in section 501(c)(3) and are subject to special 
rules. Private foundations are subject to excise taxes on acts 
of self-dealing between the private foundation and a 
disqualified person with respect to the foundation (section 
4941). For example, it is self-dealing if the income or assets 
of a private foundation are transferred to, or used by or for 
the benefit of a disqualified person, such as a substantial 
contributor to the foundation or a person in control of the 
foundation, and the benefit is not incidental or tenuous.

                        Explanation of Provision

    In light of the extraordinary distress caused by the 
attacks on the United States of September 11, 2001, and the 
subsequent attacks involving anthrax, the Act provides that 
organizations described in section 501(c)(3) that make payments 
by reason of the death, injury, wounding, or illness of an 
individual incurred as a result of the September 11, 2001, 
attacks, or as a result of an attack involving anthrax 
occurring on or after September 11, 2001, and before January 1, 
2002, are not required to make a specific assessment of need 
for the payments to be related to the purpose or function 
constituting the basis for the organization's exemption. This 
rule applies provided that the organization makes the payments 
in good faith using a reasonable and objective formula which is 
consistently applied. As under prior and present law, such 
payments must be for public and not private benefit and 
therefore must serve a charitable class. For example, under 
this standard, a charitable organization that assists families 
of firefighters killed in the line of duty could make a pro-
rata distribution to the families of firefighters killed in the 
attacks, even though the specific financial needs of each 
family are not directly considered. Similarly, if the amount of 
a distribution is based on the number of dependents of a 
charitable class of persons killed in the attacks and this 
standard is applied consistently among distributions, the 
specific needs of each recipient do not have to be taken into 
account. However, it would not be appropriate for a charity to 
make pro-rata payments based on the recipients' living expenses 
before September 11 if the result generally is to provide 
significantly greater assistance to persons in a better 
position to provide for themselves than to persons with fewer 
financial resources. Although such a distribution might be 
based on objective criteria, it would not, under the statutory 
standard, be a reasonable formula for distributing assistance 
in an equitable manner. Similarly, although specific 
assessments of need are not required, the Act does not change 
the other substantive standards for exemption under section 
501(c)(3), including the prohibition on private inurement and 
the need for a charitable class. It is impossible to list or 
anticipate the kinds of payments that meet the statutory test, 
but, in general, charities that make distributions in good 
faith using a reasonable and objective formula will be treated 
as acting consistently with exempt purposes. A charity that 
makes payments subject to this provision should indicate 
clearly on the charity's information return, for example by 
notation at the top of the relevant page of the return, that 
the charity relied on this provision in making distributions. 
The Act also provides that if a private foundation makes 
payments under the conditions described above, the payment is 
not treated as made to a disqualified person for purposes of 
section 4941.
    For charities making payments in connection with the 
September 11 attacks or attacks involving anthrax, but not in 
reliance on this provision, prior law rules apply. It is 
expected that, because of the severity of distress arising out 
of the September 11 and anthrax attacks and the extensive 
variety of needs that the thousands of victims and their family 
members may have, a wide array of expenses will be consistent 
with operation for exclusively charitable purposes. For 
instance, payments to permit a surviving spouse with young 
children to remain at home with the children rather than being 
forced to enter the workplace seem to be appropriate to 
maintain the psychological well-being of the entire family. 
Similarly, assistance with elementary and secondary school 
tuition to permit a child to remain in the same educational 
environment seems to be appropriate, as does assistance needed 
for higher education. Assistance with rent or mortgage payments 
for the family's principal residence or car loans also seems to 
be appropriate to forestall losses of a home or transportation 
that would cause additional trauma to families already 
suffering. Other types of assistance that the scope of the 
tragedy makes it difficult to anticipate may also serve a 
charitable purpose.

                             Effective Date

    The provision applies to payments made on or after 
September 11, 2001.

                             Revenue Effect

    The provision is estimated to have a negligible impact on 
Federal fiscal year budget receipts.

F. Exclusion for Certain Cancellations of Indebtedness (sec. 105 of the 
                                  Act)


                         Present and Prior Law

    Gross income includes income that is realized by a debtor 
from the discharge of indebtedness, subject to certain 
exceptions for debtors in Title 11 bankruptcy cases, insolvent 
debtors, certain farm indebtedness, and certain real property 
business indebtedness (secs. 61(a)(12) and 108). In cases 
involving discharges of indebtedness that are excluded from 
gross income (except for discharges of real property business 
indebtedness), taxpayers generally exclude discharge of 
indebtedness from income but reduce tax attributes by the 
amount of the discharge of indebtedness. The amount of 
discharge of indebtedness excluded from income by an insolvent 
debtor not in a Title 11 bankruptcy case cannot exceed the 
amount by which the debtor is insolvent. For all taxpayers, the 
amount of discharge of indebtedness generally is equal to the 
difference between the adjusted issue price of the debt being 
cancelled and the amount used to satisfy the debt. These rules 
generally apply to the exchange of an old obligation for a new 
obligation, including a modification of indebtedness that is 
treated as an exchange (a debt-for-debt exchange).
    Present law generally requires ``applicable entities'' to 
file information returns with the IRS regarding any discharge 
of indebtedness in the amount of $600 or more (section 6050P). 
This requirement applies without regard to whether the debtor 
is subject to tax on the discharged indebtedness.\189\ The term 
``applicable entities'' includes: (1) any financial institution 
(as described in section 581 (relating to banks) or section 
591(a) (relating to savings institutions)); (2) any credit 
union; (3) any corporation that is a direct or indirect 
subsidiary of an entity described in (1) or (2) which, by 
virtue of being affiliated with such entity, is subject to 
supervision and examination by a Federal or State agency 
regulating such entities; (4) the Federal Deposit Insurance 
Corporation, the Resolution Trust Corporation, the National 
Credit Union Administration, certain other Federal executive 
agencies, and any successor or subunit of any of them; (5) an 
executive, judicial, or legislative agency (as defined in 31 
U.S.C. section 3701(a)(4)); and (6) any other organization a 
significant trade or business of which is the lending of money. 
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 generally is $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.
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    \189\ Treas. Reg. sec. 1.6050P-1(a)(3).
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                        Explanation of Provision

    The Act provides that gross income does not include any 
amount realized from the discharge (in whole or in part) of 
indebtedness if the indebtedness is discharged by reason of the 
death of an individual incurred as a result of the September 
11, 2001, attacks, or as a result of a terrorist attack 
involving anthrax occurring on or after September 11, 2001, and 
before January 1, 2002. In all cases, the provision applies 
only if the indebtedness is discharged because the individual 
died as a result of one the attacks. Therefore, except in 
circumstances that indicate the taxpayer was financially 
dependent upon an individual who died in one of the attacks, it 
is intended that the provision generally applies only if the 
taxpayer was, or became, an obligor or co-obligor with respect 
to indebtedness of an individual who died as a result of one of 
the attacks (e.g., the surviving spouse or estate of the 
individual).
    The Act also provides that the information return filing 
requirements that otherwise apply to discharges of indebtedness 
do not apply with respect to any discharge of indebtedness that 
is excluded from gross income under this provision.

                             Effective Date

    This provision applies to discharges made on or after 
September 11, 2001, and before January 1, 2002.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $6 million in 2002.

                      II. OTHER RELIEF PROVISIONS

                      A. Reasons for Change \190\

General relief for victims of disaster and terroristic or military 
        actions
    In addition to the specific tax relief provided to the 
victims of the terrorist acts of September 11, 2001, and April 
19, 1995, the Congress found it appropriate to provide general 
relief for victims of disaster and terrorist or military 
actions. The Congress found it necessary to clarify and expand 
prior law.
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    \190\ The legislative history for H.R. 2884 does not include 
reasons for change. The reasons for change reported here are adapted 
from the Technical Explanation to the Economic Recovery and Assistance 
for American Workers Act of 2001 (S. Prt. No. 107-49). The Senate 
Finance Committee produced this report in connection with H.R. 3090 
that contained certain provisions similar to those enacted in Pub. L. 
No. 107-134.
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    The Congress believed it necessary to clarify that disaster 
relief payments are excludable from income. Because many forms 
of disasters make it difficult for taxpayers to meet required 
tax deadlines, the Congress believed it appropriate to grant 
authority to the Internal Revenue Service to postpone certain 
deadlines. Additionally, the Congress found it beneficial to 
establish an Internal Revenue Service disaster response team to 
assist taxpayers in resolving Federal tax matters associated 
with or resulting from a disaster. To provide additional relief 
and clarification to victims of terrorist activity, the 
Congress also believed it appropriate to clarify and expand 
prior law regarding death and disability payments made in 
connection with terrorist or military action.
    The Congress also found it necessary to clarify that the 
special deposit rules under the Air Transportation Safety and 
System Stabilization Act\191\ do not apply to employment taxes.
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    \191\ Pub. L. No. 107-42.
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 B. Exclusion of Disaster Relief Payments (sec. 111 of the Act and new 
                         sec. 139 of the Code)

                         Present and Prior Law

Taxation of disaster relief payments
    Gross income includes all income from whatever source 
derived unless a specific exception applies (section 61). There 
is no specific statutory exclusion from income for disaster 
payments. However, various types of disaster payments made to 
individuals have been excluded from gross income under a 
general welfare exception.\192\ The exception has been held to 
exclude from income payments made under legislatively provided 
social benefit programs for the promotion of the general 
welfare. The general welfare exception generally applies if the 
payments (1) are made from a governmental general welfare fund, 
(2) are for the promotion of the general welfare (on the basis 
of need and not to all residents), and (3) are made without 
respect to services rendered by the recipient. The exclusion 
generally applies to payments for food, medical, housing, 
personal property, transportation, and funeral expenses.
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    \192\ Rev. Rul. 98-19, 1998-1 C.B. 840; Rev. Rul. 76-144, 1976-1 
C.B. 17.
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    The general welfare exception generally does not apply to 
payments in the nature of income replacement, such as payments 
to individuals for lost wages or unemployment compensation or 
payments in the nature of income replacement to 
businesses.\193\ Income replacement payments are includable in 
gross income, unless another exception applies.
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    \193\ IRS Publication 547 (Casualties, Disasters, and Thefts), page 
5 (revised December 2000); Rev. Rul. 91-55, 1991-2 C.B. 321; Rev. Rul. 
73-408, 1973-2 C.B. 15.
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    Disaster relief payments may be excludable under other 
provisions. For example, payments made by charitable relief 
organizations may be excluded from the gross income of the 
recipients as gifts. Payments made in a business context 
generally are not treated as gifts. Factual issues may arise as 
to whether a payment in the context of a business relationship 
is a gift or taxable compensation for services. In general, 
payments made by an employer to, or for the benefit of, an 
employee are not excluded from gross income as gifts (section 
102(c)).
    Under prior and present law, gross income generally does 
not include payments received as damages (other than punitive 
damages) on account of personal physical injury (including 
death) or sickness (section 104(a)(2)). Such payments are 
excluded from gross income regardless of whether received by 
suit or agreement and whether received as a lump sum or as 
periodic payments.
    Section 406 of the Air Transportation Safety and System 
Stabilization Act provides for the payment of compensation for 
eligible individuals who suffered physical harm or death as a 
result of the terrorist-related aircraft crashes of September 
11, 2001. There is no statutory provision specifically 
addressing the taxation of such compensation; however, such 
compensation may be excludable from income under generally 
applicable Code provisions (e.g., section 104).
Rules relating to charitable organizations
    In general, organizations described in section 501(c)(3) of 
the Code are exempt from taxation. Contributions to such 
organizations generally are tax deductible (section 170). 
Section 501(c)(3) organizations must be organized and operated 
exclusively for exempt purposes and no part of the net earnings 
of such organizations may inure to the benefit of any private 
shareholder or individual. An organization is not organized or 
operated exclusively for one or more exempt purposes unless it 
serves a public rather than a private interest. Thus, an 
organization described in section 501(c)(3) generally must 
serve a charitable class of persons that is indefinite or of 
sufficient size.
    Tax-exempt private foundations are a type of organization 
described in section 501(c)(3) and are subject to special 
rules. Private foundations are subject to excise taxes on acts 
of self-dealing between the private foundation and a 
disqualified person with respect to the foundation (section 
4941). For example, it is self-dealing if the income or assets 
of a private foundation are transferred to, or used by or for 
the benefit of a disqualified person, such as a substantial 
contributor to the foundation or a person in control of the 
foundation, and the benefit is not incidental or tenuous. 
Private foundations also are subject to excise taxes on taxable 
expenditures (section 4945). For example, it is a taxable 
expenditure if a private foundation pays an amount that does 
not further certain charitable purposes, or makes a grant to an 
individual for educational or other similar purposes without 
following certain procedures.

                        Explanation of Provision

Taxation of disaster relief payments
    The Act clarifies that any amount received as payment under 
section 406 of the Air Transportation Safety and System 
Stabilization Act is excludable from gross income. In addition, 
the Act provides a specific exclusion from income for qualified 
disaster relief payments. No inference is intended as to the 
taxability of such payments under prior law. In addition, the 
provision is not intended to preclude the exclusion of other 
types of payments under the general welfare exception or other 
Code provisions.
    Qualified disaster relief payments include payments, from 
any source, to, or for the benefit of, an individual to 
reimburse or pay reasonable and necessary personal, family, 
living, or funeral expenses incurred as a result of a qualified 
disaster. Personal, family, and living expenses are intended to 
have the same meaning as when used in section 262. Personal 
expenses include personal property expenses.
    Qualified disaster relief payments also include payments, 
from any source, to reimburse or pay reasonable and necessary 
expenses incurred for the repair or rehabilitation of a 
personal residence, or for the repair or replacement of its 
contents, to the extent that the need for the repair, 
rehabilitation, or replacement is attributable to a qualified 
disaster. For purposes of determining the tax basis of a 
rehabilitated residence, it is intended that qualified disaster 
relief payments be treated in the same manner as amounts 
received on an involuntary conversion of a principal residence 
under section 121(d)(5) and sections 1033(b) and (h). A 
residence is not precluded from being a personal residence 
solely because the taxpayer does not own the residence; a 
rented residence can qualify as a personal residence.
    Qualified disaster relief payments also include payments by 
a person engaged in the furnishing or sale of transportation as 
a common carrier on account of death or personal physical 
injuries incurred as a result of a qualified disaster. Thus, 
for example, payments made by commercial airlines to families 
of passengers killed as a result of a qualified disaster would 
be excluded from gross income. \194\
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    \194\ The exclusion from income applies irrespective of section 
104(a)(2). As previously discussed, no inference is intended that 
payments excludable under section 139 would not be otherwise excludable 
under another Code provision.
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    Qualified disaster relief payments also include amounts 
paid by a Federal, State or local government in connection with 
a qualified disaster in order to promote the general welfare. 
As under the general welfare exception, the exclusion does not 
apply to payments in the nature of income replacement, such as 
payments to individuals of lost wages, unemployment 
compensation, or payments in the nature of business income 
replacement.
    Qualified disaster relief payments do not include payments 
for any expenses compensated for by insurance or otherwise. No 
change from prior law is intended as to the deductibility of 
qualified disaster relief payments, made by an employer or 
otherwise, merely because the payments are excludable by the 
recipients. Thus, it is intended that payments excludable from 
income under the provision are deductible to the same extent 
they would be if they were includable in income. In addition, 
in light of the extraordinary circumstances surrounding a 
qualified disaster, it is anticipated that individuals will not 
be required to account for actual expenses in order to qualify 
for the exclusion, provided that the amount of the payments can 
be reasonably expected to be commensurate with the expenses 
incurred.
    Particular payments may come within more than one category 
of qualified disaster relief payments; the categories are not 
intended to be mutually exclusive. Qualified disaster relief 
payments also are excludable for purposes of self-employment 
taxes and employment taxes. Thus, no withholding applies to 
qualified disaster relief payments.
    Under the Act, a qualified disaster includes a disaster 
which results from a terroristic or military action (as defined 
in section 692(c)(2), as amended by the Act), a Presidentially 
declared disaster, a disaster which results from an accident 
involving a common carrier or from any other event which would 
be determined by the Secretary to be of a catastrophic nature, 
or, for purposes of payments made by a Federal, State or local 
government, a disaster designated by Federal, State or local 
authorities to warrant assistance.
    The exclusion from income under section 139 does not apply 
to any individual identified by the Attorney General to have 
been a participant or conspirator in the terrorist-related 
aircraft crashes of September 11, 2001, or any other terrorist 
attack, or to a representative of such individual.
Rules applicable to charitable organizations making disaster relief 
        payments
    Recognizing that employers and employees may also 
contribute to section 501(c)(3) organizations that make 
disaster relief payments, clarification of the type of disaster 
relief grants such organizations may make consistent with 
exempt purposes to assist individuals in distress as a result 
of the September 11 attacks, and more generally, may be 
helpful. Because the Act provides a special rule for certain 
payments made by reason of death, injury, wounding, or illness 
of an individual as a result of the September 11 attacks, and 
certain attacks involving anthrax, the following discussion 
relates to disaster relief generally.
    Generally, a charitable organization must serve a public 
rather than a private interest. Providing assistance to relieve 
distress for individuals suffering the effects of a disaster 
generally serves a public rather than a private interest if the 
assistance benefits the community as a whole, or if the 
recipients otherwise lack the resources to meet their physical, 
mental and emotional needs. Such assistance could include cash 
grants to provide for food, clothing, housing, medical care, 
funeral costs, transportation, education and other needs. All 
such grants must be need-based, taking into account the 
family's financial resources and their physical, mental and 
emotional well-being.
    Charitable organizations generally are in the best position 
to determine the type and amount of, and appropriate 
beneficiaries for, disaster relief. Accordingly, it is expected 
that the Secretary will presume that a charity providing cash 
assistance in good faith to victims (and their family members) 
of a qualified disaster is acting consistent with the 
requirements of section 501(c)(3) if the class of beneficiaries 
is sufficiently large or indefinite and the charity can 
demonstrate that it is applying consistent, objective criteria 
for assessing need.
    In addition to the rules described above that are 
applicable to all charities, special rules apply with respect 
to disaster relief provided by private foundations controlled 
by an employer. In such cases, clarification of the appropriate 
treatment of the foundation and the payments may be helpful. In 
general, a private foundation that is established and 
controlled by an employer violates the requirements of section 
501(c)(3) if it provides benefits to a class of beneficiaries 
composed exclusively of the employer's employees, and such 
benefits are a form of compensation. The IRS recently held in a 
private letter ruling, \195\ and in similar rulings, that a 
private foundation that is established, funded and controlled 
by a particular employer for the purpose of providing disaster 
relief for employees of a particular employer does not qualify 
as a charitable organization under section 501(c)(3), because 
the foundation is not operated solely for charitable purposes 
and is providing a benefit on behalf of the employer in 
violation of the prohibition on private inurement. Although 
private letter rulings do not constitute precedent for other 
taxpayers, considerable uncertainty exists regarding IRS' 
position relating to employer-controlled private foundations 
making disaster relief payments to employee-beneficiaries.
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    \195\ Priv. Ltr. Rul. 199914040.
---------------------------------------------------------------------------
    If payments in connection with a qualified disaster are 
made by a private foundation to employees (and their family 
members) of an employer that controls the foundation, the 
presumption that the charity acts consistently with the 
requirements of section 501(c)(3) applies if the class of 
beneficiaries is large or indefinite and if recipients are 
selected based on an objective determination of need by an 
independent committee of the private foundation, a majority of 
the members of which are persons other than persons who are in 
a position to exercise substantial influence over the affairs 
of the controlling employer (determined under principles 
similar to those in effect under section 4958). The presumption 
does not apply to grants made to, or for the benefit of, a 
disqualified person or member of the selection committee. 
However, the absence of an independent selection committee does 
not necessarily mean that a foundation violates the 
requirements of section 501(c)(3). Other procedures and 
standards may be adequate substitutes to ensure that any 
benefit to the employer is incidental and tenuous. Similarly, 
providing need-based payments to employees and their survivors 
in response to a disaster other than a qualified disaster may 
well further charitable purposes consistent with the 
requirements of section 501(c)(3).
    It is intended that an employer-controlled private 
foundation is not providing an inappropriate benefit and is not 
disqualified from exemption under section 501(c)(3) if it makes 
a payment to an employee or a family member of an employee (who 
is employed by an employer who controls the foundation) that 
relieves distress caused by a qualified disaster as defined 
under section 139, provided that it awards grants based on an 
objective determination of need using either an independent 
selection committee or adequate substitute procedures, as 
described above. It is further intended that section 102(c) of 
the Code, which provides that a transfer from an employer to, 
or for the benefit of, an employee generally is not excludable 
from income as a gift, does not apply to such payments. It is 
further expected that the Service will reconsider the ruling 
position it has taken to ensure that private foundations 
established and controlled by employers will have appropriate 
guidance, consistent with the principles outlined above, on the 
circumstances under which they may provide disaster assistance 
in connection with a qualified disaster specifically to the 
employers' employees.
    It is intended that the making by a private foundation of 
disaster relief payments that qualify for the presumption 
stated above (1) will not be treated as an act of self-dealing 
under section 4941 merely because the recipient is an employee 
(or family member of an employee) of a disqualified person with 
respect to the foundation, (2) will be treated as in 
furtherance of section 170(c)(2)(B) purposes, and (3) will be 
considered to meet the requirements of section 4945(g) to the 
extent that they apply. Moreover, contributions to a section 
501(c)(3) organization administering relief in a manner 
outlined above (including those made by employers and any of 
their employees) are deductible under the generally applicable 
rules of section 170. Finally, it is confirmed that need-based 
payments made by an employer-controlled foundation to an 
individual for exclusively charitable purposes generally are 
excludable from the recipients' income as gifts. \196\ Thus, 
such payments made by a foundation to relieve distress caused 
by a qualified disaster are excludable from the recipients' 
income regardless of whether they fall within the scope of 
section 139, or any other such provision of the Code providing 
for an exclusion. The IRS is directed to issue prompt guidance 
to taxpayers relating to the requirements applicable to private 
foundations making disaster assistance payments. The principles 
discussed above should apply to foundations and public 
charities providing relief in response to both the September 
11, 2001, disaster and future qualified disasters.
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    \196\ See, e.g., Rev. Rul. 99-44, 1999-2 C.B. 549.
---------------------------------------------------------------------------

                             Effective Date

    The provision applies to taxable years ending on or after 
September 11, 2001.

                             Revenue Effect

    The provision is estimated to have a negligible impact on 
Federal fiscal year budget receipts.

 C. Authority to Postpone Certain Deadlines and Required Actions (sec. 
122 of the Act, sec. 7508A of the Code, and new sec. 518 and sec. 4002 
        of the Employee Retirement Income Security Act of 1974)

                         Present and Prior Law

In general
    In general, the Secretary of the Treasury may prescribe 
regulations under which a period of up to 120 days may be 
disregarded 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, for any taxpayer 
determined by the Secretary to be affected by a Presidentially 
declared disaster (section 7508A).
    The suspension of time may apply 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 by the Secretary of the Treasury. \197\
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    \197\ Treas. Reg. sec. 301.7508A-1(c)(1)(vii) states, with respect 
to this clause, that it encompasses ``any other act specified in a 
revenue ruling, revenue procedure, notice, announcement, news release, 
or other guidance published in the Internal Revenue Bulletin.''
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    Individuals may, if they choose, perform any of these acts 
during the period of suspension.
    On September 13, 2001, the IRS issued Notice 2001-61 
providing relief to taxpayers affected by the September 11, 
2001, terrorist attack. Prior to issuance of this notice, the 
President had declared certain affected areas to be disaster 
areas. In addition, on September 14, 2001, the IRS issued 
Notice 2001-63 providing additional tax relief to taxpayers who 
found it difficult to meet their tax filing and payment 
obligations.
Employee benefit plans
    Questions have arisen about the scope of section 7508A in 
relation to employee benefit plans. Some acts related to 
employee benefit plans are not clearly covered by the 
suspension. For example, a plan sponsor or plan administrator 
may be required to provide a notice to plan participants or to 
make a plan contribution, or a plan participant may be required 
to make a benefit election or take a distribution under the 
plan. In addition, some acts related to employee benefit plans 
may be required or provided for under the Employee Retirement 
Income Security Act (``ERISA'')or under the terms of the plan, 
rather than under the Internal Revenue Code. For example, on 
September 14, 2001, the Department of Labor issued News Release 
No. 01-36, announcing that the Pension and Welfare Benefits 
Administration, the Internal Revenue Service, and the Pension 
Benefit Guaranty Corporation were extending the deadline for 
filing Form 5500 and Form 5500-EZ.

                        Explanation of Provision

In general
    The Act redrafts section 7508A to expand its scope and to 
clarify its application. Specifically, the Act permits the 
Secretary to suspend the period of time under this provision 
for up to one year (increased from up to 120 days). The Act 
also clarifies that interest on underpayments may be waived or 
abated pursuant to section 7508A with respect to either a 
declared disaster or a terroristic or military action. The Act 
clarifies that the Secretary of the Treasury has the authority 
to postpone actions pursuant to section 7508A in response to a 
terroristic or military action, regardless of whether a 
disaster area has been declared by the President in connection 
with the action. The Act facilitates the prompt issuance of 
guidance by the Secretary of the Treasury with respect to 
section 7508A by removing the requirement that regulations be 
published listing the scope of additional actions that may be 
postponed pursuant to section 7508(a)(1)(K); accordingly, the 
Secretary may provide authoritative guidance via a notice or 
other mechanism of the Secretary's choice that may be issued 
more rapidly. It is intended that the Secretary construe this 
authority as broadly as is necessary and appropriate to respond 
to specific disasters or terroristic or military actions. The 
authority to postpone ``any . . . act'' is sufficiently broad 
to encompass, for example, specific deadlines enumerated in the 
Code, such as those in section 1031 (relating to the exchange 
of property held for productive use or investment). Similarly, 
it is intended that the Secretary utilize this authority to 
address issues that arise from the discovery of tax information 
subsequent to the filing of a tax return that would affect the 
tax liability reported on that return.

Employee benefit plans

    The Act expands and clarifies the scope of the deadlines 
and required actions that may be postponed pursuant to section 
7508A. The Act provides that the Secretary of the Treasury may 
prescribe a period of up to one year which may be disregarded 
in determining the date by which any action by a pension or 
other employee benefit plan, or by a plan sponsor, 
administrator, participant, beneficiary or other person would 
be required or permitted to be completed. The Act provides 
similar authority to the Secretary of Labor and the Pension 
Benefit Guaranty Corporation with respect to actions within 
their respective jurisdictions.
    The Act is not limited to actions under the Internal 
Revenue Code. Accordingly, actions under ERISA or under the 
terms of the plan come within the scope of this provision. Acts 
performed within the extended period are considered timely 
under the Internal Revenue Code, ERISA, and the plan. In 
addition, a plan is not treated as operating in a manner 
inconsistent with its terms or in violation of its terms merely 
because acts provided for under the plan are performed during 
the extended period.
    Examples of acts covered by the provision include: (1) the 
filing of a form with the IRS, Department of Labor or the 
Pension Benefit Guaranty Corporation, (2) an employer's 
contribution to the plan of required quarterly amounts for the 
current year or the prior year minimum funding amounts, (3) the 
filing of an application for a waiver of the minimum funding 
standard, (4) the payment of premiums to the Pension Benefit 
Guarantee Corporation, (5) a participant's election of a form 
of benefits under a plan, (6) the plan administrator's 
distribution of benefits in accordance with a participant's 
election, (7) notice to an employee of eligibility for 
continuation coverage under a group health plan, and (8) an 
employee's election of continuation coverage.

                             Effective Date

    The provision applies to disasters and terroristic or 
military actions occurring on or after September 11, 2001, with 
respect to any action of the Secretary of the Treasury, the 
Secretary of Labor, or the Pension Benefit Guaranty Corporation 
on or after the date of the enactment.

                             Revenue Effect

    The provision is estimated to have a negligible impact on 
Federal fiscal year budget receipts.

D. Application of Certain Provisions to Terroristic or Military Actions 
        (sec. 113 of the Act and secs. 104 and 692 of the Code)


                         Present and Prior Law


Taxation of disability income of U.S. employees related to terrorist 
        activity outside the United States

    Gross income does not include amounts received by an 
individual as disability income attributable to injuries 
incurred as a direct result of a terrorist attack (as 
determined by the Secretary of State) which occurred while the 
individual was performing official duties as an employee of the 
United States outside the United States (section 104(a)(5)).

Income tax relief for military and civilian U.S. employees who die as a 
        result of terrorist activity outside the United States

    Military and civilian employees of the United States who 
die as a result of wounds or injury incurred outside the United 
States in a terroristic or military action are not subject to 
income tax for the year of death and for prior taxable years 
beginning with the taxable year prior to the taxable year in 
which the wounds or injury were incurred. Accordingly, if such 
an individual is injured and dies in the same taxable year, 
this exemption from income tax is available for the taxable 
year of death as well as the prior taxable year.

                        Explanation of Provision


Taxation of disability income related to terrorist activity

    The Act expands the present and prior-law exclusion from 
gross income for disability income of U.S. civilian employees 
attributable to a terrorist attack outside the United States to 
apply to disability income received by any individual 
attributable to a terroristic or military action.

Income tax relief for individuals who die as a result of terrorist 
        activity

    The Act extends the income tax relief provided under 
present and prior law to U.S. military and civilian personnel 
who die as a result of terroristic activity or military action 
outside the United States to such personnel regardless of where 
the terroristic activity or military action occurred.

                             Effective Date

    The provision is effective for taxable years ending on or 
after September 11, 2001.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $2 million annually in 2002 and 2003, $1 
million annually in 2004 and 2005, and less than $500,000 
annually in 2006-2012.

E. Clarification that the Special Deposit Rules Provided Under the Air 
Transportation Safety and Stabilization Act Do Not Apply to Employment 
   Taxes (sec. 114 of the Act and sec. 301 of the Air Transportation 
                     Safety and Stabilization Act)


                         Present and Prior Law

    Section 301 of the Air Transportation Safety and System 
Stabilization Act \198\ provides a special rule for the deposit 
of certain taxes. If a deposit of these taxes was required to 
be made after September 10, 2001, and before November 15, 2001, 
they are treated as timely made if deposited by November 15, 
2001. The Secretary of the Treasury is given the authority to 
extend this deadline further, but no later than January 15, 
2002. For eligible air carriers, the special deposit rules are 
applicable to the excise taxes imposed on air travel. The 
special deposit rules were also applied inadvertently to the 
deposit of the following employment taxes: both the employer 
and employee portions of FICA, railroad retirement taxes, and 
income taxes withheld by employers from employees.
---------------------------------------------------------------------------
    \198\ Pub. L. No. 107-42.
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                        Explanation of Provision

    The applicability of these special deposit rules to 
employment taxes is repealed. The applicability of these 
special deposit rules to excise taxes is unaffected. It is 
intended that no penalties be imposed with respect to taxes 
that were not deposited timely in reliance on the provisions of 
the Air Transportation Safety and System Stabilization Act 
prior to the enactment of this provision.

                             Effective Date

    The provision is effective as if included in section 301 of 
the Air Transportation Safety and System Stabilization Act.

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

F. Treatment of Purchase of Structured Settlements (sec. 115 of the Act 
                     and new sec. 5891 of the Code)


                         Present and Prior Law

    Present and prior law provide tax-favored treatment for 
structured settlement arrangements for the payment of damages 
on account of personal injury or sickness.
    An exclusion from gross income is provided for amounts 
received for agreeing to a qualified assignment to the extent 
that the amount received does not exceed the aggregate cost of 
any qualified funding asset (section 130). A qualified 
assignment means any assignment of a liability to make periodic 
payments as damages (whether by suit or agreement) on account 
of a personal injury or sickness (in a case involving physical 
injury or physical sickness), provided the liability is assumed 
from a person who is a party to the suit or agreement, and the 
terms of the assignment satisfy certain requirements. 
Generally, these requirements are that: (1) the periodic 
payments are fixed as to amount and time; (2) the payments 
cannot be accelerated, deferred, increased, or decreased by the 
recipient; (3) the assignee's obligation is no greater than 
that of the assignor; and (4) the payments are excludable by 
the recipient under section 104(a)(1) or (2) as workmen's 
compensation for personal injuries or sickness, or as damages 
on account of personal physical injuries or physical sickness.
    A qualified funding asset means an annuity contract issued 
by an insurance company licensed in the U.S., or any obligation 
of the United States, provided the annuity contract or 
obligation meets statutory requirements. An annuity that is a 
qualified funding asset is not subject to the rule requiring 
current inclusion of the income on the contract which generally 
applies to annuity contract holders that are not natural 
persons (e.g., corporations) (section 72(u)(3)(C)). In 
addition, when the payments on the annuity are received by the 
structured settlement company and included in income, the 
company generally may deduct the corresponding payments to the 
injured person, who, in turn, excludes the payments from his or 
her income (section 104). Thus, neither the amount received for 
agreeing to the qualified assignment of the liability to pay 
damages, nor the income on the annuity that funds the liability 
to pay damages, generally is subject to tax.
    The exclusion for recipients of the periodic payments 
received under a structured settlement arrangement as damages 
for personal physical injuries or physical sickness can be 
contrasted with the treatment of investment earnings that are 
not paid as damages. If a recipient of damages chooses to 
receive a lump sum payment (excludable from income under 
section 104), and then to invest it himself, generally the 
earnings on the investment are includable in income. For 
example, if the recipient uses the lump sum to purchase an 
annuity contract providing for periodic payments, then a 
portion of each payment under the annuity contract is 
includable in income, and the balance is excludable under 
present-law rules based on the ratio of the individual's 
investment in the contract to the expected return on the 
contract (section 72(b)).
    The payments to the injured person under the qualified 
assignment cannot be accelerated, deferred, increased, or 
decreased by the recipient (section 130). Consistent with these 
requirements, it is understood that contracts under structured 
settlement arrangements generally contain anti-assignment 
clauses. It is understood, however, that injured persons may 
nonetheless be willing to accept discounted lump sum payments 
from certain ``factoring'' companies in exchange for their 
payment streams. The tax effect on the parties of these 
transactions may not have been completely clear under prior 
law.

                        Explanation of Provision

    The provision generally imposes an excise tax on any person 
who acquires certain payment rights under a structured 
settlement arrangement from a structured settlement recipient 
for consideration. The amount of the excise tax is 40 percent 
of the excess of: (1) the undiscounted amount of the payments 
being acquired, over (2) the total amount actually paid to 
acquire them.
    The 40-percent excise tax does not apply, however, if the 
transfer is approved in advance in a final order, judgment or 
decree that: (1) finds that the transfer does not contravene 
any Federal or State statute or the order of any court or 
responsible administrative authority; (2) finds that the 
transfer is in the best interest of the payee, taking into 
account the welfare and support of the payee's dependents; and 
(3) is issued under an applicable State statute by a court or 
is issued by the responsible administrative authority. Rules 
are provided for determining the applicable State statute.
    The provision also provides that the acquisition 
transaction does not affect the application of certain present-
law rules, if those rules were satisfied at the time the 
structured settlement was entered into. The rules are section 
130 (relating to an exclusion from gross income for personal 
injury liability assignments), section 72 (relating to 
annuities), sections 104(a)(1) and (2) (relating to an 
exclusion for amounts received under workers' compensation acts 
and for damages on account of personal physical injuries or 
physical sickness), and section 461(h) (relating to the time of 
economic performance in determining the taxable year of a 
deduction).

                             Effective Date

    The provision generally is effective for acquisition 
transactions entered into on or after 30 days following 
enactment. A transition rule applies during the period from 
that date to July 1, 2002. Under the transition rule, if no 
applicable State law (relating to the best interest of the 
payee) applies to a transfer during that period, then the 
exception from the 40 percent excise tax is available without 
the otherwise required court (or administrative) order, 
provided certain disclosure requirements are met. Under the 
transition rule, the person acquiring the structured settlement 
payments is required to disclose in advance to the payee: (1) 
the amounts and due dates of the payments to be transferred; 
(2) the aggregate amount to be transferred; (3) the 
consideration to be received by the payee; (4) the discounted 
present value of the transferred payments; and (5) the expenses 
to be paid by the payee or deducted from the payee's proceeds.
    The provision providing that the acquisition transaction 
does not affect the application of certain present-law rules is 
effective for transactions entered into before, on or after the 
30th day following enactment.

                             Revenue Effect

    The provision is estimated to increase Federal fiscal year 
budget receipts by less than $500,000 annually in 2002 through 
2005, to reduce Federal fiscal year budget receipts by less 
than $500,000 in 2006, and to reduce Federal fiscal year budget 
receipts by $1 million annually in 2007 through 2012.

G. Personal Exemption Deduction for Certain Disability Trusts (sec. 116 
                  of the Act and sec. 642 of the Code)


                         Present and Prior Law

    Present and prior law generally provide a $300 personal 
exemption for trusts that are required by their governing 
instruments to currently distribute all of their income. For 
other trusts, present and prior law generally provide a $100 
personal exemption. These deductions are in lieu of the 
personal exemption that generally is provided under section 151 
for individuals (section 642(b)).
    Under present law, a grantor who transfers property to a 
trust while retaining certain powers or interests over the 
trust is treated as the owner of the trust for income tax 
purposes under the so-called ``grantor trust rules'' (secs. 
671-677). Similarly, a third party who is not adverse to the 
grantor is treated as the owner of the trust under these rules 
to the extent that the third party is granted certain powers 
over the trust. If a grantor or third party is treated as the 
owner of a trust (a ``grantor trust''), the income and 
deductions of the trust are included directly in the taxable 
income of the grantor or third party. Because the personal 
exemption under section 642(b) applies to income that is 
taxable to a trust (rather than a grantor or third party), the 
personal exemption under section 642(b) does not apply to 
grantor trusts.

                        Explanation of Provision

    The Act provides that certain disability trusts may claim a 
personal exemption in an amount that is based upon the personal 
exemption provided for individuals under section 151(d), rather 
than the $300 or $100 personal exemption provided under present 
and prior law. The provision applies to taxable disability 
trusts described in 42 U.S.C. section 1396p(c)(2)(B)(iv) 
(relating to the treatment, for purposes of determining 
eligibility for medical assistance under the Social Security 
Act, of assets transferred to a trust established solely for 
the benefit of a disabled individual under 65 years of age).
    The provision only applies to disability trusts the 
beneficiaries of which have been determined by the Commissioner 
of Social Security to be disabled (other than holders of a 
remainder or reversionary interest in the trust), within the 
meaning of 42 U.S.C. section 1382c(a)(3) (relating to the 
definition of a ``disabled individual'' for purposes of 
determining eligibility for Supplemental Security Income).
    The provision applies if all of the beneficiaries of the 
trust at the end of the taxable year are determined under 42 
U.S.C. section 1382c(a)(3) to be disabled for some portion of 
such year. Thus, a disability trust may claim the personal 
exemption under the provision even if one or more of the 
beneficiaries becomes no longer disabled during the taxable 
year. However, the trust may claim the personal exemption for 
the following taxable year only if such individual or 
individuals are no longer beneficiaries of the trust at the end 
of the following taxable year (i.e., all remaining 
beneficiaries of the trust at the end of the following taxable 
year are disabled or were disabled during some portion of such 
year). In the case of a disability trust with a single 
beneficiary, the trust may claim the personal exemption under 
the provision for the taxable year during which the beneficiary 
becomes no longer disabled, but not for subsequent taxable 
years.
    The personal exemption provided for disability trusts under 
the provision is equal in amount to the section 151(d) personal 
exemption for unmarried individuals with no dependents and is 
subject to a phaseout, which is determined by reference to the 
phaseout of the personal exemption for such individuals under 
section 151(d)(3)(C)(iii). For purposes of computing the 
phaseout of the personal exemption under the provision, the 
adjusted gross income of the trust is determined by reference 
to section 67(e) (relating to the determination of adjusted 
gross income of estates and trusts for purposes of computing 
the 2-percent floor on miscellaneous itemized deductions).
    The provision does not affect the determination of whether 
a disability trust is treated as a grantor trust under the 
present-law grantor trust rules, and does not change the 
inapplicability of the personal exemption under section 642(b) 
to grantor trusts. Thus, the provision does not apply to 
disability trusts that are treated as grantor trusts.

                             Effective Date

    The provision applies to taxable years of disability trusts 
ending on or after September 11, 2001.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $3 million in 2002, $4 million in 2003, $5 
million annually in 2004 and 2005, $6 million annually in 2006 
and 2007, $7 million in 2008, $8 million annually in 2009 and 
2010, and $9 million annually in 2011 and 2012.

 III. DISCLOSURE OF TAX INFORMATION IN TERRORISM AND NATIONAL SECURITY 
     INVESTIGATIONS (Sec. 201 of the Act and sec. 6103 of the Code)

                         Present and Prior Law

In general
    Returns and return information are confidential (section 
6103). A ``return'' is any tax return, information return, 
declaration of estimated tax, or claim for refund filed under 
the Code on behalf of or with respect to any person. The term 
return also includes any amendment or supplement, including 
supporting schedules, attachments, or lists, which are 
supplemental to or are part of a filed return. Return 
information is defined broadly. It includes the following 
information:
           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;
           Whether the taxpayer's return was, is being, 
        or will be examined or subject to other investigation 
        or processing;
           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;
           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;
           Any advance pricing agreement entered into 
        by a taxpayer and the Secretary and any background 
        information related to the agreement or any application 
        for an advance pricing agreement; and
           Any agreement under section 7121 (relating 
        to closing agreements), and any similar agreement, and 
        any background information related to such agreement or 
        request for such agreement (section 6103(b)(2)).
    The term ``return information'' does not include data in a 
form that cannot be associated with or otherwise identify, 
directly or indirectly, a particular taxpayer. ``Taxpayer 
return information'' means return information which is filed 
with, or furnished to, the Internal Revenue Service by or on 
behalf of the taxpayer to whom such return information relates.
    Section 6103 provides that returns and return information 
may not be disclosed by the IRS, other Federal employees, State 
employees, and certain others having access to the information 
except as provided in the Internal Revenue Code. Section 6103 
contains a number of exceptions to this general rule of 
nondisclosure that authorize disclosure in specifically 
identified circumstances (including nontax criminal 
investigations) when certain conditions are satisfied.
    Recordkeeping and safeguard requirements also are imposed. 
These requirements establish a system of records to keep track 
of disclosure requests and disclosures and to ensure that the 
information is securely stored and that access to the 
information is restricted to authorized persons. These 
conditions and safeguards are intended to ensure that an 
individual's right to privacy is not unduly compromised and the 
information is not misused or improperly disclosed. The IRS 
also must submit reports to the Joint Committee on Taxation and 
to the public regarding requests for and disclosures made of 
returns and return information 90 days after the close of the 
calendar year (section 6103(p)(3)). Criminal and civil 
sanctions apply to the unauthorized disclosure or inspection of 
returns and return information (secs. 7213, 7213A, and 7431).
Disclosure of returns and return information for use in nontax criminal 
        investigations_by ex parte court order
    A Federal agency enforcing a nontax criminal law must 
obtain an ex parte court order to receive a return or taxpayer 
return information (i.e., that information submitted by or on 
behalf of a taxpayer to the IRS) (section 6103(i)(1)).\199\ 
Only the Attorney General, Deputy Attorney General, Assistant 
Attorney Generals, United States Attorneys, Independent 
Counsels, or an attorney in charge of an organized crime strike 
force may authorize an application for the order.
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    \199\ Return information other than that submitted by the taxpayer 
may be obtained by ex parte court order under this provision as well.
---------------------------------------------------------------------------
    For a judge or magistrate to grant such an order, the 
application must demonstrate that:
           There is reasonable cause to believe, based 
        upon information believed to be reliable, that a 
        specific criminal act has been committed;
           There is reasonable cause to believe that 
        the return or return information is or may be relevant 
        to a matter relating to the commission of such act;
           The return or return information is sought 
        exclusively for use in a Federal criminal investigation 
        or proceeding concerning such act; and
           The information sought reasonably cannot be 
        obtained, under the circumstances, from another source.
    Pursuant to the ex parte order, the information may be 
disclosed to officers and employees of the Federal agency who 
are personally and directly engaged in: (1) the preparation for 
any judicial or administrative proceeding pertaining to the 
enforcement of a specifically designated Federal criminal 
statute (not involving tax administration) to which the United 
States or such agency is a party, (2) any investigation which 
may result in such a proceeding, or (3) any Federal grand jury 
proceeding pertaining to enforcement of such a criminal statute 
to which the United States or such agency is or may be a party.
    A Federal agency may obtain, by ex parte court order, the 
return and return information of a fugitive from justice for 
purposes of locating such individual (section 6103(i)(5)). The 
application for an ex parte order must establish that: (1) a 
Federal felony arrest warrant has been issued and the taxpayer 
is a fugitive from justice, (2) the return or return 
information is sought exclusively for locating the fugitive 
taxpayer, and (3) reasonable cause exists to believe the 
information may be relevant in determining the location of the 
fugitive. Only the Attorney General, Deputy Attorney General, 
Assistant Attorney Generals, United States Attorneys, 
Independent Counsels, or an attorney in charge of an organized 
crime strike force may authorize an application for this order. 
Once a court grants the application for an ex parte order, the 
return or return information may be disclosed to any Federal 
agency exclusively for purposes of locating the fugitive 
individual.
Agency request procedure for disclosure of return information other 
        than taxpayer return information to the IRS for use in criminal 
        investigations
    For nontax criminal investigations, Federal agencies can 
obtain return information, other than taxpayer return 
information, without a court order. For nontax criminal 
purposes, the head of a Federal agency and other persons 
specifically identified by section 6103 may make a written 
request for return information that was not provided to the IRS 
by the taxpayer or his representative (section 6103(i)(2)). The 
written request must contain:
           The taxpayer's name, and address;
           The taxable period for which the information 
        is sought;
           The statutory authority under which the 
        criminal investigation or judicial, administrative or 
        grand jury proceeding is being conducted; and
           The reasons why such disclosure is or may be 
        relevant to the investigation or proceeding. Unlike the 
        requirements for an ex parte order, the requesting 
        agency does not have to demonstrate that the 
        information sought is not reasonably available 
        elsewhere.
Disclosure of return information to apprise appropriate officials of 
        criminal activities or emergency circumstances
            Criminal activities
    Section 6103 permits the IRS to disclose return information 
(other than taxpayer return information) that may be evidence 
of a crime (section 6103(i)(3)(A)). The IRS may make the 
disclosure in writing to the head of a Federal agency charged 
with enforcing the laws to which the crime relates. Return 
information also may be disclosed to apprise Federal law 
enforcement of the imminent flight of any individual from 
Federal prosecution. The IRS may not disclose returns under 
this provision.
            Emergency circumstances
    In cases of imminent danger of death or physical injury to 
an individual, the IRS may disclose return information to 
Federal and State law enforcement agencies (section 
6103(i)(3)(B)). The statute does not grant authority, however, 
to disclose return information to local law enforcement, such 
as city, county, or town police. The statute does not permit 
the IRS to disclose return information concerning terrorist 
activities if there is no imminent danger of death or physical 
injury to an individual.
Tax convention information
    With limited exceptions, the Code prohibits the disclosure 
of tax convention information (section 6105). A tax convention 
is any: (1) income tax or gift and estate tax convention, or 
(2) other convention or bilateral agreement (including 
multilateral conventions and agreements and any agreement with 
a possession of the United States) providing for the avoidance 
of double taxation, the prevention of fiscal evasion, 
nondiscrimination with respect to taxes, the exchange of tax 
relevant information with the United States, or mutual 
assistance in tax matters. Tax convention information is any: 
(1) agreement entered into with the competent authority of one 
or more foreign governments pursuant to a tax convention; (2) 
application for relief under a tax convention; (3) background 
information related to such agreement or application; (4) 
document implementing such agreement; and (5) other information 
exchanged pursuant to a tax convention which is treated as 
confidential or secret under the tax convention.
    The general rule that tax convention information cannot be 
disclosed does not apply to the disclosure of tax convention 
information to persons or authorities (including courts and 
administrative bodies) that are entitled to disclosure under 
the tax convention and any generally applicable procedural 
rules regarding applications for relief under a tax convention. 
It also does not apply to the disclosure of tax convention 
information not relating to a particular taxpayer if the IRS 
determines, after consultation with the parties to the tax 
convention, that such disclosure would not impair tax 
administration.

                        Reasons for Change \200\

    For purposes of investigating terrorist activity or threats 
and analyzing intelligence, the Congress believed it necessary 
to expand present law disclosure rules.
---------------------------------------------------------------------------
    \200\ The legislative history for H.R. 2884 does not include 
reasons for change. The reasons for change reported here are adapted 
from the Technical Explanation to the Economic Recovery and Assistance 
for American Workers Act of 2001 (S. Prt. No. 107-49). The Senate 
Finance Committee produced this report in connection with H.R. 3090, 
which contained certain provisions similar to those enacted in Pub. L. 
No. 107-134.
---------------------------------------------------------------------------

                        Explanation of Provision

In general
    The Act expands the availability of returns and return 
information for purposes of investigating terrorist incidents, 
threats, or activities, and for analyzing intelligence 
concerning terrorist incidents, threats, or activities. In 
general, under the Act, returns and taxpayer return information 
must be obtained pursuant to an ex parte court order. Return 
information, other than taxpayer return information, generally 
is available upon a written request meeting specific 
requirements. Prior and present-law safeguards, recordkeeping, 
reporting requirements, and civil and criminal penalties for 
unauthorized disclosures apply to disclosures made pursuant to 
the Act. The Act also permits the disclosure of tax convention 
information for the same purposes and in the same manner that 
return information is made available under the Act. No 
disclosures may be made under the Act after December 31, 2003.
Disclosure of returns and return information including taxpayer return 
        information_by ex parte court order
    Ex parte court orders sought by Federal law enforcement and 
Federal intelligence agencies.--The Act permits, pursuant to an 
ex parte court order, the disclosure of returns and return 
information (including taxpayer return information) to certain 
officers and employees of a Federal law enforcement agency or 
Federal intelligence agency. These officers and employees are 
required to be personally and directly engaged in any 
investigation of, response to, or analysis of intelligence and 
counterintelligence information concerning any terrorist 
incident, threat, or activity. These officers and employees are 
permitted to use this information solely for their use in the 
investigation, response, or analysis, and in any judicial, 
administrative, or grand jury proceeding, pertaining to any 
such terrorist incident, threat, or activity.
    The Attorney General, Deputy Attorney General, Associate 
Attorney General, an Assistant Attorney General, or a United 
States attorney, may authorize the application for the ex parte 
court order to be submitted to a Federal district court judge 
or magistrate. The Federal district court judge or magistrate 
would grant the order if based on the facts submitted he or she 
determines that:
           There is reasonable cause to believe, based 
        upon information believed to be reliable, that the 
        return or return information may be relevant to a 
        matter relating to such terrorist incident, threat, or 
        activity; and
           The return or return information is sought 
        exclusively for the use in a Federal investigation, 
        analysis, or proceeding concerning any terrorist 
        incident, threat, or activity.
    Special rule for ex parte court ordered disclosure 
initiated by the IRS.--If the Secretary of Treasury possesses 
returns or return information that may be related to a 
terrorist incident, threat, or activity, the Secretary of the 
Treasury (or his delegate), may on his own initiative, 
authorize an application for an ex parte court order to permit 
disclosure to Federal law enforcement. In order to grant the 
order, the Federal district court judge or magistrate must 
determine that there is reasonable cause to believe, based upon 
information believed to be reliable, that the return or return 
information may be relevant to a matter relating to such 
terrorist incident, threat, or activity. Under the Act, the 
information may be disclosed only to the extent necessary to 
apprise the appropriate Federal law enforcement agency 
responsible for investigating or responding to a terrorist 
incident, threat, or activity and for officers and employees of 
that agency to investigate or respond to such terrorist 
incident, threat, or activity. Further, use of the information 
is limited to use in a Federal investigation, analysis, or 
proceeding concerning a terrorist incident, threat, or 
activity. Because the Department of Justice represents the 
Secretary of the Treasury in Federal district court, the 
Secretary is permitted to disclose returns and return 
information to the Department of Justice as necessary and 
solely for the purpose of obtaining the special IRS ex parte 
court order.
Disclosure of return information other than taxpayer return information
    Disclosure by the IRS without a request.--The Act permits 
the IRS to disclose return information, other than taxpayer 
return information, related to a terrorist incident, threat, or 
activity to the extent necessary to apprise the head of the 
appropriate Federal law enforcement agency responsible for 
investigating or responding to such terrorist incident, threat, 
or activity. As under prior and present law Code section 
6103(i)(3)(A), the IRS on its own initiative and without a 
written request may make this disclosure. The head of the 
Federal law enforcement agency may disclose information to 
officers and employees of such agency to the extent necessary 
to investigate or respond to such terrorist incident, threat, 
or activity. A taxpayer's identity is not treated as return 
information supplied by the taxpayer or his or her 
representative.
    Disclosure upon written request of a Federal law 
enforcement agency.--The Act permits the IRS to disclose return 
information, other than taxpayer return information, to 
officers and employees of Federal law enforcement upon a 
written request satisfying certain requirements. The request 
must: (1) be made by the head of the Federal law enforcement 
agency (or his delegate) involved in the response to or 
investigation of terrorist incidents, threats, or activities, 
and (2) set forth the specific reason or reasons why such 
disclosure may be relevant to a terrorist incident, threat, or 
activity. The information is to be disclosed to officers and 
employees of the Federal law enforcement agency who would be 
personally and directly involved in the response to or 
investigation of terrorist incidents, threats, or activities. 
The information is to be used by such officers and employees 
solely for such response or investigation.
    The Act permits the redisclosure by a Federal law 
enforcement agency to officers and employees of State and local 
law enforcement personally and directly engaged in the response 
to or investigation of the terrorist incident, threat, or 
activity. The State or local law enforcement agency must be 
part of an investigative or response team with the Federal law 
enforcement agency for these disclosures to be made.
    Disclosure upon request from the Departments of Justice or 
Treasury for intelligence analysis of terrorist activity.--Upon 
written request satisfying certain requirements discussed 
below, the IRS is to disclose return information (other than 
taxpayer return information) \201\ to officers and employees of 
the Department of Justice, Department of Treasury, and other 
Federal intelligence agencies, who are personally and directly 
engaged in the collection or analysis of intelligence and 
counterintelligence or investigation concerning terrorist 
incidents, threats, or activities. Use of the information is 
limited to use by such officers and employees in such 
investigation, collection, or analysis.
---------------------------------------------------------------------------
    \201\ A taxpayer's identity is treated as not having been supplied 
by the taxpayer or his representative.
---------------------------------------------------------------------------
    The written request is to set forth the specific reasons 
why the information to be disclosed is relevant to a terrorist 
incident, threat, or activity. The request is to be made by an 
individual who is: (1) an officer or employee of the Department 
of Justice or the Department of Treasury, (2) appointed by the 
President with the advice and consent of the Senate, and (3) 
responsible for the collection, and analysis of intelligence 
and counterintelligence information concerning terrorist 
incidents, threats, or activities. The Director of the United 
States Secret Service also is an authorized requester under the 
Act.
Tax convention information
    The Act permits the disclosure of tax convention 
information on the same terms as return information may be 
disclosed under the Act, except that in the case of tax 
convention information provided by a foreign government, no 
disclosure may be made under this paragraph without the written 
consent of the foreign government.
Definitions
    The term ``terrorist incident, threat, or activity'' is 
statutorily defined to mean an incident, threat, or activity 
involving an act of domestic terrorism or international 
terrorism, as both of those terms were defined in the recently 
enacted USA PATRIOT Act.\202\
---------------------------------------------------------------------------
    \202\ 18 U.S.C. 2331.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective for disclosures made on or after 
the date of enactment.

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

   IV. NO IMPACT ON SOCIAL SECURITY TRUST FUNDS (Sec. 301 of the Act)

                         Present and Prior Law

    Present law provides for the transfer of Social Security 
taxes and certain self-employment taxes to the Social Security 
trust fund. In addition, the income tax collected with respect 
to a portion of Social Security benefits included in gross 
income is transferred to the Social Security trust fund.

                        Explanation of Provision

    The Act provides that the Secretary is to annually estimate 
the impact of the Act on the income and balances of the Social 
Security trust fund. If the Secretary determines that the Act 
has a negative impact on the income and balances of the fund, 
then the Secretary is to transfer from the general revenues of 
the Federal government an amount sufficient so as to ensure 
that the income and balances of the Social Security trust funds 
are not reduced as a result of the Act. Such transfers are to 
be made not less frequently than quarterly.
    The Act provides that the provisions of the Act are not to 
be construed as an amendment of title II of the Social Security 
Act.

                             Effective Date

    The provision is effective on the date of enactment.

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

PART EIGHT: JOB CREATION AND WORKER ASSISTANCE ACT OF 2002 (PUBLIC LAW 
                             107-147) \203\

                      TITLE I. BUSINESS PROVISIONS

A. Special Depreciation Allowance for Certain Property (sec. 101 of the 
                     Act and sec. 168 of the Code)

                         Present and Prior Law

Depreciation deductions
    A taxpayer is allowed to recover, through annual 
depreciation deductions, the cost of certain property used in a 
trade or business or for the production of income. The amount 
of the depreciation deduction allowed with respect to tangible 
property for a taxable year is determined under the modified 
accelerated cost recovery system (``MACRS''). Under MACRS, 
different types of property generally are assigned applicable 
recovery periods and depreciation methods. The recovery periods 
applicable to most tangible personal property (generally 
tangible property other than residential rental property and 
nonresidential real property) range from 3 to 25 years. The 
depreciation methods generally applicable to tangible personal 
property are the 200-percent and 150-percent declining balance 
methods, switching to the straight-line method for the taxable 
year in which the depreciation deduction would be maximized.
---------------------------------------------------------------------------
    \203\ H.R. 3090. The bill was reported by the House Committee on 
Ways and Means on October 17, 2001 (H.R. Rep. No. 107-251). The bill 
passed the House on October 24, 2001. The bill was reported with an 
amendment in the nature of a substitute by the Senate Committee on 
Finance on November 9, 2001 (S. Prt. No. 107-49). Another Finance 
Committee substitute was proposed and failed on the Senate Floor on 
November 14, 2001. An amendment in the nature of a substitute passed 
the Senate by voice vote on February 14, 2002. The House passed the 
bill with an amendment to the Senate amendment on March 7, 2002. The 
Senate agreed to the House amendment to the Senate amendment on March 
8, 2002. The bill was signed by the President on March 9, 2002.
---------------------------------------------------------------------------
    With respect to passenger automobiles, section 280F limits 
the annual depreciation deductions to specified dollar amounts, 
indexed for inflation.
    Section 167(f)(1) provides that capitalized computer 
software costs, other than computer software to which section 
197 applies, are recovered ratably over 36 months.
    In lieu of depreciation, a taxpayer with a sufficiently 
small amount of annual investment generally may elect to deduct 
up to $24,000 (for taxable years beginning in 2001 or 2002) of 
the cost of qualifying property placed in service for the 
taxable year (section 179). This amount is increased to $25,000 
for taxable years beginning in 2003 and thereafter. In general, 
qualifying property is defined as depreciable tangible personal 
property that is purchased for use in the active conduct of a 
trade or business.

                           Reasons for Change

    The Congress believes that allowing additional first-year 
depreciation will accelerate purchases of equipment, promote 
capital investment, modernization, and growth, and will help to 
spur an economic recovery.

                        Explanation of Provision

    JCWA allows an additional first-year depreciation deduction 
equal to 30 percent of the adjusted basis of qualified 
property.\204\ The additional first-year depreciation deduction 
is allowed for both regular tax and alternative minimum tax 
purposes for the taxable year in which the property is placed 
in service.\205\ The basis of the property and the depreciation 
allowances in the placed-in-service year and later years are 
appropriately adjusted to reflect the additional first-year 
depreciation deduction. In addition, JCWA provides that there 
are no adjustments to the allowable amount of depreciation for 
purposes of computing a taxpayer's alternative minimum taxable 
income with respect to property to which the provision applies. 
A taxpayer is allowed to elect out of the additional first-year 
depreciation for any class of property for any taxable year.
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    \204\ The amount of the additional first-year depreciation 
deduction is not affected by a short taxable year.
    \205\ The additional first-year depreciation deduction is subject 
to the general rules regarding whether an item is deductible under 
section 162 or subject to capitalization under section 263 or section 
263A.
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    In order for property to qualify for the additional first-
year depreciation deduction it must meet all of the following 
requirements. First, the property must be property to which the 
general rules of MACRS \206\ apply (1) with an applicable 
recovery period of 20 years or less, (2) water utility property 
(as defined in section 168(e)(5)), (3) computer software other 
than computer software covered by section 197, or (4) qualified 
leasehold improvement property.\207\ Second, the original use 
\208\ of the property must commence with the taxpayer on or 
after September 11, 2001.\209\ Third, the taxpayer must 
purchase the property within the applicable time period. 
Finally, the property must be placed in service before January 
1, 2005. An extension of the placed in service date of one year 
(i.e., January 1, 2006) is provided for certain property with a 
recovery period of ten years or longer and certain 
transportation property.\210\ Transportation property is 
defined as tangible personal property used in the trade or 
business of transporting persons or property.
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    \206\ A special rule precludes the additional first-year 
depreciation deduction for property that is required to be depreciated 
under the alternative depreciation system of MACRS.
    \207\ Qualified leasehold improvement property is any improvement 
to an interior portion of a building that is nonresidential real 
property, provided certain requirements are met. The improvement must 
be made under or pursuant to a lease either by the lessee (or 
sublessee) of that portion of the building, or by the lessor of that 
portion of the building. That portion of the building is to be occupied 
exclusively by the lessee (or any sublessee). The improvement must be 
placed in service more than three years after the date the building was 
first placed in service.
    Qualified leasehold improvement property does not include any 
improvement for which the expenditure is attributable to the 
enlargement of the building, any elevator or escalator, any structural 
component benefiting a common area, or the internal structural 
framework of the building.
    For these purposes, a binding commitment to enter into a lease is 
treated as a lease, and the parties to the commitment are treated as 
lessor and lessee. A lease between related persons is not considered a 
lease for this purpose.
    Finally, New York Liberty Zone qualified leasehold improvement 
property, as described in new Code sec. 1400L(b), is not eligible for 
the additional first year depreciation deduction.
    \208\ The term ``original use'' means the first use to which the 
property is put, whether or not such use corresponds to the use of such 
property by the taxpayer. It is intended that, when evaluating whether 
property qualifies as ``original use,'' the factors used to determine 
whether property qualified as ``new section 38 property'' for purposes 
of the investment tax credit would apply. See Treasury Regulation 1.48-
2. Thus, it is intended that additional capital expenditures incurred 
to recondition or rebuild acquired property (or owned property) would 
satisfy the ``original use'' requirement. However, the cost of 
reconditioned or rebuilt property acquired by the taxpayer would not 
satisfy the ``original use'' requirement. For example, assume on 
February 1, 2002, a taxpayer buys from X for $20,000 a machine that has 
been previously used by X. Prior to September 11, 2004, the taxpayer 
makes an expenditure on the property of $5,000 of the type that must be 
capitalized. Regardless of whether the $5,000 is added to the basis of 
such property or is capitalized as a separate asset, such amount would 
be treated as satisfying the ``original use'' requirement and would be 
qualified property (assuming all other conditions are met). No part of 
the $20,000 purchase price would qualify for the additional first year 
depreciation.
    In addition, Congress intended that if in the normal course of its 
business a taxpayer sells fractional interests in property to unrelated 
third parties, that the original use of such property begins with the 
first user of each fractional interest (i.e., each first fractional 
owner is considered the original user of its proportionate share of the 
property).
    \209\ A special rule applies in the case of certain leased 
property. In the case of any property that is originally placed in 
service by a person and that is sold to the taxpayer and leased back to 
such person by the taxpayer within three months after the date that the 
property was placed in service, the property would be treated as 
originally placed in service by the taxpayer not earlier than the date 
that the property is used under the leaseback.
    Congress intended that if property is originally placed in service 
by a lessor (including by operation of section 168(k)(2)(D)(ii)), such 
property is sold within three months after the date that the property 
was placed in service, and the user of such property does not change, 
then the property is treated as originally placed in service by the 
purchaser not earlier than the date of such sale. A technical 
correction may be needed so that the statute reflects this intent.
    \210\ In order for property to qualify for the extended placed in 
service date, the property is required to have a production period 
exceeding two years or an estimated production period exceeding one 
year and a cost exceeding $1 million.
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    The applicable time period for acquired property is: (1) 
after September 10, 2001 and before September 11, 2004, and no 
binding written contract for the acquisition is in effect 
before September 11, 2001, or (2) pursuant to a binding written 
contract which was entered into after September 10, 2001, and 
before September 11, 2004.\211\ With respect to property that 
is manufactured, constructed, or produced by the taxpayer for 
use by the taxpayer, the taxpayer must begin the manufacture, 
construction, or production of the property after September 10, 
2001, and before September 11, 2004. Property that is 
manufactured, constructed, or produced for the taxpayer by 
another person under a contract that is entered into prior to 
the manufacture, construction, or production of the property is 
considered to be manufactured, constructed, or produced by the 
taxpayer. For property eligible for the extended placed in 
service date, a special rule limits the amount of costs 
eligible for the additional first year depreciation. With 
respect to such property, only the portion of the basis that is 
properly attributable to the costs incurred before September 
11, 2004 (``progress expenditures'') are eligible for the 
additional first year depreciation.\212\
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    \211\ Congress did not intend to preclude property from qualifying 
for the additional first year depreciation merely because a binding 
written contact to acquire a component of the property was in effect 
prior to September 11, 2001.
    \212\ For purposes of determining the amount of eligible progress 
expenditures, it is intended that rules similar to section 46(d)(3) as 
in effect prior to the Tax Reform Act of 1986 shall apply.
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    Congress intended that property not qualify for the 
additional first-year depreciation deduction when the user of 
such property (or a related party) would not have been eligible 
for the additional first-year depreciation deduction if the 
user (or a related party) were treated as the owner.\213\ For 
example, if a taxpayer sells to a related party property that 
was under construction prior to September 11, 2001, the 
property does not qualify for the additional first-year 
depreciation deduction. Similarly, if a taxpayer sells to a 
related party property that was subject to a binding written 
contract prior to September 11, 2001, the property does not 
qualify for the additional first-year depreciation deduction. 
As a further example, if a taxpayer sells property and leases 
the property back in a sale-leaseback arrangement, and the 
property otherwise would not have qualified for the additional 
first-year depreciation deduction if it were owned by the 
taxpayer-lessee, then the lessor is not entitled to the 
additional first-year depreciation deduction.
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    \213\ A technical correction may be needed so that the statute 
reflects this intent.
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    The limitation on the amount of depreciation deductions 
allowed with respect to certain passenger automobiles (section 
280F of the Code) is increased in the first year by $4,600 for 
automobiles that qualify (and do not elect out of the increased 
first year deduction). The $4,600 increase is not indexed for 
inflation.
    The following examples illustrate the operation of the 
provision.
    EXAMPLE 1.--Assume that on March 1, 2002, a calendar year 
taxpayer acquires and places in service qualified property that 
costs $1 million. Under the provision, the taxpayer is allowed 
an additional first-year depreciation deduction of $300,000. 
The remaining $700,000 of adjusted basis is recovered in 2002 
and subsequent years pursuant to the depreciation rules of 
present law.
    EXAMPLE 2.--Assume that during 2002, a calendar year 
taxpayer acquires and places in service qualified property that 
costs $50,000. In addition, assume that the property qualifies 
for the expensing election under section 179. Under the 
provision, the taxpayer is first allowed a $24,000 deduction 
under section 179. The taxpayer then is allowed an additional 
first-year depreciation deduction of $7,800 based on $26,000 
($50,000 original cost less the section 179 deduction of 
$24,000) of adjusted basis. Finally, the remaining adjusted 
basis of $18,200 ($26,000 adjusted basis less $7,800 additional 
first-year depreciation) is to be recovered in 2002 and 
subsequent years pursuant to the depreciation rules of present 
law.

                             Effective Date

    The provision applies to property placed in service after 
September 10, 2001.

                             Revenue Effect

    The provision is expected to reduce Federal fiscal year 
budget receipts by $35,329 million in 2002, $32,378 million in 
2003, $29,178 million in 2004, and increase Federal fiscal year 
budget receipts by $136 million in 2005, $18,951 million in 
2006, $18,265 million in 2007, $15,354 million in 2008, $11,638 
million in 2009, $8,023 million in 2010, $5,328 million in 
2011, and $3,372 million in 2012.

B. Five-Year Carryback of Net Operating Losses (sec. 102 of the Act and 
                     secs. 172 and 56 of the Code)


                         Present and Prior Law

    A net operating loss (``NOL'') is, generally, the amount by 
which a taxpayer's allowable deductions exceed the taxpayer's 
gross income. A carryback of an NOL generally results in the 
refund of Federal income tax for the carryback year. A 
carryover of an NOL reduces Federal income tax for the 
carryover year.
    In general, an NOL may be carried back two years and 
carried forward 20 years to offset taxable income in such 
years. Different rules apply with respect to NOLs arising in 
certain circumstances. For example, a three-year carryback 
applies with respect to NOLs: (1) arising from casualty or 
theft losses of individuals, or (2) attributable to 
Presidentially declared disasters for taxpayers engaged in a 
farming business or a small business. A five-year carryback 
period applies to NOLs from a farming loss (regardless of 
whether the loss was incurred in a Presidentially declared 
disaster area). Special rules also apply to real estate 
investment trusts (no carryback), specified liability losses 
(10-year carryback), and excess interest losses (no carryback 
to any year preceding a corporate equity reduction 
transaction).
    The alternative minimum tax rules provide that a taxpayer's 
NOL deduction cannot reduce the taxpayer's alternative minimum 
taxable income (``AMTI'') by more than 90 percent of the AMTI.

                           Reasons for Change

    The NOL carryback and carryover rules are designed to allow 
taxpayers to smooth out swings in business income (and Federal 
income taxes thereon) that result from business cycle 
fluctuations and unexpected financial losses. The uncertain 
economic conditions have resulted in many taxpayers incurring 
unexpected financial losses. A temporary extension of the NOL 
carryback period provides taxpayers in all sectors of the 
economy who experience such losses the ability to increase 
their cash flow through the refund of income taxes paid in 
prior years, which can be used for capital investment or other 
expenses that will provide stimulus to the economy.

                        Explanation of Provision

    JCWA temporarily extends the general NOL carryback period 
to five years (from two years) for NOLs arising in taxable 
years ending in 2001 and 2002.\214\ In addition, the five-year 
carryback period applies to NOLs from these years that 
otherwise qualify for a three-year carryback period (i.e., NOLs 
arising from casualty or theft losses of individuals or 
attributable to certain Presidentially declared disaster 
areas).
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    \214\ JCWA does not affect the terms and conditions that the 
Internal Revenue Service may impose on a taxpayer seeking approval for 
a change in its annual accounting period. See e.g., Rev. Proc. 2000-11, 
2000-1 C.B. 309, sec. 5.06 (``If the corporation (or consolidated 
group) has a NOL (or consolidated NOL) in the short period required to 
effect the change, the NOL may not be carried back but must be carried 
over in accordance with the provisions of sec. 172 beginning with the 
first taxable year after the short period. However, the short period 
NOL (or consolidated NOL) is carried back or carried over in accordance 
with sec. 172 if it is either: (a) $50,000 or less, or (b) results from 
a short period of 9 months or longer and is less than the NOL (or the 
consolidated NOL) for a full 12-month period beginning with the first 
day of the short period.'')
    The IRS, however, may alter or modify such terms and conditions 
where modification is sought by taxpayers (including taxpayers that had 
already received permission to change accounting periods) as it deems 
appropriate or necessary to further the purposes of this provision. See 
148 Cong. Rec. S1702 (daily ed. March 8, 2002) (colloquy between 
Senators Hatch and Baucus).
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    A taxpayer can elect to forgo the five-year carryback 
period. The election to forgo the five-year carryback period is 
made in the manner prescribed by the Secretary of the Treasury 
and must be made by the due date of the return (including 
extensions) for the year of the loss. The election is 
irrevocable. If a taxpayer elects to forgo the five-year 
carryback period, then the losses are subject to the rules that 
otherwise would apply under section 172 absent the 
provision.\215\
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    \215\ Because JCWA was enacted after some taxpayers had filed 
returns for years affected by the provision, a technical correction is 
needed to provide for a period of time in which prior decisions 
regarding the NOL carryback may be reviewed. Similarly, a technical 
correction is needed to modify the carryback adjustment procedures of 
sec. 6411 for NOLs arising in 2001 and 2002. These issues were 
addressed in a letter dated April 15, 2002, sent by the Chairman and 
Ranking Member of the House Ways and Means Committee and Senate Finance 
Committee, as well as in guidance issued by the IRS pursuant to the 
Congressional letter (Rev. Proc. 2002-40, 2002-23 I.R.B. 1096, June 10, 
2002). See section 2(b) of H.R. 5713 and S. 3153, the Tax Technical 
Corrections Act of 2002.
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    JCWA also allows an NOL deduction attributable to NOL 
carrybacks arising in taxable years ending in 2001 and 2002, as 
well as NOL carryovers to these taxable years, to offset 100 
percent of a taxpayer's AMTI.\216\
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    \216\ Section 172(b)(2) should be appropriately applied in 
computing AMTI to take proper account of the order that the NOL 
carryovers and carrybacks are used as a result of this provision. See 
section 56(d)(1)(B)(ii).
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                             Effective Date

    The 5-year carryback provision is effective for net 
operating losses generated in taxable years ending after 
December 31, 2000.
    The provision allowing the use of NOL carrybacks and 
carryovers to offset 100 percent of AMTI is effective for 
taxable years beginning before January 1, 2003.\217\
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    \217\ A technical correction may be needed in connection with the 
date. See section 2(b)(3) of H.R. 5713 and S. 3153, the Tax Technical 
Corrections Act of 2002.
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                             Revenue Effect

    The provision is expected to reduce Federal fiscal year 
budget receipts by $7,927 million in 2002, $6,623 million in 
2003, and increase Federal fiscal year budget receipts by 
$4,197 million in 2004, $2,865 million in 2005, $1,891 million 
in 2006, $1,256 million in 2007, $840 million in 2008, $568 
million in 2009, $388 million in 2010, $269 million in 2011, 
and $191 million in 2012.

 TITLE II. TAX BENEFITS FOR AREA OF NEW YORK CITY DAMAGED IN TERRORIST 
                  ATTACKS ON SEPTEMBER 11, 2001 \218\

  A. Expansion of Work Opportunity Tax Credit Targeted Categories to 
Include Certain Employees in New York City (sec. 301 of the Act and new 
                       sec. 1400L(a) of the Code)

                         Present and Prior Law

In general
    The work opportunity tax credit (``WOTC'') is 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 less than 400 hours) 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.
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    \218\ The interaction of the tax benefits for New York City in the 
JCWA with the business tax provisions of Title I JCWA has revenue 
effects which are not reflected in the revenue effects provided in the 
individual provisions of JCWA. The revenue effects of such interaction 
are as follows: The interaction of the provisions increase Federal 
fiscal year budget receipts of $563 million in 2002, $520 million in 
2003, and $470 million in 2004, and reduce Federal year fiscal budget 
receipts by $42 million in 2005, $303 million in 2006, $270 million in 
2007, $228 million in 2008, $173 million in 2009, $120 million in 2010, 
$80 million in 2011, and $52 million in 2012.
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    The maximum credit per employee is $2,400 (40 percent of 
the first $6,000 of qualified first-year wages). With respect 
to qualified summer youth employees, the maximum credit is 
$1,200 (40 percent of the first $3,000 of qualified first-year 
wages).
    For purposes of the credit, wages are generally defined as 
under the Federal Unemployment Tax Act, without regard to the 
dollar cap.
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.
    The employer's deduction for wages is reduced by the amount 
of the credit.
Expiration date
    The credit is effective for wages paid or incurred to a 
qualified individual who began work for an employer before 
January 1, 2004.\219\
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    \219\ Section 604 of JCWA, also described in Part Eight of this 
document, provides for the extension of the WOTC for two years (for 
wages paid to qualified individuals who began work for an employer 
after December 31, 2001 and before January 1, 2004).
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                        Explanation of Provision

    JCWA creates a new targeted group for the WOTC. Generally, 
the new targeted group is individuals who perform substantially 
all their services in the recovery zone for a business located 
on or south of Canal street, East Broadway (east of its 
intersection with Canal Street), or Grand Street (east of its 
intersection with East Broadway) in the Borough of Manhattan, 
New York, New York (the ``New York Liberty Zone''). The new 
targeted group also includes individuals who perform 
substantially all their services in New York City for a 
business that relocated from the New York Liberty Zone 
elsewhere within New York City due to the physical destruction 
or damage of their workplaces within the New York Liberty Zone 
by the September 11, 2001 terrorist attack. It is anticipated 
that only otherwise qualified businesses that relocate due to 
significant physical damage will be eligible for the credit.
    Generally qualified wages for purposes of this targeted 
group are wages paid or incurred for work performed in the New 
York Liberty Zone after December 31, 2001 and before January 1, 
2004 by such qualified individuals. Also, in the case of 
otherwise qualified businesses that relocated due to the 
destruction or damage of their workplaces by the September 11, 
2001 terrorist attack, the credit can be claimed for work 
performed outside of the zone but within New York City subject 
to the dates specified above. Other rules like the minimum 
employment periods (section 51(i)(3)) of the WOTC apply.
    Unlike the other targeted categories, the credit for the 
new targeted group is available for wages paid to both new 
hires and existing employees. For each qualified business that 
relocated from the New York Liberty Zone elsewhere within New 
York City due to the physical destruction or damage of their 
workplaces within the New York Liberty Zone, the number of that 
employer's employees whose wages are eligible under the new 
targeted category may not exceed the number of its employees in 
the New York Liberty Zone on September 11, 2001. Other 
qualified businesses (e.g., businesses that operate in the New 
York Liberty Zone both on and after Sept. 11, 2001 and 
businesses that move into the New York Liberty Zone after 
September 11, 2001) would not be subject to that limitation.
    No credit for this new category of workers is allowed if 
the otherwise qualifying employer on average employed more than 
200 employees during the taxable year in question.
    Unlike the other targeted categories, members of this 
targeted group will not require certification for their wages 
to qualify for the credit.
    For the new category, the maximum credit is $2,400 (40 
percent of $6,000 of qualified wages) per qualified employee in 
each taxable year.
    The portion of each employer's WOTC credit attributable to 
the new targeted group is allowed against the alternative 
minimum tax.

                             Effective Date

    The provision is effective in taxable years ending after 
December 31, 2001 (for wages paid or incurred to qualified 
individuals for work after December 31, 2001 and before January 
1, 2004).

                             Revenue Effect

    The provision is expected to reduce Federal fiscal year 
budget receipts by $119 million in 2002, $259 million in 2003, 
$176 million in 2004, $52 million in 2005, $19 million in 2006, 
and $6 million in 2007.

B. Special Depreciation Allowance for Certain Property (sec. 301 of the 
                 Act and new sec. 1400L(b) of the Code)

                         Present and Prior Law

Depreciation deductions
    A taxpayer is allowed to recover, through annual 
depreciation deductions, the cost of certain property used in a 
trade or business or for the production of income. The amount 
of the depreciation deduction allowed with respect to tangible 
property for a taxable year is determined under MACRS. The 
MACRS system assigns different applicable recovery periods and 
depreciation methods to different types of property. The 
recovery periods applicable to most tangible personal property 
(generally tangible property other than residential rental 
property and nonresidential real property) range from three to 
25 years. The depreciation methods generally applicable to 
tangible personal property are the 200-percent and 150-percent 
declining balance methods, switching to the straight-line 
method for the taxable year in which the depreciation deduction 
would be maximized. In lieu of depreciation, a taxpayer with a 
sufficiently small amount of annual investment generally may 
elect to deduct up to $24,000 (for taxable years beginning in 
2001 or 2002) of the cost of qualifying property placed in 
service for the taxable year (section 179). For taxable years 
beginning in 2003 and thereafter, the amount deductible under 
section 179 is increased to $25,000.
    Section 167(f)(1) provides that capitalized computer 
software costs, other than computer software to which section 
197 applies, are recovered ratably over 36 months.

                        Explanation of Provision

    JCWA allows an additional first-year depreciation deduction 
equal to 30 percent of the adjusted basis of qualified New York 
Liberty Zone property.\220\ The additional first-year 
depreciation deduction is allowed for both regular tax and 
alternative minimum tax purposes for the taxable year in which 
the property is placed in service.\221\ The basis of the 
property and the depreciation allowances in the placed-in-
service year and later years are appropriately adjusted to 
reflect the additional first-year depreciation deduction. In 
addition, the provision provides that there is no adjustment to 
the allowable amount of depreciation for purposes of computing 
a taxpayer's alternative minimum taxable income with respect to 
property to which the provision applies. A taxpayer is allowed 
to elect out of the additional first-year depreciation for any 
class of property for any taxable year.
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    \220\ The amount of the additional first-year depreciation 
deduction is not affected by a short taxable year.
    \221\ The additional first-year depreciation deduction is subject 
to the general rules regarding whether an item is deductible under 
section 162 or subject to capitalization under section 263 or section 
263A.
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    In order for property to qualify for the additional first-
year depreciation deduction it must meet all of the following 
requirements. First, the property must be property to which the 
general rules of MACRS \222\ apply (1) with an applicable 
recovery period of 20 years or less, (2) water utility property 
(as defined in section 168(e)(5)), (3) certain nonresidential 
real property and residential rental property, or (4) computer 
software other than computer software covered by section 197. A 
special rule precludes the additional first-year depreciation 
under this provision for (1) qualified New York Liberty Zone 
leasehold improvement property \223\ and, (2) property eligible 
for the additional first-year depreciation deduction under 
section 168(k) (i.e., property is eligible for only one 30 
percent additional first year depreciation). Second, 
substantially all of the use of such property must be in the 
New York Liberty Zone. Third, the original use \224\ of the 
property in the New York Liberty Zone must commence with the 
taxpayer on or after September 11, 2001.\225\ Finally, the 
property must be acquired by purchase \226\ by the taxpayer (1) 
after September 10, 2001, and placed in service on or before 
December 31, 2006. For qualifying nonresidential real property 
and residential rental property the property must be placed in 
service on or before December 31, 2009, in lieu of December 31, 
2006. Property will not qualify if a binding written contract 
for the acquisition of such property was in effect before 
September 11, 2001.\227\
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    \222\ A special rule precludes the additional first-year 
depreciation deduction for property that is required to be depreciated 
under the alternative depreciation system of MACRS.
    \223\ Qualified New York Liberty Zone leasehold improvement 
property is defined in another provision. Leasehold improvements that 
do not satisfy the requirements to be treated as ``qualified New York 
Liberty Zone leasehold improvement property'' maybe eligible for the 30 
percent additional first-year depreciation deduction (assuming all 
other conditions are met).
    \224\ Thus, used property may constitute qualified property so long 
as it has not previously been used within the Liberty Zone. In 
addition, it is intended that additional capital expenditures incurred 
to recondition or rebuild property the original use of which in the 
Liberty Zone began with the taxpayer would satisfy the ``original use'' 
requirement. See Treasury Regulation 1.48-2 Example 5.
    \225\ A special rule applies in the case of certain leased 
property. In the case of any property that is originally placed in 
service by a person and that is sold to the taxpayer and leased back to 
such person by the taxpayer within three months after the date that the 
property was placed in service, the property will be treated as 
originally placed in service by the taxpayer not earlier than the date 
that the property is used under the leaseback.
    It is the intent of Congress that if property is originally placed 
in service by a lessor (including by operation of section 
168(k)(2)(D)(ii)), such property is sold within three months after the 
date that the property was placed in service, and the user of such 
property does not change, then the property is treated as originally 
placed in service by the purchaser not earlier than the date of such 
sale. A technical correction may be needed so that the statute reflects 
this intent.
    \226\ For purposes of this provision, purchase is defined under 
section 179(d).
    \227\ Congress did not intend to preclude property from qualifying 
for the additional first year depreciation merely because a binding 
written contract to acquire a component of the property is in effect 
prior to September 11, 2001.
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    Nonresidential real property and residential rental 
property is eligible for the additional first-year depreciation 
only to the extent such property rehabilitates real property 
damaged, or replaces real property destroyed or condemned as a 
result of the terrorist attacks of September 11, 2001. Property 
shall be treated as replacing destroyed property, if as part of 
an integrated plan, such property replaces real property which 
is included in a continuous area which includes real property 
destroyed or condemned. For purposes of this provision, it is 
intended that real property destroyed (or condemned) only 
include circumstances in which an entire building or structure 
was destroyed (or condemned) as a result of the terrorist 
attacks. Otherwise, such property is considered damaged real 
property. For example, if certain structural components (e.g., 
walls, floors, or plumbing fixtures) of a building are damaged 
or destroyed as a result of the terrorist attacks but the 
building is not destroyed (or condemned), then only costs 
related to replacing the damaged or destroyed components 
qualifies for the provision.
    Property that is manufactured, constructed, or produced by 
the taxpayer for use by the taxpayer qualifies if the taxpayer 
begins the manufacture, construction, or production of the 
property after September 10, 2001, and the property is placed 
in service on or before December 31, 2006 \228\ (and all other 
requirements are met). Property that is manufactured, 
constructed, or produced for the taxpayer by another person 
under a contract that is entered into prior to the manufacture, 
construction, or production of the property is considered to be 
manufactured, constructed, or produced by the taxpayer.
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    \228\ December 31, 2009, with respect to qualified nonresidential 
real property and residential rental property.
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    Congress intended that property not qualify for the 
additional first-year depreciation deduction when the user of 
such property (or a related party) would not have been eligible 
for the additional first-year depreciation deduction if the 
user (or a related party) were treated as the owner.\229\
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    \229\ A technical correction may be needed so that the statute 
reflects this intent.
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    The following examples illustrate the operation of the 
provision.
    EXAMPLE 1.--Assume that on March 1, 2002, a calendar year 
taxpayer acquires and places in service qualified property in 
the New York Liberty Zone that costs $1 million. Under the 
provision, the taxpayer is allowed an additional first-year 
depreciation deduction of $300,000. The remaining $700,000 of 
adjusted basis is recovered in 2002 and subsequent years 
pursuant to the depreciation rules of present law.
    EXAMPLE 2.--Assume that on March 1, 2002, a calendar year 
taxpayer acquires and places in service qualified property in 
the New York Liberty Zone that costs $100,000. In addition, 
assume that the property qualifies for the expensing election 
under section 179. Under the provision, the taxpayer is first 
allowed a $59,000 deduction under section 179.\230\ The 
taxpayer then is allowed an additional first-year depreciation 
deduction of $12,300 based on $41,000 ($100,000 original cost 
less the section 179 deduction of $59,000) of adjusted basis. 
Finally, the remaining adjusted basis of $28,700 ($41,000 
adjusted basis less $12,300 additional first-year depreciation) 
is to be recovered in 2002 and subsequent years pursuant to the 
depreciation rules of present law.
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    \230\ Section 301 of JCWA provides that property in the Liberty 
Zone is eligible for an additional $35,000 of expensing under section 
179.
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                             Revenue Effect

    The provisions are expected to decrease Federal fiscal year 
budget receipts by $622 million in 2002, $604 million in 2003, 
$600 million in 2004, $597 million in 2005, $565 million in 
2006, and increase Federal fiscal year budget receipts by $42 
million in 2007, $335 million in 2008, $261 million in 2009, 
$312 million in 2010, $273 million in 2011, and $199 million in 
2012.

 C. Treatment of Qualified Leasehold Improvement Property (sec. 301 of 
                the Act and new sec. 1400L of the Code)


                              Present Law


Depreciation of leasehold improvements

    Depreciation allowances for property used in a trade or 
business generally are determined under MACRS of section 168. 
Depreciation allowances for improvements made on leased 
property are determined under MACRS, even if the MACRS recovery 
period is longer than the term of the lease (section 
168(i)(8)).\231\ This rule applies regardless of who places the 
leasehold improvements in service.\232\ If a leasehold 
improvement constitutes an addition or improvement to 
nonresidential real property already placed in service, the 
improvement is depreciated using the straight-line method over 
a 39-year recovery period, beginning in the month the addition 
or improvement is placed in service (secs. 168(b)(3), (c)(1), 
(d)(2), and (i)(6)).\233\
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    \231\ The Tax Reform Act of 1986 modified the Accelerated Cost 
Recovery System (``ACRS'') to institute MACRS. Prior to the adoption of 
ACRS by the Economic Recovery Tax Act of 1981, taxpayers were allowed 
to depreciate the various components of a building as separate assets 
with separate useful lives. The use of component depreciation was 
repealed upon the adoption of ACRS. The Tax Reform Act of 1986 also 
denied the use of component depreciation under MACRS.
    \232\ Former Code sections 168(f)(6) and 178 provided that in 
certain circumstances, a lessee could recover the cost of leasehold 
improvements made over the remaining term of the lease. These 
provisions were repealed by the Tax Reform Act of 1986.
    \233\ If the improvement is characterized as tangible personal 
property, ACRS or MACRS depreciation is calculated using the shorter 
recovery periods and accelerated methods applicable to such property. 
The determination of whether certain improvements are characterized as 
tangible personal property or as nonresidential real property often 
depends on whether the improvements constitute a ``structural 
component'' of a building (as defined by Treas. Reg. sec. 1.48-
1(e)(1)). See, e.g., Metro National Corp., 52 TCM 1440 (1987); King 
Radio Corp., 486 F.2d 1091 (10th Cir., 1973); Mallinckrodt, Inc., 778 
F.2d 402 (8th Cir., 1985) (with respect various leasehold 
improvements).
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Treatment of dispositions of leasehold improvements

    A lessor of leased property that disposes of a leasehold 
improvement which was made by the lessor for the lessee of the 
property may take the adjusted basis of the improvement into 
account for purposes of determining gain or loss if the 
improvement is irrevocably disposed of or abandoned by the 
lessor at the termination of the lease.\234\ This rule conforms 
the treatment of lessors and lessees with respect to leasehold 
improvements disposed of at the end of a term of a lease. For 
purposes of applying this rule, it is expected that a lessor 
must be able to separately account for the adjusted basis of 
the leasehold improvement that is irrevocably disposed of or 
abandoned. This rule does not apply to the extent section 280B 
applies to the demolition of a structure, a portion of which 
may include leasehold improvements.\235\
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    \234\ The conference report to the Small Business Job Protection 
Act of 1996 (H. Rept. 104-737) describing this provision mistakenly 
states that the provision applies to improvements that are irrevocably 
disposed of or abandoned by the lessee (rather than the lessor) at the 
termination of the lease.
    \235\ Under present and prior law, section 280B denies a deduction 
for any loss sustained on the demolition of any structure.
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                        Explanation of Provision

    JCWA provides that for purposes of the depreciation rules 
of section 168 5-year property includes qualified New York 
Liberty Zone leasehold improvement property (``qualified NYLZ 
leasehold improvement property''). The term qualified NYLZ 
leasehold improvement property means property defined in 
section 168(k) \236\ that is acquired and placed in service 
after September 10, 2001 and before January 1, 2007 (and not 
subject to a binding contract on September 10, 2001) in the New 
York Liberty Zone. The straight-line method is required to be 
used with respect to qualified NYLZ leasehold improvement 
property. A nine-year period is specified as the class life of 
qualified NYLZ leasehold improvement property for purposes of 
the alternative depreciation system.
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    \236\ Section 168(k) regarding qualified leasehold improvement 
property is added by section 101 of JCWA.
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                             Revenue Effect

    The provision is expected to reduce Federal fiscal year 
budget receipts by $11 million in 2002, $26 million in 2003, 
$45 million in 2004, $70 million in 2005, $102 million in 2006, 
$115 million in 2007, $101 million in 2008, $79 million in 
2009, $50 million in 2010, $12 million in 2011, and increase 
Federal fiscal year budget receipts by $14 million in 2012.

    D. Authorize Issuance of Tax-Exempt Private Activity Bonds for 
 Rebuilding the Portion of New York City Damaged in the September 11, 
 2001, Terrorist Attack (sec. 301 of the Act and new sec. 1400L(d) of 
                               the Code)


                         Present and Prior Law


In general

    Interest on debt incurred by States or local governments is 
excluded from income if the proceeds of the borrowing are used 
to carry out governmental functions of those entities or the 
debt is repaid with governmental funds (section 103). Interest 
on bonds that nominally are issued by States or local 
governments, but the proceeds of which are used (directly or 
indirectly) by a private person and payment of which is derived 
from funds of such a private person is taxable unless the 
purpose of the borrowing is approved specifically in the Code 
or in a non-Code provision of a revenue Act. These bonds are 
called ``private activity bonds.'' The term ``private person'' 
includes the Federal Government and all other individuals and 
entities other than States or local governments.

Private activities eligible for financing with tax-exempt private 
        activity bonds

    Present and prior law includes several exceptions 
permitting States or local governments to act as conduits 
providing tax-exempt financing for private activities. Both 
capital expenditures and limited working capital expenditures 
of charitable organizations described in section 501(c)(3) of 
the Code may be financed with tax-exempt bonds (``qualified 
501(c)(3) bonds'').
    States or local governments may issue tax-exempt ``exempt-
facility bonds'' to finance property for certain private 
businesses. Business facilities eligible for this financing 
include transportation (airports, ports, local mass commuting, 
and high speed intercity rail facilities); privately owned and/
or privately operated public works facilities (sewage, solid 
waste disposal, local district heating or cooling, and 
hazardous waste disposal facilities); privately owned and/or 
operated low-income rental housing; \237\ and certain private 
facilities for the local furnishing of electricity or gas. A 
further provision allows tax-exempt financing for 
``environmental enhancements of hydro-electric generating 
facilities.'' Tax-exempt financing also is authorized for 
capital expenditures for small manufacturing facilities and 
land and equipment for first-time farmers (``qualified small-
issue bonds''), local redevelopment activities (``qualified 
redevelopment bonds''), and eligible empowerment zone and 
enterprise community businesses.
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    \237\ Residential rental projects must satisfy low-income tenant 
occupancy requirements for a minimum period of 15 years.
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    Tax-exempt private activity bonds also may be issued to 
finance limited non-business purposes: certain student loans 
and mortgage loans for owner-occupied housing (``qualified 
mortgage bonds'' and ``qualified veterans'' mortgage bonds''). 
Purchasers of houses financed with qualified mortgage bonds 
must be first-time homebuyers satisfying prescribed income 
limits, the purchase prices of the houses is limited, the 
amount by which interest rates charged to homebuyers may exceed 
the interest paid by issuers is restricted, and a recapture 
provision applies to target the benefit to purchasers having 
longer-term need for the subsidy provided by the bonds. 
Qualified veterans' mortgage bonds generally are not subject to 
these limitations, but these bonds may only be issued by five 
States and may only be used to finance mortgage loans to 
veterans who served on active duty before January 1, 1977.
    With the exception of qualified 501(c)(3) bonds, private 
activity bonds may not be issued to finance working capital 
requirements of private businesses.
    In most cases, the aggregate volume of tax-exempt private 
activity bonds that may be issued in a State is restricted by 
annual volume limits. For calendar year 2002, these annual 
volume limits were equal to the greater of $75 per resident of 
the State or $225 million. After 2002, the volume limits will 
be indexed annually for inflation.

Arbitrage restrictions on tax-exempt bonds

    The Federal income tax does not apply to the income of 
States and local governments that is derived from the exercise 
of an essential governmental function. To prevent these tax-
exempt entities from issuing more Federally subsidized tax-
exempt bonds than is necessary for the activity being financed 
or from issuing such bonds earlier than needed for the purpose 
of the borrowing, the Code includes arbitrage restrictions 
limiting the ability to profit from investment of tax-exempt 
bond proceeds. In general, arbitrage profits may be earned only 
during specified periods (e.g., defined ``temporary periods'' 
before funds are needed for the purpose of the borrowing) or on 
specified types of investments (e.g., ``reasonably required 
reserve or replacement funds''). Subject to limited exceptions, 
profits that are earned during these periods or on such 
investments must be rebated to the Federal Government. 
Governmental bonds are subject to less restrictive arbitrage 
rules that most private activity bonds.

Miscellaneous additional restrictions on tax-exempt bonds

    Several additional restrictions apply to the issuance of 
tax-exempt bonds. First, private activity bonds (other than 
qualified 501(c)(3) bonds) may not be advance refunded. 
Governmental bonds and qualified 501(c)(3) bonds may be advance 
refunded one time. An advance refunding occurs when the 
refunded bonds are not retired within 90 days of issuance of 
the refunding bonds.
    Issuance of private activity bonds is subject to 
restrictions on use of proceeds for the acquisition of land and 
existing property, use of proceeds to finance certain specified 
facilities (e.g., airplanes, skyboxes, other luxury boxes, 
health club facilities, gambling facilities, and liquor stores) 
and use of proceeds to pay costs of issuance (e.g., bond 
counsel and underwriter fees). Additionally, the term of the 
bonds generally may not exceed 120 percent of the economic life 
of the property being financed and certain public approval 
requirements (similar to requirements that typically apply 
under State law to issuance of governmental debt) apply under 
Federal law to issuance of private activity bonds. Present and 
prior law precludes substantial users of property financed with 
private activity bonds from owning the bonds to prevent their 
deducting tax-exempt interest paid to themselves. Finally, 
owners of most private-activity-bond-financed property are 
subject to special ``change-in-use'' penalties if the use of 
the bond-financed property changes to a use that is not 
eligible for tax-exempt financing while the bonds are 
outstanding.

                        Explanation of Provision

    JCWA authorizes issuance during calendar years 2002, 2003, 
and 2004 of an aggregate amount of $8 billion of tax-exempt 
private activity bonds to finance the construction and 
rehabilitation of nonresidential real property \238\ and 
residential rental real property \239\ in a newly designated 
``Liberty Zone'' (the ``Zone'') of New York City.\240\ Property 
eligible for financing with these bonds includes buildings and 
their structural components, fixed tenant improvements,\241\ 
and public utility property (e.g., gas, water, electric and 
telecommunication lines). All business addresses located on or 
south of Canal Street, East Broadway (east of its intersection 
with Canal Street), or Grand Street (east of its intersection 
with East Broadway) in the Borough of Manhattan are considered 
to be located within the Zone. Issuance of bonds authorized 
under JCWA is limited to projects approved by the Mayor of New 
York City or the Governor of New York State, each of whom may 
designate up to $4 billion of the bonds authorized under the 
Act.
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    \238\ No more than $800 million of the authorized bond amount may 
be used to finance property used for retail sales of tangible property 
(e.g., department stores, restaurants, etc.) and functionally related 
and subordinate property. The term nonresidential real property 
includes structural components of such property if the taxpayer treats 
such components as part of the real property structure for all Federal 
income tax purposes (e.g., cost recovery). The $800 million limit is 
divided equally between the Mayor and the Governor.
    \239\ No more than $1.6 billion of the authorized bond amount may 
be used to finance residential rental property. The $1.6 billion limit 
is divided equally between the Mayor and the Governor.
    \240\ Current refundings of outstanding bonds issued under JCWA do 
not count against the $8 billion volume limit to the extent that the 
amount of the refunding bonds does not exceed the outstanding amount of 
the bonds being refunded. In addition, qualified New York Liberty Bonds 
may be issued after December 31, 2004 to refund (other than advance 
refund) qualified New York Liberty Bonds originally issued before 
January 1, 2005, to the extent the amount of the refunding bonds does 
not exceed the outstanding amount of the refunded bonds. The bonds may 
not be advance refunded.
    \241\ Fixtures and equipment that could be removed from the 
designated zone for use elsewhere are not eligible for financing with 
these bonds.
---------------------------------------------------------------------------
    If the Mayor or the Governor determines that it is not 
feasible to use all of the authorized bonds that he is 
authorized to designate for property located in the Zone, up to 
$1 billion of bonds may designated by each to be used for the 
acquisition, construction, and rehabilitation of nonresidential 
real property (including fixed tenant improvements) located 
outside the Zone and within New York City.\242\ Bond-financed 
property located outside the Zone must meet the additional 
requirement that the project have at least 100,000 square feet 
of usable office or other commercial space in a single building 
or multiple adjacent buildings.
---------------------------------------------------------------------------
    \242\ Public utility property and residential property located 
outside the Zone cannot be financed with the bonds.
---------------------------------------------------------------------------
    Subject to the following exceptions and modifications, 
issuance of these tax-exempt bonds is subject to the general 
rules applicable to issuance of exempt-facility private 
activity bonds:
          (1) Issuance of the bonds is not subject to the 
        aggregate annual State private activity bond volume 
        limits (section 146);
          (2) The restriction on acquisition of existing 
        property is applied using a minimum requirement of 50 
        percent of the cost of acquiring the building being 
        devoted to rehabilitation (section 147(d));
          (3) The special arbitrage expenditure rules for 
        certain construction bond proceeds apply to available 
        construction proceeds of the bonds (section 
        148(f)(4)(C));
          (4) The tenant targeting rules applicable to exempt-
        facility bonds for residential rental property (and the 
        corresponding change in use penalties for violations of 
        those rules) do not apply to such property financed 
        with the bonds (secs. 142(d) and 150(b)(2));
          (5) Repayments of bond-financed loans may not be used 
        to make additional loans, but rather must be used to 
        retire outstanding bonds (with the first such 
        retirement occurring 10 years after issuance of the 
        bonds);\243\ and
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    \243\ It is intended that redemptions will occur at least semi-
annually beginning at the end of 10 years after the bonds are issued; 
however amounts less than $250,000 are not required to be used to 
redeem bonds at such intervals.
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          (6) Interest on the bonds is not a preference item 
        for purposes of the alternative minimum tax preference 
        for private activity bond interest (section 57(a)(5)).

                             Effective Date

    The provision is effective for bonds issued after the date 
of enactment and before January 1, 2005.

                             Revenue Effect

    The provision is expected to reduce Federal fiscal year 
budget receipts by $11 million in 2002, $41 million in 2003, 
$90 million in 2004, $127 million in 2005, and $137 million 
annually in 2006 through 2012.

   E. Allow One Additional Advance Refunding for Certain Previously 
Refunded Bonds for Facilities Located in New York City (sec. 301 of the 
                   Act and sec. 1400L(d) of the Code)


                         Present and Prior Law

    Interest on bonds issued by States or local governments is 
excluded from income if the proceeds of the borrowing are used 
to carry out governmental functions of those entities or the 
debt is repaid with governmental funds (section 103). Interest 
on bonds that nominally are issued by States or local 
governments, but the proceeds of which are used (directly or 
indirectly) by a private person and payment of which is derived 
from funds of such a private person is taxable unless the 
purpose of the borrowing is approved specifically in the Code 
or in a non-Code provision of a revenue Act. These bonds are 
called private activity bonds. Present law includes several 
exceptions permitting States or local governments to act as 
conduits providing tax-exempt financing for private activities. 
One such exception is the provision of financing for activities 
of charitable organizations described in section 501(c)(3) of 
the Code (``qualified 501(c)(3) bonds'').
    A refunding bond is used to redeem a prior bond issuance. 
The Code contains different rules for ``current'' as opposed to 
``advance'' refunding bonds. Tax-exempt bonds may be refunded 
currently an indefinite number of times. A current refunding 
occurs when the refunded debt is redeemed within 90 days of 
issuance of the refunding bonds. Governmental bonds and 
qualified 501(c)(3) bonds also may be advance refunded one time 
(section 149(d)).\244\ An advance refunding occurs when the 
refunded debt is not redeemed within 90 days after the 
refunding bonds are issued. Rather, proceeds of the refunding 
bonds are invested in an escrow account and held until a future 
date when the refunded debt may be redeemed under the terms of 
the refunded bonds.
---------------------------------------------------------------------------
    \244\ Bonds issued before 1986 and pursuant to certain transition 
rules contained in the Tax Reform Act of 1986 may be advance refunded 
more than one time in certain cases.
---------------------------------------------------------------------------

                        Explanation of Provision

    JCWA permits certain bonds for facilities located in New 
York City to be advance refunded one additional time. These 
bonds include only bonds for which all present-law advance 
refunding authority was exhausted before September 12, 2001, 
and with respect to which the advance refunding bonds 
authorized under present law were outstanding on September 11, 
2001.\245\ Further, to be eligible for the additional advance 
refunding, at least 90 percent \246\ of the net proceeds of the 
refunded bonds must have been used to finance facilities 
located in New York City,\247\ and the bonds must be--
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    \245\ At no time after the advance refunding authorized under the 
provision occurs may there be more than two sets of bonds outstanding.
    \246\ This requirement is 95 percent in the case of eligible 
qualified 501(c)(3) bonds.
    \247\ In the case of bonds for water facilities issued by the New 
York Municipal Water Finance Authority, property located outside New 
York City that is functionally related and subordinate to property 
located in the city is deemed to be located in the city.
---------------------------------------------------------------------------
          (1) Governmental general obligation bonds of New York 
        City;
          (2) Governmental bonds issued by the Metropolitan 
        Transportation Authority of the State of New York;\248\
---------------------------------------------------------------------------
    \248\ Bonds issued by the New York City Transit Authority or the 
Triborough Bridge and Tunnel Authority that otherwise satisfy the 
requirements of this provision are treated as issued by the 
Metropolitan Transportation Authority of the State of New York. See, 
Internal Revenue Service, Notice 2002-42, New York Liberty Zone 
Questions and Answers (June 24, 2002).
---------------------------------------------------------------------------
          (3) Governmental bonds issued by the New York 
        Municipal Water Finance Authority;\249\ or
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    \249\ The reference to the ``New York Municipal Water Finance 
Authority'' is deemed to refer to the New York City Municipal Water 
Finance Authority. See, Internal Revenue Service, Notice 2002-42, New 
York Liberty Zone Questions and Answers (June 24, 2002).
---------------------------------------------------------------------------
          (4) Qualified 501(c)(3) bonds issued by or on behalf 
        of New York State or New York City to finance hospital 
        facilities (within the meaning of section 145(c)).
    The maximum amount of advance refunding bonds that may be 
issued pursuant to this provision is $9 billion. Eligible 
advance refunding bonds must be designated as such by the Mayor 
of New York City or the Governor of New York State. Up to $4.5 
billion of bonds may be designated by each of these officials. 
Advance refunding bonds issued under the provision must satisfy 
all requirements of section 148 and 149(d) except for the limit 
on the number of advance refundings allowed under section 
149(d).

                             Effective Date

    The provision is effective on the date of enactment and 
before January 1, 2005.

                             Revenue Effect

    The provision is expected to reduce Federal fiscal year 
budget receipts by $103 million in 2002, $124 million in 2003, 
$133 million in 2004, $125 million in 2005, $115 million in 
2006, $98 million in 2007, $80 million in 2008, $64 million in 
2009, $49 million in 2010, $30 million in 2011, and $15 million 
in 2012.

 F. Increase in Expensing Treatment for Business Property Used in the 
 New York Liberty Zone (sec. 301 of the Act and new sec. 1400L of the 
                                 Code)


                         Present and Prior Law

    In lieu of depreciation, a taxpayer with a sufficiently 
small amount of annual investment may elect to deduct up to 
$24,000 (for taxable years beginning in 2001 or 2002) of the 
cost of qualifying property placed in service for the taxable 
year (section 179). This amount is increased to $25,000 of the 
cost of qualified property placed in service for taxable years 
beginning in 2003 and thereafter. The amount is phased-out (but 
not below zero) by the amount by which the cost of qualifying 
property placed in service during the taxable year exceeds 
$200,000.
    Additional section 179 incentives are provided with respect 
to a qualified zone property used by a business in an 
empowerment zone (section 1397A). Such a business may elect to 
deduct an additional $20,000 of the cost of qualified zone 
property placed in service in year 2001. The $20,000 amount is 
increased to $35,000 for taxable years beginning in 2002 and 
thereafter. In addition, the phase-out range is applied by 
taking into account only 50 percent of the cost of qualified 
zone property that is section 179 property.
    The amount eligible to be expensed for a taxable year may 
not exceed the taxable income for a taxable year that is 
derived from the active conduct of a trade or business 
(determined without regard to this provision). Any amount that 
is not allowed as a deduction because of the taxable income 
limitation may be carried forward to succeeding taxable years 
(subject to similar limitations). No general business credit 
under section 38 is allowed with respect to any amount for 
which a deduction is allowed under section 179.

                        Explanation of Provision

    JCWA increases the amount a taxpayer can deduct under 
section 179 for qualifying property used in the New York 
Liberty Zone.\250\ Specifically, JCWA increases the maximum 
dollar amount that may be deducted under section 179 by the 
lesser of: (1) $35,000 or (2) the cost of qualifying property 
placed in service during the taxable year. This amount is in 
addition to the amount otherwise deductible under section 179.
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    \250\ The ``New York Liberty Zone'' means the area located on or 
south of Canal Street, East Broadway (east of its intersection with 
Canal Street), or Grand Street (east of its intersection with East 
Broadway) in the Borough of Manhattan in the City of New York, New 
York.
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    Qualifying property \251\ means section 179 property \252\ 
purchased and placed in service by the taxpayer after September 
10, 2001 and before January 1, 2007, where: (1) substantially 
all of its use is in the New York Liberty Zone in the active 
conduct of a trade or business by the taxpayer in the zone, and 
(2) the original use of which in the New York Liberty Zone 
commences with the taxpayer after September 10, 2001.\253\
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    \251\ As drafted, if property qualifies for both the general 
additional first-year depreciation and Liberty Zone additional first-
year depreciation, it is deemed to be eligible for the general 
additional first-year depreciation and is not considered New York 
Liberty Zone property (i.e., only one 30-percent additional first-year 
depreciation deduction is allowed). Because only New York Liberty Zone 
property is eligible for the increased section 179 expensing amount, 
the legislation has the unintended consequence of denying the increased 
section 179 expensing to New York Liberty Zone property. This issue was 
addressed in a letter dated April 15, 2002, sent by the Chairman and 
Ranking Member of the House Ways and Means Committee and Senate Finance 
Committee. The Tax Technical Corrections Act of 2002, introduced on 
November 13, 2002 (H.R. 5713 in the House of Representatives and S. 
3153 in the Senate), includes a provision that corrects this unintended 
result (such that qualifying Liberty Zone property qualifies for both 
the 30-percent additional first-year depreciation and the additional 
section 179 expensing).
    \252\ As defined in section 179(d)(1).
    \253\ Rev. Proc. 2002-33, 2002-20 I.R.B. 963 (May 20, 2002), 
described procedures on claiming the increased section 179 expensing 
deduction by taxpayers who filed their tax returns before June 1, 2002.
---------------------------------------------------------------------------
    As under present and prior law with respect to empowerment 
zones, the phase-out range for the section 179 deduction 
attributable to New York Liberty Zone property is applied by 
taking into account only 50 percent of the cost of New York 
Liberty Zone property that is section 179 property. Also, no 
general business credit under section 38 is allowed with 
respect to any amount for which a deduction is allowed under 
section 179.

                             Effective Date

    The provision is effective for property placed in service 
after September 10, 2001 and before January 1, 2007.

                             Revenue Effect

    The provision is expected to reduce Federal fiscal year 
budget receipts by $36 million in 2002, $56 million in 2003, 
$37 million in 2004, $29 million in 2005, $23 million in 2006, 
and increase Federal fiscal year budget receipts by $20 million 
in 2007, $49 million in 2008, $31 million in 2009, $21 million 
in 2010, $14 million in 2011, and $9 million in 2012.

 G. Extension of Replacement Period for Certain Property Involuntarily 
  Converted in the New York Liberty Zone (sec. 301 of the Act and new 
                        sec. 1400L of the Code)


                            Present and Law

    A taxpayer may elect not to recognize gain with respect to 
property that is involuntarily converted if the taxpayer 
acquires within an applicable period (the ``replacement 
period'') property similar or related in service or use 
(section 1033). If the taxpayer does not replace the converted 
property with property similar or related in service or use, 
then gain generally is recognized. If the taxpayer elects to 
apply the rules of section 1033, gain on the converted property 
is recognized only to the extent that the amount realized on 
the conversion exceeds the cost of the replacement property. In 
general, the replacement period begins with the date of the 
disposition of the converted property and ends two years after 
the close of the first taxable year in which any part of the 
gain upon conversion is realized.\254\ The replacement period 
is extended to three years if the converted property is real 
property held for the productive use in a trade or business or 
for investment.\255\
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    \254\ Section 1033(a)(2)(B).
    \255\ Section 1033(g)(4).
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    Special rules apply for property converted in a 
Presidentially declared disaster.\256\ With respect to a 
principal residence that is converted in a Presidentially 
declared disaster, no gain is recognized by reason of the 
receipt of insurance proceeds for unscheduled personal property 
that was part of the contents of such residence. In addition, 
the replacement period for the replacement of such a principal 
residence is extended to four years after the close of the 
first taxable year in which any part of the gain upon 
conversion is realized. With respect to investment or business 
property that is converted in a Presidentially declared 
disaster, any tangible property acquired and held for 
productive use in a business is treated as similar or related 
in service or use to the converted property.
---------------------------------------------------------------------------
    \256\ Section 1033(h). For this purpose, a ``Presidentially 
declared disaster'' means any disaster which, with respect to the area 
in which the property is located, resulted in a subsequent 
determination by the President that such area warrants assistance by 
the Federal Government under the Disaster Relief and Emergency 
Assistance Act.
---------------------------------------------------------------------------

                        Explanation of Provision

    JCWA extends the replacement period to five years for a 
taxpayer to purchase property to replace property that was 
involuntarily converted within the New York Liberty Zone \257\ 
as a result of the terrorist attacks that occurred on September 
11, 2001. However, the five-year period is available only if 
substantially all of the use of the replacement property is in 
New York City. In all other cases, the present-law replacement 
period rules continue to apply.
---------------------------------------------------------------------------
    \257\ The ``New York Liberty Zone'' has the same definition 
throughout the JCWA.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective for involuntary conversions in 
the New York Liberty Zone occurring on or after September 11, 
2001, as a consequence of the terrorist attacks on such date.

                             Revenue Effect

    The provision is expected to reduce Federal fiscal year 
budget receipts by $145 million in 2002, $199 million in 2003, 
$18 million in 2004, and increase Federal fiscal year budget 
receipts by $1 million in 2005, $2 million in 2006, $3 million 
in 2007, $6 million in 2008, $7 million in 2009 and 2010, $8 
million in 2011, and $9 million in 2012.

            TITLE III. MISCELLANEOUS AND TECHNICAL PROVISONS

              Subtitle A--General Miscellaneous Provisions

        A. Allowance of Electronic Forms 1099 (sec. 401 the Act)

                         Present and Prior Law

    Temporary regulations allow Form W-2 to be furnished 
electronically on a voluntary basis. Under temporary Treasury 
regulations,\258\ a recipient must have affirmatively consented 
to receive the statement electronically and must not have 
withdrawn that consent before the statement is furnished.
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    \258\ Temp. Treas. Reg. sec. 31.6051-1T(j).
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                           Reasons for Change

    Recent stresses have been placed on the United States 
Postal Service, the IRS, and taxpayers as a result of terrorist 
activities. The Congress believed that one step to be taken in 
relieving such stress is to reduce the amount of mail being 
sent to taxpayers who desire to receive information 
electronically.

                        Explanation of Provision

    JCWA allows IRS Form 1099 to be provided to taxpayers 
electronically, if they so consented.

                             Effective Date

    The provision is effective on date of enactment.

                             Revenue Effect

    The provision is estimated to have no effect on Federal 
fiscal year budget receipts.

 B. Discharge of Indebtedness of an S Corporation (sec. 402 of the Act 
                       and sec. 108 of the Code)

                         Present and Prior Law

    In general, an S corporation is not subject to the 
corporate income tax on its items of income and loss. Instead, 
an S corporation passes through its items of income and loss to 
its shareholders. Each shareholder takes into account 
separately his or her pro rata share of these items on their 
individual income tax returns. To prevent double taxation of 
these items, each shareholder's basis in the stock of the S 
corporation is increased by the amount included in income 
(including tax-exempt income) and is decreased by the amount of 
any losses (including nondeductible losses) taken into account. 
A shareholder may deduct losses only to the extent of a 
shareholder's basis in his or her stock in the S corporation 
plus the shareholder's adjusted basis in any indebtedness of 
the corporation to the shareholder. Any loss that is disallowed 
by reason of lack of basis is ``suspended'' at the corporate 
level and is carried forward and allowed in any subsequent year 
in which the shareholder has adequate basis in the stock or 
debt.
    In general, gross income includes income from the discharge 
of indebtedness. However, income from the discharge of 
indebtedness of a taxpayer in a bankruptcy case or when the 
taxpayer is insolvent (to the extent of the insolvency) is 
excluded from income.\259\ The taxpayer is required to reduce 
tax attributes, such as net operating losses, certain 
carryovers, and basis in assets, to the extent of the excluded 
income.
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    \259\ Section 108. Special rules also apply to certain real estate 
debt and farm debt.
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    In the case of an S corporation, the eligibility for the 
exclusion and the attribute reduction are applied at the 
corporate level. For this purpose, a shareholder's suspended 
loss is treated as a tax attribute that is reduced. Thus, if 
the S corporation is in bankruptcy or is insolvent, any income 
from the discharge of indebtedness by a creditor of the S 
corporation is excluded from the corporation's income, and the 
S corporation reduces its tax attributes (including any 
suspended losses).
    To illustrate these rules, assume that a sole shareholder 
of an S corporation has zero basis in its stock of the 
corporation. The S corporation borrows $100 from a third party 
and loses the entire $100. Because the shareholder has no basis 
in its stock, the $100 loss is ``suspended'' at the corporate 
level. If the $100 debt is forgiven when the corporation is in 
bankruptcy or is insolvent, the $100 income from the discharge 
of indebtedness is excluded from income, and the $100 
``suspended'' loss should be eliminated in order to achieve a 
tax result that is consistent with the economics of the 
transactions in that the shareholder has no economic gain or 
loss from these transactions.
    Notwithstanding the economics of the overall transaction, 
the United States Supreme Court ruled in the case of Gitlitz v. 
Commissioner \260\ that, under prior law, income from the 
discharge of indebtedness of an S corporation that was excluded 
from income was treated as an item of income which increased 
the basis of a shareholder's stock in the S corporation and 
allowed the suspended corporate loss to pass through to a 
shareholder. Thus, under the decision, an S corporation 
shareholder was allowed to deduct a loss for tax purposes that 
it did not economically incur.
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    \260\ 531 U.S. 206 (2001).
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                           Reasons for Change

    The Congress believed that it was inappropriate for a 
shareholder of an insolvent or bankrupt S corporation to take 
into account excluded income from the discharge of the S 
corporation's indebtedness and thereby increase the 
shareholder's adjusted basis in the stock. Under the provisions 
of the Code, an increase in the stock basis allowed the 
shareholder a deduction for an amount of loss that was not 
economically borne by the shareholder.
    As a general matter, the Congress believes that where, as 
in the case of the prior statute under section 108, the plain 
text of a provision of the Internal Revenue Code produces an 
ambiguity, the provision should be read as closing, not 
maintaining, a loophole that would result in an inappropriate 
reduction of tax liability.

                        Explanation of Provision

    JCWA provides that income from the discharge of 
indebtedness of an S corporation that is excluded from the S 
corporation's income is not taken into account as an item of 
income by any shareholder and thus does not increase the basis 
of any shareholder's stock in the corporation.

                             Effective Date

    The provision generally applies to discharges of 
indebtedness after October 11, 2001. The provision does not 
apply to any discharge of indebtedness before March 1, 2002, 
pursuant to a plan of reorganization filed with a bankruptcy 
court on or before October 11, 2001.

                             Revenue Effect

    The provision is expected to increase Federal fiscal year 
budget receipts by $34 million in 2002, $76 million in 2003, 
$86 million in 2004, $88 million in 2005, $91 million in 2006, 
$94 million in 2007, $97 million in 2008, $99 million in 2009, 
$102 million in 2010, $106 million in 2011, and $109 million in 
2012.

  C. Limitation on Use of Non-Accrual Experience Method of Accounting 
             (sec. 403 of the Act and sec. 448 of the Code)

                         Present and Prior Law

    An accrual method taxpayer generally must recognize income 
when all the events have occurred that fix the right to receive 
the income and the amount of the income can be determined with 
reasonable accuracy. An accrual method taxpayer may deduct the 
amount of any receivable that was previously included in income 
that becomes worthless during the year.
    Accrual method taxpayers are not required to include in 
income amounts to be received for the performance of services 
which, on the basis of experience, will not be collected (the 
``non-accrual experience method''). The availability of this 
method is conditioned on the taxpayer not charging interest or 
a penalty for failure to timely pay the amount charged.
    Generally, a cash method taxpayer is not required to 
include an amount in income until received. A taxpayer 
generally may not use the cash method if purchase, production, 
or sale of merchandise is an income producing factor. Such 
taxpayers generally are required to keep inventories and use an 
accrual method of accounting. In addition, corporations (and 
partnerships with corporate partners) generally may not use the 
cash method of accounting if their average annual gross 
receipts exceed $5 million. An exception to this $5 million 
rule is provided for qualified personal service corporations. A 
qualified personal service corporation is a corporation: (1) 
substantially all of whose activities involve the performance 
of services in the fields of health, law, engineering, 
architecture, accounting, actuarial science, performing arts or 
consulting and (2) substantially all of the stock of which is 
owned by current or former employees performing such services, 
their estates or heirs. Qualified personal service corporations 
are allowed to use the cash method without regard to whether 
their average annual gross receipts exceed $5 million.

                           Reasons for Change

    The Congress understood that the use of the non-accrual 
experience method provides the equivalent of a bad debt 
reserve, which generally is not available to taxpayers using an 
accrual method of accounting. The Congress believed that 
accrual method taxpayers should be treated similarly, unless 
there is a strong indication that different treatment is 
necessary to clearly reflect income or to address a particular 
competitive situation.
    The Congress understood that accrual basis providers of 
qualified services (services in the fields of health, law, 
engineering, architecture, accounting, actuarial science, 
performing arts or consulting) compete on a regular basis with 
competitors using the cash method of accounting. The Congress 
believed that this competitive situation justifies the 
continued availability of the non-accrual experience method 
with respect to amounts due to be received for the performance 
of qualified services. The Congress believed that it is 
important to avoid the disparity of treatment between competing 
cash and accrual method providers of qualified services that 
could result if the non-accrual experience method were 
eliminated with regard to amounts to be received for such 
services.
    The Congress also recognized the burdens placed on small 
businesses to comply with the complexity of the federal income 
tax code and, in this time of economic uncertainty, the 
importance of cash flow to small businesses. The Congress 
believed that small business service providers using an accrual 
method of accounting should be permitted to continue to use the 
non-accrual experience method.
    In addition, the Congress believed that the formula 
contained in Temporary Treasury regulations \261\ may not 
clearly reflect the amount of income that, based on experience, 
would not be collected for many qualified service providers, 
especially for those where significant time elapses between the 
rendering of the service and a final determination that the 
account will not be collected. Providers of qualified services 
should not be subject to a formula that requires the payments 
of taxes on receivables that will not be collected.
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    \261\ Temp. Treas. Reg. sec. 1.448-2T.
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                        Explanation of Provision

    Under JCWA, the non-accrual experience method of accounting 
is available only for amounts to be received for the 
performance of qualified services and for services provided by 
certain small businesses. Amounts to be received for all other 
services are subject to the general rule regarding inclusion in 
income. Qualified services are services in the fields of 
health, law, engineering, architecture, accounting, actuarial 
science, performing arts or consulting. As under present and 
prior law, the availability of this method is conditioned on 
the taxpayer not charging interest or a penalty for failure to 
timely pay the amount charged.
    Under a special rule, the non-accrual experience method of 
accounting continues to be available for the performance of 
non-qualified services if the average annual gross receipts (as 
defined in section 448(c)) of the taxpayer (or any predecessor) 
does not exceed $5 million. The rules of paragraph (2) and (3) 
of section 448(c) (i.e., the rules regarding the aggregation of 
related taxpayers, taxpayers not in existence for the entire 
three year period, short taxable years, definition of gross 
receipts, and treatment of predecessors) apply for purposes of 
determining the average annual gross receipts test.
    JCWA requires that the Secretary of the Treasury prescribe 
regulations to permit a taxpayer to use alternative 
computations or formulas if such alternative computations or 
formulas accurately reflect, based on experience, the amount of 
its year-end receivables that will not be collected. It is 
anticipated that the Secretary of the Treasury will consider 
providing safe harbors in such regulations that may be relied 
upon by taxpayers. In addition, JCWA also provides that the 
Secretary of the Treasury permit taxpayers to adopt, or request 
consent of the Secretary of the Treasury to change to, an 
alternative computation or formula that clearly reflects the 
taxpayer's experience. JCWA requires the Secretary of Treasury 
to approve a request provided that the alternative computation 
or formula clearly reflects the taxpayer's experience.

                             Effective Date

    The provision is effective for taxable years ending after 
date of enactment. Any change in the taxpayer's method of 
accounting required as a result of the limitation on the use of 
the non-accrual experience method is treated as a voluntary 
change initiated by the taxpayer with the consent of the 
Secretary of the Treasury. Any resultant section 481(a) 
adjustment is to be taken into account over a period not to 
exceed the lesser of the number of years the taxpayer has used 
the non-accrual experience method of accounting or four years 
under principles consistent with those in Revenue Procedure 99-
49.\262\
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    \262\ 1999-2 C.B. 725.
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                             Revenue Effect

    The provision is expected to increase Federal fiscal year 
budget receipts by $5 million in 2002, $56 million in 2003, $47 
million in 2004, $29 million in 2005, $16 million in 2006, $8 
million in 2007, $10 million in 2008, $12 million in 2009, $13 
million in 2010, $15 million in 2011, $17 million in 2012.

  D. Expansion of the Exclusion from Income for Qualified Foster Care 
        Payments (sec. 404 of the Act and sec. 131 of the Code)

                         Present and Prior Law

    If certain requirements are satisfied, an exclusion from 
gross income is provided for qualified foster care payments 
paid to a foster care provider by either (1) a State or local 
government; or (2) a tax-exempt placement agency. Qualified 
foster care payments are amounts paid for caring for a 
qualified foster care individual in the foster care provider's 
home and difficulty of care payments.\263\ A qualified foster 
care individual is an individual living in a foster care family 
home in which the individual was placed by: (1) an agency of 
the State or local government (regardless of the individual's 
age at the time of placement); or (2) a tax-exempt placement 
agency licensed by the State or local government (if such 
individual was under the age of 19 at the time of placement).
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    \263\ A difficulty of care payment is a payment designated by the 
person making such payment as compensation for providing the additional 
care of a qualified foster care individual in the home of the foster 
care provider which is required by reason of a physical, mental, or 
emotional handicap of such individual and with respect to which the 
State has determined that there is a need for additional compensation.
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                        Reasons for Change \264\

    The Congress was aware that States, in their continuing 
efforts to improve the foster care system, have realized the 
utility of both tax-exempt and for-profit private placement 
agencies. In some instances, the States have utilized for-
profit private placement agencies to perform the functions 
previously reserved for State or local government or tax-exempt 
entities. JCWA was intended to modernize the exclusion to 
reflect these changes at the State level by equalizing the tax 
treatment of payments to qualified foster care providers 
regardless of the source of the payment. Also, the Congress 
believed that allowing placement by any qualified foster care 
agency (regardless of the individual's age at placement) would 
improve older children's chances for adoption. Finally, the 
Congress believed that these simpler rules might encourage more 
families to provide foster care.
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    \264\ See H.R. 586, the ``Fairness for Foster Care Families Act of 
2001,'' which was reported by the House Committee on Ways and Means on 
May 15, 2001 (H. R. Rep. 107-66).
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                        Explanation of Provision

    JCWA makes two modifications to the present-law exclusion 
for qualified foster care payments. First, JCWA expands the 
definition of qualified foster care payments to include 
payments by any placement agency that is licensed or certified 
by a State or local government, or an entity designated by a 
State or local government to make payments to providers of 
foster care. Second, JCWA expands the definition of a qualified 
foster care individual by including foster care individuals 
placed by a qualified foster care placement agency (regardless 
of the individual's age at the time of placement).

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2001.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $17 million in 2002, $29 million in 2003, 
$36 million in 2004, $44 million in 2005, $52 million in 2006, 
$61 million in 2007, $70 million in 2008, $80 million in 2009, 
$90 million in 2010, $101 million in 2010, and $112 million in 
2011.

E. Interest Rate Used in Determining Additional Required Contributions 
 to Defined Benefit Plans and PBGC Variable Rate Premiums (sec. 405 of 
    the Act, sec. 412 of the Code, and secs. 302 and 4006 of ERISA)


                         Present and Prior Law


In general

    ERISA and the Code impose both minimum and maximum \265\ 
funding requirements with respect to defined benefit pension 
plans. The minimum funding requirements are designed to provide 
at least a certain level of benefit security by requiring the 
employer to make certain minimum contributions to the plan. The 
amount of contributions required for a plan year is generally 
the amount needed to fund benefits earned during that year plus 
that year's portion of other liabilities that are amortized 
over a period of years, such as benefits resulting from a grant 
of past service credit.
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    \265\ The maximum funding requirement for a defined benefit plan is 
referred to as the full funding limitation. Additional contributions 
are not required if a plan has reached the full funding limitation.
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Additional contributions for certain plans

    Additional contributions are required under a special 
funding rule for certain single-employer defined benefit 
pension plans \266\ if the value of the plan assets is less 
than 90 percent of the plan's current liability.\267\ The value 
of plan assets as a percentage of current liability is the 
plan's ``funded current liability percentage.''
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    \266\ Plans with no more than 100 participants on any day in the 
preceding plan year are not subject to the special funding rule. Plans 
with more than 100 but not more than 150 participants are generally 
subject to lower contribution requirements under the special funding 
rule.
    \267\ Under an alternative test, a plan is not subject to the 
special rule if (1) the value of the plan assets is at least 80 percent 
of current liability and (2) the value of the plan assets was at least 
90 percent of current liability for each of the two immediately 
preceding years or each of the second and third immediately preceding 
years.
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    If a plan is subject to the special rule, the amount of 
additional required contributions for a plan year is based on 
certain elements, including whether the plan has an unfunded 
liability related to benefits accrued before 1988 or 1995 or to 
changes in the mortality table used to determine contributions, 
and whether the plan provides for unpredictable contingent 
event benefits (that is, benefits that depend on contingencies 
that are not reliably and reasonably predictable, such as 
facility shutdowns or reductions in workforce). However, the 
amount of additional contributions cannot exceed the amount 
needed to increase the plan's funded current liability 
percentage to 100 percent.

Required interest rate

    In general, a plan's current liability means all 
liabilities to employees and their beneficiaries under the 
plan. The interest rate used to determine a plan's current 
liability must be within a permissible range of the weighted 
average of the interest rates on 30-year Treasury securities 
for the four-year period ending on the last day before the plan 
year begins.\268\ The permissible range is from 90 percent to 
105 percent. As a result of debt reduction, the Department of 
the Treasury does not currently issue 30-year Treasury 
securities.
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    \268\ The interest rate used under the plan must be consistent with 
the assumptions which reflect the purchase rates which would be used by 
insurance companies to satisfy the liabilities under the plan (section 
412(b)(5)(B)(iii)(II)).
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Timing of plan contributions

    In general, plan contributions required to satisfy the 
funding rules must be made within 8\1/2\ months after the end 
of the plan year. If the contribution is made by such due date, 
the contribution is treated as if it were made on the last day 
of the plan year.
    In the case of a plan with a funded current liability 
percentage of less than 100 percent for the preceding plan 
year, estimated contributions for the current plan year must be 
made in quarterly installments during the current plan year. 
The amount of each required installment is 25 percent of the 
lesser of (1) 90 percent of the amount required to be 
contributed for the current plan year or (2) 100 percent of the 
amount required to be contributed for the preceding plan 
year.\269\
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    \269\ No additional quarterly contributions are due once the plan's 
funded current liability percentage for the plan year reaches 100 
percent.
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PBGC premiums

    Because benefits under a defined benefit pension plan may 
be funded over a period of years, plan assets may not be 
sufficient to provide the benefits owed under the plan to 
employees and their beneficiaries if the plan terminates before 
all benefits are paid. In order to protect employees and their 
beneficiaries, the Pension Benefit Guaranty Corporation 
(``PBGC'') generally insures the benefits owed under defined 
benefit pension plans. Employers pay premiums to the PBGC for 
this insurance coverage.
    In the case of an underfunded plan, additional PBGC 
premiums are required based on the amount of unfunded vested 
benefits. These premiums are referred to as ``variable rate 
premiums.'' In determining the amount of unfunded vested 
benefits, the interest rate used is 85 percent of the interest 
rate on 30-year Treasury securities for the month preceding the 
month in which the plan year begins.

                        Explanation of Provision


Additional contributions

    JCWA expands the permissible range of the statutory 
interest rate used in calculating a plan's current liability 
for purposes of applying the additional contribution 
requirements for plan years beginning after December 31, 2001, 
and before January 1, 2004. Under JCWA, the permissible range 
is from 90 percent to 120 percent for these years. Use of a 
higher interest rate under the expanded range will affect the 
plan's current liability, which may in turn affect the need to 
make additional contributions and the amount of any additional 
contributions.
    Because the quarterly contributions requirements are based 
on current liability for the preceding plan year, JCWA also 
provides special rules for applying these requirements for 
plans years beginning in 2002 (when the expanded range first 
applies) and 2004 (when the expanded range no longer applies). 
In each of those years (``present year''), current liability 
for the preceding year is redetermined, using the permissible 
range applicable to the present year. This redetermined current 
liability will be used for purposes of the plan's funded 
current liability percentage for the preceding year, which may 
affect the need to make quarterly contributions and for 
purposes of determining the amount of any quarterly 
contributions in the present year, which is based in part on 
the preceding year.

PBGC variable rate premiums

    Under JCWA, the interest rate used in determining the 
amount of unfunded vested benefits for variable rate premium 
purposes is increased to 100 percent of the interest rate on 
30-year Treasury securities for the month preceding the month 
in which the plan year begins.\270\
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    \270\ Section 2(d) of the Tax Technical Corrections Act of 2002, 
introduced on November 13, 2002, as H.R. 5713 in the House of 
Representatives and S. 3153 in the Senate, would make conforming 
changes so that this rule applies for purposes of notices and reporting 
required under Title IV of ERISA with respect to underfunded plans.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective with respect to plan 
contributions and PBGC variable rate premiums for plan years 
beginning after December 31, 2001, and before January 1, 2004.

                             Revenue Effect

    The provision is estimated to increase Federal fiscal year 
budget receipts by $1,953 million in 2002, $3,979 million in 
2003, $346 million in 2004 and reduce Federal fiscal year 
budget receipts by, $2,478 million in 2005, $1,316 million in 
2006, $1,624 million in 2007, $1,764 million in 2008, $1,204 
million in 2009, $714 million in 2010, $210 million in 2011, 
and $30 million in 2012.

  F. Adjusted Gross Income Determined by Taking into Account Certain 
 Expenses of Elementary and Secondary School Teachers (sec. 406 of the 
                      Act and sec. 62 of the Code)


                         Present and Prior Law

    In general, ordinary and necessary business expenses are 
deductible (sec. 162). However, unreimbursed employee business 
expenses are deductible only as an itemized deduction and only 
to the extent that the individual's total miscellaneous 
deductions (including employee business expenses) exceed two 
percent of adjusted gross income.
    An individual's otherwise allowable itemized deductions may 
be further limited by the overall limitation on itemized 
deductions, which reduces itemized deductions for taxpayers 
with adjusted gross income in excess of $137,300 (for 
2002).\271\ In addition, miscellaneous itemized deductions are 
not allowable under the alternative minimum tax.
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    \271\ The effect of this overall limitation is phased down 
beginning in 2006, and is repealed for 2010 by section 103 of EGTRRA, 
described in Part Two, Section I of this document.
---------------------------------------------------------------------------

                        Explanation of Provision

    JCWA provides an above-the-line deduction for taxable years 
beginning in 2002 and 2003 for up to $250 annually of expenses 
paid or incurred by an eligible educator for books, supplies 
(other than nonathletic supplies for courses of instruction in 
health or physical education), computer equipment (including 
related software and services) and other equipment, and 
supplementary materials used by the eligible educator in the 
classroom. To be eligible for this deduction, the expenses must 
be otherwise deductible under 162 as a trade or business 
expense. A deduction is allowed only to the extent the amount 
of expenses exceeds the amount excludable from income under 
section 135 (relating to education savings bonds), 529(c)(1) 
(relating to qualified tuition programs), and section 530(d)(2) 
(relating to Coverdell education savings accounts).
    An eligible educator is a kindergarten through grade 12 
teacher, instructor, counselor, principal, or aide in a school 
for at least 900 hours during a school year. A school means any 
school which provides elementary education or secondary 
education, as determined under State law.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2001, and before January 1, 2004.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $152 million in 2002, $205 million in 2003, 
$52 million in 2004.

          Subtitle B--Tax Technical and Additional Corrections

    Except as otherwise provided, the technical and additional 
corrections contained in JCWA generally are effective as if 
included in the originally enacted related legislation.

A. Amendments to the Economic Growth and Tax Relief Reconciliation Act 
                 of 2001 (sec. 411(a)--(h) of the Act)


1. Section 6428 credit interaction with refundable child tax credit

    The provision treats the section 6428 credit (rate 
reduction) like a nonrefundable personal credit, thus allowing 
it prior to determining the refundable child credit.

2. Child tax credit

    The provision clarifies that for taxable years beginning in 
2001, the portion of the child credit that is refundable is 
determined by referring in Code section 24(d)(1)(B) to ``the 
aggregate amount of credits allowed by this subpart.'' This 
would retain prior law that was inadvertently changed by the 
Act.

3. Transition rule for adoption tax credit

    Under prior law, the maximum amount of adoption expenses 
which could be taken into account in computing the adoption tax 
credit for any child was $5,000 ($6,000 in the case of special 
needs adoptions). Under prior and present law, the credit 
generally is allowed in the taxable year following the taxable 
year the expenses are paid or incurred where expenses are paid 
or incurred before the taxable year the adoption becomes final. 
The Act increased the maximum amount of expenses to $10,000 for 
taxable years beginning after 2001, but did not include a 
provision describing the dollar limit for amounts paid or 
incurred during taxable years beginning before January 1, 2002, 
for adoptions that do not become final in those years. The 
provision clarifies that amount of expenses paid or incurred 
during taxable years beginning before January 1, 2002, which 
are taken into account in determining a credit allowed in a 
taxable year beginning after December 31, 2001, are subject to 
the $5,000 (or $6,000) dollar cap in effect immediately prior 
to the enactment of the Act.

4. Dollar amount of credit for special needs adoptions

    The provision clarifies that, for special needs adoptions 
that become final in taxable years beginning after 2002, the 
adoption expenses taken into account are increased by the 
excess (if any) of $10,000 over the aggregate adoption expenses 
for the taxable year that the adoption becomes final and all 
prior taxable years.

5. Employer-provided adoption assistance exclusion with respect to 
        special needs adoptions

    The provision clarifies that, for taxable years beginning 
after 2002, the amount of adoption expenses taken into account 
in determining the exclusion for employer-provided adoption 
assistance in the case of a special needs adoption is increased 
by the excess (if any) of $10,000 over the aggregate qualified 
adoption expenses with respect to the adoption for the taxable 
year the adoption becomes final and all prior taxable years.

6. Credit for employer expenses for child care assistance

    The provision clarifies that recapture tax with respect to 
this credit is treated like recapture taxes with respect to 
other credits under chapter 1 of the Code. Thus, it would not 
be treated as a tax for purposes of determining the amounts of 
other credits or determining the amount of alternative minimum 
tax.

7. Elimination of marriage penalty in standard deduction

    The provision provides rules that were inadvertently 
omitted providing for separate returns and rounding rules for 
the standard deduction for the transition period years.

8. Education IRAs; non-application of 10-percent additional tax with 
        respect to amounts for which HOPE credit is claimed

    Under the law prior to the Act, taxpayers could not claim 
the HOPE (or Lifetime learning) credit in the same year that 
they claimed an exclusion from income from an education IRA. 
Taxpayers were permitted to waive the exclusion in order to 
claim the HOPE (or Lifetime learning) credit. For taxpayers 
electing the waiver, earnings from amounts withdrawn from 
education IRAs and attributable to education expenses for which 
a HOPE (or Lifetime learning) credit was claimed were 
includable in income, but the additional ten percent tax was 
not applied. Under the Act, taxpayers are permitted to claim 
the education IRA exclusion and claim a HOPE (or Lifetime 
learning) credit in the same year, provided they do not claim 
both with respect to the same educational expenses. The 
election to waive the education IRA exclusion was thus 
unnecessary, and was dropped. However, a reference to the 
election was retained (section 530(d)(4)(b)(iv)). The reference 
to the election was intended to preserve the rule relating to 
the non-application of the 10-percent additional tax for 
education IRA earnings that are includable in income solely 
because the HOPE (or Lifetime learning) credit is claimed for 
those expenses. The provision clarifies the present-law rules 
to reflect this result.
    The provision prevents the 10-percent additional tax from 
applying to a distribution from an education IRA (or qualified 
tuition program) that is used to pay qualified higher education 
expenses, but the taxpayer elects to claim a HOPE or Lifetime 
Learning credit in lieu of the exclusion under section 530 or 
529. Thus, the income distributed from the education IRA (or 
qualified tuition program) would be subject to income tax, but 
not to the 10-percent additional tax.

9. Transfers in trust

    The provision clarifies that the effect of section 511(e) 
of the Act (effective for gifts made after 2009) is to treat 
certain transfers in trust as transfers of property by gift. 
The result of the clarification is that the gift tax annual 
exclusion and the marital and charitable deductions may apply 
to such transfers. Under the provision as clarified, certain 
amounts transferred in trust will be treated as transfers of 
property by gift, despite the fact that such transfers would be 
regarded as incomplete gifts or would not be treated as 
transferred under the law applicable to gifts made prior to 
2010. For example, if in 2010 an individual transfers property 
in trust to pay the income to one person for life, remainder to 
such persons and in such portions as the settlor may decide, 
then the entire value of the property will be treated as being 
transferred by gift under the provision, even though the 
transfer of the remainder interest in the trust would not be 
treated as a completed gift under current Treas. Reg. sec. 
25.2511-2(c). Similarly, if in 2010 an individual transfers 
property in trust to pay the income to one person for life, and 
makes no transfer of a remainder interest, the entire value of 
the property will be treated as being transferred by gift under 
the provision.

10. Recovery of taxes claimed as credit (State death tax credit)

    The provision eliminates as deadwood a reference to the 
State death tax credit.

  B. Pension-Related Amendments to the Economic Growth and Tax Relief 
        Reconciliation Act of 2001 (sec. 411(i)--(w) of the Act)


1. Individual Retirement Arrangements (``IRAs'')

    Under the Act, a qualified employer plan may provide for 
voluntary employee contributions to a separate account that is 
deemed to be an IRA. The provision clarifies that, for purposes 
of deemed IRAs, the term ``qualified employer plan'' includes 
the following types of plans maintained by a governmental 
employer: a qualified retirement plan under section 401(a), a 
qualified annuity plan under section 403(a), a tax-sheltered 
annuity plan under section 403(b), and an eligible deferred 
compensation plan under section 457(b). The provision also 
clarifies that ERISA is intended to apply to a deemed IRA in a 
manner similar to a simplified employee pension (``SEP'').

2. Increase in benefit and contribution limits

    Under the Act, the benefit and contribution limits that 
apply to qualified retirement plans are increased. These 
increases are generally effective for years beginning after 
December 31, 2001, but the increase in the limit on benefits 
under a defined benefit plan is effective for years ending 
after December 31, 2001. In the case of some plans that 
incorporate the benefit limits by reference and that use a plan 
year other than the calendar year, the increased benefit limits 
became effective under the plan automatically, causing 
unintended benefit increases. The provision permits an employer 
to amend such a plan by June 30, 2002, to reduce benefits to 
the level that applied before enactment of the Act without 
violating the anticutback rules that generally apply to plan 
amendments.
    In connection with the increases in the benefit and 
contribution limits under the Act, a new base period applies in 
indexing the 2002 dollar amounts for future cost-of-living 
adjustments. The same indexing method applies to the dollar 
amounts used to determine eligibility to participate in a SEP 
and to determine the proper period for distributions from an 
employee stock ownership plan (``ESOP''). The provision changes 
these dollar amounts to the 2002 indexed amounts so that future 
indexing will operate properly.

3. Modification of top-heavy rules

    Under the Act, in determining whether a plan is top-heavy, 
distributions made because of separation from service, death, 
or disability are taken into account for one year after 
distribution. Other distributions are taken into account for 
five years. The Act also permits distributions from a section 
401(k) plan, a tax-sheltered annuity plan, or an eligible 
deferred compensation plan to be made when the participant has 
a severance from employment (rather than separation from 
service). The provision clarifies that distributions made after 
severance from employment (rather than separation from service) 
are taken into account for only one year in determining top-
heavy status.

4. Elective deferrals not taken into account for deduction limits

    The provision clarifies that elective deferrals to a SEP 
are not subject to the deduction limits and are not taken into 
account in applying the limits to other SEP contributions. The 
provision also clarifies that the combined deduction limit of 
25 percent of compensation for qualified defined benefit and 
defined contribution plans does not apply if the only amounts 
contributed to the defined contribution plan are elective 
deferrals.

5. Deduction limits

    Under present law, contributions to a SEP are included in 
an employee's income to the extent they exceed the lesser of 15 
percent of compensation or $40,000 (for 2002), subject to a 
reduction in some cases. Under prior law, the annual limitation 
on the amount of deductible contributions to a SEP was 15 
percent of compensation. Under the Act, the annual limitation 
on the amount of deductible contributions that can be made to a 
SEP is increased from 15 percent of compensation to 25 percent 
of compensation. The provision makes a conforming change to the 
rule that limits the amount of SEP contributions that may be 
made for a particular employee. Under the provision, 
contributions are included in an employee's income to the 
extent they exceed the lesser of 25 percent of compensation or 
$40,000 (for 2002), subject to a reduction in some cases.
    Under present law, the Secretary of the Treasury has the 
authority to require an employer who makes contributions to a 
SEP to provide simplified reports with respect to such 
contributions. Consistent with present law and the provision, 
such reports could appropriately include information as to 
compliance with the requirements that apply to SEPs, including 
the contribution limits.

6. Nonrefundable credit for certain individuals for elective deferrals 
        and IRA contributions

    The provision clarifies that the amount of contributions 
taken into account in determining the credit for elective 
deferrals and IRA contributions is reduced by the amount of a 
distribution from a qualified retirement plan, an eligible 
deferred compensation plan, or a traditional IRA that is 
includible in income or that consists of after-tax 
contributions. The provision retains the rule that 
distributions that are rolled over to another retirement plan 
do not affect the credit.

7. Small business tax credit for new retirement plan expenses

    The provision clarifies that the small business tax credit 
for new retirement plan expenses applies in the case of a plan 
first effective after December 31, 2001, even if adopted on or 
before that date.

8. Additional salary reduction catch-up contributions

    Under the Act, an individual age 50 or over may make 
additional elective deferrals (``catch-up contributions'') to 
certain retirement plans, up to a specified limit. A plan may 
not permit catch-up deferrals in excess of this limit. The 
provision clarifies that, for this purpose, the limit applies 
to all qualified retirement plans, tax-sheltered annuity plans, 
SEPs and SIMPLE plans maintained by the same employer on an 
aggregated basis, as if all plans were a single plan. The limit 
applies also to all eligible deferred compensation plans of a 
government employer on an aggregated basis.
    Under the Act, catch-up contributions up to the specified 
limit are excluded from an individual's income. The provision 
also clarifies that the total amount that an individual may 
exclude from income as catch-up contributions for a year cannot 
exceed the catch-up contribution limit for that year (and for 
that type of plan), without regard to whether the individual 
made catch-up contributions under plans maintained by the more 
than one employer.
    The provision clarifies that an individual who will attain 
age 50 by the end of the taxable year is an eligible 
participant as of the beginning of the taxable year rather than 
only at the attainment of age 50. The provision also clarifies 
that a participant in an eligible deferred compensation plan of 
a government employer may make catch-up contributions in an 
amount equal to the greater of the amount permitted under the 
new catch-up rule and the amount permitted under the special 
catch-up rule for eligible deferred compensation plans.
    The provision revises the lists of requirements that do not 
apply to catch-up contributions to reflect other statutory 
amendments made by the Act and to reflect the fact that catch-
up contributions can be made only to a qualified defined 
contribution plan, not to a qualified defined benefit plan. The 
provision also clarifies that the special nondiscrimination 
rule for mergers and acquisitions applies for purposes of the 
nondiscrimination requirement applicable to catch-up 
contributions.

9. Equitable treatment for contributions of employees to defined 
        contribution plans

    Under prior law, the limits on contributions to a tax-
sheltered annuity plan applied at the time contributions became 
vested. Under the Act, tax-sheltered annuity plans are 
generally subject to the same contribution limits as qualified 
defined contribution plans, but certain special rules were 
retained.
    The provision clarifies that the limits apply to 
contributions to a tax-sheltered annuity plan in the year the 
contributions are made without regard to when the contributions 
become vested. The provision also clarifies that contributions 
may be made for an employee for up to five years after 
retirement, based on includible compensation for the last year 
of service before retirement. The provision also restores 
special rules for ministers and lay employees of churches and 
for foreign missionaries that were inadvertently eliminated.
    Under the Act, amounts deferred under an eligible deferred 
compensation plan are generally subject to the same 
contribution limits as qualified defined contribution plans. 
The provision conforms the definition of compensation used in 
applying the limits to an eligible deferred compensation plan 
to the definition used for qualified defined contribution 
plans.

10. Rollovers of retirement plan and IRA distributions

    Under prior law and under the Act, a qualified retirement 
plan must provide for the rollover of certain distributions 
directly to a qualified defined contribution plan, a qualified 
annuity plan, a tax-sheltered annuity plan, a governmental 
eligible deferred compensation plan, or a traditional IRA, if 
the participant elects a direct rollover. The provision 
clarifies that a qualified retirement plan must provide for the 
direct rollover of after-tax contributions only to a qualified 
defined contribution plan or a traditional IRA. The provision 
also clarifies that, if a distribution includes both pretax and 
after-tax amounts, the portion of the distribution that is 
rolled over is treated as consisting first of pretax amounts.

11. Employers may disregard rollovers for purposes of cash-out amounts

    Under prior and present law, if a participant in a 
qualified retirement plan ceases to be employed with the 
employer maintaining the plan, the plan may distribute the 
participant's nonforfeitable accrued benefit without the 
consent of the participant and, if applicable, the 
participant's spouse, if the present value of the benefit does 
not exceed $5,000. Under the Act, a plan may provide that the 
present value of the benefit is determined without regard to 
the portion of the benefit that is attributable to rollover 
contributions (and any earnings allocable thereto) for purposes 
of determining whether the participant must consent to the 
cash-out of the benefit. The provision clarifies that rollover 
amounts may be disregarded also in determining whether a spouse 
must consent to the cash-out of the benefit.

12. Notice of significant reduction in plan benefit accruals

    Under the Act, notice must be provided to participants if a 
defined benefit plan is amended to provide for a significant 
reduction in the future rate of benefit accrual, including any 
elimination or reduction of an early retirement benefit or 
retirement-type subsidy. The provision clarifies that the 
notice requirement applies to a defined benefit plan only if 
the plan is qualified. The provision further clarifies that, in 
the case of an amendment that eliminates an early retirement 
benefit or retirement-type subsidy, notice is required only if 
the early retirement benefit or retirement-type subsidy is 
significant. The provision also eliminates inconsistencies in 
the statutory language.

13. Modification of timing of plan valuation

    Under the Act, a plan valuation may be made as of any date 
in the immediately preceding plan year if, as of such date, 
plan assets are not less than 100 percent of the plan's current 
liability. Under the Act, a change in funding method to use a 
valuation date in the prior year generally may not be made 
unless, as of such date, plan assets are not less than 125 
percent of the plan's current liability. The provision conforms 
the statutory language to Congressional intent as reflected in 
the Statement of Managers.

14. ESOP dividends may be reinvested without loss of dividend deduction

    Under prior and present law, a deduction is permitted for a 
dividend paid with respect to employer stock held in an ESOP if 
the dividend is (1) paid in cash directly to participants or 
(2) paid to the plan and subsequently distributed to the 
participants in cash no later than 90 days after the close of 
the plan year in which the dividend is paid to the plan. The 
deduction is allowable for the taxable year of the corporation 
in which the dividend is paid or distributed to the 
participants.
    Under the Act, in addition to the deductions permitted 
under present law, a deduction is permitted for a dividend paid 
with respect to employer stock that, at the election of the 
participants, is payable in cash directly to participants or 
paid to the plan and subsequently distributed to the 
participants in cash no later than 90 days after the close of 
the plan year in which the dividend is paid to the plan, or 
paid to the plan and reinvested in qualifying employer 
securities. Under the provision, the deduction for dividends 
that are reinvested in qualifying employer securities at the 
election of participants is allowable for the taxable year in 
which the later of the reinvestment or the election occurs. The 
provision also clarifies that a dividend that is reinvested in 
qualifying employer securities at the participant's election 
must be nonforfeitable.

C. Amendments to the Community Renewal Tax Relief Act of 2000 (sec. 412 
                              of the Act)


1. Phaseout of $25,000 amount for certain rental real estate under 
        passive loss rules

    Present law provides for a phaseout of the $25,000 amount 
allowed in the case of certain deductions and certain credits 
with respect to rental real estate activities, for taxpayers 
with adjusted gross income exceeding $100,000. The phaseout 
rule does not apply, or applies separately, in the case of the 
rehabilitation credit, the low-income housing credit, and the 
commercial revitalization deduction. The provision clarifies 
the operation of the ordering rules to reflect the exceptions 
and separate phaseout rules for these items.

2. Treatment of missing children

    Present law provides that in the case of a dependent child 
of the taxpayer that is kidnapped, the taxpayer may continue to 
treat the child as a dependent for purposes of the dependency 
exemption, child credit, surviving spouse filing status, and 
head of household filing status. A similar rule applies under 
the earned income credit. The provision clarifies that, if a 
taxpayer met the household maintenance requirement of the 
surviving spouse filing status or the head of household filing 
status, respectively, with respect to his or her dependent 
child immediately before the kidnapping, then the taxpayer 
would be deemed to continue to meet that requirement for 
purposes of the filing status rule of section 2 of the Code 
until the child would have reached age 18 or is determined to 
be dead.

3. Basis of property in an exchange by a corporation involving 
        assumption of liabilities

    The provision clarifies that the basis reduction rule of 
section 358(h) of the Code gives rise to a basis reduction in 
the amount of any liability that is assumed by another party as 
part of the exchange in which the property (whose basis exceeds 
its fair market value) is received, so long as the other 
requirements under section 358(h) apply.

4. Tax treatment of securities futures contracts

    The provision clarifies that the termination of a 
securities contract is treated in a manner similar to a sale or 
exchange of a securities futures contract for purposes of 
determining the character of any gain or loss from a 
termination of a securities futures contract. Under the 
provision, any gain or loss from the termination of a 
securities futures contract (other than a dealer securities 
futures contract) is treated as gain or loss from the sale or 
exchange of property that has the same character as the 
property to which the contract relates has (or would have) in 
the hands of the taxpayer.
    The provision also clarifies that losses from the sale, 
exchange, or termination of a securities futures contract 
(other than a dealer securities futures contract) to sell 
generally are treated in the same manner as losses from the 
closing of a short sale for purposes of applying the wash sale 
rules. Thus, the wash sale rules apply to any loss from the 
sale, exchange, or termination of a securities futures contract 
(other than dealer securities futures contract) if, within a 
period beginning 30 days before the date of such sale, 
exchange, or termination and ending 30 days after such date: 
(1) stock that is substantially identical to the stock to which 
the contract relates is sold; (2) a short sale of substantially 
identical stock is entered into; or (3) another securities 
futures contract to sell substantially identical stock is 
entered into.
    The provision clarifies that a securities futures contract 
to sell generally is treated in a manner similar to a short 
sale for purposes of the special holding period rules in 
section 1233. Thus, subsections (b) and (d) of section 1233 may 
apply to characterize certain capital gains as short-term 
capital gain and certain capital losses as long-term capital 
loss, and to determine holding periods where certain securities 
futures contracts to sell are entered into while holding the 
substantially identical stock.

 D. Amendment to the Tax Relief Extension Act of 1999 (sec. 413 of the 
                                  Act)


1. Taxable REIT subsidiaries--100 percent tax on improperly allocated 
        amounts

    The provision clarifies that redetermined rents, to which 
the excise tax applies, are the excess of the amount treated by 
the REIT as rents from real property under Code section 856(d) 
over the amount that would be so treated after reduction under 
Code section 482 to clearly reflect income as a result of 
services furnished or rendered by a taxable REIT subsidiary of 
the REIT to a tenant of the REIT. Similarly, redetermined 
deductions are the excess of the amount treated by the taxable 
REIT subsidiary as other deductions over the amount that would 
be so treated after reduction under Code section 482.

 E. Amendments to the Taxpayer Relief Act of 1997 (sec. 414 of the Act)


1. Election to recognize gain on assets held on January 1, 2001; 
        treatment of gain on sale of principal residence

    The provision clarifies that the gain to which the mark-to-
market election applies is included in gross income. Thus, the 
exclusion of gain on the sale of a principal residence under 
Code section 121 would not apply with respect to an asset for 
which the election to mark to market is made. The provision is 
consistent with the holding of Rev. Rul. 2001-57.

2. Election to recognize gain on assets held on January 1, 2001; 
        treatment of disposition of interest in passive activity

    The provision clarifies that the election to mark to market 
an interest in a passive activity does not result in the 
deduction of suspended losses by reason of section 
469(g)(1)(A). Any gain taken into account by reason of an 
election with respect to any interest in a passive activity is 
taken into account in determining the passive activity loss for 
the taxable year (as defined in section 469(d)(1)). Section 
469(g)(1)(A) may apply to a subsequent disposition of the 
interest in the activity by the taxpayer.

 F. Amendment to the Balanced Budget Act of 1997 (sec. 415 of the Act)


1. Medicare+Choice MSA

    The provision conforms the treatment of the additional tax 
on Medicare+Choice MSAs distributions not used for qualified 
medical expenses if a minimum balance is not maintained to the 
treatment of the additional tax on Archer MSA distributions not 
used for qualified medical expenses, for purposes of 
determining whether certain taxes are included within regular 
tax liability under Code section 26(b).

            G. Amendment to other Acts (sec. 416 of the Act)


1. Advance payments of earned income credit

    The provision corrects a reference in section 32(g)(2) to 
refer to credits allowable under this part (i.e., all tax 
credits) rather than under this subpart (i.e., the refundable 
credits). The provision is effective as if included in section 
474 of the Tax Reform Act of 1984.

2. Coordination of wash sale rules and section 1256 contracts

    The bill clarifies that the wash sale rules do not apply to 
any loss arising from a section 1256 contract. This rule is 
similar to the rule in present-law section 475 applicable to 
securities that are marked to market under that section. The 
provision is effective as if included in section 5075 of the 
Technical and Miscellaneous Revenue Act of 1988.

3. Disclosure by the Social Security Administration to Federal child 
        support enforcement agencies

    Section 6103(l)(8) permits the Social Security 
Administration (SSA) to disclose certain tax information in its 
possession to State child support enforcement agencies. The 
Office of Child Support Enforcement (OCSE), a Federal agency, 
oversees child support enforcement at the Federal level and 
acts as a coordinator for most programs involved with child 
support enforcement. OCSE acts as a conduit for the disclosure 
of tax information from the Internal Revenue Service to the 
various State and local child support enforcement agencies. The 
change to section 6103(l)(8) permits SSA to make disclosures 
directly to OCSE, which in turn would make the disclosures to 
the State and local child support enforcement agencies. The 
provision is effective on the date of enactment.

4. Treatment of settlements under partnership audit rules

    The provision clarifies that the partnership audit 
procedures that apply to settlement agreements entered into by 
the Secretary also apply to settlement agreements entered into 
by the Attorney General. Under present law, when the Secretary 
enters into a settlement agreement with a partner with respect 
to partnership items, those items convert to nonpartnership 
items, and the other partners in the partnership have a right 
to request consistent settlement terms. The conversion of the 
settling partner's partnership items to nonpartnership items is 
the mechanism by which the settling partner is removed from the 
ongoing partnership proceeding. If these rules did not apply to 
settlement agreements entered into by the Attorney General (or 
his delegate), it is possible that a settling partner would 
inadvertently be bound by the outcome of the partnership 
proceeding rather than the settlement agreement entered into 
with the Attorney General (or his delegate) (section 
6224(c)(2)). Similar changes are made to related provisions 
with respect to settlement agreements. The provision is 
effective for settlement agreements entered into after the date 
of enactment.

5. Clarification of permissible extension of limitations period for 
        installment agreements

    Uncertainty existed as to whether the permissible extension 
of the period of limitations in the context of installment 
agreements is governed by reference to an agreement of the 
parties pursuant to section 6502 or by reference to the period 
of time during which the installment agreement is in effect 
pursuant to sections 6331(k)(3) and (i)(5). A 2000 technical 
correction clarified that the permissible extension of the 
period of limitations in the context of installment agreements 
is governed by the pertinent provisions of section 6502. The 
provision further clarifies that the elimination of the 
application of the section 6331(i)(5) rules applies only to 
section 6331(k)(2)(C). The provision modifies section 313(b)(3) 
of H.R. 5662, the Community Renewal Tax Relief Act of 2000 
(Pub. Law No. 106-554). This is the further technical 
correction referred to in footnote 185a, Joint Committee on 
Taxation, General Explanation of Tax Legislation Enacted in the 
106th Congress (JCS-2-01), April 19, 2001, page 162. The 
provision is effective on the date of enactment.

6. Determination of whether a life insurance contract is a modified 
        endowment contract

    The provision clarifies that, for purposes of determining 
whether a life insurance contract is a modified endowment 
contract, if there is a material change to the contract, 
appropriate adjustments are made in determining whether the 
contract meets the 7-pay test to take into account the cash 
surrender value under the contract. No reference is needed to 
the cash surrender under the ``old contract'' (as was provided 
under section 318(a)(2) of H.R. 5662, the Community Renewal Tax 
Relief Act of 2000 (Pub. Law No. 106-554)) because prior and 
present law provide a definition of cash surrender value for 
this purpose (by cross reference to section 7702(f)(2)(A)). It 
is reiterated that Code section 7702A(c)(3)(ii) is not intended 
to permit a policyholder to engage in a series of ``material 
changes'' to circumvent the premium limitations in section 
7702A. Thus, if there is a material change to a life insurance 
contract, it is intended that the fair market value of the 
contract be used as the cash surrender value under the 
provision, if the amount of the putative cash surrender value 
of the contract is artificially depressed. For example, if 
there is a material change because of an increase in the face 
amount of the contract, any artificial or temporary reduction 
in the cash surrender value of the contract is not to be taken 
into account, but rather, it is intended that the fair market 
value of the contract be used as cash surrender value, so that 
the substance rather than the form of the transaction is 
reflected. Further, as stated in the 1988 Act legislative 
history to section 7702A,\272\ in applying the 7-pay test to 
any premiums paid under a contract that has been materially 
changed, the 7-pay premium for each of the first 7 contract 
years after the change is to be reduced by the product of (1) 
the cash surrender value of the contract as of the date that 
the material change takes effect (determined without regard to 
any increase in the cash surrender value that is attributable 
to the amount of the premium payment that is not necessary), 
and (2) a fraction the numerator of which equals the 7-pay 
premium for the future benefits under the contract, and the 
denominator of which equals the net single premium for such 
benefits computed using the same assumptions used in 
determining the 7-pay premium. The provision is effective as if 
section 318(a) of the Community Renewal Tax Relief Act of 2000 
(114. Stat. 2763A-645) had not been enacted.
---------------------------------------------------------------------------
    \272\ The conference Report to accompany H.R. 4333, the ``Technical 
and Miscellaneous Revenue Act of 1988,'' (H.R. Rep. No. 100-1104), Oct. 
21, 1988, Vol. II, p. 105.
---------------------------------------------------------------------------

              H. Clerical Amendments (sec. 417 of the Act)

    The bill makes a number of clerical and typographical 
amendments to the Code.

            I. Additional Corrections (sec. 418 of the Act)


1. Adoption credit and employer-provided adoption assistance exclusion 
        rounding rules

    The provision provides uniform rounding rules (to the 
nearest multiple of $10) for the inflation-adjusted dollar 
limits and income limitations in the adoption credit and the 
employer-provided adoption assistance exclusion. The provision 
is effective as if included in the provision of the Economic 
Growth and Tax Reform Reconciliation Act of 2001 to which it 
relates.

2. Dependent care credit

    The provision conforms the dollar limit on deemed earned 
income of a taxpayer's spouse who is either (1) a full-time 
student, or (2) physically or mentally incapable of caring for 
himself, to the dollar limit on employment-related expenses 
applicable in determining the maximum credit amount. The 2001 
Act increased the dollar limit on employer-related expenses to 
$3,000 for one qualifying individual or $6,000 for two or more 
qualifying individuals annually but did not conform the dollar 
limit on deemed earned income of a spouse. The provision is 
effective as if included in the provision of the Economic 
Growth and Tax Reform Reconciliation Act of 2001 to which it 
relates.

                             Revenue Effect

    The additional corrections are estimated to reduce Federal 
fiscal year budget receipts by $1 million annually in 2003 
through 2009 and by less than $500,000 annually in 2010 and 
2011.

  TITLE IV. NO IMPACT ON SOCIAL SECURITY TRUST FUNDS (Sec. 501 of the 
                                  Act)

                              Present Law

    Present Law provides for the transfer of Social Security 
taxes and certain self-employment taxes to the Social Security 
trust fund. In addition, the income tax collected with respect 
to a portion of Social Security benefits included in gross 
income is transferred to the Social Security trust fund.

                        Explanation of Provision

    JCWA provides that the Secretary is to annually estimate 
the impact of JCWA on the income and balances of the Social 
Security trust fund. If the Secretary determines that JCWA has 
a negative impact on the income and balances of the fund, then 
the Secretary is to transfer from the general revenues of the 
Federal government an amount sufficient so as to ensure that 
the income and balances of the Social Security trust funds are 
not reduced as a result of the bill. Such transfers are to be 
made not less frequently than quarterly.
    Job Creation and Workers Assistance provides that the 
provisions of JCWA are not to be construed as an amendment of 
Title II of the Social Security Act.

                             Effective Date

    The provision is effective on the date of enactment.

                             Revenue Effect

    The provision is estimated to have no effects on Federal 
fiscal year budget receipts.

          TITLE V. EMERGENCY DESIGNATION (Sec. 502 of the Act)

                              Present Law

    Under the Balanced Budget and Emergency Deficit Control Act 
of 1985, as amended, any legislation that reduces revenues or 
increases outlays is subject to a pay-as-you-go (``PAYGO'') 
requirement. The PAYGO system tracks legislation that may 
increase budget deficits using a ``scorecard'' estimated by the 
Office of Management and Budget. Under PAYGO requirements, in 
order to avoid sequestration, any revenue loss or increase in 
outlays would need to be offset by revenue increases or 
reductions in direct spending.
    If a provision of direct spending or receipts legislation 
is enacted that the President designates as an emergency 
requirement and that the Congress so designates in statute, the 
amounts of new budget authority, outlays, and receipts in all 
fiscal years resulting from that provision are not taken into 
account in determining the PAYGO scorecard.

                        Explanation of Provision

    JCWA designates any revenue loss, new authority, and new 
outlays under the bill in excess of those allowed under the FY 
2002 budget resolution as emergency requirements pursuant to 
section 252(e) of the Balanced Budget and Emergency Deficit 
Control Act of 1985.

                             Effective Date

    The provision is effective on the date of enactment.

                             Revenue Effect

    This provision is estimated to have no effects on Federal 
fiscal year budget receipts.

              TITLE VI. EXTENSIONS OF EXPIRING PROVISIONS

 A. Extend Alternative Minimum Tax Relief for Individuals (sec. 601 of 
                    the Act and sec. 26 of the Code)

                         Present and Prior Law

    Prior and present 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,\273\ the credit for interest on certain home 
mortgages, the HOPE Scholarship and Lifetime Learning credits, 
the IRA credit, and the D.C. homebuyer's credit). Under prior 
law, for taxable years beginning after 2001, these credits 
(other than the adoption credit, child credit, and IRA credit) 
were allowed only to the extent that the individual's regular 
income tax liability exceeded the individual's tentative 
minimum tax, determined without regard to the minimum tax 
foreign tax credit. Under present and prior law, the adoption 
credit, child credit, and IRA credit are allowed to the full 
extent of the individual's regular tax and alternative minimum 
tax.
---------------------------------------------------------------------------
    \273\ A portion of the child credit may be refundable.
---------------------------------------------------------------------------
    For taxable years beginning in 2001, all the nonrefundable 
personal credits were allowed to the extent of the full amount 
of the individual's regular tax and alternative minimum tax.
    The alternative minimum tax is the amount by which the 
tentative minimum tax exceeds the regular income 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 ($49,000 in taxable years beginning 
before 2005) in the case of married individuals filing a joint 
return and surviving spouses; (2) $33,750 ($35,750 in taxable 
years beginning before 2005) in the case of other unmarried 
individuals; (3) $22,500 ($24,500 in taxable years beginning 
before 2005) in the case of married individuals filing separate 
returns; and (4) $22,500 in the case of an estate or trust. 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.

                           Reasons for Change

    The Congress believed that the nonrefundable personal 
credits should be useable without limitation by reason of the 
alternative minimum tax. This will result in significant 
simplification.

                        Explanation of Provision

    JCWA allows an individual to offset the entire regular tax 
liability and alternative minimum tax liability by the personal 
nonrefundable credits in 2002 and 2003.

                             Effective Date

    The provision is effective for taxable years beginning in 
2002 and 2003.

                             Revenue Effect

    The provision is expected to reduce fiscal year budget 
receipts by $85 million in 2002, $444 million in 2003, and $424 
million in 2004.

B. Extend Credit for Purchase of Qualified Electric Vehicles (sec. 602 
             of the Act and secs. 30 and 280F of the Code)

                         Present and Prior Law

    A 10-percent tax credit is provided for the cost of a 
qualified electric vehicle, up to a maximum credit of $4,000 
(section 30). A qualified electric vehicle is a motor vehicle 
that is powered primarily by an electric motor drawing current 
from rechargeable batteries, fuel cells, or other portable 
sources of electric current, the original use of which 
commences with the taxpayer, and that is acquired for the use 
by the taxpayer and not for resale. The full amount of the 
credit is available for purchases prior to 2002. Under prior 
law, the credit phased down in the years 2002 through 2004, and 
was unavailable for purchases after December 31, 2004.\274\
---------------------------------------------------------------------------
    \274\ The amount the taxpayer may claim as a depreciation deduction 
for any passenger automobile is limited (sec. 280F). In the case of a 
passenger vehicle designed to be propelled primarily by electricity and 
built by an original equipment manufacturer, the otherwise applicable 
limitation amounts are tripled. Under prior law, these exceptions from 
sec. 280F applied to vehicles placed in service prior to January 1, 
2005.
---------------------------------------------------------------------------

                           Reasons for Change

    The Congress believed that continued economic incentive is 
warranted to increase the presence of electric vehicles on the 
nation's roadways.

                        Explanation of Provision

    JCWA defers the phase down of the credit by two years. 
Taxpayers may claim the full amount of the credit for qualified 
purchases made in 2002 and 2003. Under JCWA, the phase down of 
the credit value commences in 2004 and the credit is 
unavailable for purchases after December 31, 2006. A conforming 
modification is made to section 280F.

                             Effective Date

    The provision is effective for property placed in service 
after December 31, 2001.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
receipts by $25 million in 2002, $43 million in 2003, $41 
million in 2004, $34 million in 2005, and $20 million in 2006. 
The provision is estimate to increase Federal fiscal year 
receipts by $1 million in 2007, $6 million in 2008, $4 million 
in 2009, $2 million in 2010, $1 million in 2011, and by less 
than $500,000 in 2012.

 C. Extend Section 45 Credit for Production of Electricity from Wind, 
 Closed Loop Biomass, and Poultry Litter (sec. 603 of the 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, qualified 
``closed-loop'' biomass, or qualified poultry waste facilities 
(section 45). The amount of the credit is 1.5 cents per 
kilowatt hour (indexed for inflation) of electricity produced. 
The amount of the credit is 1.8 cents per kilowatt hour for 
electricity produced in 2002.\275\
---------------------------------------------------------------------------
    \275\ The amount of the credit was 1.7 cents per kilowatt hour for 
2001.
---------------------------------------------------------------------------
    Under prior law, the credit applied to electricity produced 
by a wind energy facility placed in service after December 31, 
1993, and before January 1, 2002, to electricity produced by a 
closed-loop biomass facility placed in service after December 
31, 1992, and before January 1, 2002, and to electricity 
produced by a poultry waste facility placed in service after 
December 31, 1999, and before January 1, 2002. The credit is 
allowable for production during the 10-year period after a 
facility is originally placed in service. In order to claim the 
credit, a taxpayer must own the facility and sell the 
electricity produced by the facility to an unrelated party. In 
the case of a poultry waste facility, the taxpayer may claim 
the credit as a lessee/operator of a facility owned by a 
governmental unit.
    Closed-loop biomass is plant matter, where the plants are 
grown for the sole purpose of being used to generate 
electricity. It does not include 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. 
Poultry waste means poultry manure and litter, including wood 
shavings, straw, rice hulls, and other bedding material for the 
disposition of manure.
    The credit for electricity produced from wind, closed-loop 
biomass, or poultry waste is a component of the general 
business credit (section 38(b)(8)). The 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. For credits arising in taxable years beginning 
after December 31, 1997, an unused general business credit 
generally may be carried back one year and carried forward 20 
years (section 39). To coordinate the carryback with the period 
of application for this credit, the credit for electricity 
produced from closed-loop biomass facilities may not be carried 
back to a tax year ending before 1993 and the credit for 
electricity produced from wind energy may not be carried back 
to a tax year ending before 1994 (section 39).

                           Reasons for Change

    The Congress believed that continued economic incentive is 
warranted to increase the presence of these more 
environmentally friendly generation sources in the nation's 
electricity grid.

                        Explanation of Provision

    JCWA extends the placed in service date for qualified 
facilities by two years to include those facilities placed in 
service prior to January 1, 2004.

                             Effective Date

    The provision is effective facilities placed in service 
after December 31, 2001.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
receipts by $11 million in 2002, $40 million in 2003, $72 
million in 2004, $96 million in 2005, $108 million in 2006, 
$113 million in 2007, $115 million in 2008, $116 million in 
2009, $119 million in 2010, $121 million in 2011, and $97 
million in 2012.

D. Extend the Work Opportunity Tax Credit (sec. 604 of the Act and sec. 
                            51 of the Code)

                         Present and Prior Law

In general
    The work opportunity tax credit (``WOTC'') is 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 less than 400 hours) 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 percent of 
the first $6,000 of qualified first-year wages). With respect 
to qualified summer youth employees, the maximum credit is 
$1,200 (40 percent of the first $3,000 of qualified first-year 
wages).
    For purposes of the credit, wages are generally defined as 
under the Federal Unemployment Tax Act, without regard to the 
dollar cap.
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.
    The employer's deduction for wages is reduced by the amount 
of the credit.
Expiration date
    Under prior law, the credit was effective for wages paid or 
incurred to a qualified individual who begins work for an 
employer before January 1, 2002.

                           Reasons for Change

    The Congress believed that a temporary extension of this 
credit would allow the Congress and the Treasury and Labor 
Departments to continue to monitor the effectiveness of the 
credit.

                        Explanation of Provision

    JCWA extends the work opportunity tax credit for two years 
(through December 31, 2003).

                             Effective Date

    The provision is effective for wages paid or incurred to a 
qualified individual who begins work for an employer on or 
after January 1, 2002, and before January 1, 2004.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $96 million in 2002, $227 million in 2003, 
$173 million in 2004, $62 million in 2005, $35 million in 2006, 
$21 million in 2007 and $7 million in 2008.

E. Extend the Welfare-To-Work Tax Credit (sec. 605 of the Act and sec. 
                            51A of the Code)

                         Present and Prior Law

In general
    The welfare-to-work tax credit is available on an elective 
basis for employers for the first $20,000 of eligible wages 
paid to qualified long-term family assistance recipients during 
the first two years of employment. The credit is 35 percent of 
the first $10,000 of eligible wages in the first year of 
employment and 50 percent of the first $10,000 of eligible 
wages in the second year of employment. The maximum credit is 
$8,500 per qualified employee.
    Qualified long-term family assistance recipients are: (1) 
members of a family that 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 
two years after the date that the 18-month total is reached; 
and (3) members of a family that is no longer eligible for 
family assistance because of either Federal or State time 
limits, if they are hired within two years after the Federal or 
State time limits made the family ineligible for family 
assistance. Family assistance means benefits under the 
Temporary Assistance to Needy Families (``TANF'') program.
    For purposes of the credit, wages are generally defined as 
under the Federal Unemployment Tax Act, without regard to the 
dollar amount. In addition, wages include the following: (1) 
educational assistance excludable under a section 127 program; 
(2) the value of excludable health plan coverage but not more 
than the applicable premium defined under section 4980B(f)(4); 
and (3) dependent care assistance excludable under section 129.
    The employer's deduction for wages is reduced by the amount 
of the credit.
Expiration date
    Under prior law, the welfare to work credit was effective 
for wages paid or incurred to a qualified individual who begins 
work for an employer before January 1, 2002.

                           Reasons for Change

    The Congress believed that the welfare-to-work 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. These goals are: (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 for 
these individuals; and (3) to encourage employers to provide 
these individuals with training, health coverage, dependent 
care and ultimately better job attachment.

                        Explanation of Provision

    JCWA extends the welfare to work credit for two years 
(through December 31, 2003).

                             Effective Date

    The provision is effective for wages paid or incurred to a 
qualified individual who begins work for an employer on or 
after January 1, 2002, and before January 1, 2004.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $30 million in 2002, $76 million in 2003, 
$61 million in 2004, $22 million in 2005, $12 million in 2006, 
$7 million in 2007 and $3 million in 2008.

   F. Extend Deduction for Qualified Clean-Fuel Vehicle Property and 
 Qualified Clean-Fuel Vehicle Refueling Property (sec. 606 of the Act 
                  and secs. 179A and 280F of the Code)


                         Present and Prior Law

    Certain costs of qualified clean-fuel vehicle property and 
clean-fuel vehicle refueling property may be expensed and 
deducted when such property is placed in service (section 
179A).\276\ Qualified clean-fuel vehicle property includes 
motor vehicles that use certain clean-burning fuels (natural 
gas, liquefied natural gas, liquefied petroleum gas, hydrogen, 
electricity and any other fuel at least 85 percent of which is 
methanol, ethanol, any other alcohol or ether). The maximum 
amount of the deduction is $50,000 for a truck or van with a 
gross vehicle weight over 26,000 pounds or a bus with a seating 
capacity of at least 20 adults; $5,000 in the case of a truck 
or van with a gross vehicle weight between 10,000 and 26,000 
pounds; and $2,000 in the case of any other motor vehicle. 
Qualified electric vehicles do not qualify for the clean-fuel 
vehicle deduction.
---------------------------------------------------------------------------
    \276\ The amount the taxpayer may claim as a depreciation deduction 
for any passenger automobile is limited (section 280F). In the case of 
a qualified clean-burning fuel vehicle, the limitation of section 280F 
applies only to that portion of the vehicle's cost not represented by 
the installed qualified clean-burning fuel property. The taxpayer may 
claim an amount otherwise allowable as a depreciation deduction on the 
installed qualified clean-burning fuel property, without regard to the 
limitation. Under prior law, these exceptions from section 280F applied 
to vehicles placed in service prior to January 1, 2005.
---------------------------------------------------------------------------
    Clean-fuel vehicle refueling property comprises property 
for the storage or dispensing of a clean-burning fuel, if the 
storage or dispensing is at the point at which the fuel is 
delivered into the fuel tank of a motor vehicle. Clean-fuel 
vehicle refueling property also includes property for the 
recharging of electric vehicles, but only if the property is 
located at a point where the electric vehicle is recharged. Up 
to $100,000 of such property at each location owned by the 
taxpayer may be expensed with respect to that location.
    Under prior law, the deduction for clean-fuel vehicle 
property phased down in the years 2002 through 2004, and was 
unavailable for purchases after December 31, 2004. Under prior 
law, the deduction for clean-fuel vehicle refueling property 
was unavailable for property placed in service after December 
31, 2004.

                           Reasons for Change

    The Congress believed that continued economic incentive is 
warranted to increase the presence of alternative fuel vehicles 
in the market.

                        Explanation of Provision

    JCWA defers the phase down of the deduction for clean-fuel 
vehicle property by two years. Taxpayers may claim the full 
amount of the deduction for qualified vehicles placed in 
service in 2002 and 2003. Under JCWA, the phase down of the 
deduction for clean-fuel vehicles commences in 2004 and the 
deduction is unavailable for purchases after December 31, 2006. 
A conforming modification is made to section 280F.
    JCWA extends the placed in service date for clean-fuel 
vehicle refueling property by two years. The deduction for 
clean-fuel vehicle refueling property is available for property 
placed in service prior to January 1, 2007.

                             Effective Date

    The provision is effective for property placed in service 
after December 31, 2001.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
receipts by $32 million in 2002, $116 million in 2003, $127 
million in 2004, $109 million in 2005, and $46 million in 2006. 
The provision is estimate to increase Federal fiscal year 
receipts by $63 million in 2007, $80 million in 2008, $50 
million in 2009, $29 million in 2010, $12 million in 2011, and 
$3 million in 2012.

G. Taxable Income Limit on Percentage Depletion for Marginal Production 
            (sec. 607 of the Act and sec. 613A of the Code)


                         Present and Prior 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 (section 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'') (section 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. The limitation subsequently was extended to 
include taxable years beginning before January 1, 2002. 
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) 
(section 613A(d)(1)).\277\ 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.
---------------------------------------------------------------------------
    \277\ 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.
---------------------------------------------------------------------------
    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 (section 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 (section 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 believed that 
extension of the current waiver of the 100-percent-of-income-
limit would contribute to investment in domestic oil and gas 
production.

                        Explanation of Provision

    JCWA extends the period when the 100-percent net-income 
limit is suspended to include taxable years beginning after 
December 31, 2001 and before January 1, 2004.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2001.

                             Revenue Effect

    The provision is expected to reduce Federal fiscal year 
budget receipts by $21 million in 2002, $35 million in 2003, 
and $13 million in 2004.

 H. Extension of Authority to Issue Qualified Zone Academy Bonds (sec. 
               608 of the 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. Activities that can be 
financed with these tax-exempt bonds include the financing of 
public schools (section 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'') (section 1397E). 
Before enactment of the JCWA, a total of $400 million of 
qualified zone academy bonds may be issued annually in calendar 
years 1998 through 2001. 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.
    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 zone or 
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.

                           Reasons for Change

    The Congress believed that extension of authority to issue 
qualified zone academy bonds is appropriate in light of the 
educational needs that exist today.

                        Explanation of Provision

    JCWA authorizes issuance of up to $400 million of qualified 
zone academy bonds annually in calendar years 2002 and 2003.

                             Effective Date

    The provision is effective on the date of enactment.

                             Revenue Effect

    The provision is expected to reduce Federal fiscal year 
budget receipts by less than $500,000 in 2002, $2 million in 
2003, $7 million in 2004, $14 million in 2005, $19 million in 
2006, and $21 million annually in 2007 through 2012.

  I. Extension of Increased Coverover Payments to Puerto Rico and the 
     Virgin Islands (sec. 609 of the Act and sec. 7652 of the Code)


                         Present and Prior Law

    A $13.50 per proof gallon \278\ 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).
---------------------------------------------------------------------------
    \278\ A proof gallon is a liquid gallon consisting of 50 percent 
alcohol.
---------------------------------------------------------------------------
    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 was scheduled to return to 
its permanent level of $10.50 per proof gallon.
    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.

                           Reasons for Change

    The Congress believed that extension of the increased 
coverover rate to Puerto Rico and the Virgin Islands would 
contribute to economic stability in those possessions.

                        Explanation of Provision

    JCWA extends the $13.25-per-proof-gallon coverover rate for 
two additional years, through December 31, 2003.
    The Congress is aware that Puerto Rico currently allocates 
a portion of the coverover payments it receives to the Puerto 
Rico Conservation Trust. The Congress believes it is 
appropriate that this allocation continue through the period 
when the $13.25-per-proof-gallon rate is extended.

                             Effective Date

    The provision is effective for articles brought into the 
United States after December 31, 2001.

                             Revenue Effect

    The provision is expected to decrease Federal fiscal year 
budget receipts by $65 million in 2002, $61 million in 2003, 
and $14 million in 2004.

  J. Tax on Failure to Comply with Mental Health Parity Requirements 
           (sec. 610 of the Act and sec. 9812(f) of the Code)


                         Present and Prior Law

    The Mental Health Parity Act of 1996 amended ERISA and the 
Public Health Service Act to provide that group health plans 
that provide both medical and surgical benefits and mental 
health benefits cannot impose aggregate lifetime or annual 
dollar limits on mental health benefits that are not imposed on 
substantially all medical and surgical benefits. The provisions 
of the Mental Health Parity Act are effective with respect to 
plan years beginning on or after January 1, 1998, and expired 
with respect to benefits for services furnished on or after 
September 30, 2001.
    The Taxpayer Relief Act of 1997 added to the Internal 
Revenue Code the requirements imposed under the Mental Health 
Parity Act, and imposed an excise tax on group health plans 
that fail to meet the requirements. The excise tax is equal to 
$100 per day during the period of noncompliance and is imposed 
on the employer sponsoring the plan if the plan fails to meet 
the requirements. The maximum tax that can be imposed during a 
taxable year cannot exceed the lesser of 10 percent of the 
employer's group health plan expenses for the prior year or 
$500,000. No tax is imposed if the Secretary determines that 
the employer did not know, and exercising reasonable diligence 
would not have known, that the failure existed.
    Under prior law, the excise tax initially was applicable 
with respect to plan years beginning on or after January 1, 
1998, and expired with respect to benefits for services 
provided on or after September 30, 2001. Section 701 of Public 
Law 107-116 (providing appropriations for the Departments of 
Labor, Health and Human Services, and Education for fiscal year 
2002), enacted January 10, 2002, restored retroactively the 
mental health parity requirements and the related excise tax to 
September 30, 2001, and provides that the provisions are to 
expire with respect to benefits provided for services on or 
after December 31, 2002.

                           Reasons for Change

    The Congress believed it appropriate to provide an 
extension of the mental health parity provisions.

                        Explanation of Provision

    With respect to services provided on or after September 30, 
2001, the excise tax on failures to comply with mental health 
parity requirements is amended to apply to benefits for such 
services provided on or after January 10, 2002, and before 
January 1, 2004.\279\
---------------------------------------------------------------------------
    \279\ Pub. L. No. 107-313, the ``Mental Health Parity 
Reauthorization Act of 2002,'' enacted December 2, 2002, amends ERISA 
and the Public Health Service Act to extend the mental health parity 
requirements through December 31, 2003.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective with respect to plan years 
beginning after December 31, 2000.

                             Revenue Effect

    The Joint Committee on Taxation estimates that the 
provision will have a negligible effect on excise tax receipts. 
The Congressional Budget Office estimates that the provision 
will have indirect effects on income and payroll tax revenues. 
CBO estimates that these revenues will decline by $30 million 
in 2003 and $10 million in 2004.

  K. Suspension of Reduction of Deductions for Mutual Life Insurance 
        Companies (sec. 611 of the Act and sec. 809 of the Code)


                         Present and Prior Law

    In general, a corporation may not deduct amounts 
distributed to shareholders with respect to the corporation's 
stock. The Deficit Reduction Act of 1984 added a provision to 
the rules governing insurance companies that was intended to 
remedy the failure of prior law to distinguish between amounts 
returned by mutual life insurance companies to policyholders as 
customers, and amounts distributed to them as owners of the 
mutual company.
    Under the provision, section 809, a mutual life insurance 
company is required to reduce its deduction for policyholder 
dividends by the company's differential earnings amount. If the 
company's differential earnings amount exceeds the amount of 
its deductible policyholder dividends, the company is required 
to reduce its deduction for changes in its reserves by the 
excess of its differential earnings amount over the amount of 
its deductible policyholder dividends. The differential 
earnings amount is the product of the differential earnings 
rate and the average equity base of a mutual life insurance 
company.
    The differential earnings rate is based on the difference 
between the average earnings rate of the 50 largest stock life 
insurance companies and the earnings rate of all mutual life 
insurance companies. The mutual earnings rate applied under the 
provision is the rate for the second calendar year preceding 
the calendar year in which the taxable year begins. Under 
present and prior law, the differential earnings rate cannot be 
a negative number.
    A company's equity base equals the sum of: (1) its surplus 
and capital increased by 50 percent of the amount of any 
provision for policyholder dividends payable in the following 
taxable year; (2) the amount of its nonadmitted financial 
assets; (3) the excess of its statutory reserves over its tax 
reserves; and (4) the amount of any mandatory security 
valuation reserves, deficiency reserves, and voluntary 
reserves. A company's average equity base is the average of the 
company's equity base at the end of the taxable year and its 
equity base at the end of the preceding taxable year.
    A recomputation or ``true-up'' in the succeeding year is 
required if the differential earnings amount for the taxable 
year either exceeds, or is less than, the recomputed 
differential earnings amount. The recomputed differential 
earnings amount is calculated taking into account the average 
mutual earnings rate for the calendar year (rather than the 
second preceding calendar year, as above). The amount of the 
true-up for any taxable year is added to, or deducted from, the 
mutual company's income for the succeeding taxable year.

                        Explanation of Provision

    JCWA provides a zero rate for both the differential 
earnings rate and recomputed differential earnings rate 
(``true-up'') for a life insurance company's taxable years 
beginning in 2001, 2002, or 2003, under the rules requiring 
reduction in certain deductions of mutual life insurance 
companies (section 809).

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2000.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $29 million in 2002, $53 million annually in 
2003 and 2004, $26 million in 2005, $3 million in 2006, and 
less than $500,000 in 2007.

L. Extension of Archer Medical Savings Accounts (``MSAs'') (sec. 612 of 
                   the Act and sec. 220 of the Code)


                         Present and Prior Law


In general

    Within limits, contributions to a an Archer medical savings 
account (``MSA'') are deductible in determining adjusted gross 
income if made by an eligible individual and are excludable 
from gross income and wages for employment tax purposes if made 
by the employer of an eligible individual. Earnings on amounts 
in an Archer MSA are not currently taxable. Distributions from 
an Archer MSA for medical expenses are not taxable. 
Distributions not used for medical expenses are taxable. In 
addition, distributions not used for medical expenses are 
subject to an additional 15-percent tax unless the distribution 
is made after age 65, death, or disability.

Eligible individuals

    Archer MSAs are available to employees covered under an 
employer-sponsored high deductible plan of a small employer and 
self-employed individuals covered under a high deductible 
health plan.\280\ An employer is a small employer if it 
employed, on average, no more than 50 employees on business 
days during either the preceding or the second preceding year. 
An individual is not eligible for an Archer MSA if they are 
covered under any other health plan in addition to the high 
deductible plan.
---------------------------------------------------------------------------
    \280\ Self-employed individuals include more than 2-percent 
shareholders of S corporations who are treated as partners for purposes 
of fringe benefit rules pursuant to section 1372.
---------------------------------------------------------------------------

Tax treatment of and limits on contributions

    Individual contributions to an Archer MSA are deductible 
(within limits) in determining adjusted gross income (i.e., 
``above the line''). In addition, employer contributions are 
excludable from gross income and wages for employment tax 
purposes (within the same limits), except that this exclusion 
does not apply to contributions made through a cafeteria plan. 
In the case of an employee, contributions can be made to an 
Archer MSA either by the individual or by the individual's 
employer.
    The maximum annual contribution that can be made to an 
Archer MSA for a year is 65 percent of the deductible under the 
high deductible plan in the case of individual coverage and 75 
percent of the deductible in the case of family coverage.

Definition of high deductible plan

    A high deductible plan is a health plan with an annual 
deductible of at least $1,650 and no more than $2,500 in the 
case of individual coverage and at least $3,300 and no more 
than $4,950 in the case of family coverage. In addition, the 
maximum out-of-pocket expenses with respect to allowed costs 
(including the deductible) must be no more than $3,300 in the 
case of individual coverage and no more than $6,050 in the case 
of family coverage.\281\ A plan does not fail to qualify as a 
high deductible plan merely because it does not have a 
deductible for preventive care as required by State law. A plan 
does not qualify as a high deductible health plan if 
substantially all of the coverage under the plan is for 
permitted coverage (as described above). In the case of a self-
insured plan, the plan must in fact be insurance (e.g., there 
must be appropriate risk shifting) and not merely a 
reimbursement arrangement.
---------------------------------------------------------------------------
    \281\ These dollar amounts are for 2002. These amounts are indexed 
for inflation in $50 increments.
---------------------------------------------------------------------------

Taxation of distributions

    Distributions from an Archer MSA for the medical expenses 
of the individual and his or her spouse or dependents generally 
are excludable from income.\282\ However, in any year for which 
a contribution is made to an Archer MSA, withdrawals from an 
Archer MSA maintained by that individual generally are 
excludable from income only if the individual for whom the 
expenses were incurred was covered under a high deductible plan 
for the month in which the expenses were incurred.\283\ For 
this purpose, medical expenses are defined as under the 
itemized deduction for medical expenses, except that medical 
expenses do not include expenses for insurance other than long-
term care insurance, premiums for health care continuation 
coverage, and premiums for health care coverage while an 
individual is receiving unemployment compensation under Federal 
or State law.
---------------------------------------------------------------------------
    \282\ This exclusion does not apply to expenses that are reimbursed 
by insurance or otherwise.
    \283\ The exclusion continues to apply to expenses for continuation 
coverage or coverage while the individual is receiving unemployment 
compensation, even for an individual who is not an eligible individual.
---------------------------------------------------------------------------
    Distributions that are not used for medical expenses are 
includible in income. Such distributions are also subject to an 
additional 15-percent tax unless made after age 65, death, or 
disability.

Cap on taxpayers utilizing Archer MSAs

    The number of taxpayers benefiting annually from an Archer 
MSA contribution is limited to a threshold level (generally 
750,000 taxpayers). If it is determined in a year that the 
threshold level has been exceeded (called a ``cut-off'' year) 
then, in general, for succeeding years during the pilot period 
1997-2002, only those individuals who: (1) made an Archer MSA 
contribution or had an employer Archer MSA contribution for the 
year or a preceding year (i.e., are active Archer MSA 
participants) or (2) are employed by a participating employer, 
those individuals are eligible for an Archer MSA contribution. 
In determining whether the threshold for any year has been 
exceeded, Archer MSAs of individuals who were not covered under 
a health insurance plan for the six month period ending on the 
date on which coverage under a high deductible plan commences 
would not be taken into account.\284\ However, if the threshold 
level is exceeded in a year, previously uninsured individuals 
are subject to the same restriction on contributions in 
succeeding years as other individuals. That is, they would not 
be eligible for an Archer MSA contribution for a year following 
a cut-off year unless they are an active Archer MSA participant 
(i.e., had an Archer MSA contribution for the year or a 
preceding year) or are employed by a participating employer.
---------------------------------------------------------------------------
    \284\ Permitted coverage, as described above, does not constitute 
coverage under a health insurance plan for this purpose.
---------------------------------------------------------------------------
    The number of Archer MSAs established has not exceeded the 
threshold level.

End of Archer MSA pilot program

    After 2002, no new contributions could be made to Archer 
MSAs except by or on behalf of individuals who previously had 
Archer MSA contributions and employees who are employed by a 
participating employer. An employer is a participating employer 
if: (1) the employer made any Archer MSA contributions for any 
year to an Archer MSA on behalf of employees or (2) at least 20 
percent of the employees covered under a high deductible plan 
made Archer MSA contributions of at least $100 in the year 
2001.
    Self-employed individuals who made contributions to an 
Archer MSA during the period 1997-2002 also may continue to 
make contributions after 2002.

                           Reasons for Change

    Archer MSAs were enacted to provide additional health 
insurance options and to give individuals more control over 
their health care dollars by providing incentives for 
individuals to be more cost conscious consumers of health care. 
The Congress believed that an extension of the Archer MSA 
program was appropriate in order to continue to pursue such 
objectives.

                        Explanation of Provision

    The provision extends the Archer MSA program for another 
year, through December 31, 2003.

                             Effective Date

    The provision is effective on the January 1, 2002.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by less than $500,000 in 2003 and $2 million 
annually in 2004-2012.

 M. Extension of Tax Incentives for Investment on Indian Reservations 
       (sec. 613 of the Act and secs. 45A and 168(j) of the Code)


                         Present and Prior Law

    Present and prior law provide the following tax incentives 
in order to encourage investment on Indian reservations.

Indian employment credit

    A general business credit is available for an employer of 
qualified employees that work on an Indian reservation.\285\ 
The credit is equal to 20 percent of the excess of qualified 
wages and health insurance costs paid to qualified employees in 
the current year over the amount paid in 1993, up to a maximum 
of $20,000. Wages for which the work opportunity credit is 
available are not qualified wages and are not eligible for the 
credit.
---------------------------------------------------------------------------
    \285\ Section 45A.
---------------------------------------------------------------------------
    Employees generally are qualified employees if they (or 
their respective spouses) are enrolled in an Indian tribe and 
live on or near the Indian reservation where they work, perform 
services that are all or substantially all within an Indian 
reservation, and do not receive wages greater than $30,000 
(adjusted for inflation after 1994) for the taxable year. The 
credit is not available for employees involved in certain 
gaming activities or who work in a building that houses certain 
gaming activities.
    Under prior law, the Indian employment credit would not be 
available after December 31, 2003.

Accelerated depreciation of property on Indian reservations

    A special depreciation recovery period is available to 
qualified Indian reservation property.\286\ In general, 
qualified Indian reservation property is property used 
predominantly in the active conduct of a trade or business 
within an Indian reservation, which is not used outside the 
reservation on a regular basis and was not acquired from a 
related person. Property used to conduct or house certain 
gaming activities is not qualified Indian reservation property.
---------------------------------------------------------------------------
    \286\ Section 168(j).
---------------------------------------------------------------------------
    The applicable recovery period for qualified Indian 
reservation property is as follows:

------------------------------------------------------------------------
                                          The applicable recovery period
             In the case of                             is
------------------------------------------------------------------------
3 year property........................  2 years.
5 year property........................  3 years.
7 year property........................  4 years.
10 year property.......................  6 years.
15 year property.......................  9 years.
20 year property.......................  12 years.
Nonresidential real property...........  22 years.
------------------------------------------------------------------------

    Under prior law, accelerated depreciation of property on 
Indian reservations would not be available for property placed 
in service after December 31, 2003.

                        Explanation of Provision

    JCWA extends through December 31, 2004, the Indian 
employment credit and the accelerated depreciation rules for 
property on Indian reservations.

                             Effective Date

    The provision is effective on the date of enactment.

                             Revenue Effect

    The provision is expected increase Federal fiscal year 
budget receipts by $8 million in 2003, reduce receipts by $163 
million in 2004, $294 million in 2005, and $108 million in 
2006, and increase Federal fiscal year budget receipts by $23 
million in 2007, $79 million in 2008, $123 million in 2009, 
$100 million in 2010, $54 million in 2011, and $7 million in 
2012.

N. Extension and Modification of Exceptions under Subpart F for Active 
  Financing Income (sec. 614 of the 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.\287\
---------------------------------------------------------------------------
    \287\ 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'').\288\
---------------------------------------------------------------------------
    \288\ Temporary exceptions from the subpart F provisions for 
certain active financing income applied only for taxable years 
beginning in 1998. Those exceptions were modified and extended for one 
year, applicable only for taxable years beginning in 1999. The Tax 
Relief Extension Act of 1999 (Pub. L. No. 106-170) clarified and 
extended the temporary exceptions for two years, applicable only for 
taxable years beginning after 1999 and before 2002.
---------------------------------------------------------------------------
    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.
    In the case of a life insurance or annuity contract, 
reserves for such contracts are determined as follows for 
purposes of these provisions. The reserves equal the greater 
of: (1) the net surrender value of the contract (as defined in 
section 807(e)(1)(A)), including in the case of pension plan 
contracts; or (2) the amount determined by applying the tax 
reserve method that would apply if the qualifying life 
insurance company were subject to tax under Subchapter L of the 
Code, with the following modifications. First, there is 
substituted for the applicable Federal interest rate an 
interest rate determined for the functional currency of the 
qualifying insurance company's home country, calculated (except 
as provided by the Treasury Secretary in order to address 
insufficient data and similar problems) in the same manner as 
the mid-term applicable Federal interest rate (within the 
meaning of section 1274(d)). Second, there is substituted for 
the prevailing State assumed rate the highest assumed interest 
rate permitted to be used for purposes of determining statement 
reserves in the foreign country for the contract. Third, in 
lieu of U.S. mortality and morbidity tables, mortality and 
morbidity tables are applied that reasonably reflect the 
current mortality and morbidity risks in the foreign country. 
Fourth, the Treasury Secretary may provide that the interest 
rate and mortality and morbidity tables of a qualifying 
insurance company may be used for one or more of its branches 
when appropriate. In no event may the reserve for any contract 
at any time exceed the foreign statement reserve for the 
contract, reduced by any catastrophe, equalization, or 
deficiency reserve or any similar reserve.
    A temporary exception from foreign personal holding company 
income is also provided for income from investment of assets 
equal to 10 percent of reserves (determined for purposes of the 
provision) for contracts regulated in the country in which sold 
as life insurance or annuity contracts. This exception does not 
apply to investment income with respect to excess surplus.

                           Reasons for Change

    In the Taxpayer Relief Act of 1997, one-year temporary 
exceptions from foreign personal holding company income were 
enacted for income from the active conduct of an insurance, 
banking, financing, or similar business.\289\ In the Tax and 
Trade Relief Extension Act of 1998, 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.\290\ In the Tax Relief Extension Act of 
1999, Congress extended the temporary extensions for an 
additional two years, as modified by the 1998 Act, and with a 
clarification relating to the application of prior law in the 
event of future non-application of the temporary 
provisions.\291\ The Congress believed that it is appropriate 
to extend \292\ the temporary provisions, as modified by the 
previous legislation, with an additional modification relating 
to the determination of certain reserves for life insurance and 
annuity contracts. The Congress believed that the use of 
foreign statement reserves for exempt life insurance and 
annuity contracts may be appropriate under these exceptions in 
certain circumstances, provided IRS approval is obtained, based 
on whether such use with respect to those foreign contracts 
provides an appropriate means of measuring income for Federal 
income tax purposes.
---------------------------------------------------------------------------
    \289\ The President canceled this provision in 1997 pursuant to the 
Line Item Veto Act. On June 25, 1998, the Supreme Court held that the 
cancellation procedures set forth in the Line Item Veto Act are 
unconstitutional. Clinton v. City of New York, 524 U.S. 417 (1998).
    \290\ The Tax and Trade Relief Extension Act of 1998, Division J, 
Making Omnibus Consolidated and Emergency Supplemental Appropriations 
for Fiscal Year 1999, Pub. L. No. 105-277, sec. 1005 (1998).
    \291\ The Tax Relief Extension Act of 1999, Pub.L. No. 106-170, 
sec. 503 (1999).
    \292\ The House bill, H.R. 3090, the ``Economic Security and 
Recovery Act of 2001,'' provided for a permanent extension. See H. R. 
Rep. No. 107-251 at 50 (2001). The Senate bill, the ``Economic Recovery 
and Assistance for American Workers Act of 2001,'' provided for a one-
year extension. See S. Prt. No. 107-49 at 58-60 (2001).
---------------------------------------------------------------------------

                        Explanation of Provision

    JCWA extends for five 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.
    JCWA generally retains present and prior law with respect 
to the determination of an insurance company's reserve for a 
life insurance or annuity contract under these exceptions. JCWA 
does, however, permit a taxpayer in certain circumstances, 
subject to approval by the IRS through the ruling process or in 
published guidance, to establish that the reserve for such 
contracts is the amount taken into account in determining the 
foreign statement reserve for the contract (reduced by 
catastrophe, equalization, or deficiency reserve or any similar 
reserve). IRS approval is to be based on whether the method, 
the interest rate, the mortality and morbidity assumptions, and 
any other factors taken into account in determining foreign 
statement reserves (taken together or separately) provide an 
appropriate means of measuring income for Federal income tax 
purposes. In seeking a ruling, the taxpayer is required to 
provide the IRS with necessary and appropriate information as 
to the method, interest rate, mortality and morbidity 
assumptions and other assumptions under the foreign reserve 
rules so that a comparison can be made to the reserve amount 
determined by applying the tax reserve method that would apply 
if the qualifying insurance company were subject to tax under 
Subchapter L of the Code (with the modifications provided under 
present law for purposes of these exceptions). The IRS also may 
issue published guidance indicating its approval. Present and 
prior law continues to apply with respect to reserves for any 
life insurance or annuity contract for which the IRS has not 
approved the use of the foreign statement reserve. An IRS 
ruling request under this provision is subject to the present-
law provisions relating to IRS user fees.

                             Effective Date

    The provision is effective for taxable years of foreign 
corporations beginning after December 31, 2001, and before 
January 1, 2007, 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 $315 million in 2002, $1,490 million in 
2003, $1,684 million in 2004, $1,903 million in 2005, $2,129 
million in 2006, and $1,520 million in 2007.

 O. Repeal of Dyed-Fuel Requirement for Registered Diesel or Kerosene 
       Terminals (sec. 615 of the Act and sec. 4101 of the Code)


                               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.\293\ One such exception allows removal of diesel 
fuel or kerosene without payment of tax if the fuel is destined 
for a nontaxable use (e.g., use as heating oil) and is 
indelibly dyed.
---------------------------------------------------------------------------
    \293\ 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).
---------------------------------------------------------------------------
    Terminal facilities are not permitted to receive and store 
non-tax-paid motor fuels unless they are registered with the 
Internal Revenue Service. Under prior law, a prerequisite to 
registration was that if the terminal offered for sale diesel 
fuel, it had to offer both dyed and undyed diesel fuel. 
Similarly, if the terminal offered for sale kerosene, it had to 
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, and later until January 1, 2002.

                           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 and diesel fuel (destined for 
nontaxable uses) might be unavailable in markets where those 
fuels were commonly used (e.g., as heating oil). To ensure 
availability of untaxed, dyed fuels for those 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 where there is a demand for them.

                        Explanation of Provision

    The diesel fuel and kerosene dyeing mandate is repealed.

                             Effective Date

    The provision is effective January 1, 2002.

                             Revenue Effect

    The provision is expected to have a negligible revenue 
effect on Federal fiscal year budget receipts.

   PART NINE: THE CLERGY HOUSING ALLOWANCE CLARIFICATION ACT OF 2002 
                       (PUBLIC LAW 107-181) \294\

                         Present and Prior Law

    Section 107 of the Internal Revenue Code provides that a 
minister of the gospel's gross income does not include: (1) the 
rental value of a home furnished as part of his or her 
compensation; or (2) the rental allowance paid as part of his 
or her compensation, to the extent used to rent or provide a 
home. The Internal Revenue Service's position (Rev. Rul. 71-
280, 1971-2 C.B.92) is that the amount of the section 107 
rental allowance exclusion may not exceed the fair rental value 
of the home plus the cost of utilities.
---------------------------------------------------------------------------
    \294\ H.R. 4156. The bill was referred to the House Committee on 
Ways and Means. The House passed the bill on April 16, 2002, under a 
motion to suspend the rules and pass the bill. See Joint Committee on 
Taxation, Description of H.R. 4156, The Clergy Housing Clarification 
Act of 2002, As Passed by the House of Representatives on April 16, 
2002 (JCX-31-02), April 18, 2002. The bill was referred to the Senate 
Committee on Finance. The Finance Committee discharged the bill by 
unanimous consent. The Senate passed the bill on May 2, 2002, by 
unanimous consent. The President signed the bill on May 20, 2002. The 
bill was not reported by any Committee of the House of Representatives 
or the Senate. Therefore, the bill does not have any formal legislative 
history. This description of the provisions of the bill was prepared by 
the staff of the Joint Committee on Taxation.
---------------------------------------------------------------------------
    In Warren v. Commissioner, 114 T.C. No. 343 (2000), appeal 
dismissed 302 F.3d 1012 (9th Cir. 2002), the Tax Court ruled 
that the section 107 rental allowance exclusion is limited to 
the amount used to provide the home, and not the fair rental 
value of the home.

                        Explanation of Provision

    The Act clarifies that the amount of the section 107 rental 
allowance exclusion may not exceed the fair rental value of the 
home (including furnishings and appurtenances) plus the cost of 
utilities.

                             Effective Date

    The provision is generally applicable for taxable years 
beginning after December 31, 2001. The provision also applies 
to taxable years beginning before January 1, 2002, for which 
the taxpayer: (1) filed a tax return before April 17, 2002, 
indicating that the section 107 rental allowance exclusion is 
limited to the fair rental value of the home (including 
furnishings and appurtenances) plus the cost of utilities; or 
(2) files a return after April 16, 2002. Other tax returns for 
taxable years beginning before January 1, 2002, are not subject 
to the fair rental value limitation added by the bill.

                             Revenue Effect

    The provision is estimated to increase Federal fiscal year 
budget receipts by less than $500,000 annually in 2002 and 
2003, $1 million annually in 2004 and 2005, $2 million in 2006, 
$3 million in 2007, $4 million in 2008, $5 million annually in 
2009 and 2010, $6 million annually in 2011 and 2012.

 PART TEN: REVENUE PROVISION OF THE TRADE ADJUSTMENT ASSISTANCE REFORM 
                 ACT OF 2002 (PUBLIC LAW 107-210) \295\

I. REFUNDABLE CREDIT FOR HEALTH INSURANCE COSTS OF ELIGIBLE INDIVIDUALS 
    (Secs. 201(a), 202 and 203 of the Act and new secs. 35, 6050T, 
                   6103(l)(18), and 7527 of the Code)

                         Present and Prior Law

    Under present and prior law, the tax treatment of health 
insurance expenses depends on the individual's circumstances. 
In general, employer contributions to an accident or health 
plan are excludable from an employee's gross income (section 
106).
---------------------------------------------------------------------------
    \295\ H.R. 3009. The ``Trade Adjustment Assistance Reform Act of 
2002'' is Division A of the ``Trade Act of 2002,'' Pub. L. No. 107-210, 
July 26, 2002. H.R. 3009 was reported (as amended) by the House 
Committee on Ways and Means on November 14, 2001 (H.R. Rep. No. 107-
290) and was passed by the House on November 16, 2001. As initially 
passed by the House, H.R. 3009 covered Andean trade provisions. The 
Senate Committee on Finance reported H.R. 3009, as amended, on December 
14, 2001 (S. Rep. No. 107-126). The bill as reported by the Finance 
Committee covered Andean trade provisions. The Senate agreed to S. 
Amdt. 3401 on May 23, 2002, as a substitute to H.R. 3009. This version 
of the bill contained broader trade provisions and a refundable health 
credit for eligible individuals. The House agreed to the Senate 
amendment, with an amendment pursuant to H. Res. 450 on June 26, 2002. 
Differences between the bills were resolved in conference. A conference 
report on the bill was filed in the House on July 26, 2002 (H.R. Rep. 
No. 107-624). The conference report was passed by the House on July 27, 
2002, and by the Senate on August 1, 2002. H.R. 3009 was signed by the 
President on August 6, 2002.
---------------------------------------------------------------------------
    Self-employed individuals are entitled to deduct a portion 
of the amount paid for health insurance expenses for the 
individual and his or her spouse and dependents. The percentage 
of deductible expenses is 70 percent in 2002 and 100 percent in 
2003 and thereafter.
    Individuals other than self-employed individuals who 
purchase their own health insurance may deduct their health 
insurance expenses only if they itemize deductions and only to 
the extent that their total unreimbursed medical expenses 
exceed 7.5 percent of adjusted gross income.
    Prior law did not provide a tax credit for the purchase of 
health insurance.
    The health care continuation rules (commonly referred to as 
``COBRA'' rules, after the Consolidated Omnibus Budget 
Reconciliation Act of 1985 in which they were enacted) require 
that employer-sponsored group health plans of employers with 20 
or more employees must offer certain covered employees and 
their dependents (``qualified beneficiaries'') the option of 
purchasing continued health coverage in the event of loss of 
coverage resulting from certain qualifying events. These 
qualifying events include: termination or reduction in hours of 
employment, death, divorce or legal separation, enrollment in 
Medicare, the bankruptcy of the employer, or the end of a 
child's dependency under a parent's health plan. In general, 
the maximum period of COBRA coverage is 18 months. A longer 
maximum period applies in certain cases. An employer is 
permitted to charge qualified beneficiaries 102 percent of the 
applicable premium for COBRA coverage.
    Under present law, individuals without access to COBRA are 
able to purchase individual policies on a guaranteed issue 
basis without exclusion of coverage for pre-existing conditions 
if they had 18 months of creditable coverage under an employer 
sponsored group health plan, governmental plan, or a church 
plan. Those with access to COBRA are required to exhaust their 
18 months of COBRA prior to obtaining a policy on a guaranteed 
issue basis without exclusion of coverage for pre-existing 
conditions.

                        Explanation of Provision

Refundable health insurance credit: in general
    In the case of taxpayers who are eligible individuals, a 
refundable tax credit is provided for 65 percent of the 
taxpayer's expenses for qualified health insurance of the 
taxpayer and qualifying family members for each eligible 
coverage month beginning in the taxable year. The credit is 
available only with respect to amounts paid by the taxpayer.
    Qualifying family members are the taxpayer's spouse and any 
dependent of the taxpayer with respect to whom the taxpayer is 
entitled to claim a dependency exemption.\296\ Any individual 
who has other specified coverage is not a qualifying family 
member.
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    \296\ Present and prior law allows the custodial parent to release 
the right to claim the dependency exemption for a child to the 
noncustodial parent. In addition, if certain requirements are met, the 
parents may decide by agreement that the noncustodial parent is 
entitled to the dependency exemption with respect to a child. In such 
cases, the provision treats the child as the dependent of the custodial 
parent for purposes of the credit.
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Persons eligible for the credit
    Eligibility for the credit is determined on a monthly 
basis. In general, an eligible coverage month is any month if, 
as of the first day of the month, the taxpayer (1) is an 
eligible individual, (2) is covered by qualified health 
insurance, (3) does not have other specified coverage, and (4) 
is not imprisoned under Federal, State, or local authority. In 
the case of a joint return, the eligibility requirements are 
met if at least one spouse satisfies the requirements. An 
eligible month must begin more than 90 days after the date of 
enactment of the Trade Act of 2002.\297\
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    \297\ The date of enactment is August 6, 2002.
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    An eligible individual is (1) an eligible TAA recipient, 
(2) an eligible alternative TAA recipient, and (3) an eligible 
PBGC pension recipient.
    An individual is an eligible TAA recipient during any month 
if the individual (1) is receiving for any day of such month a 
trade adjustment allowance \298\ or who would be eligible to 
receive such an allowance but for the requirement that the 
individual exhaust unemployment benefits before being eligible 
to receive an allowance and (2) with respect to such allowance, 
is covered under a certification issued under subchapter A or D 
of chapter 2 of title II of the Trade Act of 1974. An 
individual is treated as an eligible TAA recipient during the 
first month that such individual would otherwise cease to be an 
eligible TAA recipient.
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    \298\ Part I of subchapter B, or subchapter D, of chapter 2 of 
title II of the Trade Act of 1974.
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    An individual is an eligible alternative TAA recipient 
during any month if the individual (1) is a worker described in 
section 246(a)(3)(B) of the Trade Act of 1974 who is 
participating in the program established under section 
246(a)(1) of such Act, and (2) is receiving a benefit for such 
month under section 246(a)(2) of such Act. An individual is 
treated as an eligible alternative TAA recipient during the 
first month that such individual would otherwise cease to be an 
eligible TAA recipient.
    An individual is a PBGC pension recipient for any month if 
he or she (1) is age 55 or over as of the first day of the 
month, and (2) is receiving a benefit any portion of which is 
paid by the Pension Benefit Guaranty Corporation (the 
``PBGC'').
    An otherwise eligible taxpayer is not eligible for the 
credit for a month if, as of the first day of the month the 
individual has other specified coverage. Other specified 
coverage is (1) coverage under any insurance which constitutes 
medical care (except for insurance substantially all of the 
coverage of which is for excepted benefits) \299\ if at least 
50 percent of the cost of the coverage is paid by an employer 
\300\ (or former employer) of the individual or his or her 
spouse or (2) coverage under certain governmental health 
programs. \301\ A rule aggregating plans of the same employer 
applies in determining whether the employer pays at least 50 
percent of the cost of coverage. A person is not an eligible 
individual if he or she may be claimed as a dependent on 
another person's tax return. A special rule applies with 
respect to alternative TAA recipients.
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    \299\ Excepted benefits are: (1) coverage only for accident or 
disability income or any combination thereof; (2) coverage issued as a 
supplement to liability insurance; (3) liability insurance, including 
general liability insurance and automobile liability insurance; (4) 
worker's compensation or similar insurance; (5) automobile medical 
payment insurance; (6) credit-only insurance; (7) coverage for on-site 
medical clinics; (8) other insurance coverage similar to the coverages 
in (1)-(7) specified in regulations under which benefits for medical 
care are secondary or incidental to other insurance benefits; (9) 
limited scope dental or vision benefits; (10) benefits for long-term 
care, nursing home care, home health care, community-based care, or any 
combination thereof; and (11) other benefits similar to those in (9) 
and (10) as specified in regulations; (12) coverage only for a 
specified disease or illness; (13) hospital indemnity or other fixed 
indemnity insurance; and (14) Medicare supplemental insurance.
    \300\ An amount is considered paid by the employer if it is 
excludable from income. Thus, for example, amounts paid for health 
coverage on a salary reduction basis under an employer plan are 
considered paid by the employer.
    \301\ Specifically, an individual is not eligible for the credit 
if, as of the first day of the month, the individual is (1) entitled to 
benefits under Medicare Part A, enrolled in Medicare Part B, or 
enrolled in Medicaid or SCHIP, (2) enrolled in a health benefits plan 
under the Federal Employees Health Benefit Plan, or (3) entitled to 
receive benefits under chapter 55 of title 10 of the United States Code 
(relating to military personnel). An individual is not considered to be 
enrolled in Medicaid solely by reason of receiving immunizations.
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Qualified health insurance

    Qualified health insurance eligible for the credit is: (1) 
COBRA continuation coverage; (2) State based continuation 
coverage provided by the State under a State law that requires 
such coverage; (3) coverage offered through a qualified State 
high risk pool; (4) coverage under a health insurance program 
offered to State employees or a comparable program; (5) 
coverage through an arrangement entered into by a State and a 
group health plan, an issuer of health insurance coverage, an 
administrator, or an employer; (6) coverage offered through a 
State arrangement with a private sector health care coverage 
purchasing pool; (7) coverage under a State-operated health 
plan that does not receive any Federal financial participation; 
(8) coverage under a group health plan that is available 
through the employment of the eligible individual's spouse; and 
(9) coverage under individual health insurance if the eligible 
individual was covered under individual health insurance during 
the entire 30-day period that ends on the date the individual 
became separated from the employment which qualified the 
individual for the TAA allowance, the benefit for an eligible 
alternative TAA recipient, or a pension benefit from the PBGC, 
whichever applies. \302\
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    \302\ For this purpose, ``individual health insurance'' means any 
insurance which constitutes medical care offered to individuals other 
than in connection with a group health plan. Such term does not include 
Federal- or State-based health insurance coverage.
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    Qualified health insurance does not include any State-based 
coverage (i.e., coverage described in (2)-(8) in the preceding 
paragraph), unless the State has elected to have such coverage 
treated as qualified health insurance and such coverage meets 
certain requirements. Such State coverage must provide that 
each qualifying individual is guaranteed enrollment if the 
individual pays the premium for enrollment or provides a 
qualified health insurance costs eligibility certificate and 
pays the remainder of the premium. In addition, the State-based 
coverage cannot impose any pre-existing condition limitation 
with respect to qualifying individuals. State-based coverage 
cannot require a qualifying individual to pay a premium or 
contribution that is greater than the premium or contribution 
for a similarly situated individual who is not a qualified 
individual. Finally, benefits under the State-based coverage 
must be the same as (or substantially similar to) benefits 
provided to similarly situated individuals who are not 
qualifying individuals. A qualifying individual is an eligible 
individual who seeks to enroll in the State-based coverage and 
who has aggregate periods of creditable coverage \303\ of three 
months or longer, does not have other specified coverage, and 
who is not imprisoned. A ``qualifying individual'' also 
includes qualified family members of such an eligible 
individual.
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    \303\ Creditable coverage is determined under the Health Care 
Portability and Accountability Act (Code sec. 9801(c)).
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    Qualified health insurance does not include coverage under 
a flexible spending or similar arrangement or any insurance if 
substantially all of the coverage is of excepted benefits.

Other rules

    Amounts taken into account in determining the credit may 
not be taken into account in determining the amount allowable 
under the itemized deduction for medical expenses or the 
deduction for health insurance expenses of self-employed 
individuals. Amounts distributed from a medical savings account 
are not eligible for the credit. The amount of the credit 
available through filing a tax return is reduced by any credit 
received on an advance basis. Married taxpayers filing separate 
returns are eligible for the credit; however, if both spouses 
are eligible individuals and the spouses file a separate 
return, then the spouse of the taxpayer is not a qualifying 
family member.
    The Secretary of the Treasury is authorized to prescribe 
such regulations and other guidance as may be necessary or 
appropriate to carry out the provision.

Advance payment of refundable health insurance credit; reporting 
        requirements

    The credit is payable on an advance basis (i.e., prior to 
the filing of the taxpayer's return) pursuant to a program to 
be established by the Secretary of the Treasury no later than 
August 1, 2003. Such program is to provide for making payments 
on behalf of certified individuals to providers of qualified 
health insurance. In order to receive the credit on an advance 
basis, a qualified health insurance costs credit eligibility 
certificate would have to be in effect for the taxpayer. A 
qualified health insurance costs credit eligibility certificate 
is a written statement that an individual is an eligible 
individual for purposes of the credit, provides such 
information as the Secretary of the Treasury may require, and 
is provided by the Secretary of Labor or the PBGC (as 
appropriate) or such other person or entity designated by the 
Secretary.
    The disclosure of return information of certified 
individuals to providers of health insurance information is 
permitted to the extent necessary to carry out the advance 
payment mechanism.
    Any person who receives payments during a calendar year for 
qualified health insurance and claims a reimbursement for an 
advance credit amount is required to file an information return 
with respect to each individual from whom such payments were 
received or for whom such a reimbursement is claimed. The 
return is to be in such form as the Secretary may prescribe and 
is to contain the name, address, and taxpayer identification 
number of the individual and any other individual on the same 
health insurance policy, the aggregate of the advance credit 
amounts provided, the number of months for which advance credit 
amounts are provided, and such other information as the 
Secretary may prescribe. Similar information must be provided 
to the individual no later than January 31 of the year 
following the year for which the information return is made.

                             Effective Date

    The provision is generally be effective with respect to 
taxable years beginning after December 31, 2001. The provision 
relating to the advance payment mechanism to be developed by 
the Secretary is effective on the date of enactment.

                             Revenue Effect

    The provision to create a new 65 percent refundable credit 
for the purchase of health insurance coverage by certain 
taxpayers eligible for TAA assistance or alternative TAA 
assistance is estimated to reduce Federal fiscal year budget 
receipts by $122 million in 2003, $212 million in 2004, $260 
million in 2005, $272 million in 2006, $285 million in 2007, 
$297 million in 2008, $309 million in 2009, $321 million in 
2010, $333 million in 2011, and $345 million in 2012. \304\
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    \304\ The estimate of the reduction in Federal fiscal year budget 
receipts includes the following increase it outlays: $37 million in 
2003, $66 million in 2004, $86 million in 2005, $90 million in 2006, 
$94 million in 2007, $98 million in 2008, $102 million in 2009, $106 
million in 2010, $110 million in 2011, and $114 million in 2012.
---------------------------------------------------------------------------
    The provision to create a new 65 percent refundable credit 
for the purchase of health insurance coverage by certain PBGC 
pension recipients is estimated to reduce Federal fiscal year 
budget receipts by $172 million in 2003, $187 million in 2004, 
$192 million in 2005, $198 million in 2006, $203 million in 
2007, $209 million in 2008, $214 million in 2009, $220 million 
in 2010, $225 million in 2011, and $231 million in 2012. \305\
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    \305\ The estimate of the reduction in Federal fiscal year budget 
receipts includes the following increase it outlays: $52 million in 
2003, $58 million in 2004, $63 million in 2005, $65 million in 2006, 
$67 million in 2007, $69 million in 2008, $71 million in 2009, $73 
million in 2010, $74 million in 2011, and $76 million in 2012.

 PART ELEVEN: AN ACT RELATING TO POLITICAL ORGANIZATIONS DESCRIBED IN 
  SECTION 527 OF THE INTERNAL REVENUE CODE (PUBLIC LAW 107-276) \306\
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    \306\ H.R. 5596. The bill was referred to the House Committee on 
Ways and Means. The House of Representatives considered the bill by 
unanimous consent and the bill was passed without objection on October 
16, 2002. The Senate passed the bill without amendment by unanimous 
consent on October 17, 2002. The bill was signed on November 2, 2002 by 
the President. The bill was not reported by any Committee of the House 
of Representatives or the Senate. Therefore, the bill does not have any 
formal legislative history. This description of the provisions of the 
bill was prepared by the staff of the Joint Committee on Taxation. See 
Joint Committee on Taxation, Technical Explanation of H.R. 5596, 
Relating to Political Organizations Described in Section 527 of the 
Internal Revenue Code, as Passed by the House and the Senate (JCX-103-
02), October 22, 2002.
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                         Present and Prior Law

In general
    Section 527 provides a limited tax-exempt status to 
``political organizations,'' meaning a party, committee, 
association, fund, or other organization (whether or not 
incorporated) organized and operated primarily for the purpose 
of directly or indirectly accepting contributions or making 
expenditures (or both) for an ``exempt function.'' These 
organizations generally are exempt from Federal income tax on 
their ``exempt function income'' (e.g., contributions they 
receive, membership dues, other income related to an exempt 
function) but are subject to tax on their net investment income 
and certain other income at the highest corporate income tax 
rate (``political organization taxable income''). Donors are 
exempt from gift tax on their contributions to such 
organizations. For purposes of section 527, the term ``exempt 
function'' means: the function of influencing or attempting to 
influence the selection, nomination, election, or appointment 
of any individual to any Federal, State, or local public office 
or office in a political organization, or the election of 
Presidential or Vice-Presidential electors, whether or not such 
individual or electors are selected, nominated, elected, or 
appointed.
Notice of formation as a section 527 organization
    An organization is not treated as a section 527 
organization unless it has given notice that it is a section 
527 organization to the Secretary of the Treasury 
(``Secretary''). \307\ Under prior law, the notice was required 
to be filed electronically and in writing.
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    \307\ See section 527(i).
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    The notice is not required to be filed by: (1) any person 
required to report as a political committee under the Federal 
Election Campaign Act of 1971, (2) organizations that 
reasonably anticipate that their annual gross receipts always 
will be less than $25,000, and (3) organizations described in 
section 501(c).
    The notice is required to be transmitted no later than 24 
hours after the date on which the organization is organized. 
The notice is required to include the following information: 
(1) the name and address of the organization and its electronic 
mailing address, (2) the purpose of the organization, (3) the 
names and addresses of the organization's officers, highly 
compensated employees, contact person, custodian of records, 
and members of the organization's Board of Directors, (4) the 
name and address of, and relationship to, any related entities, 
and (5) such other information as the Secretary may require.
    The organization and the Internal Revenue Service (``IRS'') 
are required to make the notice of status as a section 527 
organization open to public inspection. \308\ In addition, the 
Secretary is required to make publicly available on the 
Internet and at the offices of the IRS a list of all political 
organizations that file a notice with the Secretary under 
section 527 and the name, address, electronic mailing address, 
custodian of records, and contact person for such organization. 
\309\ The IRS is required to make this information available 
within five business days after the Secretary receives a notice 
from a section 527 organization.
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    \308\ Section 6104(a)(1).
    \309\ Section 6104(a)(3).
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    An organization that fails to file a notice with the 
Secretary is not treated as a section 527 organization and its 
exempt function income is taken into account in determining 
taxable income.
Disclosure of expenditures and contributors
    A political organization that accepts a contribution or 
makes an expenditure for an exempt function during any calendar 
year is required to file with the Secretary certain reports. 
\310\ The following reports are required: either (1) in the 
case of a calendar year in which a regularly scheduled election 
is held, quarterly reports, a pre-election report, and a post-
general election report and, in the case of any other calendar 
year, a report covering January 1 to June 30 and a report 
covering July 1 to December 31, or (2) monthly reports for the 
calendar year, except that, in lieu of the reports due for 
November and December of any year in which a regularly 
scheduled general election is held, a pre-general election 
report, a post-general election report, and a year end report 
are to be filed. A political organization may choose to file 
pursuant to either option described above, but it must file on 
the same basis for the entire calendar year. An amount to be 
paid by the organization is imposed for a failure to file a 
report or to provide the required information in the report.
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    \310\ See section 527(j).
---------------------------------------------------------------------------
    The reports are required to include the following 
information: (1) the amount of each expenditure made to a 
person if the aggregate amount of expenditures to such person 
during the calendar year equals or exceeds $500 and the name 
and address of the person (in the case of an individual, 
including the occupation and name of the employer of the 
individual); and (2) the name and address (in the case of an 
individual, including the occupation and name of employer of 
such individual) of all contributors that contributed an 
aggregate amount of $200 or more to the organization during the 
calendar year and the amount of the contribution.
    The disclosure requirements do not apply: (1) to any person 
required to report as a political committee under the Federal 
Election Campaign Act of 1971, (2) to any State or local 
committee of a political party or political committee of a 
State or local candidate, (3) to any organization that 
reasonably anticipates that it will not have gross receipts of 
$25,000 or more for any taxable year, (4) to any organization 
described in section 501(c), or (5) with respect to any 
expenditure that is an independent expenditure (as defined in 
section 301 of the Federal Election Campaign Act of 1971).
    For purposes of the disclosure requirements, the term 
``election'' means: (1) a general, special, primary, or runoff 
election for a Federal office, (2) a convention or caucus of a 
political party that has authority to nominate a candidate for 
Federal office, (3) a primary election held for the selection 
of delegates to a national nominating convention of a political 
party, or (4) a primary election held for the expression of a 
preference for the nomination of individuals for election to 
the office of President.
    The IRS is required to make available to the public any 
report filed by a political organization. \311\ In addition, 
the organization is required to make any such report available 
to the public for inspection at the organization's principal 
office (and in certain cases, regional or district offices) 
during regular business hours, and provide a copy of such 
report upon a request made in person or in writing. \312\
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    \311\ See section 6104(d).
    \312\ Id.
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Return requirements
    Under present and prior law, a section 527 organization 
that has political organization taxable income is required 
annually to file Form 1120-POL (Return for Certain Political 
Organizations). \313\ Under prior law, section 527 
organizations (other than organizations described in section 
501(c)) that did not have political organization taxable income 
but had gross receipts of $25,000 or more during the taxable 
year were required to file a Form 1120-POL. In addition, under 
prior law, the annual tax return was required to be made 
available to the public both by the organization and by the 
IRS.
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    \313\ Section 6012(a)(6).
---------------------------------------------------------------------------
    Under prior law, an organization that was required to file 
Form 1120-POL also was required to file an annual information 
return, Form 990 (Return of Organization Exempt from Income 
Tax). Present law provides that in general, unless subject to 
an exception, section 527 organizations with gross receipts of 
$25,000 or more for the taxable year must file an information 
return. \314\
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    \314\ Section 6033(g).
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    Under present and prior law, organizations that are 
required to file the annual information return are required to 
make the information available to the public. The IRS also must 
make such information public.\315\
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    \315\See section 6104.
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                        Explanation of Provision


Notice of formation and purpose (secs. 1, 6(c), (f), and (g) of the 
        Act)

    The Act provides that a political organization that is a 
political committee of a State or local candidate, or that is a 
State or local committee of a political party, is exempt from 
the requirement of section 527(i) to provide notice to the 
Secretary of its formation and purpose.
    For all political organizations subject to the notice 
filing requirement, the Act provides that the notice be filed 
electronically only, thus eliminating the requirement that the 
notice be filed in writing as well as electronically.
    In addition, the Act requires that an organization that is 
required to file the notice and that intends to claim exemption 
from the expenditure and contribution reporting requirements of 
section 527(j), or the information return requirements of 
section 6033, state such intention in the notice. If there is a 
material change to information provided in the notice, the 
organization must file a new notice not later than 30 days 
after the material change. An organization that fails to file a 
new notice is not treated as a section 527 organization and its 
exempt function income is taken into account in determining 
taxable income from the date of the material change until such 
time as a modified notice is filed.
    Effective dates.--The provision exempting certain 
organizations from the filing of notice requirement and the 
provision regarding electronic filing are effective as if 
included in the amendments made by Public Law Number 106-230.
    The provision requiring that an organization indicate its 
intent to claim a section 527(j) or section 6033 exemption is 
effective for notices required to be filed more than 30 days 
after the date of enactment.
    The provision requiring filing of a modified section 527(i) 
notice upon a material change in information generally is 
effective for material changes occurring on or after the date 
of enactment. However, a transition rule applies in the case of 
material changes that occur during the 30-day period beginning 
on the date of enactment. In such cases, the notice is not 
required to be filed before the later of: (1) 30 days after the 
date of the material change, or (2) 45 days after the date of 
enactment.

Disclosure of expenditures and contributors (secs. 2, 6(e)(1), and 
        6(e)(2) of the Act)

            Exemption for qualified State or local political 
                    organizations
    The Act exempts qualified State or local political 
organizations from the requirement provided by section 
527(j)(2) to file regular reports with the Secretary detailing 
contribution and expenditure information. For this purpose, a 
qualified State or local political organization means an 
organization meeting the following requirements.
    First, the organization must not engage in any exempt 
function activities other than to influence or attempt to 
influence the selection, nomination, election, or appointment 
of any individual to any State or local public office or office 
in a State or local political organization.
    Second, the organization must be subject to a State law 
that requires the organization to report (and it so reports) 
information regarding each separate expenditure and 
contribution (including information regarding the person who 
makes such contribution or receives such expenditure) that 
otherwise would be required to be reported to the Secretary. An 
organization would not fail this condition solely because: (1) 
the minimum amount of any expenditure or contribution required 
to be reported under State law is not more than $300 greater 
than the minimum amount required to be reported to the 
Secretary; (2) State law does not require the organization to 
report the employer or occupation of any person who makes 
contributions or receives expenditures, or the date of the 
contribution, or the date or purpose of any expenditure of the 
organization; or (3) the organization makes de minimis errors 
in complying with State law reporting requirements, so long as 
such errors are corrected within a reasonable period after the 
organization becomes aware of such errors.
    Third, the State agency receiving such information must 
make the information public. In addition, the organization must 
make the information public in a manner described in section 
6104(d). De minimis errors in making the information publicly 
available that are corrected within a reasonable period after 
the organization becomes aware of such errors are permitted.
    Fourth, no candidate for nomination or election to Federal 
elective public office or individual holding such office is 
permitted to control or materially participate in the direction 
of the organization, solicit contributions to the organization 
(with an exception for certain de minimis contributions), or 
direct, in whole or in part, disbursements by the organization.
            Other provisions
    The Act provides that section 527(j) reports include the 
date and purpose (in addition to the amount) of each 
expenditure of $500 or more and the date of each contribution 
of $200 or more. In addition, the Act mandates electronic 
filing of section 527(j) reports for organizations that have, 
or have reason to expect, contributions or expenditures 
exceeding $50,000 in a calendar year.
    Effective dates.--The provision exempting qualified State 
or local political organizations from the section 527(j) 
reporting requirements is effective as if included in the 
amendments made by Public Law Number 106-230.
    The provision requiring additional disclosures in the 
section 527(j) reports is effective for reports required to be 
filed more than 30 days after the date of enactment. The 
provision regarding electronic filing is effective for reports 
required to be filed on or after June 30, 2003.

Tax and information return requirements (sec. 3 of the Act)

    The Act provides that a political organization is required 
to file an income tax return (Form 1120-POL) only if such 
organization has political organization taxable income for the 
taxable year. Thus, political organizations without political 
organization taxable income and with gross receipts of at least 
$25,000 for the taxable year are no longer required to file an 
income tax return. In addition, the Form 1120-POL is no longer 
required to be publicly available.
    The Act modifies the prior law rule that an information 
return (Form 990) is required to be filed by organizations that 
are required to file an income tax return. Instead, under the 
Act, information returns are required for political 
organizations that have gross receipts of $25,000 or more for 
the taxable year except that, for qualified State or local 
political organizations, the gross receipts threshold is 
$100,000. In addition, the Act exempts the following 
organizations from the information return filing requirement: 
(1) a State or local committee of a political party, or a 
political committee of a State or local candidate; (2) a caucus 
or association of State or local officials; (3) an authorized 
committee (as defined in section 301(6) of the Federal Election 
Campaign Act of 1971) of a candidate for Federal office; (4) a 
national committee (as defined in section 301(14) of the 
Federal Election Campaign Act of 1971) of a political party; 
(5) a U.S. House of Representatives or U.S. Senate campaign 
committee of a political party committee; (6) a political 
committee (as defined in section 301(4) of the Federal Election 
Campaign Act of 1971) required to report under such Act; or (7) 
an organization described in section 501(c). In addition, the 
Act directs the Secretary to review the information return for 
possible modification. Also, the Secretary retains the 
discretion to waive the information return filing requirement.
    Effective date.--The provisions regarding tax and 
information return requirements are effective as if included in 
the amendments made by Public Law Number 106-230.

Public availability of notices and reports (sec. 6(e)(3) of the Act)

    Under the Act, the Secretary must make the section 527(i) 
notices and the electronically filed section 527(j) reports 
available for public inspection on the Internet not later than 
48 hours of filing, and must make the entire database of such 
notices and reports searchable by names, States, zip codes, 
custodians of records, directors, and general purposes of the 
organization; entities related to the organization; 
contributors to the organization; employers of contributors; 
recipients of expenditures by the organization; ranges of 
contributions and expenditures; and time periods of the notices 
and reports. In addition, the database must be downloadable.
    Effective date.--The provision regarding public 
availability of notices and reports is effective for notices 
and reports required to be filed on or after June 30, 2003.

Other provisions and technical corrections (secs. 4, 5, 6(a), (b), (d), 
        and 7 of the Act)

    The Act gives the Secretary the authority to waive all or 
any portion of the taxes imposed on an organization for failure 
to notify the Secretary of the organization's establishment (or 
to file a modified notice) or the amounts imposed for failure 
to file a report. Such waiver would be subject to a showing by 
the organization that the failure was due to reasonable cause 
and not to willful neglect.
    The Act further provides that the Secretary in consultation 
with the Federal Election Commission shall publicize the 
effects of the Act and the interaction of the requirements to 
file a notification or report under section 527 and reports 
under the Federal Election Campaign Act of 1971.
    Finally, the Act makes the following modifications. The Act 
clarifies that in computing taxable income for organizations 
that fail to notify the Secretary of their status as a 
political organization, all exempt function income, whether or 
not segregated for use for an exempt function, is taken into 
account. The Act also clarifies that amounts imposed for 
failure to report under section 527(j) are to be assessed and 
collected in the same manner as penalties imposed on exempt 
organizations for failure to file returns (section 6652(c)). 
The Act applies the penalty for fraudulent returns, statements, 
or other documents (section 7207) to the notification (section 
527(i)) and reporting (section 527(j)) requirements of 
political organizations. In addition, the Act provides that 
notices and reports already made public by the Secretary may 
remain public, even if the retroactive effective dates of 
certain parts of the Act mean that a notice or report was not 
required to have been filed.
    Effective dates.--The provision giving the Secretary the 
authority to waive taxes and amounts is effective for any tax 
assessed or amount imposed after June 30, 2000.
    The remaining provisions are effective on the date of 
enactment.

                             Revenue Effect

    The provisions are estimated to reduce Federal fiscal year 
budget receipts by $2 million in 2003, $1 million annually in 
2004 and 2005, and by less than $500,000 in 2006 through 2012.

  PART TWELVE: THE REVENUE PROVISIONS OF THE HOMELAND SECURITY ACT OF 
                    2002 (PUBLIC LAW 107-296) \316\

A. Transfer of Certain Functions of the Bureau of Alcohol, Tobacco and 
 Firearms to the Department of Justice (secs. 1111 and 1112 of the Act 
  and secs. 6103, 7801, chapter 53 and chapters 61 through 80 of the 
                                 Code)

                         Present and Prior Law

    Except as otherwise expressly provided by law, the 
administration and enforcement of the Code is performed by or 
under the supervision of the Secretary of the Treasury (section 
7801(a)). The Code imposes an excise tax on the sale of 
pistols, revolvers, rifles, shotguns, shells and cartridges 
(section 4181). The manufacturer, importer, or producer making 
the sale must pay the tax. Separate excise taxes are imposed on 
the making or transfer of ``non-regular'' firearms or explosive 
devices, as well as occupational taxes (collectively known as 
the ``National Firearms Act''). The term ``non-regular'' 
firearm includes machine guns, explosive devices such as bombs, 
grenades, small rockets, and mines, sawed-off shotguns or 
rifles, silencers, and certain concealable weapons. In addition 
to the excise taxes imposed on the manufacture and transfer of 
non-regular firearms, present law imposes annual occupational 
excise taxes on importers and manufacturers ($1,000 per year 
per premise) of and on dealers ($200 per transfer) of these 
weapons. The Bureau of Alcohol, Tobacco, and Firearms, which 
under prior law was a bureau of the Department of the Treasury, 
administers all of these taxes in conjunction with non-tax 
Federal firearms laws.
---------------------------------------------------------------------------
    \316\ H.R. 5005. The bill was referred to the House Committee on 
Ways and Means, which reported the amended bill on July 10, 2002. The 
House Select Committee on Homeland Security reported the bill on July 
19, 2002. The House passed the bill on July 26, 2002. The Senate passed 
the bill with amendment on November 19, 2002. The House passed the bill 
with Senate amendment by unanimous consent on November 22, 2002. The 
President signed the bill on November 25, 2002. This description of the 
provisions of the bill was prepared by the staff of the Joint Committee 
on Taxation.
---------------------------------------------------------------------------
    The Code permits the General Accounting Office to access 
returns and return information for the purpose of, and to the 
extent necessary in making an audit of the Bureau of Alcohol, 
Tobacco and Firearms (section 6103(i)(8)(A)(i)).

                        Explanation of Provision

    The Act establishes a Bureau of Alcohol, Tobacco, Firearms 
and Explosives within the Department of Justice and transfers 
certain authorities to that bureau. Among other things, this 
new bureau is responsible for administering the National 
Firearms Act (chapter 53 of the Code) and chapters 61 through 
80 of the Code (regarding procedure and administration) to the 
extent such chapters relate to the enforcement and 
administration of the National Firearms Act. The terms 
``Secretary'' or ``Secretary of the Treasury'' when applied to 
those chapters mean ``Attorney General'' and the term 
``internal revenue officer'' when applied to those chapters 
means any officer of the Bureau of Alcohol, Tobacco, Firearms 
and Explosives so designated by the Attorney General.
    With regard to certain administration and revenue 
collection functions, the Department of the Treasury retains 
the authorities, functions, personnel and assets of the Bureau 
of Alcohol, Tobacco, and Firearms relating to the 
administration and enforcement of chapters 51 and 52 of the 
Code (relating to taxes on distilled spirits, wines, beer, and 
tobacco products and cigarette papers and tubes), sections 4181 
and 4182 of the Code (relating to the tax on the sale of 
pistols, revolvers, rifles, shotguns, shells and cartridges and 
exemptions) and title 27 of the United States Code. These 
retained functions are carried out by the Tax and Trade Bureau 
of the Department of the Treasury, created by the provision.
    The Act makes conforming name changes to the Code to permit 
the General Accounting Office to access returns and return 
information for purposes of auditing the Tax and Trade Bureau 
of the Department of the Treasury and the Bureau of Alcohol, 
Tobacco, Firearms and Explosives of the Department of Justice 
as created by the provision.

                             Effective Date

    The provision is effective sixty days after the date of 
enactment (sixty days after November 25, 2002, which is January 
24, 2003).

                             Revenue Effect

    The provision is estimated to have no revenue effect on 
Federal fiscal year budget receipts.

    PART THIRTEEN: THE REVENUE PROVISIONS OF THE VETERANS BENEFITS 
           IMPROVEMENT ACT OF 2002 (PUBLIC LAW 107-330) \317\

 A. Disclosure of Tax Return Information for Administration of Certain 
  Veterans Programs (sec. 306 of the Act and sec. 6103(l) of the Code)

                         Present and Prior Law

    The Code prohibits disclosure of tax returns and return 
information, except to the extent specifically authorized by 
the Code (section 6103). Unauthorized disclosure is a felony 
punishable by a fine not exceeding $5,000 or imprisonment of 
not more than five years, or both (section 7213). An action for 
civil damages also may be brought for unauthorized disclosure 
(section 7431). No tax information may be furnished by the 
Internal Revenue Service (``IRS'') to another agency unless the 
other agency establishes procedures satisfactory to the IRS for 
safeguarding the tax information it receives (section 6103(p)).
---------------------------------------------------------------------------
    \317\ S. 2237. The bill was reported by the Senate Committee on 
Veterans' Affairs on June 6, 2002. The Senate passed the bill after 
amendment by unanimous consent on September 26, 2002. The House passed 
the bill with an amendment by unanimous consent on November 15, 2002. 
The Senate concurred to the House amendment by unanimous consent on 
November 18, 2002. The President signed the bill on December 6, 2002. 
This description of the provisions of the bill was prepared by the 
staff of the Joint Committee on Taxation.
---------------------------------------------------------------------------
    Among the disclosures permitted under the Code is 
disclosure to the Department of Veterans Affairs of self-
employment tax information and certain tax information supplied 
to the IRS and Social Security Administration by third parties. 
Disclosure is permitted to assist the Department of Veterans 
Affairs in determining eligibility for, and establishing 
correct benefit amounts under, certain of its needs-based 
pension, health care, and other programs (section 
6103(1)(7)(D)(viii)). The income tax returns filed by the 
veterans themselves are not disclosed to Department of Veterans 
Affairs.
    Under prior law, the Department of Veterans Affairs 
disclosure provision was scheduled to expire after September 
30, 2003.

                        Explanation of Provision

    The Act extends the Department of Veterans Affairs 
disclosure provision through September 30, 2008.

                             Effective Date

    The provision is effective on the date of enactment.

                             Revenue Effect

    The provision is estimated to increase Federal fiscal year 
budget receipts by $9 million in 2004, $16 million in 2005, $23 
million in 2006, $28 million in 2007, $33 million in 2008, $28 
million in 2009, $25 million in 2010, $21 million in 2011 and 
$19 million in 2012.

PART FOURTEEN: THE HOLOCAUST RESTITUTION TAX FAIRNESS ACT OF 2002 (P.L. 
                             107-358) \318\

                         Present and Prior Law

Exclusion from Federal income tax for restitution received by victims 
        of the Nazi regime
    Present and prior law provides that eligible restitution 
payments made to an eligible individual (or the individual's 
heirs or estate) are: (1) excluded from gross income; and (2) 
not taken into account for any provision of the Code which 
takes into account excludable gross income in computing 
adjusted gross income (e.g., taxation of Social Security 
benefits).
---------------------------------------------------------------------------
    \318\ H.R. 4823. The bill was referred to the House Committee on 
Ways and Means. See Joint Committee on Taxation, Description of H.R. 
4823, ``Holocaust Restitution Tax Fairness Act of 2002'' (JCX-48-02), 
June 3, 2002. The House passed the bill on June 4, 2002, under a motion 
to suspend the rules and pass the bill. The Senate passed the bill by 
unanimous consent on November 20, 2002. The bill was signed by the 
President on December 17, 2002. The bill was not reported by any 
Committee of the House of Representatives or the Senate. Therefore, the 
bill does not have any formal legislative history. This description of 
the provisions of the bill was prepared by the staff of the Joint 
Committee on Taxation.
---------------------------------------------------------------------------
    The basis of any property received by an eligible 
individual (or the individual's heirs or estate) that is 
excluded under this provision is the fair market value of such 
property at the time of receipt by the eligible individual (or 
the individual's heirs or estate).
    Eligible restitution payments are any payment or 
distribution made to an eligible individual (or the 
individual's heirs or estate) which: (1) is payable by reason 
of the individual's status as an eligible individual (including 
any amount payable by any foreign country, the United States, 
or any foreign or domestic entity or fund established by any 
such country or entity, any amount payable as a result of a 
final resolution of legal action, and any amount payable under 
a law providing for payments or restitution of property); (2) 
constitutes the direct or indirect return of, or compensation 
or reparation for, assets stolen or hidden, or otherwise lost 
to, the individual before, during, or immediately after World 
War II by reason of the individual's status as an eligible 
individual (including any proceeds of insurance under policies 
issued on eligible individuals by European insurance companies 
immediately before and during World War II); or (3) interest 
payable as part of any payment or distribution described in (1) 
or (2), above. An eligible individual is a person who was 
persecuted on the basis of race, religion, physical or mental 
disability or sexual orientation by Nazi Germany, or any other 
Axis regime, or any other Nazi-controlled or Nazi-allied 
country. Interest earned by enumerated escrow or settlement 
funds are also excluded under the provision.
Sunset provision
    The Economic Growth and Tax Relief Reconciliation Act of 
2001 (``EGTRRA'') made a number of changes to the Federal tax 
laws, including the exclusion from Federal income tax for 
restitution received by victims of the Nazi regime. However, in 
order to comply with reconciliation procedures under the 
Congressional Budget Act of 1974 (e.g., section 313 of the 
Budget Act, under which a point of order may be lodged in the 
Senate), EGTRRA included a ``sunset'' provision, pursuant to 
which the provisions of EGTRRA expire at the end of 2010. 
Specifically, EGTRRA's provisions do not apply for taxable, 
plan, or limitation years beginning after December 31, 2010, or 
to estates of decedents dying after, or gifts or generation-
skipping transfers made after, December 31, 2010. EGTRRA 
provides that, as of the effective date of the sunset, both the 
Code and the Employee Retirement Income Security Act of 1974 
(``ERISA'') will be applied as though EGTRRA had never been 
enacted. Likewise, all other provisions of the Code and ERISA 
will be applied as though the relevant provisions of EGTRRA had 
never been enacted.

                        Explanation of Provision

    The Act repeals the sunset provision of EGTRRA for purposes 
of the exclusion from Federal income tax for restitution 
received by victims of the Nazi regime.

                             Effective Date

    The provision is effective on the date of its enactment.

                             Revenue Effect

    The provision is estimated to reduce Federal fiscal year 
budget receipts by $3 million in 2012.
      

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


                               APPENDIX:

              ESTIMATED BUDGET EFFECTS OF TAX LEGISLATION

                     ENACTED IN THE 107TH CONGRESS

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

      

                                                                                                                APPENDIX:
                                                                                ESTIMATED BUDGET EFFECTS OF TAX LEGISLATION ENACTED IN THE 107TH CONGRESS
                                                                                                         Fiscal Years 2001-2012
                                                                                                          [Millions of dollars]
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                   Provision                               Effective               2001       2002       2003       2004        2005        2006        2007        2008        2009        2010        2011        2012       2001-12
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
PART ONE: FALLEN HERO SURVIVOR BENEFIT TAX      pra 12/31/01..................  .........         -4         -5          -5          -5          -5          -5          -5          -4          -4          -4          -4          -50
 FAIRNESS ACT OF 2001--Extend the Present-Law
 Treatment of Survivor Annuities With Respect
 to Public Safety Officers Killed in the Line
 of Duty to Payments With Respect to
 Individuals Dying on or Before December 31,
 1996 (P.L. 107-15, signed into law by the
 President on June 5, 2001)...................

PART TWO: ECONOMIC GROWTH AND TAX RELIEF
 RECONCILIATION ACT OF 2001 (``EGTRRA'') (P.L.
 107-16, signed into law by the President on
 June 7, 2001) (\1\)

I. Marginal Rate Reduction Provisions (Sunset
 12/31/10)
A. Create New 10% Bracket in 2001 Through 2007  tyba 12/31/00.................    -38,186    -33,421    -40,223     -40,336     -40,201     -40,203     -40,065     -43,422     -45,359     -46,034     -13,871  ..........     -421,321
 for the First $6,000 of Taxable Income for
 Singles, First $10,000 for Heads of
 Households, and First $12,000 for Married
 Couples, and in 2008, First $7,000 of Taxable
 Income for Singles, First $10,000 for Heads
 of Households, and First $14,000 for Married
 Couples; and Index Beginning in 2009; Credit
 with Advanced Payment in Lieu of Rate for
 2001.........................................
B. Reduce the Various Income Tax Rates (39.6%   7/1/01........................     -2,005    -21,100    -21,256     -29,049     -32,774     -50,924     -59,378     -60,401     -61,652     -63,033     -19,035  ..........     -420,607
 rate reduced to 38.6% in 2001 through 2003,
 37.6% in 2004 and 2005, 35% in 2006 and
 thereafter; 36% rate reduced to 35% in 2001
 through 2003, and 34% in 2004 and 2005, and
 33% in 2006 and thereafter; 31% rate reduced
 to 30% in 2001 through 2003, 29% in 2004 and
 2005, 28% in 2006 and thereafter; 28% rate
 reduced to 27% in 2001 through 2003, 26% in
 2004 and 2005; and 25% in 2006 and
 thereafter)..................................
C. Phase In Repeal of Pease Limitation of       tyba 12/31/05.................  .........  .........  .........  ..........  ..........      -1,265      -2,566      -4,003      -5,414      -7,168      -4,456  ..........      -24,872
 Itemized Deductions Over 5 Years.............
D. Phase In Repeal of the Personal Exemption    tyba 12/31/05.................  .........  .........  .........  ..........  ..........        -473        -955      -1,382      -1,793      -2,216      -1,323  ..........       -8,142
 Phaseout Over 5 Years........................

      Total of Marginal Rate Reductions         ..............................    -40,191    -54,521    -61,479     -69,385     -72,975     -92,865    -102,964    -109,208    -114,218    -118,451     -38,685  ..........     -874,942
       Provisions (Sunset 12/31/10)...........

II. Tax Benefits Relating to Children (Sunset
 12/31/10)
A. Increase and Expand the Child Tax Credit--   tyba 12/31/00.................       -518     -9,291     -9,927     -10,602     -12,786     -18,320     -19,000     -19,408     -20,532     -25,200     -26,197  ..........     -171,781
 increase the child tax credit from $500 to
 $600 in 2001 through 2004, $700 in 2005
 through 2008, $800 in 2009, and $1,000 in
 2010; make refundable up to greater of 15%
 (10% for 2001 through 2004) of earned income
 in excess of $10,000 (indexed in 2002) or
 present law; allow credit permanently against
 the AMT; repeal AMT offset of refundable
 credits......................................
B. Extension and Expansion of Adoption Tax      generally.....................  .........        -51       -191        -252        -293        -325        -349        -375        -403        -432        -464        -222       -3,357
 Benefits--increase the expense limit and the   tyba 12/31/01.................
 exclusion to $10,000 for both non-special
 needs and special needs adoptions, and
 beginning in 2003, make the credit
 independent of expenses for special needs
 adoptions, permanently extend the credit and
 the exclusion, increase the phase-out start
 point to $150,000, index for inflation the
 expenses limit and the phase-out start point
 for both the credit and the exclusion, and
 allow the credit to apply to the AMT.........
C. Expansion of Dependent Care Tax Credit--     tyba 12/31/02.................  .........  .........       -336        -432        -413        -393        -380        -352        -317        -296         -73       (\2\)       -2,992
 increase the credit rate to 35%, increase the
 eligible expenses to $3,000 for one child and
 $6,000 for two or more children (not
 indexed), and increase the start of the phase-
 out to $15,000 of AGI........................
D. Provide an Employer-Provided Child Care      tyba 12/31/01.................  .........        -48       -108        -129        -142        -156        -169        -178        -188        -196         -90       (\2\)       -1,404
 Credit of 25% for Child Care Expenditures and
 10% for Child Care Resource and Referral
 Expenditures.................................

      Total of Tax Benefits Relating to         ..............................  .........     -9,390    -10,562     -11,415     -13,634     -19,194     -19,898     -20,313     -21,440     -26,124     -26,824        -222     -179,534
       Children (Sunset 12/31/10).............

III. Marriage Penalty Relief Provisions
 (Sunset 12/31/10)
A. Standard Deduction Set at 2 Times Single     tyba 12/31/04.................  .........  .........  .........  ..........        -685      -1,954      -2,580      -2,772      -3,164      -2,932        -831  ..........      -14,918
 for Married Filing Jointly, Phased in Over 5
 Years........................................
B. 15% Rate Bracket Set at 2 Times Single for   tyba 12/31/04.................  .........  .........  .........  ..........      -4,208      -6,204      -6,559      -5,876      -4,737      -4,001      -1,150  ..........      -32,735
 Married Filing Jointly, Phased in Over 4
 Years........................................
C. EIC Modification and Simplification)--       tyba 12/31/01.................  .........         -8       -847      -1,277      -1,243      -1,817      -1,819      -1,787      -2,258      -2,240      -2,348       (\2\)      -15,644
 increase in joint returns beginning and
 ending income level for phaseout by $1,000 in
 2002 through 2004, $2,000 in 2005 through
 2007, and $3,000 in 2008, and indexed
 thereafter; simplify definition of earned
 income; use AGI instead of modified AGI;
 conform definition of qualifying child and
 tie-breaker rules to those in JCT
 simplification study; and allow math error
 procedure with Federal Case registry data
 beginning in 2004 (\3\)......................

      Total of Marriage Penalty Relief          ..............................  .........         -8       -847      -1,277      -6,136      -9,975     -10,958     -10,435     -10,159      -9,173      -4,329       (\2\)      -63,297
       Provisions (Sunset 12/31/10)...........

IV. Affordable Education Provisions (Sunset 12/
 31/10)
A. Education IRAs--increase the annual          tyba 12/31/01.................  .........       -203       -365        -461        -561        -667        -778        -892      -1,013      -1,136        -295  ..........       -6,371
 contribution limit to $2,000; allow education
 IRA contributions for special needs
 beneficiaries above the age of 18; allow
 corporations and other entities to contribute
 to education IRAs; allow contributions until
 April 15 of the following year; allow a
 taxpayer to exclude Ed IRA distributions from
 gross income and claim the HOPE or Lifetime
 Learning credits as long as they are not used
 for the same expenses; repeal excise tax on
 contributions made to education IRA when
 contribution made by anyone on behalf of same
 beneficiary to a qualified tuition plan
 (``QTP''); modify phaseout range for married
 taxpayers; allow tax-free expenditures for
 elementary and secondary school expenses;
 expand the definition of qualified expenses
 to include certain computers and related
 items........................................
B. Qualified Tuition Plans--tax-free            tyba 12/31/01.................  .........        -24        -53         -81        -111        -141        -170        -200        -234        -256         -64  ..........       -1,334
 distributions from State plans; allow private
 institutions to offer prepaid tuition plans,
 tax-deferred in 2002, with tax-free
 distributions beginning in 2004; allow a
 taxpayer to exclude QTP distributions from
 gross income and claim the HOPE or Lifetime
 Learning credits as long as they are not used
 for the same expenses; expand definition of
 family member to include cousins; allow tax-
 free distributions for actual living
 expenses; ease rollover limitations; clarify
 coordination with the deduction for higher
 education expenses...........................
C. Employer Provided Assistance--permanently    cba 12/31/01..................  .........       -519       -720        -760        -804        -852        -904        -958      -1,012      -1,068        -267  ..........       -7,864
 extend the exclusion for undergraduate
 courses and graduate level courses...........
D. Student loan interest--eliminate the 60-     ipa 12/31/01..................  .........       -170       -245        -262        -277        -289        -305        -321        -338        -356         -89  ..........       -2,652
 month rule; increase phaseout ranges to
 $50,000-$65,000 single/ $100,000-$130,000
 joint; indexed for inflation after 2002......
E. Eliminate the Tax on Awards Under the        tyba 12/31/01.................  .........         -1         -1          -1          -1          -1          -1          -1          -1          -1       (\2\)  ..........           -9
 National Health Corps Scholarship Program and
 F. Edward Hebert Armed Forces Health
 Professions Scholarship Program..............
F. Increase Arbitrage Rebate Exception for      bia 12/31/01..................  .........      (\2\)         -3          -5          -6         -11         -15         -16         -17         -18         -19         -17         -127
 Governmental Bonds Used to Finance Qualified
 School Construction from $10 Million to $15
 Million......................................
G. Issuance of Tax-Exempt Private Activity      bia 12/31/01..................  .........         -5        -19         -38         -61         -88        -120        -155        -191        -227        -251        -249       -1,404
 Bonds for Qualified Education Facilities With
 Annual State Volume Caps the Greater of $10
 Per Resident or $5 Million...................
H. Above-the-Line Deduction for Qualified       tyba 12/31/01.................  .........     -1,535     -2,063      -2,683      -2,911        -730  ..........  ..........  ..........  ..........  ..........  ..........       -9,922
 Higher Education Expenses in 2002 Through
 2005.........................................

      Total of Affordable Education Provisions  ..............................  .........     -2,457     -3,469      -4,291      -4,732      -2,779      -2,293      -2,543      -2,806      -3,062        -985        -266      -29,683
       (Sunset 12/31/10)......................
V. Estate, Gift, and Generation-Skipping
 Transfer Tax Provisions (Sunset 12/31/10)
A. Phase In Repeal of Estate and Generation-    dda & gma.....................  .........  .........     -6,383      -5,031      -7,054      -4,051      -9,695     -11,862     -12,701     -23,036     -53,422  ..........     -133,235
 Skipping Transfer Taxes--beginning in 2002,    12/31/01......................
 repeal phase out of lower rates and repeal
 rates in excess of 50%; in 2003, repeal rates
 in excess of 49%, in 2004 in excess of 48%,
 in 2005 in excess of 47%, in 2006 in excess
 of 46%, and in 2007 through 2009 in excess of
 45%; reduce State death tax credit rates by
 25% in 2002, 50% in 2003, 75% in 2004, and
 repeal in 2005; increase the unified credit
 to $1 million in 2002 and 2003, $1.5 million
 in 2004 and 2005, $2 million in 2006 through
 2008, and $3.5 million in 2009; repeal
 section 2057 in 2004; repeal estate and
 generation-skipping transfer taxes in 2010;
 retain gift tax in 2010 and thereafter with
 $1 million lifetime gift exclusion and gift
 tax rates set at the highest individual
 income tax rate; carryover basis applies to
 transfers at death after 12/31/09 of assets
 fully owned by decedents, except (1) $1.3
 million of additional basis and certain loss
 carryforwards of the decedent are allowed to
 be added to carryover basis, and (2) an
 additional $3 million of basis is allowed to
 be added to carryover basis of assets going
 to surviving spouse; certain reporting
 requirements on bequests.....................
B. Expand Availability of Estate Tax Exclusion  dda 12/31/00..................  .........         -3        -19         -28         -29         -30         -32         -34         -36         -39         -42  ..........         -292
 for Conservation Easements--repeal the 25-
 mile and 10-mile limits, and clarify the date
 for determining easement compliance..........
C. Modifications to Generation-Skipping
 Transfer Tax Rules
  1. Deemed allocation of the generation-       ta 12/31/00...................  .........         -1         -3          -4          -4          -4          -4          -4          -4          -4          -4  ..........          -36
   skipping transfer tax exemption to lifetime
   transfers to trusts that are not direct
   skips......................................
  2. Retroactive allocation of the generation-  generally.....................  .........         -1         -4          -6          -6          -6          -6          -6          -6          -6          -6  ..........          -53
   skipping tax exemption.....................  12/31/00......................
  3. Severing of trusts holding property        ..............................  .........  .........  .........  ..........  ..........          Included in Item 2.         ..........  ..........  ..........  ..........  ...........
   having an inclusion ratio of greater than
   zero.......................................
  4. Modification of certain valuation rules..  ..............................  .........  .........  .........  ..........  ..........          Included in Item 2.         ..........  ..........  ..........  ..........  ...........
  5. Relief from late elections...............  ..............................  .........  .........  .........  ..........  ..........          Included in Item 2.         ..........  ..........  ..........  ..........  ...........
  6. Substantial compliance...................  ..............................  .........  .........  .........  ..........  ..........          Included in Item 2.         ..........  ..........  ..........  ..........  ...........
D. Expand Availability of Installment Payment
 Relief Under Section 6166
  1. Increase from 15 to 45 the number of       dda 12/31/01..................  .........  .........       -285        -297        -330        -364        -394        -383        -381        -371        -358  ..........       -3,163
   partners of a partnership or shareholders
   in a corporation eligible for installment
   payments of estate tax under section 6166..
  2. Qualified lending and finance business     dda 12/31/01..................  .........  .........       -103         -84         -64         -43         -21         -22         -24         -25         -27  ..........         -413
   interests..................................
  3. Certain holding company stock............  dda 12/31/01..................  .........  .........       -171        -140        -107         -72         -34         -47         -49         -42         -45  ..........         -707
E. Waiver of Statute of Limitations for         DOE...........................  .........       -100        -25  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........         -125
 Refunds of Recapture of Estate Tax Under
 Section 2032A................................

      Total of Estate, Gift, and Generation-    ..............................  .........       -105     -6,993      -5,590      -7,594      -4,570     -10,186     -12,358     -13,201     -23,523     -53,904  ..........     -138,024
       Skipping Transfer Tax Provisions
       (Sunset 12/31/10)......................
VI. Pension and IRA Provisions (Generally
 Sunset 12/31/01)
A. Individual Retirement Arrangement
 Provisions
  1. Modification of IRA Contributor Limits--   tyba 12/31/01.................  .........       -368       -847      -1,054      -1,693      -2,346      -2,582      -3,148      -3,817      -4,243      -3,033      -1,652      -24,784
   increase the maximum contribution limit for
   traditional and Roth IRAs to: $3,000 in
   2002 through 2004, $4,000 in 2005 through
   2007, and $5,000 in 2008; index in years
   thereafter.................................
  2. IRA Catch-Up Contributions--increase       tyba 12/31/01.................  .........        -69       -151        -174        -176        -225        -293        -252        -211        -234        -182        -116       -2,083
   maximum contribution limits for traditional
   and Roth IRAs for individuals age 50 and
   above by $500 in 2002 and $1,000 in 2006...
  3. Deemed IRAs under employee plans.........  pyba 12/31/02.................  .........  .........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........

      Total of Individual Retirement            ..............................  .........       -437       -998      -1,228      -1,869      -2,571      -2,875      -3,400      -4,028      -4,477      -3,215      -1,768      -26,867
       Arrangement Provisions.................
B. Pension Provisions
  1. Provisions for Expanding Coverage
    a. Increase contribution and benefit
     limits:
      1. Increase limitation on exclusion for   yba 12/31/01..................  .........  .........       -100        -328        -500        -636        -708        -753        -797        -880        -436        -236       -5,374
       elective deferrals to: $11,000 in 2002,
       $12,000 in 2003, $13,000 in 2004;
       $14,000 in 2005, and $15,000 in 2006;
       index thereafter (\4\) (\5\)...........
      2. Increase limitation on SIMPLE          yba 12/31/01..................  .........        -10        -30         -42         -51         -55         -59         -63         -66         -69         -35         -18         -498
       elective contributions to: $7,000 in
       2002, $8,000 in 2003, $9,000 in 2004,
       and $10,000 in 2005; index thereafter
       (\4\) (\5\)............................
      3. Increase defined benefit dollar limit  yba 12/31/01..................  .........        -23        -42         -46         -47         -48         -49         -54         -57         -56          -8       (\6\)         -430
       to $160,000............................
      4. Lower early retirememt age to 62;      yba 12/31/01..................  .........         -3         -4          -4          -5          -5          -5          -5          -5          -5          -2       (\7\)          -43
       lower normal retirement age to 65......
      5. Increase annual addition limitation    yba 12/31/01..................  .........         -7        -15         -19         -21         -17         -17         -20         -23         -27         -14          -7         -187
       for defined contribution plans to
       $40,000 with indexing in $1,000
       increments (\4\).......................
      6. Increase qualified plan compensation   yba 12/31/01..................  .........        -55       -119        -125        -143        -141        -157        -154        -170        -184         -98         -52       -1,398
       limit to $200,000 with indexing in       & tyba 12/31/01...............
       $5,000 increments (\4\) and expand
       availability of qualified plans to self-
       employed individuals who are exempt
       from the self-employment tax by reason
       of their religious beliefs.............
      7. Increase limits on deferrals under     yba 12/31/01..................  .........        -29        -61         -87        -108        -127        -138        -147        -155        -164         -84         -45       -1,145
       deferred compensation plans of State
       and local governments and tax-exempt
       organizations to: $11,000 in 2002,
       $12,000 in 2003, $13,000 in 2004,
       $14,000 in 2005, and $15,000 in 2006;
       index thereafter (\4\) (\5\)...........
    b. Plan loans for S corporation owners,     yba 12/31/01..................  .........        -21        -32         -34         -36         -39         -41         -44         -47         -49         -19          -8         -370
     partners, and sole proprietors...........
    c. Modification of top-heavy rules........  yba 12/31/01..................  .........         -4         -8         -10         -11         -13         -14         -16         -17         -19         -10          -5         -127
    d. Elective deferrals not taken into        yba 12/31/01..................  .........        -47        -88        -103        -111        -119        -127        -135        -144        -152        -103         -50       -1,179
     account for purposes of deduction limits.
    e. Repeal of coordination requirements for  yba 12/31/01..................  .........        -16        -27         -27         -25         -23         -24         -24         -24         -24         -14          -7         -235
     deferred compensation plans of State and
     local governments and tax-exempt
     organizations (\4\)......................
    f. Definition of compensation for purposes  yba 12/31/01..................  .........         -1         -3          -3          -3          -3          -4          -4          -4          -4          -2          -1          -32
     of deduction limits (\4\)................
    g. Increase stock bonus and profit sharing  tyba 12/31/01.................  .........         -7        -14         -16         -18         -19         -21         -23         -24         -26         -14          -6         -188
     plan deduction limit from 15% to 25%
     (\4\)....................................
    h. Option to treat elective deferrals as    yba 12/31/05..................  .........  .........  .........  ..........  ..........         185         236         172          90          -5        -358        -365          -45
     after-tax Roth contributions.............
    i. Nonrefundable credit to certain          tyba 12/31/01.................  .........     -1,036     -2,096      -1,963      -1,856      -1,746        -920        -102         -91         -89         -86         -82      -10,067
     individuals for elective deferrals and
     IRA contributions (sunset 12/31/06)......
    j. Small business (100 or fewer employees)  (\8\).........................  .........         -3        -12         -21         -29         -29         -29         -27         -26         -25         -22          -8         -231
     tax credit for new retirement plan
     expenses--first 3 years of the plan......
    k. Elimination of user fee for certain      rma 12/31/01..................  .........         -7         10  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........          -17
     requests regarding small employer pension
     plans with at least one non-highly
     compensated employee (\9\)...............
    l. Treatment of nonresident aliens engaged  tyba 12/31/01.................  .........         -2         -7          -7          -7          -8          -8          -8          -8          -8          -5  ..........          -68
     in international transportation services.

      Total of Provisions for Expanding         ..............................  .........     -1,271     -2,668      -2,835      -2,971      -2,843      -2,085      -1,407      -1,568      -1,786      -1,310        -890      -21,634
       Coverage...............................
  2. Provisions for Enhancing Fairness for
   Women
    a. Additional catch-up contributions for    tyba 12/31/01.................  .........       -124       -243        -234        -164        -100         -84         -76         -63         -57         -38         -18       -1,201
     individuals age 50 and above--increase
     the otherwise applicable contribution
     limit for all plans other than SIMPLE by
     $1,000 in 2002, $2,000 in 2003, $3,000 in
     2004, $4,000 in 2005, and $5,000 in 2006
     and thereafter, index in $500 increments
     after 2006; SIMPLE plan catch-ups would
     be 50% of that applicable to other plans
     (nondiscrimination rules would not apply)
     (\4\)....................................
    b. Equitable treatment for contributions    yba 12/31/01..................  .........        -45        -84         -98        -106        -113        -121        -129        -136        -144         -75         -36       -1,087
     of employees to defined contribution
     plans (\4\)..............................
    c. Faster vesting of certain employer       cf pyba.......................  .........  .........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
     matching contributions...................  12/31/01......................
    d. Modifications to the minimum             yba 12/31/01..................  .........      (\2\)         -1          -1          -2          -2          -2          -2          -2          -3          -3          -1          -19
     distribution rules.......................
    e. Clarification of tax treatment of        tdapma........................  .........  .........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
     division of section 457 plan benefits      12/31/01......................
     upon divorce.............................
    f. Modification of safe harbor relief for   yba 12/31/01..................  .........  .........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
     hardship withdrawals from 401(k) plans...
    g. Waiver of tax on nondeductible           tyba 12/31/01.................  .........      (\2\)      (\2\)          -1          -2          -4          -6          -8         -10         -12         -14          -5          -62
     contributions for domestic and similar
     workers..................................

      Total of Provisions for Enhancing         ..............................  .........       -169       -328        -334        -274        -219        -213        -215        -211        -216        -130         -60       -2,369
       Fairness for Women.....................
  3. Provisions for Increasing Portability for
   Participants
    a. Rollovers allowed among governmental     da 12/31/01...................  .........         27         -4          -4          -5          -5          -5          -6          -6          -7         -43          -3          -61
     section 457 plans, section 403(b) plans,
     and qualified plans......................
    b. Rollovers of IRAs to workplace           da 12/31/01...................  .........  .........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
     retirement plans.........................
    c. Rollovers of after-tax retirement plan   dma 12/31/01..................  .........  .........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
     contributions............................
    d. Waiver of 60-day rule..................  da 12/31/01...................  .........  .........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
    e. Treatment of forms of qualified plan     yba 12/31/01..................  .........  .........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
     distributions............................
    f. Rationalization of restrictions on       da 12/31/01...................  .........  .........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
     distributions............................
    g. Purchase of service credit in            ta 12/31/01...................  .........  .........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
     governmental defined benefit plans.......
    h. Employers may disregard rollovers for    da 12/31/01...................  .........  .........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
     cash-out amounts.........................
    i. Minimum distribution and inclusion       da 12/31/01...................  .........  .........  .........  ..........  ..........     Considered in Other Provisions   ..........  ..........  ..........  ..........  ...........
     requirements for section 457 plans.......

      Total of Provisions for Increasing        ..............................  .........         27         -4          -4          -5          -5          -5          -6          -6          -7         -43          -3          -61
       Portability for Participants...........
  4. Provisions for Strengthening Pension
   Security and Enforcement
    a. Phase-in repeal of 160% of current       pyba 12/31/01.................  .........        -14        -20         -36         -36         -38         -38         -39         -41         -42         -22       (\6\)         -326
     liability funding limit; extend maximum
     deduction rule...........................
    b. Excise tax relief for sound pension      yba 12/31/01..................  .........         -2         -3          -3          -3          -3          -3          -3          -3          -3          -3       (\2\)          -29
     funding..................................
    c. Repeal 100% of compensation limit for    yba 12/31/01..................  .........         -2         -4          -4          -4          -4          -5          -5          -5          -5          -3       (\2\)          -41
     multiemployer plans......................
    d. Modification of section 415 aggregation  tyba 12/31/01.................  .........         -1         -1          -1          -1          -1          -1          -1          -1          -1          -1       (\2\)          -10
     rules for multiemployer plans............
    e. Investment of employee contributions in  aiii TRA'97...................  .........  .........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
     401(k) plans.............................
    f. Prohibited allocations of stock in an    (\10\)........................  .........          3          5           6           8           8           9          10          10          10          11      (\11\)           80
     ESOP S corporation.......................
    g. Automatic rollovers of certain           dma frap......................  .........  .........  .........          -7         -29         -30         -32         -33         -33         -34         -26         -10         -234
     mandatory distributions..................
    h. Clarification of treatment of            yea DOE.......................  .........  .........        -11         -19         -32         -38         -35         -30         -26         -19         -14          -3         -227
     contributions to multiemployer plans.....
    i. Notice of significant reduction in plan  pateo/a DOE...................  .........  .........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
     benefit accruals.........................

      Total of Provisions for Strengthening     ..............................  .........        -16        -34         -64         -97        -106        -105        -101         -99         -94         -58         -13         -787
       Pension Security and Enforcement.......
  5. Provisions for Reducing Regulatory
   Burdens
    a. Modification of timing of plan           pyba 12/31/01.................  .........  .........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
     valuations...............................
    b. ESOP dividends may be reinvested         tyba 12/31/01.................  .........        -20        -49         -59         -63         -66         -69         -71         -74         -77         -39       (\6\)         -587
     without loss of dividend deduction.......
    c. Repeal transition rule relating to       pyba 12/31/01.................  .........         -2         -3          -3          -3          -3          -4          -4          -4          -4          -2       (\2\)          -32
     certain highly compensated employees.....
    d. Employees of tax-exempt entities (\12\)  LDOE..........................  .........  .........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
    e. Treatment of employer-provided           yba 12/31/01..................  .........  .........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
     retirement advice........................
    f. Repeal of multiple use test............  yba 12/31/01..................  .........  .........  .........  ..........  ..........     Considered in Other Provisions   ..........  ..........  ..........  ..........  ...........

      Total of Provisions for Reducing          ..............................  .........        -22        -52         -62         -66         -69         -73         -75         -78         -81         -41       (\6\)         -619
       Regulatory Burdens.....................
C. Tax Treatment of Electing Alaska Native      (\14\)........................  .........         -4         -4          -3          -3          -3          -3          -3          -4          -4          -1  ..........          -33
 Settlement Trusts--allow electing Alaska
 Native Settlement Trusts to tax income to the
 Trust not the beneficiaries (\13\)...........

      Total of Pension and IRA Provisions       ..............................  .........     -1,892     -4,088      -4,530      -5,285      -5,816      -5,359      -5,207      -5,994      -6,665      -4,798      -2,734      -52,370
       (Generally Sunset 12/31/01)............

VII. AMT Relief--Increase Exemption by $2,000   tyba 12/31/00.................       -178     -2,311     -3,161      -4,605      -3,646  ..........  ..........  ..........  ..........  ..........  ..........  ..........      -13,901
 (Single) and $4,000 (Joint) in 2001 through
 2004; Sunset 12/31/04........................

VIII. Other Provisions (Generally Sunset 12/31/
 10)
A. Modification to Corporate Estimated Tax      DOE...........................    -32,921     32,921  .........      -6,606       6,606  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ...........
 Requirements; Special Estimated Tax Rules for
 Certain 2001 and 2004 Corporate Estimated Tax
 Payments.....................................
B. Expansion of Authority to Postpone Certain   doa DOE.......................  .........      (\2\)      (\7\)       (\7\)       (\7\)       (\7\)       (\7\)       (\7\)       (\7\)       (\7\)       (\7\)       (\7\)        (\6\)
 Tax Deadlines Due to Disaster (Sunset 12/31/
 10)..........................................
C. Exclude from Gross Income Certain Payments   aro/a 1/1/00..................  .........  .........         -3          -3          -3          -3          -3          -3          -3          -3          -3  ..........          -27
 Made to Holocaust Survivors or Their Heirs...

      Total of Other Provisions (Generally      ..............................    -32,921     32,921         -3      -6,609       6,603          -3          -3          -3          -3          -3          -3       (\7\)          -27
       Sunset 12/31/10).......................

TOTAL OF PART TWO: ECONOMIC GROWTH AND TAX      ..............................    -73,808    -37,763    -90,602    -107,702    -107,399    -135,202    -151,661    -160,067    -167,821    -187,001    -129,528      -3,222   -1,351,778
 RELIEF RECONCILIATION ACT OF 2001 (\15\)
 (\16\).......................................

PART THREE: RENAME EDUCATION INDIVIDUAL         DOE...........................  .........  .........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 RETIREMENT ACCOUNTS AS THE COVERDELL
 EDUCATIONAL SAVINGS ACCOUNTS (P.L. 107-22,
 signed into law by the President on July 26,
 2001)........................................
PART FOUR: REVENUE PROVISIONS OF THE RAILROAD
 RETIREMENT AND SURVIVORS, IMPROVEMENT ACT OF
 2001 (P.L. 107-90, signed into law by the
 President on December 12, 2001) (\9\)
A. Repeal the Supplemental Annuity Tax........  cyba 12/31/01.................  .........        -59        -79         -81         -79         -77         -76         -75         -75         -74         -74         -74         -823
B. Reduce the Payroll Tax Rate on Railroad      cyba 12/31/01.................  .........        -59       -198        -329        -362        -366        -374        -379        -383        -384        -386        -390       -3,610
 Employers....................................

TOTAL OF PART FOUR: REVENUE PROVISIONS OF THE   ..............................  .........       -118       -277        -410        -441        -443        -450        -454        -458        -458        -460        -464       -4,433
 RAILROAD RETIREMENT AND SURVIVORS'
 IMPROVEMENT ACT OF 2001......................

PART FIVE: THE REVENUE PROVISION OF AN ACT      10/1/01.......................  .........  .........  .........  ..........           Negligible Effect On Excise Tax Receipts           ..........  ..........  ..........  ...........
 MAKING APPROPRIATIONS FOR THE DEPARTMENTS OF
 LABOR, HEALTH AND HUMAN SERVICES, AND
 EDUCATION, AND RELATED AGENCIES FOR THE
 FISCAL YEAR ENDING SEPTEMBER 30, 2002--Excise
 Tax on Failure to Comply with Mental Health
 Parity Requirements (P.L. 107-116, signed
 into law by the President on January 10,
 2002) (\17\).................................

PART SIX: SIMPLIFICATION OF REPORTING           epoaa.........................  .........  .........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 REQUIREMENTS RELATING TO HIGHER EDUCATION      12/31/02......................
 TUITION AND RELATED EXPENSES (P.L. 107-131,
 signed into law by the President on January
 16, 2002)....................................
PART SEVEN: VICTIMS OF TERRORISM TAX RELIEF
 ACT OF 2001 (P.L. 107-134, signed into law by
 the President on January 23, 2002)

I. Relief Provisions for Victims of April 19,
 1995, September 11, 2001, and Anthrax Attacks
A. Provide Income Tax Relief for Victims of     tyebo/a.......................  .........       -151        -20  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........         -171
 Terrorist Attacks; Relief Does Not Apply to    9/11/01.......................
 Certain Amounts That Would Have Been Paid on
 Account of Death or Only Because of Certain
 Actions; $10,000 Minimum Benefit Regardless
 of Income Tax Liability......................
B. Exclusion of Certain Death Benefits........  tyebo/a.......................  .........        -25        -25  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........          -60
                                                9/11/01.......................
C. Estate Tax Reduction.......................  (\18\)........................  .........         -3        -45          -8       (\7\)       (\7\)       (\7\)       (\7\)       (\7\)       (\7\)  ..........  ..........          -56
D. Payments by Charitable Organizations         pmo/a 9/11/01.................  .........  .........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
 Treated as Exempt Payments...................
E. Exclusion of Certain Cancellations of        (\19\)........................  .........         -6  .........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........           -6
 Indebtedness.................................

II. Other Relief Provisions
A. Exclusion for Disaster Relief Payments.....  tyeo/a 9/11/01................  .........  .........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
B. Authority to Postpone Certain Deadlines and  (\20\)........................  .........  .........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
 Required Actions.............................
C. Application of Certain Provisions to         tyeo/a 9/11/01................  .........         -2         -2          -1          -1       (\2\)       (\2\)       (\2\)       (\2\)       (\2\)       (\2\)       (\2\)           -6
 Terrorist or Military Actions................
D. Clarify that the Special Deposit Rules       (\21\)........................  .........  .........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 Provided Under the Air Transportation Safety
 and System Stabilization Act Do Not Apply to
 Employment Taxes.............................
E. Treatment of Certain Structured Settlement   30da DOE......................  .........     (\11\)     (\11\)      (\11\)      (\11\)       (\2\)          -1          -1          -1          -1          -1          -1           -6
 Payments.....................................
F. Personal Exemption for Certain Disability    tyebo/a.......................  .........         -3         -4          -5          -5          -6          -6          -7          -8          -8          -9          -9          -70
 Trusts.......................................  9/11/01.......................

III. Disclosure of Tax Information in           dmo/a DOE.....................  .........  .........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 Terrorism and National Security
 Investigations...............................

IV. No Impact on Social Security Trust Funds..  DOE...........................  .........  .........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........

TOTAL OF PART SEVEN: VICTIMS OF TERRORISM TAX   ..............................  .........      - 190        -96         -14          -6          -6          -7          -8          -9          -9         -10         -10         -365
 RELIEF ACT OF 2001...........................

PART EIGHT: JOB CREATION AND WORKER ASSISTANCE
 ACT OF 2002 (P.L. 107-147, signed into law by
 the President on March 9, 2002)

I. Business Provisions (\22\)
A. Special Depreciation Allowance for Certain   ppisa 9/10/01.................  .........    -35,329    -32,378     -29,178         136      18,951      18,265      15,354      11,638       8,023       5,328       3,372      -15,817
 Property--30% expending of the value of
 capital assets with MACRS lives of 20 years
 or less, leasehold improvements, and
 purchased software with one-year placed in
 service extension for certain property
 subject to a long production period; conform
 AMT depreciation for property eligible for
 the special depreciation allowance (sunset
 after 36 months) (\23\)......................
B. 5-Year Carryback of Net Operating Losses     NOLs gi.......................  .........     -7,927     -6,623       4,197       2,865       1,891       1,256         840         568         388         269         191       -2,087
 and Waive the AMT 90% Limitation on the        tyea 12/31/00.................
 Allowance of Losses (including losses carried
 forward into tax years ending in 2001 and
 2002) (sunset after 24 months)...............
      Total of Business Provisions............  ..............................  .........    -43,256    -39,001     -24,981       3,001      20,842      19,521      16,194      12,206       8,411       5,597       3,563     - 17,904

II. Tax Benefits for Area of New York City
 Damaged in Terrorist Attacks on September 11,
 2001 (\24\)
A. Expansion of Work Opportunity Tax Credit     wpoifwpa......................  .........       -119       -259        -176         -52         -19          -6  ..........  ..........  ..........  ..........  ..........         -631
 Targeted Categories to Include Certain         12/31/01......................
 Employees in New York City--for employers
 with 200 or fewer employees add individuals
 working in or relocated from the Liberty Zone
 as a targeted group eligible for a modified
 WOTC (40% on first 6,000; allow against AMT)
 (sunset 12/31/03)............................
B. 30% Bonus Depreciation for Property Placed
 in Service in the Liberty Zone
  1. 30% expensing of the value of capital      ppisa 9/11/01.................  .........       -535       -490        -464        -445        -411         192         481         403         323         240         166         -542
   assets with MACRS lives of 20 years or
   less, leasehold improvements, and purchased
   software (sunset 12/31/06).................
  2. Certain nonresidential real property and   ppisa 9/11/01.................  .........        -87       -114        -136        -152        -154        -150        -146        -142         -11          33          33       -1,026
   residential rental property (sunset 12/31/
   09)........................................
C. 5-Year Life for Leasehold Improvements in    ppisa 9/11/01.................  .........        -11        -26         -45         -70        -102        -115        -101         -79         -50         -12          14         -595
 the Liberty Zone (sunset 12/31/06) (\27\)....
D. Authorize Issuance of Tax-Exempt Private     bia DOE.......................  .........        -11        -41         -90        -127        -137        -137        -137        -137        -137        -137        -137       -1,228
 Activity Bonds for Rebuilding the Portion of
 New York City Damaged in the 9/11/01
 Terrorist Attack--bonds capped at $8 billion
 for replacement/reconstruction of office
 space, residential rental and public utility
 infrastructure to be issued within the next 3
 years; exempt from AMT (sunset 12/31/04).....
E. New York City Advance Refunding of Bonds     bia DOE.......................  .........       -103       -124        -133        -125        -115         -98         -80         -64         -49         -30         -15         -937
 Capped at $9 Billion; Allow Over a 3-Year
 Window (sunset 12/31/04) (\25\)..............
F. Increase in Section 179 Expensing by         ppisa 9/11/01.................  .........        -36        -56         -37         -29         -23          20          49          31          21          14           9          -37
 $35,000; Only Half the Cost of Section 179
 Liberty Zone Property Taken into Account When
 Applying the Phaseout Threshold (sunset 12/31/
 06)..........................................
G. Extension of Replacement Period to 5 Years   (\26\)........................  .........       -145       -199         -18           1           2           3           6           7           7           8           9         -318
 for Certain Property Involuntarily Converted
 in the New York Liberty Zone on 9/11/01, and
 Substantially All of the Use of the
 Replacement Property is in New York City.....
H. Interaction with Business Provisions of      ..............................  .........        563        520         470         -42        -303        -270        -228        -173        -120         -80         -52          285
 Title I......................................

      Total of Tax Benefits for Area of New     ..............................  .........       -484       -789        -629      -1,041      -1,262        -561        -156        -154         -16          36          27       -5,029
       York City Damaged in Terrorist Attacks
       on September 11, 2001..................

III. Miscellaneous and Technical Provisions
A. General Miscellaneous Provisions
  1. Allow Form 1099 to be provided             DOE...........................  .........  .........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
   electronically.............................
  2. Reverse the Supreme Court's decision in    (\28\)........................  .........         34         76          86          88          91          94          97          99         102         106         109          982
   Gitlitz v. Commissioner (relating to
   subchapter S corporations).................
  3. Limit use of non-accrual experience        tyea DOE......................  .........          5         56          47          29          16           8          10          12          13          15          17          228
   method of accounting to amount to be
   received for the performance of qualified
   professional services......................
  4. Exclusion for foster care payments to      tyba 12/31/01.................  .........        -17        -29         -36         -44         -52         -61         -70         -80         -90        -101        -112         -692
   apply to payments by qualified placement
   agencies...................................
  5. Temporary increase in the highest          (\29\)........................  .........      1,953      3,979         346      -2,478      -1,316      -1,624      -1,764      -1,204        -714        -210         -30       -3,062
   specified percentage applied to the
   interest rate used in determining
   additional required contributions to
   defined benefit pension plans and PBGC
   variable rate premiums (sunset 12/31/03)...
  6. Above-the-line deducation for teacher      tyba 12/31/01.................  .........       -152       -205         -52  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........         -409
   classroom expenses capped at $250 annually
   for 2002 and 2003..........................
B. Technical Corrections to Previously Enacted  DOE...........................  .........  .........         -1          -1          -1          -1          -1          -1          -1       (\2\)       (\2\)  ..........           -7
 Legislation..................................

      Total of Miscellaneous and Technical      ..............................  .........      1,823      3,876         390      -2,406      -1,262      -1,584      -1,728      -1,174        -689        -190         -16       -2,960
       Provisions.............................

IV. No Impact on Social Security Trust Funds..  DOE...........................  .........  .........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........

V. Emergency Desigination.....................  DOE...........................  .........  .........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........

VI. Extensions of Certain Expiring Provisions
A. Treatment of Nonrefundable Personal Credits  tyba 12/31/01.................  .........        -85       -444        -424  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........         -953
 under the Individual Alternative Minimum Tax
 (sunset 12/31/03) (\30\).....................
B. Tax Credit for Electric Vehicles (sunset     ppisa.........................  .........        -25        -43         -41         -34         -20           1           6           4           2           1      (\11\)         -149
 after 24 months).............................  12/31/01 (\31\)...............
C. Tax credit for Electricity Production from   fpisa 12/31/01................  .........        -11        -40         -72         -96        -108        -113        -115        -116        -119        -121         -97       -1,008
 Wind, Closed-Loop Biomass, and Poultry
 Litter--facilities placed in service date
 (sunset 12/31/03)............................
D. Work Opportunity Tax Credit (sunset 12/31/   wpoifibwa.....................  .........        -96       -227        -173         -62         -35         -21          -7  ..........  ..........  ..........  ..........         -621
 03)..........................................  12/31/01......................
E. Welfare-to-Work Tax Credit (sunset 12/31/    wpoifibwa.....................  .........        -30        -76         -61         -22         -12          -7          -3  ..........  ..........  ..........  ..........         -210
 03)..........................................  12/31/01......................
F. Deductions for Qualified Clean-Fuel Vehicle  ppisa.........................  .........        -32       -116        -127        -109         -46          63          80          50          29          12           3         -192
 Property and Qualified Clean-Fuel Refueling    12/31/01 (\32\)...............
 Property (sunset after 24 months)............
G. Suspension of 100 Percent-of-Net-Income      tyba 12/31/01.................  .........        -21        -35         -13  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........          -68
 Limitation on Percentage Depletion for Oil
 and Gas from Marginal Wells (sunset 12/31/03)
H. Authority to Issue Qualified Zone Academy    oia DOE.......................  .........      (\2\)         -2          -7         -14         -19         -21         -21         -21         -21         -21         -21         -166
 Bonds (sunset 12/31/03)......................
I. Temporary Increase in Limit on Cover Over    abiUSa........................  .........        -65        -61         -14  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........         -140
 of Rum Excise Tax Revenues (from $10.50 to     12/31/01......................
 $13.25 per proof gallon) to Puerto Rico and
 the Virgin Islands (sunset 12/31/03) (\9\)...
J. Tax on Failure to Comply with Mental Health  pyba 12/31/00.................  .........  .........  .........  ..........  ..........     Negligible Effect on Excise Tax Receipts     ..........  ..........  ..........  ...........
 Parity Requirements Applicable to Group
 Health Plans (through 12/31/03) (\33\).......
K. Suspension of Section 809 Related to the     tyba 12/31/00.................  .........        -29        -53         -53         -26          -3       (\2\)  ..........  ..........  ..........  ..........  ..........         -165
 Reduction in Policyholder Dividends for
 Mutual Life Insurance Companies (sunset 12/31/
 03)..........................................
L. Extension of Archer Medical Savings          1/1/02........................  .........  .........      (\2\)          -2          -2          -2          -2          -2          -2          -2          -2          -2          -17
 Accounts (``MSAs'') (sunset 12/31/03)........
M. Extension of Accelerated Depreciation and    DOE...........................  .........  .........          8        -163        -294        -108          23          79         123         100          54           7         -171
 Employment Tax Credit for Incentives on
 Tribal Lands (through 12/31/04)..............
N. Extension of Exceptions under Subpart F for  tyba 12/31/01.................  .........       -315     -1,490      -1,684      -1,903      -2,129      -1,520  ..........  ..........  ..........  ..........  ..........       -9,041
 Active Financing Income (allow use of foreign
 statement of insurance reserves pursuant to
 guidance) (sunset 12/31/06)..................
O. Repeal the Requirement that Terminals        1/1/02........................  .........  .........  .........  ..........  ..........       Negligible Revenue Effect      ..........  ..........  ..........  ..........  ...........
 Selling Diesel Fuel and Kerosene Must Sell
 both Dyed and Undyed Fuel....................

      Total of Extensions of Certain Expiring   ..............................  .........       -709     -2,579      -2,834      -2,562      -2,482      -1,597          17          38         -11         -77        -110      -12,901
       Provisions.............................

TOTAL OF PART EIGHT: JOB CREATION AND WORKER    ..............................  .........    -42,626    -38,493     -28,054      -3,008      15,836      15,779      14,327      10,916       7,695       5,366       3,464      -38,794
 ASSISTANCE ACT OF 2002.......................

PART NINE: CLERGY HOUSING ALLOWANCE             generally tyba 12/31/01.......  .........     (\11\)     (\11\)           1           1           2           3           4           5           5           6           6           33
 CLARIFICATION ACT OF 2002--Parsonage
 Allowance Exclusion (P.L. 107-181, signed
 into law by the President on May 20, 2002)...

PART TEN: REVENUE PROVISIONS OF THE TRADE
 ADJUSTMENT ASSISTANCE REFORM ACT OF 2002
 (P.L. 107-210, signed into law by the
 President on August 6, 2002)

I. Refundable Credit for Health Insurance Cost
 of Eligible Individuals
A. 65% Refundable Tax Credit for Purchase of    (\35\)........................  .........  .........       -122        -212        -260        -272        -285        -297        -309        -321        -333        -345       -2,757
 Health Insurance Coverage by Certain
 Taxpayers Eligible for TAA Assistance or
 Alternative TAA Assistance; Eligible Health
 Insurance Coverage Includes Certain Employer
 Continuation Coverage, Certain State-Based
 Health Coverage, and Certain Privately
 Purchased Insurance (\34\)...................
B. 65% Refundable Tax Credit for Purchase of    (\35\)........................  .........  .........       -172        -187        -192        -198        -203        -209        -214        -220        -225        -231       -2,051
 Health Insurance Coverage by Certain PBGC
 Pension Recipients (\36\)....................

TOTAL OF PART TEN: REVENUE PROVISIONS OF THE    ..............................  .........  .........       -294        -399        -452        -470        -488        -506        -523        -541        -558        -576       -4,808
 TRADE ADJUSTMENT ASSISTANCE REFORM ACT OF
 2002.........................................

PART ELEVEN: MODIFY THE RULES APPLICABLE TO     (\37\)........................  .........  .........         -2          -1          -1       (\2\)       (\2\)       (\2\)       (\2\)       (\2\)       (\2\)       (\2\)           -7
 POLITICAL ORGANIZATIONS DESCRIBED IN SECTION
 527 OF THE INTERNAL REVENUE CODE (P.L. 107-
 276, signed into law by the President on
 November 2, 2002)............................

PART TWELVE: REVENUE PROVISIONS OF THE          60da..........................  .........  .........  .........  ..........  ..........           No Revenue Effect          ..........  ..........  ..........  ..........  ...........
 HOMELAND SECURITY ACT OF 2002--Transfer of     11/25/02......................
 the Bureau of Alcohol, Tobacco, and Firearms
 to the Department of Justice (\9\) (P.L. 107-
 296, signed into law by the President on
 November 25, 2002)...........................
PART THIRTEEN: REVENUE PROVISIONS OF THE        DOE...........................  .........  .........  .........           9          16          23          28          33          28          25          21          19          202
 VETERANS BENEFITS ACT OF 2002--Extend
 Disclosure of Tax Return Information for
 Administration of Certain Veterans Programs
 through 9/30/08 (\9\) (P.L. 107-330, signed
 into law by the President on December 6,
 2002)........................................

PART FOURTEEN: HOLOCAUST RESTITUTION TAX        aor/a 1/1/11..................  .........  .........  .........  ..........  ..........  ..........  ..........  ..........  ..........  ..........  ..........          -3           -3
 FAIRNESS ACT OF 2002--Make Permanent The
 Exclusion from Gross Income Certain Payments
 Made to Holocaust Survivors or Their Heirs
 (P.L. 107-358, signed into law by the
 President on December 17, 2002)..............
========================================================================================================================================================================================================================================
Note.--Details may not add to totals due to rounding.

Source: Joint Committee on Taxation.


Legend for ``Effective'' column:

abiUSa = articles brought into the United States after    fpisa = facilities placed in service after                tdapma = transfers, distributions,
                                                                                                                     and payments made after
aiii TRA'97 = as if included in the Taxpayer Relief Act   frap = Federal regulations are prescribed                 tyba = taxable years beginning after
 of 1997
aro/a = amounts received on or after                      gi = generated in                                         tyea = taxable years ending after
bia = bonds issued after                                  gma = gifts made after                                    tyebo/a = taxable years ending
                                                                                                                     before, on, or after
cba = courses beginning after                             ipa = interest paid after                                 tyeo/a = taxable years ending on or
                                                                                                                     after
cf = contributions for                                    NOLs = net operating losses                               wpoifibwa = wages paid or incurred
                                                                                                                     for individuals beginning
cyba = calendar years beginning after                     oia = obligations issued after                              work after
da = distributions after                                  pateo/a = plan amendments taking effect on or after       wpoifwpa = wages paid or incurred
                                                                                                                     for work performed after
dda = decedents dying after                               pmo/a = payments made on or after                         yba = years beginning after
doa = disasters occurring after                           ppisa = property placed in service after                  yea = years endings after
dma = distributions made after                            pra = payments received after                             30da = 30 days after
dmo/a = disclosures made on or after                      pyba = plan years beginning after                         60da = 60 days after.
DOE = date of enactment                                   rma = requests made after                                 ....................................
epoaa = expenses paid or assessed after                   ta = transfers after                                      ....................................


\1\ The estimates presented in this table include the effects of certain behavioral responses to the tax proposals, including shifts between nontaxable
  and taxable sources of income, changes in amounts of charitable giving, and changes in the timing of realization of some sources of income. While the
  estimates do not include the effects of these proposals on economic growth, the proposals are likely to result in modest increases in growth of the
  economy during the 10-year budget estimating period. The largest component of the proposals, the marginal rate cuts, will provide incentives for more
  work, investment, and savings.
\2\ Loss of less than $500,000.
\3\ Estimate assumes that any constitution challenge based on the use of Federal Case registry data would not be successful.
\4\ Provision includes interaction with other provisions in Provisions for Expanding Coverage.
\5\ Provision includes interaction with the Individual Retirement Arrangement Provisions.
\6\ Loss of less than $5 million.
\7\ Loss of less than $1 million.
\8\ Effective for costs paid or incurred in taxable years beginning after December 31, 2001, with respect to qualified employer plans established after
  such date.
\9\ Estimate provided by the Congressional Budget Office.
\10\ Generally effective with respect to years beginning after December 31, 2004. In the case of an ESOP established after March 14, 2001, or an ESOP
  established on or before such date if the employer maintaining the plan was not an S corporation on such date, the proposal would be effective with
  respect to plan years ending after March 14, 2001.
\11\ Gain of less than $500,000.
\12\ Directs the Secretary of the Treasury to modify rules through regulations.
\13\ Special Federal income tax rules would apply if the Trust makes an election for its first taxable year ending after the date of enactment.
\14\ Effective for taxable years of electing Settlement Trusts ending after the date of enactment, and to contributions made to such trust made after
  the date of enactment.


------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  2001      2002      2003      2004      2005      2006      2007      2008      2009      2010      2011      2012     2001-12
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
  \15\ Includes the following effect on fiscal year outlays     ........     6,226     6,600     7,006     7,081     9,597     9,542     9,360     9,668    11,080    12,244    (\38\)    88,404
 (millions)...................................................
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------


------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  2001      2002      2003      2004      2005      2006      2007      2008      2009      2010      2011      2012     2001-12
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
  \16\ Taxpayers affected by the AMT: Present Law (millions of       1.5       3.5       4.3       5.6       7.1       8.7      10.5      12.8      14.9      17.5      20.7      24.0
 taxpayers):..................................................
  Taxpayers affected by the AMT: Proposal (millions of               1.4       2.7       3.3       5.3      13.0      19.6      23.9      29.1      32.1      35.5      20.7      24.0
 taxpayers):..................................................
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\17\ This provision will have a negligible effect on revenues from penalty excise taxes.
\18\ Effective for decedents dying on or after September 11, 2001, or, in the case of victims of the Oklahoma City terrorist attack, decedents dying on or after April 19, 1995.

[Footnotes for the Appendix are continued on the following page]

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

Footnotes for the Appendix continued:

\19\ Effective for discharges made on or after September 11, 2001, and before January 1, 2002.
\20\ Effective for disasters and terrorist or military actions occurring on or after September 11, 2001, with respect to any action of the Secretary of the Treasury, the Secretary of Labor, or
  the Pension Benefit Guaranty Corporation occurring on or after the date of enactment.
\21\ Effective as if included in section 301 of the Air Transportation Safety and System Stabilization Act.
\22\ There are interactions among the business tax provisions that can affect the revenue estimates of specific provisions. These interactions are substantial in the case of the two expensing
  provisions and the net operating loss provisions. For the presentation here, the provisions are assumed to be added in the order presented. So, for example, the section 179 expensing
  provision and the net operating loss provision assume that the special 30% depreciation provision is already in place.
\23\ A binding contract placed-in-service extension would apply in certain cases.
\24\ The New York City Liberty Zone is defined as all business addresses located on or south of Canal Street, East Broadway (east of its intersection with Canal Street), or Grand Street (east
  of its intersection with East Broadway) in the Borough of Manhattan, New York, NY.
\25\ Applies to original bonds issued by New York City (governmental obligations only), New York Municipal Water Authority, and the Metropolitan Transit Authority of the State of New York
  (governmental obligations only), and qualified 501(c)(3) for hospital facilities in New York City.
\26\ Effective for involuntary conversions in the New York Liberty Zone as a result of the terrorist attacks that occurred on September 11, 2001.
\27\ Leasehold improvements that are recovered over a 5-year life are not eligible for bonus depreciation.
\28\ The provision generally applies to discharges of indebtedness after October 11, 2001. The provision does not apply to any discharge of indebtedness before March 1, 2002, pursuant to a
  plan of reorganization filed with a bankruptcy court on or before October 11, 2001.
\29\ Effective with respect to plan contributions and PBGC variable rate premiums for plan years beginning after December 31, 2001, and before January 1, 2004.
\30\ The ``Economic Growth and Tax Relief Reconciliation Act of 2001'' provides that the child tax credit and adoption tax credit are allowed for purposes of the alternative minimum tax for
  2002 through 2010.
\31\ The credit phases down for vehicles placed in service after 12/31/03. The credit for vehicles is reduced by 25 percent in 2004, 50 percent in 2005, and 75 percent in 2006. No credit is
  available after 2006.
\32\ The deduction phases down for vehicles placed in service after 12/31/03. The deductible amount for vehicles is reduced by 25 percent in 2004, 50 percent in 2005, and 75 percent in 2006.
  No expensing is available after 2006.
\33\ This provision will have a negligible effect on revenues from excise taxes. The Congressional Budget Office estimates that the provision would have indirect effects on income and payroll
  tax revenues. CBO estimates that these revenues would decline by $30 million in 2003 and $10 million in 2004.


------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  2001      2002      2003      2004      2005      2006      2007      2008      2009      2010      2011      2012     2001-12
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
  \34\ Estimate includes the following increase in outlays....  ........  ........        37        66        86        90        94        98       102       106       110       114       910
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\35\ The credit would be available for eligible health insurance premiums coverage beginning 90 days after the date of enactment.


------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  2001      2002      2003      2004      2005      2006      2007      2008      2009      2010      2011      2012     2001-12
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
  \36\ Estimate includes the following increase in outlays....  ........  ........        52        58        63        65        67        69        71        73        74        76       677
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\37\ The parts of the bill relating to the exemption of certain political organizations from the notice, reporting, and return requirements are effective as if included in the amendments made
  by P.L. 106-230. The rest of the bill is effective on various dates.
\38\ Outlays of less than $500,000.


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