[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.
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\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.
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A committee report on legislation issued by a Congressional
committee sets forth the committee's explanation of the bill as
it was reported by that committee. In some instances, a
committee report does not serve as an explanation of the final
provisions of the legislation as enacted. This is because the
version of the bill enacted after action by the Conference
Committee may differ significantly from the versions of the
bill reported by the House and Senate Committees and passed by
the House and Senate. The material contained in this 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.
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\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.
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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.
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\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.
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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\
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\4\ Congressional Budget Office, Congress of the United States, The
Budget and Economic Outlook: Fiscal Years 2002-2011, January 2001, at
56.
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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.
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\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.
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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.
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\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.
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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\
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\8\ See discussion of the provisions regarding marriage penalty
relief in the 15-percent bracket, Part Two, Section III. A., of this
document.
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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.
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\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.
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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\
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\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).
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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\
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\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).
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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).
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\26\ Section 32(c)(5).
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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).
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\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.
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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\
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\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\
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\30\ Section 32(h).
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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.
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\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.
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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.
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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.
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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.
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\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.
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\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.
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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.
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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\
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\43\ This definition also applies to distributions from education
IRAs.
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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.
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\44\ This definition also applies to distributions from education
IRAs.
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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.
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\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.
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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.
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Reasons for Change
The Congress believed that the exclusion for employer-
provided educational assistance has enabled millions of workers
to advance their education and improve their job skills without
incurring additional taxes and a reduction in take-home pay. In
addition, the exclusion lessens the complexity of the tax laws.
Without the special exclusion, a worker receiving educational
assistance from his or her employer is subject to tax on the
assistance, unless the education is related to the worker's
current job. Because the determination of whether particular
educational assistance is job related is based on the facts and
circumstances, it may be difficult to determine with certainty
whether the educational assistance is excludable from income.
This uncertainty may lead to disputes between taxpayers and the
Internal Revenue Service.
The 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.
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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\
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\60\ Section 1014(b)(2) and (3).
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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.
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\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.
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\65\ Treas. Reg. sec. 26.2632-1(d).
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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.
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\66\ Treas. Reg. sec. 26.2654-1(b).
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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).
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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.
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\73\ The 25 percent of compensation limitation is increased to 100
percent of compensation under section 632 of EGTRRA.
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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.
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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\
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\76\ Section 632 of EGTRRA increases the 33-1/3 percentage of
compensation limit to 100 percent.
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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\
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\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.
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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.
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\78\ Title I of ERISA also contains prohibited transaction rules.
The Code and ERISA provisions are substantially similar, although not
identical.
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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.
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\79\ Certain transactions involving a plan and S corporation
shareholders are permitted.
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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\
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\80\ Treas. Reg. sec. 1.416-1 Q&A M-19.
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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.
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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\
---------------------------------------------------------------------------
\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.
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\101\ The credit cannot be carried back to years before the
effective date.
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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\
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\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.
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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)).
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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\
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\104\ Rev. Proc. 2001-55, 2001-2 C.B. 552.
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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.
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\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.
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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.
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\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.
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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.
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\108\ Section 611 of EGTRRA increases the defined contribution plan
dollar limit.
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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.
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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\
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\111\ The minimum vesting requirements are also contained in Title
I of ERISA.
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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\.
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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.
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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.
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\114\ Treas. Reg. sec. 1.401(k)-1.
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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.
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\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.
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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.
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\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.
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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.
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\118\ Distributions from a Roth IRA may be rolled over only to
another Roth IRA.
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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\
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\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.
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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.
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\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.
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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.
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\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\
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\123\ A similar provision is contained in Title I of ERISA.
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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\
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\125\ Rev. Rul. 79-336, 1979-2 C.B. 187.
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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.
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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.
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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.
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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.
---------------------------------------------------------------------------
\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\
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\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.
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\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.
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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.
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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).
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\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.
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\144\ Section 641 of EGTRRA expands the kinds of plans to which
benefits may be rolled over.
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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).
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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.
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\153\ An employee includes a self-employed individual.
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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\
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\154\ Treas. Reg. sec. 1.410(b)-6(g).
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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.
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\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.
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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.
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\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).
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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\
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\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.
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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.
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\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.
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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\
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\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.
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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\
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\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).
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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\
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\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.
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\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.
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\168\ Section 7508A.
\169\ Section 6404(h).
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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\
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\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.
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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.
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\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.
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\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.
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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.
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\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.
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\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.
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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.
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\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.
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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\
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\176\ Estimate provided by the Congressional Budget Office.
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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\
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\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.
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\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.
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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.
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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).
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\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.
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\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.
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\185\ Such amounts may, however, be excludable from gross income
under the death benefit exclusion provided in section 102 of the Act.
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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\
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\186\ Comm'r v. Duberstein, 363 U.S. 278 (1960).
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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.
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\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.
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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.
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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.
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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.
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\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.
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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.
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\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.
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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.
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\201\ A taxpayer's identity is treated as not having been supplied
by the taxpayer or his representative.
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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\
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\202\ 18 U.S.C. 2331.
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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.
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\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.
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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.
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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.
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\242\ Public utility property and residential property located
outside the Zone cannot be financed with the bonds.
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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.
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\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.
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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.
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(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\
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\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).
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(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).
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(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.
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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.
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\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.
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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.
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\257\ The ``New York Liberty Zone'' has the same definition
throughout the JCWA.
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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.
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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.
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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.
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\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.
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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.
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\273\ A portion of the child credit may be refundable.
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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\
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\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.
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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\
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\275\ The amount of the credit was 1.7 cents per kilowatt hour for
2001.
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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.
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\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.
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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.
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\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.
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A taxpayer is required to determine the depletion deduction
for each oil or gas property under both the percentage
depletion method (if the taxpayer is entitled to use this
method) and the cost depletion method. If the cost depletion
deduction is larger, the taxpayer must utilize that method for
the taxable year in question (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).
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\278\ A proof gallon is a liquid gallon consisting of 50 percent
alcohol.
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The Code provides for coverover (payment) of $13.25 per
proof gallon of the excise tax imposed on rum imported (or
brought) into the United States (without regard to the country
of origin) to Puerto Rico and the Virgin Islands during the
period July 1, 1999 through December 31, 2001. Effective on
January 1, 2002, the coverover rate 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\
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\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.
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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.
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\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.
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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.
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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.
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\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.
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\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\
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\287\ Prop. Treas. Reg. sec. 1.953-1(a).
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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\
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\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.
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With respect to income derived in the active conduct of a
banking, financing, or similar business, a CFC is required to
be predominantly engaged in such business and to conduct
substantial activity with respect to such business in order to
qualify for the exceptions. In addition, certain nexus
requirements apply, which provide that income derived by a CFC
or a qualified business unit (``QBU'') of a CFC from
transactions with customers is eligible for the exceptions if,
among other things, substantially all of the activities in
connection with such transactions are conducted directly by the
CFC or QBU in its home country, and such income is treated as
earned by the CFC or QBU in its home country for purposes of
such country's tax laws. Moreover, the exceptions apply to
income derived from certain cross-border transactions, provided
that certain requirements are met. Additional exceptions from
foreign personal holding company income apply for certain
income derived by a securities dealer within the meaning of
section 475 and for gain from the sale of active financing
assets.
In the case of insurance, in addition to a temporary
exception from foreign personal holding company income for
certain income of a qualifying insurance company with respect
to risks located within the CFC's country of creation or
organization, certain temporary exceptions from insurance
income and from foreign personal holding company income apply
for certain income of a qualifying branch of a qualifying
insurance company with respect to risks located within the home
country of the branch, provided certain requirements are met
under each of the exceptions. Further, additional temporary
exceptions from insurance income and from foreign personal
holding company income apply for certain income of certain CFCs
or branches with respect to risks located in a country other
than the United States, provided that the requirements for
these exceptions are met.
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.
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\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).
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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.
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\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).
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Terminal facilities are not permitted to receive and store
non-tax-paid motor fuels unless they are registered with the
Internal Revenue Service. Under 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.
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\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.
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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).
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\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.
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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.
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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.
---------------------------------------------------------------------------
\308\ Section 6104(a)(1).
\309\ Section 6104(a)(3).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
\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\
---------------------------------------------------------------------------
\314\ Section 6033(g).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\315\See section 6104.
---------------------------------------------------------------------------
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)).
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\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.
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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).
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\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.
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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.