[House Report 104-84]
[From the U.S. Government Publishing Office]
104th Congress 1st HOUSE OF REPRESENTATIVES Report
Session
104-84
_______________________________________________________________________
CONTRACT WITH AMERICA TAX RELIEF ACT OF 1995
__________
R E P O R T
of the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
on
H.R. 1215
together with
DISSENTING VIEWS
[Including cost estimate of the Congressional Budget Office]
March 21, 1995.--Committed to the Committee of the Whole House on the
State of the Union, and ordered to be printed
CONTENTS
----------
Page
I. INTRODUCTION.....................................................2
A. Purpose and Summary................................. 2
B. Background and Need for Legislation................. 8
C. Legislative History................................. 8
II. EXPLANATION OF PROVISIONS.......................................10
TITLE I. AMERICAN DREAM RESTORATION.............................10
A. Family Tax Credit (sec. 101)........................ 10
B. Credit to Reduce the Marriage Penalty (sec. 102).... 12
C. American Dream Savings Accounts and Deductible
Spousal IRAs (secs. 103-104)....................... 14
TITLE II. SENIOR CITIZENS' EQUITY...............................19
A. Repeal of Increase in Income Tax on Social Security
Benefits (sec. 201)................................ 19
B. Treatment of Long-Term Care Insurance and Services
(secs. 211-214 and 231-232)........................ 22
C. Tax Treatment of Accelerated Death Benefits under
Life Insurance Contracts (secs. 221-222)........... 30
TITLE III. JOB CREATION AND WAGE ENHANCEMENT....................34
A. Capital Gains Provisions............................ 34
1. 50-percent capital gains deduction for
individuals (sec. 301)......................... 34
2. Indexing of basis of certain assets for purposes
of determining gain (sec. 302)................. 37
3. 25-percent corporate alternative tax for capital
gains (sec. 311)............................... 42
4. Capital loss deduction allowed with respect to
the sale or exchange of principal residence
(sec. 316)..................................... 43
B. Cost Recovery Provisions............................ 44
1. Neutral cost recovery (sec. 321)................ 44
2. Treatment of leasehold improvements (sec. 322).. 47
C. Alternative Minimum Tax (sec. 331).................. 49
D. Public Debt Reduction Checkoff and Trust Fund (secs.
341-342)........................................... 54
E. Small Business Incentives........................... 56
1. Increase in unified estate and gift tax credits;
indexing of certain provisions (sec. 351)...... 56
2. Increase in expensing for small businesses (sec.
352)........................................... 59
3. Clarification of definition of principal place
of business; Treatment of storage of product
samples (secs. 353-354)........................ 60
TITLE IV. FAMILY REINFORCEMENT..................................64
A. Tax Credit for Adoption Expenses (sec. 401)......... 64
B. Tax Credit for Custodial Care of Certain Elderly
Family Members in Taxpayer's Home (sec. 402)....... 65
TITLE V. INCREASE IN THE SOCIAL SECURITY EARNINGS LIMIT (Sec. 5068
TITLE VI. TAX TECHNICAL CORRECTIONS.............................70
A. Technical Corrections to the Revenue Reconciliation
Act of 1990........................................ 70
1. Excise tax provisions........................... 70
a. Application of the 2.5-cents-per-gallon tax
on fuel used in rail transportation to
States and local governments (sec.
602(b)(2))................................. 70
b. Small winery production credit and bonding
requirements (secs. 602(b)(5), (6), and
(7))....................................... 70
2. Other revenue-increase provisions of the 1990
Act............................................ 71
a. Deposits of Railroad Retirement Tax Act
taxes (sec. 602(c)(3))..................... 71
b. Treatment of salvage and subrogation of
property and casualty insurance companies
(sec. 602(c)(4))........................... 71
c. Information with respect to certain foreign-
owned or foreign corporations: Suspension
of statute of limitations during certain
judicial proceedings (sec. 602(c)(5))...... 72
d. Rate of interest for large corporate
underpayments (secs. 602(c)(6) and (7)).... 74
3. Research credit provision: Effective date for
repeal of special proration rule (sec.
602(d)(1))..................................... 74
4. Energy tax provision: Alternative minimum tax
adjustment based on energy preferences (secs.
602(e)(1) and (4))............................. 75
5. Estate tax freezes (sec. 602(f))................ 76
6. Miscellaneous provisions........................ 80
a. Conforming amendments to the repeal of the
General Utilities doctrine (secs. 602(g)(1)
and (2))................................... 80
b. Prohibited transaction rules (sec.
602(g)(3))................................. 81
c. Effective date of LIFO adjustment for
purposes of computing adjusted current
earnings (sec. 602(g)(4)).................. 81
d. Low-income housing credit (sec. 602(g)(5)).. 82
7. Expired or obsolete provisions (``deadwood
provisions'') (sec. 602(h)(1)-(18))............ 82
B. Technical Corrections to the Revenue Reconciliation
Act of 1993........................................ 83
1. Treatment of full-time students under the low-
income housing credit (sec. 603(b))............ 83
2. Indexation of threshold applicable to excise tax
on luxury automobiles (sec. 603(c))............ 83
3. Indexation of the limitation based on modified
adjusted gross income for income from United
States savings bonds used to pay higher
education tuition and fees (sec. 603(d))....... 84
4. Reporting and notification requirements for
lobbying and political expenditures of tax-
exempt organizations (sec. 603(g))............. 84
5. Estimated tax rules for certain tax-exempt
organizations (sec. 603(h)).................... 85
6. Current taxation of certain earnings of
controlled foreign corporations--application of
foreign tax credit limitation (sec. 603(i)(1)). 85
7. Current taxation of certain earnings of
controlled foreign corporations--measurement of
accumulated earnings (sec. 603(i)(2)).......... 86
8. Current taxation of certain earnings of
controlled foreign corporations--aggregation
and look-through rules (sec. 603(i)(3))........ 87
9. Treatment of certain leased assets for PFIC
purposes (sec. 603(i)(5))...................... 87
10. Amortization of goodwill and certain other
intangibles (sec. 603(k))...................... 88
11. Empowerment zones and eligibility of small
farms for tax incentives (sec. 603(l))......... 89
C. Other Tax Technical Corrections..................... 89
1. Hedge bonds (sec. 604(b))....................... 89
2. Withholding on distributions from U.S. real
property holding companies (sec. 604(c))....... 90
3. Treatment of credits attributable to working
interests in oil and gas properties (sec.
604(d))........................................ 92
4. Clarification of passive loss disposition rule
(sec. 604(e)).................................. 92
5. Estate tax unified credit allowed nonresident
aliens under treaty (sec. 604(f)(1))........... 93
6. Limitation on deduction for certain interest
paid by corporation to related person (sec.
604(f)(2))..................................... 94
7. Branch-level interest tax (sec. 604(f)(3))...... 96
8. Determination of source in case of sales of
inventory property (sec. 604(f)(4))............ 97
9. Repeal of obsolete provisions (sec. 604(f)(5)).. 98
10. Clarification of certain stadium bond
transition rule in Tax Reform Act of 1986 (sec.
604(g))........................................ 99
11. Health care continuation rules (sec. 604(h))... 99
12. Taxation of excess inclusions of a residual
interest in a REMIC for taxpayers subject to
alternative minimum tax with net operating
losses (sec. 604(i))........................... 100
13. Application of harbor maintenance tax to Alaska
and Hawaii ship passengers (sec. 604(j))....... 101
14. Modify effective date provision relating to the
Energy Policy Act of 1992 (sec. 604(k))........ 101
15. Treat qualified football coaches plan as multi-
employer pension plan for purposes of the
Internal Revenue Code (sec. 604(l))............ 102
16. Determination of unrecovered investment in
annuity contract (sec. 604(m))................. 103
17. Election by parent to claim unearned income of
certain children on parent's return (sec.
604(n))........................................ 103
18. Exclusion from income for combat zone
compensation (sec. 604(o)(4)).................. 104
III. VOTES OF THE COMMITTEE.........................................105
IV. BUDGET EFFECTS OF THE BILL.....................................107
A. Committee Estimate of Budgetary Effects............. 107
B. New Budget Authority and Tax Expenditures........... 110
C. Cost Estimate of the Congressional Budget Office.... 110
V. OTHER MATTERS TO BE DISCUSSED UNDER HOUSE RULES................114
A. Committee Oversight Findings and Recommendations.... 114
B. Findings and Recommendations of the Committee on
Government Reform and Oversight.................... 114
C. Inflationary Impact Statement....................... 114
VI. CHANGES IN EXISTING LAW IN THE BILL AS REPORTED................115
VII. DISSENTING VIEWS...............................................267
104th Congress Report
HOUSE OF REPRESENTATIVES
1st Session 104-84
_______________________________________________________________________
CONTRACT WITH AMERICA TAX RELIEF ACT OF 1995
_______
March 21, 1995.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______________________________________________________________________
Mr. Archer, from the Committee on Ways and Means, submitted the
following
R E P O R T
together with
DISSENTING VIEWS
[To accompany H.R. 1215]
[Including cost estimate of the Congressional Budget Office]
The Committee on Ways and Means, to whom was referred the
bill (H.R. 1215) to amend the Internal Revenue Code of 1986 to
strengthen the American family and create jobs, having
considered the same, report favorably thereon without amendment
and recommend that the bill do pass.
I. INTRODUCTION
A. Purpose and Summary
H.R. 1215, the ``Contract With America Tax Relief Act of
1995,'' includes provisions derived from the revenue provisions
contained in the ``Contract With America'' (the ``Contract''),
the ``Tax Technical Corrections Act of 1995'' (H.R. 1121), and
certain other revenue proposals. The following is a title-by-
title summary of the bill as reported.
Title I--American Dream Restoration
Family tax credit (sec. 101)
The bill provides families with an income tax credit of
$500 for each qualifying child under age 18. The credit is
phased out ratably for families with adjusted gross incomes
between $200,000 and $250,000. The provision is effective for
taxable years beginning after December 31, 1995. The credit
amount and the phaseout threshold are indexed for inflation
after 1996.
Credit to reduce the marriage penalty (sec. 102)
The bill provides married couples who file joint returns
with an income tax credit of up to $145. The provision is
effective for taxable years beginning after December 31, 1995.
American Dream Savings Accounts and deductible spousal IRAs (secs. 103-
104)
The bill establishes a new savings vehicle, the American
Dream Savings Account (``ADS account''), to which individuals
are permitted to make annual nondeductible contributions of up
to $2,000 ($4,000 for married couples filing joint returns).
The annual limitation is indexed for inflation after 1996.
Amounts withdrawn from a regular Individual Retirement
Arrangement (IRA) can be rolled over to an ADS account between
January 1, 1996 and December 31, 1997, with the amount included
in gross income ratably over four years. Qualified
distributions from an ADS account are not includible in gross
income, and are not subject to the additional tax imposed on
early withdrawals. A qualified distribution is a distribution
that is made after five years and is (1) made on or after the
individual attains age 59\1/2\; (2) made to a beneficiary (or
the individual's estate) on or after the individual's death;
(3) attributable to the individual's being disabled; or (4) is
for a qualified special purpose, which includes the first-time
purchase of a home or the payment of qualified higher education
expenses, medical expenses, and long-term care insurance
premiums.
The bill also modifies the present-law rules relating to
deductible IRAs by permitting deductible IRA contributions of
up to $2,000 for each spouse (including a homemaker who does
not work outside the home) if the combined compensation of both
spouses is at least equal to the contributed amount. The ADS
and IRA provisions are effective for taxable years beginning
after December 31, 1995.
Title II_Senior Citizens' Equity
Repeal of tax increase on Social Security benefits (sec. 201)
The bill repeals the 1993 increase in the amount of Social
Security and Railroad Retirement Tier 1 benefits that are
potentially subject to income taxation, reducing the amount
from 85 percent to 50 percent over five years. The maximum
percentage of Social Security benefits subject to tax is 75
percent in 1996, 65 percent in 1997, 60 percent in 1998, 55
percent in 1999, and 50 percent thereafter. The bill also
phases in a reduction in the amount of Social Security or
Railroad Retirement Tier 1 benefits included in the gross
income of nonresident aliens. The bill also provides that
revenues from the income taxation of Social Security and
Railroad Retirement Tier 1 benefits attributable to the
increased portion of benefits included in gross income under
the Omnibus Budget Reconciliation Act of 1993 (as phased out
under the provision) will be credited to the Old-Age and
Survivors and Disability Insurance Trust Funds.
Treatment of long-term care insurance and services (secs. 211-214 and
231-232)
The bill provides tax incentives for the purchase of long-
term care insurance contracts. The bill generally treats a
long-term care insurance contract as an accident and health
insurance contract. Amounts (other than policyholder dividends
or premium refunds) received under a long-term care insurance
contract are excludable as amounts received for personal
injuries and sickness (up to $200 per day or $73,000 per year).
A plan of an employer providing coverage under a long-term care
insurance contract generally is treated as an accident and
health plan; however, coverage under a long-term care insurance
contract is not excludable by an employee if provided through a
cafeteria plan and expenses for long-term care services cannot
be reimbursed under a flexible spending arrangement. Within
certain limits, premiums for long-term care insurance are
treated as medical expenses for purposes of the itemized
deduction for medical expenses. Similarly, expenses for
qualified long-term care services are treated as medical
expenses for purposes of the itemized deduction. The long-term
care provisions generally are effective for taxable years
beginning after December 31, 1995.
In determining reserves for insurance company tax purposes,
the bill provides that the Federal income tax reserve method
for a long-term care insurance contract issued after December
31, 1995, generally is the method prescribed by the National
Association of Insurance Commissioners. However, the tax
reserve for a contract cannot exceed the amount taken into
account in determining statutory reserves.
Tax treatment of accelerated death benefits under life insurance
contracts (secs. 221-222)
The bill provides an exclusion from gross income for (1)
amounts received under a life insurance contract and (2)
amounts received for the sale or assignment of a life insurance
contract to a qualified viatical settlement provider, provided
that the insured under the life insurance contract is either
terminally ill or chronically ill. An individual is considered
to be terminally ill if a physician certifies that the
individual has an illness or physical condition that reasonably
can be expected to result in death within 24 months of the date
of certification. An individual generally is considered to be
chronically ill if a licensed health care practitioner
certifies that the individual is unable to perform (without
substantial assistance) at least two activities of daily living
for at least 90 days due to a loss of functional capacity or
cognitive impairment. With respect to a chronically ill
individual (who is not also terminally ill), the $200 per day
($73,000 per year) limit on excludable long-term care benefits
applies. The provision applies to amounts received after
December 31, 1995.
Title III--Job Creation and Wage Enhancement
Capital gains provisions
The bill includes four general provisions affecting the tax
treatment of capital gains and losses:
(1) 50-percent capital gains deduction for individuals
(sec. 301)
The bill allows individuals to deduct 50 percent of net
capital gain for the taxable year, repeals the provisions in
the Omnibus Budget Reconciliation Act of 1993 providing a
capital gain exclusion for sales of certain small business
stock, and reinstates the rule in effect prior to the l986 Tax
Reform Act that required two dollars of the long-term capital
loss of an individual to offset one dollar of ordinary income.
The $3,000 limitation on the deduction of capital losses
against ordinary income continues to apply. Collectibles will
not qualify for the 50-percent exclusion. However, an
individual may elect to apply a maximum rate of 28 percent to
the net capital gain attributable to collectibles, if the
individual forgoes the benefit of indexing the basis of the
collectible. The provision generally applies to taxable years
ending after December 31, 1994.
(2) Indexing of basis of certain assets for purposes of
determining gain (sec. 302)
The bill generally provides an inflation adjustment to
(i.e., indexing of) the basis of certain assets (called
``indexed assets'') for purposes of determining gain (but not
loss) upon a sale or other disposition of such assets by a
taxpayer other than a C corporation. Indexed assets generally
include common stock of C corporations and tangible property
that is a capital asset or property used in a trade or
business. To be eligible for indexing, an asset must be held by
the taxpayer for more than three years. The provision is
effective for assets acquired on or after January 1, 1995 (and
to principal residences held on that date).
A taxpayer holding any indexed asset (other than a
principal residence) on January 1, 1995, may elect to treat the
indexed asset as having been sold on that date for an amount
equal to its fair market value, and as having been reacquired
for an amount equal to such value. If the election is made, the
asset would be eligible for indexing under the provision.
(3) 25-percent corporate alternative tax for capital gains
(sec. 311)
The bill provides an alternative tax of 25 percent on the
net capital gain of a corporation if that rate is less than the
corporation's regular tax rate. The provision generally applies
to taxable years ending after December 31, 1994. For taxable
years ending after December 31, 1994, and beginning before
January 1, 1996, the 25-percent rate applies to the lesser of
(1) the net capital gain for the taxable year or (2) the net
capital gain taking into account only gain or loss properly
taken into account for the portion of the taxable year after
December 31, 1994.
(4) Capital loss deduction allowed with respect to the sale
or exchange of a principal residence (sec. 316)
The bill provides that a loss from the sale or exchange of
a principal residence is treated as a deductible capital loss
rather than a nondeductible personal loss. The provision is
effective for sales and exchanges after December 31, 1994, in
taxable years ending after such date.
Cost recovery provisions
Neutral cost recovery (sec. 321)
For any property that is currently eligible for
depreciation under the modified Accelerated Cost Recovery
System (``MACRS''), the bill allows a taxpayer to elect, on a
property-by-property basis, to determine depreciation
deductions under present law or under a new neutral cost
recovery system (``NCRS''). NCRS generally follows MACRS but
replaces the 200-percent declining balance method of MACRS
applicable to shorter-lived property with the 150-percent
declining balance method. In addition, depreciation deductions
are increased to reflect inflation occurring since the property
was placed in service, and, in the case of property that is
currently eligible for the 200-percent declining balance
method, an assumed 3.5-percent real rate of return. The
depreciation allowances provided under NCRS for regular tax
purposes also are applied for alternative minimum tax purposes.
The NCRS election is available for qualifying property placed
in service after December 31, 1994.
Treatment of leasehold improvements (sec. 322)
The bill provides that a lessor that disposes of a
leasehold improvement at the end of a lease term is allowed to
recover the adjusted basis of the improvement at that time. The
provision is effective for leasehold improvements disposed of
after March 13, 1995.
Alternative minimum tax (sec. 331)
The bill repeals the corporate alternative minimum tax for
taxable years beginning after December 31, 2000, and modifies
the individual alternative minimum tax. Business and corporate
preferences and adjustments under the alternative minimum tax
generally cease to apply after December 31, 1995 (March 13,
1995, in the case of depreciable property). For taxable years
beginning after December 31, 1995, a taxpayer with alterative
minimum tax credit carryovers is allowed to use these credits
to offset 90 percent of its regular tax liability (determined
after the application of other credits). In no event can
alternative minimum tax credit carryovers be used to reduce the
taxpayer's tax liability below its tentative minimum tax, if
any.
Public debt reduction checkoff and trust fund (secs. 341-342)
The bill permits individual taxpayers to designate an
amount up to 10 percent of their Federal income tax liability
for a taxable year to be earmarked to reduce the Federal public
debt. Amounts earmarked by taxpayers to reduce the public debt
will be transferred into a Public Debt Reduction Trust Fund,
which will be used only to retire or purchase Federal
securities. Related provisions (outside the jurisdiction of the
committee and, thus, not included in the bill) would require
either specific spending cuts or an across-the-board
sequestration in Federal spending (with certain exceptions) to
match the amounts designated by taxpayers for debt reduction.
The provision is effective for taxable years ending after the
date of enactment, and will remain in effect until the entire
outstanding Federal public debt is retired.
Small business incentives
Increase in unified estate and gift tax credits; indexing
of certain provisions (sec. 351)
The bill increases the present-law unified credit from an
amount that effectively exempts $600,000 in taxable transfers
from the estate and gift tax to an amount that effectively
exempts taxable transfers of $750,000. The increase is phased
in to exempt taxable transfers of $700,000 in 1996, $725,000 in
1997, and $750,000 in 1998. After 1998, the $750,000 exclusion
amount is indexed for inflation. These revisions apply to the
estates of decedents dying, and gifts made, after December 31,
1995.
The bill also indexes the following amounts for inflation
beginning after 1998: (1) the $10,000 annual exclusion for
gifts; (2) the $750,000 ceiling amount on special use valuation
under Code section 2032A; (3) the $1,000,000 generation-
skipping transfer tax exemption; and (4) the value of a
closely-held business (i.e., $1,000,000) eligible for the
special four-percent interest rate under Code section 6601(j).
Increase in expensing for small businesses (sec. 352)
The bill increases the $17,500 amount that a small business
is allowed to expense under Code section 179 to $35,000. The
increase is phased in as follows: $22,500 for property placed
in service in taxable years beginning in 1996; $27,500 for
taxable years beginning in 1997; $32,500 for taxable years
beginning in 1998; and, $35,000 for taxable years beginning
after 1998.
Clarification of definition of principal place of business;
Treatment of storage of product samples (secs. 353-
354)
The bill provides that a home office qualifies as a
taxpayer's ``principal place of business'' if (1) the office is
used by the taxpayer to conduct administrative or management
activities for a trade or business and (2) there is no other
fixed location of the trade or business where the taxpayer
conducts substantial administrative or management activities of
the trade or business. The bill also clarifies that deductions
are permitted for expenses related to a storage unit in a
taxpayer's home regularly used for inventory or product samples
(or both) of the taxpayer's trade or business of selling
products at retail or wholesale, provided that the home is the
sole fixed location of such trade or business. The provision
applies to taxable years beginning after 1995.
Title IV_Family Reinforcement
Tax credit for adoption expenses (sec. 401)
The bill provides taxpayers with an income tax credit of up
to $5,000 per child for qualified adoption expenses paid or
incurred by the taxpayer. The credit is phased out ratably for
taxpayers with adjusted gross income between $60,000 and
$100,000. The credit is available for taxable years beginning
after December 31, 1995.
Tax credit for custodial care of certain elderly family members in
taxpayer's home (sec. 402)
The bill provides an income tax credit of $500 for each
qualified family member. Generally, a qualified family member
is a parent or grandparent who lives with the taxpayer and is
physically or mentally incapable of caring for himself or
herself. The provision is effective for taxable years beginning
after December 31, 1995.
Title V_Increase in the Social Security Earnings Limit
The bill increases the amount that an individual between
age 65 and 69 may earn while retaining full eligibility for
Social Security benefits (the ``earnings limit'') from $11,280
to $30,000. The increase is phased in over five years as
follows: $15,000 in 1996; $19,000 in 1997; $23,000 in 1998;
$27,000 in 1999; and $30,000 in 2000. Senior citizens age 65 to
69 who earn more than the specified earnings limit for the year
will continue to lose $1 in benefits for every $3 earned over
the limit.
Title VI_Tax Technical Corrections
The bill incorporates (with modifications) the ``Tax
Technical Corrections Act of 1995,'' previously introduced
separately as H.R. 1121 by Chairman Archer and Mr. Gibbons on
March 3, 1995. The bill modifies H.R. 1121 by deleting two
provisions ((1) section 2(a)(3) (relating to correction of head
of household rate table for proper indexation) and (2) section
3(f)(1) (relating to treatment of certain nonqualified
withdrawals from Merchant Marine capital construction funds)),
and by adding new clerical corrections.
B. Background and Need for Legislation
The ``Contract With America Tax Relief Act of 1995'', H.R.
1215, includes provisions derived from the revenue provisions
contained in the ``Contract With America'' (the ``Contract''),
as well as the Tax Technical Corrections Act of 1995 (H.R.
1121) and certain other revenue proposals. The Contract was
signed by over 300 Republican House candidates and incumbents
on September 27, 1994, as an agenda for the first 100 days of
the 104th Congress. The Contract was introduced when the 104th
Congress convened on January 4, 1995, and included four bills
containing various tax proposals: H.R. 6 (``American Dream
Restoration Act''); H.R. 8 (``Senior Citizens' Equity Act'');
H.R. 9 (``Job Creation and Wage Enhancement Act''); and H.R. 11
(``Family Reinforcement Act'').
The revenue provisions in the Contract are designed to
strengthen the American family by reducing the tax burden on
families with children and on two-earner married couples, and
by providing tax incentives for families to adopt children and
care for elderly relatives. The bill also includes provisions
to encourage savings and capital investment, expand
entrepreneurship, encourage taxpayers to designate funds to
reduce the national debt, reduce the estate and gift tax
burden, and alleviate the tax burden on the elderly. The
reductions in tax on savings and investment are designed to
allow individuals and businesses to retain funds needed for
savings and investment, leading to job creation as well as more
efficient economic productivity and growth.
C. Legislative History
Committee Bill
H.R. 1215 (``Contract With America Tax Relief Act of
1995'') was introduced by Committee on Ways and Means Chairman
Archer on March 13, 1995. The bill contains six titles and
includes provisions derived from the revenue provisions in the
``Contract With America'' (the ``Contract''), as well as
certain other revenue provisions.
The Contract's legislative proposals were introduced on
January 4, 1995, and included four bills that contain various
revenue proposals: H.R. 6 (``American Dream Restoration Act'');
H.R. 8 (``Senior Citizens' Equity Act''); H.R. 9 (``Job
Creation and Wage Enhancement Act''); and H.R. 11 (``Family
Reinforcement Act'').\1\
\1\ For a description of the revenue provisions contained in these
four bills, see Joint Committee on Taxation, Description of Tax
Proposals Contained in the ``Contract With America'' (H.R. 6, H.R. 9,
H.R. 8, and H.R. 11) (JCS-1-95), January 9, 1995.
Title I of H.R. 1215 relates to revenue provisions derived
from the American Dream Restoration Act; Title II relates to
revenue provisions derived from the Senior Citizens' Equity
Act; Title III relates to revenue provisions derived from the
Job Creation and Wage Enhancement Act, with additional
provisions regarding a 25-percent corporate alternative tax for
capital gains, the tax treatment of leasehold improvements, and
the alternative minimum tax; Title IV relates to revenue
provisions derived from the Family Reinforcement Act; Title V
relates to a provision to increase the social security earnings
limit derived from the Senior Citizens' Equity Act; and Title
VI relates to the provisions of H.R. 1121, the ``Tax Technical
Corrections Act of 1995,'' introduced on March 3, 1995, with
certain modifications.
The Committee on Ways and Means marked up H.R. 1215 on
March 14, 1995, and ordered the bill favorably reported without
amendment by a recorded vote of 21-14.
Committee Hearings
Full Committee hearings
The Committee on Ways and Means held overview hearings on
the Contract provisions within its jurisdiction on January 5
and 10-12, 1995.\2\ On January 17-18, 1995, the Committee held
hearings on Contract provisions relating to taxation of the
family: tax credit for families with children, marriage penalty
tax relief, tax credit for adoption expenses, and tax credit
for home care of elderly family members. On January 19, 1995,
the Committee held a hearing on two tax provisions in the
Senior Citizens' Equity Act: repeal of the income tax increase
on Social Security benefits and allowance of tax-free death
benefits under life insurance contracts.
\2\ For a summary of the Contract provisions within the
Committee's jurisdiction, see Committee on Ways and Means, Description
of Provisions in the Contract With America Within the Jurisdiction of
the Committee on Ways and Means (WMCP:104-1), January 5, 1995.
---------------------------------------------------------------------------
The Committee held hearings on January 24-26 and 31 and
February 1, 1995, on tax incentive provisions relating to
savings and investment: the American Dream Savings Account
provision in the American Dream Restoration Act and tax
reductions in the Job Creation and Wage Enhancement Act
(capital gains tax reductions, neutral cost recovery, increased
expensing for small business, increased estate and gift tax
unified credit, and the deduction for home office expenses).
The Committee also held hearings on revenue proposals in the
President's fiscal year 1996 budget on February 7-9, 1995.
Subcommittee hearings
The Subcommittee on Social Security held a hearing on
January 9, 1995, on the Social Security earnings limit
provision of the Contract (in the Senior Citizens' Equity Act).
On January 20, 1995, the Subcommittee on Health held a hearing
on tax incentives for long-term care insurance (in the Senior
Citizens' Equity Act).
II. EXPLANATION OF PROVISIONS
TITLE I. AMERICAN DREAM RESTORATION
A. Family Tax Credit (sec. 101 of the bill and new sec. 23 of the Code)
Present Law
Present law does not provide tax credits based solely on
the number of dependent children. Taxpayers with dependent
children, however, generally are able to claim a personal
exemption for each of these dependents. The total amount of
personal exemptions is subtracted (along with certain other
items) from adjusted gross income (AGI) in arriving at taxable
income. The amount of each personal exemption is $2,500 for
1995, and is adjusted annually for inflation. The amount of the
personal exemption is phased out for taxpayers with AGI in
excess of $114,700 for single taxpayers, $143,350 for heads of
household, and $172,050 for married couples filing joint
returns.
In addition, eligible low-income workers are able to claim
a refundable earned income tax credit (EITC). The amount of the
credit an eligible taxpayer may claim depends upon whether the
taxpayer has one, more than one, or no qualifying children, and
is determined by multiplying the credit rate by the taxpayer's
earned income up to an earned income threshold. The maximum
amount of the credit is the product of the credit rate and the
earned income threshold. In 1995, the maximum credit is $3,112
for taxpayers with more than one qualifying child, $2,093 for
taxpayers with one qualifying child, and $314 for taxpayers
with no qualifying children. For taxpayers with earned income
(or AGI, if greater) in excess of the phaseout threshold, the
credit amount is reduced by the phaseout rate multiplied by the
amount of earned income (or AGI, if greater) in excess of the
phaseout threshold. The credit is not allowed if earned income
(or AGI, if greater) exceeds the phaseout limit. In 1995, the
phaseout limit is $26,676 for taxpayers with more than one
qualifying child, $24,388 for taxpayers with one qualifying
child, and $9,234 for taxpayers with no qualifying children.
Reasons for Change
The Committee believes that the individual income tax
structure does not reduce tax liability by enough to reflect a
family's reduced ability to pay taxes as family size increases.
In part, this is because over the last 50 years the value of
the dependent personal exemption has declined in real terms by
over one-third. The Committee believes that a tax credit for
families with dependent children will reduce the individual
income tax burden of those families, will better recognize the
financial responsibilities of raising dependent children, and
will promote family values.
Explanation of Provision
The bill provides taxpayers with a maximum credit against
income tax liability of $500 for each qualifying child.
The credit is phased out ratably for taxpayers with AGI
over $200,000, and is fully phased out at AGI of $250,000. For
purposes of the AGI phaseout, the taxpayer's AGI is increased
by the amount otherwise excluded from gross income under Code
section 911, 931, or 933 (relating to the exclusion of income
of U.S. citizens or residents living abroad; residents of Guam,
American Samoa, and the Northern Mariana Islands; and residents
of Puerto Rico, respectively). In calendar years beginning
after 1996, the maximum credit amount ($500) and the beginning
point of the phaseout range ($200,000) are indexed annually for
inflation, with rounding to the nearest multiple of $50. The
size of the phaseout range will change as needed so as to
remain 100 times the maximum amount of the credit per child.
To be a qualifying child, an individual has to satisfy a
relationship test, a dependency test, and an age test. An
individual satisfies the relationship test if the individual is
a son or daughter of the taxpayer, a descendant of a son or
daughter of the taxpayer, a stepson or stepdaughter of the
taxpayer, or an adopted child of the taxpayer. An adopted child
includes a child who is legally adopted or who is placed with
the taxpayer by an authorized placement agency for adoption by
the taxpayer. A foster child also satisfies the relationship
test if, for the taxpayer's entire taxable year, the foster
child (1) is a member of the taxpayer's household and (2) has
as his principal place of abode the home of the taxpayer.
An individual satisfies the dependency test if the
individual is a dependent of the taxpayer with respect to whom
the taxpayer is entitled to claim a dependency deduction. For
this purpose, the term ``dependent'' does not include an
individual who is a resident of a country contiguous to the
United States unless (1) that individual is an adopted child of
a taxpayer who is a U.S. citizen or national and (2) for the
taxpayer's entire taxable year, the individual is a member of
the taxpayer's household and has as his principal place of
abode the home of the taxpayer.
An individual satisfies the age test if the individual has
not attained the age of 18 as of the close of the calendar year
in which the taxable year of the taxpayer begins.
The bill provides that individuals who are married at the
end of the taxable year must file a joint return to receive the
credit unless they lived apart from their spouse for the last
six months of the taxable year and the individual claiming the
credit (1) maintains as his or her home a household for the
qualifying child for more than one-half of the taxable year and
(2) furnishes over one-half of the cost of maintaining that
household in that taxable year. An individual legally separated
from his spouse under a decree of divorce or separate
maintenance is not considered married for purposes of this
provision.
Except in the case of a taxable year closed by reason of
the taxpayer's death, no credit is allowable in the case of a
taxable year covering a period of less than 12 months.
Effective Date
The provision is effective for taxable years beginning
after December 31, 1995.
B. Credit to Reduce the Marriage Penalty (sec. 102 of the bill and new
sec. 24 of the Code)
Present Law
A married couple generally is treated as one tax unit that
must pay tax on the unit's total taxable income. Although
married couples may elect to file separate returns, the rate
schedules and provisions are structured so that filing separate
returns usually results in a higher tax than filing joint
returns. Other rate schedules apply to single persons and to
single heads of household.
A ``marriage penalty'' exists when the sum of the tax
liabilities of two unmarried individuals filing their own tax
returns (either single or head of household returns) is less
than their tax liability under a joint return (if the two
individuals were to marry). A ``marriage bonus'' exists when
the sum of the tax liabilities of the individuals is greater
than their combined tax liability under a joint return.
While the size of any marriage penalty or bonus under
present law depends upon the individuals' incomes, number of
dependents, and itemized deductions, as a general rule married
couples whose earnings are split more evenly than 70-30 suffer
a marriage penalty. Married couples whose earnings are largely
attributable to one spouse generally receive a marriage bonus.
Under present law, the size of the standard deduction and
the bracket breakpoints follow certain customary ratios across
filing statuses. The standard deduction and bracket breakpoints
for single filers are roughly 60 percent of those for joint
filers. The standard deduction and bracket breakpoints for head
of household filers are about 83 percent of those for joint
filers. With these ratios, unmarried individuals have standard
deductions whose sum exceeds the standard deduction they would
receive as a married couple filing a joint return. Thus, their
taxable income as joint filers may exceed the sum of their
taxable incomes as unmarried individuals. Furthermore, because
of the way the bracket breakpoints are structured, as joint
filers they may have some of their taxable income pushed into a
higher marginal tax bracket than when they were not married.
The rate changes in the Revenue Reconciliation Act of 1993
exacerbated the existing marriage penalty because the new
bracket breakpoints did not provide the customary ratios across
filing statuses. For the new 36-percent bracket, the breakpoint
for single filers and for head of household filers are 82
percent and 91 percent, respectively, of the breakpoint for
joint filers. For the 39.6-percent bracket that results from
the ``surtax,'' the bracket breakpoint is $250,000 regardless
of filing status.
Reasons for Change
The Committee is concerned about the inequity of the
marriage penalty and the potential work disincentive it causes.
As the first step in response to these problems, the Committee
believes it is appropriate to allow a credit to married couples
who suffer a marriage penalty.
Any attempt to eliminate the marriage penalty involves the
balancing of several competing principles, including equal tax
treatment of married couples with equal incomes and the
determination of equitable relative tax burdens of single
individuals and married couples with equal incomes. The
Committee believes that relief from the marriage penalty is
needed because marriage penalties in the tax laws undermine
respect for the family and may discourage family formation.
Allowing married couples to file individual returns
according to the rates applicable to single individuals
(``optional separate filing'') would be very complex because of
the necessity for rules to allocate income, deductions, and
dependent exemptions between the spouses. With optional
separate filing, many married couples would be burdened by
having to compute tax liability under both options (jointly and
separately) in order to determine which option minimizes tax
liability. Furthermore, optional separate filing would provide
tax reductions with respect to all types of income received by
married couples, while the Committee believes that relief
should be targeted to wages and salaries received by two-earner
married couples.
To avoid these difficulties, the Committee believes it is
appropriate to provide relief that can be determined by
reference to a table in the tax information materials. The
relief is designed to be directed only to those married couples
who suffer a marriage penalty through the earnings of both
spouses. Consequently, married couples whose distribution of
earned income between the spouses currently creates a marriage
bonus would not qualify for the credit.
Explanation of Provision
Under the bill, married couples who file a joint return may
be eligible for a credit against their income tax liability.
The amount of the credit is determined based on the earned
income of each of the spouses. The Secretary of the Treasury is
directed to issue tables calculating the marriage penalty
credit applicable for married taxpayers based on the qualified
earned income of each of the spouses.
Taxpayers may not claim a credit if they claim an exclusion
from gross income under Code sections 911, 931, or 933
(relating to the exclusion of income of U. S. citizens or
residents living abroad; residents of Guam, American Samoa, and
the Northern Mariana Islands; and residents of Puerto Rico,
respectively).
The amount of the credit is based on the hypothetical tax
liabilities that would result if the individual income tax
rates applicable to single filers were applied to each spouse's
qualified earned income, allowing for one personal exemption
and the standard deduction allowed for single filers. The sum
of those hypothetical tax liabilities is compared to the
hypothetical tax liability that would result if the individual
income tax rates applicable to married couples filing joint
returns were applied to the aggregate qualified earned income
of the spouses, allowing for two personal exemptions and the
standard deduction allowed for joint filers.
If the hypothetical tax liability of the married couple
exceeds the sum of the hypothetical tax liabilities of the
individual spouses, the married couple is allowed an income tax
credit equal to the lesser of that excess or $145, with amounts
less than the maximum credit rounded to the nearest multiple of
$25. If the hypothetical tax liability of the married couple is
less than or equal to the sum of the hypothetical tax
liabilities of the individual spouses, the married couple is
not allowed the credit.
In general, qualified earned income is earned income within
the meaning of Code sections 911(d)(2) (relating to wages,
salaries, professional fees, and other amounts received as
compensation for personal services) or 401(c)(2)(C) (relating
to dispositions of certain property created by the personal
efforts of the taxpayer) less specified deductions allowable
under section 62 that are properly allocable to such earned
income. Under the bill, qualified earned income does not
include any amount that is not includible in gross income,
because untaxed income does not give rise to a marriage
penalty. Wages exempt from certain social security taxes
because an individual is in the employ of his or her spouse
also are excluded from qualified earned income to prevent
shifting of income between the spouses in a way that
inaccurately reflects the earned income of each spouse. In
addition, the qualified earned income of each spouse is
computed without regard to any community property laws; that
is, earned income is attributed to the spouse who renders the
services for which the earned income is received.
Effective Date
The provision is effective for taxable years beginning
after December 31, 1995.
C. American Dream Savings Accounts and Deductible Spousal IRAs (secs.
103 and 104 of the bill and sec. 408 and new sec. 408A of the Code)
Present Law
Under present law, an individual may make deductible
contributions to an individual retirement arrangement (IRA) up
to the lesser of $2,000 or the individual's compensation if the
individual (and, if married, the individual's spouse) is not an
active participant in an employer-sponsored retirement plan. In
addition, the $2,000 limit is increased to $2,250 in the case
of a married taxpayer who files a joint return and makes
contributions to an IRA for the benefit of his or her spouse,
if the spouse has no compensation or elects to be treated as
having no compensation. The $2,250 contribution can be divided
in any manner between IRAs for each spouse, except that the
maximum contribution to an IRA on behalf of one individual
cannot exceed $2,000.
If the individual (or the individual's spouse) is an active
participant in an employer-sponsored retirement plan, the
$2,000 deduction limit (and the $2,250 spousal IRA deduction
limit) is phased out over certain levels of adjusted gross
income (AGI). The limit is phased out between $40,000 and
$50,000 of AGI for married taxpayers, and between $25,000 and
$35,000 of AGI for single taxpayers. An individual may make
nondeductible IRA contributions to the extent the individual is
not permitted to make deductible IRA contributions.
Contributions cannot be made to an IRA after age 70\1/2\.
The amounts held in an IRA, including earnings on
contributions, generally are not subject to tax until
withdrawn. 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, disability, or is made
in the form of certain periodic payments. A similar early
withdrawal tax applies to distributions from tax-qualified
pension plans, with an additional exception for distributions
used to pay medical expenses that exceed 7.5 percent of AGI.
This exception for distributions to pay extraordinary medical
expenses does not apply to withdrawals from IRAs.
In general, distributions from an IRA are required to begin
at age 70\1/2\. An excise tax is imposed if the minimum
required distributions are not made. Distributions to the
beneficiary of an IRA are generally required to begin within 5
years of the death of the IRA owner, unless the beneficiary is
the surviving spouse. Similar rules apply to distributions from
tax-qualified pension plans.
Present law imposes a 15-percent excise tax on excess
distributions with respect to an individual during any calendar
year from qualified retirement plans, tax-sheltered annuities,
and IRAs. The purpose of the tax is to limit the total amount
that can be accumulated on behalf of a particular individual on
a tax-favored basis. In general, excess distributions are
defined as the aggregate amount of retirement distributions
(i.e., payments from applicable retirement plans) made with
respect to an individual during any calendar year to the extent
such amounts exceed $150,000 (for 1995). The dollar limit is
indexed for inflation. Special rules apply in the case of lump-
sum distributions and post-death distributions.
Reasons for Change
The Committee is concerned about the national savings rate,
and believes that individuals should be encouraged to save. The
Committee believes that the ability to make deductible
contributions to an IRA is a significant savings incentive.
However, this incentive is not available to all taxpayers under
present law. Further, the present-law income thresholds for IRA
deductions are not indexed for inflation so that fewer
Americans will be eligible to make a deductible IRA
contribution each year, and the amount of the maximum
contribution is declining in real terms over time.
The Committee believes it is appropriate to encourage
individual saving and that some individuals would be more
likely to save if funds set aside in a tax-favored account
could be withdrawn without tax after a reasonable holding
period. Some taxpayers may find such a vehicle more suitable
for their savings needs.
The Committee believes that providing an incentive to save
for certain special purposes is appropriate. The Committee
believes that many Americans may have difficulty saving enough
to ensure that their children will be able to afford a college
education or to purchase a home. The ability to obtain a
college education is an important factor in ensuring that the
United States remains competitive with other nations. Home
ownership is a fundamental part of the American dream. Large
medical expenses can often deplete personal savings, as can the
need to care for chronically ill individuals. Thus, the
Committee believes that withdrawals from the new savings
vehicle for first-time home purchase, education expenses,
medical expenses, and long-term care premiums should be
penalty-free.
Finally, the Committee believes that the present-law rules
relating to deductible IRAs penalize American homemakers. The
Committee believes that IRA contributions should be permitted
for both spouses even though only one spouse works.
Explanation of Provision
Tax-free nondeductible IRAs
In general
The bill replaces present-law nondeductible IRAs with new
American Dream Savings accounts (``ADS accounts'') to which
individuals can make nondeductible contributions. Contributions
to an ADS account are in addition to any contributions that can
be made to a deductible IRA under the present-law rules. In
general, an ADS account is an IRA which is designated at the
time of establishment as an ADS account in the manner
prescribed by the Secretary. Qualified distributions from an
ADS account are not includible in income.
Contributions
The maximum annual contribution that could be made to an
ADS account is the lesser of $2,000 or the individual's
compensation for the year. In the case of a married couple, the
aggregate compensation of the couple is taken into account in
determining the maximum permitted contribution. Thus, for
example, in 1996 each spouse in a married couple could make an
ADS contribution of $2,000 (for a total contribution by the
couple of $4,000), provided the couple has at least $4,000 in
compensation. The $2,000 contribution limit is adjusted
annually for inflation beginning after 1996. Inflation
adjustments are rounded to the nearest $50.
Contributions to an ADS account can be made even after the
individual for whom the account is maintained has attained age
70\1/2\.
Taxation of distributions
Qualified distributions from an ADS account are not
includible in gross income, nor subject to the additional 10-
percent tax on early withdrawals. A qualified distribution is a
distribution that is made after the 5-taxable year period \3\
beginning with the first taxable year in which the individual
made a contribution to an ADS account, and (2) which is (a)
made on or after the date on which the individual attains age
59\1/2\, (b) made to a beneficiary (or to the individual's
estate) on or after the death of the individual, (c)
attributable to the individual's being disabled, or (d) a
qualified special purpose distribution.
\3\ In the case of rollover contributions that are not from another
ADS account, the 5-year holding period begins on the date on which the
rollover was made. As is the case with IRAs generally, contributions to
an ADS account can be made for a year by the due date for the
individual's tax return for the year (determined without regard to
extensions). The 5-year holding period begins to run from the taxable
year in which the individual is deemed to make the contribution.
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Qualified special purpose distributions (whether or not
qualified distributions) are not subject to the 10-percent tax
on early withdrawals. Distributions from an ADS account other
than qualified distributions or qualified special purpose
distributions are includible in gross income to the extent
attributable to earnings and subject to the 10-percent tax on
early withdrawals.
In general, qualified special purpose distributions are
distributions for: the purchase or acquisition of a principal
residence of a first-time homebuyer; qualified higher education
expenses; for medical expenses of the taxpayer or the
taxpayer's spouse and dependents; or long-term care insurance
premiums treated as medical expenses under the long-term care
provisions of the bill.
First-time homebuyers are individuals who did not own an
interest in a principal residence during the 3 years prior to
the purchase of a home. In order to qualify as a first-time
homebuyer distribution, the distribution must be used within 60
days to pay the costs of acquiring, contracting, or
reconstructing a residence. If there is a delay in acquisition,
construction, or reconstruction, the distribution can be
redeposited in an ADS account within 120 days without
imposition of tax.
Qualified higher education expenses are tuition, fees,
books, supplies and equipment required for the enrollment or
attendance of the taxpayer, the taxpayer's spouse, or a child
or grandchild of the taxpayer at an eligible educational
institution (defined as under sec. 135). The amount of
qualified higher education expenses is reduced by any amount
excludable from income under the present-law rules relating to
education savings bonds (sec. 135).
The pre-death minimum distribution rules that apply to IRAs
do not apply to ADS accounts, and amounts in ADS accounts are
not taken into account for purposes of the excise tax on excess
distributions.
Rollovers
Distributions from ADS accounts can be rolled over tax free
to another ADS account.
In addition, amounts withdrawn from an IRA can be rolled
over to an ADS account after December 31, 1995, and before
January 1, 1998. The amount otherwise includible in gross
income due to the IRA distribution is includible in gross
income ratably over the 4-taxable year period beginning with
the taxable year in which the distribution is made. The early
withdrawal tax does not apply to such rollovers.
Deductible contributions to spousal IRAs
The bill modifies the present-law rules relating to
deductible IRAs by permitting deductible IRA contributions of
up to $2,000 to be made for each spouse if the combined
compensation of both spouses is at least equal to the
contributed amount. The bill does not otherwise modify the
rules relating to deductible IRAs. Thus, the present-law
limitations on deductible contributions by an individual who is
an active participant in an employer-sponsored retirement plan
(or whose spouse is an active participant) continue to apply.
Effective Date
The provision is effective for taxable years beginning
after December 31, 1995.
TITLE II. SENIOR CITIZENS' EQUITY
A. Repeal of Increase in Income Tax on Social Security Benefits (sec.
201 of the bill and secs. 86(a) and 871(a)(3) of the Code)
Present Law
In general
Under present law, taxpayers receiving Social Security and
Railroad Retirement Tier 1 benefits are not required to include
any such benefits in gross income if their ``provisional
income'' does not exceed $25,000 in the case of unmarried
taxpayers or $32,000 in the case of married taxpayer's filing
joint returns. For purposes of these computations, a taxpayer's
provisional income is defined as adjusted gross income plus
tax-exempt interest plus certain foreign source income plus
one-half of the taxpayer's Social Security or Railroad
Retirement Tier 1 benefit.
Certain taxpayers with provisional income in excess of
those thresholds are required to include in gross income up to
50 percent of their Social Security or Railroad Retirement Tier
1 benefit. Under a provision added by the Revenue
Reconciliation Act of 1993 (``1993 Act''), taxpayers with
provisional income in excess of a second-tier threshold
($34,000 in the case of unmarried taxpayers or $44,000 in the
case of married taxpayers filing joint returns) are required to
include in gross income up to 85 percent of their Social
Security or Railroad Retirement Tier 1 benefit.
If the taxpayer's provisional income exceeds the lower
threshold but does not exceed the second-tier threshold, then
the amount of the inclusion is the lesser of (1) 50 percent of
the taxpayer's Social Security or Railroad Retirement Tier 1
benefit, or (2) 50 percent of the excess of the taxpayer's
provisional income over the lower threshold.
If the amount of provisional income exceeds the second-tier
threshold, then the amount of the inclusion is the lesser of:
(1) 85 percent of the taxpayer's Social Security or
Railroad Retirement Tier 1 benefit or
(2) the sum of:
(a) 85 percent of the excess of the taxpayer's
provisional income over the second-tier threshold,
plus,
(b) the smaller of (i) the amount of benefits that
would have been included if the 50-percent inclusion
rule (the rule in the previous paragraph) were applied,
or (ii) one-half of the difference between the
taxpayer's second-tier threshold and lower threshold.
Treatment of nonresident alien individuals
If a nonresident alien individual is engaged in a trade or
business within the United States during the taxable year, the
individual is subject to U.S. tax at the normal graduated rates
on net taxable income that is effectively connected with the
conduct of the U.S. trade or business. U.S. source fixed or
determinable annual or periodic income of a nonresident alien
individual (for example, salary, wages, annuities,
compensation, remuneration, and emoluments) that is not
effectively connected with the conduct of a U.S. trade or
business generally is subject to tax at a rate of 30 percent of
the gross amount paid. This latter tax generally is collected
by means of withholding (hence this tax is often called a
``withholding tax''). Withholding taxes are often reduced or
eliminated in the case of payments to residents of countries
with which the United States has an income tax treaty.
For purposes of taxing the income of nonresident alien
individuals, the income thresholds for including Social
Security and Railroad Retirement Tier 1 benefits do not apply.
Instead, a fixed percentage of any such benefit is included in
gross income. Until January 1, 1995, that percentage was 50
percent. Thus, prior to 1995, a nonresident alien individual
typically was subject to U.S. withholding tax at an effective
rate of 15 percent on the gross amount of U.S. Social Security
benefits. This tax was reduced or eliminated under some
treaties. Although the Omnibus Budget Reconciliation Act of
1993 increased the inclusion of benefits in some cases for
taxpayers other than nonresident aliens (to up to 85 percent of
the benefits), it did not amend the rule that a nonresident
alien individual was required to include 50 percent (and only
50 percent) of these benefits in gross income.
The implementing legislation for the General Agreement on
Tariffs and Trade (P. L. 103-465) increased from 50 percent to
85 percent the amount of Social Security or Railroad Retirement
Tier 1 benefits included in the gross income of a nonresident
alien individual, effective for benefits paid after December
31, 1994, in taxable years ending after such date. Thus, a
nonresident alien individual may be subject to U.S. withholding
tax at an effective rate of 25. 5 percent on the gross amount
of U.S. Social Security or Railroad Retirement Tier 1 benefits.
Trust funds
Revenues from the income taxation of Social Security and
Railroad Retirement Tier 1 benefits attributable to the 1993
Act increase in the portion of benefits included in gross
income are credited quarterly to the Medicare Hospital
Insurance (HI) Trust Fund. The remainder of the proceeds from
the income taxation of Social Security and Railroad Retirement
Tier 1 benefits are credited quarterly to the Old-Age and
Survivors Insurance Trust Fund, the Disability Insurance Trust
Fund, or the Social Security Equivalent Benefit Account (of the
Railroad Retirement system), as appropriate.
Congress designated the revenues attributable to the 1993
Act increase in the portion of Social Security benefits
included in gross income as HI trust fund revenues to clarify
the differing nature of these tax revenues from Old-Age and
Survivors and Disability Insurance (OASDI) taxes as
contemplated at the time of enactment of the Budget Enforcement
Act of 1990. For purposes of the fiscal year 1994 President's
Budget and Budget Resolution, and the 1993 Budget
Reconciliation Act, revenues from the increased taxation of
Social Security benefits were not intended to be considered as
OASDI taxes for Budget Act enforcement purposes, including
Social Security firewall provisions. These revenues were
considered on budget, and treated as an item on the PAYGO
scorecard, as were the payment and receipt of the allocation of
these revenues to the Medicare Hospital Insurance Trust Fund.
Reasons for Change
The Committee believes that the provision in the 1993 Act
that increased inclusion of social security benefits resulted
in burdensome taxation of certain senior citizens. Furthermore,
the Committee is concerned that for future retirees, the
inclusion in gross income of up to 85 percent of social
security benefits will result in tax treatment of those
benefits that is less favorable than the tax treatment of
private pension benefits. For these reasons, the Committee
believes that repeal of the 1993 Act provision is necessary to
restore equity.
Explanation of Provision
In general
The bill phases in a repeal of the higher rate of income
inclusion for taxpayers with provisional incomes in excess of
the second-tier threshold.
For taxable years beginning in calendar years 1996 through
1999, if the amount of provisional income exceeds the second-
tier threshold, then the amount of the inclusion is calculated
as under present law, except that the following rates are
substituted for 85 percent:
For taxable years beginning in calendar year-The percentage is--
1996..........................................................75 percent
1997..........................................................65 percent
1998..........................................................60 percent
1999.........................................................55 percent.
For taxable years beginning after December 31, 1999, Social
Security and Railroad Retirement Tier 1 benefits will be
treated as under the law prior to 1994: if the amount of
provisional income exceeds $25,000 in the case of unmarried
taxpayers or $32,000 in the case of married taxpayers filing
joint returns, then the amount of the inclusion is the lesser
of (1) 50 percent of the taxpayers Social Security or Railroad
Retirement Tier 1 benefit, or (2) 50 percent of the excess of
the taxpayers provisional income over the threshold.
Treatment of nonresident alien individuals
The bill phases in a reduction in the amount of Social
Security or Railroad Retirement Tier 1 benefits included in the
gross income of a nonresident alien individual. The inclusion
percentage for any taxable year beginning in calendar years
1996 through 1999 is as given in the table above. For taxable
years beginning after December 31, 1999, the amount of Social
Security or Railroad Retirement Tier 1 benefits included in the
gross income of a nonresident alien individual will be 50
percent.
Trust funds
Revenues from the income taxation of Social Security and
Railroad Retirement Tier 1 benefits attributable to the
increased portion of benefits included in gross income under
the 1993 Act (as phased out under the provision) will be
credited to the Old-Age and Survivors and Disability Insurance
Trust Funds.
Effective Date
In general, the provision is effective for taxable years
beginning after December 31, 1995. The provision crediting
revenues to the Old-Age and Survivors and Disability Insurance
Trust Funds applies to tax liabilities for taxable years
beginning after December 31, 1995.
B. Treatment of Long-Term Care Insurance and Services (secs. 211-214
and 231-232 of the bill and secs. 91, 106, 125, 137, 213, 807(d)(3),
1035, 4980B, and 6050Q of the Code)
Present Law
In general
Present law generally does not provide explicit rules
relating to the tax treatment of long-term care insurance
contracts or long-term care services. Thus, the treatment of
long-term care contracts and services is unclear. Present law
does provide rules relating to medical expenses and accident or
health insurance.
Itemized deduction for medical expenses
In determining taxable income for Federal income tax
purposes, a taxpayer is allowed an itemized deduction for
unreimbursed expenses that are paid by the taxpayer during the
taxable year for medical care of the taxpayer, the taxpayer's
spouse, or a dependent of the taxpayer, to the extent that such
expenses exceed 7.5 percent of the adjusted gross income of the
taxpayer for such year (sec. 213). For this purpose, expenses
paid for medical care generally are defined as amounts paid:
(1) for the diagnosis, cure, mitigation, treatment, or
prevention of disease (including prescription medicines or
drugs and insulin), or for the purpose of affecting any
structure or function of the body (other than cosmetic surgery
not related to disease, deformity, or accident); (2) for
transportation primarily for, and essential to, medical care
referred to in (1); or (3) for insurance (including Part B
Medicare premiums) covering medical care referred to in (1) and
(2).
Exclusion for amounts received under accident or health insurance
Amounts received by a taxpayer under accident or health
insurance for personal injuries or sickness generally are
excluded from gross income to the extent that the amounts
received are not attributable to medical expenses that were
allowed as a deduction for a prior taxable year (sec. 104).
Treatment of accident or health plans maintained by employers
Contributions of an employer to an accident or health plan
that provides compensation (through insurance or otherwise) to
an employee for personal injuries or sickness of the employee,
the employee's spouse, or a dependent of the employee, are
excluded from the gross income of the employee (sec. 106). In
addition, amounts received by an employee under such a plan
generally are excluded from gross income to the extent that the
amounts received are paid, directly or indirectly, to reimburse
the employee for expenses for the medical care of the employee,
the employee's spouse, or a dependent of the employee (sec.
105). For this purpose, expenses incurred for medical care are
defined in the same manner as under the rules regarding the
deduction for medical expenses.
A cafeteria plan is an employer-sponsored arrangement under
which employees can elect among cash and certain employer-
provided qualified benefits. No amount is included in the gross
income of a participant in a cafeteria plan merely because the
participant has the opportunity to make such an election (sec.
125). Employer-provided accident or health coverage is one of
the benefits that may be offered under a cafeteria plan.
A flexible spending arrangement (FSA) is an arrangement
under which an employee is reimbursed for medical expenses or
other nontaxable employer-provided benefits, such as dependent
care, and under which the maximum amount of reimbursement that
is reasonably available to a participant for a period of
coverage is not substantially in excess of the total premium
(including both employee-paid and employer-paid portions of the
premium) for such participant's coverage. Under proposed
Treasury regulations, a maximum amount of reimbursement is not
substantially in excess of the total premium if such maximum
amount is less than 500 percent of the premium. An FSA may be
part of a cafeteria plan or provided by an employer outside a
cafeteria plan. FSAs are commonly used to reimburse employees
for medical expenses not covered by insurance. If certain
requirements are satisfied,\4\ amounts reimbursed for
nontaxable benefits from an FSA are excludable from income.
\4\ These requirements include a requirement that a health FSA can
only provide reimbursement for medical expenses (as defined in sec.
213) and cannot provide reimbursement for premium payments for other
health coverage and that the maximum amount of reimbursement under a
health FSA must be available at all times during the period of
coverage.
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Health care continuation rules
The health care continuation rules require that an employer
must provide qualified beneficiaries the opportunity to
continue to participate for a specified period in the
employer's health plan after the occurrence of certain events
(such as termination of employment) that would have terminated
such participation (sec. 4980B). Individuals electing
continuation coverage can be required to pay for such coverage.
Life insurance company reserve rules
In general, life insurance companies are allowed a
deduction for a net increase in reserves and must take into
income any net decreases in reserves (sec. 807(a) and (b)).
Present law prescribes a tax reserve method based on the nature
of the contract. For noncancellable accident and health
insurance contracts, the prescribed method is a two-year full
preliminary term method (sec. 807(d)(3)(A)(iii)). Long-term
care insurance reserves are treated like noncancellable
accident and health insurance for this purpose and, therefore,
are determined under the two-year full preliminary term method.
In no event is the tax reserve for any contract as of any time
permitted to exceed the amount which would be taken into
account in determining statutory reserves as set forth on the
annual statement (sec 807(d)(1)).
The amount of any adjustment, whether an increase or a
reduction in income, that is attributable to a change in the
basis for determining reserves (or for determining any other
item referred to in sec. 807(c)) is generally spread over a 10-
year period (sec. 807(f)).
Reasons for Change
Providing an incentive for individuals to take financial
responsibility for their long-term health care is an important
element of the Contract With America. The bill therefore
provides generally for the treatment of long-term care services
and eligible long-term care premiums as medical expenses for
purposes of the itemized deduction for medical expenses, and
the exclusion (subject to dollar limits) from income of certain
amounts paid under long-term care insurance contracts and long-
term care riders to life insurance contracts that meet the
bill's requirements. In order further to encourage taxpayers to
direct resources to financing their long-term health care, the
bill also permits tax-free exchanges of life insurance, annuity
and endowment contracts for long-term care insurance contracts,
and permits withdrawals, free from the early withdrawal tax or
other income tax, of elective deferral amounts under certain
pension plans to the extent of premiums paid for any long-term
care insurance contract during the year.
Under the National Association of Insurance Commissioners
(NAIC) Long-Term Care Insurance Model Act and Regulations,
which have been adopted by some States, long-term care
insurance reserves are calculated under a one-year full
preliminary term method, while a two-year full preliminary term
method is required for Federal income tax purposes. Because of
this inconsistency, in some cases life insurance companies are
required to establish reserves for long-term care insurance
contracts earlier for State regulatory purposes than they do
for Federal tax purposes. In addition, some life insurance
companies have voluntarily complied with the NAIC model act and
regulations. The bill therefore modifies the reserve method
applicable to long-term care insurance contracts under the life
insurance company tax rules so that this disparity is
eliminated with respect to contracts issued after the effective
date.
Explanation of Provision
Tax treatment and definition of long-term care insurance contracts and
qualified long-term care services
In general
Under the bill, a long-term care insurance contract is
accorded the following tax treatment. A long-term care
insurance contract generally is treated as an accident and
health insurance contract.\5\ Amounts (other than policyholder
dividends or premium refunds) received under a long-term care
insurance contract generally are excludable as amounts received
for personal injuries and sickness (subject to a cap of $200
per day, or $73,000 annually). A plan of an employer providing
coverage under a long-term care insurance contract generally is
treated as an accident and health plan; however, coverage under
a long-term care insurance contract is not excludable by an
employee if provided through a cafeteria plan; similarly,
expenses for long-term care services cannot be reimbursed under
an FSA.\6\
\5\ Prior to December 31, 1993, a self-employed individual was
entitled to deduct up to 25 percent of the health insurance expenses
for the individual and his or her spouse and dependents. The bill
treats long-term care insurance as health insurance. Thus, if the 25-
percent deduction is extended, it would apply to long-term care
insurance premiums under the bill. H.R. 831 as passed by the House on
February 21, 1995, would retroactively and permanently extend the 25-
percent deduction.
\6\ The bill does not otherwise modify the requirements relating to
FSAs. An FSA is defined (as under proposed regulations) as a benefit
program providing employees with coverage under which specified
incurred expenses may be reimbursed (subject to maximums and other
reasonable conditions), and the maximum amount of reimbursement that is
reasonably available to a participant is less than 500 percent of the
value of the coverage.
Within certain limits, premiums for long-term care
insurance are treated as medical expenses for purposes of the
itemized deduction for medical expenses.\7\ In addition,
expenses for qualified long-term care services are treated as
medical expenses for purposes of the itemized deduction.
\7\ Similarly, within certain limits, in the case of a rider to a
life insurance contract, charges against the life insurance contract's
cash surrender value that are includible in income are treated as
medical expenses (provided the rider constitutes a long-term care
insurance contract).
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Definition of long-term care insurance contract
A long-term care insurance contract is defined as any
insurance contract that provides only coverage of qualified
long-term care services and that meets other requirements. The
other requirements are that (1) the contract is guaranteed
renewable, (2) the contract does not provide for a cash
surrender value or other money that can be paid, assigned,
pledged or borrowed, (3) refunds (other than refunds on the
death of the insured or complete surrender or cancellation of
the contract) and dividends under the contract may be used only
to reduce future premiums or increase future benefits, and (4)
the contract generally does not pay or reimburse expenses
reimbursable under Medicare (except where Medicare is a
secondary payor, or the contract makes per diem or other
periodic payments without regard to expenses).\8\
\8\ The bill provides that no provision of law shall be construed
or applied so as to prohibit the offering of a long-term care insurance
contract on the basis that the contract coordinates its benefits with
those provided under Medicare. Thus, long-term care insurance contracts
are not subject to the rules requiring duplication of Medicare
benefits.
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A contract does not fail to be treated as a long-term care
insurance contract solely because it provides for payments on a
per diem or other periodic basis without regard to expenses
during the period.
Definition of qualified long-term care services
Qualified long-term care services means necessary
diagnostic, preventive, therapeutic, curing, treating,
mitigating and rehabilitative services, and maintenance or
personal care services that are required by a chronically ill
individual and that are provided pursuant to a plan of care
prescribed by a licensed health care practitioner.
A chronically ill individual is one who has been certified
within the previous 12 months by a licensed health care
practitioner as being unable to perform (without substantial
assistance) at least 2 activities of daily living for at least
90 days \9\ due to a loss of functional capacity or cognitive
impairment, or having a similar level of disability as
determined by the Secretary of the Treasury in consultation
with the Secretary of Health and Human Services. Activities of
daily living are eating, toileting, transferring, bathing,
dressing and continence.\10\
\9\ The 90-day period is not a waiting period. Thus, an individual
can be certified as chronically ill if the licensed health care
practitioner certifies that the individual will be unable to perform at
least 2 activities of daily living for at least 90 days.
\10\ Nothing in the bill requires the contract to take into account
all of the activities of daily living. For example, a contract could
require that an individual be unable to perform (without substantial
assistance) 2 out of any 5 such activities, or for another example, 3
out of the 6 activities.
A licensed health care practitioner is a physician (as
defined in sec. 1861(r)(l) of the Social Security Act) and any
registered professional nurse, licensed social worker, or other
individual who meets such requirements as may be prescribed by
the Secretary of the Treasury.
Itemized deduction for medical expenses
Unreimbursed expenses for qualified long-term care services
provided to the taxpayer or the taxpayer's spouse or dependent
are treated as medical expenses for purposes of the itemized
deduction for medical expenses (subject to the present-law
floor of 7.5 percent of adjusted gross income). For this
purpose, amounts received under a long-term care insurance
contract (regardless of whether the contract reimburses
expenses or pays benefits on a per diem or other basis) are
treated as reimbursement for expenses actually incurred for
medical care.
For purposes of the deduction for medical expenses,
qualified long-term care services do not include services
provided to an individual by a relative (directly, or through a
partnership, corporation, or other entity), unless the relative
is a licensed professional with respect to such services, or by
a related corporation (within the meaning of Code section
267(b) or 707(b)).\11\
\11\ The rule limiting such services provided by a relative or a
related corporation does not apply for purposes of the exclusion for
amounts received under a long-term care insurance contract, whether the
contract is employer-provided or purchased by an individual. The
limitation is unnecessary in such cases because it is anticipated that
the insurer will monitor reimbursements to limit opportunities for
fraud in connection with the performance of services by the taxpayer's
relative or a related corporation.
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Long-term care insurance premiums that do not exceed
specified dollar limits are treated as medical expenses for
purposes of the itemized deduction for medical expenses. The
limits are as follows:
In the case of an individual with an The limitation on
attained age before the close of premiums paid for
the taxable year of: such taxable years is:
Not more than 40.................................................. $200
More than 40 but not more than 50................................. 375
More than 50 but not more than 60................................. 750
More than 60 but not more than 70................................. 2,000
More than 70...................................................... 2,500
For taxable years beginning after 1996, these dollar limits
are indexed for increases in the medical care component of the
consumer price index. The Secretary of the Treasury, in
consultation with the Secretary of Health and Human Services,
is directed to develop a more appropriate index to be applied
in lieu of the foregoing. Such an alternative might
appropriately be based on increases in skilled nursing facility
and home health care costs. It is intended that the Treasury
Secretary annually publish the indexed amount of the limits as
early in the year as they can be calculated.
Long-term care riders on life insurance contracts
In the case of long-term care insurance coverage provided
by a rider on a life insurance contract, the requirements
applicable to long-term care insurance contracts apply as if
the portion of the contract providing such coverage were a
separate contract. The term ``portion'' means only the terms
and benefits that are in addition to the terms and benefits
under the life insurance contract without regard to long-term
care coverage. The guideline premium limitation applicable
under section 7702(c)(2) is increased by the sum of charges
(but not premium payments) against the life insurance
contract's cash surrender value, the imposition of which
reduces premiums paid for the contract (within the meaning of
sec. 7702(f)(1)). In addition, it is anticipated that Treasury
regulations will provide for appropriate reduction in premiums
paid (within the meaning of sec. 7702(f)(1)) to reflect the
payment of benefits under the rider that reduce the cash
surrender value of the life insurance contract. A similar rule
should apply in the case of a contract governed by section
101(f) and in the case of the payments under a rider that are
excludable under section 101(g) of the Code (as added by this
bill).
Life insurance company reserves
In determining reserves for insurance company tax purposes,
the bill provides that the Federal income tax reserve method
applicable for a long-term care insurance contract issued after
December 31, 1995, is the method prescribed by the National
Association of Insurance Commissioners (or, if no reserve
method has been so prescribed, a method consistent with the tax
reserve method for life insurance, annuity or noncancellable
accident and health insurance contracts, whichever is most
appropriate). The method currently prescribed by the NAIC for
long-term care insurance contracts is the one-year full
preliminary term method. As under present law, however, in no
event may the tax reserve for a contract as of any time exceed
the amount which would be taken into account with respect to
the contract as of such time in determining statutory reserves.
Health care continuation rules
The health care continuation rules do not apply to coverage
under a long-term care insurance contract.
Exchanges of life insurance and other contracts for long-term care
insurance contracts
The exchange of a life insurance contract or an endowment
or annuity contract for a qualified long-term care insurance
contract is not taxable under the bill.
Certain distributions from IRAs and retirement plans for long-term care
insurance excludable from income
The bill excludes from gross income distributions from
individual retirement arrangements (IRAs) and distributions
attributable to elective deferrals to qualified cash or
deferred arrangements (sec. 401(k) plans), tax-sheltered
annuities (sec. 403(b) plans), nonqualified deferred
compensation plans of governmental or tax-exempt employers
(sec. 457 plans), and section 501(c)(18) plans used to pay
premiums for long-term care insurance for the individual or the
individual's spouse. Such distributions are also not subject to
the 10-percent tax on early withdrawals. A plan will not fail
to meet the Internal Revenue Code requirements applicable to
such plan merely because it permits such distributions.
Inclusion of excess long-term care benefits
In general, the bill provides that the maximum annual
amount of long-term care benefits excludable from income with
respect to an insured who is chronically ill (not including
amounts received by reason of the individual being terminally
ill) \12\ cannot exceed the equivalent of $200 per day for each
day the individual is chronically ill. Thus, the maximum annual
exclusion for long-term care benefits with respect to any
chronically ill individual (not including amounts received by
reason of the individual being terminally ill) is $73,000 (for
1996). Long-term care benefits for this purpose include
payments and other benefits received under a long-term care
insurance contract (to the extent otherwise excludable under
section 7702B(b) as added by the bill) and payments that are
otherwise excludable under the provision of the bill related to
accelerated death benefits and viatical settlements with
respect to persons who are chronically ill (sec. 101(g) (as
added by the bill). If the insured is not the same as the
holder of the contract, the insured may assign some or all of
this limit to the contract holder at the time and manner
prescribed by the Secretary.
\12\ Terminally ill is defined as under the provision of the bill
relating to accelerated death benefits. In general, under that
provision, an individual is considered to be terminally ill if he or
she is certified as having an illness or physical condition that
reasonably can be expected to result in death within 24 months of the
date of the certification.
This $200 per day limit is indexed for inflation after 1996
for increases in the medical care component of the consumer
price index. The Treasury Secretary, in consultation with the
Secretary of Health and Human Services, is directed to develop
a more appropriate index, to be applied in lieu of the
foregoing. Such an alternative might appropriately be based on
increases in skilled nursing facility and home health care
costs. It is intended that the Treasury Secretary annually
publish the indexed amount of the limit as early in the year as
it can be calculated.
A payor of long-term care benefits (as defined above) is
required to report to the IRS the aggregate amount of such
benefits paid to any individual during any calendar year, and
the name, address and taxpayer identification number of such
individual. A copy of the report must be provided to the payee
by January 31 following the year of payment, showing the name
of the payor and the aggregate amount of benefits paid to the
individual during the calendar year. Failure to file the report
or provide the copy to the payee is subject to the generally
applicable penalties for failure to file similar information
reports.
Effective Date
The provisions defining long-term care insurance contracts
and qualified long-term care services apply to contracts issued
after December 31, 1995. Any contract issued before January 1,
1996, that met the long-term care insurance requirements in the
State in which the policy was sitused at the time it was issued
is treated as a long-term care insurance contract, and services
provided under or reimbursed by the contract are treated as
qualified long-term care services.
A contract providing for long-term care insurance may be
exchanged for a long-term care insurance contract (or the
former cancelled and the proceeds reinvested in the latter
within 60 days) tax free between the date of enactment and
January 1, 1996. Taxable gain would be recognized to the extent
money or other property is received in the exchange.
The issuance or conformance of a rider to a life insurance
contract providing long-term care insurance coverage is not
treated as a modification or a material change for purposes of
applying sections 101(f), 7702 and 7702A of the Code.
The provisions relating to (1) treatment as a medical
expense of qualified long-term care insurance services and
eligible long-term care premiums and (2) tax-free exchanges of
life insurance, endowment and annuity contracts for long-term
care insurance contracts, are effective for taxable years
beginning after December 31, 1995.
The change in treatment of reserves for long-term care
insurance contracts is effective for contracts issued after
December 31, 1995. If, after that date, a company changes its
tax reserve method for long-term care insurance contracts
issued after that date, the amount of any adjustment arising
from the change with respect to those contracts is spread over
a 10-year period as provided in section 807(f).
The provision relating to certain distributions from IRAs
and elective deferrals used to pay long-term care insurance
premiums is effective for payments and distributions after
December 31, 1995.
The provisions relating to the maximum exclusion for long-
term care benefits and reporting are effective for taxable
years beginning after December 31, 1995. Thus, the initial year
in which reports will be filed with the IRS and copies provided
to the payee will be 1997, with respect to long-term care
benefits paid in 1996.
C. Tax Treatment of Accelerated Death Benefits under Life Insurance
Contracts (secs. 221-222 and 231-232 of the bill and secs. 91, 101(g),
818(g), 6050Q, and 6724(d) of the Code)
Present Law
Treatment of amounts received under a life insurance contract
If a contract meets the definition of a life insurance
contract, gross income does not include insurance proceeds that
are paid pursuant to the contract by reason of the death of the
insured (sec. 101(a)). In addition, the undistributed
investment income (``inside buildup'') earned on premiums
credited under the contract is not subject to current taxation
to the owner of the contract. The exclusion under section 101
applies regardless of whether the death benefits are paid as a
lump sum or otherwise.
Amounts received under a life insurance contract (other
than a modified endowment contract) prior to the death of the
insured are includible in the gross income of the recipient to
the extent that the amount received constitutes cash value in
excess of the taxpayer's investment in the contract (generally,
the investment in the contract is the aggregate amount of
premiums paid less amounts previously received that were
excluded from gross income).
If a contract fails to be treated as a life insurance
contract under section 7702(a), inside buildup on the contract
is generally subject to tax (sec. 7702(g)).
Requirements for a life insurance contract
To qualify as a life insurance contract for Federal income
tax purposes, a contract must be a life insurance contract
under the applicable State or foreign law and must satisfy
either of two alternative tests: (1) a cash value accumulation
test or (2) a test consisting of a guideline premium
requirement and a cash value corridor requirement (sec.
7702(a)). A contract satisfies the cash value accumulation test
if the cash surrender value of the contract may not at any time
exceed the net single premium that would have to be paid at
such time to fund future benefits under the contract. A
contract satisfies the guideline premium and cash value
corridor tests if the premiums paid under the contract do not
at any time exceed the greater of the guideline single premium
or the sum of the guideline level premiums, and if the death
benefit under the contract is not less than a varying statutory
percentage of the cash surrender value of the contract.
Proposed regulations on accelerated death benefits
The Treasury Department has issued proposed regulations
\13\ under which certain ``qualified accelerated death
benefits'' paid by reason of the terminal illness of an insured
would be treated as paid by reason of the death of the insured
and therefore qualify for exclusion under section 101. In
addition, the proposed regulations would permit an insurance
contract that includes a qualified accelerated death benefit
rider to qualify as a life insurance contract under section
7702. Thus, the proposed regulations provide that including
this benefit would not cause an insurance contract to fail to
meet the definition of a life insurance contract.
\13\ Prop. Treas. Reg. Secs. 1.101-8, 1.7702-0, 1.7702-2, and
1.7702A-1 (December 15, 1992).
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Under the proposed regulations, a benefit would qualify as
a qualified accelerated death benefit only if it meets three
requirements. First, the accelerated death benefit can be
payable only if the insured becomes terminally ill. Second, the
amount of the benefit must equal or exceed the present value of
the reduction in the death benefit otherwise payable.\14\
Third, the cash surrender value and the death benefit payable
under the policy must be reduced proportionately as a result of
the accelerated death benefit.
\14\ For purposes of determining the present value under the
proposed regulations, the maximum permissible discount rate would be
the greater of (1) the applicable Federal rate that applies under the
discounting rules for property and casualty insurance loss reserves,
and (2) the interest rate applicable to policy loans under the
contract. Also, the present value would be determined assuming that the
death benefit would have been paid twelve months after payment of the
accelerated death benefit.
For purposes of the proposed regulations, an insured would
be treated as terminally ill if he or she has an illness that,
despite appropriate medical care, the insurer reasonably
expects to result in death within twelve months from the
payment of the accelerated death benefit. The proposed
regulations would not apply to viatical settlements.
Reasons for Change
The Committee wishes to extend the present-law rule
permitting an exclusion from income for amounts paid under a
life insurance contract by reason of the death of the insured
to accelerated death benefits paid with respect to certain
terminally ill and chronically ill insured individuals. In
addition, in the case of a terminally ill or chronically ill
insured individual, the Committee believes that this exclusion
from income should be extended to certain sales or assignments
of all or a portion of a life insurance contract to a viatical
settlement provider. The Committee believes that a single set
of rules should apply to benefits received with respect to a
chronically ill individual. To provide parity in treatment, the
same definition of a chronically ill individual applies for
purposes of the rules under this provision and the rules
governing long-term care insurance contracts. Further, the $200
per day ($73,000 annual) limit on excludability of benefits for
chronically ill individuals applies in both situations as well.
Explanation of Provision
The bill provides an exclusion from gross income as an
amount paid by reason of the death of an insured for (1)
amounts received under a life insurance contract and (2)
amounts received for the sale or assignment of a life insurance
contract to a qualified viatical settlement provider, provided
that the insured under the life insurance contract is either
terminally ill or chronically ill.\15\
\15\ The exclusion for amounts received under a life insurance
contract on the life of an insured who is chronically ill applies if
the amount is received under a rider or other provision of the contract
that is treated as a long-term care insurance contract under section
7702B (as added by the bill).
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The provision does not apply in the case of an amount paid
to any taxpayer other than the insured, if such taxpayer has an
insurable interest by reason of the insured being a director,
officer or employee of the taxpayer, or by reason of the
insured being financially interested in any trade or business
carried on by the taxpayer.
A terminally ill individual is defined as one who has been
certified by a physician as having an illness or physical
condition that reasonably can be expected to result in death
within 24 months of the date of certification. A physician is
defined for this purpose in the same manner as under the long-
term care insurance rules of the bill.\16\
\16\ A physician is defined for these purposes as in section
1861(r)(1) of the Social Security Act, which provides that a physician
means a doctor of medicine or osteopathy legally authorized to practice
medicine and surgery by the State in which he performs such function or
action (including a physician within the meaning of section 1101(a)(7)
of that Act). Section 1101(a)(7) of that Act provides that the term
physician includes osteopathic practitioners within the scope of their
practice as defined by State law.
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A chronically ill individual is defined as under the long-
term care provisions of the bill.\17\ In the case of amounts
received with respect to a chronically ill individual (but not
amounts received by reason of the individual being terminally
ill), the $200 per day ($73,000 annual) limitation on
excludable benefits applies.\18\ A payor of such an accelerated
death benefit or a qualified viatical settlement provider
making such a payment with respect to an individual who is
chronically ill is required to report to the IRS the aggregate
amount of such benefits paid to any individual during any
calendar year, and the name, address and taxpayer
identification number of such individual. A copy of the report
must be provided to the payee by January 31 following the year
of payment, showing the name of the payor and the aggregate
amount of such benefits paid to the individual during the
calendar year. Failure to file the report or provide the copy
to the payee is subject to the generally applicable penalties
for failure to file similar information reports.
\17\ Thus, a chronically ill individual is one who has been
certified within the previous 12 months by a licensed health care
practitioner as being unable to perform (without substantial
assistance) at least 2 activities of daily living for at least 90 days
due to a loss of functional capacity or cognitive impairment, or having
a similar level of disability as determined by the Secretary of the
Treasury in consultation with the Secretary of Health and Human
Services. Activities of daily living are eating, toileting,
transferring, bathing, dressing and continence. Nothing in the bill
requires the contract to take into account all of the activities of
daily living.
\18\ In general, the bill provides that the maximum annual amount
of benefits excludable from income under sections 7702B(a)(2) or 101(g)
(as added by this bill) with respect to an insured who is chronically
ill (but not amounts received by reason of the insured being terminally
ill) cannot exceed the equivalent of $200 per day for each day the
individual is chronically ill. Thus, the maximum annual exclusion for
long-term care benefits with respect to any chronically ill individual
(but not amounts received by reason of the insured being terminally
ill) is $73,000 (for 1996). If the insured is not the same as the
holder of the contract, the insured may assign some or all of this
limit to the contract holder at the time and manner prescribed by the
Secretary.
A qualified viatical settlement provider is any person that
regularly purchases or takes assignments of life insurance
contracts on the lives of terminally ill or chronically ill
individuals and either (1) is licensed for such purposes in the
State in which the insured resides, or (2) if the person is not
required to be licensed by that State, meets the requirements
of sections 8 and 9 of the Viatical Settlements Model Act
issued by the National Association of Insurance Commissioners
(relating to disclosure requirements and general rules for a
viatical settlement contract).
For life insurance company tax purposes, the bill provides
that a life insurance contract is treated as including a
reference to a qualified accelerated death benefit rider to a
life insurance contract (except in the case of any rider that
is treated as a long-term care insurance contract under section
7702B, as added by the bill). A qualified accelerated death
benefit rider is any rider on a life insurance contract that
provides only for payments of a type that are excludable under
this provision.
Effective Date
The provision applies to amounts received after December
31, 1995. The provision treating a qualified accelerated death
benefit rider as life insurance for life insurance company tax
purposes takes effect on January 1, 1996. The issuance of a
qualified accelerated death benefit rider to a life insurance
contract, or the addition of any provision required to conform
an accelerated death benefit rider to these provisions, is not
treated as a modification or material change of the contract
(and is not intended to affect the issue date of any contract
under section 101(f)).
TITLE III. JOB CREATION AND WAGE ENHANCEMENT ACT
A. Capital Gains Provisions
1. 50-percent capital gains deduction for individuals (sec. 301 of the
bill and new sec. 1202 of the Code)
Present Law
In general, gain or loss reflected in the value of an asset
is not recognized for income tax purposes until a taxpayer
disposes of the asset. On the sale or exchange of capital
assets, the net capital gain is taxed at the same rate as
ordinary income, except that individuals are subject to a
maximum marginal rate of 28 percent of the net capital gain.
Net capital gain is the excess of the net long-term capital
gain for the taxable year over the net short-term capital loss
for the year. Gain or loss is treated as long-term if the asset
is held for more than one year.
A capital asset generally means any property except (1)
inventory, stock in trade, or property held primarily for sale
to customers in the ordinary course of the taxpayer's trade or
business, (2) depreciable or real property used in the
taxpayer's trade or business, (3) specified literary or
artistic property, (4) business accounts or notes receivable,
or (5) certain U.S. publications. In addition, the net gain
from the disposition of certain property used in the taxpayer's
trade or business is treated as long-term capital gain. Gain
from the disposition of depreciable personal property is not
treated as capital gain to the extent of all previous
depreciation allowances. Gain from the disposition of
depreciable real property is generally not treated as capital
gain to the extent of the depreciation allowances in excess of
the allowances that would have been available under the
straight-line method.
The Revenue Reconciliation Act of 1993 provided a 50-
percent exclusion for gain from the sale of certain small
business stock acquired at original issue and held for at least
five years. One-half of the excluded amount is a minimum tax
preference.
Prior to the enactment of the Tax Reform Act of 1986,
individuals were allowed a deduction equal to 60 percent of net
capital gain. The deduction resulted in a maximum effective tax
rate of 20 percent on such gains.
Capital losses are generally deductible in full against
capital gains. In addition, individuals may deduct capital
losses against up to $3,000 of ordinary income in each year.
Capital losses in excess of the amount deductible are carried
forward indefinitely in the case of individuals, and generally
carried back three years and forward five years in the case of
corporations. Prior to the Tax Reform Act of 1986, individuals
were required to use two dollars of long-term capital loss to
offset each dollar of ordinary income.
Reasons for Change
The Committee believes it is important that tax policy be
conducive to economic growth. Economic growth cannot occur
without saving, investment, and the willingness of individuals
to take risks and exploit new market opportunities. The greater
the pool of savings, the greater the monies available for
business investment in equipment and research. It is through
such investment in equipment and new products and services that
the United States economy can increase output and productivity.
It is through increases in productivity that workers earn
higher real wages. Hence, greater saving is necessary for all
Americans to benefit through a higher standard of living.
The net personal saving rate in the United States averaged
4.8 percent of gross domestic product (GDP) in the 1980s, below
the 5.5 percent rate of the 1970s, and far below the rates of
Japan, Germany, Canada and other major trading partners. The
net personal saving rate reported by the Department of Commerce
for 1990 through 1992 averaged only 3.5 percent of GDP. The
Committee believes such saving is inadequate to finance the
investment that is needed to equip the country's businesses
with the equipment and research dollars necessary to create the
higher productivity that results in higher real wages for
working Americans. A reduction in the taxation of capital gains
increases the rate of return on household saving. Testimony by
many economists before the Committee generally concluded that
increasing the after-tax return to saving should increase the
saving rate of American households.
American technological leadership has been enhanced by the
willingness of individuals to take the risk of pursuing new
businesses exploiting new technologies. Risk taking is stifled
if the taxation of any resulting gain is high and the ability
to claim losses is limited. The Committee believes it is
important to encourage risk taking and believes a reduction in
the taxation of capital gains will have that effect.
Reduction in the taxation of capital gains also should
improve the efficiency of the capital markets. The taxation of
capital gains upon realization encourages investors who have
accrued past gains to keep their monies ``locked in'' to such
investments even when better investment opportunities present
themselves. All economists that testified before the Committee
agreed that reducing the rate of taxation of capital gains
would encourage investors to unlock many of these gains. This
unlocking will permit more monies to flow to new, highly valued
uses in the economy. When monies flow freely, the efficiency of
the capital market is improved.
The unlocking effect also has the short-term and long-term
effect of increasing revenues to the Federal Government. The
current revenue estimating methods employed by the Congress
account for this long-term behavioral response. Nevertheless,
current Congressional estimates project that revenue losses to
the Federal Government will arise from the reduction in the tax
rate on capital gains beginning in fiscal year 1997. The
Committee observes, however, that the conservative approach
embodied in such estimates does not attempt to account for the
potential for increased growth in GDP that can result from
increased saving and risk taking. Many macroeconomists have
concluded that reductions in the taxation of capital gains will
increase GDP and wage growth sufficiently that future tax
revenues from the taxation of wages and business profits will
offset the losses forecast from the sale of capital assets.
Allen Sinai, chief global economist at Lehman Brothers, has
estimated that a reduction in capital gains taxation will raise
real and nominal gross domestic product by increasing capital
spending and capital formation and, thereby, increase future
government revenues. The Committee also notes that a recent
study by the economic forecasting firm, Data Resources, Inc.,
of a reduction in the taxation of capital gains similar to that
adopted by the Committee suggests ``that after 10 years real
GDP could be 0.4% higher than in the baseline.'' \19\ The
potential for future growth and its benefits both for all
United States citizens and for future Federal revenues were
important considerations for the Committee.
\19\ Roger E. Brinner, David A. Wyss, and Cynthia M. Latta,
``Growth and Budget Repercussions of the Republican Contract with
America,'' Review of the U.S. Economy, DRI/McGraw-Hill, February 1995,
p. 36.
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The Committee rejects the narrow view that reductions in
the taxation of capital gains benefit primarily higher-income
Americans. Traditional attempts to measure the benefit of a tax
reduction for capital gains are deficient. Typically, the
classification of individuals in such studies measure the
individuals' incomes including any capital gains realized. Many
Americans realize only one or two capital gains during their
lifetime, for example upon the sale of family business upon
retirement. Including the gain on such a one-time sale in the
income of the individual makes the individual appear, for that
one year, to be a higher-income taxpayer when, in other years,
the taxpayer would appear to be solidly middle class. Another
deficiency is that such studies classify taxpayers only by
their current economic condition. Studies show that there is
substantial economic mobility in the United States. An
individual who might be counted as lower income now may in a
decade be higher income.
Thus, taking a longer view, the Committee sees a reduction
in the taxation of capital gains as providing potential
benefits to all individuals. Most importantly, the Committee
stresses that economic growth benefits all Americans. Increased
investment leads to greater productivity and leads to higher
wages. Traditional attempts to measure the benefit or burden of
a tax change do not account for this critical outcome.
Explanation of Provision
The bill allows individuals a deduction equal to 50 percent
of net capital gain for the taxable year. The bill repeals the
present-law maximum 28-percent rate. Thus, under the bill, the
effective rate on the net capital gain of an individual in the
highest (i.e., 39.6 percent) marginal rate bracket is 19.8
percent.
The bill repeals the provisions in the Revenue
Reconciliation Act of 1993 providing a capital gain exclusion
for sales of certain small business stock (sec. 1202 of the
Code).
The bill reinstates the rule in effect prior to the l986
Tax Reform Act that required two dollars of the long-term
capital loss of an individual to offset one dollar of ordinary
income. The $3,000 limitation on the deduction of capital
losses against ordinary income continues to apply.
Collectibles are excluded from net capital gain. However,
an individual could elect to apply a maximum rate of 28 percent
to the net capital gain attributable to collectibles, if the
individual forgoes the benefit of indexing the basis of the
collectible.
Effective Date
The provision generally applies to taxable years ending
after December 31, 1994.
For a taxpayer's fiscal year that includes January 1, 1995
(or for the 1995 calendar year of a taxpayer holding interests
in one or more pass-thru entities with a fiscal year that
includes January 1, 1995), the 50-percent capital gains
deduction applies to the lesser of (1) the net capital gain for
the taxable year, or (2) the net capital gain determined by
taking into account gain or loss properly taken into account
for the portion of the taxable year after December 31, 1994.
Any net capital gain not eligible for the 50-percent capital
gains deduction is subject to the present-law maximum rate of
28 percent. This generally has the effect of applying the 50-
percent deduction to capital assets sold or exchanged (or
installment payments received) on or after January 1, 1995, and
subjecting gains from capital assets sold before that date to a
maximum rate of 28 percent.
In the case of gain taken into account by a pass-through
entity (i.e., a RIC, a REIT, a partnership, an estate or trust,
or a common trust fund), the date taken into account by the
entity is the appropriate date for applying the rule in the
preceding paragraph. Thus, gain taken into account by a fiscal-
year pass-thru entity in 1994 which an owner takes into account
on its calendar-year 1995 income tax return is not eligible for
the new capital gains deduction.
A taxpayer holding small business stock on the date of
enactment is able to elect, within one year from the date of
enactment, to have the provision of present law (rather than
the provisions of the bill) apply to any gain from the sale of
the stock.
The capital loss rule does not apply to losses arising in
taxable years beginning before January 1, 1996.
2. Indexing of basis of certain assets for purposes of determining gain
(sec. 302 of bill and new sec. 1022 of the Code)
Present Law
Under present law, gain or loss from the disposition of any
asset generally is the sales price of the asset is reduced by
the taxpayer's adjusted basis in that asset. The taxpayer's
adjusted basis generally is the taxpayer's cost in the asset
adjusted for depreciation, depletion, and certain other
amounts. No adjustment is allowed for inflation.
Reasons for Change
Because a taxpayer's adjusted basis for tax purposes is
determined by historical cost, a taxpayer can have gains for
tax purposes even though the real value of the assets (i.e.,
adjusted for inflation) has not increased. Even at modest
inflation rates of three percent per year for five years, an
investor's adjusted basis will under-represent his real
purchasing power by 16 percent over five years. The taxation of
these inflationary gains discourages new saving and investors
from selling old investments even when better investment
opportunities present themselves. This retards economic growth
and leads to an inefficient allocation of capital by the
capital markets. For this reason, the Committee believes it is
appropriate to provide for inflation adjustments to a
taxpayer's adjusted basis in certain assets (held for more than
three years) for purposes of determining gain on their
disposition.
Explanation of Provision
In general
The bill generally provides for an inflation adjustment to
(i. e. , indexing of) the adjusted basis of certain assets
(called ``indexed assets'') for purposes of determining gain
(but not loss) upon a sale or other disposition of such assets
by a taxpayer other than a C corporation. Assets held by
trusts, estates, S corporations, regulated investment companies
(``RICs''), real estate investment trusts (``REITs''), and
partnerships are eligible for indexing, to the extent gain on
such assets is taken into account by taxpayers other than C
corporations.
The bill applies to assets acquired on or after January 1,
1995 (and to principal residences held on that date).
Indexed assets
Assets eligible for the inflation adjustment generally
include common (but not preferred) stock of C corporations and
tangible property that are capital assets or property used in a
trade or business. To be eligible for indexing, an asset must
be held by the taxpayer for more than three years.
The adjusted basis of debt is not indexed. The proposal
also excludes from indexing intangible assets, such as options,
futures, and other derivatives.
No property using neutral cost recovery is an indexed
asset.
Computation of inflation adjustment
The inflation adjustment under the provision is computed by
multiplying the taxpayer's adjusted basis in the indexed asset
by an inflation adjustment percentage. The inflation adjustment
percentage is the percentage by which the GDP deflator for the
last calendar quarter ending before the disposition exceeds the
GDP deflator for the last calendar quarter ending before the
asset was acquired by the taxpayer. The inflation adjustment
percentage is rounded to the nearest one-tenth of a percent. No
adjustment is made if the inflation adjustment is one or less.
Indexing with respect to any asset ends at the time the
asset is treated as disposed of for tax purposes. Thus, with
respect to installment sales, the inflation adjustment to the
seller does not take into account any periods after the sale is
made. The purchaser generally is entitled to inflation
adjustments beginning with the date of purchase, even though
the purchase price is not paid until a later date.
In computing the inflation ratio, periods of time for which
an asset is not an indexed asset are not taken into account.
For example, if convertible debt is converted into common
stock, the period prior to conversion is disregarded in
determining the inflation ratio applicable to the disposition
of the common stock.
Special entities
RICs and REITs
In the case of a RIC or a REIT, the indexing adjustments
generally apply in computing the taxable income and the
earnings and profits of the RIC or REIT. The indexing
adjustments, however, are not applicable in determining whether
a corporation qualifies as a RIC or REIT.
In order to deny the benefit of indexing to corporate
shareholders of the RIC or REIT, the bill provides that, under
regulations, (1) the determination of whether a distribution to
a corporate shareholder is a dividend is made without regard to
this provision, (2) the amount treated as a capital gain
dividend is increased to take into account that the amount
distributed was reduced by reason of the indexing adjustment,
and (3) such other adjustments as are necessary shall be made
to ensure that the benefits of indexing are not allowed to
corporate shareholders.
In the case of shares held in a RIC or REIT, partial
indexing generally is provided by the provision based on the
ratio of the value of indexed assets held by the entity to the
value of all its assets. The ratio of indexed assets to total
assets is determined quarterly (for RICs, the quarterly ratio
is based on a three-month average). If the ratio of indexed
assets to total assets exceeds 80 percent in any quarter, full
indexing of the shares is allowed for that quarter. If less
than 20 percent of the assets are indexed assets in any
quarter, no indexing is allowed for that quarter for the
shares. Partnership interests held by a RIC or REIT are subject
to a look-through test for purposes of determining whether, and
to what degree, the shares in the RIC or REIT are indexed.
A return of capital distribution by a RIC or REIT generally
is treated by a shareholder as allocable to stock acquired by
the shareholder in the order in which the stock was acquired.
Partnership and S corporations, etc.
Under the provision, stock in an S corporation or an
interest in a partnership or common trust fund is not an
indexed asset. \20\ This rule avoids the complexity that would
result in determining the proper measure of the basis
adjustment if indexing were to take into account the
fluctuating basis of the S corporation stock or partnership
interest attributable to earnings and distributions or to the
frequently changing mix of assets (i.e., indexed assets and
other assets) of the entity. Under the provision, the
individual owner receives the benefit of the indexing
adjustment when the S corporation, partnership, or common trust
fund disposes of indexed assets. Under the provision, any
inflation adjustments at the entity level flows through to the
holders and result in a corresponding increase in the basis of
the holder's interest in the entity. Where a partnership has a
section 754 election in effect, a partner transferring his
interest in the partnership is entitled to any indexing
adjustment that has accrued at the partnership level with
respect to the partner and the transferee partner is entitled
to the benefits of indexing for inflation occurring after the
transfer.
\20\ An interest in a real estate mortgage investment conduit
(``REMIC'') also is not an indexed asset, since a REMIC is not treated
as a corporation for income tax purposes.
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The indexing adjustment is disregarded in determining any
loss on the sale of an interest in a partnership, S corporation
or common trust fund.
Example 1.--A, B, and C form an equal partnership, and each
contributes $50 cash. The partnership purchases common stock in
corporation X for $150. At a time when the indexed basis to the
partnership for the stock is $240, the partnership sells the
stock for $300. Under the bill, the partnership recognizes $60
gain. Each partner takes into account $20 gain and increases
his basis in his partnership interest by the $20 gain (under
present law sec. 705). In addition, under the bill each partner
increases his basis for purposes of determining gain on his
partnership interest by $30 (his share of the $90 indexing
adjustment made by the partnership). Thus, if any partner sells
his partnership interest for $100, no gain or loss is
recognized to the partner.
Example 2.--Same facts as in Example 1, except that the
partnership does not sell the stock. Rather, partner A sells
his partnership interest to D for $100. The partnership does
not have an election under section 754 in effect. Partner A
recognizes $50 of gain. Partner D's basis in the partnership is
the $100 purchase price. Assume that after the sale by A, the
partnership sells the stock for $300 (at a time when the
indexed basis is $240). The partnership recognizes $60 of gain
and each partner takes into account $20 gain and makes the same
adjustments as in the above example. If partner D then sold his
partnership interest for $100, he will recognize a loss of $20
($100 amount realized less adjusted basis for purposes of
determining loss of $120; the $30 inflation adjustment would be
disregarded in computing D's adjusted basis in his partnership
interest. )
Example 3.--Same facts as in Example 2, except that the
partnership has an election under section 754 in effect. When A
sells his partnership interest to D, A recognizes $20 of gain,
because under the bill, A's share of the partnership indexing
adjustment is available to A at that time. Upon the sale of the
stock by the partnership, D recognizes no gain or loss since
the adjustment under section 743(b) had been made with respect
to his share of the partnership properties. No adjustment is
made by D to the basis in his partnership interest as a result
of the sale by the partnership.
Foreign corporations
Common stock of a foreign corporation generally is an
indexed asset if the stock is regularly traded on an
established securities market. The Committee intends that the
terms ``regularly traded'' and ``established securities
market'' have the same meaning under the bill as they have in
Treas. Reg. 1. 884-5(d). Indexed assets, however, do not
include stock in a foreign investment company, a passive
foreign investment company (including a qualified electing
fund), a foreign personal holding company, or, in the hands of
a shareholder who meets the requirements of section 1248(a)(2)
(generally pertaining to 10-percent shareholders of controlled
foreign corporations), any other foreign corporation. An
American Depository Receipt (ADR) for common stock in a foreign
corporation is treated as common stock in the foreign
corporation and, therefore, the basis in an ADR for common
stock generally is indexed.
Other rules
Improvements and contributions to capital
No indexing is provided for improvements or contributions
to capital if the aggregate amount of the improvements or
contributions to capital during the taxable year with respect
to the property or stock is less than $1,000. If the aggregate
amount of such improvements or contributions to capital is
$1,000 or more, each addition is treated as a separate asset
acquired at the close of the taxable year.
Suspension of holding period
No indexing adjustment is allowed during any period during
which there is a substantial diminution of the taxpayer's risk
of loss from holding the indexed asset by reason of any
transaction entered into by the taxpayer, or a related party.
Short sales
In the case of a short sale of an indexed asset with a
short sale period in excess of three years, the provision
requires that the amount realized be indexed for inflation for
the short sale period.
Related parties
The bill does not index the basis of property for sales or
dispositions between related persons, except to the extent the
adjusted basis of property in the hands of the transferee is a
substituted basis (e.g., gifts).
Collapsible corporations
Under the bill, indexing does not reduce the amount of
ordinary gain that would be recognized in cases where a
corporation is treated as a collapsible corporation (under sec.
341) with respect to a distribution or sale of stock.
Effective Date
The provision applies to property the holding period of
which begins after December 31, 1994. The provisions also apply
to a principal residence (within the meaning of section 1034)
held by the taxpayer on January 1, 1995. For purposes of
computing the inflation adjustment (including the holding
period for purposes of the three-year holding period
requirement), the residence will be treated as acquired on
January 1, 1995.
A taxpayer holding any indexed asset (other than a
principal residence) on January 1, 1995, may elect to treat the
indexed asset as having been sold on such date for an amount
equal to its fair market value, and as having been reacquired
for an amount equal to such value. If the election is made, the
asset would be eligible for indexing under the provision. Any
gain resulting from the election would be treated as received
on the date of the deemed sale, and would not be treated as
gain from the sale or exchange of property between related
persons under Code section 1239. Any loss would not be allowed
(and the disallowed loss would not be added to the basis of the
indexed asset). For readily traded securities, fair market
value is the closing market price on the business day following
January 1, 1995. For this purpose, ``readily traded'' means
readily tradable on an established securities market or
otherwise.
A taxpayer may make the above election with respect to some
indexed assets and not with respect to others.
3. 25-percent corporate alternative tax for capital gains (sec. 311 of
the bill and sec. 1201 of the Code)
Present Law
Under present law, the net capital gain of a corporation is
taxed at the same rate as ordinary income, and subject to tax
at graduated rates up to 35 percent. Prior to the Tax Reform
Act of 1986, the net capital gain of a corporation was subject
to a maximum effective tax rate of 28 percent (and the highest
rate was 46 percent for ordinary income).
Reasons for Change
The Committee believes it is important that tax policy be
conducive to economic growth. Economic growth cannot occur
without saving, investment, and the willingness of businesses
to take risks and exploit new market opportunities. The greater
the pool of savings, the greater the monies available for
business investment in equipment and research. It is through
such investment in equipment and new products and services that
the United States economy can increase output and productivity.
It is through increases in productivity that workers earn
higher real wages. Hence, greater saving is necessary for all
Americans to benefit through a higher standard of living.
The Committee observes that net business saving has not
increased significantly from its levels of a decade ago. The
Committee believes that a lower rate of tax on capital gains
will promote economic growth, create new jobs and encourage
investment, saving, and risk-taking.
Explanation of Provision
The provision provides an alternative tax of 25 percent on
the net capital gain of a corporation if that rate is less than
the corporation's regular tax rate.
Effective Date
The provision generally applies to taxable years ending
after December 31, 1994. For taxable years ending after
December 31, 1994, and beginning before January 1, 1996, the
25-percent rate applies to the lesser of (1) the net capital
gain for the taxable year or (2) the net capital gain taking
into account only gain or loss properly taken into account for
the portion of the taxable year after December 31, 1994. This
generally has the effect of applying the 25-percent alternative
rate to gains from capital assets sold or exchanged on or after
January 1, 1995, and subjecting gains from capital assets
before that date to the regular 35-percent rate.
In the case of gain taken into account by a corporation
from a pass-through entity (i.e., a RIC, a REIT, an S
corporation, a partnership, an estate or trust, or a common
trust fund), the date taken into account by the entity is the
appropriate date for applying the rule in the preceding
paragraph. Thus, gain taken into account by a fiscal-year pass-
thru entity in 1994 which a corporate owner takes into account
on its calendar-year 1995 income tax return is not eligible for
the alternative tax on capital gains.
4. Capital loss deduction allowed with respect to the sale or exchange
of a principal residence (sec. 316 of the bill and sec. 165 of
the Code)
Present Law
Taxpayers generally may claim as a deduction any loss
sustained during the taxable year and not compensated by
insurance or otherwise. In the case of an individual, however,
the deduction is limited to (1) losses incurred in a trade or
business, (2) losses incurred in any transaction entered into
for profit though not connected with a trade or business, and
(3) catastrophic losses of property that arise from fire,
storm, shipwreck, or other casualty or from theft. Deductions
for losses from the sale or exchange of capital assets are
subject to the limitations described above. In addition,
taxpayers other than corporations may deduct capital losses
against up to $3,000 of ordinary income each year.
A loss on the sale or exchange of a principal residence is
treated as a nondeductible personal loss. Gain on the sale or
exchange of a principal residence generally is includible in
gross income and is subject to a maximum rate of 28 percent. If
an individual purchases a new principal residence within two
years of selling the old residence, gain from the sale of the
old residence (if any) is recognized only to the extent that
the taxpayer's adjusted sales price exceeds the taxpayer's cost
of purchasing the new residence (sec. 1034). A taxpayer also
may elect to exclude from gross income up to $125,000 of gain
from the sale of a principal residence if the taxpayer (1) has
attained age 55 before the sale and (2) has used the residence
as a principal residence for three or more years of the five
years preceding the sale of the residence (sec. 121). This
election may be made only once.
Reasons for Change
Generally, under present law if a taxpayer sells the
taxpayer's principal residence for less than the taxpayer's
adjusted basis in that asset the taxpayer is treated as having
a nondeductible personal loss. In contrast, when a taxpayer
sells an investment asset for less than the taxpayer's adjusted
basis in that investment asset, the taxpayer may be eligible
for capital loss treatment on the sale. That capital loss is
available to offset the taxpayer's capital gains and $3000 of
ordinary income annually. The Committee believes that it is
inappropriate to allow the capital loss on the sale of the
investment asset but not on the sale of the principal
residence. Further, the Committee believes that the proper
measurement of economic income under the Code requires a
recognition of the large out-of-pocket loss that a taxpayer
incurs when a taxpayer's principal residence is sold at a loss.
Explanation of Provision
The bill provides that a loss from the sale or exchange of
a principal residence is treated as a deductible capital loss
rather than a nondeductible personal loss.
Effective Date
The provision is effective for sales and exchanges after
December 31, 1994, in taxable years ending after such date.
B. Cost Recovery Provisions
1. Neutral cost recovery (sec. 321 of the bill and secs. 56 and 168 of
the Code)
Present Law
Under present law, a taxpayer is allowed depreciation
deductions for the cost of property used in a trade or
business. In general, depreciation for tangible property placed
in service after 1986 is determined under the modified
Accelerated Cost Recovery System (``MACRS'') enacted as part of
the Tax Reform Act of 1986. MACRS includes a general
depreciation system and an alternative depreciation system.
Under the general MACRS rules, property is divided into
nine classes based on recovery periods (3-year property, 5-year
property, 7-year property, 10-year property, 15-year property,
20-year property, 27. 5-year residential rental property, 39-
year nonresidential real property and 50-year railroad grading
or tunnel bores) and is depreciated over such periods. The 200-
percent declining balance method of depreciation is used for 3-
year, 5-year, 7-year, and 10-year property; the 150-percent
declining balance method is used for 15-year and 20-year
property and property used in a farming business; and the
straight-line method is used for other property (including real
property).
The alternative depreciation system applies to foreign use
property, tax-exempt use property, tax-exempt bond financed
property, certain imported property, and property to which the
taxpayer so elects, and is used to compute corporate earnings
and profits. In general, the value of MACRS deductions are
reduced under the alternative depreciation system by
calculating depreciation using the straight-line method over
the property's class life.\21\ A property's class life
generally corresponds to its Asset Depreciation Range (``ADR'')
midpoint life and often is longer than the recovery period
available under the general MACRS. (The class lives and
recovery periods of some assets are set by statute, regardless
of the asset's ADR midpoint life.) The class lives of the
alternative depreciation system are used for purposes of the
corporate and individual alternative minimum taxes. The
alternative minimum tax generally applies the 150-percent
declining balance method to tangible personal property placed
in service after 1993.
\21\ Annual depreciation deductions for passenger automobiles also
are limited under section 280F.
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Reasons for Change
The ability of a business to recover its capital costs when
determining its income subject to tax is critical in the
decision to invest. In looking at the future investment needs
of the United States, the Committee finds the present-law MACRS
inadequate in two respects. First, the real value of the
capital cost recovery available to business under MACRS depends
upon the rate of inflation. Uncertainty about the real value of
capital cost recovery discourages investment. The Committee
believes that capital cost recovery provisions should be
inflation proof. Second, the present value of the costs
permitted to be recovered under present law is less than the
cost of the investment. The Committee believes that, in order
to provide the investment incentives necessary for growth in
GDP and wages, the Internal Revenue Code should provide for the
recovery of the real present value of capital outlays. The
Committee believes that increasing the deductions currently
allowable under MACRS by the rate of inflation and, for
shorter-lived property, an assumed real interest rate factor of
3. 5 percent helps rectify both inadequacies of present law.
Explanation of Provision
For MACRS property placed in service after December 31,
1994, the bill allows a taxpayer to elect, on a property-by-
property basis, to determine depreciation deductions under
present law or under a new neutral cost recovery system
(``NCRS''). The following describes the treatment of property
under NCRS.
First, NCRS generally follows MACRS but would replace the
200-percent declining balance method of MACRS applicable to
shorter-lived property with the 150-percent declining balance
method.\22\
\22\ Thus, except as specifically provided, the elections that are
generally available under MACRS are available under NCRS. For example,
it is expected that a taxpayer will be allowed to elect to maintain
general asset accounts with respect to NCRS property (sec. 168(i)(4)).
However, some MACRS elections are not compatible with NCRS. For
example, a taxpayer may not apply the 3.5-percent factor described
below to shorter-lived property for which the taxpayer elects to apply
the straight-line methods of depreciation under section 168(e)(5).
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Second, depreciation for any taxable year after the year in
which the property is placed in service would be determined by
multiplying the deduction allowable for the property for the
taxable year (determined without regard to this provision) by
the ``applicable neutral cost recovery ratio'' for the year.
In the case of property that would otherwise qualify for
the 200-percent declining balance method (but for the election
to use NCRS), the applicable neutral cost recovery ratio for
the taxable year is first determined by dividing (1) the gross
domestic product deflator for the taxable year by (2) the gross
domestic product deflator for the year the property was placed
in service by the taxpayer. This ratio is then multiplied by
the number equal to 1.035 raised to the nth power, where ``n''
is the number of full years since the property was placed in
service by the taxpayer. In the case of other MACRS property
(e.g., longer-lived property and property to which the
alternative depreciation system applies), the applicable
neutral cost recovery ratio for the taxable year is determined
by dividing (1) the gross domestic product deflator for the
taxable year by (2) the gross domestic product deflator for the
year the property was placed in service by the taxpayer.
The gross domestic product deflator for any taxable year is
the appropriate price deflator released by the Department of
Commerce for the gross domestic product for the calendar
quarter that includes the mid-point of the taxpayer's taxable
year. The mid-point of a full taxable year generally is the
183rd day of such year.\23\ Thus, for example, the gross
domestic product deflator for a taxpayer with a fiscal year
ending November 30 is the appropriate price deflator published
for the calendar quarter ending June 30. The appropriate price
deflator for any calendar quarter is the last deflator for such
quarter released by the Department of Commerce before the end
of the next calendar quarter.
\23\ It is expected that the Secretary of the Treasury will provide
such rules as are necessary to determine the appropriate price deflator
for any taxable year that is a short year.
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For any property, the applicable neutral cost recovery
ratio may not be less than one and is rounded to the nearest
one-thousandth.
The depreciation allowances provided under NCRS for regular
tax purposes also are applied for alternative minimum tax
purposes. In addition, the component of the adjusted current
earnings adjustment relating to earnings and profits (sec.
56(g)(4)(C)) does not apply to the additional deductions
allowed under NCRS for purposes of the corporate alternative
minimum tax.
The application of the applicable neutral cost recovery
ratio generally is not taken into account for purposes of (1)
determining the adjusted basis of depreciable property,\24\ any
interest in a pass-thru entity (as defined in sec. 1202(e)(2)
as added by the bill to mean a regulated investment company, a
real estate investment trust, an S corporation, a partnership,
an estate or trust, or a common trust fund), or the stock of a
consolidated subsidiary; (2) determining earnings and profits;
or (3) the recapture provisions of sections 1245 and 1250. The
additional deductions determined under NCRS are subject to the
built-in loss rules of section 382 generally in the same manner
as depreciation deductions are subject to such rules under
present law. Finally, the additional deductions determined
under NCRS are not subject to the at-risk rules to the extent
the taxpayer's underlying MACRS depreciation deductions are not
deemed to be subject to the at-risk rules.
\24\ The additional deductions allowed by the provision will
increase the ``unrecovered basis'' of a passenger automobile to the
extent such deductions are not allowed by reason of section 280F.
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NCRS does not apply to any property for which the taxpayer
so elects \25\ or to property placed in service pursuant to
certain churning transactions.
\25\ Any election, once made, is irrevocable.
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Effective Date
The provision is effective for qualifying property placed
in service after December 31, 1994.
2. Treatment of leasehold improvements (sec. 322 of the bill and sec.
168 of the Code)
Present Law
Depreciation of leasehold improvements
Improvements made on leased property are depreciated under
the modified Accelerated Cost Recovery System (``MACRS''), even
if the MACRS recovery period assigned to the property is longer
than the term of the lease (sec. 168(i)(8)).\26\ This rule
applies regardless of whether the lessor or lessee places the
leasehold improvements in service.\27\ 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 was placed in service (secs. 168(b)(3), (c)(1),
(d)(2), and (i)(6)).\28\
\26\ Prior to the adoption of the Accelerated Cost Recovery System
(``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 denial of component
depreciation also applies under MACRS, as provided by the Tax Reform
Act of 1986.
\27\ 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.
\28\ If the improvement is characterized as tangible personal
property, 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 or not the improvements constitute a ``structural
component'' of a building (as defined by Treas. Reg. sec. 1.48-
1(e)(1)). See, for example, 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 to various leasehold
improvements).
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Treatment of dispositions of leasehold improvements
A taxpayer generally recovers the adjusted basis of
property for purposes of determining gain or loss upon the
disposition of the property. Upon the termination of a lease,
the adjusted basis of leasehold improvements that were made,
but are not retained, by a lessee are taken into account to
compute gain or loss by the lessee.\29\ The proper treatment of
the adjusted basis of improvements made by a lessor upon
termination of a lease is less clear. Proposed Treasury
regulation section 1.168-2(e)(1) provides that the unadjusted
basis of a building's structural components must be recovered
as whole. In addition, proposed Treasury regulation sections
1.168-2(l)(1) and 1.168-6(b) provide that ``disposition'' does
not include the retirement of a structural component of real
property if there is no disposition of the underlying
building.\30\ Thus, it appears that it is the position of the
Internal Revenue Service that leasehold improvements made by a
lessor that constitute structural components of a building must
continue to be depreciated in the same manner as the underlying
real property, even if such improvements are retired at the end
of the lease term.\31\ Some lessors, on the other hand, may be
taking the position that a leasehold improvement is a property
separate and distinct from the underlying building and that an
abandonment loss under section 165 is allowable at the end of
the lease term for the adjusted basis of the abandoned
property. In addition, lessors may argue that even if a
leasehold improvement constitutes a structural component of a
building, proposed Treasury regulation section 1.168-2(l)(1)
(that seemingly denies the deduction at the end of the lease
term) applies only to retirements, but not abandonments or
demolitions, of such property.\32\ Thus, it appears that some
lessors take the position that, at least in certain
circumstances, the adjusted bases of leasehold improvements may
be recovered at the end of the term of the lease to which the
improvements relate even if there is no disposition of the
underlying building.
\29\ See, Report of the House Committee on Ways and Means on H.R.
3838 (H. Rept. 99-426), p. 158, and Senate Committee on Finance Report
on H.R. 3838 (S. Rept. 99-313), p. 105 (Tax Reform Act of 1986, 99th
Cong.).
\30\ For example, if a taxpayer places a new roof on building
subject to ACRS, the taxpayer must continue to depreciate the allocable
cost of the old roof as part of the cost of the underlying building.
(Prop. Treas. reg. sec. 1.168-6(b)(1)) See, also, Joint Committee on
Taxation, General Explanation of the Economic Recovery Tax Act of 1981
(97th Cong.), p. 86.
\31\ See, IRS General Information Letter, dated Sept. 17, 1992.
\32\ Compare the second and fourth sentences of proposed Treasury
regulation section 1.168-2(l)(1).
Reasons for Change
The Committee believes that costs that relate to the
leasing of property should not be recovered beyond the term of
the lease to the extent the costs do not provide a future
benefit beyond such term. The Committee also believes that the
proper present-law treatment of leasehold improvements disposed
of at the end of the term of a lease is unclear. Thus, the
Committee would provide that the unrecovered costs of leasehold
improvements that were placed in service by a lessor with
respect to a lease and that are irrevocably disposed of at the
end of the lease term should be taken into account at that
time.
Explanation of Provision
Under the bill, 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. The bill thus
conforms the treatment of lessors and lessees with respect to
leasehold improvements disposed of at the end of a term of
lease.
For purposes of applying the provision, 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.
Effective Date
The provision is effective for leasehold improvements
disposed of after March 13, 1995. No inference is intended as
to the proper treatment of such dispositions before March 14,
1995, or to the dispositions of other property.
C. Alternative Minimum Tax (sec. 331 of the bill and secs. 55 through
59 of the Code)
Present Law
In general
Present law imposes a minimum tax (known as the alternative
minimum tax (``AMT'')) on an individual or a corporation to the
extent the taxpayer's minimum tax liability exceeds its regular
tax liability. The individual minimum tax is imposed at rates
of 26 and 28 percent on alternative minimum taxable income in
excess of a phased-out exemption amount; the corporate minimum
tax is imposed at a rate of 20 percent on alternative minimum
taxable income in excess of a phased-out $40,000 exemption
amount.\33\ Alternative minimum taxable income (``AMTI'') is
the taxpayer's taxable income increased by certain preference
items and adjusted by determining the tax treatment of certain
items in a manner that negates the deferral of income resulting
from the regular tax treatment of those items. In the case of a
corporation, in addition to the regular set of adjustments and
preferences, there is a second set of adjustments known as the
``adjusted current earnings'' adjustment.
\33\ In addition, in the case of a corporation, section 59A imposes
an environmental tax at a rate of 0.12 percent on modified AMTI in
excess of a $2,000,000 exemption amount. Environmental tax collections
are dedicated to the Hazardous Substance Superfund. This tax is
scheduled to expire for taxable years beginning after December 31,
1995.
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Preference items in computing AMTI
The minimum tax preference items are:
(1) The excess of the deduction for percentage depletion
over the adjusted basis of the property at the end of the
taxable year. For taxable years beginning after 1992, this
preference does not apply to percentage depletion allowed with
respect to oil and gas properties.
(2) The amount by which excess intangible drilling costs
arising in the taxable year exceed 65 percent of the net income
from oil, gas, and geothermal properties. For taxable years
beginning after 1992, this preference does not apply to
independent producers to the extent the producer's AMTI is
reduced by 40 percent or less by ignoring the preference.
(3) The amount that a financial institution's bad debt
deduction determined under section 593 exceeds the amount that
would have determined based on the institution's actual
experience.
(4) Tax-exempt interest income on private activity bonds
(other than qualified 501(c)(3) bonds) issued after August 7,
1986.
(5) Accelerated depreciation or amortization on certain
property placed in service before January 1, 1987.
(6) One-half of the amount excluded from income under
section 1202 (relating to gains on the sale of certain small
business stock).
In addition, losses from any tax shelter farm or passive
activities are denied.\34\
\34\ Given the full applicability of section 469 (relating to the
deductibility of losses from passive activities) following a phase-in
period after the passage of the Tax Reform Act of 1986, these
provisions are largely deadwood.
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Adjustments in computing AMTI
The adjustments that all taxpayers must make are:
(1) Depreciation on property placed in service after 1986
must be computed by using the generally longer class lives
prescribed by the alternative depreciation system of section
168(g) and either (a) the straight-line method in the case of
property subject to the straight-line method under the regular
tax or (b) the 150-percent declining balance method in the case
of other property.
(2) Mining exploration and development costs must be
capitalized and amortized over a 10-year period.
(3) Taxable income from a long-term contract (other than a
home construction contract) must be computed using the
percentage of completion method of accounting.
(4) The amortization deduction allowed for pollution
control facilities (generally determined using 60-month
amortization for a portion of the cost of the facility under
the regular tax) must be calculated under the alternative
depreciation system.
(5) Dealers in property (other than certain dealers of
timeshares and residential lots) may not use the installment
method of accounting.
The adjustments applicable to individuals are:
(1) Miscellaneous itemized deductions (generally
those that are allowable against the regular tax if
they are in excess of two percent of the taxpayer's
adjusted gross income);
(2) State, local, and foreign real property taxes;
state and local personal property taxes; and state,
local, and foreign income, war profits, and excess
profits taxes;
(3) Medical expenses except to the extent in excess
of ten percent of the taxpayer's adjusted gross income;
(4) Standard deductions and personal exemptions;
(5) The amount allowable as a deduction for
circulation expenditures must be capitalized and
amortized over a three-year period;
(6) The amount allowable as a deduction for research
and experimental expenditures must be capitalized and
amortized over a 10-year period; \35\ and
\35\ No adjustment is required if the taxpayer materially
participates in the activity that relates to the research and
experimental expenditures.
(7) The special rules relating to incentive stock
options.
The adjustments applicable to corporations are:
(1) The special rules applicable to Merchant Marine
capital construction funds;
(2) The special deduction allowable under section
833(b) (relating to Blue Cross and Blue Shield
organizations); and
(3) The adjusted current earnings adjustment,
described below.
Adjusted current earnings (ACE) adjustment
The adjusted current earnings adjustment is the amount
equal to 75 percent of the amount by which the adjusted current
earnings (``ACE'') of a corporation exceeds its AMTI
(determined without the ACE adjustment and the alternative tax
net operating loss deduction).\36\ In determining ACE, the
following rules apply:
\36\ If ACE is less than AMTI, the ACE adjustment may reduce AMTI
to the extent of prior-year ACE inclusions.
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(1) For property placed in service before 1994,
depreciation generally is determined using the straight-line
method and the class life determined under the alternative
depreciation system.\37\
\37\ Pursuant to a provision in the Omnibus Budget Reconciliation
Act of 1993, ACE depreciation adjustments are not required for property
placed in service after 1993.
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(2) Any amount that is excluded from gross income under the
regular tax but is included for purposes of determining
earnings and profits is included in determining ACE.\38\
\38\ Exceptions and special rules are provided for related expenses
that are not deductible for regular tax purposes but reduce earnings
and profits, the dividends received deduction relating to certain
dividends, taxes on dividends from 936 companies, and certain dividends
received by certain cooperatives.
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(3) The inside build-up of a life insurance contract is
includible in ACE (and the related premiums are deductible).
(4) Intangible drilling costs (other than those incurred by
an independent producer after 1992) must be capitalized and
amortized over a 60-month period.
(5) The regular tax rules of sections 173 (allowing
circulation expenditures to be expensed) and 248 (allowing
organizational expenditures to be amortized) do not apply.
(6) Inventory must be calculated using the FIFO, rather
than LIFO, method.
(7) The installment sales method generally may not be used.
(8) No loss may be recognized on the exchange of any pool
of debt obligations for another pool of debt obligations having
substantially the same effective interest rates and maturities.
(9) Depletion (other than depletion claimed by an
independent producer after 1992) must be calculated using the
cost, rather than the percentage, method; and
(10) In certain cases, the assets of a corporation that has
undergone an ownership change must be stepped-down to their
fair market values.
Other rules
The combination of the taxpayer's net operating loss
carryover and foreign tax credits cannot reduce the taxpayer's
AMT by more than 90 percent of the amount determined without
these items.
The various credits allowed under the regular tax generally
are not allowed against the AMT.
If a taxpayer is subject to AMT in any year, such amount of
tax is allowed as a credit in any subsequent taxable year to
the extent the taxpayer's regular tax liability exceeds its
tentative minimum tax in such subsequent year. If the taxpayer
is an individual, this credit is allowed to the extent the
taxpayer's AMT liability is a result of adjustments that are
timing in nature.
Reasons for Change
The Committee believes that the AMT inhibits capital
formation and business enterprise. Therefore, the bill repeals
the business-related adjustments and preferences contained in
the present-law AMT with respect to new investment and
prospective transactions. In addition, the Committee believes
that the AMT is administratively complex. Therefore, the bill
completely repeals the corporate AMT after an initial phase-in
period so that corporate taxpayers would not be required to
maintain AMT records for the few remaining adjustments relating
to pre-effective date investments.
Explanation of Provision
Repeal of the corporate alternative minimum tax
The bill repeals the corporate AMT for taxable years
beginning after December 31, 2000. In addition, as described
below, the bill makes certain changes to the individual AMT,
and to the corporate AMT for taxable years beginning before
January 1, 2001.\39\ The individual AMT, as amended by the
bill, will remain in existence.
\39\ These changes made to the corporate AMT will also apply for
purposes of section 59A.
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Preference items in computing AMTI
The bill makes the following changes to the minimum tax
preference items:
(1) The preference relating to depletion is repealed for
depletion claimed in taxable years beginning after December 31,
1995.
(2) The preference relating to excess intangible drilling
costs is repealed for costs incurred in taxable years beginning
after December 31, 1995.
(3) The preference relating to bad debt losses of financial
institutions is repealed for taxable years beginning after
December 31, 1995.
(4) In the case of a corporation (other than an S
corporation, regulated investment company, real estate
investment trust, or REMIC), the preference relating to tax-
exempt interest on private activity bonds is repealed for
interest accruing after December 31, 1995.
In addition, Code section 58 (relating to tax shelter farm
activity and passive losses) is repealed for taxable years
beginning after December 31, 1995. An individual that has a
loss from a tax shelter farm activity arising in a taxable year
beginning after December 31, 1995, (or arising in prior year
and being carried forward), may use such loss in computing the
individual's AMTI for a taxable year beginning after December
31, 1995 (to the extent such loss is otherwise allowable after
taking into account such limitations as the passive activity
and at-risk rules). The bill moves the passive activity rules
of present-law section 58 to section 59(h).
Adjustments in computing AMTI
The bill makes the following changes to the adjustments
used in computing AMTI:
(1) The adjustment relating to depreciation is repealed for
property placed in service after March 13, 1995. Under another
provision of the bill, property to which the proposed neutral
cost recovery system applies is not subject to the AMT
depreciation adjustment. The neutral cost recovery system
generally applies to qualified property placed in service after
December 31, 1994, unless the taxpayer irrevocably elects, on a
property-by-property basis, to not have the system apply.
(2) The adjustment relating to mining exploration and
development costs is repealed for costs paid or incurred after
December 31, 1995.
(3) The adjustment relating to long-term contracts is
repealed for contracts entered into after December 31, 1995.
(4) The adjustment relating to pollution control facilities
is repealed for property placed in service after December 31,
1995.
(5) The adjustment relating to installment sales is
repealed for dispositions after December 31, 1995.
(6) The adjustments relating to circulation and research
and experimental expenditures of individuals is repealed for
costs paid or incurred after December 31, 1995.
(7) The adjustment relating to Merchant Marine capital
construction funds of corporations is repealed for deposits
made to a fund after December 31, 1995, and to earnings
received or accrued after December 31, 1995, on amounts in such
funds. Withdrawals of deposits and earnings from a fund after
December 31, 1995, will be treated as allocable: (a) first to
deposits (and earnings received or accrued) before January 1,
1987; (b) then, to deposits (and earnings received or accrued)
after December 31, 1986, and before January 1, 1996; and (c)
then, to deposits (and earnings received or accrued) after
December 31, 1995.
(8) The denial of the special deduction allowed under
section 833(b) is repealed for taxable years beginning after
December 31, 1995.
Adjusted current earnings (ACE) adjustment
The bill makes the following changes to the ACE adjustment
of the corporate AMT:
(1) The ACE rules relating to the inclusion (or deduction)
of items included (or excluded) from the calculation of
earnings and profits are repealed for taxable years beginning
after December 31, 1995.
(2) The ACE adjustment relating to intangible drilling
costs is repealed for amounts paid or incurred after December
31, 1995.
(3) The ACE adjustments relating to section 173 and section
248 costs are repealed for amounts paid or incurred after
December 31, 1995.
(4) The ACE adjustment relating to LIFO inventory is
repealed for LIFO adjustments arising in taxable years
beginning after December 31, 1995.
(5) The ACE adjustment relating to installment sales is
repealed for sales after December 31, 1995.
(6) The ACE adjustment relating to the exchange of debt
pools is repealed for exchanges after December 31, 1995.
(7) The ACE adjustment relating to built-in losses with
respect to certain changes of ownership is repealed for
ownership changes after December 31, 1995.
(8) The ACE adjustment relating to depletion is repealed
for depletion allowed in taxable years beginning after December
31, 1995.
Use of credits
The special rules relating to the use of net operating
losses and foreign tax credits are repealed for net operating
losses and foreign tax credits used in taxable years beginning
after December 31, 1995. Carrybacks of losses and credits to
taxable years beginning before January 1, 1996, continue to be
subject to the 90-percent limitations.
The bill does not change the rules regarding the
availability of other credits against the AMT.
For taxable years beginning after December 31, 1995, a
taxpayer with alternative minimum tax credit carryovers is
allowed to use these credits to offset 90 percent of its
regular tax liability (determined after the application of
other credits as under present law). As under present law, in
no event may alternative minimum tax credit carryovers be used
to reduce the taxpayer's tax liability below its tentative
minimum tax, if any.
Effective Date
Except as provided above, the provision is effective for
taxable years beginning after December 31, 1995.
D. Public Debt Reduction Checkoff and Trust Fund (secs. 341 and 342 of
the bill and new secs. 6097 and 9512 of the Code)
Present Law
The Presidential Election Campaign Fund (``Campaign Fund'')
provides for public financing of a portion of qualified
Presidential election campaign expenditures and certain
convention costs (sec. 9001 et seq.) The Campaign Fund is
financed through the voluntary designation by individual
taxpayers on their Federal income tax returns of $3 of tax
liability, which is commonly known as the Presidential election
campaign checkoff (sec. 6096). This checkoff can be made only
by individuals (not corporations) and does not affect the
individual's tax liability.\40\ The Treasury Department
accumulates revenues in the Campaign Fund over a four-year
period and then disburses funds to eligible candidates for
President, Vice President, and conventions during the
Presidential election year.\41\
\40\ Prior to enactment of the Revenue Reconciliation Act of 1993,
individuals could designate $1 of their Federal income tax liability to
the Campaign Fund. For calendar year 1992, 20.5 million returns, or 18
percent of the total number of individual income tax returns,
designated a total of $29.6 million in contributions to the Campaign
Fund. See Statement of Maurice B. Foley, Deputy Tax Legislative Counsel
(Tax Legislation), Department of the Treasury, before the Ways and
Means Subcommittee on Select Revenue Measures, U. S. House of
Representatives, November 16, 1993.
\41\ A number of States provide checkoffs on their income tax forms
to permit taxpayers to fund State electoral campaigns, private
charitable organizations, and State governmental programs. Some of the
State programs require taxpayers to pay additional amounts to exercise
the checkoff option, generally by accepting a smaller refund.
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Individuals who itemize deductions (as well as
corporations) are allowed a deduction, subject to certain
limitations, for contributions made to qualified charitable
organizations or to Federal, State, and local governments.
Instructions to IRS income tax forms inform taxpayers that they
may make a gift to the Federal Government to reduce the public
debt by enclosing with their return a separate check made
payable to the ``Bureau of Public Debt.'' In addition, various
public laws provide that contributions to specific Federal
entities or programs are regarded as gifts to the United
States. Such contributions to the Bureau of Public Debt and to
specific Federal entities or programs are deductible if the
donor itemizes deductions for the year in which the
contribution is made.
Reasons for Change
The Committee believes that eliminating the Federal budget
deficit and reducing the outstanding public debt is crucial to
the nation's long-term economic growth. It is, therefore,
appropriate to give taxpayers a more direct voice in the
Federal budget process and to impose additional discipline on
spending by the Federal government. The provision will allow
taxpayers to earmark funds to reduce the current Federal
deficit, which will reduce government borrowing and increase
funds available for private investment, thereby contributing to
long-term economic growth. If taxpayers elect to designate
sufficient amounts under the provision to reduce the
outstanding national debt, the interest expense of the Federal
government would be reduced, permitting government funds
otherwise needed to pay interest charges to be used for other
public purposes. Reducing the outstanding national debt also
will lessen the tax burden on future generations.
Explanation of Provision
Individual taxpayers will be allowed to designate an amount
up to 10 percent of their Federal income tax liability for a
taxable year to be earmarked to reduce the Federal public debt.
Such a designation may be made only at the time the taxpayer
files his or her income tax return for a particular taxable
year. An individual's decision whether or not to make a
designation under the provision will not affect his or her tax
liability. If an individual has no Federal income tax liability
for a taxable year--i.e, the individual owes no Federal income
tax after claiming allowable credits (other than the EITC) and
any designation to the Presidential Election Campaign Fund--
then such individual will not be allowed to make a designation
to reduce the Federal debt on his or her return for that year.
Under the bill, amounts earmarked by taxpayers to reduce
the public debt will be transferred into a Public Debt
Reduction Trust Fund, which will be used only to retire or
purchase Federal securities (other than obligations held by the
Social Security Trust Fund, the Civil Service Retirement and
Disability Fund, and the Department of Defense Military
Retirement Fund). Related provisions (outside the jurisdiction
of the Committee and, thus, not included in the bill) will
require either specific spending cuts or an across-the-board
sequestration in Federal spending (with certain exceptions) to
match the amounts designated by taxpayers for debt reduction.
Effective Date
The provision is effective for taxable years ending after
the date of enactment, and will remain in effect until the
entire outstanding Federal public debt is retired.
E. Small Business Incentives
1. Increase in unified estate and gift tax credit; indexing of certain
provisions (sec. 351 of the bill and secs. 2001(c), 2010,
2032A, 2102(c), 2503, 2505(a), 2631, 6018(a), and 6601(j) of
the Code)
Present Law
Application of the estate and gift tax
A gift tax is imposed on lifetime transfers and an estate
tax is imposed on transfers at death. Since 1976, the gift tax
and the estate tax have been 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.\42\ Under
this rate schedule, the unified estate and gift tax rates begin
at 18 percent on the first $10,000 in cumulative taxable
transfers and reach 55 percent on cumulative taxable transfers
over $3 million (sec. 2001(c)).
\42\ Prior to 1976, separate tax rate schedules applied to the
gift tax and the estate tax.
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The amount of gift tax payable for any calendar year
generally is determined by multiplying the applicable tax rate
(from the unified rate schedule) by the cumulative lifetime
taxable transfers made by the taxpayer and then subtracting any
gift taxes payable for prior taxable periods. This amount is
reduced by any available unified credit (and other applicable
credits) to determine the gift tax liability for the taxable
period.
The amount of estate tax payable generally is determined by
multiplying the applicable tax rate (from the unified rate
schedule) by the cumulative post-1976 taxable transfers made by
the taxpayer during his lifetime or at death and then
subtracting any gift taxes payable for prior calendar years
(after 1976). This amount is reduced by any available unified
credit (and other applicable credits) to determine the estate
tax liability.
Unified credit
A unified credit is available with respect to taxable
transfers by gift and at death. Since 1987, the unified credit
amount has been fixed at $192,800 (sec. 2010), which
effectively exempts a total of $600,000 in cumulative taxable
transfers from the estate and gift tax. The benefits of the
unified credit (and the graduated estate and gift tax rates)
are phased-out by a 5-percent surtax imposed upon cumulative
taxable transfers over $10 million and not exceeding
$21,040,000 (sec. 2001(c)(2)).\43\
\43\ Thus, if a taxpayer has made cumulative taxable transfers
exceeding $21,040,000, his or her average transfer tax rate will be 55
percent under present law.
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The unified credit originally was enacted in the Tax Reform
Act of 1976. As enacted, the credit was phased in over five
years to a level that effectively exempted $175,625 of taxable
transfers from the estate and gift tax in 1981 (i.e., a unified
credit of $47,000). The Economic Recovery Tax Act of 1981
increased the amount of the unified credit each year between
1982 and 1987, from an effective exemption of $225,000 in 1982
to an effective exemption of $600,000 in 1987. The unified
credit has not been increased since 1987.
Annual exclusion for gifts
A taxpayer may exclude $10,000 of gifts made to any one
donee during a calendar year (sec. 2503). This annual exclusion
does not apply to gifts of future interests (e.g., reversions
or remainders). Prior to 1982, the annual exclusion was $3,000.
Special use valuation
Generally, for Federal transfer tax purposes, the value of
property is its fair market value, i.e., the price at which the
property would change hands between a willing buyer and a
willing seller, neither being under any compulsion to buy or
sell and both having reasonable knowledge of relevant facts.
Under Code section 2032A, an executor may elect for estate tax
purposes to value certain ``qualified real property'' used in
farming or another qualifying closely-held trade or business at
its current use value, rather than its highest and best use
value. Currently, the maximum reduction in the value of such
real property resulting from an election under Code section
2032A is $750,000.
Generation-skipping transfer tax
A generation-skipping transfer tax (``GST 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 GST tax include direct
skips, taxable terminations and taxable distributions.\44\
\44\ For this purpose, a direct skip is any transfer subject to
estate or gift tax of an interest in property to a skip person (e.g., a
gift from grandparent to grandchild). 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 a direct skip).
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A person is allowed an exemption from the GST tax of up to
$1,000,000 for generation-skipping transfers made during life
or at death (sec. 2631).
Installment payment of estate tax
Under Code section 6166, an executor generally may elect to
pay the Federal estate tax attributable to an interest in a
closely held business in installments over, at most, a 14-year
period. To qualify for the election, the business must be an
active trade or business and the value of the decedent's
interest in the closely held business must exceed 35 percent of
the decedent's adjusted gross estate.
If an election is made, the estate pays only interest for
the first four years, followed by up to ten annual installments
of principal and interest. Interest is generally imposed at the
rate applicable to underpayments of tax under Code section 6621
(i.e., the Federal short term rate plus three percentage
points). Under Code section 6601(j), however, a special 4-
percent interest rate applies to the amount of deferred estate
tax attributable to the first $1,000,000 in value of the
closely-held business. The maximum amount that may be subject
to the 4-percent rate is the lower of (1) $345,800 (i.e., the
amount of estate tax on the first $1,000,000), less the amount
of allowable unified credit, or (2) the amount of estate tax
attributable to the closely-held business that is being paid in
installments pursuant to Code section 6166.
Reasons for Change
The Committee believes that increasing the amount of the
estate and gift tax unified credit will encourage saving,
promote capital formation and entrepreneurial activity, and
help to preserve existing family-owned farms and businesses.
The Committee further believes that indexing the unified credit
exemption equivalent amount (as well as other similar amounts)
for inflation is appropriate to reduce the transfer tax
consequences that result from increases in asset value
attributable solely to inflation.
Explanation of Provisions
Increase in unified credit
The bill increases the present-law unified credit of
$192,800 to $248,300 over a three-year period beginning in
1996. For decedents dying and gifts made in 1996, the unified
credit is $229,800 (i.e., the amount that would effectively
exempt $700,000 in taxable transfers from the estate and gift
tax). For decedents dying and gifts made in 1997, the unified
credit is $239,050 (i.e., the amount that would effectively
exempt $725,000 in taxable transfers from the estate and gift
tax). For decedents dying and gifts made after 1997, the
unified credit is $248,300 (i.e., the amount that would
effectively exempt $750,000 in taxable transfers from the
estate and gift tax). After 1998, the unified credit is indexed
for inflation each year by multiplying the applicable exclusion
amount of $750,000 by a cost of living adjustment. The indexed
exclusion amount is rounded to the nearest $10,000.
To reflect the increase in the unified credit, the bill
also makes conforming amendments to (1) the 5-percent surtax in
order to permit the proper phase out of the increased unified
credit, (2) the general filing requirements for estate and gift
tax returns under Code section 6018(a), and (3) the amount of
the unified credit allowed under Code section 2102(c)(3) with
respect to nonresident aliens with U. S. situs property who are
residents of certain treaty countries.
Indexing of certain other provisions
In addition to increasing and indexing the unified credit,
the bill indexes the following amounts for inflation beginning
after 1998: (1) the $10,000 annual exclusion for gifts; (2) the
$750,000 ceiling amount on special use valuation under Code
section 2032A; (3) the $1,000,000 generation-skipping transfer
tax exemption; and (4) the value of a closely-held business
(i.e., $1,000,000) eligible for the special four-percent
interest rate under Code section 6601(j). Indexing of the
annual exclusion is rounded to the nearest $1,000 and indexing
of the other amounts is rounded to the nearest $10,000.
Effective Date
The provisions apply to the estates of decedents dying, and
gifts made, after December 31, 1995.
2. Increase in expensing for small businesses (sec. 352 of the bill and
sec. 179 of the Code)
Present Law
In lieu of depreciation, a taxpayer with a sufficiently
small amount of annual investment may elect to deduct up to
$17,500 of the cost of qualifying property placed in service
for the taxable year (sec. 179).\45\ 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. The $17,500 amount is reduced (but not below zero) by
the amount by which the cost of qualifying property placed in
service during the taxable year exceeds $200,000. In addition,
the amount eligible to be expensed for a taxable year may not
exceed the taxable income of the taxpayer for the 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).
\45\ The amount permitted to be expensed under Code section 179 is
increased by up to an additional $20,000 for certain property placed in
service by a business located in an empowerment zone (sec. 1397A).
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Reasons for Change
The Committee believes that section 179 expensing provides
two important benefits for small businesses. First, it lowers
the cost of capital for tangible property used in a trade or
business. Second, it eliminates depreciation recordkeeping
requirements with respect to expensed property. In order to
increase the value of these benefits, the Committee would,
after a phase-in period, double the amount allowed to be
expensed under section 179.
Explanation of Provision
The bill increases the $17,500 amount allowed to be
expensed under Code section 179 to $35,000. The increase is
phased in as follows:
Taxable year beginning in-- Maximum expensing
1996.................................................... $22,500
1997.................................................... 27,500
1998.................................................... 32,500
1999 and thereafter..................................... 35,000
Effective Date
The provision is effective for property placed in service
in taxable years beginning after December 31, 1995, subject to
the phase-in schedule set forth above.
3. Clarification of definition of principal place of business;
Treatment of storage of product samples (secs. 353 and 354 of
the bill and sec. 280A of the Code)
Present Law
A taxpayer's business use of his or her home may give rise
to a deduction for the business portion of expenses related to
operating the home (e.g., a portion of rent or depreciation and
repairs). Code section 280A(c)(1) provides, however, that
business deductions generally are allowed only with respect to
a portion of a home that is used exclusively and regularly in
one of the following ways: (1) as the principal place of
business for a trade or business; (2) as a place of business
used to meet with patients, clients, or customers in the normal
course of the taxpayer's trade or business; or (3) in
connection with the taxpayer's trade or business, if the
portion so used constitutes a separate structure not attached
to the dwelling unit. In the case of an employee, the Code
further requires that the business use of the home must be for
the convenience of the employer (sec. 280A(c)(1)).\46\ These
rules apply to houses, apartments, condominiums, mobile homes,
boats, and other similar property used as the taxpayer's home
(sec. 280A(f)(1)). Under Internal Revenue Service (IRS)
rulings, the deductibility of expenses incurred for local
transportation between a taxpayer's home and a work location
sometimes depends on whether the taxpayer's home office
qualifies under section 280A(c)(1) as a principal place of
business (see Rev. Rul. 94-47, 1994-29 I.R.B. 6).
\46\ If an employer provides access to suitable space on the
employer's premises for the conduct by an employee of particular
duties, then, if the employee opts to conduct such duties at home as a
matter of personal preference, the employee's use of the home office is
not ``for the convenience of the employer.'' See, e.g., W. Michael
Mathes, (1990) T.C. Memo 1990-483.
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Prior to 1976, expenses attributable to the business use of
a residence were deductible whenever they were ``appropriate
and helpful'' to the taxpayer's business. In 1976, Congress
adopted section 280A, in order to provide a narrower scope for
the home office deduction, but did not define the term
``principal place of business.'' In Commissioner v. Soliman,
113 S. Ct. 701 (1993), the Supreme Court reversed lower court
rulings and upheld an IRS interpretation of section 280A that
disallowed a home office deduction for a self-employed
anesthesiologist who practiced at several hospitals but was not
provided office space at the hospitals. Although the
anesthesiologist used a room in his home exclusively to perform
administrative and management activities for his profession
(i.e., he spent two or three hours a day in his home office on
bookkeeping, correspondence, reading medical journals, and
communicating with surgeons, patients, and insurance
companies), the Supreme Court upheld the IRS position that the
``principal place of business'' for the taxpayer was not the
home office, because the taxpayer performed the ``essence of
the professional service'' at the hospitals.\47\ Because the
taxpayer did not meet with patients at his home office and the
room was not a separate structure, a deduction was not
available under the second or third exception under section
280A(c)(1) (described above).
\47\ In response to the Supreme Court's decision in Soliman, the
IRS revised its ``Publication 587, Business Use of Your Home,'' to more
closely follow the comparative analysis used in Soliman by focusing on
the following two primary factors in determining whether a home office
is a taxpayer's principal place of business: (1) the relative
importance of the activities performed at each business location; and
(2) the amount of time spent at each location.
Section 280A(c)(2) contains a special rule that allows a
home office deduction for business expenses related to a space
within a home that is used on a regular (even if not exclusive)
basis as a storage unit for the inventory of the taxpayer's
trade or business of selling products at retail or wholesale,
but only if the home is the sole fixed location of such trade
or business.
Home office deductions may not be claimed if they create
(or increase) a net loss from a business activity, although
such deductions may be carried over to subsequent taxable years
(sec. 280A(c)(5)).
Reasons for Change
The Committee believes that the Supreme Court's decision in
Soliman unfairly denies a home office deduction to a growing
number of taxpayers who manage their business activities from
their homes. Thus, the statutory modification adopted by the
Committee will reduce the present-law bias in favor of
taxpayers who manage their business activities from outside
their home, thereby enabling more taxpayers to work efficiently
at home, save commuting time and expenses, and spend additional
time with their families. Moreover, the statutory modification
is an appropriate response to the computer and information
revolution, which has made it more practical for taxpayers to
manage trade or business activities from a home office.
The Committee also believes that present-law section
280A(c)(2) should be clarified so that taxpayers who sell
products at retail or wholesale, and regularly store such
products at home, need not attempt to distinguish between
inventory and product samples. This clarification will simplify
the administration of present-law section 280A(c)(2).
Explanation of Provisions
Definition of principal place of business
The bill amends present-law section 280A to specifically
provide that a home office qualifies as the ``principal place
of business'' if (1) the office is used by the taxpayer to
conduct administrative or management activities of a trade or
business and (2) there is no other fixed location of the trade
or business where the taxpayer conducts substantial
administrative or management activities of the trade or
business. As under present law, deductions will be allowed for
a home office meeting the above two-part test only if the
office is exclusively used on a regular basis as a place of
business by the taxpayer, and in the case of an employee, only
if such exclusive use is for the convenience of the employer.
Thus, under the bill, a home office deduction will be
allowed (subject to the present-law ``convenience of the
employer'' rule governing employees) if a portion of a
taxpayer's home is exclusively and regularly used to conduct
administrative or management activities for a trade or business
of the taxpayer, who does not conduct substantial
administrative or management activities at any other fixed
location of the trade or business, regardless of whether
administrative or management activities connected with his
trade or business (e.g., billing activities) are performed by
others at other locations. The fact that a taxpayer also
carries out administrative or management activities at sites
that are not fixed locations of the business, such as a car or
hotel room, will not affect the taxpayer's ability to claim a
home office deduction under the provision. Moreover, if a
taxpayer conducts some administrative or management activities
at a fixed location of the business outside the home, the
taxpayer still will be eligible to claim a deduction so long as
the administrative or management activities conducted at any
fixed location of the business outside the home are not
substantial (e.g., the taxpayer occasionally does minimal
paperwork at another fixed location of the business). In
addition, a taxpayer's eligibility to claim a home office
deduction under the provision will not be affected by the fact
that the taxpayer conducts substantial non-administrative or
non-management business activities at a fixed location of the
business outside the home (e.g., meeting with, or providing
services to, customers, clients, or patients at a fixed
location of the business away from home).
If a taxpayer in fact does not perform substantial
administrative or management activities at any fixed location
of the business away from home, then the second prong of the
provision is satisfied, regardless of whether or not the
taxpayer opted not to use an office away from home that was
available for the conduct of such activities. However, in the
case of an employee, the question whether an employee opted not
to use suitable space made available by the employer for
administrative activities is relevant to determining whether
the present-law ``convenience of the employer'' test is
satisfied (see footnote 46 supra). In cases where a taxpayer's
use of a home office does not satisfy the provision's two-part
test, the taxpayer nonetheless may be able to claim a home
office deduction under the present-law ``principal place of
business'' exception or any other provision of section 280A.
Treatment of storage of product samples
In addition, the bill clarifies that the special rule
contained in present-law section 280A(c)(2) permits deductions
for expenses related to a storage unit in a taxpayer's home
regularly used for inventory or product samples (or both) of
the taxpayer's trade or business of selling products at retail
or wholesale, provided that the home is the sole fixed location
of such trade or business.
Effective Date
The provisions apply to taxable years beginning after
December 31, 1995.
TITLE IV. FAMILY REINFORCEMENT
A. Tax Credit for Adoption Expenses (sec. 401 of the bill and new sec.
25 of the Code)
Present Law
Present law does not provide a tax credit for adoption
expenses. The Federal Adoption Assistance program (a Federal
outlay program) provides financial assistance for the adoption
of certain special needs children. In general, a special needs
child is defined as a child who (1) according to a State
determination, could not or should not be returned to the home
of the natural parents and (2) on account of a specific factor
or condition (such as ethnic background, age, membership in a
minority or sibling group, medical condition, or physical,
mental or emotional handicap), could not reasonably be expected
to be adopted unless adoption assistance is provided.
Specifically, the program provides assistance for adoption
expenses for those special needs children receiving Federally
assisted adoption assistance payments as well as special needs
children in private and State-funded programs. The maximum
Federal reimbursement is $1,000 per special needs child.
Reimbursable expenses include those nonrecurring costs directly
associated with the adoption process such as legal costs,
social service review, and transportation costs. \48\
\48\ H.R. 1157 (``Welfare Transformation Act of 1995''), as
reported by the House Committee on Ways and Means, would replace the
Federal Adoption Assistance Program with a block grant to the States
(H. Rept. 104-81, March 15, 1995).
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Reasons for Change
The Committee believes that the financial costs of the
adoption process should not be a barrier to adoptions. The
Committee wishes to encourage further the adoption of special
needs children therefore a tax credit is allowed in addition to
any grant money received for the adoption expenses associated
with the adoption of special needs children.
Explanation of Provision
The bill provides taxpayers with a maximum credit against
income tax liability of $5,000 per child for qualified adoption
expenses paid or incurred by the taxpayer. Qualified adoption
expenses are reasonable and necessary adoption fees, court
costs, attorneys' fees and other expenses that are directly
related to, and the principal purpose of which, are the legal
adoption of an eligible child. An eligible child is an
individual (1) who has not attained age 18 as of the time of
the adoption, or (2) who is physically or mentally incapable of
caring for himself or herself. No credit is allowed for
expenses incurred (1) in violation of State or Federal law, (2)
in carrying out any surrogate parenting arrangement, or (3) in
connection with the adoption of a child of the taxpayer's
spouse. The credit is phased out ratably for taxpayers with
adjusted gross income (AGI) above $60,000 and is fully phased
out at $100,000 of AGI. For purposes of this AGI test, the
taxpayer's AGI is increased by the amount otherwise excluded
from gross income under Code sections 911, 931, or 933
(relating to the exclusion of income of U. S. citizens or
residents living abroad; residents of Guam, American Samoa, and
the Northern Mariana Islands, and residents of Puerto Rico,
respectively).
The $5,000 limit is a per child not an annual limitation.
For example, if a taxpayer incurs $3,000 of qualified adoption
expenses in year one and $3,000 of qualified adoption expenses
in year two, then the taxpayer will receive a $3,000 credit in
year one and a $2,000 credit in year two. Further, the credit
is not limited to successful adoptions so the taxpayer in the
above example will receive the credit regardless of whether the
adoption is completed.
To avoid a double benefit, the bill denies the credit to
taxpayers to the extent the taxpayer may use otherwise
qualified adoption expenses as the basis of another credit or
deduction. Also, except in the case of special needs children,
the credit is not allowed for any expenses for which a grant is
received under any Federal, State, or local program. A special
needs child is a child who the State has determined: (1) cannot
or should not be returned to the home of the parents, and (2)
has a specific factor or condition because of which the child
cannot be placed with adoptive parents without adoption
assistance. Examples of factors or conditions are the child's
ethnic background, age, membership in a minority or sibling
group, medical conditions, or physical, mental, or emotional
handicaps.
The bill provides that individuals who are married at the
end of the taxable year must file a joint return to receive the
credit unless they lived apart from their spouse for the last
six months of the taxable year and the individual claiming the
credit (1) maintained as his or her home a household for the
child for more than one-half of the taxable year and (2)
furnished over one-half of the cost of maintaining that
household in that taxable year. Finally, the bill provides that
an individual legally separated from his spouse under a decree
of divorce or separate maintenance is not considered married
for purposes of this provision.
Effective Date
The provision is effective for taxable years beginning
after December 31, 1995.
B. Tax Credit for Custodial Care of Certain Elderly Family Members in
Taxpayer's Home (sec. 402 of the bill and new sec. 25B of the Code)
Present Law
Generally, present law does not provide for tax credits
based solely on custodial care of parents or grandparents.
However, taxpayers with dependent parents generally are able to
claim a personal exemption for these dependents. The total
amount of personal exemptions is subtracted (along with certain
other items) from adjusted gross income (AGI) in arriving at
taxable income. The amount of each personal exemption is $2,500
for 1995, and is adjusted annually for inflation. The amount of
the personal exemption is phased out for taxpayers with AGI in
excess of $114,700 for single taxpayers, $143,350 for heads of
household, and $172,050 for married couples filing joint
returns.
Reasons for Change
The Committee believes that it is appropriate to provide
some relief to families providing for elderly and incapacitated
family members. Further, the Committee believes that the
provision will encourage homecare rather than
institutionalization of these family members.
Explanation of Provision
The bill provides taxpayers who maintain a household
including one or more ``qualified persons'' with a maximum
credit against income tax liability of $500 for each qualified
person.
To be a ``qualified person,'' an individual has to satisfy:
(1) a relationship test, (2) a residency test, (3) a disability
test, and (4) an identification test. The individual satisfies
the relationship test if the individual is the father or mother
of: (a) the taxpayer, (b) the taxpayer's spouse, or (c) a
former spouse of the taxpayer. A stepfather, stepmother, and
ancestors of the father or mother are treated as a father or
mother for these purposes.
An individual satisfies the residency test if the
individual has the same principal place of abode as the
taxpayer for more than one-half of the taxpayer's taxable year.
An individual satisfies the disability test if the
individual is physically or mentally incapable of caring for
himself or herself. This disability test should operate in the
same manner as the disability test in section 21 of the Code
(the credit based on expenses for household and dependent care
services necessary for gainful employment).
An individual satisfies the identification test if the
individual's name and taxpayer identification number (TIN) are
included on the taxpayer's return for the taxable year.
The bill provides that an individual is treated as
maintaining a household for any period only if over one-half of
the cost of maintaining a household for such period is
furnished by such individual or, if such individual is married,
by such individual and his or her spouse. The bill also
provides that individuals who are married at the end of the
taxable year must file a joint return to receive the credit
unless they lived apart from their spouse for the last six
months of the taxable year and the individual claiming the
credit (1) maintained as his or her home a household for the
qualified person for more than one-half of the taxable year and
(2) furnished over one-half of the cost of maintaining that
household in that taxable year. Finally, the bill provides that
an individual legally separated from his or her spouse under a
decree of divorce or of separate maintenance is not considered
married for purposes of this provision.
Effective Date
The provision is effective for taxable years beginning
after December 31, 1995.
TITLE V. INCREASE IN THE SOCIAL SECURITY EARNINGS LIMIT (sec. 501 of
the bill)
Present Law
Under present law, senior citizens age 70 and older receive
full Social Security benefits regardless of the amount of
earnings they have from wages or self employment. Senior
citizens between age 65 and 69 are eligible for full benefits
only if their earnings are lower than the earnings limit amount
determined by law. In 1995, the annual earnings limit for those
age 65 to 69 is $11,280. The earnings limit amount is indexed
and increases annually in proportion to the rate of average
wage growth in the economy.
Earnings limit
Calendar year Present law
1996.................................................... $11,640
1997.................................................... 11,880
1998.................................................... 12,240
1999.................................................... 12,720
2000.................................................... 13,200
Senior citizens age 65 to 69 who earn more than the
earnings limit lose $1 in Social Security benefits for every $3
in wages or self employment income they earn over the limit.
The substantial gainful activity (SGA) amount applicable to
individuals who are eligible for Social Security disability
benefits on the basis of blindness is currently linked to the
monthly earnings limit exempt amount for those age 65 to 69.
The 1995 monthly amount is $940, wage-indexed in the future.
For individuals eligible for Social Security disability based
on severe disabilities other than blindness, the SGA amount is
$500 per month and is not wage-indexed.
Reasons for Change
The current earnings limit has been shown to act as a
disincentive to skilled older workers, who would otherwise
choose to remain productively employed. In particular, the
earnings limit imposes a hardship on middle and lower-income
retirees, who often rely on earnings from work to supplement
their Social Security benefits. These middle and lower income
retirees often have little or no other income, such as pensions
or investments, to supplemental their Social Security benefits.
Given the combined effects of Federal, State and local
income taxes, Social Security payroll tax, tax on benefits, and
the earnings limit, senior citizens who earn even moderate
amounts over the earnings limit can be subjected to extremely
high marginal tax rates, rates far greater than those paid by
younger workers with incomes at the same level.
Raising the earnings limit would also ease the
administrative burdens of the Social Security Administration
(SSA), which spends over $200 million a year to monitor and
update the earnings limit. SSA estimates that 60 percent of all
overpayments, and 45 percent of all underpayments, result from
the earnings limit.
Explanation of Provision
The bill will gradually raise the earnings limit for those
age 65 to 69 to $30,000 by the year 2000. The increase will be
phased in over 5 years as follows:
Earnings limit
Calendar Year Under the bill
1996.................................................... 15,000
1997.................................................... 19,000
1998.................................................... 23,000
1999.................................................... 27,000
2000.................................................... 30,000
After 2000, the exempt amount will be increased
automatically based on increases in average wages.
Senior citizens age 65 to 69 who earn over the given
earnings limit for the year will continue to lose $1 in
benefits for every $3 earned over the limit.
The substantial gainful activity (SGA) amount applicable to
individuals who are eligible for Social Security disability
benefits on the basis of blindness will no longer be linked to
the earnings limit exempt amount for those age 65 to 69. As
under present law, the SGA amount for blind individuals will
continue to be wage-indexed in the future.
Effective Date
The provision applies to taxable years beginning after
1995.
TITLE VI. TAX TECHNICAL CORRECTIONS
The technical corrections title contains clerical,
conforming and clarifying amendments to the provisions enacted
by the Revenue Reconciliation Act of 1990, the Revenue
Reconciliation Act of 1993, and other recently enacted
legislation. All amendments made by this title are meant to
carry out the intent of Congress in enacting the original
legislation. Therefore, no separate ``Reasons for Change'' is
set forth for each individual amendment. Except as otherwise
described, the amendments made by the technical corrections
title take effect as if included in the original legislation to
which each amendment relates.
A. Technical Corrections to the Revenue Reconciliation Act of 1990
1. Excise tax provisions
a. Application of the 2.5-cents-per-gallon tax on fuel used
in rail transportation to States and local
governments (sec. 602(b)(2) of the bill, sec.
11211(b)(4) of the 1990 Act, and sec. 4093 of the
Code)
Present Law
The 1990 Act increased the highway and motorboat fuels
taxes by 5 cents per gallon, effective on December 1, 1990. The
1990 Act continued the exemption from these taxes for fuels
used by States and local governments.
The 1990 Act further imposed a 2.5-cents-per-gallon tax on
fuel used in rail transportation, also effective on December 1,
1990. Because of a drafting error, the 2.5-cents-per-gallon tax
on fuel used in rail transportation incorrectly applies to fuel
used by States and local governments.
Explanation of Provision
The bill clarifies that the 2.5-cents-per-gallon tax on
fuel used in rail transportation does not apply to such uses by
States and local governments.
b. Small winery production credit and bonding requirements
(secs. 602(b)(5), (6), and (7) of the bill, sec.
11201 of the 1990 Act, and sec. 5041 of the Code)
Present Law
A 90-cents-per-gallon credit is allowed to wine producers
who produce no more than 250,000 gallons of wine in a year. The
credit may be claimed against the producers' excise or income
taxes.
Wine producers must post a bond in amounts determined by
reference to expected excise tax liability as a condition of
legally operating.
Explanation of Provision
The bill clarifies that wine produced by eligible small
wineries may be transferred without payment of tax to bonded
warehouses that become liable for payment of the wine excise
tax without losing credit eligibility. In such cases, the
bonded warehouse will be eligible for the credit to the same
extent as the producer otherwise would have been.
The bill further clarifies that the Treasury Department has
broad regulatory authority to prevent the benefit of the credit
from accruing (directly or indirectly) to wineries producing in
excess of 250,000 gallons in a calendar year.
It is intended that the Treasury regulatory authority will
extend to all circumstances in which wine production is
increased with a purpose of securing indirect credit
eligibility for wine produced by such large producers.
The bill also clarifies that the Treasury Department may
take the amount of credit expected to be claimed against a
producer's wine excise tax liability into account in
determining the amount of required bond.
2. Other revenue-increase provisions of the 1990 Act
a. Deposits of Railroad Retirement Tax Act taxes (sec.
602(c)(3) of the bill, sec. 11334 of the 1990 Act,
and sec. 6302(g) of the Code)
Present Law
Employers must deposit income taxes withheld from
employees' wages and FICA taxes that are equal to or greater
than $100,000 by the close of the next banking day. Under the
Railroad Retirement Solvency Act of 1983, the deposit rules for
withheld income taxes and FICA taxes automatically apply to
Railroad Retirement Tax Act taxes (sec. 226 of P. L. 98-76).
Explanation of Provision
The bill conforms the Internal Revenue Code to the Railroad
Retirement Solvency Act of 1983 by stating in the Code that
these deposit rules for withheld income taxes and FICA taxes
apply to Railroad Retirement Tax Act taxes.
b. Treatment of salvage and subrogation of property and
casualty insurance companies (sec. 602(c)(4) of the
bill and sec. 11305 of the 1990 Act)
Present Law
For taxable years beginning after December 31, 1989,
property and casualty insurance companies are required to
reduce the deduction allowed for losses incurred (both paid and
unpaid) by estimated recoveries of salvage and subrogation
attributable to such losses. In the case of any property and
casualty insurance company that took into account estimated
salvage and subrogation recoverable in determining losses
incurred for its last taxable year beginning before January 1,
1990, 87 percent of the discounted amount of the estimated
salvage and subrogation recoverable as of the close of the last
taxable year beginning before January 1, 1990, is allowed as a
deduction ratably over the first 4 taxable years beginning
after December 31, 1989. This special deduction was enacted in
order to provide such property and casualty insurance companies
with substantially the same Federal income tax treatment as
that provided to those property and casualty insurance
companies that prior to the Revenue Reconciliation Act of 1990
did not take into account estimated salvage and subrogation
recoverable in determining losses incurred.
Explanation of Provision
The bill provides that the earnings and profits of any
property and casualty insurance company that took into account
estimated salvage and subrogation recoverable in determining
losses incurred for its last taxable year beginning before
January 1, 1990, is to be determined without regard to the
special deduction that is allowed over the first 4 taxable
years beginning after December 31, 1989. The special deduction
is to be taken into account, however, in determining earnings
and profits for purposes of applying sections 56, 902, and
subpart F of part III of subchapter N of chapter 1 of the
Internal Revenue Code of 1986. This provision is considered
necessary in order to provide those property and casualty
insurance companies that took into account estimated salvage
and subrogation recoverable in determining losses incurred with
substantially the same Federal income tax treatment as that
provided to those property and casualty insurance companies
that prior to the 1990 Act did not take into account estimated
salvage and subrogation recoverable in determining losses
incurred.
c. Information with respect to certain foreign-owned or
foreign corporations: Suspension of the statute of
limitations during certain judicial proceedings
(sec. 602(c)(5) of the bill, secs. 11314 and 11315
of the 1990 Act, and secs. 6038A and 6038C of the
Code)
Present Law
Any domestic corporation that is 25-percent owned by one
foreign person is subject to certain information reporting and
recordkeeping requirements with respect to transactions carried
out directly or indirectly with certain foreign persons treated
as related to the domestic corporation (``reportable
transactions'') (sec. 6038A(a)). In addition, the Code provides
procedures whereby an IRS examination request or summons with
respect to reportable transactions can be served on foreign
related persons through the domestic corporation (sec.
6038A(e)). Similar provisions apply to any foreign corporation
engaged in a trade or business within the United States, with
respect to information, records, examination requests, and
summonses pertaining to the computation of its liability for
tax in the United States (sec. 6038C). Certain noncompliance
rules may be applied by the Internal Revenue Service in the
case of the failure by a domestic corporation to comply with a
summons pertaining to a reportable transaction (a ``6038A
summons'') (sec. 6038A(e)), or the failure by a foreign
corporation engaged in a U.S. trade or business to comply with
a summons issued for purposes of determining the foreign
corporation's liability for tax in the United States (a ``6038C
summons'') (sec. 6038C(d)).
Any corporation that is subject to the provisions of
section 6038A or 6038C has the right to petition a Federal
district court to quash a 6038A or 6038C summons, or to review
a determination by the IRS that the corporation did not
substantially comply in a timely manner with the 6038A or 6038C
summons (sec. 6038A(e)(4)(A) and (B); sec. 6038C(d)(4)). During
the period that either such judicial proceeding is pending
(including appeals), and for up to 90 days thereafter, the
statute of limitations is suspended with respect to any
transaction (or item, in the case of a foreign corporation) to
which the summons relates (secs. 6038A(e)(4)(D), 6038C(d)(4)).
The legislative history of the 1989 Act amendments to
section 6038A states that the suspension of the statute of
limitations applies to ``the taxable year(s) at issue.'' \49\
The legislative history of the 1990 Act, which added section
6038C to the Code, uses the same language.\50\
\49\ H. Rept. No. 247, 101st Cong., 1st Sess. 1301 (1989);
``Explanation of Provisions Approved by the Committee on October 3,
1989,'' Senate Finance Committee Print, 101st Cong., 1st Sess. 118
(October 12, 1989).
\50\ ``Legislative History of Ways and Means Democratic
Alternative,'' House Ways and Means Committee Print (WMCP: 101-37),
101st Cong., 2nd Sess. 58 (October 15, 1990); Report language submitted
by the Senate Finance Committee to the Senate Budget Committee on S.
3299, 136 Cong. Rec. S 15629, S 15700 (1990).
Explanation of Provision
The bill modifies the provisions in sections 6038A and
6038C that suspend the statute of limitations to clarify that
the suspension applies to any taxable year the determination of
the amount of tax imposed for which is affected by the
transaction or item to which the summons relates.
It is intended that, under the provision, a transaction or
item would affect the determination of the amount of tax
imposed for the taxable year directly at issue, as well as for
any taxable year indirectly affected through, for example, net
operating loss carrybacks or carryforwards. It is not intended
that, under the provision, a transaction or item would affect
the determination of the amount of tax imposed for any taxable
year other than the taxable year directly at issue solely by
reason of any similarity of issues involved. Similarly, it is
not intended that, under the provision, a transaction or item
would affect the determination of the amount of tax imposed on
any taxpayer unrelated to the taxpayer to whom the summons is
directed.
d. Rate of interest for large corporate underpayments
(secs. 602(c)(6) and (7) of the bill, sec. 11341 of
the 1990 Act, and sec. 6621(c) of the Code)
Present Law
The rate of interest otherwise applicable to underpayments
of tax is increased by two percent in the case of large
corporate underpayments (generally defined to exceed $100,000),
applicable to periods after the 30th day following the earlier
of a notice of proposed deficiency, the furnishing of a
statutory notice of deficiency, or an assessment notice issued
in connection with a nondeficiency procedure.
Explanation of Provision
The bill provides that an IRS notice that is later
withdrawn because it was issued in error does not trigger the
higher rate of interest. The bill also corrects an incorrect
reference to ``this subtitle''.
3. Research credit provision: Effective date for repeal of special
proration rule (sec. 602(d)(1) of the bill and sec. 11402 of
the 1990 Act)
Present Law
The Omnibus Budget Reconciliation Act of 1989 (``1989
Act'') effectively extended the research credit for nine months
by prorating certain qualified research expenses incurred
before January 1, 1991. The special rule to prorate qualified
research expenses applied in the case of any taxable year which
began before October 1, 1990, and ended after September 30,
1990. Under this special proration rule, the amount of
qualified research expenses incurred by a taxpayer prior to
January 1, 1991, was multiplied by the ratio that the number of
days in that taxable year before October 1, 1990, bears to the
total number of days in such taxable year before January 1,
1991. The amendments made by the 1989 Act to the research
credit (including the new method for calculating a taxpayer's
base amount) generally were effective for taxable years
beginning after December 31, 1989. However, this effective date
did not apply to the special proration rule (which applied to
any taxable year which began prior to October 1, 1990--
including some years which began before December 31, 1989--if
such taxable year ended after September 30, 1990).
Section 11402 of the Revenue Reconciliation Act of 1990
(``1990 Act'') extended the research credit through December
31, 1991, and repealed the special proration rule provided for
by the 1989 Act. Section 11402 of the 1990 Act was effective
for taxable years beginning after December 31, 1989. Thus, in
the case of taxable years beginning before December 31, 1989,
and ending after September 30, 1990 (e.g., a taxable year of
November 1, 1989 through October 31, 1990), the special
proration rule provided by the 1989 Act would continue to
apply.
Explanation of Provision
The bill repeals for all taxable years ending after
December 31, 1989, the special proration rule provided for by
the 1989 Act.
4. Energy tax provision: Alternative minimum tax adjustment based on
energy preferences (secs. 602(e)(1) and (4) of the bill, sec.
11531(a) of the 1990 Act, and former sec. 56(h) of the Code)
Present Law
In computing alternative minimum taxable income (and the
adjusted current earnings (ACE) adjustment of the alternative
minimum tax), certain adjustments are made to the taxpayer's
regular tax treatment for intangible drilling costs (IDCs) and
depletion. For certain taxable years, a special energy
deduction is also allowed. The special energy deduction is
initially determined by determining the taxpayer's (1)
intangible drilling cost preference and (2) the marginal
production depletion preference. The intangible drilling cost
preference is the amount by which the taxpayer's alternative
minimum taxable income would be reduced if it were computed
without regard to the adjustments for IDCs. The marginal
production depletion preference is the amount by which the
taxpayer's alternative minimum taxable income would be reduced
if it were computed without regard to depletion adjustments
attributable to marginal production. The intangible drilling
cost preference is then apportioned between (1) the portion of
the preference related to qualified exploratory costs and (2)
the remaining portion of the preference. The portion of the
preference related to qualified exploratory costs is multiplied
by 75 percent and the remaining portion is multiplied by 15
percent. The marginal production depletion preference is
multiplied by 50 percent. The three products described above
are added together to arrive at the taxpayer's special energy
deduction (subject to certain limitations).
The special energy deduction is not allowed to the extent
that it exceeds 40 percent of alternative minimum taxable
income determined without regard to either this special energy
deduction or the alternative tax net operating loss deduction.
Any special energy deduction amount limited by the 40-percent
threshold may not be carried to another taxable year. In
addition, the combination of the special energy deduction, the
alternative minimum tax net operating loss and the alternative
minimum tax foreign tax credit cannot generally offset, in the
aggregate, more than 90 percent of a taxpayer's alternative
minimum tax determined without such attributes.
The special energy deduction was repealed for taxable years
beginning after December 31, 1992.
Explanation of Provision
Interaction of special energy deduction with net operating loss and
investment tax credit
The bill clarifies that the amount of alternative tax net
operating loss that is utilized in any taxable year is to be
appropriately adjusted to take into account the amount of
special energy deduction claimed for that year. This operates
to preserve a portion of the alternative tax net operating loss
carryover by reducing the amount of net operating loss utilized
to the extent of the special energy deduction claimed, which if
unused, could not be carried forward.
In addition, the bill contains a similar provision which
clarifies that the limitation on the utilization of the
investment tax credit for purposes of the alternative minimum
tax is to be determined without regard to the special energy
deduction.
Interaction of special energy deduction with adjustment based on
adjusted current earnings
The bill provides that the ACE adjustment for taxable years
beginning in 1991 and 1992 is to be computed without regard to
the special energy deduction. Thus, the bill specifies that the
ACE adjustment is equal to 75 percent of the excess of a
corporation's adjusted current earnings over its alternative
minimum taxable income computed without regard to either the
ACE adjustment, the alternative tax net operating loss
deduction, or the special energy deduction.
5. Estate tax freezes (sec. 602(f) of the bill, sec. 11602 of the 1990
Act, and secs. 2701-2704 of the Code)
Present Law
Generally
The value of property transferred by gift or includible in
the decedent's gross estate is its fair market value. Fair
market value is generally the price at which the property would
change hands between a willing buyer and willing seller,
neither being under any compulsion to buy or sell and both
having reasonable knowledge of relevant facts (Treas. Reg. sec.
20.2031). Chapter 14 contains rules that supersede the willing
buyer, willing seller standard (Code secs. 2701-2704).
Preferred interests in corporations and partnerships
Valuation of retained interests
Scope.--Section 2701 provides special rules for valuing
certain rights retained in conjunction with the transfer to a
family member of an interest in a corporation or partnership.
These rules apply to any applicable retained interest held by
the transferor or an applicable family member immediately after
the transfer of an interest in such entity. An ``applicable
family member'' is, with respect to any transferor, the
transferor's spouse, ancestors of the transferor and the
spouse, and spouses of such ancestors.
An applicable retained interest is an interest with respect
to which there is one of two types of rights (``affected
rights''). The first type of affected right is a liquidation,
put, call, or conversion right, generally defined as any
liquidation, put, call, or conversion right, or similar right,
the exercise or nonexercise of which affects the value of the
transferred interest. The second type of affected right is a
distribution right \51\ in an entity in which the transferor
and applicable family members hold control immediately before
the transfer. In determining control, an individual is treated
as holding any interest held by the individual's brothers,
sisters and lineal descendants. A distribution right does not
include any right with respect to a junior equity interest.
\51\ Distribution right generally is a right to a distribution from
a corporation with respect to its stock, or from a partnership with
respect to a partner's interest in the partnership.
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Valuation.--Section 2701 contains two rules for valuing
applicable retained interests. Under the first rule, an
affected right other than a right to qualified payments is
valued at zero. Under the second rule any retained interest
that confers (1) a liquidation, put, call or conversion right
and (2) a distribution right that consists of the right to
receive a qualified payment is valued on the assumption that
each right is exercised in a manner resulting in the lowest
value for all such rights (the ``lowest value rule''). There is
no statutory rule governing the treatment of an applicable
retained interest that confers a right to receive a qualified
payment, but with respect to which there is no liquidation,
put, call or conversion right.
A qualified payment is a dividend payable on a periodic
basis and at a fixed rate under cumulative preferred stock (or
a comparable payment under a partnership agreement). A
transferor or applicable family member may elect not to treat
such a dividend (or comparable payment) as a qualified payment.
A transferor or applicable family member also may elect to
treat any other distribution right as a qualified payment to be
paid in the amounts and at the times specified in the election.
Inclusion in transfer tax base.--Failure to make a
qualified payment valued under the lowest value rule within
four years of its due date generally results in an inclusion in
the transfer tax base equal to the difference between the
compounded value of the scheduled payments over the compounded
value of the payments actually made. The Treasury Department
has regulatory authority to make subsequent transfer tax
adjustments in the transfer of an applicable retained interest
to reflect the increase in a prior taxable gift by reason of
section 2701.
Generally, this inclusion occurs if the holder transfers by
sale or gift the applicable retained interest during life or at
death. In addition, the taxpayer may, by election, treat the
payment of the qualified payment as giving rise to an inclusion
with respect to prior periods.
The inclusion continues to apply if the applicable retained
interest is transferred to an applicable family member. There
is no inclusion on a transfer of an applicable retained
interest to a spouse for consideration or in a transaction
qualifying for the marital deduction but subsequent transfers
by the spouse are subject to the inclusion. Other transfers to
applicable family members result in an immediate inclusion as
well as subjecting the transferee to subsequent inclusions.
Minimum value of residual interest
Section 2701 also establishes a minimum value for a junior
equity interest in a corporation or partnership. For
partnerships, a junior equity interest is an interest under
which the rights to income and capital are junior to the rights
of all other classes of equity interests.
Trusts and term interests in property
The value of a transfer in trust is the value of the entire
property less the value of rights in the property retained by
the grantor. Section 2702 provides that in determining the
extent to which a transfer of an interest in trust to a member
of the transferor's family is a gift, the value of an interest
retained by the transferor or an applicable family member is
zero unless such interest takes certain prescribed forms.
For a transfer with respect to a specified portion of
property, section 2702 applies only to such portion. The
section does not apply to the extent that the transfer is
incomplete.
Options and buy-sell agreements
A restriction upon the sale or transfer of property may
reduce its fair market value. Treasury regulations provide that
a restriction is to be disregarded unless the agreement
represents a bona fide business arrangement and not a device to
pass the decedent's shares to the natural objects of his bounty
for less than full and adequate consideration (Treas. Reg. sec.
20.2031-2(h)).
Section 2703 provides that for transfer tax purposes the
value of property is determined without regard to any option,
agreement or other right to acquire or use the property at less
than fair market value or any restriction on the right to sell
or use such property. Certain options are excepted from this
rule. To fall within the exception, the option, agreement,
right or restriction must (1) be a bona fide business
arrangement, (2) not be a device to transfer such property to
members of the decedent's family for less than full and
adequate consideration in money or money's worth, and (3) have
terms comparable to similar arrangements entered into by
persons in an arm's length transaction.
Explanation of Provision
Preferred interests in corporations and partnerships
Valuation
The bill provides that an applicable retained interest
conferring a distribution right to qualified payments with
respect to which there is no liquidation, put, call, or
conversion right is valued without regard to section 2701. The
bill also provides that the retention of such right gives rise
to potential inclusion in the transfer tax base. In making
these changes, it is understood that Treasury regulations could
provide, in appropriate circumstances, that a right to receive
amounts on liquidation of the corporation or partnership
constitutes a liquidation right within the meaning of section
2701 if the transferor, alone or with others, holds the right
to cause liquidation.
The bill modifies the definition of junior equity interest
by granting regulatory authority to treat a partnership
interest with rights that are junior with respect to either
income or capital as a junior equity interest. The bill also
modifies the definition of distribution right by replacing the
junior equity interest exception with an exception for a right
under an interest that is junior to the rights of the
transferred interest. As a result, section 2701 does not affect
the valuation of a transferred interest that is senior to the
retained interest, even if the retained interest is not a
junior equity interest.
The bill modifies the rules for electing into or out of
qualified payment treatment. A dividend payable on a periodic
basis and at a fixed rate under a cumulative preferred stock
held by the transferor is treated as a qualified payment unless
the transferor elects otherwise. If held by an applicable
family member, such stock is not treated as a qualified payment
unless the holder so elects.\52\ In addition, a transferor or
applicable family member holding any other distribution right
may treat such right as a qualified payment to be paid in the
amounts and at the times specified in the election.
\52\ With respect to gifts made in 1990, the provision provides
that this election may be made by the due date (including extensions)
of the transferor's gift tax return due for the first calendar year
after the date of enactment.
Inclusion in transfer tax base
The bill grants the Treasury Department regulatory
authority to make subsequent transfer tax adjustments to
reflect the inclusion of unpaid amounts with respect to a
qualified payment. This authority, for example, would permit
the Treasury Department to eliminate the double taxation that
might occur if, with respect to a transfer, both the inclusion
and the value of qualified payment arrearages were included in
the transfer tax base. It would also permit elimination of the
double taxation that might result from a transfer to a spouse,
who, under the statute, is both an applicable family member and
a member of the transferor's family.
The bill treats a transfer to a spouse falling under the
annual exclusion the same as a transfer qualifying for the
marital deduction. Thus, no inclusion would occur upon the
transfer of an applicable retained interest to a spouse, but
subsequent transfers by the spouse would be subject to
inclusion. The bill also clarifies that the inclusion continues
to apply if an applicable family member transfers a right to
qualified payments to the transferor.
The provision clarifies the consequences of electing to
treat a distribution as giving rise to an inclusion. Under the
bill, the election gives rise to an inclusion only with respect
to the payment for which the election is made. The inclusion
with respect to other payments is unaffected.
Trust and term interests in property
The bill conforms section 2702 to existing regulatory
terminology by substituting the term ``incomplete gift'' for
``incomplete transfer.'' In addition, the bill limits the
exception for incomplete gifts to instances in which the entire
gift is incomplete. The Treasury Department is granted
regulatory authority, however, to create additional exceptions
not inconsistent with the purposes of the section. This
authority, for example, could be used to except a charitable
trust that meets the requirements of section 664 and that does
not otherwise create an opportunity for transferring property
to a family member free of transfer tax.
6. Miscellaneous provisions
a. Conforming amendments to the repeal of the General
Utilities doctrine (secs. 602(g)(1) and (2) of the
bill, sec. 11702(e)(2) of the 1990 Act, and secs.
897(f) and 1248 of the Code)
Present Law
As a result of changes made by recent tax legislation, gain
is generally recognized on the distribution of appreciated
property by a corporation to its shareholders. The Technical
Corrections subtitle of the 1990 Act and technical correction
provisions in prior acts made various conforming amendments
arising out of these changes. For example, the 1990 Act made a
conforming change to section 355(c) to state the treatment of
distributions in section 355 transactions in the affirmative
rather than by reference to the provisions of section 311. In
addition, the Technical and Miscellaneous Revenue Act of 1988
(``1988 Act'') made a conforming change to section 1248(f) to
update the references to the nonrecognition provisions
contained in that subsection. One of the changes was to change
the reference to ``section 311(a)'' from ``section 311''.
Explanation of Provision
The bill makes three conforming changes to the Code with
respect to the repeal of the General Utilities doctrine.
First, section 1248(f) is amended to add a reference to
section 355(c)(1), which provides generally for the
nonrecognition of gain or loss on the distribution of stock or
securities in certain subsidiary corporations. This retains the
substance of the law as it existed before the conforming change
to section 355(c) made by the 1990 Act. This provision is not
intended to affect the authority of the Secretary of the
Treasury to issue regulations under section 1248(f) providing
exceptions to the rule recognizing gain in certain
distributions (cf. Notice 87-64, 1987-2 C.B. 375).
Second, section 1248 is amended to clarify that,
notwithstanding the conforming changes made by the 1988 Act,
with respect to any transaction in which a U.S. person is
treated as realizing gain from the sale or exchange of stock of
a controlled foreign corporation, the U.S. person shall be
treated as having sold or exchanged the stock for purposes of
applying section 1248. Thus, if a U.S. person distributes
appreciated stock of a controlled foreign corporation to its
shareholders in a transaction in which gain is recognized under
section 311(b), section 1248 shall be applied as if the stock
had been sold or exchanged at its fair market value. Under
section 1248(a), part or all of the gain may be treated as a
dividend. Under the bill, the rule treating the distribution
for purposes of section 1248 as a sale or exchange also applies
where the U.S. person is deemed to distribute the stock under
the provisions of section 1248(i). Under section 1248(i), gain
will be recognized only to the extent of the amount treated as
a dividend under section 1248.
Third, section 897(f), relating to the basis in a United
States real property interest distributed to a foreign person,
is repealed as deadwood. The basis of the distributed property
is its fair market value in accordance with section 301(d).
b. Prohibited transaction rules (sec. 602(g)(3) of the
bill, sec. 11701(m) of the 1990 Act, and sec. 4975
of the Code)
Present Law
The Code and title I of the Employee Retirement Income
Security Act of 1974 (ERISA) prohibit certain transactions
between an employee benefit plan and certain persons related to
such plan. An exemption to the prohibited transaction rules of
title I of ERISA is provided in the case of sales of employer
securities the plan is required to dispose of under the Pension
Protection Act of 1987 (ERISA sec. 408(b)(12)). The 1990 Act
amended the Code to provide that certain transactions that are
exempt from the prohibited transaction rules of ERISA are
automatically exempt from the prohibited transaction rules of
the Code. The 1990 Act change was intended to be limited to
transactions exempt under section 408(b)(12) of ERISA.
Explanation of Provision
The bill conforms the statutory language to legislative
intent by providing that transactions that are exempt from the
prohibited transaction rules of ERISA by reason of ERISA
section 408(b)(12) are also exempt from the prohibited
transaction rules of the Code.
c. Effective date of LIFO adjustment for purposes of
computing adjusted current earnings (sec. 602(g)(4)
of the bill, sec. 11701 of the 1990 Act, sec.
7611(b) of the 1989 Act, and sec. 56(g) of the
Code)
Present Law
For purposes of computing the adjusted current earnings
(ACE) component of the corporate alternative minimum tax,
taxpayers are required to make the LIFO inventory adjustments
provided in section 312(n)(4) of the Code. Section 312(n)(4)
generally is applicable for purposes of computing earnings and
profits in taxable years beginning after September 30, 1984.
The ACE adjustment generally is applicable to taxable years
beginning after December 31, 1989.
Explanation of Provision
The bill clarifies that the LIFO inventory adjustment
required for ACE purposes shall be computed by applying the
rules of section 312(n)(4) only with respect to taxable years
beginning after December 31, 1989. The effective date
applicable to the determination of earnings and profits
(September 30, 1984) is inapplicable for purposes of the ACE
LIFO inventory adjustment. Thus, the ACE LIFO adjustment shall
be computed with reference to increases (and decreases, to the
extent provided in Treasury regulations) in the ACE LIFO
reserve in taxable years beginning after December 31, 1989.
d. Low-income housing credit (sec. 602(g)(5) of the bill,
sec. 11701(a)(11) of the 1990 Act, and sec. 42 of
the Code)
Present Law
The amendments to the low-income housing tax credit
contained in the Omnibus Budget Reconciliation Act of 1989
(``1989 Act'') generally were effective for buildings placed in
service after December 31, 1989, to the extent the buildings
were financed by tax-exempt bonds (``bond-financed
buildings''). This rule applied regardless of when the bonds
were issued.
A technical correction enacted in the Revenue
Reconciliation Act of 1990 (``1990 Act'') limited this
effective date to buildings financed with bonds issued after
December 31, 1989. Thus, the technical correction applied pre-
1989 Act law to bond-financed buildings placed in service after
December 31, 1989, if the bonds were issued before January 1,
1990.
Explanation of Provision
The bill repeals the 1990 technical correction. The bill
provides, however, that pre-1989 Act law will apply to a bond-
financed building if the owner of the building establishes to
the satisfaction of the Secretary of the Treasury reasonable
reliance upon the 1990 technical correction. In the case of
buildings placed in service before the date of the bill's
enactment, reasonable reliance may be established by a showing
of compliance with the law as in effect for those buildings
before enactment of the amendments made by the bill.
7. Expired or obsolete provisions (``deadwood provisions'') (secs.
602(h)(1)-(18) of the bill and secs. 11801-11816 of the 1990
Act)
Present Law
The 1990 Act repealed and amended numerous sections of the
Code by deleting obsolete provisions (``deadwood''). These
amendments were not intended to make substantive changes to the
tax law.
Explanation of Provision
The bill makes several amendments to restore the substance
of prior law which was inadvertently changed by the deadwood
provisions of the 1990 Act. These amendments include (1) a
provision restoring the prior-law depreciation treatment of
certain energy property (sec. 168(e)(3)(B)(vi)); (2) a
provision restoring the prior-law definition of property
eligible for expensing (sec. 179(d)); and (3) a provision
restoring the prior-law rule providing that if any member of an
affiliated group of corporations elects the credit under
section 901 for foreign taxes paid or accrued, then all members
of the group paying or accruing such taxes must elect the
credit in order for any dividend paid by a member of the group
to qualify for the 100-percent dividends received deduction
(sec. 243(b)).
The bill also makes several nonsubstantive clerical
amendments to conform the Code to the amendments made by the
deadwood provisions. None of these amendments is intended to
change the substance of pre-1990 law.
B. Technical Corrections to the Revenue Reconciliation Act of 1993
1. Treatment of full-time students under the low-income housing credit
(sec. 603(b) of the bill, sec. 13142 of the 1993 Act and sec.
42 of the Code).
Present Law
The Revenue Reconciliation Act of 1993 (``1993 Act'')
codified prior law rules relating to the treatment of married
students filing joint returns. Further, it provided that a
housing unit occupied entirely by full-time students may
qualify for the credit if the full-time students are a single
parent and his or her minor children and none of the tenants is
a dependent of a third party.
Explanation of Provision
The bill provides that the full-time student provision is
effective on the date of enactment of the 1993 Act.
2. Indexation of threshold applicable to excise tax on luxury
automobiles (sec. 603(c) of the bill, sec. 13161 of the 1993
Act, and sec. 4001(e)(1) of the Code)
Present Law
The 1993 Act indexed the threshold above which the excise
tax on luxury automobiles is to apply.
Explanation of Provision
The bill corrects the application of the indexing
adjustment so that the adjustment calculated for a given
calendar year applies for that calendar year rather than in the
subsequent calendar year. This conforms the indexation to that
described in the conference report to the 1993 Act.\53\ The
intent of Congress, as reflected in the conference report, was
that current year indexation be effective on the date of
enactment of the 1993 Act. Under the bill, the provision would,
however, be effective on the date of enactment, to alleviate
the difficulties that both taxpayers and the Treasury would
experience in administering a retroactive refund effective to
August 10, 1993.
\53\ See, H. Rept. 103-213, August 4, 1993, p. 558.
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3. Indexation of the limitation based on modified adjusted gross income
for income from United States Savings bonds used to pay higher
education tuition and fees (sec. 603(d) of the bill, sec. 13201
of the 1993 Act, and sec. 135(b)(2)(B) of the Code)
Present Law
A taxpayer may exclude from gross income the proceeds from
the redemption of qualified United States savings bonds if the
proceeds are used to pay qualified higher education expenses
and the taxpayer's modified adjusted gross income is equal to
or less than $60,000 ($40,000 in the case of a single return).
The exclusion is phased out for incomes above these thresholds.
The $60,000 ($40,000) threshold is indexed for inflation
occurring after 1992.
Explanation of Provision
The bill corrects the indexing of the $60,000 ($40,000)
threshold to provide that the thresholds be indexed for
inflation after 1989, as was provided prior to the 1993 Act.
4. Reporting and notification requirements for lobbying and political
expenditures of tax-exempt organizations (sec. 603(g) of the
bill, sec. 13222 of the 1993 Act and sec. 6033(e) of the Code)
Present Law
Tax-exempt organizations which incur political expenditures
are subject to tax under Code section 527(f). The tax is
calculated by applying the highest corporate rate to the lesser
of (a) the net investment income of the organization, or (b)
the amount of political expenditures incurred by the
organization during the taxable year. Expenditures covered by
Code section 527(f) are those expended for ``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
of not such individual or electors are selected, nominated,
elected, or appointed.''
Code section 162(e), as amended by the 1993 Act, provides a
separate set of rules regarding the tax treatment of lobbying
and political expenditures. Political expenditures include
amounts paid or incurred in connection with ``participation in,
or intervention in, any political campaign on behalf of (or in
opposition to) any candidate for public office.'' Taxpayers may
not deduct the portion of dues or similar amounts paid to a
tax-exempt organization which the organization notifies the
taxpayer are allocable to lobbying or political expenditures.
Code section 6033(e) sets forth reporting and notification
requirements applicable to tax-exempt organizations (other than
charities) that incur lobbying or political expenditures within
the meaning of Code section 162(e). First, the organization
must report on its annual tax return both the total amount of
its lobbying and political expenditures, and the total amount
of dues (or similar payments) allocable to such expenditures.
Second, the organization must either provide notice to its
members of the portion of dues allocable to lobbying and
political expenditures (so that such amounts are not deductible
by members), or may elect to pay a proxy tax (at the highest
corporate rate) on its lobbying and political expenditures, up
to the amount of dues receipts.
Explanation of Provision
The bill amends Code section 6033(e) to clarify that any
political expenditures on which tax is paid pursuant to Code
section 527(f) are not subject to the reporting and
notification requirements of Code section 6033(e). In addition,
the bill clarifies that the reporting and notification
requirements of Code section 6033(e) apply to organizations
exempt from tax under Code section 501(a), other than charities
described in section 501(c)(3).
5. Estimated tax rules for certain tax-exempt organizations (sec.
603(h) of the bill, sec. 13225 of the 1993 Act and sec.
6655(g)(3) of the Code)
Present Law
A tax-exempt organization is generally subject to an
addition to tax for any underpayment of estimated tax on its
unrelated business taxable income or its net investment income
(as the case may be). Under the 1993 Act, for years beginning
after December 31, 1993, a corporation or tax-exempt
organization does not have an underpayment of estimated tax if
it makes four timely estimated tax payments that total at least
100 percent of the tax liability shown on its return for the
current taxable year. A corporation or tax-exempt organization
may estimate its current year tax liability prior to year-end
by annualizing its income. The 1993 Act also changed the method
by which a corporation annualizes its current year tax
liability.
Explanation of Provision
The bill clarifies that the 1993 Act did not change the
method by which a tax-exempt organization annualizes its
current year tax liability.
6. Current taxation of certain earnings of controlled foreign
corporations--application of foreign tax credit limitation
(sec. 603(i)(1) of the bill, sec. 13231(b) of the 1993 Act, and
sec. 904(d) of the Code)
Present Law
Present law requires U.S. shareholders of a controlled
foreign corporation to include in income the corporation's
subpart F income, certain earnings invested in U.S. property,
and, as modified by the 1993 Act, certain earnings invested in
excess passive assets. A U.S. shareholder's tax liability
attributable to the inclusion may be offset by foreign tax
credits for certain foreign taxes paid or deemed paid by the
shareholder.
The foreign tax credit limitation applies separately to
several categories of income. The separate limitations apply to
a dividend from a controlled foreign corporation to a U.S.
shareholder of that controlled foreign corporation by reference
to the character of the earnings and profits of the
distributing corporation.
An inclusion of a controlled foreign corporation's earnings
invested in U.S. property is treated like a dividend for
purposes of the foreign tax credit limitation. Although the
1993 Act provided that inclusions of earnings invested in
excess passive assets generally are determined in the same
manner as inclusions of earnings invested in U.S. property, the
1993 Act did not specify how the separate limitations of the
foreign tax credit should apply to inclusions of earnings
invested in excess passive assets.
Some have argued that the separate limitations of the
foreign tax credit do not apply to an inclusion of a controlled
foreign corporation's earnings invested in excess passive
assets; rather, that such an inclusion is allocated entirely to
the general foreign tax credit limitation, without regard to
the character of the underlying earnings and profits of the
controlled foreign corporation.
Explanation of Provision
The bill clarifies that a U.S. shareholder's inclusion of a
controlled foreign corporation's earnings invested in excess
passive assets is treated like a dividend for purposes of the
foreign tax credit limitation. Thus, the inclusion is
characterized by reference to the underlying earnings and
profits of the controlled foreign corporation. This treatment
is consistent with present law's application of the separate
limitations of the foreign tax credit to other amounts included
in income with respect to a controlled foreign corporation.
7. Current taxation of certain earnings of controlled foreign
corporations--measurement of accumulated earnings (sec.
603(i)(2) of the bill, sec. 13231(b) of the 1993 Act, and sec.
956A(b) of the Code)
Present Law
Present law, as modified by the 1993 Act, limits the
availability of deferral of U.S. tax on certain earnings of
controlled foreign corporations by requiring U.S. shareholders
of a controlled foreign corporation to include in income the
corporation's accumulated \54\ or current earnings invested in
excess passive assets. Some have argued that the Code's
definition of earnings subject to this treatment permits an
accumulated deficit in earnings to eliminate positive current
earnings, resulting in no income inclusion in a case where an
actual distribution would be treated as a dividend out of
current earnings. In addition, some have argued that the Code's
definition of earnings subject to this treatment takes current-
year earnings into account more than once.
\54\ Accumulated earnings and profits are taken into account only
to the extent that they were accumulated in taxable years beginning
after September 30, 1993.
Explanation of Provision
The bill clarifies that the accumulated earnings and
profits of a controlled foreign corporation taken into account
for purposes of determining the foreign corporation's earnings
invested in excess passive assets do not include any deficit in
accumulated earnings and profits,\55\ and do not include
current earnings (which are taken into account separately).
\55\ Incurred in taxable years beginning after September 30, 1993.
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8. Current taxation of certain earnings of controlled foreign
corporations--aggregation and look-through rules (sec.
603(i)(3) of the bill, sec. 13231(b) of the 1993 Act, and sec.
956A(f) of the Code)
Present Law
Present law, as modified by the 1993 Act, provides certain
aggregation and look-through rules in connection with requiring
U.S. shareholders of a controlled foreign corporation to
include in income certain of the corporation's earnings
invested in excess passive assets. Under the aggregation rule,
certain groups of controlled foreign corporations that are
linked by stock ownership of more than 50 percent (CFC groups)
are treated as a single corporation for purposes of determining
their earnings invested in excess passive assets. Look-through
treatment applies to certain corporations whose stock is owned
at least 25 percent by a controlled foreign corporation. Some
have argued that these rules permit the assets of one foreign
corporation to be taken into account more than once through a
combination of CFC group treatment and look-through treatment.
In addition, some have argued that these rules permit the
assets of one foreign corporation to be taken into account more
than once through membership of the foreign corporation in more
than one CFC group.
Explanation of Provision
The bill clarifies that, within the regulatory authority
provided to the Secretary of the Treasury under the 1993 Act,
regulations are specifically authorized to coordinate the CFC
group treatment and look-through treatment applicable for
purposes of determining a foreign corporation's earnings
invested in excess passive assets. Pending the promulgation of
guidance by the Secretary, it is intended that taxpayers be
permitted to coordinate such treatment using any reasonable
method for taking assets into account only once, so long as the
method is consistently applied to all controlled foreign
corporations (whether or not members of any CFC group) in all
taxable years.
9. Treatment of certain leased assets for PFIC purposes (sec. 603(i)(5)
of the bill, sec. 13231(d)(4) of the 1993 Act, and sec. 1297(d)
of the Code)
Present Law
Under present law, as modified by the 1993 Act, certain
property leased by a foreign corporation may be treated as an
asset actually owned by the foreign corporation in measuring
the assets of the foreign corporation for purposes of the
passive foreign investment company (``PFIC'') asset test of
section 1296(a)(2). The 1993 Act provided a special measurement
rule, under which the adjusted basis of the leased asset for
this purpose is determined by reference to the unamortized
portion of the present value of the payments under the lease
for the use of the property. Some have argued, however, that
the special measurement rule does not apply to PFICs that are
permitted to measure their assets by fair market value, rather
than by adjusted basis. Under this argument, the entire fair
market value of the leased asset might be treated as owned by
the foreign corporation.
Explanation of Provision
The bill clarifies that, in the case of any item of
property leased by a foreign corporation and treated as an
asset actually owned by the foreign corporation in measuring
the assets of the foreign corporation for purposes of the PFIC
asset test, the amount taken into account with respect to the
leased property is the amount determined under the 1993 Act's
special measurement rule, which is based on the unamortized
portion of the present value of the payments under the lease
for the use of the property. That is, the provision clarifies
that the special measurement rule of the 1993 Act applies to
all PFICs, regardless of whether they are generally permitted
to measure their assets by fair market value rather than
adjusted basis.
10. Amortization of goodwill and certain other intangibles (sec. 603(k)
of the bill, sec. 13261(g) of the 1993 Act and sec. 197 of the
Code)
Present Law
The 1993 Act allows amortization deductions to certain
intangible assets acquired after the 1993 Act's effective date
that were not amortizable under prior law. The 1993 Act
contains ``antichurning'' rules that deny amortization to
intangible assets that were not amortizable under prior law if
such assets are acquired by the taxpayer after the effective
date from certain related parties.
The 1993 Act also contains an election under which a
taxpayer and certain related parties may elect to treat all
acquisitions after July 25, 1991 as subject to the provisions
of the 1993 Act.
Explanation of Provision
The bill clarifies that when a taxpayer and its related
parties have made an election to apply the 1993 Act to all
acquisitions after July 25, 1991, the antichurning rules will
not apply when property acquired from an unrelated party after
July 25, 1991 (and not subject to the antichurning rules in the
hands of the acquirer) is transferred to a taxpayer related to
the acquirer after the date of enactment of the 1993 Act.
11. Empowerment zones and eligibility of small farms for tax incentives
(sec. 603(l) of the bill, sec. 13301 of the 1993 Act and sec.
1397B(d)(5)(B) of the Code)
Present Law
Pursuant to the 1993 Act, on December 21, 1994, six
empowerment zones and 65 enterprise communities were designated
in eligible urban areas, and three empowerment zones and 30
enterprise communities were designated in rural areas. Special
tax incentives (i.e., a wage credit, additional section 179
expensing, and expanded tax-exempt financing) are available for
certain business activities conducted in urban and rural
empowerment zones. Expanded tax-exempt financing benefits are
available for certain facilities located in urban and rural
enterprise communities.
The empowerment zone wage credit is not available with
respect to any individual employed by a trade or business the
principal activity of which is farming (within the meaning of
subparagraphs (A) and (B) of section 2032A(e)(5)) if, as of the
close of the current taxable year, the sum of the aggregate
unadjusted bases (or, if greater, the fair market value) of
assets of the farm exceed $500,000 (sec. 1396(d)(2)(E)). In
contrast, the additional section 179 expensing (available in
empowerment zones) and expanded tax-exempt financing benefits
(available in both empowerment zones and enterprise
communities) are not allowed for any trade or business the
principal activity of which is farming if, as of the close of
the preceding taxable year, the sum of the aggregate bases (or,
if greater, the fair market value) of the assets of the farm
exceed $500,000 (sec. 1397B(d)(5)).
Explanation of Provision
The bill provides that the $500,000 asset test for
determining whether a farm is eligible for additional section
179 expensing (in an empowerment zone) and expanded tax-exempt
financing benefits (in an empowerment zone or enterprise
community) is applied based on the assets of the farm at the
end of the current taxable year. Thus, the $500,000 asset test
for determining farm eligibility is based on the same taxable
period (i.e., the current taxable year) for purposes of all tax
incentives available in empowerment zones and enterprise
communities.
C. Other Tax Technical Corrections
1. Hedge bonds (sec. 604(b) of the bill, sec. 11701 of the 1989 Act,
and sec. 149(g) of the Code)
Present Law
The 1989 Act provided generally that interest on hedge
bonds is not tax-exempt unless prescribed minimum percentages
of the proceeds are reasonably expected to be spent at set
intervals during the five-year period after issuance of the
bonds (sec. 149(g)). A hedge bond is defined generally as a
bond (1) at least 85 percent of the proceeds of which is not
reasonably expected to be spent within three years following
issuance and (2) more than 50 percent of the proceeds of which
is invested at substantially guaranteed yields for four years
or more.
This restriction does not apply, however, if at least 95
percent of the bond proceeds is invested in other tax-exempt
bonds (not subject to the alternative minimum tax). The 95-
percent investment requirement is not violated if investment
earnings exceeding five percent of the proceeds are temporarily
invested for up to 30 days pending reinvestment in taxable
(including alternative minimum taxable) investments.
This provision is effective as if included in the Omnibus
Budget Reconciliation Act of 1989.
Explanation of Provision
The bill clarifies that the 30-day exception for temporary
investments of investment earnings applies to amounts (i.e.,
principal and earnings thereon) temporarily invested during the
30-day period immediately preceding redemption of the bonds as
well as such periods preceding reinvestment of the proceeds.
2. Withholding on distributions from U.S. real property holding
companies (sec. 604(c) of the bill, sec. 129 of the Deficit
Reduction Act of 1984, and sec. 1445 of the Code)
Present Law
In general
Under the Foreign Investment in Real Property Tax Act of
1980 (``FIRPTA''), a foreign investor that disposes of a U.S.
real property interest generally is required to pay tax on any
gain on the disposition. For this purpose a U.S. real property
interest generally includes stock in a domestic corporation
that is a U.S. real property holding corporation (``USRPHC''),
or was a USRPHC at any time during the previous five years.
A sale or exchange of stock in a USRPHC is an example of a
disposition of a U.S. real property interest. In addition,
provisions of subchapter C of the Code treat amounts received
in certain corporate distributions as amounts received in sales
or exchanges, giving rise to tax liability under the FIRPTA
rules when a foreign person receives such a distribution from a
present or former USRPHC. Thus, amounts received by a foreign
shareholder in a USRPHC in a distribution in complete
liquidation of the USRPHC are treated as in full payment in
exchange for the USRPHC stock, and are therefore subject to tax
under FIRPTA (sec. 331; Treas. Reg. sec. 1.897-5T(b)(2)(iii)).
Similarly, amounts received by a foreign shareholder in a
USRPHC upon redemption of the USRPHC stock are treated as a
distribution in part or full payment in exchange for the stock,
and are therefore subject to tax under FIRPTA (sec. 302(a);
Treas. Reg. sec. 1.897-5T(b)(2)(ii)). Third, amounts received
by a foreign shareholder in a USRPHC, in a section 301
distribution from the USRPHC that exceeds the available
earnings and profits of the USRPHC, are treated as gain from
the sale or exchange of the shareholder's USRPHC stock to the
extent that they exceed the shareholder's adjusted basis in the
stock; such amounts are therefore also subject to tax under
FIRPTA (sec. 301(c)(3); Treas. Reg. sec. 1.897-5T(b)(2)(i)).
FIRPTA withholding
The Deficit Reduction Act of 1984 established a withholding
system to enforce the FIRPTA tax. Unless an exception applies,
a transferee of a U.S. real property interest from a foreign
person generally is required to withhold the lesser of 10
percent of the amount realized (purchase price), or the maximum
tax liability on disposition (as determined by the IRS) (sec.
1445). Such withholding may be reduced or eliminated pursuant
to a withholding certificate issued by the Internal Revenue
Service (Treas. Reg. sec. 1. 1445-3).
Although the FIRPTA withholding requirement by its terms
generally applies to all dispositions of U.S. real property
interests, and subchapter C treats amounts received in certain
distributions as amounts received in sales or exchanges, the
FIRPTA withholding provisions also provide express rules for
withholding on certain distributions treated as sales or
exchanges. Generally, distributions in a transaction to which
section 302 (redemptions) or part II of subchapter C
(liquidations) applies are subject to 10-percent
withholding.\56\ Although a section 301 distribution in excess
of earnings and profits is also treated as a disposition for
purposes of computing the FIRPTA liability of a foreign
recipient of the distribution, there is no corresponding
withholding provision expressly addressed to the payor of such
a distribution.
\56\ Under other rules, dividend distributions (i.e., distributions
to which sec. 301(c)(1) applies) to foreign persons by U.S.
corporations, including USRPHCs, are subject to 30-percent withholding
under the Code. Under treaties, the withholding on a dividend may be
reduced to as little as 5 or 15 percent.
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Explanation of Provision
The bill clarifies that FIRPTA withholding requirements
apply to any section 301 distribution to a foreign person by a
domestic corporation that is or was a USRPHC, which
distribution is not made out of the corporation's earnings and
profits and is therefore treated as an amount received in a
sale or exchange of a U.S. real property interest. (The bill
does not alter the withholding treatment of section 301
distributions by such a corporation that are out of earnings
and profits.) Under the bill, the FIRPTA withholding
requirements that apply to a section 301 distribution not out
of earnings and profits are similar to the requirements
applicable to redemption or liquidation distributions to a
foreign person by such a corporation. It is anticipated that
withholding certificates will be available to taxpayers that
expect to receive section 301 distributions not out of earnings
and profits.
The provision is effective for distributions made after the
date of enactment of the bill. No inference is intended to be
drawn from the provision as to the FIRPTA withholding
requirements applicable to such a distribution under present
law.
3. Treatment of credits attributable to working interests in oil and
gas properties (sec. 604(d) of the bill, sec. 501 of the Tax
Reform Act of 1986, and sec. 469 of the Code)
Present Law
Under present law, a working interest in an oil and gas
property which does not limit the liability of the taxpayer is
not a ``passive activity'' for purposes of the passive loss
rules (sec. 469). However, if any loss from an activity is
treated as not being a passive loss by reason of being from a
working interest, any net income from the activity in
subsequent years is not treated as income from a passive
activity, notwithstanding that the activity may otherwise have
become passive with respect to the taxpayer.
Explanation of Provision
The bill clarifies that any credit attributable to a
working interest in an oil and gas property, in a taxable year
in which the activity is no longer treated as not being a
passive activity, will not be treated as attributable to a
passive activity to the extent of any tax allocable to the net
income from the activity for the taxable year. Any credits from
the activity in excess of this amount of tax will continue to
be treated as arising from a passive activity and will be
treated under the rules generally applicable to the passive
activity credit. The provision applies to taxable years
beginning after December 31, 1986.
4. Clarification of passive loss disposition rule (sec. 604(e) of the
bill, sec. 501 of the Tax Reform Act of 1986, sec.
1005(a)(2)(A) of the Technical and Miscellaneous Revenue Act of
1988, and sec. 469(g)(1)(A) of the Code)
Present Law
The Tax Reform Act of 1986 (``1986 Act'') provided that if
a passive activity is disposed of in a transaction in which all
gain or loss is recognized, any overall loss from the activity
in the year of disposition is recognized and allowed against
income (whether active or passive income).\57\ The language of
the 1986 Act provided that any loss was allowable, first,
against income or gain from the passive activity, second,
against income or gain from all passive activities, and
finally, against any other income or gain. This rule was
rewritten by the technical corrections portion of the Technical
and Miscellaneous Revenue Act of 1988 (``1988 Act''). The
statutory language (as amended by the 1988 Act) providing for
the computation of the overall loss for the taxable year of
disposition is not entirely clear where the activity is
disposed of at a gain.
\57\ See S. Rept. 99-313, p. 725.
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Explanation of Provision
The bill clarifies the rule relating to the computation of
the overall loss allowed upon the disposition of a passive
activity. The bill provides that, in a transaction in which all
gain or loss is recognized on the disposition of a passive
activity, any loss from the activity for the taxable year
(taking into account all income, gain, and loss, including gain
or loss recognized on the disposition) in excess of any net
income or gain from other passive activities for the taxable
year is treated as a loss which is not from a passive activity.
The provision applies to taxable years beginning after December
31, 1986.
5. Estate tax unified credit allowed nonresident aliens under treaty
(sec. 604(f)(1) of the bill, sec. 5032(b)(2) of the Technical
and Miscellaneous Revenue Act of 1988, and sec. 2102(c)(3)(A)
of the Code)
Present Law
Amount subject to tax
For U.S. citizens and residents, the amount subject to
Federal estate and gift tax is determined by reference to all
property, wherever situated. For nonresident aliens, the Code
provides that the amount subject to Federal estate and gift tax
is determined only by reference to property situated in the
United States.
The United States has entered into bilateral treaties
designed to avoid double transfer taxation. Early treaties
typically did this by providing rules for determining situs and
requiring that the State of domicile allow a credit for taxes
paid to the situs country.\58\ In contrast, treaties signed in
the 1980s, and the U.S. and OECD model treaties, exempt most
property, wherever situated, from taxation outside the State of
domicile.\59\
\58\ See Staff of the Joint Committee on Taxation, 98th Cong., 2d
Sess., ``Explanation of Proposed Estate and Gift Tax Treaty Between the
United States and Sweden 8'' (1984).
\59\ See, e.g., U.S. Treasury Model Estate and Gift Tax Treaty
(1980), Article 7, paragraph 1: ``Transfers and deemed transfers by an
individual domiciled in a Contracting State of property other than
property referred to in Article 5 (Real Property) and 6 (Business
Property of a Permanent Establishment and Assets Pertaining to a Fixed
Base Used for the Performance of Independent Personal Services) shall
be taxable only in that State.''
Specific exemption and unified credit
Prior to the Tax Reform Act of 1976 (``1976 Act''), the
Code allowed a ``specific exemption'' against the estate tax.
The estate of a U.S. citizen or resident was allowed an
exemption of $60,000, while the estate of a nonresident alien
was allowed a lesser amount. A number of U.S. estate tax
treaties ratified in the 1950s allowed a nonresident alien a
``specific exemption'' equal to the exemption allowed a U.S.
citizen or resident multiplied by the percentage of the gross
estate subject to U.S. estate tax (the ``pro rata exemption'').
\60\
\60\ See Rev. Rul. 81-303, 1981-2 C. B. 255.
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The 1976 Act replaced the specific exemption with a unified
credit of $47,000 for the estate of U.S. citizen or resident
and $3,600 for the estate of a nonresident alien. After 1976,
two courts interpreted the pro rata exemption allowed in the
1950s treaties as applying to the unified credit, i.e. , as
allowing a unified credit no less than the unified credit
allowed a U.S. citizen or resident multiplied by the percentage
of the gross estate situated in the United States (and
therefore subject to U.S. estate tax under those treaties).
\61\
\61\ See Mudry v. United States, 11 Cl. Ct. 207 (1986) (Swiss
treaty); Burghardt v. Commissioner, 80 T. C. 705 (1983), aff'd, 734 F.
2d 3 (3d Cir. 1984) (Italian treaty).
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The Technical and Miscellaneous Revenue Act of 1988 (``1988
Act'') increased the unified credit allowed an estate of a
nonresident alien to $13,000. In so doing, the 1988 Act
provided that, ``to the extent required by any treaty,'' the
estate of a nonresident alien is allowed a unified credit equal
to the unified credit allowed a U.S. citizen or resident
multiplied by the percentage of the gross estate situated in
the United States (Code sec. 2102(c)(3)(A)). Thus, the 1988 Act
did not override the ``specific exemption'' language of the
1950s treaties, as interpreted by the two courts, and could be
interpreted as encouraging the negotiation of pro rata unified
credits in future treaties.
Explanation of Provision
The bill clarifies that in determining the pro rata unified
credit required by treaty, property exempted by the treaty from
U.S. estate tax is not treated as situated in the United
States. Under this rule, a treaty granting a pro rata unified
credit would allow a nonresident alien the unified credit
allowed a U.S. citizen or resident multiplied by the percentage
of the gross estate subject to U.S. estate tax, as modified by
treaty.
The bill is not intended to affect existing treaties
containing pro rata exemptions, because in those treaties
taxation follows situs. For future treaties, it is intended
that any pro rata unified credit negotiated not exceed the
proportion of the gross worldwide estate subject to U.S. estate
and gift tax, as modified by treaty. The provision is effective
upon the date of its enactment.
6. Limitation on deduction for certain interest paid by corporation to
related persons (sec. 604(f)(2) of the bill, sec. 7210(a) of
the 1989 Act, and sec. 163(j) of the Code)
Present Law
Subject to certain limitations, a taxpayer may deduct
interest paid or accrued on indebtedness within a taxable year
(sec. 163(a)). The 1989 Act added a so-called ``earnings
stripping'' limitation on interest deductibility with respect
to certain interest paid by corporations to related persons
(sec. 163(j)). If the provision applies to a corporation for a
taxable year, it disallows deductions for certain amounts of
``disqualified interest'' paid or accrued by the corporation
during that year. If in a taxable year a deduction is
disallowed, under the provision, for an amount of interest paid
or accrued in that year, the disallowed amount is treated under
the earnings stripping provision as disqualified interest paid
or accrued in the succeeding taxable year. \62\
\62\ Disqualified interest is interest paid by a corporation to
related persons that are not subject to U.S. tax on the interest
received. (If, in accordance with a U.S. income tax treaty, interest
income of a related person is subject to a reduced rate of U.S. tax, a
portion of the interest paid to the related person is deemed to be
interest on which no tax is imposed. )
In order for the earnings stripping provision to apply to a
corporation for a taxable year, two thresholds must be
exceeded. To exceed the first threshold, the corporation must
have ``excess interest expense'' as that term is defined in the
Code for this purpose. To exceed the second threshold, the
corporation must have a ratio of debt to equity as of the close
of the taxable year in question (or on any other day prescribed
by the Secretary in regulations) that exceeds 1.5 to 1. Excess
interest expense is the excess (if any) of the corporation's
net interest expense over the sum of 50 percent of the adjusted
taxable income of the corporation plus any excess limitation
carryforward from a prior year. Excess limitation is the excess
(if any) of 50 percent of adjusted taxable income over net
interest expense.
Explanation of Provision
The bill provides that the debt-equity threshold does not
apply for purposes of applying the earnings stripping provision
to a carryover of excess interest expense from a prior taxable
year. Thus, the bill clarifies that excess interest carried
forward from a year in which the debt-equity ratio threshold is
exceeded may be deducted in a subsequent year in which that
threshold is not exceeded, but only to the extent that such
interest would not otherwise be treated as excess interest
expense in the carryforward year.
For example, assume that in year 1 $20 of a corporation's
interest expense is nondeductible due to the operation of the
earnings stripping provision. The corporation carries forward
the $20 of interest deduction that it could not use in year 1.
Assume that in year 2 the corporation has a debt-equity ratio
of 1 to 1 and $50 of current net and gross interest expense,
all of which is disqualified interest, and that it earns $400
of adjusted taxable income. The bill is intended to clarify
that the $20 of interest carried forward from year 1 is
deductible in year 2. This is because $70, the sum of the
current net interest expense for year 2 ($50) plus the interest
expense carried over from year 1 ($20), does not exceed one-
half of adjusted taxable income in year 2.
As another example, assume that in year 2 the corporation
has a debt-equity ratio of 1 to 1 and $50 of current net and
gross interest expense, all of which is disqualified interest,
and that it earns $80 of adjusted taxable income. The bill is
intended to clarify that the $20 of interest carried forward
from year 1 is not deductible in year 2. This is because the
current net interest expense for year 2 ($50) exceeds by $10
one-half of adjusted taxable income in year 2 ($80 divided by
2, or $40). Therefore, treating the year 1 carryover as an
interest expense in year 2 causes the corporation to have
excess interest expense equal to $30. But for the debt-equity
safe harbor, the corporation would have a $30 interest expense
disallowance in year 2 if the carried over amount were treated
as having been paid in year 2. Under the bill, no actual year 2
interest can be disallowed. However, under these facts, none of
the interest carried over from year 1 can be deducted in year
2. Instead, the interest carried over from year 1 is carried
forward for potential deduction (subject to the same rules that
applied to the carryforward in year 2) in a year subsequent to
year 2.
As a third example, assume that in year 2 the corporation
has a debt-equity ratio of 1 to 1 and $50 of current net and
gross interest expense, all of which is disqualified interest,
and that it earns $110 of adjusted taxable income. The bill is
intended to clarify that $5 of interest carried forward from
year 1 is deductible in year 2, and the other $15 of interest
carried forward from year 1 is not deductible in year 2. This
is because the current net interest expense for year 2 ($50) is
$5 less than one-half of adjusted taxable income in year 2
(one-half of $110, or $55). Therefore, even if the debt-equity
safe harbor had not been met in year 2, the corporation would
have had $5 of excess limitation in year 2 had there been no
carryover amount from year 1. On the other hand, treating the
year 1 carryover as an interest expense in year 2 causes the
corporation to have excess interest expense equal to $15. This
$15 may be carried forward to a subsequent year.
The provision is effective as if included in the amendments
made by section 7210(a) of the Revenue Reconciliation Act of
1989.
7. Branch-level interest tax (sec. 604(f)(3) of the bill, sec. 1241 of
the 1986 Act, and sec. 884 of the Code)
Present Law
Interest paid (or treated as if paid) by a U.S. trade or
business (i.e., a U.S. branch) of a foreign corporation is
treated as if paid by a U.S. corporation and, hence, is U.S.
source and subject to U.S. withholding tax of 30 percent,
unless the tax is reduced or eliminated by a specific Code or
treaty provision. The Treasury has regulatory authority to
limit U.S. sourcing, and hence U.S. withholding, to the amount
of interest reasonably expected to be deducted in arriving at
the U.S. branch's effectively connected taxable income.
To the extent a U.S. branch of a foreign corporation has
allocated to it under Treasury Regulation section 1.882-5 an
interest deduction in excess of the interest actually paid by
the branch (this generally occurs where the indebtedness of the
U.S. branch is disproportionately small compared to the total
indebtedness of the foreign corporation), the excess is treated
as if it were interest paid on a notional loan to a U.S.
subsidiary (the U.S. branch, in actuality) from its foreign
corporate parent (the home office). This excess is subject to
the 30-percent tax, absent a specific Code exemption or treaty
reduction (sec. 884(f)(1)(B)).
These branch-level interest taxes, along with the branch
profits tax, were intended to reflect the view that a foreign
corporation doing business in the United States generally
should be subject to the same substantive tax rules that apply
to a foreign corporation operating in the United States through
a U.S. subsidiary.\63\ Where a U.S. corporation pays interest
to its foreign corporate parent, that interest, like the
interest deducted by a U.S. branch of a foreign corporation, is
also generally subject to a 30-percent U.S. withholding tax
unless the tax is reduced by treaty. In the case of a U.S.
subsidiary of a foreign parent corporation, the withholding tax
applies without regard to whether the interest payment is
currently deductible by the U.S. subsidiary. For example,
deductions for interest may be delayed or denied under section
163, 263, 263A, 266, 267, or 469, but it is still subject (or
not subject) to withholding when paid without regard to the
operation of those provisions.
\63\ Staff of the Joint Committee on Taxation, 100th Cong., 1st
Sess., ``General Explanation of the Tax Reform Act of 1986,'' at 1036
(1987).
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Explanation of Provision
The bill provides that the branch level interest tax on
interest not actually paid by the branch applies to any
interest which is allocable to income which is effectively
connected with the conduct of a trade or business in the United
States. Similarly, in the case of interest paid by the U.S.
branch, the bill provides regulatory authority to limit U.S.
sourcing, and hence U.S. withholding, to the amount of interest
reasonably expected to be allocable to income which is
effectively connected with the conduct of a trade or business
in the United States. Thus, where an interest expense of a
foreign corporation is allocable to U.S. effectively connected
income, but that interest expense would not have been fully
deductible for tax purposes under another Code provision had it
been paid by a U.S. corporation, the bill clarifies that such
interest is nonetheless treated for branch level interest tax
purposes like a payment by a U.S. corporation to a foreign
corporate parent. Similarly, with regard to the Treasury's
regulatory authority to treat an interest payment by a foreign
corporation's U.S. branch as though not paid by a U.S. person
for source and withholding purposes, the bill clarifies that
the authority extends to interest payments in excess of those
reasonably expected to be allocable to U.S. effectively
connected income of the foreign corporation.
These provisions are effective as if they were made by the
Tax Reform Act of 1986.
8. Determination of source in case of sales of inventory property (sec.
604(f)(4) of the bill, sec. 211 of the 1986 Act, and sec.
865(b) of the Code)
Present Law
Prior to the 1986 Act, the source of income derived from
the sale of personal property generally was determined by the
place of sale (commonly referred to as the ``title passage''
rule) (see, e.g. , Treas. Reg. sec. 1. 861-7, T. D. 6258, 1957-
2 C. B. 368). While the 1986 Act generally replaced the place-
of-sale rule for sales of personal property with a residence-
of-the-seller rule (sec. 865(a)), the Act did not change the
place-of-sale rule for most sales of inventory property (sec.
865(b)).
Before and after the 1986 Act, statutory rules for sourcing
income from inventory sales have included those covering income
from (1) purchasing inventory property outside the United
States (other than within a U.S. possession) and selling it in
the United States (sec. 861(a)(6)); (2) purchasing inventory
property in the United States and selling it outside the United
States (sec. 862(a)(6)); (3) selling outside the United States
inventory property which has been produced by the taxpayer in
the United States (or selling in the United States inventory
property which has been produced by the taxpayer outside the
United States) (sec. 863(b)(2)); and (4) purchasing inventory
property in a U.S. possession and selling it in the United
States (sec. 863(b)(3)). Prior to the 1986 Act, these
provisions were not limited in application to income from sales
of inventory property, but rather covered sales of personal
property generally.
In addition to statutory rules for sourcing items of income
from transactions involving inventory property specified in the
Code, such as those listed above, the Code both before and
after the 1986 Act has contained other sourcing rules that do
not make specific reference to property sales, and includes
general regulatory authority to allocate and apportion between
U.S. and foreign sources items of gross income, expenses,
losses, and deductions other than those specified in sections
861(a) and 862(a) (sec. 863(a)). In carving income from the
sale inventory property out of the general residence-of-the-
seller rule of section 865, section 865(b) makes reference to
the above statutory rules making specific reference to
inventory property, but not to the general grant of regulatory
authority in section 863(a).
Explanation of Provision
The bill modifies the general provision relating to the
sourcing of income from the sale of personal property (sec.
865) so that the cross-reference to sourcing rules applicable
to inventory property includes a reference to all of section
863, rather than simply to section 863(b). The bill thus
clarifies that, to the extent that the Secretary of the
Treasury had general regulatory authority to provide rules for
the sourcing of income from the sales of personal property
prior to the 1986 Act, the Secretary of the Treasury retains
that authority under present law with respect to inventory
property.
The bill is not intended to increase the Treasury
Secretary's regulatory authority under section 863(a) beyond
the authority that he had under the law in effect prior to the
enactment of the 1986 Act. It is intended that no inference be
drawn from this provision either as to the correctness of, or
as to the post-1986 Act implications of, any judicial decision
interpreting the scope of that pre-1986 Act authority.
The provision is effective as if it were included in the
Tax Reform Act of 1986.
9. Repeal of obsolete provisions (sec. 604(f)(5) of the bill, sec.
10202 of the Revenue Act of 1987, and secs. 6038(a)(1)(F) and
6038A(b)(4) of the Code)
Present Law
A U. S person who controls a foreign corporation must
report certain information related to that foreign corporation
as may be required by the Treasury Secretary (sec. 6038).
Information reporting is also required with respect to certain
foreign-owned domestic corporations (sec. 6038A). Included
under each of these information reporting provisions is a
requirement to report such information as the Treasury
Secretary may require for purposes of carrying out the
provisions of section 453C. Section 453C, relating to certain
indebtedness treated as payment on installment obligations (the
so-called ``proportional disallowance rule''), was repealed in
the Revenue Act of 1987.
Explanation of Provision
The bill repeals as obsolete the information reporting
requirements of sections 6038 and 6038A relating to section
453C. The provision is effective upon the date of its
enactment.
10. Clarification of certain stadium bond transition rule in Tax Reform
Act of 1986 (sec. 604(g) of the bill and sec. 1317(3)(A) of the
Tax Reform Act of 1986)
Present Law
The Tax Reform Act of 1986 included a transition rule
authorizing tax-exempt bonds not exceeding $200 million to be
issued by or on behalf of the City of Cleveland, Ohio, to
finance a stadium. The bonds were required to be issued before
January 1, 1991 (and were so issued). As enacted, the rule
required Cleveland to retain a residual interest in the stadium
following planned private business use.
Explanation of Provision
The bill permits the residual interest in the stadium
currently held by the City of Cleveland to be assigned to
Cuyahoga County, Ohio (the county in which both Cleveland and
the stadium are located) because of a change in Ohio State law
prior to issuance of the bonds. The bill does not extend the
time for issuing the bonds or otherwise affect the amount of
bonds or the location or design of the stadium.
This provision is effective as if included in the Tax
Reform Act of 1986.
11. Health care continuation rules (sec. 604(h) of the bill, sec.
7862(c)(5) of the 1989 Act, sec. 4980B(f)(2)(B)(i) of the Code,
sec. 602(2)(A) of ERISA, and sec. 2202(2)(A) of the Public
Health Service Act)
Present Law
The Revenue Reconciliation Act of 1989 (``1989 Act'')
amended the health care continuation rules to provide that if a
covered employee is entitled to Medicare and within 18 months
of such entitlement separates from service or has a reduction
in hours, the duration of continuation coverage for the spouse
and dependents is 36 months from the date the covered employee
became entitled to Medicare. One possible interpretation of the
statutory language, however, would permit continuation coverage
for up to 54 months. This extension of the coverage period was
not intended.
Explanation of Provision
The bill amends the Code (sec. 4980B), title I of the
Employee Retirement Income Security Act (sec. 602), and the
Public Health Service Act (sec. 2202(2)(A)) to limit the
continuation coverage in such cases to no more than 36 months.
The provision is effective for plan years beginning after
December 31, 1989.
12. Taxation of excess inclusions of a residual interest in a REMIC for
taxpayers subject to alternative minimum tax with net operating
losses (sec. 604(i) of the bill and sec. 860E(a)(6) of the
Code)
Present Law
Residual interests in a REMIC
A real estate mortgage investment conduit (``REMIC'') is an
entity that holds real estate mortgages. All interests in a
REMIC must be ``regular interests'' or ``residual interests. ''
A regular interest is an interest the terms of which are fixed
on the start-up day, which unconditionally entitles the holder
to receive a specified principal amount, and which provides
that interest amounts are payable based on a fixed rate (or a
variable rate to the extent provided in the Treasury
regulations). A residual interest is any interest that is so
designated and that is not a regular interest in a REMIC.
Generally, the holder of a residual interest in a REMIC
takes into account his daily portion of the taxable income or
net loss of such REMIC for each day during which he held such
interest. The taxable income of any holder of a residual
interest in a REMIC for any taxable year cannot be less than
the excess inclusion for the year (sec. 860E). Thus, in
general, income from excess inclusions cannot be offset by a
net operating loss (or net operating loss carryover) in
computing the taxpayer's regular tax.
Alternative minimum tax
Taxpayers are subject to an alternative minimum tax which
is payable, in addition to all other tax liabilities, to the
extent it exceeds the taxpayer's regular tax. The tax is
imposed at a rate of 24 percent (20 percent in the case of a
corporation) on alternative minimum taxable income in excess of
an exemption amount. Alternative minimum taxable income
generally is the taxpayer's taxable income, as increased or
decreased by certain adjustments and preferences. Under the
alternative tax net operating loss deduction, a taxpayer may
deduct ninety percent of its net operating loss carryovers
against alternative minimum taxable income.
Because the determination of a taxpayer's alternative
minimum taxable income begins with taxable income, a holder of
a residual interest in a REMIC may have positive alternative
minimum taxable income even where the taxpayer has a net
operating loss for the year.
Explanation of Provision
The bill provides that three rules for determining the
alternative minimum taxable income of a taxpayer that is not a
thrift institution that holds residual interests in a REMIC.
First, the alternative minimum taxable income of such a
taxpayer is computed without regard to the REMIC rule that
taxable income cannot be less than the amount of excess
inclusions. This provision prevents a taxpayer from having to
include in alternative minimum taxable income preference items
for which it received no tax benefit.
Second, the alternative minimum taxable income of such a
taxpayer for a taxable year cannot be less than the excess
inclusions of the residual interests for that year. In effect,
this provision prevents nonrefundable credits from reducing the
taxpayer's income tax below an amount equal to what the
tentative minimum tax would be if computed only on excess
inclusions.
Third, the amount of any alternative minimum tax net
operating loss deduction of such a taxpayer is computed without
regard to any excess inclusions. This provision insures that
the net operating losses will not reduce any income
attributable to any excess inclusions. Thus, all such taxpayers
subject to the alternative minimum tax will pay a tax on excess
inclusions at the alternative minimum tax rate, regardless of
whether the taxpayer has a net operating loss.
The provision is effective for all taxable years beginning
after December 31, 1986, unless the taxpayer elects to apply
the rules of the bill only to taxable years beginning after the
date of enactment.
13. Application of harbor maintenance tax to Alaska and Hawaii ship
passengers (sec. 604(j) of the bill and sec. 4462(b) of the
Code)
Present Law
A harbor maintenance excise tax (``harbor tax'') of 0.125
percent of value applies generally to commercial cargo
(including passenger fares) loaded or unloaded at U.S. ports
(sec. 4461). The harbor tax does not apply to commercial cargo
(other than crude oil with respect to Alaska) loaded or
unloaded in Alaska, Hawaii, and U.S. possessions where such
cargo is transported to or from the U.S. mainland (for domestic
use) or where such cargo is loaded and unloaded in the same
State (Alaska or Hawaii) or possession (sec. 4462(b)).
Explanation of Provision
The bill clarifies that the harbor tax does not apply to
passenger fares where the passengers are transported on U.S.
flag vessels operating solely within the State waters of Alaska
or Hawaii and adjacent international waters (i.e., leaving and
returning to a port in the same State without stopping
elsewhere).
The provision applies as if included in the Harbor
Maintenance Revenue Act of 1986 (April 1, 1987).
14. Modify effective date provision relating to the Energy Policy Act
of 1992 (sec. 604(k) of the bill and secs. 53 and 30 of the
Code)
Present Law
The nonconventional fuels production credit (sec. 29)
cannot reduce the taxpayer's tax liability to less than the
amount of the tentative minimum tax. The credit for prior year
minimum tax liability (sec. 53) is increased by the amount of
the nonconventional fuels credit not allowed for the taxable
year solely by reason of the limitation based on the taxpayer's
tentative minimum tax.
Explanation of Provision
The bill corrects a cross reference to section 29(b)(6)(B)
contained in section 53(d)(1)(B)(iv), and clarifies that the
correction applies to taxable years beginning after December
31, 1990. In addition, section 2(e)(5) of the bill clarifies
that a correction made in the Energy Policy Act of 1992 to a
similar cross reference in section 53(d)(1)(B)(iii) applies to
taxable years beginning after December 31, 1990.
The bill also clarifies the relationship between the basis
adjustment rules for the electric vehicle credit (sec.
30(d)(1)) and the alternative minimum tax.
15. Treat qualified football coaches plan as multiemployer pension plan
for purposes of the Internal Revenue Code (sec. 604(l) of the
bill and sec. 1022 of ERISA)
Present Law
Section 3(37) of the Employee Retirement Income Security
Act of 1974 (``ERISA''), as amended by Public Law 100-202
(Continuing Appropriations for Fiscal Year 1988), provides
that, for purposes of Title I of ERISA, a qualified football
coaches plan generally is treated as a multiemployer plan and
may include a qualified cash or deferred arrangement. Under
section 3(37) of ERISA, a qualified football coaches plan is
defined as any defined contribution plan established and
maintained by an organization described in section 501(c) of
the Internal Revenue Code (the ``Code''), the membership of
which consists entirely of individuals who primarily coach
football as full-time employees of 4-year colleges or
universities, if the organization was in existence on September
18, 1986. This definition is generally intended to apply to the
American Football Coaches Association.
However, section 9343(a) of the Omnibus Budget
Reconciliation Act of 1987 (P.L. 100-203) provides that Titles
I and IV of ERISA are not applicable in interpreting Title II
of ERISA (the Code provisions relating to qualified plans),
except to the extent specifically provided in the Code or as
determined by the Secretary of the Treasury.
Explanation of Provision
The bill amends Title II of ERISA to provide that, for
purposes of determining the qualified plan status of a
qualified football coaches plan, section 3(37) of ERISA is
treated as part of Title II of ERISA and a qualified football
coaches plan is treated as a multiemployer collectively
bargained plan.
The provision is effective for years beginning after
December 22, 1987 (the date of enactment of P.L. 100-202).
16. Determination of unrecovered investment in annuity contract (sec.
604(m) of the bill and sec. 72(b) and (c) of the Code)
Present Law
An exclusion is provided for amounts received as an annuity
under an annuity, endowment, or life insurance contract, as
determined under a statutory exclusion ratio (sec. 72(b)). The
exclusion ratio is determined as the ratio of (1) the
taxpayer's investment in the contract (as of the annuity
starting date) to (2) the expected return under the contract
(as of such date). In the case of a contract with a refund
feature, the amount of a taxpayer's investment in the contract
is reduced by the value of the refund feature (sec. 72(c)).
This exclusion was modified by the Tax Reform Act of 1986
to limit the excludable amount to the taxpayer's unrecovered
investment in the contract, and to provide a deduction for the
unrecovered investment in the contract if payments as an
annuity under the contract cease by reason of the death of an
annuitant. In the case of a contract with a refund feature, the
1986 Act modifications reduce the exclusion ratio so that it is
possible that less than the entire investment in the contract
can be recovered tax-free.
Explanation of Provision
The bill modifies the definition of the unrecovered
investment in the contract, in the case of a contract with a
refund feature, so that the entire investment in the contract
can be recovered tax-free.
The provision is effective as if enacted in the Tax Reform
Act of 1986.
17. Election by parent to claim unearned income of certain children on
parent's return (sec. 604(n) of the bill and secs. 1 and 59(j)
of the Code)
Present Law
The net unearned income of a child under 14 years of age is
taxed to the child at the parent's statutory rate. Net unearned
income means unearned income less the sum of $650 (for 1995)
and the greater of: (1) $650 (for 1995) or, (2) if the child
itemizes deductions, the amount of allowable deductions
directly connected with the production of the unearned income.
The dollar amounts are adjusted for inflation.
In certain circumstances, a parent may elect to include a
child's unearned income on the parent's income tax return if
the child's income is less than $5,000. A parent making this
election must include the gross income of the child in excess
of $1,000 in income for the taxable year. In addition, the
parent must report an additional tax liability equal to the
lesser of (1) $75 or (2) 15 percent of the excess of the
child's income over $500. The dollar amounts for the election
are not adjusted for inflation.
A person claimed as a dependent cannot claim a standard
deduction exceeding the greater of $650 (for 1995) or such
person's earned income. For alternative minimum tax purposes,
the exemption of a child under 14 years of age generally cannot
exceed the sum of such child's earned income plus $1,000. The
$650 amount is adjusted for inflation but the $1,000 amount is
not.
Explanation of Provision
The bill adjusts for inflation the dollar amounts involved
in the election to claim unearned income on the parent's
return. It likewise indexes the $1,000 amount used in computing
the child's alternative minimum tax.
The provision is effective for taxable years beginning
after December 31, 1994.
18. Exclusion from income for combat zone compensation (sec. 604(o)(4)
of the bill and sec. 112 of the Code)
Present Law
The Code provides that gross income does not include
compensation received by a taxpayer for active service in the
Armed Forces of the United States for any month during any part
of which the taxpayer served in a combat zone (or was
hospitalized as a result of injuries, wounds or disease
incurred while serving in a combat zone) (limited to $500 per
month for commissioned officers). The heading refers to
``combat pay,'' although that term is no longer used to refer
to special pay provisions for members of the Armed Forces, nor
is the exclusion limited to those special pay provisions
(hazardous duty pay (37 U.S.C. sec. 301) and hostile fire or
imminent danger pay (37 U.S.C. sec. 310)).
Explanation of Provision
The bill modifies the heading of Code section 112 to refer
to ``combat zone compensation'' instead of ``combat pay. '' The
bill also makes conforming changes to cross-references
elsewhere in the Code. This provision is effective on the date
of enactment.
III. VOTES OF THE COMMITTEE
In compliance with clause 2(l)(2)(B) of rule XI of the
Rules of the House of Representatives, the following statements
are made concerning the votes of the Committee in its
consideration of the bill, H.R. 1215.
Motion to Report the Bill
The bill, H.R. 1215, was ordered favorably reported without
amendment on March 14, 1995, by a roll call vote of 21 yeas and
14 nays (with a quorum being present). The vote was as follows:
YEAS NAYS
Mr. Archer Mr. Gibbons
Mr. Crane Mr. Rangel
Mr. Thomas Mr. Stark
Mr. Shaw Mr. Jacobs
Mrs. Johnson Mr. Ford
Mr. Bunning Mr. Matsui
Mr. Houghton Mrs. Kennelly
Mr. Herger Mr. Coyne
Mr. McCrery Mr. Levin
Mr. Hancock Mr. Cardin
Mr. Camp Mr. McDermott
Mr. Ramstad Mr. Kleczka
Mr. Zimmer Mr. Lewis
Mr. Nussle Mr. Payne
Mr. Johnson
Ms. Dunn
Mr. Collins
Mr. Portman
Mr. English
Mr. Ensign
Mr. Christensen
Vote on Amendment
The Committee defeated an amendment (14 yeas and 21 nays)
offered by Mr. McDermott to sunset all provisions of the bill
on and after January 1, 2001. The roll call vote was as
follows:
YEAS NAYS
Mr. Gibbons Mr. Archer
Mr. Rangel Mr. Crane
Mr. Stark Mr. Thomas
Mr. Jacobs Mr. Shaw
Mr. Ford Mrs. Johnson
Mr. Matsui Mr. Bunning
Mrs. Kennelly Mr. Houghton
Mr. Coyne Mr. Herger
Mr. Levin Mr. McCrery
Mr. Cardin Mr. Hancock
Mr. McDermott Mr. Camp
Mr. Kleczka Mr. Ramstad
Mr. Lewis Mr. Zimmer
Mr. Payne Mr. Nussle
Mr. Johnson
Ms. Dunn
Mr. Collins
Mr. Portman
Mr. English
Mr. Ensign
Mr. Christensen
IV. BUDGET EFFECTS OF THE BILL
A. Committee Estimate of Budgetary Effects
In compliance with clause 7(a) of rule XIII of the Rules of
the House of Representatives, the following statement is made
concerning the effects on the budget of this bill, H.R. 1215,
as reported.
The bill is estimated to have the following effects on
budget receipts and outlays for fiscal years 1995-2000:
ESTIMATED BUDGET EFFECTS OF THE PROVISIONS RELATING TO H.R. 1215, THE ``CONTRACT WITH AMERICA TAX RELIEF ACT OF
1995''
[By fiscal years, in billions of dollars]
----------------------------------------------------------------------------------------------------------------
Provision Effective 1995 1996 1997 1998 1999 2000 1995-00
----------------------------------------------------------------------------------------------------------------
Title I. American
Dream Restoration:
A. Family Tax 1/1/96.............. ........ -4.6 -23.3 -24.1 -26.2 -26.7 -104.9
Credit ($500 in
1996, and
thereafter;
children under
age 18; phase-
out $200,000 to
$250,000).
B. Credit to tyba DoE............ ........ -0.2 -2.0 -2.0 -2.0 -2.0 -8.2
Reduce the
Marriage
Penalty.
C. Establishment
of American
Dream Savings
Accounts and
Spousal IRAs:
1. American 1/1/96.............. ........ 1.2 1.6 1.0 0.2 -2.0 2.0
Dream
Savings
Accounts.
2. $2,000 1/1/96.............. ........ (\1\) -0.1 -0.1 -0.1 -0.1 -0.5
Spousal IRA.
---------------------------------------------------------------------
Total, .................... ........ -3.7 -23.8 -25.2 -28.1 -30.9 -111.6
title I.
=====================================================================
Title II. Senior
Citizens' Equity:
A. Repeal of 1/1/96.............. ........ -0.5 -1.9 -3.2 -4.3 -5.6 -15.6
Increase in Tax
on Social
Security
Benefits (phase-
in 75%, 65%,
60%, 55%, 50%).
B. Treatment of 1/1/96.............. ........ -0.9 -1.0 -1.2 -1.4 -1.6 -6.1
Long-Term Care
Insurance.
C. Tax Treatment 1/1/96.............. ........ (\1\) -0.1 -0.1 -0.2 -0.2 -0.6
of Accelerated
Death Benefits
under Life
Insurance
Contracts.
---------------------------------------------------------------------
Total, .................... ........ -1.4 -3.0 -4.5 -5.9 -7.4 -22.3
title II.
=====================================================================
Title III. Job
Creation and Wage
Enhancement:
A. Capital Gains 1/1/95.............. 0.3 11.3 -5.2 -10.4 -13.0 -14.9 -31.9
Reforms:
Provisions in
``Contract''
but (a)
indexing is not
allowed to
create losses;
(b) no indexing
and max rate of
25% for
corporations;
(c)
collectibles--c
hoice of
indexing or 28%
max rate; (d)
holding period
for indexing of
3 years; (e)
indexing
applies only to
assets acquired
after 1994, but
with an
election to
mark-to-market
for 1995; (f)
net lease
exclusion
removed; and
(g) other
miscellaneous
changes.
B. Leasehold lida 3/13/95........ (\1\) (\1\) (\1\) (\1\) (\1\) (\1\) (\2\)
Improvements
Provision.
C. Neutral Cost ppisa 12/31/94...... 1.2 9.2 10.0 6.3 -1.2 -8.8 16.7
Recovery.
D. Corporate generally 1/1/95 \3\ -0.8 -2.7 -3.6 -3.3 -3.7 -2.7 -16.9
Alternative
Minimum Tax
(AMT) Reform:
Prospective
repeal of
corporate AMT
and business
preferences
under the
individual AMT;
Full repeal of
the corporate
AMT beginning
in 2001.
E. Interaction .................... 0.4 0.7 0.7 0.4 0.1 (\5\) 2.3
Between Neutral
Cost Recovery
(C.) and
Corporate AMT
(D.) Provisions
\4\.
F. Debt tyba DoE............ (\9\) (\9\) (\9\) (\9\) (\9\) (\9\) (\9\)
Reduction
Checkoff and
Trust Fund.
G. Small
Business
Incentives:
1. Increase 1/1/96.............. ........ ........ -1.4 -1.6 -1.8 -2.1 -6.8
in unified
estate and
gift tax
credits \6\.
2. Increase tyba 12/31/95....... ........ -0.6 -1.4 -2.0 -2.1 -1.8 -7.8
in expense
treatment
for small
businesses
($22,500
for 1996,
$27,500 for
1997,
$32,500 for
1998, and
$35,000 for
1999 and
thereafter).
3. 1/1/96.............. ........ -0.1 -0.2 -0.2 -0.2 -0.2 -0.9
Clarificati
on of
definition
of
principal
place of
business;
Treatment
of storage
of product
samples.
---------------------------------------------------------------------
Total, .................... 1.1 17.8 -1.1 -10.8 -21.9 -30.5 -45.3
title III.
=====================================================================
Title IV. Family
Reinforcement:
A. Credit for tyba 12/31/95....... ........ (\1\) -0.2 -0.2 -0.2 -0.2 -1.0
Adoption
Expenses.
B. Credit for tyba 12/31/95....... ........ -0.1 -0.2 -0.2 -0.2 -0.2 -1.0
Custodial Care
of Certain
Elderly
Dependents in
Taxpayer's Home.
---------------------------------------------------------------------
Total, .................... ........ -0.1 -0.4 -0.4 -0.4 -0.4 -2.0
title IV.
----------------------=====================================================================
Title V. Social
Security
Provisions:
A. Modify Social 1/1/96.............. ........ -0.5 -1.1 -1.6 -2.1 -2.4 -7.6
Security
Earnings
Limitations \7\.
---------------------------------------------------------------------
Total, .................... ........ -0.5 -1.1 -1.6 -2.1 -2.4 -7.6
title V.
=====================================================================
Title VI. Technical
Corrections:
A. Technical .................... (\5\) ........ ........ ........ ........ ........ (\5\)
Corrections
Provisions.
---------------------------------------------------------------------
Total, .................... (\5\) ........ ........ ........ ........ ........ (\5\)
title, VI.
=====================================================================
Total, .................... 1.1 12.6 -28.3 -40.9 -56.4 -69.2 -181.2
revenue
provision
s (titles
I, II,
III, IV,
VI) \8\.
=====================================================================
Grand .................... 1.1 12.1 -29.4 -42.5 -58.5 -71.6 -188.8
total
(all
titles) \
8\.
----------------------------------------------------------------------------------------------------------------
\1\ Loss of less than $50 million.
\2\ Loss of less than $100 million.
\3\ The Alternative Minimum Tax depreciation adjustment would be repealed for: (1) all property covered under
the Neutral Cost Recovery System; and (2) all other depreciable property placed in service after March 13,
1995.
\4\ The positive interaction between these two provisions will go to zero if either of these provisions is
removed from the package.
\5\ Gain of less than $50 million.
\6\ Beginning after 1998, estimate includes indexing of the following: (1) the $10,000 annual exclusions for
gifts; (2) the $750,000 ceiling amount on special use valuation under section 2032A of the Internal Revenue
Code; (3) the $1,000,000 generation-skipping transfer tax exemption; and (4) the value of closely held
business eligible for the special four-percent interest rate under section 6601(j) of the Internal Revenue
Code.
\7\ Change in outlays supplied by the Congressional Budget Office.
\8\ Total does not include all possible interaction among provisions.
\9\ No revenue effect.
Legend for ``Effective'' column: tyba DoE=taxable years beginning after date of enactment; ppisa=property placed
in service after; tyba=taxable years beginning after; lida=leasehold improvements disposed of after.
Note.--Details may not add to totals due to rounding.
Source: Joint Committee on Taxation.
B. New Budget Authority and Tax Expenditures
Budget authority
In compliance with subdivision (B) of clause 2(l)(3) of
rule XI of the Rules of the House of Representatives, the
Committee states that the outlay for the increase in the limit
on Social Security earnings involves increased budget authority
(amounts shown in the revenue table in IV.A., above).
Tax expenditures
In compliance with subdivision (B) of clause 2(l)(3) of
rule XI of the Rules of the House of Representatives, the
Committee states that the revenue-reducing income tax
provisions (other than the provision relating to the definition
of principal place of business and treatment of storage of
product samples) of the bill involve increased tax
expenditures, and that the revenue-increasing income tax
provisions involve reduced tax expenditures. (See specific
amounts in the revenue table in IV.A., above.) The increase in
the unified estate and gift tax credits is not treated as a tax
expenditure, since under the Budget Act estate and gift tax
changes are not considered as tax expenditures.
C. Cost Estimate of the Congressional Budget Office
In compliance with subdivision (C) of clause 2(l)(3) of
rule XI of the Rules of the House of Representatives (requiring
a cost estimate by the Congressional Budget Office), the
following statement from the Congressional Budget Office is
provided.
U.S. Congress,
Congressional Budget Office,
Washington, DC, March 16, 1995.
Hon. Bill Archer,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 1215, the Contract
With America Tax Relief Act of 1995, as ordered reported by the
House Committee on Ways and Means on March 14, 1995.
The bill would affect direct spending and receipts and thus
would be subject to pay-as-you-go procedures under section 252
of the Balanced Budget and Emergency Deficit Control Act of
1985.
If you wish further details on this estimate, we will be
pleased to provide them.
Sincerely,
June E. O'Neill, Director.
Enclosure.
CONGRESSIONAL BUDGET OFFICE COST ESTIMATE
1. Bill number: H.R. 1215.
2. Bill title: Contract With America Tax Relief Act of
1995.
3. Bill status: As ordered reported by the Committee on
Ways and Means on March 14, 1995.
4. Bill purpose: The bill would provide for a family tax
credit, establish American dream savings accounts, repeal a
portion of the income tax on Social Security benefits, reduce
the taxation of capital gains and index them for inflation,
change depreciation rules, and make other changes in the
Internal Revenue Code. It would also increase the exempt amount
for the Social Security earnings test and establish a Public
Debt Reduction Trust Fund.
5. Estimated cost to the Federal Government:
Direct spending
The bill would increase Social Security benefit payments,
which are off-budget. The following table shows projected
Social Security benefits under current law, the changes that
would stem from the bill, and projected benefit payments if the
bill were enacted.
SOCIAL SECURITY BENEFITS (OFF-BUDGET)
[Outlays by fiscal years, in billions of dollars]
------------------------------------------------------------------------
1995 1996 1997 1998 1999 2000
------------------------------------------------------------------------
Projected Spending
Under Current Law 329.7 347.5 366.5 386.5 407.7 430.3
Proposed Changes.. 0 0.5 1.1 1.6 2.1 2.4
Projected Spending
under H.R. 1215.. 329.7 347.9 367.6 388.1 409.7 432.7
------------------------------------------------------------------------
Note.--Numbers may not add to totals due to rounding.
The effects of this provision fall within budget function
650.
The bill would also phase out the increase in the taxation
of Social Security benefits that was enacted in 1993. During
the phase-out period, the part of the increase that remained
would be allocated to the Social Security trust funds rather
than to the Hospital Insurance trust fund. This reallocation
would appear in the budget as a decrease in offsetting receipts
(increase in net outlays) of the Hospital Insurance trust fund
(which is on-budget) and a corresponding increase in the
receipts (decrease in the net outlays) of the Social Security
trust funds (which are off-budget). The following table shows
these changes.
------------------------------------------------------------------------
1995 1996 1997 1998 1999 2000
------------------------------------------------------------------------
Off-Budget........ 0 -2.4 -2.4 -1.7 -1.0 -0.2
On-Budget......... 0 2.4 2.4 1.7 1.0 0.2
-----------------------------------------------------
Total....... 0 0 0 0 0 0
------------------------------------------------------------------------
The effects of this provision fall within budget functions
570 and 650.
Revenues
The bill would affect on-budget federal revenues. The
following table shows projected revenues under current law, the
changes that would stem from the bill, and projected revenues
if the bill were enacted.
------------------------------------------------------------------------
1995 1996 1997 1998 1999 2000
------------------------------------------------------------------------
Projected revenues
under current law 1,355.2 1,417.7 1,475.5 1,546.4 1,618.3 1,697.5
Proposed changes
(on-budget)...... 1.1 12.6 -28.3 -40.9 -56.4 -69.2
Projected revenues
under H.R. 1215.. 1,356.3 1,430.3 1,447.2 1,505.5 1,561.9 1,628.3
------------------------------------------------------------------------
6. Basis of estimate:
Direct spending
Social Security Earnings Test. Title V of H.R. 1215 would
relax the current limitations on the receipt of Social Security
benefits for those aged 65-69 with earnings above a certain
level. Under current law, individuals entitled to Social
Security cash benefits may have their benefits reduced, or
withheld completely, if their earnings exceed a specified
exempt amount.
In 1995, the law provides that Social Security
beneficiaries under age 65 may earn up to $8,160 a year in
wages or self-employment income without having their benefits
affected. Those aged 65-69 can earn up to $11,280. The earnings
test currently reduces benefits for those under age 65 by $1
for each $2 of earnings above the exempt amount. Those aged 65-
69 lose $1 in benefits for each $3 of earnings above the exempt
amount. The test does not apply to recipients over age 69. (A
different and more stringent earnings restriction applies to
recipients of Disability Insurance (DI) benefits and would be
unaffected by proposed changes in the earnings test.) The
exempt amounts rise each year at the same rate as average wages
in the economy.
Title V of H.R. 1215 would affect beneficiaries who have
reached the normal retirement age, currently 65. Under this
bill, the annual exempt amount for beneficiaries aged 65-69
would be increased in stages during 1996-2000 to $30,000 in
2000. The exempt amount would be increased automatically
thereafter based on the increase in average wages. The ad hoc
increases in the exempt amount under the bill are compared in
the following table with the exempt amounts that are estimated
to occur under current law.
------------------------------------------------------------------------
Calendar year Current law H.R. 1215
------------------------------------------------------------------------
1995........................................ $11,280 $11,280
1996........................................ 11,640 15,000
1997........................................ 11,880 19,000
1998........................................ 12,240 23,000
1999........................................ 12,720 27,000
2000........................................ 13,200 30,000
------------------------------------------------------------------------
The legislation is estimated to increase outlays by $458
million in 1996 rising to $2.415 billion in the year 2000.
According to the Social Security Administration, in 1996 an
estimated 720,000 Social Security beneficiaries would receive
additional benefits under the proposal. In 2000, when the
proposal would be fully phased in, roughly 800,000
beneficiaries would be so affected.
Raising the earnings test exempt amount could result in
behavioral responses that lead to an increase in earnings of
those 65 and over, but empirical research suggests that the
response is likely to be relatively small. Although the
proposed increase in the earnings test is larger than past
increases, two considerations reinforce this conclusion. First,
Social Security beneficiaries who have already reduced their
hours of work on account of the earnings test may not be
inclined to increase their work effort or may find limited
opportunities to do so. Therefore, any increase in work effort
may be largely confined to newly eligible beneficiaries.
Second, two scheduled changes in Social Security will reduce
the impact of changing the earnings test. The increase in the
normal retirement age for workers who reach age 62 in 2000 and
thereafter will reduce the number of years during which the
proposed increases in the exempt amount will apply. Also, the
amount of the delayed retirement credit is being gradually
increased, so that in 2005 and thereafter the expected amount
of the credit will fully offset the amount of benefits withheld
on account of the earnings test.
Public Debt Reduction Trust Fund. Subtitle D of H.R. 1215
would establish a public debt reduction checkoff and trust
fund. Enactment of this provision would have no effect on
either revenues or outlays. The proposal would permit
individual taxpayers to dedicate up to 10 percent of income tax
liability into a ``Public Debt Reduction Trust Fund'' by means
of a checkoff on their tax returns. The checkoff would neither
increase nor decrease the amount of taxes paid by the taxpayer.
Furthermore, the amount dedicated to the trust fund would have
no effect on current law spending obligations of the federal
government and would not directly constrain future
appropriations or direct spending legislation. Because expected
deficits would not change as a result of enactment of Subtitle
D, the total amount of debt issued and redeemed would not be
affected.
Revenues
The revenue estimates were prepared by the Joint Committee
on Taxation (see attached table). For information on the
estimating assumptions, see Joint Committee on Taxation,
``Analysis of Estimated Effects on Fiscal Year Budget Receipts
of the Revenue Provisions in the Contract With America'' (JCX-
4-95), February 6, 1995, and Joint Committee on Taxation,
``Description of the Contract With America Tax Relief Act of
1995'' (JCX-9-95), March 9, 1995.
7. Pay-as-you-go considerations: The Balanced Budget and
Emergency Deficit Control Act of 1985 sets up pay-as-you-go
procedures for legislation affecting direct spending or
receipts through 1998. Changes in Social Security are excluded
from the pay-as-you-go calculations. The pay-as-you-go effects
of the bill are as follows.
------------------------------------------------------------------------
1995 1996 1997 1998
------------------------------------------------------------------------
Outlays............. 0 2.4 2.4 1.7
Receipts............ 1.1 12.6 -28.3 -40.9
------------------------------------------------------------------------
8. Estimated cost to State and local governments: H.R. 1215
mandates no new or additional spending by state and local
governments. Tax receipts could be affected in states whose
income taxes are tied to provisions of the federal income tax.
9. Estimate comparison: None.
10. Previous CBO estimate: None.
11. Estimate prepared by: Wayne Boyington (Social Security)
Daniel Kowalski (Debt Reduction Trust Fund) Richard Kasten
(Payments to OASDI and HI Trust Funds)
12. Estimate approved by: Paul N. Van de Water, Assistant
Director for Budget Analysis.
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE
A. Committee Oversight Findings and Recommendations
With respect to subdivision (A) of clause 2(l)(3) of rule
XI of the Rules of the House of Representatives (relating to
oversight findings), the Committee advises that it was as a
result of the Committee's oversight activities concerning the
taxation of the family, taxation of savings and investment,
capital cost recovery, the alternative minimum tax, the tax
treatment of leasehold improvements, taxation of social
security benefits, the tax treatment of long-term care
insurance and accelerated death benefits under life insurance
contracts, the unified estate and gift tax credits, expensing
deduction for small business, the tax treatment of home office
expenses and storage of product samples, the debt reduction
checkoff and trust fund, increase in Social Security earnings
limit, and technical corrections to recent tax legislation that
the Committee concluded it is appropriate to enact the
provisions contained in the bill as reported. (See also Parts
I.B and I.C of this report for a discussion of the background
and purpose of the bill and the legislative history and
hearings held on the provisions included in the bill.)
B. Findings and Recommendations of the Committee on Government Reform
and Oversight
With respect to subdivision (D) of clause 2(l)(3) of rule
XI of the Rules of the House of Representatives, the Committee
advises that no oversight findings or recommendations have been
submitted to the Committee by the Committee on Government
Reform and Oversight with respect to the provisions contained
in this bill.
C. Inflationary Impact Statement
In compliance with clause 2(l)(4) of Rule XI of the Rules
of the House of Representatives, the Committee makes the
following statement concerning the possible inflationary impact
of the bill.
The estimated revenue reductions in the bill as reported
(see Part IV.A of this report) are expected to be fully offset
by spending reductions in other legislation to be considered by
the House of Representatives along with the provisions of this
bill (H.R. 1215). Thus, the combined tax reduction provisions
of this bill and the expected spending reduction legislation
are projected to not result in an increase in the overall
Federal deficit or an overall inflationary impact on prices in
the operation of the nation's economy.
VI. CHANGES IN EXISTING LAW MADE BY THE BILL AS REPORTED
In compliance with clause 3 of rule XIII of the Rules of the
House of Representatives, changes in existing law made by the
bill, as reported, are shown as follows (existing law proposed
to be omitted is enclosed in black brackets, new matter is
printed in italic, existing law in which no change is proposed
is shown in roman):
INTERNAL REVENUE CODE OF 1986
* * * * * * *
Subtitle A--Income Taxes
CHAPTER 1--NORMAL TAXES AND SURTAXES
Subchapter A--Determination of Tax Liability
* * * * * * *
PART I--TAX ON INDIVIDUALS
* * * * * * *
SECTION 1. TAX IMPOSED.
(a) * * *
* * * * * * *
(g) Certain Unearned Income of Minor Children Taxed as if
Parent's Income.--
(1) * * *
* * * * * * *
(7) Election to claim certain unearned income of
child on parent's return.--
(A) In general.--If--
(i) any child to whom this subsection
applies has gross income for the
taxable year only from interest and
dividends (including Alaska Permanent
Fund dividends),
[(ii) such gross income is more than
$500 and less than $5,000,]
(ii) such gross income is more than
the amount described in paragraph
(4)(A)(ii)(I) and less than 10 times
the amount so described,
* * * * * * *
(B) Income included on parent's return.--In
the case of a parent making the election under
this paragraph--
(i) the gross income of each child to
whom such election applies (to the
extent the gross income of such child
exceeds [$1,000] twice the amount
described in paragraph (4)(A)(ii)(I)
shall be included in such parent's
gross income for the taxable year,
(ii) the tax imposed by this section
for such year with respect to such
parent shall be the amount equal to the
sum of--
(I) the amount determined
under this section after the
application of clause (i), plus
[(II) for each such child,
the lesser of $75 or 15 percent
of the excess of the gross
income of such child over $500,
and]
(II) for each such child, 15
percent of the lesser of the
amount described in paragraph
(4)(A)(ii)(I) or the excess of
the gross income of such child
over the amount so described,
and
* * * * * * *
[(h) Maximum Capital Gains Rate.--If a taxpayer has a net
capital gain for any taxable year, then the tax imposed by this
section shall not exceed the sum of--
[(1) a tax computed at the rates and in the same
manner as if this subsection had not been enacted on
the greater of--
[(A) taxable income reduced by the amount of
the net capital gain, or
[(B) the amount of taxable income taxed at a
rate below 28 percent, plus
[(2) a tax of 28 percent of the amount of taxable
income in excess of the amount determined under
paragraph (1).
[For purposes of the preceding sentence, the net capital gain
for any taxable year shall be reduced (but not below zero) by
the amount which the taxpayer elects to take into account as
investment income for the taxable year under section
163(d)(4)(B)(iii).]
PART IV--CREDITS AGAINST TAX
* * * * * * *
Subpart A--Nonrefundable Personal Credits
Sec. 21. Expenses for household and dependent care services
necessary for gainful employment.
Sec. 23. Family tax credit.
Sec. 24. Credit to reduce marriage penalty.
Sec. 25A. Adoption expenses.
Sec. 25B. Credit for taxpayers with certain persons requiring
custodial care in their households.
* * * * * * *
SEC. 23. FAMILY TAX CREDIT.
(a) Allowance of Credit.--There shall be allowed as a credit
against the tax imposed by this chapter for the taxable year an
amount equal to $500 multiplied by the number of qualifying
children of the taxpayer.
(b) Limitation.--The amount of credit which would (but for
this subsection) be allowed by subsection (a) shall be reduced
(but not below zero) by an amount which bears the same ratio to
such amount of credit as--
(1) the excess (if any) of the taxpayer's adjusted
gross income (determined without regard to sections
911, 931, and 933) over $200,000, bears to
(2) an amount equal to 100 times the dollar amount in
effect under subsection (a) for the taxable year.
(c) Qualifying Child.--For purposes of this section--
(1) In general.--The term ``qualifying child'' means
any individual if--
(A) the taxpayer is allowed a deduction under
section 151 with respect to such individual for
such taxable year,
(B) such individual has not attained the age
of 18 as of the close of the calendar year in
which the taxable year of the taxpayer begins,
and
(C) such individual bears a relationship to
the taxpayer described in section 32(c)(3)(B)
(determined without regard to clause (ii)
thereof).
(2) Exception for certain noncitizens.--The term
``qualifying child'' shall not include any individual
who would not be a dependent if the first sentence of
section 152(b)(3) were applied without regard to all
that follows ``resident of the United States''.
(d) Inflation Adjustments.--
(1) In general.--In the case of a taxable year
beginning in a calendar year after 1996, the $500 and
$200,000 amounts contained in subsections (a) and (b)
shall each be increased by an amount equal to--
(A) such dollar amount, multiplied by
(B) the cost-of-living adjustment determined
under section 1(f)(3) for the calendar year in
which the taxable year begins, determined by
substituting ``calendar year 1995'' for
``calendar year 1992'' in subparagraph (B)
thereof.
(2) Rounding.--If any amount as adjusted under
paragraph (1) is not a multiple of $50, such amount
shall be rounded to the nearest multiple of $50.
(e) Certain Other Rules Apply.--Rules similar to the rules of
subsections (d) and (e) of section 32 shall apply for purposes
of this section.
SEC. 24. CREDIT TO REDUCE MARRIAGE PENALTY.
(a) Allowance of Credit.--In the case of a joint return for
the taxable year, there shall be allowed as a credit against
the tax imposed by this chapter for such taxable year an amount
equal to the marriage penalty reduction credit.
(b) Limitations.--
(1) Dollar limitation.--The amount of credit allowed
by subsection (a) for the taxable year shall not exceed
$145.
(2) Credit disallowed for individuals claiming
section 911, etc.--No credit shall be allowed under
this section for any taxable year if either spouse
claims the benefits of section 911, 931, or 933 for
such taxable year.
(c) Marriage Penalty Reduction Credit.--For purposes of this
section--
(1) In general.--The marriage penalty reduction
credit is an amount equal to the excess (if any) of--
(A) the joint tax amount of the taxpayer,
over
(B) the sum of the unmarried tax amounts for
each spouse.
(2) Unmarried tax amount.--For purposes of paragraph
(1), the unmarried tax amount, with respect to an
individual, is the amount of tax which would be imposed
by section 1(c) if such individual's taxable income
were equal to the excess (if any) of--
(A) such individual's qualified earned income
for the taxable year, over
(B) the sum of--
(i) an amount equal to the basic
standard deduction under section
63(c)(2)(C) for the taxable year, plus
(ii) the exemption amount (as defined
in section 151(d)) for such taxable
year.
(3) Joint tax amount.--For purposes of paragraph (1),
the joint tax amount is the amount of tax which would
be imposed by section 1(a) if the taxpayer's taxable
income were equal to the excess (if any) of--
(A) the taxpayer's qualified earned income
for the taxable year, over
(B) the sum of--
(i) an amount equal to the basic
standard deduction under section
63(c)(2)(A) for the taxable year, plus
(ii) an amount equal to twice the
exemption amount (as so defined) for
such taxable year.
(d) Qualified Earned Income.--For purposes of this section--
(1) In general.--The term ``qualified earned income''
means an amount equal to the excess (if any) of--
(A) the earned income for the taxable year,
over
(B) an amount equal to the sum of the
deductions described in paragraphs (1), (2),
(6), (7), and (12) of section 62(a) to the
extent that such deductions are properly
allocable to or chargeable against earned
income for such taxable year.
The amount of qualified earned income shall be
determined without regard to any community property
laws.
(2) Earned income.--For purposes of paragraph (1)--
(A) In general.--The term ``earned income''
means income which is earned income within the
meaning of section 401(c)(2)(C) or 911(d)(2)
(determined without regard to the phrase ``not
in excess of 30 percent of his share of the net
profits of such trade or business'' in
subparagraph (B) thereof).
(B) Exception.--Such term shall not include
any amount--
(i) not includible in gross income,
(ii) received as a pension or
annuity,
(iii) paid or distributed out of an
individual retirement plan (within the
meaning of section 7701(a)(37)),
(iv) received as deferred
compensation, or
(v) received for services performed
by an individual in the employ of the
spouse (within the meaning of section
3121(b)(3)(A)).
(e) Amount of Credit To Be Determined Under Tables.--
(1) In general.--The amount of the credit allowed by
this section shall be determined under tables
prescribed by the Secretary.
(2) Requirements for tables.--The tables prescribed
under paragraph (1) shall reflect the provisions of
subsection (c) and shall round to the nearest $25 any
amount of credit which is less than the maximum credit
under subsection (b)(1).
SEC. 25A. ADOPTION EXPENSES.
(a) Allowance of Credit.--In the case of an individual, there
shall be allowed as a credit against the tax imposed by this
chapter for the taxable year the amount of the qualified
adoption expenses paid or incurred by the taxpayer during such
taxable year.
(b) Limitations.--
(1) Dollar limitation.--The aggregate amount of
qualified adoption expenses which may be taken into
account under subsection (a) with respect to the
adoption of a child shall not exceed $5,000.
(2) Income limitation.--The amount allowable as a
credit under subsection (a) for any taxable year shall
be reduced (but not below zero) by an amount which
bears the same ratio to the amount so allowable
(determined without regard to this paragraph but with
regard to paragraph (1)) as--
(A) the amount (if any) by which the
taxpayer's adjusted gross income (determined
without regard to sections 911, 931, and 933)
exceeds $60,000, bears to
(B) $40,000.
(3) Denial of double benefit.--
(A) In general.--No credit shall be allowed
under subsection (a) for any expense for which
a deduction or credit is allowable under any
other provision of this chapter.
(B) Grants.--No credit shall be allowed under
subsection (a) for any expense to the extent
that funds for such expense are received under
any Federal, State, or local program. The
preceding sentence shall not apply to expenses
for the adoption of a child with special needs.
(c) Definitions.--For purposes of this section--
(1) Qualified adoption expenses.--
(A) In general.--The term ``qualified
adoption expenses'' means reasonable and
necessary adoption fees, court costs, attorney
fees, and other expenses--
(i) which are directly related to,
and the principal purpose of which is
for, the legal adoption of an eligible
child by the taxpayer, and
(ii) which are not incurred in
violation of State or Federal law or in
carrying out any surrogate parenting
arrangement.
(B) Expenses for adoption of spouse's child
not eligible.--The term ``qualified adoption
expenses'' shall not include any expenses in
connection with the adoption by an individual
of a child who is the child of such
individual's spouse.
(2) Eligible child.--The term ``eligible child''
means any individual--
(A) who has not attained age 18 as of the
time of the adoption, or
(B) who is physically or mentally incapable
of caring for himself.
(3) Child with special needs.--The term ``child with
special needs'' means any child if--
(A) a State has determined that the child
cannot or should not be returned to the home of
his parents, and
(B) such State has determined that there
exists with respect to the child a specific
factor or condition (such as his 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 it is
reasonable to conclude that such child cannot
be placed with adoptive parents without
providing adoption assistance.
(d) Married Couples Must File Joint Returns, Etc.--Rules
similar to the rules of paragraphs (2), (3), and (4) of section
21(e) shall apply for purposes of this section.
SEC. 25B. CREDIT FOR TAXPAYERS WITH CERTAIN PERSONS REQUIRING CUSTODIAL
CARE IN THEIR HOUSEHOLDS.
(a) Allowance of Credit.--In the case of an individual who
maintains a household which includes as a member one or more
qualified persons, there shall be allowed as a credit against
the tax imposed by this chapter for the taxable year an amount
equal to $500 for each such person.
(b) Qualified Person.--For purposes of this section, the term
``qualified person'' means any individual--
(1) who is a father or mother of the taxpayer, his
spouse, or his former spouse or who is an ancestor of
such a father or mother,
(2) who is physically or mentally incapable of caring
for himself,
(3) who has as his principal place of abode for more
than half of the taxable year the home of the taxpayer,
and
(4) whose name and TIN are included on the taxpayer's
return for the taxable year.
For purposes of paragraph (1), a stepfather or stepmother shall
be treated as a father or mother.
(c) Special Rules.--For purposes of this section, rules
similar to the rules of paragraphs (1), (2), (3), and (4) of
section 21(e) shall apply.
Subpart B--Foreign Tax Credit, Etc.
* * * * * * *
SEC. 30. CREDIT FOR QUALIFIED ELECTRIC VEHICLES.
(a) * * *
* * * * * * *
(d) Special Rules.--
(1) Basis reduction.--The basis of any property for
which a credit is allowable under subsection (a) shall
be reduced by the amount of such credit (determined
without regard to subsection (b)(3)).
* * * * * * *
(4) Election to not take credit.--No credit shall be
allowed under subsection (a) for any vehicle if the
taxpayer elects to not have this section apply to such
vehicle.
* * * * * * *
Subpart D--Business related Credits
* * * * * * *
SEC. 38. GENERAL BUSINESS CREDIT.
(a) * * *
* * * * * * *
(c) Limitation Based on Amount of Tax.--
(1) * * *
(2) Special Rules.--
(A) * * *
* * * * * * *
(C) Limitations with respect to certain
persons.--In the case of a person described in
subparagraph (A) or (B) of section 46(e)(1) (as
in effect on the day before the date of the
enactment of the Revenue Reconciliation Act of
1990), the $25,000 amount specified under
subparagraph (B) of paragraph (1) shall equal
such person's ratable share (as determined
under section 46(e)(2) (as so in effect) of
such amount and without regard to the deduction
under section 56(h).
* * * * * * *
SEC. 39. CARRYBACK AND CARRYFORWARD OF UNUSED CREDITS
(a) * * *
* * * * * * *
(d) Transitional Rules.--
(1) * * *
* * * * * * *
(5) No carryback of section [45] 45a credit before
enactment.--No portion of the unused business credit
for any taxable year which is attributable to the
Indian employment credit determined under section 45A
may be carried to a taxable year ending before the date
of the enactment of section 45A.
(6) No carryback of section [45] 45b credit before
enactment.--No portion of the unused business credit
for any taxable year which is attributable to the
employer social security credit determined under
section 45B may be carried back to a taxable year
ending before the date of the enactment of section 45B.
* * * * * * *
SEC. 40. ALCOHOL USED AS FUEL.
(a) * * *
* * * * * * *
(e) Termination.--
(1) In general.--This section shall not apply to any
sale or use.--
(A) for any period after December 31, 2000,
or
[(B) for any period before January 1, 2001,
during which the Highway Trust Fund financing
rate under section 4081(a)(2) is not in
effect.]
(B) for any period before January 1, 2001,
during which the rates of tax under section
4081(a)(2)(A) are 4.3 cents per gallon.
* * * * * * *
SEC. 42. LOW-INCOME HOUSING CREDIT.
(a) * * *
* * * * * * *
(c) Qualified Basis; Qualified Low-Income Building.--For
purposes of this section--
(1) * * *
(2) Qualified low-income building.--The term
``qualified low-income building'' means any building--
(A) which is part of a qualified low-income
housing project at all times during the
period--
(i) beginning on the 1st day in the
compliance period on which such
building is part of such a project, and
(ii) ending on the last day of the
compliance period with respect to such
building, and
(B) to which the amendments made by section
201(a) of the Tax Reform Act of 1986 apply.
Such term does not include any building with respect to which
moderate rehabilitation assistance is provided, at any time
during the compliance period, under section 8(e)(2) of the
United States Housing Act of 1937 (other than assistance under
the Stewart B. McKinney Homeless Assistance Act [of 1988] (as
in effect on the date of enactment of this sentence)).
* * * * * * *
Subpart E--Rules for Computing Investment Credit
* * * * * * *
SEC. 50. OTHER SPECIAL RULES.
(a) Recapture in Case of Dispositions, Etc.--Under
regulations prescribed by the Secretary--
(1) * * *
(2) Property ceases to qualify for progress
expenditures.--
(A) * * *
* * * * * * *
(C) Certain sales and leasebacks.--Under
regulations prescribed by the Secretary, a sale
by, and leaseback to, a taxpayer who, when the
property is placed in service, will be a lessee
to whom the rules referred to in [subsection
(c)(4)] subsection (d)(5) apply shall not be
treated as a cessation described in
subparagraph (A) to the extent that the amount
which will be passed through to the lessee
under such rules with respect to such property
is not less than the qualified rehabilitation
expenditures properly taken into account by the
lessee under section 47(d) with respect to such
property.
* * * * * * *
(E) Special rules.--Rules similar to the
rules of this paragraph shall apply in cases
where qualified progress expenditures were
taken into account under the rules referred to
in [section 48(a)(5)(A)] section 48(a)(5).
* * * * * * *
Subpart G--Credit Against Regular Tax for Prior Year Minimum Tax
Liability
* * * * * * *
SEC. 53. CREDIT FOR PRIOR YEAR MINIMUM TAX LIABILITY.
(a) * * *
* * * * * * *
[(c) Limitation.--The credit allowable under subsection (a)
for any taxable year shall not exceed the excess (if any) of--
[(1) the regular tax liability of the taxpayer for
such taxable year reduced by the sum of the credits
allowable under subparts A, B, D, E, and F of this
part, over
[(2) the tentative minimum tax for the taxable year.]
(c) Limitation.--The credit allowable under subsection (a)
for any taxable year shall not exceed the lesser of--
(1) the excess (if any) of--
(A) the regular tax liability of the taxpayer
for such taxable year reduced by the sum of the
credits allowable under subparts A, B, D, E,
and F of this part, over
(B) the tentative minimum tax for the taxable
year, or
(2) 90 percent of the amount determined under
paragraph (1)(A).
(d) Definitions.--For purposes of this section--
(1) Net minimum tax.--
(A) In general.--The term ``net minimum tax''
means the tax imposed by section 55.
(B) Credit not allowed for exclusion
preferences.--
(i) * * *
* * * * * * *
(iv) Credit allowable for exclusion
preferences of corporations.--In the
case of a corporation--
(I) the preceding provisions
of this subparagraph shall not
apply, and
[(II) the adjusted net
minimum tax for any taxable
year is the amount of the net
minimum tax for such year
increased by the amount of any
credit not allowed under
section 29 solely by reason of
the application of section
29(b)(5)(B) or not allowed
under section 28 solely by
reason of the application of
section 28(d)(2)(B).]
(II) the adjusted net minimum
tax for any taxable year is the
amount of the net minimum tax
for such year increased in the
manner provided in clause
(iii).
* * * * * * *
PART VI--ALTERNATIVE MINIMUM TAX
* * * * * * *
SEC. 55. ALTERNATIVE MINIMUM TAX IMPOSED.
(a) General Rule.--There is hereby imposed (in addition to
any other tax imposed by this subtitle) a tax equal to the
excess (if any) of--
(1) the tentative minimum tax for the taxable year,
over
(2) the regular tax for the taxable year.
In the case of a corporation, the tentative minimum tax for any
taxable year beginning after December 31, 2000, shall be zero.
* * * * * * *
SEC. 56. ADJUSTMENTS IN COMPUTING ALTERNATIVE MINIMUM TAXABLE INCOME.
(a) Adjustments Applicable to All Taxpayers.--In determining
the amount of the alternative minimum taxable income for any
taxable year the following treatment shall apply (in lieu of
the treatment applicable for purposes of computing the regular
tax):
(1) Depreciation.--
(A) In general.--
(i) Property other than certain
personal property.--Except as provided
in clause (ii), the depreciation
deduction allowable under section 167
with respect to any tangible property
placed in service after December 31,
1986, and before March 14, 1995, shall
be determined under the alternative
system of section 168(g).
(ii) 150-percent declining balance
method for certain property.--The
method of depreciation used shall be--
(I) the 150 percent declining
balance method,
(II) switching to the
straight line method for the
1st taxable year for which
using the straight line method
with respect to the adjusted
basis as of the beginning of
the year will yield a higher
allowance.
The preceding sentence shall not apply
to any section 1250 property (as
defined in section 1250(c)) or to any
other property if the depreciation
deduction determined under section 168
with respect to such other property for
purposes of the regular tax is
determined by using the straight line
method.
(B) Exception for certain property.--This
paragraph shall not apply to property described
in paragraph (1), (2), (3), or (4) of section
168(f).
(C) Coordination with transitional rules.--
(i) In general.--This paragraph shall
not apply to property placed in service
after December 31, 1986, to which the
amendments made by section 201 of the
Tax Reform Act of 1986 do not apply by
reason of section 203, 204, or 251(d)
of such Act.
(ii) Treatment of certain property
placed in service before 1987.--This
paragraph shall apply to any property
to which the amendments made by section
201 of the Tax Reform Act of 1986 apply
by reason of an election under section
203(a)(1)(B) of such Act without regard
to the requirement of subparagraph (A)
that the property be placed in service
after December 31, 1986.
(D) Normalization rules.--With respect to
public utility property described in section
168(i)(10), the Secretary shall prescribe the
requirements of a normalization method of
accounting for this section.
(E) Use of neutral cost recovery ratio.--This
paragraph shall not apply to property to which
section 168(k) applies.
(2) Mining exploration and development costs.--
(A) In general.--With respect to each mine or
other natural deposit (other than an oil, gas,
or geothermal well) of the taxpayer, the amount
allowable as a deduction under section 616(a)
or 617(a) (determined without regard to section
291(b)) in computing the regular tax for costs
paid or incurred after December 31, 1986, and
before January 1, 1996, shall be capitalized
and amortized ratably over the 10-year period
beginning with the taxable year in which the
expenditures were made.
* * * * * * *
(3) Treatment of certain long-term contracts.--In the
case of any long-term contract entered into by the
taxpayer on or after March 1, 1986, and before January
1, 1996, the taxable income from such contract shall be
determined under the percentage of completion method of
accounting (as modified by section 460(b)). For
purposes of the preceding sentence, in the case of a
contract described in section 460(e)(1), the percentage
of the contract completed shall be determined under
section 460(b)(2) by using the simplified procedures
for allocation of costs prescribed under section
460(b)(4). The first sentence of this paragraph shall
not apply to any home construction contract (as defined
in section 460(e)(6)).
* * * * * * *
(5) Pollution control facilities.--In the case of any
certified pollution control facility placed in service
after December 31, 1986, and before January 1, 1996,
the deduction allowable under section 169 (without
regard to section 291) shall be determined under the
alternative system of section 168(g).
(6) Installment sales of certain property.--In the
case of any disposition after March 1, 1986, and before
January 1, 1996, of any property described in section
1221(1), income from such disposition shall be
determined without regard to the installment method
under section 453. This paragraph shall not apply to
any disposition with respect to which an election is in
effect under section 453(l)(2)(B).
* * * * * * *
(b) Adjustments Applicable to Individuals.--In determining
the amount of the alternative minimum taxable income of any
taxpayer (other than a corporation), the following treatment
shall apply (in lieu of the treatment applicable for purposes
of computing the regular tax):
(1) * * *
(2) Circulation and research and experimental
expenditures.--
(A) In general.--The amount allowable as a
deduction under section 173 or 174(a) in
computing the regular tax for amounts paid or
incurred after December 31, 1986, and before
January 1, 1996, shall be capitalized and--
(i) in the case of circulation
expenditures described in section 173,
shall be amortized ratably over the 3-
year period beginning with the taxable
year in which the expenditures were
made, or
(ii) in the case of research and
experimental expenditures described in
section 174(a), shall be amortized
ratably over the 10-year period
beginning with the taxable year in
which the expenditures were made.
* * * * * * *
(c) Adjustments Applicable to Corporations.--In determining
the amount of the alternative minimum taxable income of a
corporation, the following treatment shall apply:
(1) Adjustment for adjusted current earnings.--
Alternative minimum taxable income shall be adjusted as
provided in subsection (g).
(2) Merchant marine capital construction funds.--In
the case of a capital construction fund established
under section 607 of the Merchant Marine Act, 1936 (46
U.S.C. 1177)--
(A) subparagraphs (A), (B), and (C) of
section 7518(c)(1) (and the corresponding
provisions of such section 607) shall not apply
to--
(i) any amount deposited in such fund
after December 31, 1986, and before
January 1, 1996, or
(ii) any earnings (including gains
and losses) after December 31, 1986,
and before January 1, 1996, on amounts
in such fund, and
(B) no reduction in basis shall be made under
section 7518(f) (or the corresponding
provisions of such section 607) with respect to
the withdrawal from the fund of any amount to
which subparagraph (A) applies.
[For purposes of this paragraph, any withdrawal of
deposits or earnings from the fund shall be treated as
allocable first to deposits made before (and earnings
received or accrued before) January 1, 1987.]
For purposes of this paragraph, any withdrawal of
deposit or earnings from the fund shall be treated as
allocable to deposits made, and earnings received or
accrued, in the order in which made, received, or
accrued.
(3) Special deduction for certain organizations not
allowed.--The deduction determined under section 833(b)
shall not be allowed. This paragraph shall not apply to
any taxable year beginning after December 31, 1995.
(d) Alternative Tax Net Operating Loss Deduction Defined.--
(1) In general.--For purposes of subsection (a)(4),
the term ``alternative tax net operating loss
deduction'' means the net operating loss deduction
allowable for the taxable year under section 172,
except that--
(A) the amount of such deduction shall not
exceed 90 percent (100 percent in the case of
taxable years beginning after December 31,
1995) of alternate minimum taxable income
determined without regard to such deduction,
and
(B) in determining the amount of such
deduction--
(i) the net operating loss (within
the meaning of section 172(c)) for any
loss year shall be adjusted as provided
in paragraph (2), and
[(ii) in the case of taxable years
beginning after December 31, 1986,
section 172(b)(2) shall be applied by
substituting ``90 percent of
alternative minimum taxable income
determined without regard to the
alternative tax net operating loss
deduction'' for ``taxable income'' each
place it appears.]
(ii) appropriate adjustments in the
application of section 172(b)(2) shall
be made to take into account the
limitation of subparagraph (A).
* * * * * * *
(g) Adjustments Based on Adjusted Current Earnings.--
(1) * * *
* * * * * * *
(4) Adjustments.--In determining adjusted current
earnings, the following adjustments shall apply:
(A) Depreciation.--
(i) Property placed in service after
1989.--The depreciation deduction with
respect to any property placed in
service in a taxable year beginning
after 1989 shall be determined under
the alternative system of section
168(g). The preceding sentence shall
not apply to any property placed in
service after December 31, 1993, and
the depreciation deduction with respect
to such property shall be determined
under the rules of subsection
(a)(1)[(A)].
* * * * * * *
(B) Inclusion of items included for purposes
of computing earnings and profits.--
(i) * * *
* * * * * * *
(iii) Termination.--This subparagraph
shall not apply to any taxable year
beginning after December 31, 1995.
(C) Disallowance of items not deductible in
computing earnings and profits.
(i) In general.--A deduction shall
not be allowed for any item if such
item would not be deductible for any
taxable year for purposes of computing
earnings and profits.
(ii) Special rule for certain
dividends.--
(I) * * *
(II) 100-percent dividend.--
For purposes [of the subclause]
of subclause (I), the term
``100 percent dividend'' means
any dividend if the percentage
used for purposes of
determining the amount
allowable as a deduction under
section 243 or 245 with respect
to such dividend is 100
percent.
* * * * * * *
(v) Neutral cost recovery
deduction.--Clause (i) shall not apply
to the additional deduction allowable
by reason of section 168(k).
(v) Termination.--This subparagraph
shall not apply to any taxable year
beginning after December 31, 1995.
(D) Certain other earnings and profits
adjustments.--
(i) Intangible drilling costs.--The
adjustments provided in section
312(n)(2)(A) shall apply in the case of
amounts paid or incurred in taxable
years beginning after December 31,
1989. In the case of a taxpayer other
than an integrated oil company (as
defined in section 291(b)(4)), in the
case of any oil or gas well, this
clause shall not apply in the case of
amounts paid or incurred in taxable
years beginning after December 31,
1992. This clause shall not apply to
any taxable year beginning after
December 31, 1995.
(ii) Certain amortization provisions
not to apply.--Sections 173 and 248
shall not apply to expenditures paid or
incurred in taxable year beginning
after December 31, 1989. This clause
shall not apply to any expenditure paid
or incurred after December 31, 1995.
(iii) LIFO inventory adjustments.--
The adjustments provided in section
312(n)(4) shall apply, but only with
respect to taxable years beginning
after December 31, 1989. This clause
shall not apply to any adjustment
arising in a taxable year beginning
after December 31, 1995.
(iv) Installment sales.--In the case
of any installment sale in a taxable
year beginning after December 31, 1989,
adjusted current earnings shall be
computed as if the corporation did not
use the installment method. The
preceding sentence shall not apply to
the applicable percentage (as
determined under section 453A) of the
gain from any installment sale with
respect to which section 453A(a)(1)
applies. This clause shall not apply to
any disposition after December 31,
1995.
(E) Disallowance of loss on exchange of debt
pools.--No loss shall be recognized on the
exchange of any pool of debt obligations for
another pool of debt obligations having
substantially the same effective interest rates
and maturities. This subparagraph shall not
apply to any exchange after December 31, 1995.
(F) Depletion.--
(i) * * *
* * * * * * *
(iii) Termination.--This subparagraph
shall not apply to any deduction for
depletion for any taxable year
beginning after December 31, 1995.
(G) Treatment of certain ownership changes.--
If--
(i) there is an ownership change
(within the meaning of section 382)
after the date of the enactment of the
Tax Reform Act of 1986 with respect to
any corporation, and
(ii) there is a net unrealized built-
in loss (within the meaning of section
382(h)) with respect to such
corporation, then the adjusted basis of
each asset of such corporation
(immediately after the ownership
change) shall be its proportionate
share (determined on the basis of
respective fair market values) of the
fair market value of the assets of such
corporation (determined under section
382(h)) immediately before the
ownership change. This subparagraph
shall not apply to any ownership change
after December 31, 1995.
[(I)] (H) Adjusted basis.--The adjusted basis
of any property with respect to which an
adjustment under this paragraph applies shall
be determined by applying the treatment
prescribed in this paragraph.
[(J)] (I) Treatment of charitable
contributions.--Notwithstanding subparagraphs
(B) and (C), no adjustment related to the
earnings and profits effects of any charitable
contribution shall be made in computing
adjusted current earnings.
* * * * * * *
SEC. 57. ITEMS OF TAX PREFERENCE.
(a) General Rule.--For purposes of this part, the items of
tax preference determined under this section are--
(1) Depletion.--With respect to each property (as
defined in section 614), the excess of the deduction
for depletion allowable under section 611 for the
taxable year over the adjusted basis of the property at
the end of the taxable year (determined without regard
to the depletion deduction for the taxable year).
Effective with respect to taxable years beginning after
December 31, 1992, this paragraph shall not apply to
any deduction for depletion computed in accordance with
section 613A(c). This paragraph shall not apply to any
taxable year beginning after December 31, 1995.
(2) Intangible drilling costs.--
(A) * * *
* * * * * * *
(F) Termination.--This paragraph shall not
apply to any taxable year beginning after
December 31, 1995.
(4) Reserves for losses on bad debts of financial
institutions.--In the case of a financial institution
to which section 593 applies, the amount by which the
deduction allowable for the taxable year for a
reasonable addition to a reserve for bad debts exceeds
the amount that would have been allowable had the
institution maintained its bad debt reserve for all
taxable years on the basis of actual experience. This
paragraph shall not apply to any taxable year beginning
after December 31, 1995.
(5) Tax-exempt interest.--
(A) * * *
* * * * * * *
(D) Termination for corporations.--In the
case of a corporation (other than a corporation
referred to in section 56(g)(6)), this
paragraph shall not apply to interest accruing
for periods after December 31, 1995.
* * * * * * *
SEC. 58. DENIAL OF CERTAIN LOSSES.
(a) * * *
* * * * * * *
(d) Termination.--This section shall not apply to any loss
incurred for any taxable year beginning after December 31,
1995.
SEC. 59. OTHER DEFINITIONS AND SPECIAL RULES.
(a) Alternative Minimum Tax Foreign Tax Credit.--For purposes
of this part--
(1) In general.--The alternative minimum tax foreign
tax credit for any taxable year shall be the credit
which would be determined under section 27(a) for such
taxable year if--
(A) [the amount determined under section
55(b)(1)(A)] the pre-credit tentative minimum
tax were the tax against which such credit was
taken for purposes of section 904 for the
taxable year and all prior taxable years
beginning after December 31, 1986,
(B) section 904 were applied on the basis of
alternative minimum taxable income instead of
taxable income, and
(C) the determination of whether any income
is high-taxed income for purposes of section
904(d)(2) were made on the basis of the
applicable rate [specified in section
55(b)(1)(A)] specified in subparagraph (A)(i)
or (B)(i) of section 55(b)(1) (whichever
applies) in lieu of the highest rate of tax
specified in section 1 or 11 (whichever
applies).
(2) Limitation to 90 percent of tax.--
(A) In general.--The alternative minimum tax
foreign tax credit for any taxable year shall
not exceed the excess (if any) of--
(i) [the amount determined under
section 55(b)(1)(A)] the pre-credit
tentative minimum tax for the taxable
year, over
(ii) 10 percent of the amount [which
would be determined under section
55(b)(1)(A)] which would be the pre-
credit tentative minimum tax without
regard to the alternative tax net
operating loss deduction and
57(a)(2)(E).
* * * * * * *
(D) Termination.--This paragraph shall not
apply to any taxable year beginning after
December 31, 1995.
(3) Pre-credit tentative minimum tax.--For purposes
of this subsection, the term ``pre-credit tentative
minimum tax'' means--
(A) in the case of a taxpayer other than a
corporation, the amount determined under the
first sentence of section 55(b)(1)(A)(i), or
(B) in the case of a corporation, the amount
determined under section 55(b)(1)(B)(i).
* * * * * * *
(h) Coordination With Certain Limitations.--The limitations
of sections 704(d), 465, 469, and 1366(d) (and such other
provisions as may be specified in regulations) shall be applied
for purposes of computing the alternative minimum taxable
income of the taxpayer for the taxable year with the
adjustments of sections 56, 57, and 58.
* * * * * * *
(j) Treatment of Unearned Income of Minor Children.--
(1) Limitation on exemption amount.--In the case of a
child to whom section 1(g) applies, the exemption
amount for purposes of section 55 shall not exceed the
sum of--
(A) such child's earned income (as defined in
section 911(d)(2)) for the taxable year, plus
(B) [$1,000] twice the amount in effect for
the taxable year under section 63(c)(5)(A) (or,
if greater, the child's share of the unused
parental minimum tax exemption).
* * * * * * *
(3) Unused parental minimum tax exemption.--
(A) * * *
(B) Certain rules made applicable.--A child's
share of any unused parental minimum tax
exemption shall be determined under rules
similar to the rules of [section 1(i)(3)(B)]
section 1(g)(3)(B), and rules similar to the
rules of paragraphs (3)(D) and (5) of section
1(g) shall apply for purposes of this
paragraph.
* * * * * * *
Subchapter B--Computation
* * * * * * *
PART I--DEFINITION OF GROSS INCOME, ADJUSTED GROSS INCOME, TAXABLE
INCOME ETC.
* * * * * * *
SEC. 62. ADJUSTED GROSS INCOME DEFINED.
(a) General Rule.--For purposes of this subtitle, the term
``adjusted gross income'' means, in the case of an individual,
gross income minus the following deductions:
(1) * * *
* * * * * * *
(16) Long-term capital gains.--The deduction allowed
by section 1202.
* * * * * * *
PART II--ITEMS SPECIFICALLY INCLUDED IN GROSS INCOME
Sec. 71. Alimony and separate maintenance payments.
* * * * * * *
Sec. 91. Excess long-term care benefits.
* * * * * * *
SEC. 72. ANNUITIES; CERTAIN PROCEEDS OF ENDOWMENT AND LIFE INSURANCE
CONTRACTS.
(a) * * *
(b) Exclusion Ratio.--
(1) * * *
* * * * * * *
(4) Unrecovered investment.--For purposes of this
subsection, the unrecovered investment in the contract
as of any date is--
(A) the investment in the contract
(determined without regard to subsection
(c)(2)) as of the annuity starting date,
reduced by
* * * * * * *
(m) Special Rules Applicable to Employee Annuities and
Distributions Under Employee Plans.--
* * * * * * *
(2) Computation of consideration paid by the
employee.--In computing--
(A) the aggregate amount of premiums or other
consideration paid for the contract for
purposes of subsection (c)(1)(A) (relating to
the investment in the contract), and
[(B) the consideration for the contract
contributed by the employee for purposes of
subsection (d)(1) (relating to employee's
contributions recoverable in 3 years) and
subsection (e)(7) (relating to plans where
substantially all contributions are employee
contributions), and
[(C)] (B) the aggregate premiums or other
consideration paid for purposes of subsection
(e)(6) (relating to certain amounts not
received as an annuity),
any amount allowed as a deduction with respect to the
contract under section 404 which was paid while the
employee was an employee within the meaning of section
401(c)(1) shall be treated as consideration contributed
by the employer, and there shall not be taken into
account any portion of the premiums or other
consideration for the contract paid while the employee
was an owner-employee which is properly allocable (as
determined under regulations prescribed by the
Secretary) to the cost of life, accident, health, or
other insurance.
* * * * * * *
(p) Loans Treated as Distributions.--For purposes of this
section--
(1) * * *
* * * * * * *
(4) Qualified employer plan, etc.--For purposes of
this subsection--
(A) Qualified employer plan.--
(i) * * *
[(ii) Special rules.--The term
``qualified employer plan''--
[(I) shall include any plan
which was (or was determined to
be) a qualified employer plan
or a government plan, but
[(II) shall not include a
plan described in subsection
(e)(7).]
(ii) Special rule.--The term
``qualified employer plan'' shall not
include any plan which was (or was
determined to be) a qualified employer
plan or a government plan.
* * * * * * *
SEC. 86. SOCIAL SECURITY AND TIER 1 RAILROAD RETIREMENT BENEFITS.
(a) In General.--
(1) * * *
(2) Additional amount.--In the case of a taxpayer
with respect to whom the amount determined under
subsection (b)(1)(A) exceeds the adjusted base amount,
the amount included in gross income under this section
shall be equal to the lesser of--
(A) the sum of--
(i) 85 percent of such excess, plus
(ii) the lesser of the amount
determined under paragraph (1) or an
amount equal to one-half of the
difference between the adjusted base
amount and the base amount of the
taxpayer, or
(B) 85 percent of the social security
benefits received during the taxable year.
This paragraph shall not apply to any taxable year
beginning after December 31, 1999.
(3) Phaseout of additional amount.--In the case of
any taxable year beginning in a calendar year after
1995 and before 2000, paragraph (2) shall be applied by
substituting the percentage determined under the
following table for ``85 percent'' each place it
appears:
In the case of a taxable
year beginning in The percentage is:
1996............75 percent..........................................
1997............65 percent..........................................
1998............60 percent..........................................
1999............55 percent..........................................
(b) Taxpayers to Whom Subsection (a) Applies.--
(1) * * *
(2) Modified adjusted gross income.--For purposes of
this subsection, the term ``modified adjusted gross
income'' means [adusted] adjusted gross income--
(A) * * *
* * * * * * *
SEC. 91. EXCESS LONG-TERM CARE BENEFITS.
(a) General Rule.--Notwithstanding any other provision of
this title, gross income shall include the amount of excess
long-term care benefits received by the taxpayer during the
taxable year.
(b) Exception for Terminally Ill Individuals.--Subsection (a)
shall not apply to any long-term care benefit paid by reason of
an insured who is a terminally ill individual (as defined in
section 101(g)) as of the date the benefit is received.
(c) Excess Long-Term Care Benefits.--For purposes of this
section--
(1) In general.--The term ``excess long-term care
benefits'' means the excess (if any) of--
(A) the value of the long-term care benefits
received by the taxpayer during the taxable
year, over
(B) the exclusion amount applicable to such
benefits.
(2) Long-term care benefits.--The term ``long-term
care benefits'' means--
(A) payments and other benefits under long-
term care insurance contracts (as defined in
section 7702B(b)) to the extent excludable from
gross income by reason of section 7702B(a)(2),
and
(B) payments which are excludable from gross
income by reason of section 101(g).
(3) Exclusion amount.--
(A) In general.--In the case of long-term
care benefits received by the taxpayer during
the taxable year by reason of the taxpayer
being a chronically ill individual, the term
``exclusion amount'' means the aggregate of
$200 for each day during such year on which the
individual is a chronically ill individual. In
the case of individuals who are married to each
other and who are both chronically ill
individuals, the preceding sentence shall be
applied separately with respect to each spouse.
(B) Other taxpayers.--In the case of long-
term care benefits received during the taxable
year by a taxpayer by reason of another
individual being a chronically ill individual,
the term ``exclusion amount'' means so much of
such other individual's exclusion amount (for
such other individual's taxable year which
begins in the calendar year in which the
taxpayer's taxable year begins) as is allocated
by such other individual to the taxpayer. Such
an allocation shall be made at the time and in
the manner prescribed by the Secretary; and
once made, shall be irrevocable.
(d) Chronically Ill Individual.--For purposes of this
section, the term ``chronically ill individual'' has the
meaning given to such term by section 7702B(c)(2).
(e) Inflation Adjustment of $200 Benefit Limit.--In the case
of a calendar year after 1996, the $200 amount contained in
subsection (c)(3)(A) shall be increased at the same time and in
the same manner as amounts are increased pursuant to section
213(d)(11).
PART III--ITEMS SPECIFICALLY EXCLUDED FROM GROSS INCOME
Sec. 101. Certain death benefits.
* * * * * * *
Sec. 112. Certain [combat pay] combat zone compensation of
members of the Armed Forces.
* * * * * * *
[Sec. 137. Cross reference to other Acts.]
Sec. 137. Distributions from certain retirement plans for long-
term care insurance.
Sec. 138. Cross references to other Acts.
* * * * * * *
SEC. 101. CERTAIN DEATH BENEFITS.
(a) * * *
* * * * * * *
(g) Treatment of Certain Accelerated Death Benefits.--
(1) In general.--For purposes of this section, the
following amounts shall be treated as an amount paid by
reason of the death of an insured:
(A) Any amount received under a life
insurance contract on the life of an insured
who is a terminally ill individual.
(B) Any amount received under a life
insurance contract on the life of an insured
who is a chronically ill individual (as defined
in section 7702B(c)(2)) but only if such amount
is received under a rider or other provision of
such contract which is treated as a long-term
care insurance contract under section 7702B.
(2) Treatment of viatical settlements.--
(A) In general.--In the case of a life
insurance contract on the life of an insured
described in paragraph (1), if--
(i) any portion of such contract is
sold to any viatical settlement
provider, or
(ii) any portion of the death benefit
is assigned to such a provider,
the amount paid for such sale or assignment
shall be treated as an amount paid under the
life insurance contract by reason of the death
of such insured.
(B) Viatical settlement provider.--The term
``viatical settlement provider'' means any
person regularly engaged in the trade or
business of purchasing, or taking assignments
of, life insurance contracts on the lives of
insureds described in paragraph (1) if--
(i) such person is licensed for such
purposes in the State in which the
insured resides, or
(ii) in the case of an insured who
resides in a State not requiring the
licensing of such persons for such
purposes, such person meets the
requirements of sections 8 and 9 of the
Viatical Settlements Model Act of the
National Association of Insurance
Commissioners.
(3) Definitions.--For purposes of this subsection--
(A) Terminally ill individual.--The term
``terminally ill individual'' means an
individual who has been certified by a
physician as having an illness or physical
condition which can reasonably be expected to
result in death in 24 months or less after the
date of the certification.
(B) Physician.--The term ``physician'' has
the meaning given to such term by section
1861(r)(1) of the Social Security Act (42
U.S.C. 1395x(r)(1)).
(4) Exception for business-related policies.--This
subsection shall not apply in the case of any amount
paid to any taxpayer other than the insured if such
taxpayer has an insurable interest with respect to the
life of the insured by reason of the insured being a
director, officer, or employee of the taxpayer or by
reason of the insured being financially interested in
any trade or business carried on by the taxpayer.
(5) Cross reference.--
For inclusion in gross income of excess benefits, see section
91.
* * * * * * *
SEC. 106. CONTRIBUTIONS BY EMPLOYER TO ACCIDENT AND HEALTH PLANS.
[Gross income of an employee does not include employer-
provided coverage under an accident or health plan.]
(a) General Rule.--Except as provided in subsection (b),
gross income of an employee does not include employer-provided
coverage under an accident or health plan.
(b) Inclusion of Long-Term Care Benefits Provided Through
Flexible Spending Arrangements.--
(1) In general.--Effective on and after January 1,
1996, gross income of an employee shall include
employer-provided coverage for qualified long-term care
services (as defined in section 7702B(c)) to the extent
that such coverage is provided through a flexible
spending or similar arrangement.
(2) Flexible spending arrangement.--For purposes of
this subsection, a flexible spending arrangement is a
benefit program which provides employees with coverage
under which--
(A) specified incurred expenses may be
reimbursed (subject to reimbursement maximums
and other reasonable conditions), and
(B) the maximum amount of reimbursement which
is reasonably available to a participant for
such coverage is less than 500 percent of the
value of such coverage.
In the case of an insured plan, the maximum amount
reasonably available shall be determined on the basis
of the underlying coverage.
* * * * * * *
SEC. 108. INCOME FROM DISCHARGE OF INDEBTEDNESS.
(a) * * *
* * * * * * *
(d) Meaning of Terms; Special Rules Relating to Certain
Provisions.--
(1) * * *
* * * * * * *
(9) Time for making election, etc.--
(A) Time.--An election under paragraph (5) of
subsection (b) or under [paragraph (3)(B)]
paragraph (3)(C) of subsection (c) shall be
made on the taxpayer's return for the taxable
year in which the discharge occurs or at such
other time as may be permitted in regulations
prescribed by the Secretary.
* * * * * * *
SEC. 112. CERTAIN [COMBAT PAY] COMBAT ZONE COMPENSATION OF MEMBERS OF
THE ARMED FORCES.
(a) Enlisted Personnel.--Gross income does not include
compensation received for active service as a member below the
grade of commissioned officer in the Armed Forces of the United
States for any month during any part of which such member--
(1) * * *
* * * * * * *
SEC. 117. QUALIFIED SCHOLARSHIPS.
(a) * * *
* * * * * * *
(d) Qualified Tuition Reduction.--
(1) * * *
(2) Qualified tuition reduction.-- For purposes of
this subsection, the term ``qualified tuition
reduction'' means the amount of any reduction in
tuition provided to an employee of an organization
described in section 170(b)(1)(A)(ii) for the education
(below the graduate level) at such organization (or
another organization described in section
170(b)(1)(A)(ii)) of--
(A) such employee, or
(B) any person treated as an employee (or
whose use is treated as an employee use) under
the rules of [section 132(f)] section 132(h).
* * * * * * *
SEC. 125. CAFETERIA PLANS.
(a) * * *
* * * * * * *
(f) Qualified Benefits Defined.--For purposes of this
section, the term ``qualified benefit'' means any benefit
which, with the application of subsection (a), is not
includible in the gross income of the employee by reason of an
express provision of this chapter (other than section 117, 127,
or 132). Such term includes any group term life insurance which
is includible in gross income only because it exceeds the
dollar limitation of section 79 and such term includes any
other benefit permitted under regulations. Such term shall not
include any long-term care insurance contract (as defined in
section 7702B(b)).
* * * * * * *
SEC. 135. INCOME FROM UNITED STATES SAVINGS BONDS USED TO PAY HIGHER
EDUCATION TUITION AND FEES.
(a) General Rule.--In the case of an individual who pays
qualified higher education expenses during the taxable year, no
amount shall be includible in gross income by reason of the
redemption during such year of any qualified United States
savings bond.
(b) Limitations.--
(1) * * *
(2) Limitation based on modified adjusted gross
income.--
(A) * * *
(B) Inflation adjustment.--In the case of any
taxable year beginning in a calendar year after
1990, the $40,000 and $60,000 amounts contained
in subparagraph (A) shall be increased by an
amount equal to--
(i) such dollar amount, multiplied by
(ii) the cost-of-living adjustment
under section 1(f)(3) for the calendar
year in which the taxable year begins,
determined by substituting ``calendar
year 1989'' for ``calendar year 1992''
in subparagraph (B) thereof.
* * * * * * *
SEC. 137. DISTRIBUTIONS FROM CERTAIN RETIREMENT PLANS FOR LONG-TERM
CARE INSURANCE.
(a) General Rule.--The amount which would (but for this
section) be includible in the gross income of an individual for
the taxable year by reason of eligible distributions during the
taxable year shall be reduced (but not below zero) by the
aggregate premiums paid by such individual during such taxable
year for any long-term care insurance contract (as defined in
section 7702B(b)) for coverage of such individual or the spouse
of such individual.
(b) Eligible Distribution.--For purposes of this section, the
term ``eligible distribution'' means any distribution or
payment to an individual from--
(1) an individual retirement plan of such individual,
(2) amounts attributable to employer contributions
made pursuant to elective deferrals described in
subparagraph (A) or (C) of section 402(g)(3) or section
501(c)(18)(D)(iii), or
(3) amounts deferred under section 457(a).
SEC. [137.] 138. CROSS REFERENCES TO OTHER ACTS.
(a) For exemption of--
(1) * * *
* * * * * * *
PART IV--TAX EXEMPTION FOR STATE AND LOCAL BONDS
Subpart A--Private Activity Bonds
* * * * * * *
SEC. 143. MORTGAGE REVENUE BONDS: QUALIFIED MORTGAGE BOND AND QUALIFIED
VETERANS' MORTGAGE BOND.
(a) * * *
* * * * * * *
(d) 3-Year Requirement.--
(1) * * *
(2) Exceptions.--For purposes of paragraph (1), the
proceeds of an issue which are used to provide--
(A) financing with respect to targeted area
residences,
(B) qualified home improvement loans and
qualified rehabilitation loans, and
(C) financing with respect to land described
in subsection (i)(1)(C) and the construction of
any residence thereon[.],
shall be treated as used as described in paragraph (1).
* * * * * * *
(m) Recapture of Portion of Federal Subsidy From Use of
Qualified Mortgage Bonds and Mortgage Credit Certificates.--
(1) * * *
* * * * * * *
(4) Recapture amount.--For purposes of this
subsection--
(A) * * *
* * * * * * *
(C) Holding period percentage.--
(i) * * *
(ii) Retirements of indebtedness.--If
the federally-subsidized indebtedness
is completely repaid during [any month
of the 10-year period] any year of the
4-year period beginning on the testing
date, the holding period percentage for
[succeeding months] succeeding years
shall be determined by reducing ratably
[over the remainder of such period (or,
if lesser, 5 years)] to zero over the
succeeding 5 years the holding period
percentage which would have been
determined under this subparagraph had
the taxpayer disposed of his interest
in the residence on the date of the
repayment.
* * * * * * *
SEC. 149. BONDS MUST BE REGISTERED TO BE TAX EXEMPT; OTHER
REQUIREMENTS.
(a) * * *
* * * * * * *
(g) Treatment of Hedge Bonds.--
(1) * * *
* * * * * * *
(3) Hedge bond.--
(A) * * *
(B) Exception for investment in tax-exempt
bonds not subject to minimum tax.--
(i) * * *
* * * * * * *
[(iii) Investment earnings held
pending reinvestment.--Investment
earnings held for not more than 30 days
pending reinvestment shall be treated
as invested in bonds described in
clause (i).]
(iii) Amounts held pending
reinvestment or redemption.--Amounts
held for not more than 30 days pending
reinvestment or bond redemption shall
be treated as invested in bonds
described in clause (i).
* * * * * * *
PART V--DEDUCTIONS FOR PERSONAL EXEMPTIONS
* * * * * * *
SEC. 151. ALLOWANCE OF DEDUCTIONS FOR PERSONAL EXEMPTIONS.
(a) * * *
* * * * * * *
(d) Exemption Amount.--For purposes of this section--
(1) * * *
* * * * * * *
(3) Phaseout.--
(A) * * *
* * * * * * *
(C) Threshold amount.--For purposes of this
paragraph, the term ``threshold amount''
means--
(i) $150,000 in the case of a [joint
of a return] joint return or a
surviving spouse (as defined in section
2(a)),
* * * * * * *
PART VI--ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS
* * * * * * *
SEC. 163. INTEREST.
(a) * * *
* * * * * * *
(j) Limitation of Deduction for Interest on Certain
Indebtedness.--
(1) Limitation.--
(A) * * *
(B) Disallowed amount carried to succeeding
taxable year.--Any amount disallowed under
subparagraph (A) for any taxable year shall be
treated as disqualified interest paid or
accrued in the succeeding taxable year (and
clause (ii) of paragraph (2)(A) shall not apply
for purposes of applying this subsection to the
amount so treated).
* * * * * * *
(6) Other definitions and special rules.--For
purposes of this subsection--
(A) * * *
* * * * * * *
(E) Gross basis and net basis taxation.--
(i) Gross basis tax.--The term
``gross basis tax'' means any tax
imposed by this subtitle which is
determined by reference to the gross
amount of any item of income without
any reduction for any deduction allowed
by this subtitle.
(ii) Net basis tax.--The term ``net
basis tax'' means any tax imposed by
this subtitle [which is a] which is not
a gross basis tax.
* * * * * * *
SEC. 164. TAXES.
(a) General Rule.--Except as otherwise provided in this
section, the following taxes shall be allowed as a deduction
for the taxable year within which paid or accrued:
(1) State and local, and foreign, real property
taxes.
(2) State and local personal property taxes.
(3) State and local, and foreign, income, war
profits, and excess profits taxes.
[(4) The environmental tax imposed by section 59A.
[(5) The GST tax imposed on income distributions.]
(4) The GST tax imposed on income distributions.
(5) The environmental tax imposed by section 59A.
In addition, there shall be allowed as a deduction State and
local, and foreign, taxes not described in the preceding
sentence which are paid or accrued within the taxable year in
carrying on a trade or business or an activity described in
section 212 (relating to expenses for production of income).
Notwithstanding the preceding sentence, any tax (not described
in the first sentence of this subsection) which is paid or
accrued by the taxpayer in connection with an acquisition or
disposition of property shall be treated as part of the cost of
the acquired property or, in the case of a disposition, as a
reduction in the amount realized on the disposition.
* * * * * * *
SEC. 165. LOSSES.
(a) * * *
* * * * * * *
(c) Limitation on Losses of Individuals.--In the case of an
individual, the deduction under subsection (a) shall be limited
to--
(1) losses incurred in a trade or business;
(2) losses incurred in any transaction entered into
for profit, though not connected with a trade or
business; [and]
(3) except as provided in subsection (h), losses of
property not connected with a trade or business or a
transaction entered into for profit, if such losses
arise from fire, storm, shipwreck, or other casualty,
or from theft[.]; and
(4) losses arising from the sale or exchange of the
principal residence (within the meaning of section
1034) of the taxpayer.
* * * * * * *
SEC. 168. ACCELERATED COST RECOVERY SYSTEM.
(a) * * *
* * * * * * *
(e) Classification of Property.--For purposes of this
section--
(1) * * *
* * * * * * *
(3) Classification of certain property.--
(A) * * *
(B) 5-year property.--The term ``5-year
property'' includes--
(i) * * *
* * * * * * *
(vi) any property which--
(I) is described in
subparagraph (A) of section
48(a)(3) (or would be so
described if ``solar and wind''
were substituted for ``solar''
in clause (i) thereof, [or]
(II) is described in
paragraph (15) of section 48(l)
(as in effect on the day before
the date of the enactment of
the Revenue Reconciliation Act
of 1990) and is a qualifying
small power production facility
within the meaning of section
3(17)(C) of the Federal Power
Act (16 U.S.C. 796(17)(C)), as
in effect on September 1,
1986[.], or
(III) is described in section
48(l)(3)(A)(ix) (as in effect
on the day before the date of
the enactment of the Revenue
Reconciliation Act of 1990).
* * * * * * *
(g) Alternative Depreciation System for Certain Property.--
(1) * * *
* * * * * * *
(4) Exception for certain property used outside
united states.--Subparagraph (A) of paragraph (1) shall
not apply to--
(A) * * *
* * * * * * *
(K) any property described in [section
48(a)(3)(A)(iii)] section 48(l)(3)(A)(ix) (as
in effect on the day before the date of the
enactment of the Revenue Reconciliation Act of
1990) which is owned by a United States person
and which is used in international or
territorial waters to generate energy for use
in the United States; and
* * * * * * *
(i) Definitions and Special Rules.--For purposes of this
section--
(1) * * *
* * * * * * *
[(8) Treatment of leasehold improvements.--In the
case of any building erected (or improvements made) on
leased property, if such building or improvement is
property to which this section applies, the
depreciation deduction shall be determined under the
provisions of this section.]
(8) Treatment of leasehold improvements.--
(A) In general.--In the case of any building
erected (or improvements made) on leased
property, if such building or improvement is
property to which this section applies, the
depreciation deduction shall be determined
under the provisions of this section.
(B) Treatment of lessor improvements which
are abandoned at termination of lease.--An
improvement--
(i) which is made by the lessor of
leased property for the lessee of such
property, and
(ii) which is irrevocably disposed of
or abandoned by the lessor at the
termination of the lease by such
lessee,
shall be treated for purposes of determining
gain or loss under this title as disposed of by
the lessor when so disposed of or abandoned.
* * * * * * *
(k) Deduction Adjustment To Allow Equivalent of Expensing For
Certain Property Placed in Service After December 31, 1994.--
(1) In general.--In the case of tangible property
placed in service after December 31, 1994, the
deduction under this section with respect to such
property--
(A) shall be determined by substituting ``150
percent'' for ``200 percent'' in subsection
(b)(1) in the case of property to which the 200
percent declining balance method would
otherwise apply, and
(B) for any taxable year after the taxable
year during which the property is placed in
service shall be--
(i) the amount determined under this
section for such taxable year without
regard to this subparagraph, multiplied
by
(ii) the applicable neutral cost
recovery ratio for such taxable year.
(2) Applicable neutral cost recovery ratio.--For
purposes of paragraph (1)--
(A) In general.--The applicable neutral cost
recovery ratio for the property for any taxable
year is the number determined by--
(i) dividing--
(I) the gross domestic
product deflator for the
calendar quarter which includes
the mid-point of the taxable
year, by
(II) the gross domestic
product deflator for the
calendar quarter which includes
the mid-point of the taxable
year in which the property was
placed in service by the
taxpayer, and
(ii) then multiplying the number
determined under clause (i) by the
number equal to 1.035 to the nth power
where ``n'' is the number of full years
(as of the close of the taxable year
referred to in clause (i)(I)) after the
date such property was placed in
service.
The applicable neutral cost recovery ratio
shall never be less than 1. The applicable
neutral cost recovery ratio shall be rounded to
the nearest \1/1000\.
(B) Special rule for certain property.--In
the case of property described in paragraph (2)
or (3) of subsection (b) or in subsection (g),
the applicable neutral cost recovery ratio
shall be determined without regard to
subparagraph (A)(ii).
(3) Gross domestic product deflator.--For purposes of
paragraph (2), the gross domestic product deflator for
any calendar quarter is the implicit price deflator for
the gross domestic product for such quarter (as shown
in the last revision thereof released by the Secretary
of Commerce before the close of the following calendar
quarter).
(4) Coordination with indexing of basis for purposes
of determining gain.--Section 1022 shall not apply to
any property to which this subsection applies.
(5) Election not to have subsection apply.--This
subsection shall not apply to any property if the
taxpayer elects not to have this subsection apply to
such property. Such an election, once made, shall be
irrevocable.
(6) Churning transactions.--This subsection shall not
apply to any property if this section would not apply
to such property were--
(A) subsection (f)(5)(A)(ii) applied by
substituting ``1995'' for ``1987'' and ``1994''
for ``1986'', and
(B) subsection (f)(5)(B) not applied.
(7) Additional deduction not to affect basis or
recapture.--The additional amount determined under this
section by reason of this subsection shall not be taken
into account in determining the adjusted basis of any
property or of any interest in a pass-thru entity (as
defined in section 1202(e)(2)) which holds such
property and shall not be treated as a deduction for
depreciation for purposes of sections 1245 and 1250.
* * * * * * *
SEC. 170. CHARITABLE, ETC., CONTRIBUTIONS AND GIFTS.
(a) * * *
(b) Percentage Limitations.--
(1) Individuals.--In the case of an individual, the
deduction provided in subsection (a) shall be limited
as provided in the succeeding subparagraphs.
(A) * * *
* * * * * * *
(C) Special limitation with respect to
contributions described in subparagraph (A) of
certain capital gain property
(i) * * *
* * * * * * *
(iv) For purposes of this paragraph,
the term ``capital gain property''
means with respect to any contribution,
any capital asset the sale of which at
its fair market value at the time of
the contribution would have resulted in
gain which would have been long-term
capital gain. For purposes of the
preceding sentence, any property which
is property used in the trade or
business (as defined in section
1231(b)) shall be treated as a capital
asset and section 1222 shall be applied
without regard to paragraph (12)
thereof (relating to special rule for
collectibles).
* * * * * * *
(e) Certain Contributions of Ordinary Income and Capital Gain
Property.--
(1) General rule.--The amount of any charitable
contribution of property otherwise taken into account
under this section shall be reduced by the sum of--
(A) the amount of gain which would not have
been long-term capital gain if the property
contributed had been sold by the taxpayer at
its fair market value (determined at the time
of such contribution), and
(B) in the case of a charitable
contribution--
(i) of tangible personal property, if
the use by the donee is unrelated to
the purpose or function constituting
the basis for its exemption under
section 501 (or, in the case of a
governmental unit, to any purpose or
function described in subsection (c)),
or
(ii) to or for the use of a private
foundation (as defined in section
509(a)), other than a private
foundation described in subsection
(b)(1)(E),
[the amount of gain] 50 percent (\25/35\ in the
case of a corporation) of the amount of gain
which would have been long-term capital gain if
the property contributed had been sold by the
taxpayer at its fair market value (determined
at the time of such contribution).
For purposes of applying this paragraph (other than in the case
of gain to which section 617(d)(1), 1245(a), 1250(a), 1252(a)
or 1254(a) applies), property which is property used in the
trade or business (as defined in section 1231(b)) shall be
treated as a capital asset. For purposes of this paragraph,
section 1222 shall be applied without regard to paragraph (12)
thereof (relating to special rule for collectibles).
* * * * * * *
SEC. 172. NET OPERATING LOSS DEDUCTION.
(a) * * *
* * * * * * *
(b) Net Operating Loss Carrybacks and Carryovers.--
(1) Year to which loss may be carried.--
(A) * * *
(E) Excess interest loss.--
(i) * * *
(ii) Loss limitation year.--For
purposes of clause (i) and [subsection
(m)] subsection (h), the term ``loss
limitation year'' means, with respect
to any corporate equity reduction
transaction, the taxable year in which
such transaction occurs and each of the
2 succeeding taxable years.
* * * * * * *
(d) Modifications.--The modifications referred to in this
section are as follows:
(1) * * *
[(2) Capital gains and losses of taxpayers other than
corporations.--In the case of a taxpayer other than a
corporation--
[(A) the amount deductible on account of
losses from sales or exchanges of capital
assets shall not exceed the amount includable
on account of gains from sales or exchanges of
capital assets; and
[(B) the exclusion provided by section 1202
shall not be allowed.]
(2) Capital gains and losses.--
(A) Losses of taxpayers other than
corporations.--In the case of a taxpayer other
than a corporation, the amount deductible on
account of losses from sales or exchanges of
capital assets shall not exceed the amount
includible on account of gains from sales or
exchanges of capital assets.
(B) Deduction under section 1202.--The
deduction under section 1202 shall not be
allowed.
* * * * * * *
(4) Nonbusiness deductions of taxpayers other than
corporations.--In the case of a taxpayer other than a
corporation, the deductions allowable by this chapter
which are not attributable to a taxpayer's trade or
business shall be allowed only to the extent of the
amount of the gross income not derived from such trade
or business. For purposes of the preceding sentence--
(A) * * *
(B) the modifications specified in paragraphs
(1), [(2)(B),] (2)(B), and (3) shall be taken
into account;
(h) Corporate Equity Reduction Interest Losses.--For purposes
of this section--
(1) * * *
* * * * * * *
(3) Corporate equity reduction transaction.--
(A) * * *
(B) Major stock acquisition.--
(i) In general.--The term ``major
stock acquisition'' means the
acquisition by a corporation pursuant
to a plan of such corporation (or any
group of persons acting in concert with
such corporation) of stock in another
corporation representing 50 percent or
more (by vote or value) of the stock in
such other corporation[,].
* * * * * * *
(4) Other rules.--
(A) * * *
(B) Coordination with subsection (b)(2).--
[For purposes of subsection (b)(2)] For
purposes of subsection (b)(2)--
(i) * * *
* * * * * * *
(C) Members of affiliated groups.--Except as
provided by regulations, all members of an
affiliated group filing a consolidated return
under section 1501 shall be treated as 1
taxpayer for purposes of this subsection and
[subsection (b)(1)(M)] subsection (b)(1)(E).
* * * * * * *
SEC. 179. ELECTION TO EXPENSE CERTAIN DEPRECIABLE BUSINESS ASSETS.
(a) * * *
(b) Limitations.--
[(1) Dollar limitation.--The aggregate cost which may
be taken into account under subsection (a) for any
taxable year shall not exceed $17,500.]
(1) Dollar limitation.--The aggregate cost which may
be taken into account under subsection (a) for any
taxable year shall not exceed the following applicable
amount:
If the taxable year The applicable
begins in: amount is:
1996.................................................... $22,500
1997.................................................... 27,500
1998.................................................... 32,500
1999 or thereafter...................................... 35,000.
* * * * * * *
(d) Definitions and Special Rules.--
(1) Section 179 property.--For purposes of this
section, the term ``section 179 property'' means any
tangible property (to which section 168 applies) which
is section 1245 (as defined in section 1245(a)(3))
property and which is acquired by purchase for use in
the active conduct of [in a trade or business] a trade
or business. Such term shall not include any property
described in section 50(b) and shall not include air
conditioning or heating units and horses.
* * * * * * *
SEC. 179A. DEDUCTION FOR CLEAN-FUEL VEHICLES AND CERTAIN REFUELING
PROPERTY.
(a) * * *
* * * * * * *
[(g)] (f) Termination.--This section shall not apply to any
property placed in service after December 31, 2004.
* * * * * * *
PART VII--ADDITIONAL ITEMIZED DEDUCTIONS FOR INDIVIDUALS
* * * * * * *
SEC. 213. MEDICAL, DENTAL, ETC., EXPENSES.
(a) * * *
* * * * * * *
(d) Definitions.--For purposes of this section--
(1) The term ``medical care'' means amounts paid--
(A) for the diagnosis, cure, mitigation,
treatment, or prevention of disease, or for the
purpose of affecting any structure or function
of the body,
(B) for transportation primarily for and
essential to medical care referred to in
subparagraph (A), [or]
(C) for qualified long-term care services (as
defined in section 7702B(c)), or
[(C)] (D) for insurance (including amounts
paid as premiums under part B of title XVIII of
the Social Security Act, relating to
supplementary medical insurance for the aged)
covering medical care referred to in
[subparagraphs (A) and (B)] subparagraphs (A),
(B), and (C).
In the case of a long-term care insurance contract (as
defined in section 7702B(b)), only eligible long-term
care premiums (as defined in paragraph (11)) shall be
taken into account under subparagraph (D).
* * * * * * *
(6) In the case of an insurance contract under which
amounts are payable for other than medical care
referred to in [subparagraphs (A) and (B)]
subparagraphs (A), (B), and (C) of paragraph (1)--
(A) no amount shall be treated as paid for
insurance to which [paragraph (1)(C)] paragraph
(1)(D) applies unless the charge for such
insurance is either separately stated in the
contract, or furnished to the policyholder by
the insurance company in a separate statement,
* * * * * * *
(7) Subject to the limitations of paragraph (6),
premiums paid during the taxable year by a taxpayer
before he attains the age of 65 for insurance covering
medical care (within the meaning of [subparagraphs (A)
and (B)] subparagraphs (A), (B), and (C) of paragraph
(1)) for the taxpayer, his spouse, or a dependent after
the taxpayer attains the age of 65 shall be treated as
expenses paid during the taxable year for insurance
which constitutes medical care if premiums for such
insurance are payable (on a level payment basis) under
the contract for a period of 10 years or more or until
the year in which the taxpayer attains the age of 65
(but in no case for a period of less than 5 years).
* * * * * * *
(10) Certain payments to relatives treated as not
paid for medical care.--An amount paid for a qualified
long-term care service (as defined in section 7702B(c))
provided to an individual shall be treated as not paid
for medical care if such service is provided--
(A) by a relative (directly or through a
partnership, corporation, or other entity)
unless the relative is a licensed professional
with respect to such services, or
(B) by a corporation or partnership which is
related (within the meaning of section 267(b)
or 707(b)) to the individual.
For purposes of this paragraph, the term ``relative''
means an individual bearing a relationship to the
individual which is described in any of paragraphs (1)
through (8) of section 152(a). This paragraph shall not
apply for purposes of section 105(b) with respect to
reimbursements through insurance.
(11) Eligible long-term care premiums.--
(A) In general.--For purposes of this
section, the term ``eligible long-term care
premiums'' means the amount paid during a
taxable year for any long-term care insurance
contract (as defined in section 7702B(b))
covering an individual, to the extent such
amount does not exceed the limitation
determined under the following table:
In the case of an individual
with an attained age before the The limitation
close of the taxable year of: is:
40 or less...................................... $200
More than 40 but not more than 50............... 375
More than 50 but not more than 60............... 750
More than 60 but not more than 70............... 2,000
More than 70.................................... 2,500.
(B) Indexing.--
(i) In general.--In the case of any
taxable year beginning in a calendar
year after 1996, each dollar amount
contained in subparagraph (A) shall be
increased by the medical care cost
adjustment of such amount for such
calendar year. If any increase
determined under the preceding sentence
is not a multiple of $10, such increase
shall be rounded to the nearest
multiple of $10.
(ii) Medical care cost adjustment.--
For purposes of clause (i), the medical
care cost adjustment for any calendar
year is the percentage (if any) by
which--
(I) the medical care
component of the Consumer Price
Index (as defined in section
1(f)(5)) for August of the
preceding calendar year,
exceeds
(II) such component for
August of 1995.
The Secretary shall, in consultation
with the Secretary of Health and Human
Services, prescribe an adjustment which
the Secretary determines is more
appropriate for purposes of this
paragraph than the adjustment described
in the preceding sentence, and the
adjustment so prescribed shall apply in
lieu of the adjustment described in the
preceding sentence.
* * * * * * *
SEC. 219. RETIREMENT SAVINGS.
(a) * * *
* * * * * * *
[(c) Special Rules for Certain Married Individuals.--
[(1) In general.--In the case of any individual with
respect to whom a deduction is otherwise allowable
under subsection (a)--
[(A) who files a joint return under section
6013 for a taxable year, and
[(B) whose spouse--
[(i) has no compensation (determined
without regard to section 911) for the
taxable year, or
[(ii) elects to be treated for
purposes of subsection (b)(1)(B) as
having no compensation for the taxable
year,
there shall be allowed as a deduction any amount paid in cash
for the taxable year by or on behalf of the individual to an
individual retirement plan established for the benefit of his
spouse.
[(2) Limitation.--The amount allowable as a deduction
under paragraph (1) shall not exceed the excess of--
[(A) the lesser of--
[(i) $2,250, or
[(ii) an amount equal to the
compensation includible in the
individual's gross income for the
taxable year, over
[(B) the amount allowable as a deduction
under subsection (a) for the taxable year.
In no event shall the amount allowable as a deduction under
paragraph (1) exceed $2,000.]
(c) Special Rules for Certain Married Individuals.--
(1) In general.--In the case of an individual to whom
this paragraph applies for the taxable year, the
limitation of subsection (b)(1) shall be equal to the
lesser of--
(A) $2,000, or
(B) the sum of--
(i) the compensation includible in
such individual's gross income for the
taxable year, plus
(ii) the compensation includible in
the gross income of such individual's
spouse for the taxable year reduced by
the amount allowable as a deduction
under subsection (a) to such spouse for
such taxable year.
(2) Individuals to whom paragraph (1) applies.--
Paragraph (1) shall apply to any individual if--
(A) such individual files a joint return for
the taxable year, and
(B) the amount of compensation (if any)
includible in such individual's gross income
for the taxable year is less than the
compensation includible in the gross income of
such individual's spouse for the taxable year.
* * * * * * *
(f) Other Definitions and Special Rules.--
(1) * * *
(2) Married individuals.--The maximum deduction under
[subsections (b) and (c)] subsection (b) shall be
computed separately for each individual, and this
section shall be applied without regard to any
community property laws.
* * * * * * *
[(7) Election not to deduct contributions.--
[For election not to deduct contributions to individual
retirement plans, see section 408(o)(2)(B)(ii).]
* * * * * * *
PART VIII--SPECIAL DEDUCTIONS FOR CORPORATIONS
* * * * * * *
SEC. 243. DIVIDENDS RECEIVED BY CORPORATIONS.
(a) * * *
(b) Qualifying Dividends.--
(1) * * *
[(2) Affiliated group.--For purposes of this
subsection, the term ``affiliated group'' has the
meaning given such term by section 1504(a), except that
for such purposes sections 1504(b)(2), 1504(b)(4), and
1504(c) shall not apply.]
(2) Affiliated group.--For purposes of this
subsection:
(A) In general.--The term ``affiliated
group'' has the meaning given such term by
section 1504(b), except that for such purposes
sections 1504(b)(2), 1504(b)(4), and 1504(c)
shall not apply.
(B) Group must be consistent in foreign tax
treatment.--The requirements of paragraph
(1)(A) shall not be treated as being met with
respect to any dividend received by a
corporation if, for any taxable year which
includes the day on which such dividend is
received--
(i) 1 or more members of the
affiliated group referred to in
paragraph (1)(A) choose to any extent
to take the benefits of section 901,
and
(ii) 1 or more other members of such
group claim to any extent a deduction
for taxes otherwise creditable under
section 901.
(3) Special rule for groups which include life
insurance companies.--
(A) In general.--In the case of an affiliated
group which includes 1 or more insurance
companies under section 801, no dividend by any
member of such group shall be treated as a
qualifying dividend unless an election under
this paragraph is in effect for the taxable
year in which the dividend is received. The
preceding sentence shall not apply in the case
of a dividend described in paragraph
(1)(B)(ii).
* * * * * * *
PART IX--ITEMS NOT DEDUCTIBLE
* * * * * * *
SEC. 280A. DISALLOWANCE OF CERTAIN EXPENSES IN CONNECTION WITH BUSINESS
USE OF HOME, RENTAL OF VACATION HOMES, ETC.
(a) * * *
* * * * * * *
(c) Exceptions for Certain Business or Rental Use; Limitation
on Deductions for Such Use.--
(1) Certain business use.--Subsection (a) shall not
apply to any item to the extent such item is allocable
to a portion of the dwelling unit which is exclusively
used on a regular basis--
[(A) the principal place of business for any
trade or business of the taxpayer,]
(A) as the principal place of business for
any trade or business of the taxpayer,
* * * * * * *
SEC. 280A. DISALLOWANCE OF CERTAIN EXPENSES IN CONNECTION WITH BUSINESS
USE OF HOME, RENTAL OF VACATION HOMES, ETC.
(a) * * *
* * * * * * *
(c) Exceptions for Certain Business or Rental Use; Limitation
on Deductions for Such Use.--
(1) Certain business use.--Subsection (a) shall not
apply to any item to the extent such item is allocable
to a portion of the dwelling unit which is exclusively
used on a regular basis--
[(A) the principal place of business for any
trade or business of the taxpayer.]
(A) as the principal place of business for
any trade or business of the taxpayer,
(B) as a place of business which is used by
patients, clients, or customers in meeting or
dealing with the taxpayer in the normal course
of his trade or business, or
(C) in the case of a separate structure which
is not attached to the dwelling unit, in
connection with the taxpayer's trade or
business.
In the case of an employee, the preceding sentence
shall apply only if the exclusive use referred to in
the preceding sentence is for the convenience of his
employer. For purposes of subparagraph (A), the term
``principal place of business'' includes a place of
business which is used by the taxpayer for the
administrative or management activities of any trade or
business of the taxpayer if there is no other fixed
location of such trade or business where the taxpayer
conducts substantial administrative or management
activities of such trade or business.
(2) Certain storage use.--Subsection (a) shall not
apply to any item to the extent such item is allocable
to space within the dwelling unit which is used on a
regular basis as a storage unit for the [inventory]
inventory or product samples of the taxpayer held for
use in the taxpayer's trade or business of selling
products at retail or wholesale, but only if the
dwelling unit is the sole fixed location of such trade
or business.
* * * * * * *
SEC. 280F. LIMITATION ON DEPRECIATION FOR LUXURY AUTOMOBILES;
LIMITATION WHERE CERTAIN PROPERTY USED FOR PERSONAL
PURPOSES
(a) Limitation on Amount of [Investment Tax Credit and]
Depreciation for Luxury Automobiles.--
(1) Depreciation.--
(A) * * *
(B) Disallowed deductions allowed for years
after recovery period.--
(i) In general.--Except as provided
in clause (ii), the unrecovered basis
of any passenger automobile shall be
treated as an expense for the 1st
taxable year after the recovery period.
Any excess of the unrecovered basis
over the limitation of clause (ii)
shall be treated as an expense in the
succeeding taxable year. For purposes
of this clause, the unrecovered basis
of any passenger automobile shall be
treated as including the additional
amount determined under section 168 by
reason of subsection (k) thereof to the
extent not allowed as a deduction by
reason of this paragraph for any
taxable year in the recovery period.
* * * * * * *
Subchapter C--Corporate Distributions and Adjustments
* * * * * * *
PART II--CORPORATE LIQUIDATIONS
* * * * * * *
Subpart C--Collapsible Corporations
* * * * * * *
SEC. 341. COLLAPSIBLE CORPORATIONS.
(a) * * *
* * * * * * *
(f) Certain Sales of Stock of Consenting
Corporations.--
(1) * * *
* * * * * * *
(3) Exception for certain tax-free transactions.--If
the basis of a subsection (f) asset in the hands of a
transferee is determined by reference to its basis in
the hands of the transferor by reason of the
application of section 332, [351, 361, 371(a), or
374(a)] 351, or 361, then the amount of gain taken into
account by the transferor under paragraph (2) shall not
exceed the amount of gain recognized to the transferor
on the transfer of such asset (determined without
regard to this subsection). This paragraph shall apply
only if the transferee--
(A) is not an organization which is exempt
from tax imposed by this chapter, and
(B) agrees (at such time and in such manner
as the Secretary may by regulations prescribe)
to have the provisions of paragraph (2) apply
to any disposition by it of such subsection (f)
asset.
* * * * * * *
PART III--CORPORATE ORGANIZATIONS AND REORGANIZATIONS
* * * * * * *
Subpart B--Effects on Shareholders and Security Holders
* * * * * * *
SEC. 355. DISTRIBUTION OF STOCK AND SECURITIES OF A CONTROLLED
CORPORATION.
(a) * * *
* * * * * * *
(d) Recognition of Gain on Certain Distributions of Stock or
Securities in Controlled Corporation.--
(1) * * *
* * * * * * *
(7) Aggregation rules.--
(A) In general.--For purposes of this
subsection, a person and all persons related to
such person (within the meaning of section
267(b) or 707(b)(1)) shall be treated as one
person.
* * * * * * *
PART V--CARRYOVERS
* * * * * * *
SEC. 382. LIMITATION ON NET OPERATING LOSS CARRYFORWARDS AND CERTAIN
BUILT-IN LOSSES FOLLOWING OWNERSHIP CHANGE.
(a) * * *
* * * * * * *
(h) Special Rules for Built-in Gains and Losses and Section
338 Gains.--For purposes of this section--
(1) * * *
(2) Recognized built-in gain and loss.--
(A) * * *
(B) Recognized built-in loss.--The term
``recognized built-in loss'' means any loss
recognized during the recognition period on the
disposition of any asset except to the extent
the new loss corporation establishes that--
(i) such asset was not held by the
old loss corporation immediately before
the change date, or
(ii) such loss exceeds the excess
of--
(I) the adjusted basis of
such asset on the change date,
over
(II) the fair market value of
such asset on such date.
Such term includes any amount allowable as
depreciation, amortization, or depletion for
any period within the recognition period except
to the extent the new loss corporation
establishes that the amount so allowable is not
attributable to the excess described in clause
(ii). The amount of the net unrealized built-in
loss shall be increased by the amount of the
additional deduction allowable by reason of
section 168(k) which is treated under the
preceding sentence as a recognized built-in
loss.
* * * * * * *
Subchapter D--Deferred Compensation, Etc.
* * * * * * *
PART I--PENSION, PROFIT-SHARING, STOCK BONUS PLANS, ETC
Subpart A--General Rule
Sec. 401. Qualified pension, profit-sharing, and stock bonus
plans.
* * * * * * *
Sec. 408A. American Dream Savings Accounts.
* * * * * * *
SEC. 401. QUALIFIED PENSION, PROFIT-SHARING, AND STOCK BONUS PLANS.
(a) Requirements for Qualification.--A trust created or
organized in the United States and forming part of a stock
bonus, pension, or profit-sharing plan of an employer for the
exclusive benefit of his employees or their beneficiaries shall
constitute a qualified trust under this section--
(1) * * *
* * * * * * *
(20) A trust forming part of a pension plan shall not
be treated as failing to constitute a qualified trust
under this section merely because the pension plan of
which such trust is a part makes 1 or more
distributions within 1 taxable year to a distributee on
account of a termination of the plan of which the trust
is a part, or in the case of a profit-sharing or stock
bonus plan, a complete discontinuance of contributions
under such plan. This paragraph shall not apply to a
defined benefit plan unless the employer maintaining
such plan files a notice with the Pension Benefit
Guaranty Corporation (at the time and in the manner
prescribed by the Pension Benefit Guaranty Corporation)
notifying the Corporation of such payment or
distribution and the Corporation has approved such
payment or distribution or, within 90 days after the
date on which such notice was filed, has failed to
disapprove such payment or distribution. For purposes
of this paragraph, rules similar to the rules of
section 402(a)(6)(B) (as in effect before its repeal by
[section 211] section 521 of the Unemployment
Compensation Amendments of 1992) shall apply.
* * * * * * *
(k) Cash or Deferred Arrangements.--
(1) * * *
(2) Qualified cash or deferred arrangement.--A
qualified cash or deferred arrangement is any
arrangement which is part of a profit-sharing or stock
bonus plan, a pre-ERISA money purchase plan, or a rural
cooperative plan which meets the requirements of
subsection (a)--
(A) under which a covered employee may elect
to have the employer make payments as
contributions to a trust under the plan on
behalf of the employee, or to the employee
directly in cash;
(B) under which amounts held by the trust
which are attributable to employer
contributions made pursuant to the employee's
election--
(i) may not be distributable to
participants or other beneficiaries
earlier than--
(I) separation from service,
death, or disability,
(II) an event described in
paragraph (10),
(III) in the case of a
profit-sharing or stock bonus
plan, the attainment of age
59\1/2\, [or]
(IV) in the case of
contributions to a profit-
sharing or stock bonus plan to
which section 402(e)(3)
applies, upon hardship of the
employee, [and] or
(V) the date distributions
for premiums for a long-term
care insurance contract (as
defined in section 7702B(b))
for coverage of such individual
or the spouse of such
individual are made, and
* * * * * * *
SEC. 402. TAXABILITY OF BENEFICIARY OF EMPLOYEES' TRUST.
(a) * * *
* * * * * * *
(g) Limitation on Exclusion for Elective Deferrals.--
(1) * * *
* * * * * * *
(3) Elective deferrals.--For purposes of this
subsection, the term ``elective deferrals'' means, with
respect to any taxable year, the sum of--
(A) any employer contribution under a
qualified cash or deferred arrangement (as
defined in section 401(k)) to the extent not
includible in gross income for the taxable year
under [subsection (a)(8)] subsection (e)(3)
(determined without regard to this subsection),
* * * * * * *
SEC. 403. TAXATION OF EMPLOYEE ANNUITIES.
(a) * * *
(b) Taxability of Beneficiary Under Annuity Purchased by
Section 501(c)(3) Organization or Public School.--
(1) * * *
* * * * * * *
(10) Distribution requirements.--Under regulations
prescribed by the Secretary, this subsection shall not
apply to any annuity contract (or to any custodial
account described in paragraph (7) or retirement income
account described in paragraph (9)) unless requirements
similar to the requirements of section 401(a)(9) and
401(a)(31) are met (and requirements similar to the
incidental death benefit requirements of section 401(a)
are met) with respect to such annuity contract (or
custodial account or retirement income account). Any
amount transferred in [an] a direct trustee-to-trustee
transfer in accordance with section 401(a)(31) shall
not be includible in gross income for the taxable year
of the transfer.
(11) Requirement that distributions not begin before
age 59\1/2\, separation from service, death, or
disability.--This subsection shall not apply to any
annuity contract unless under such contract
distributions attributable to contributions made
pursuant to a salary reduction agreement (within the
meaning of section 402(g)(3)(C)) may be paid only--
(A) when the employee attains age 59\1/2\,
separates from service, dies, or becomes
disabled (within the meaning of section
72(m)(7)), [or]
(B) in the case of hardship[.], or
(C) for the payment of premiums for a long-
term care insurance contract (as defined in
section 7702B(b)) for coverage of the employee
or the spouse of the employee.
Such contract may not provide for the distribution of
any income attributable to such contributions in the
case of hardship.
* * * * * * *
SEC. 404. DEDUCTION FOR CONTRIBUTIONS OF AN EMPLOYER TO AN EMPLOYEES'
TRUST OR ANNUITY PLAN AND COMPENSATION UNDER A
DEFERRED-PAYMENT PLAN.
(a) General Rule.--If contributions are paid by an employer
to or under a stock bonus, pension, profit-sharing, or annuity
plan, or if compensation is paid or accrued on account of any
employee under a plan deferring the receipt of such
compensation, such contributions or compensation shall not be
deductible under this chapter; but, if they would otherwise be
deductible, they shall be deductible under this section,
subject, however, to the following limitations as to the
amounts deductible in any year:
(1) * * *
(2) Employees' annuities.--In the taxable year when
paid, in an amount determined in accordance with
paragraph (1), if the contributions are paid toward the
purchase of retirement annuities, or retirement
annuities and medical benefits as described in section
401(h), and such purchase is part of a plan which meets
the requirements of section 401(a)(3), (4), (5), (6),
(7), (8), (9), (11), (12), (13), (14), (15), (16),
(17), [(18),] (19), (20), (22), (26), (27) and (31)
and, if applicable, the requirements of section
401(a)(10) and of section 401(d), and if refunds of
premiums, if any, are applied within the current
taxable year or next succeeding taxable year toward the
purchase of such retirement annuities, or such
retirement annuities and medical benefits.
* * * * * * *
SEC. 408. INDIVIDUAL RETIREMENT ACCOUNTS.
(a) * * *
* * * * * * *
(o) Definitions and Rules Relating to Nondeductible
Contributions to Individual Retirement Plans.--
(1) * * *
* * * * * * *
(5) Termination.--This subsection shall not apply to
any designated nondeductible contribution for any
taxable year beginning after December 31, 1995.
* * * * * * *
SEC. 408A. AMERICAN DREAM SAVINGS ACCOUNTS.
(a) General Rule.--Except as provided in this section, an
American Dream Savings Account shall be treated for purposes of
this title in the same manner as an individual retirement plan.
(b) American Dream Savings Account.--For purposes of this
title, the term ``American Dream Savings Account'' or ``ADS
account'' means an individual retirement plan which is
designated at the time of the establishment of the plan as an
American Dream Savings Account. Such designation shall be made
in such manner as the Secretary may prescribe.
(c) Contribution Rules.--
(1) No deduction allowed.--No deduction shall be
allowed under section 219 for a contribution to an ADS
account.
(2) Contribution limit.--
(A) In general.--The aggregate amount of
contributions (other than rollover
contributions) for any taxable year to all ADS
accounts maintained for the benefit of an
individual shall not exceed the lesser of--
(i) $2,000, or
(ii) an amount equal to the
compensation includible in the
individual's gross income for such
taxable year.
(B) $4,000 limitation for certain additional
married individuals.--
(i) In general.--In the case of an
individual to whom this subparagraph
applies for the taxable year, the
limitation of subparagraph (A)(ii)
shall be equal to the sum of--
(I) the compensation
includible in such individual's
gross income for the taxable
year, plus
(II) the compensation
includible in the gross income
of such individual's spouse for
the taxable year reduced by the
amount of the limitation under
subparagraph (A) applicable to
such spouse for such taxable
year.
(ii) Individuals to whom clause (i)
applies.--Clause (i) shall apply to any
individual if--
(I) such individual files a
joint return for the taxable
year, and
(II) the amount of
compensation (if any)
includible in such individual's
gross income for the taxable
year is less than the
compensation includible in the
gross income of such
individual's spouse for the
taxable year.
(C) Adjustment for inflation.--
(i) In general.--In the case of a
taxable year beginning in a calendar
year after 1996, the $2,000 amount
contained in subparagraph (A) shall be
increased by an amount equal to--
(I) such dollar amount,
multiplied by
(II) the cost-of-living
adjustment under section
1(f)(3) for the calendar year
in which the taxable year
begins, determined by
substituting ``calendar year
1995'' for ``calendar year
1992'' in subparagraph (B)
thereof.
(ii) Rounding.--If any amount as
adjusted under clause (i) is not a
multiple of $50, such amount shall be
rounded to the nearest multiple of $50.
(D) Tax on excess contributions.--Section
4973 shall be applied separately with respect
to individual retirement plans which are ADS
accounts and individual retirement plans which
are not ADS accounts; except that, for purposes
of applying such section with respect to
individual retirement plans which are ADS
accounts, excess contributions shall be
considered to be any amounts in excess of the
limitation under subsection (c)(2)(A).
(3) Contributions permitted after age 70\1/2\.--
Contributions to an ADS account may be made even after
the individual for whom the account is maintained has
attained age 70\1/2\.
(4) Mandatory distribution rules not to apply, etc.--
(A) In general.--Except as provided in
subparagraph (B), subsections (a)(6) and (b)(3)
of section 408 (relating to required
distributions) and section 4974 (relating to
excise tax on certain accumulations in
qualified retirement plans) shall not apply to
any ADS account.
(B) Post-death distributions.--Rules similar
to the rules of section 401(a)(9) (other than
subparagraph (A) thereof) shall apply for
purposes of this section.
(5) Limitations on rollover contributions.--No
rollover contribution may be made to an ADS account
unless--
(A) such contribution is from another ADS
account, or
(B) such contribution is from an individual
retirement plan (other than an ADS account) and
is made before January 1, 1998.
(d) Distribution Rules.--For purposes of this title--
(1) General rules.--
(A) Exclusion from gross income.--No portion
of a qualified distribution from an ADS account
shall be includible in gross income.
(B) Exception from penalty tax.--Section
72(t) shall not apply to--
(i) any qualified distribution from
an ADS account, and
(ii) any qualified special purpose
distribution (whether or not a
qualified distribution) from an ADS
account.
(2) Qualified distribution.--For purposes of this
subsection--
(A) In general.--The term ``qualified
distribution'' means any payment or
distribution--
(i) made on or after the date on
which the individual attains age 59\1/
2\,
(ii) made to a beneficiary (or to the
estate of the individual) on or after
the death of the individual,
(iii) attributable to the
individual's being disabled (within the
meaning of section 72(m)(7)), or
(iv) which is a qualified special
purpose distribution.
(B) Distributions within 5 years.--No payment
or distribution shall be treated as a qualified
distribution if--
(i) it is made within the 5-taxable
year period beginning with the 1st
taxable year for which the individual
made a contribution to an ADS account
(or such individual's spouse made a
contribution to an ADS account)
established for such individual, or
(ii) in the case of a payment or
distribution properly allocable to a
rollover contribution (or income
allocable thereto), it is made within 5
years after the date on which such
rollover contribution was made, as
determined under regulations prescribed
by the Secretary.
Clause (ii) shall not apply to a rollover
contribution from an ADS account.
(3) Income inclusion for rollovers from non-ADS
accounts.--In the case of any amount paid or
distributed out of an individual retirement plan (other
than an ADS account) which is paid into an ADS account
(established for the benefit of the payee or
distributee, as the case may be) before the close of
the 60th day after the day on which the payment or
distribution is received--
(A) sections 72(t) and 408(d)(3) shall not
apply, and
(B) any amount required to be included in
gross income by reason of this paragraph shall
be so included ratably over the 4-taxable year
period beginning with the taxable year in which
the payment or distribution is made.
(e) Qualified Special Purpose Distribution.--
(1) In general.--For purposes of this section, the
term ``qualified special purpose distribution'' means
any payments or distributions from an ADS account to
the individual for whose benefit such account is
established--
(A) if such payments or distributions are
qualified first-time homebuyer distributions,
or
(B) to the extent such payments or
distributions do not exceed--
(i) the qualified higher education
expenses of the taxpayer for the
taxable year in which received, and
(ii) the qualified medical expenses
of the taxpayer for the taxable year in
which received.
(2) Qualified first-time homebuyer distributions.--
(A) In general.--For purposes of this
subsection, the term ``qualified first-time
homebuyer distribution'' means any payment or
distribution received by an individual to the
extent such payment or distribution is used by
the individual before the close of the 60th day
after the day on which such payment or
distribution is received to pay qualified
acquisition costs with respect to a principal
residence for such individual as a first-time
homebuyer.
(B) Qualified acquisition costs.--For
purposes of this paragraph, the term
``qualified acquisition costs'' means the costs
of acquiring, constructing, or reconstructing a
residence. Such term includes any usual or
reasonable settlement, financing, or other
closing costs.
(C) First-time homebuyer; other
definitions.--For purposes of this paragraph--
(i) First-time homebuyer.--The term
``first-time homebuyer'' means any
individual if such individual (and, if
married, such individual's spouse) had
no present ownership interest in a
principal residence during the 3-year
period ending on the date of
acquisition of the principal residence
to which this paragraph applies.
(ii) Principal residence.--The term
``principal residence'' has the same
meaning as when used in section 1034.
(iii) Date of acquisition.--The term
``date of acquisition'' means the
date--
(I) on which a binding
contract to acquire the
principal residence to which
subparagraph (A) applies is
entered into, or
(II) on which a binding
contract to construct or
reconstruct such a principal
residence is entered into.
(D) Special rule where delay in
acquisition.--If any payment or distribution
out of an ADS account fails to meet the
requirements of subparagraph (A) solely by
reason of a delay or cancellation of the
purchase, construction, or reconstruction of
the residence, the amount of the payment or
distribution may be contributed to an ADS
account as provided in subsection (d)(3)(A)(i)
of section 408 (determined by substituting
``120th day'' for ``60th day'' in such
subsection), except that--
(i) subsection (d)(3)(B) of such
section shall not be applied to such
contribution, and
(ii) such amount shall not be taken
into account in determining whether
subsection (d)(3)(A)(i) of such section
applies to any other amount.
(3) Qualified higher education expenses.--For
purposes of this subsection--
(A) In general.--The term ``qualified higher
education expenses'' means tuition, fees,
books, supplies, and equipment required for the
enrollment or attendance of--
(i) the taxpayer,
(ii) the taxpayer's spouse, or
(iii) the taxpayer's child (as
defined in section 151(c)(3)) or
grandchild,
at an eligible educational institution (as
defined in section 135(c)(3)).
(B) Coordination with savings bond
provisions.--The amount of qualified higher
education expenses for any taxable year shall
be reduced by any amount excludable from gross
income under section 135.
(4) Qualified medical expenses.--
(A) In general.--For purposes of this
subsection, the term ``qualified medical
expenses'' means any amounts paid during the
taxable year, not compensated for by insurance
or otherwise, for medical care (as defined in
section 213(d)) of the taxpayer, his spouse, or
a dependent (as defined in section 152).
(B) Long-term care insurance premiums treated
as medical expenses.--For purposes of
subparagraph (A), section 213(d)(1)(C) shall
not apply but the term ``qualified medical
expenses'' shall include premiums for long-term
care insurance (as defined in section 7702B(b))
for coverage of the taxpayer or his spouse.
(f) Other Definitions.--For purposes of this section--
(1) Rollover contributions.--The term ``rollover
contributions'' means contributions described in
section 402(c), 403(a)(4), 403(b)(8), or 408(d)(3).
(2) Compensation.--The term ``compensation'' has the
meaning given such term by section 219(f).
* * * * * * *
Subpart B--Special Rules
* * * * * * *
SEC. 415. LIMITATIONS ON BENEFITS AND CONTRIBUTION UNDER QUALIFIED
PLANS.
(a) * * *
* * * * * * *
(k) Special Rules.--
(1) Defined benefit plan and defined contribution
plan.--For purposes of this title, the term ``defined
contribution plan'' or ``defined benefit plan'' means a
defined contribution plan (within the meaning of
section 414(i)) or a defined benefit plan (within the
meaning of section 414(j)), whichever applies, which
is--
(A) a plan described in section 401(a) which
includes a trust which is exempt from tax under
section 501(a),
(B) an annuity plan described in section
403(a),
(C) an annuity contract described in section
403(b), or
[(D) an individual retirement account
described in section 408(a),
[(E) an individual retirement annuity
described in section 408(b), or
[(F)] (D) a simplified employee pension.
* * * * * * *
Subpart D--Treatment of Welfare Benefits Funds
* * * * * * *
SEC. 419A. QUALIFIED ASSET ACCOUNT; LIMITATION ON ADDITIONS TO ACCOUNT.
(a) * * *
* * * * * * *
(c) Account Limit.--For purposes of this section--
(1)
* * * * * * * * * *
(3) Amount taken into account for sub or [severence]
severance pay benefits.--
(A) * * *
* * * * * * *
Subpart E--Treatment of Transfers to Retiree Health Accounts
* * * * * * *
SEC. 420. TRANSFERS OF EXCESS PENSION ASSETS TO RETIREE HEALTH
ACCOUNTS.
(a) * * *
* * * * * * *
(e) Definition and Special Rules.--For purposes of this
section--
(1) Qualified current retiree health liabilities.--
For purposes of this section--
(A) * * *
* * * * * * *
(C) Applicable health benefits.--The term
``applicable health benefits'' [mean] means
health benefits or coverage which are provided
to--
(i) * * *
* * * * * * *
PART II--CERTAIN STOCK OPTIONS
* * * * * * *
SEC. 424. DEFINITIONS AND SPECIAL RULES.
(a) * * *
* * * * * * *
(c) Disposition.--
(1) * * *
* * * * * * *
(3) Special rule where incentive stock is acquired
through use of other statutory option stock.--
(A) * * *
(B) Statutory option stock.--For purpose of
subparagraph (A), the term ``statutory option
stock'' means any stock acquired through the
exercise of [a qualified stock option, an
incentive stock option, an option granted under
an employee stock purchase plan, or a
restricted stock option] an incentive stock
option or an option granted under an employee
stock purchase plan.
* * * * * * *
Subchapter E--Accounting Periods and Methods of Accounting
* * * * * * *
PART II--METHODS OF ACCOUNTING
* * * * * * *
Subpart B--Taxable Year for Which Items of Gross Income Included
* * * * * * *
SEC. 453A. SPECIAL RULES FOR NONDEALERS.
(a) * * *
* * * * * * *
(c) Interest on Deferred Tax Liability.--
(1) * * *
* * * * * * *
(3) Deferred tax liability.--For purposes of this
section, the term ``deferred tax liability'' means,
with respect to any taxable year, the product of--
(A) the amount of gain with respect to an
obligation which has not been recognized as of
the close of such taxable year, multiplied by
(B) the maximum rate of tax in effect under
section 1 or 11, whichever is appropriate, for
such taxable year.
For purposes of applying the preceding sentence with
respect to so much of the gain which, when recognized,
will be treated as long-term capital gain, [the maximum
rate on net capital gain under section 1(h) or 1201
(whichever is appropriate) shall be taken into
account.] the maximum rate on net capital gain under
section 1201 or the deduction under section 1202
(whichever is appropriate) shall be taken into account.
* * * * * * *
SEC. 457. DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS
AND TAX-EXEMPT ORGANIZATIONS.
(a) * * *
* * * * * * *
(d) Distribution Requirements.--
(1) In general.--For purposes of subsection (b)(5), a
plan meets the distribution requirements of this
subsection if--
(A) under the plan amounts will not be made
available to participants or beneficiaries
earlier than--
(i) the calendar year in which the
participant attains age 70\1/2\,
(ii) when the participant is
separated from service with the
employer, [or]
(iii) when the participant is faced
with an unforeseeable emergency
(determined in the manner prescribed by
the Secretary in regulations), [and] or
(iv) the date distributions for
premiums for a long-term care insurance
contract (as defined in section
7702B(b)) for coverage of such
individual or the spouse of such
individual are made, and
* * * * * * *
SEC. 460. SPECIAL RULES FOR LONG-TERM CONTRACTS.
(a) * * *
(b) Percentage of Completion Method.--
(1) Requirements of percentage of completion
method.--Except as provided in paragraph (3), in the
case of any long-term contract with respect to which
the percentage of completion method is used--
(A) the percentage of completion shall be
determined by comparing costs allocated to the
contract under subsection (c) and incurred
before the close of the taxable year with the
estimated total contract costs, and
(B) upon completion of the contract (or, with
respect to any amount properly taken into
account after completion of the contract, when
such amount is so properly taken into account),
the taxpayer shall pay (or shall be entitled to
receive) interest computed under the look-back
method of paragraph (2).
In the case of any long-term contract with respect to
which the percentage of completion method is used,
except for purposes of applying [the look-back method
of paragraph (3)] the look-back method of paragraph
(2), any income under the contract (to the extent not
previously includible in gross income) shall be
included in gross income for the taxable year following
the taxable year in which the contract was completed.
For purposes of subtitle F (other than sections 6654
and 6655) any interest required to be paid by the
taxpayer under subparagraph (B) shall be treated as an
increase in the tax imposed by this chapter for the
taxable year in which the contract is completed (or, in
the case of interest payable with respect to any amount
properly taken into account after completion of the
contract, for the taxable year in which the amount is
so properly taken into account).
* * * * * * *
(e) Exception for Certain Construction Contracts.--
(1) * * *
* * * * * * *
(6) Definitions relating to residential construction
contracts.--For purposes of this subsection--
(A) * * *
(B) Residential construction contract.--The
term ``residential construction contract''
means any contract which would be described in
subparagraph (A) if clause (i) of such
subparagraph reads as follows:
``(i) dwelling units (as defined in
[section 167(k)] section
168(e)(2)(A)(ii)), and''.
* * * * * * *
Subpart C--Taxable Year for Which Deduction Taken
SEC. 461. GENERAL RULE FOR TAXABLE YEAR OF DEDUCTION.
(a) * * *
* * * * * * *
(i) Special Rules for Tax Shelters.--
(1) * * *
* * * * * * *
(3) Tax shelter defined.--
For purposes of this subsection, the term ``tax shelter''
means--
(A) * * *
* * * * * * *
(C) any tax shelter (as defined in [section
6662(d)(2)(C)(ii)] section 6662(d)(2)(C)(iii)).
* * * * * * *
SEC. 465. DEDUCTIONS LIMITED TO AMOUNT AT RISK.
(a) Limitation to Amount at Risk.--
(1) * * *
* * * * * * *
(4) Treatment of neutral cost recovery deduction.--
(A) In general.--None of the additional
deduction allowable by reason of section 168(k)
for the taxable year shall be disallowed under
paragraph (1) unless there is a disallowed non-
NCR loss for such year.
(B) Proportionate disallowance.--
(i) In general.--If there is a
disallowed non-NCR loss for the taxable
year, only the disallowed portion of
the additional deduction allowable by
reason of section 168(k) shall be not
allowed under paragraph (1).
(ii) Disallowed portion.--For
purposes of clause (i), the disallowed
portion is the percentage which the
disallowed non-NCR loss's allocable
share of non-NCR depreciation is of
total non-NCR depreciation.
(iii) Allocable share.--For purposes
of clause (ii), a disallowed non-NCR
loss's allocable share of non-NCR
depreciation is the amount which bears
the same ratio to the amount of the
loss as the amount of non-NCR
depreciation for the taxable year bears
to the total amount of deductions for
such taxable year.
(C) Definitions.--For purposes of this
paragraph--
(i) Disallowed non-ncr loss.--The
term ``disallowed non-NCR loss'' means,
for any taxable year, the amount of the
loss from the activity which would be
disallowed under paragraph (1) if such
loss were determined without regard to
the additional deduction allowable by
reason of section 168(k).
(ii) Non-ncr depreciation.--The term
``non-NCR depreciation'' means the
amount allowable as a deduction under
section 168 without regard to
subsection (k) thereof.
* * * * * * *
SEC. 469. PASSIVE ACTIVITY LOSSES AND CREDITS LIMITED.
(a) * * *
* * * * * * *
(c) Passive Activity Defined.--For purposes of this section--
(1) * * *
* * * * * * *
(3) Working interests in oil and gas property.--
(A) * * *
(B) Income in subsequent years.--If any
taxpayer has any loss for any taxable year from
a working interest in any oil or gas property
which is treated as a loss which is not from a
passive activity, then any net income from such
property (or any property the basis of which is
determined in whole or in part by reference to
the basis of such property) for any succeeding
taxable year shall be treated as income of the
taxpayer which is not from a passive activity.
If the preceding sentence applies to the net
income from any property for any taxable year,
any credits allowable under subpart B (other
than section 27(a)) or D of part IV of
subchapter A for such taxable year which are
attributable to such property shall be treated
as credits not from a passive activity to the
extent the amount of such credits does not
exceed the regular tax liability of the
taxpayer for the taxable year which is
allocable to such net income.
* * * * * * *
(g) Dispositions of Entire Interest in Passive Activity.--
If during the taxable year a taxpayer disposes of his entire
interest in any passive activity (or former passive activity),
the following rules shall apply:
(1) Fully taxable transaction.--
[(A) In general.--If all gain or loss
realized on such disposition is recognized, the
excess of--
[(i) the sum of--
[(I) any loss from such
activity for such taxable year
(determined after application
of subsection (b)), plus
[(II) any loss realized on
such disposition, over
[(ii) net income or gain for such
taxable year from all passive
activities (determined without regard
to losses described in clause (i)),
shall be treated as a loss which is not from a
passive activity.]
(A) In general.--If all gain or loss realized
on such disposition is recognized, the excess
of--
(i) any loss from such activity for
such taxable year (determined after the
application of subsection (b)), over
(ii) any net income or gain for such
taxable year from all other passive
activities (determined after the
application of subsection (b)),
shall be treated as a loss which is not from a
passive activity.
* * * * * * *
Subchapter F--Exempt Organizations
PART I--GENERAL RULE
SEC. 501. EXEMPTION FROM TAX ON CORPORATIONS, CERTAIN TRUSTS, ETC.
(a) * * *
* * * * * * *
(c) List of Exempt Organizations.--
The following organizations are referred to in subsection
(a):
(1) * * *
* * * * * * *
(21)(A) * * *
* * * * * * *
(D) For purposes of this paragraph:
(i) * * *
(ii) The term ``qualified
investments'' means--
(I) public debt securities of
the United States,
(II) obligations of a State
or local government which are
not in default as to principal
or interest, and
(III) time or demand deposits
in a bank (as defined in
section 581) or an insured
credit union (within the
meaning of [section 101(6)]
section 101(7) of the Federal
Credit Union Act, 12 U.S.C.
[1752(6)] 1752(7)) located in
the United States.
* * * * * * *
Subchapter G--Corporations Used to Avoid Income Tax on Shareholders
PART I--CORPORATION IMPROPERLY ACCUMULATING SURPLUS
* * * * * * *
SEC. 537. REASONABLE NEEDS OF THE BUSINESS.
(a) * * *
(b) Special Rules.--For purposes of subsection (a)--
(1) * * *
* * * * * * *
(4) Product liability loss reserves.--The
accumulation of reasonable amounts for the payment of
reasonably anticipated product liability losses (as
defined in [section 172(i)] section 172(f)), as
determined under regulations prescribed by the
Secretary, shall be treated as accumulated for the
reasonably anticipated needs of the business.
* * * * * * *
PART II--PERSONAL HOLDING COMPANIES
* * * * * * *
SEC. 543. PERSONAL HOLDING COMPANY INCOME.
(a) General rule.--For purposes of this subtitle, the term
``personal holding company income'' means the portion of the
adjusted ordinary gross income which consists of:
(1) * * *
(2) Rents.--The adjusted income from rents; except
that such adjusted income shall not be included if--
(A) such adjusted income constitutes 50
percent or more of the adjusted ordinary gross
income, and
(B) the sum of--
(i) the dividends paid during the
taxable year (determined under section
562),
(ii) the dividends considered as paid
on the last day of the taxable year
under [section 563(c)] section 563(d)
(as limited by the second sentence of
section 563(b)), and
* * * * * * *
Subchapter I--Natural Resources
PART I--DEDUCTIONS
* * * * * * *
SEC. 613. PERCENTAGE DEPLETION.
(a) * * *
* * * * * * *
(e) Percentage Depletion for Geothermal Deposits.--
(1) In general.--In the case of geothermal deposits
located in the United States or in a possession of the
United States, for purposes of subsection (a)--
(A) such deposits shall be treated as listed
in subsection (b), and
(B) 15 percent shall be deemed to be the
percentage specified in paragraph (b)[,].
* * * * * * *
SEC. 613A. LIMITATIONS ON PERCENTAGE DEPLETION IN CASE OF OIL AND GAS
WELLS.
(a) * * *
* * * * * * *
(c) Exemption for Independent Producers and Royalty Owners.--
(1) * * *
* * * * * * *
(3) Depletable oil quantity.--
(A) In general.--For purposes of paragraph
(1), the taxpayer's depletable oil quantity
shall be equal to--
(i) the tentative quantity determined
under [the table contained in]
subparagraph (B), reduced (but not
below zero) by
* * * * * * *
Subchapter J--Estates, Trusts, Beneficiaries, and Decedents
PART I--ESTATES, TRUSTS, AND BENEFICIARIES
Subpart A--General Rules for Taxation of Estates and Trusts
* * * * * * *
SEC. 642. SPECIAL RULES FOR CREDITS AND DEDUCTIONS.
(a) * * *
* * * * * * *
(c) Deduction for Amounts Paid or Permanently Set Aside for a
Charitable Purpose.--
(1) * * *
* * * * * * *
[(4) Adjustments.--To the extent that the amount
otherwise allowable as a deduction under this
subsection consists of gain described in section
1202(a), proper adjustment shall be made for any
exclusion allowable to the estate or trust under
section 1202. In the case of a trust, the deduction
allowed by this subsection shall be subject to section
681 (relating to unrelated business income).]
(4) Adjustments.--To the extent that the amount
otherwise allowable as a deduction under this
subsection consists of gain from the sale or exchange
of capital assets held for more than 1 year, proper
adjustment shall be made for any deduction allowable to
the estate or trust under section 1202 (relating to
deduction for excess of capital gains over capital
losses). In the case of a trust, the deduction allowed
by this subsection shall be subject to section 681
(relating to unrelated business income).
* * * * * * *
(g) Disallowance of Double Deductions.--Amounts allowable
under section 2053 or 2054 as a deduction in computing the
taxable estate of a decedent shall not be allowed as a
deduction (or as an offset against the sales price of property
in determining gain or loss) in computing the taxable income of
the estate or of any other person, unless there is filed,
within the time and in the manner and form prescribed by the
Secretary, a statement that the amounts have not been allowed
as deductions under section 2053 or 2054 and a waiver of the
right to have such amounts allowed at any time as deductions
under section 2053 or 2054. Rules similar to the rules of the
preceding sentence shall apply to amounts which may be taken
into account [under 2621(a)(2)] under section 2621(a)(2) or
2622(b). This subsection shall not apply with respect to
deductions allowed under part II (relating to income in respect
of decedents).
* * * * * * *
SEC. 643. DEFINITIONS APPLICABLE TO SUBPARTS A, B, C, AND D.
(a) Distributable Net Income.--For purposes of this part, the
term ``distributable net income'' means, with respect to any
taxable year, the taxable income of the estate or trust
computed with the following modifications--
(1) * * *
* * * * * * *
(3) Capital gains and losses.--Gains from the sale or
exchange of capital assets shall be excluded to the
extent that such gains are allocated to corpus and are
not (A) paid, credited, or required to be distributed
to any beneficiary during the taxable year, or (B)
paid, permanently set aside, or to be used for the
purposes specified in section 642(c). Losses from the
sale or exchange of capital assets shall be excluded,
except to the extent such losses are taken into account
in determining the amount of gains from the sale or
exchange of capital assets which are paid, credited, or
required to be distributed to any beneficiary during
the taxable year. The exclusion under section 1202
shall not be taken into account. The deduction under
section 1202 (relating to deduction of excess of
capital gains over capital losses) shall not be taken
into account.
* * * * * * *
(6) Income of foreign trust.--In the case of a
foreign trust--
(A) * * *
* * * * * * *
(C) Paragraph (3) shall not apply to a
foreign trust. In the case of such a trust, (i)
there shall be included gains from the sale or
exchange of capital assets, reduced by losses
from such sales or exchanges to the extent such
losses do not exceed gains from such sales or
exchanges, and (ii) the deduction under section
1202 (relating to capital gains deduction)
shall not be taken into account.
If the estate or trust is allowed a deduction under section
642(c), the amount of the modifications specified in paragraphs
(5) and (6) shall be reduced to the extent that the amount of
income which is paid, permanently set aside, or to be used for
the purposes specified in section 642(c) is deemed to consist
of items specified in those paragraphs. For this purpose, such
amount shall (in the absence of specific provisions in the
governing instrument) be deemed to consist of the same
proportion of each class of items of income of the estate or
trust as the total of each class bears to the total of all
classes.
* * * * * * *
PART II--INCOME IN RESPECT OF DECEDENTS
* * * * * * *
SEC. 691. RECIPIENTS OF INCOME IN RESPECT OF DECEDENTS.
(a) * * *
* * * * * * *
(c) Deduction for Estate Tax.--
(1) * * *
* * * * * * *
(4) Coordination with capital gain provisions.--For
purposes of sections [1(h),] 1201, [1202,] 1202, and
1211, the amount of any gain taken into account with
respect to any item described in subsection (a)(1)
shall be reduced (but not below zero) by the amount of
the deduction allowable under paragraph (1) of this
subsection with respect to such item.
* * * * * * *
Subchapter K--Partners and Partnerships
* * * * * * *
PART II--CONTRIBUTIONS, DISTRIBUTIONS, AND TRANSFERS
Subpart A--Contributions to a Partnership
* * * * * * *
SEC. 724. CHARACTER OF GAIN OR LOSS ON CONTRIBUTED UNREALIZED
RECEIVABLES, INVENTORY ITEMS, AND CAPITAL LOSS
PROPERTY.
(a) * * *
* * * * * * *
(d) Definitions.--For purposes of this section--
(1) * * *
* * * * * * *
(3) Substituted basis property.--
(A) * * *
(B) Exception for stock in C corporation.--
[Subparagaph] Subparagraph (A) shall not apply
to any stock in a C corporation received in an
exchange described in section 351.
* * * * * * *
Subchapter L--Insurance Companies
PART I--LIFE INSURANCE COMPANIES
* * * * * * *
Subpart C--Life Insurance Deductions
* * * * * * *
SEC. 805. GENERAL DEDUCTIONS.
(a) General Rule.--For purposes of this part, there shall be
allowed the following deductions:
(1) * * *
* * * * * * *
(4) Dividends received by company.--
(A) * * *
* * * * * * *
(E) Certain dividends received by foreign
corporations.--Subparagraph (A)(i) (and not
subparagraph (A)(ii)) shall apply to any
dividend received by a foreign corporation from
a domestic corporation which would be a 100
percent dividend if section 1504(b)(3) did not
apply for purposes of applying section
[243(b)(5)] 243(b)(2).
* * * * * * *
SEC. 807. RULES FOR CERTAIN RESERVES.
(a) * * *
* * * * * * *
(d) Method of Computing Reserves for Purposes of Determining
Income.--
(1) * * *
* * * * * * *
(3) Tax reserve method.--For purposes of this
subsection--
(A) In general.--The term ``tax reserve
method'' means--
(i) * * *
* * * * * * *
(iii) Noncancellable accident and
health insurance contracts.--In the
case of any noncancellable accident and
health insurance contract (other than a
long-term care insurance contract, as
defined in section 7702B(b)), a 2-year
full preliminary term method.
* * * * * * *
(B) Definition of crvm and carvm.--For
purposes of this paragraph--
(i) CRVM.--The term ``CRVM'' means
the Commissioners' Reserve Valuation
Method prescribed by the National
Association of Insurance Commissioners
which is in effect on the date of the
issuance of the contract.
(ii) CARVM.--The term ``CARVM'' means
the [Commissoners'] Commissioners'
Annuities Reserve Valuation Method
prescribed by the National Association
of Insurance Commissioners which is in
effect on the date of the issuance of
the contract.
* * * * * * *
Subpart E--Definitions and Special Rules
* * * * * * *
SEC. 818. OTHER DEFINITIONS AND SPECIAL RULES.
(a) * * *
* * * * * * *
(g) Qualified Accelerated Death Benefit Riders Treated as
Life Insurance.--For purposes of this part--
(1) In general.--Any reference to a life insurance
contract shall be treated as including a reference to a
qualified accelerated death benefit rider on such
contract.
(2) Qualified accelerated death benefit riders.--For
purposes of this subsection, the term ``qualified
accelerated death benefit rider'' means any rider on a
life insurance contract if the only payments under the
rider are payments meeting the requirements of section
101(g).
(3) Exception for long-term care riders.--Paragraph
(1) shall not apply to any rider which is treated as a
long-term care insurance contract under section 7702B.
* * * * * * *
PART II--OTHER INSURANCE COMPANIES
* * * * * * *
SEC. 832. INSURANCE COMPANY TAXABLE INCOME.
(a) * * *
(b) Definitions.--In the case of an insurance company subject
to the tax imposed by section 831--
(1) * * *
* * * * * * *
(5) Losses incurred.--
(A) * * *
* * * * * * *
(C) Exception for investments made before
august 8, 1986.--
(i) In general.--Except as provided
in clause (ii), subparagraph (B) shall
not apply to any dividend or interest
received or accrued on any stock or
obligation acquired before August 8,
1986.
(ii) Special rule for 100 percent
dividends.--For purposes of clause (i),
the portion of any 100 percent dividend
which is attributable to prorated
amounts shall be treated as received
with respect to stock acquired on the
later of--
(I) the date the payor
acquired the stock or
obligation to which the
prorated amounts are
attributable, or
(II) the 1st day on which the
payor and payee were members of
the same affiliated group (as
defined in section [243(b)(5)]
243(b)(2)).
(D) Definitions.--For purposes of this
paragraph--
(i) Prorated amounts.--The term
``prorated amounts'' means tax-exempt
interest and dividends with respect to
which a deduction is allowable under
section 243, 244, or 245 (other than
100 percent dividends).
(ii) 100 percent dividend.--
(I) In general.--The term
``100 percent dividend'' means
any dividend if the percentage
used for purposes of
determining the deduction
allowable under section 243,
244, or 245(b) is 100 percent.
(II) Certain dividends
received by foreign
corporations.--A dividend
received by a foreign
corporation from a domestic
corporation which would be a
100 percent dividend if section
1504(b)(3) did not apply for
purposes of applying section
[243(b)(5)] 243(b)(2) shall be
treated as a 100 percent
dividend.
* * * * * * *
Subchapter M--Regulated Investment Companies and Real Estate Investment
Trusts
* * * * * * *
PART I--REGULATED INVESTMENT COMPANIES
* * * * * * *
SEC. 852. TAXATION OF REGULATED INVESTMENT COMPANIES AND THEIR
SHAREHOLDERS.
(a) * * *
(b) Method of Taxation of Companies and Shareholders.--
(1) * * *
* * * * * * *
(3) Capital gains.--
(A) * * *
* * * * * * *
(D) Treatment by shareholders of
undistributed capital gains.--
(i) * * *
* * * * * * *
(iii) The adjusted basis of such
shares in the hands of the shareholder
shall be increased, with respect to the
amounts required by this subparagraph
to be included in computing his long-
term capital gains, by [65 percent] 75
percent of so much of such amounts as
equals the amount subject to tax in
accordance with section 1201(a).
* * * * * * *
PART II--REAL ESTATE INVESTMENT TRUSTS
SEC. 856. DEFINITION OF REAL ESTATE INVESTMENT TRUST.
(a) In General.--For purposes of this title, the term ``real
estate investment trust'' means a corporation, trust, or
association--
(1) * * *
* * * * * * *
(4) which is neither (A) a financial institution
referred to in [section 582(c)(5)] section 582(c)(2),
nor (B) an insurance company to which subchapter L
applies;
* * * * * * *
PART IV--REAL ESTATE MORTGAGE INVESTMENT CONDUITS
* * * * * * *
SEC. 860E. TREATMENT OF INCOME IN EXCESS OF DAILY ACCRUALS ON RESIDUAL
INTERESTS.
(a) Excess Inclusions May Not Be Offset By Net Operating
Losses.--
(1) * * *
* * * * * * *
(6) Coordination with minimum tax.--For purposes of
part VI of subchapter A of this chapter--
(A) the reference in section 55(b)(2) to
taxable income shall be treated as a reference
to taxable income determined without regard to
this subsection,
(B) the alternative minimum taxable income of
any holder of a residual interest in a REMIC
for any taxable year shall in no event be less
than the excess inclusion for such taxable
year, and
(C) any excess inclusion shall be disregarded
for purposes of computing the alternative tax
net operating loss deduction.
The preceding sentence shall not apply to any
organization to which section 593 applies, except to
the extent provided in regulations prescribed by the
Secretary under paragraph (2).
* * * * * * *
SEC. 860F. OTHER RULES.
(a) 100 Percent Tax on Prohibited Transactions.--
(1) * * *
* * * * * * *
(5) Exceptions.--Notwithstanding subparagraphs (A)
and (D) of paragraph [(1)] (2), the term ``prohibited
transaction'' shall not include any disposition--
(A) required to prevent default on a regular
interest where the threatened default resulted
from a default on 1 or more qualified
mortgages, or
(B) to facilitate a clean-up call (as defined
in regulations).
* * * * * * *
Subchapter N--Tax Based on Income From Sources Within or Without the
United States
PART I--DETERMINATION OF SOURCES OF INCOME
* * * * * * *
SEC. 865. SOURCE RULES FOR PERSONAL PROPERTY SALES.
(a) * * *
(b) Exception for Inventory Property.--In the case of income
derived from the sale of inventory property--
(1) this section shall not apply, and
(2) such income shall be sourced under the rules of
sections 861(a)(6), 862(a)(6), and 863[(b)].
Notwithstanding the preceding sentence, any income from the
sale of any unprocessed timber which is a softwood and was cut
from an area in the United States shall be sourced in the
United States and the rules of sections 862(a)(6) and 863(b)
shall not apply to any such income. For purposes of the
preceding sentence, the term ``unprocessed timber'' means any
log, cant, or similar form of timber.
* * * * * * *
PART II--NONRESIDENT ALIENS AND FOREIGN CORPORATIONS
* * * * * * *
Subpart A--Nonresident Alien Individuals
* * * * * * *
SEC. 871. TAX ON NONRESIDENT ALIEN INDIVIDUALS.
(a) Income Not Connected With United States Business--30
Percent Tax.--
(1) * * *
(2) Capital gains of aliens present in the united
states 183 days or more.--In the case of a nonresident
alien individual present in the United States for a
period or periods aggregating 183 days or more during
the taxable year, there is hereby imposed for such year
a tax of 30 percent of the amount by which his gains,
derived from sources within the United States, from the
sale or exchange at any time during such year of
capital assets exceed his losses, allocable to sources
within the United States, from the sale or exchange at
any time during such year of capital assets. For
purposes of this paragraph, gains and losses shall be
taken into account only if, and to the extent that,
they would be recognized and taken into account if such
gains and losses were effectively connected with the
conduct of a trade or business within the United
States, except that such gains and losses shall be
determined without regard to section 1202 (relating to
deduction for capital gains) and such gains and losses
shall be determined without regard to section 1202 and
such losses shall be determined without the benefits of
the capital loss carryover provided in section 1212.
Any gain or loss which is taken into account in
determining the tax under paragraph (1) or subsection
(b) shall not be taken into account in determining the
tax under this paragraph. For purposes of the 183-day
requirement of this paragraph, a nonresident alien
individual not engaged in trade or business within the
United States who has not established a taxable year
for any prior period shall be treated as having a
taxable year which is the calendar year.
(3) Taxation of social security benefits.--For
purposes of this section and section 1441--
(A) [85 percent] 50 percent of any social
security benefit (as defined in section 86(d))
shall be included in gross income
(notwithstanding section 207 of the Social
Security Act), and
* * * * * * *
In the case of any taxable year beginning in a calendar
year after 1995 and before 2000, subparagraph (A) shall
be applied by substituting the percentage determined
for such calendar year under section 86(a)(3) for ``50
percent''. For treatment of certain citizens of
possessions of the United States see section 932(c).
Subpart B--Foreign Corporations
* * * * * * *
SEC. 884. BRANCH PROFITS TAX.
(a) * * *
* * * * * * *
(f) Treatment of Interest Allocable to Effectively Connected
Income.--
(1) In general.--In the case of a foreign corporation
engaged in a trade or business in the United States (or
having gross income treated as effectively connected
with the conduct of a trade or business in the United
States), for purposes of this subtitle--
(A) any interest paid by such trade or
business in the United States shall be treated
as if it were paid by a domestic corporation,
and
(B) [to the extent the amount of interest
allowable as a deduction under section 882 in
computing the effectively connected taxable
income of such foreign corporation exceeds the
interest described in subparagraph (A)] to the
extent that the allocable interest exceeds the
interest described in subparagraph (A), such
foreign corporation shall be liable for tax
under section 881(a) in the same manner as if
such excess were interest paid to such foreign
corporation by a wholly owned domestic
corporation on the last day of such foreign
corporation's taxable year.
To the extent provided in regulations, subparagraph (A)
shall not apply to interest in excess of the amounts
[reasonably expected to be deductible under section 882
in computing the effectively connected taxable income
of such foreign corporation.] reasonably expected to be
allocable interest.
[(2) Effectively connected taxable income.--For
purposes of this subsection, the term ``effectively
connected taxable income'' means taxable income which
is effectively connected (or treated as effectively
connected) with the conduct of a trade or business
within the United States.]
(2) Allocable interest.--For purposes of this
subsection, the term ``allocable interest'' means any
interest which is allocable to income which is
effectively connected (or treated as effectively
connected) with the conduct of a trade or business in
the United States.
* * * * * * *
Subpart D--Miscellaneous Provisions
* * * * * * *
SEC. 897. DISPOSITION OF INVESTMENT IN UNITED STATES REAL PROPERTY.
(a) * * *
* * * * * * *
[(f) Distributions by Domestic Corporations to Foreign
Shareholders.--If a domestic corporation distributes a United
States real property interest to a nonresident alien individual
or a foreign corporation in a distribution to which section 301
applies, notwithstanding any other provision of this chapter,
the basis of such United States real property interest in the
hands of such nonresident alien individual or foreign
corporation shall not exceed--
[(1) the adjusted basis of such property before the
distribution, increased by
[(2) the sum of--
[(A) any gain recognized by the distributing
corporation on the distribution, and
[(B) any tax paid under this chapter by the
distributee on such distribution.]
* * * * * * *
PART III--INCOME FROM SOURCES WITHOUT THE UNITED STATES
Subpart A--Foreign Tax Credit
* * * * * * *
SEC. 904. LIMITATION ON CREDIT.
(a) * * *
(b) Taxable Income for Purpose of Computing Limitation.--
(1) * * *
(2) Capital gains.--For purposes of this section--
[(A) In general.--Taxable income from sources
outside the United States shall include gain
from the sale or exchange of capital assets
only to the extent of foreign source capital
gain net income.
[(B) Special rules where capital gain rate
differential.--In the case of any taxable year
for which there is a capital gain rate
differential--]
(A) Corporations.--In the case of a
corporation--
(i) [in lieu of applying subparagraph
(A),] the taxable income from sources
outside the United States shall include
gain from the sale or exchange of
capital assets only in an amount equal
to foreign source capital gain net
income reduced by the rate differential
portion of foreign source net capital
gain,
* * * * * * *
(B) Other taxpayers.--In the case of a
taxpayer other than a corporation, taxable
income from sources outside the United States
shall include gain from the sale or exchange of
capital assets only to the extent of foreign
source capital gain net income.
(3) Definitions.--For purposes of this subsection--
(A) * * *
* * * * * * *
(C) Section 1231 gains.--The term ``gain from
the sale or exchange of capital assets''
includes any gain so treated under section
1231.
[(D) Capital gain rate differential.--There
is a capital gain rate differential for any
taxable year if--
[(i) in the case of a taxpayer other
than a corporation, subsection (h) of
section 1 applies to such taxable year,
or
[(ii) in the case of a corporation,
any rate of tax imposed by section 11,
511, or 831(a) or (b) (whichever
applies) exceeds the alternative rate
of tax under section 1201(a)
(determined without regard to the last
sentence of section 11(b)(1)).
[(E) Rate differential portion.--
[(i) In general.--The rate
differential portion of foreign source
net capital gain, net capital gain, or
the excess of net capital gain from
sources within the United States over
net capital gain, as the case may be,
is the same proportion of such amount
as--
[(I) the excess of the
highest applicable tax rate
over the alternative tax rate,
bears to
[(II) the highest applicable
tax rate.
[(ii) Highest applicable tax rate.--
For purposes of clause (i), the term
``highest applicable tax rate'' means--
[(I) in the case of a
taxpayer other than a
corporation, the highest rate
of tax set forth in subsection
(a), (b), (c), (d), or (e) of
section 1 (whichever applies),
or
[(II) in the case of a
corporation, the highest rate
of tax specified in section
11(b).
[(iii) Alternative tax rate.--For
purposes of clause (i), the term
``alternative tax rate'' means--
[(I) in the case of a
taxpayer other than a
corporation, the alternative
rate of tax determined under
section 1(j), or
[(II) in the case of a
corporation, the alternative
rate of tax under section
1201(a).]
(D) Rate differential portion.--The rate
differential portion of foreign source net
capital gain, net capital gain, or the excess
of net capital gain from sources within the
United States over net capital gain, as the
case may be, is the same proportion of such
amount as the excess of the highest rate of tax
specified in section 11(b) over the alternative
rate of tax under section 1201(a) bears to the
alternative rate of tax under section 1201(a).
* * * * * * *
(d) Separate Application of Section with Respect to Certain
Categories of Income.--
(1) * * *
* * * * * * *
(3) Look-thru in case of controlled foreign
corporations.--
(A) * * *
* * * * * * *
(G) Dividend.--For purposes of this
paragraph, the term ``dividend'' includes any
amount included in gross income in [section
951(a)(1)(B)] subparagraph (B) or (C) of
section 951(a)(1). Any amount included in gross
income under section 78 to the extent
attributable to amounts included in gross
income in section 951(a)(1)(A) shall not be
treated as a dividend but shall be treated as
included in gross income under section
951(a)(1)(A).
* * * * * * *
(f) Recapture of Overall Foreign Loss.--
(1) * * *
(2) Overall foreign loss defined.--For purposes of
this subsection, the term ``overall foreign loss''
means the amount by which the gross income for the
taxable year from sources without the United States
(whether or not the taxpayer chooses the benefits of
this subpart for such taxable year) for such year is
exceeded by the sum of the deductions properly
apportioned or allocated thereto, except that there
shall not be taken into account--
(A) any net operating loss deduction
allowable for such year under section 172(a),
and
(B) any--
(i) foreign expropriation loss for
such year, as defined in section 172(h)
(as in effect on the day before the
date of the enactment of the Revenue
Reconciliation Act of 1990), or
* * * * * * *
SEC. 907. SPECIAL RULES IN CASE OF FOREIGN OIL AND GAS INCOME.
(a) * * *
* * * * * * *
(c) Foreign Income Definitions and Special Rules.--For
purposes of this section--
(1) * * *
* * * * * * *
(4) Recapture of foreign oil and gas extraction
losses by recharacterizing later extraction income.--
(A) * * *
(B) Foreign oil extraction loss defined.--
(i) * * *
* * * * * * *
(iii) Expropriation and casualty
losses not taken into account.--For
purposes of clause (i), there shall not
be taken into account--
(I) any foreign expropriation
loss (as defined in section
172(h) (as in effect on the day
before the date of the
enactment of the Revenue
Reconciliation Act of 1990))
for the taxable year, or
(II) any loss for the taxable
year which arises from fire,
storm, shipwreck, or other
casualty, or from theft, to the
extent such loss is not
compensated for by insurance or
otherwise.
* * * * * * *
Subpart D--Possessions of the United States
* * * * * * *
SEC. 936. PUERTO RICO AND POSSESSION TAX CREDIT.
(a) * * *
(b) Amounts Received in United States.--In determining
taxable income for purposes of subsection (a), there shall not
be taken into account as income from sources without the United
States any gross income which was received by such domestic
corporation within the United States, whether derived from
sources within or without the United States. This subsection
shall not apply to any amount described in subsection
(a)(1)(A)(i) received from a person who is not a related person
(within the meaning of subsection (h)(3) but without regard to
[subparagraphs (D)(ii)(I)] subparagraphs (D)(ii) and (E)(i)
thereof) with respect to the domestic corporation.
* * * * * * *
Subpart F--Controlled Foreign Corporations
* * * * * * *
SEC. 956A. EARNINGS INVESTED IN EXCESS PASSIVE ASSETS.
(a) * * *
(b) Applicable earnings.--For purposes of this section, the
term ``applicable earnings'' means, with respect to any
controlled foreign corporation, the sum of--
[(1) the amount referred to in section 316(a)(1) to
the extent such amount was accumulated in taxable years
beginning after September 30, 1993, and]
(1) the amount (not including a deficit) referred to
in section 316(a)(1) to the extent such amount was
accumulated in prior taxable years beginning after
September 30, 1993, and
* * * * * * *
(f) Regulations.--The Secretary shall prescribe such
regulations as may be necessary to carry out the purposes of
this section, including regulations to prevent the avoidance of
the provisions of this section through reorganizations or
otherwise and regulations coordinating the provisions of
subsections (c)(3)(A) and (d).
* * * * * * *
SEC. 958. RULES FOR DETERMINING STOCK OWNERSHIP.
(a) Direct and indirect ownership.--
(1) General rule.--For purposes of this subpart
(other than [sections 955(b)(1)(A) and (B),
955(c)(2)(A)(ii), and 960(a)(1)] section 960(a)(1)),
stock owned means--
(A) stock owned directly, and
(B) stock owned with the application of
paragraph (2).
* * * * * * *
(b) Constructive Ownership.--For purposes of sections 951(b),
954(d)(3), [956(b)(2)] 956(c)(2), and 957, section 318(a)
(relating to constructive ownership of stock) shall apply to
the extent that the effect is to treat any United States person
as a United States shareholder within the meaning of section
951(b), to treat a person as a related person within the
meaning of section 954(d)(3), to treat the stock of a domestic
corporation as owned by a United States shareholder of the
controlled foreign corporation for purposes of section
[956(b)(2)] 956(c)(2), or to treat a foreign corporation as a
controlled foreign corporation under section 957, except that--
(1) * * *
* * * * * * *
(4) Subparagraph (A), (B), and (C) of section
318(a)(3) shall not be applied so as to consider a
United States person as owning stock which is owned by
a person who is not a United States person.
Paragraphs (1) and (4) shall not apply for purposes of section
[956(b)(2)] 956(c)(2) to treat stock of a domestic corporation
as not owned by a United States shareholder.
* * * * * * *
Subchapter O--Gain or Loss on Dispostion of Property
* * * * * * *
PART II--BASIS RULES OF GENERAL APPLICATION
Sec. 1011. Adjusted basis for determining gain or loss.
Sec. 1022. Indexing of certain assets acquired after December
31, 1994, for purposes of determining gain.
* * * * * * *
SEC. 1017. DISCHARGE OF INDEBTEDNESS.
(a) * * *
(b) Amount and Properties Determined Under Regulations.--
(1) * * *
* * * * * * *
(4) Special rules for qualified farm indebtedness.--
(A) In general.--Any amount which under
[subsection (b)(2)(D)] subsection (b)(2)(E) of
section 108 is to be applied to reduce basis
and which is attributable to an amount excluded
under subsection (a)(1)(C) of section 108--
(i) * * *
* * * * * * *
SEC. 1022. INDEXING OF CERTAIN ASSETS ACQUIRED AFTER DECEMBER 31, 1994,
FOR PURPOSES OF DETERMINING GAIN.
(a) General Rule.--
(1) Indexed basis substituted for adjusted basis.--
Solely for purposes of determining gain on the sale or
other disposition by a taxpayer (other than a
corporation) of an indexed asset which has been held
for more than 3 years, the indexed basis of the asset
shall be substituted for its adjusted basis.
(2) Exception for depreciation, etc.--The deductions
for depreciation, depletion, and amortization shall be
determined without regard to the application of
paragraph (1) to the taxpayer or any other person.
(b) Indexed Asset.--
(1) In general.--For purposes of this section, the
term ``indexed asset'' means--
(A) common stock in a C corporation (other
than a foreign corporation), and
(B) tangible property,
which is a capital asset or property used in the trade
or business (as defined in section 1231(b)).
(2) Stock in certain foreign corporations included.--
For purposes of this section--
(A) In general.--The term ``indexed asset''
includes common stock in a foreign corporation
which is regularly traded on an established
securities market.
(B) Exception.--Subparagraph (A) shall not
apply to--
(i) stock of a foreign investment
company (within the meaning of section
1246(b)),
(ii) stock in a passive foreign
investment company (as defined in
section 1296),
(iii) stock in a foreign corporation
held by a United States person who
meets the requirements of section
1248(a)(2), and
(iv) stock in a foreign personal
holding company (as defined in section
552).
(C) Treatment of american depository
receipts.--An American depository receipt for
common stock in a foreign corporation shall be
treated as common stock in such corporation.
(c) Indexed Basis.--For purposes of this section--
(1) General rule.--The indexed basis for any asset
is--
(A) the adjusted basis of the asset,
increased by
(B) the applicable inflation adjustment.
(2) Applicable inflation adjustment.--The applicable
inflation adjustment for any asset is an amount equal
to--
(A) the adjusted basis of the asset,
multiplied by
(B) the percentage (if any) by which--
(i) the gross domestic product
deflator for the last calendar quarter
ending before the asset is disposed of,
exceeds
(ii) the gross domestic product
deflator for the last calendar quarter
ending before the asset was acquired by
the taxpayer.
The percentage under subparagraph (B) shall be rounded
to the nearest \1/10\ of 1 percentage point.
(3) Gross domestic product deflator.--The gross
domestic product deflator for any calendar quarter is
the implicit price deflator for the gross domestic
product for such quarter (as shown in the last revision
thereof released by the Secretary of Commerce before
the close of the following calendar quarter).
(d) Suspension of Holding Period Where Diminished Risk of
Loss; Treatment of Short Sales.--
(1) In general.--If the taxpayer (or a related
person) enters into any transaction which substantially
reduces the risk of loss from holding any asset, such
asset shall not be treated as an indexed asset for the
period of such reduced risk.
(2) Short sales.--
(A) In general.--In the case of a short sale
of an indexed asset with a short sale period in
excess of 3 years, for purposes of this title,
the amount realized shall be an amount equal to
the amount realized (determined without regard
to this paragraph) increased by the applicable
inflation adjustment. In applying subsection
(c)(2) for purposes of the preceding sentence,
the date on which the property is sold short
shall be treated as the date of acquisition and
the closing date for the sale shall be treated
as the date of disposition.
(B) Short sale period.--For purposes of
subparagraph (A), the short sale period begins
on the day that the property is sold and ends
on the closing date for the sale.
(e) Treatment of Regulated Investment Companies and Real
Estate Investment Trusts.--
(1) Adjustments at entity level.--
(A) In general.--Except as otherwise provided
in this paragraph, the adjustment under
subsection (a) shall be allowed to any
qualified investment entity (including for
purposes of determining the earnings and
profits of such entity).
(B) Exception for corporate shareholders.--
Under regulations--
(i) in the case of a distribution by
a qualified investment entity (directly
or indirectly) to a corporation--
(I) the determination of
whether such distribution is a
dividend shall be made without
regard to this section, and
(II) the amount treated as
gain by reason of the receipt
of any capital gain dividend
shall be increased by the
percentage by which the
entity's net capital gain for
the taxable year (determined
without regard to this section)
exceeds the entity's net
capital gain for such year
determined with regard to this
section, and
(ii) there shall be other appropriate
adjustments (including deemed
distributions) so as to ensure that the
benefits of this section are not
allowed (directly or indirectly) to
corporate shareholders of qualified
investment entities.
For purposes of the preceding sentence, any
amount includible in gross income under section
852(b)(3)(D) shall be treated as a capital gain
dividend and an S corporation shall not be
treated as a corporation.
(C) Exception for qualification purposes.--
This section shall not apply for purposes of
sections 851(b) and 856(c).
(D) Exception for certain taxes imposed at
entity level.--
(i) Tax on failure to distribute
entire gain.--If any amount is subject
to tax under section 852(b)(3)(A) for
any taxable year, the amount on which
tax is imposed under such section shall
be increased by the percentage
determined under subparagraph
(B)(i)(II). A similar rule shall apply
in the case of any amount subject to
tax under paragraph (2) or (3) of
section 857(b) to the extent
attributable to the excess of the net
capital gain over the deduction for
dividends paid determined with
reference to capital gain dividends
only. The first sentence of this clause
shall not apply to so much of the
amount subject to tax under section
852(b)(3)(A) as is designated by the
company under section 852(b)(3)(D).
(ii) Other taxes.--This section shall
not apply for purposes of determining
the amount of any tax imposed by
paragraph (4), (5), or (6) of section
857(b).
(2) Adjustments to interests held in entity.--
(A) Regulated investment companies.--Stock in
a regulated investment company (within the
meaning of section 851) shall be an indexed
asset for any calendar quarter in the same
ratio as--
(i) the average of the fair market
values of the indexed assets held by
such company at the close of each month
during such quarter, bears to
(ii) the average of the fair market
values of all assets held by such
company at the close of each such
month.
(B) Real estate investment trusts.--Stock in
a real estate investment trust (within the
meaning of section 856) shall be an indexed
asset for any calendar quarter in the same
ratio as--
(i) the fair market value of the
indexed assets held by such trust at
the close of such quarter, bears to
(ii) the fair market value of all
assets held by such trust at the close
of such quarter.
(C) Ratio of 80 percent or more.--If the
ratio for any calendar quarter determined under
subparagraph (A) or (B) would (but for this
subparagraph) be 80 percent or more, such ratio
for such quarter shall be 100 percent.
(D) Ratio of 20 percent or less.--If the
ratio for any calendar quarter determined under
subparagraph (A) or (B) would (but for this
subparagraph) be 20 percent or less, such ratio
for such quarter shall be zero.
(E) Look-thru of partnerships.--For purposes
of this paragraph, a qualified investment
entity which holds a partnership interest shall
be treated (in lieu of holding a partnership
interest) as holding its proportionate share of
the assets held by the partnership.
(3) Treatment of return of capital distributions.--
Except as otherwise provided by the Secretary, a
distribution with respect to stock in a qualified
investment entity which is not a dividend and which
results in a reduction in the adjusted basis of such
stock shall be treated as allocable to stock acquired
by the taxpayer in the order in which such stock was
acquired.
(4) Qualified investment entity.--For purposes of
this subsection, the term ``qualified investment
entity'' means--
(A) a regulated investment company (within
the meaning of section 851), and
(B) a real estate investment trust (within
the meaning of section 856).
(f) Other Pass-Thru Entities.--
(1) Partnerships.--
(A) In general.--In the case of a
partnership, the adjustment made under
subsection (a) at the partnership level shall
be passed through to the partners.
(B) Special rule in the case of section 754
elections.--In the case of a transfer of an
interest in a partnership with respect to which
the election provided in section 754 is in
effect--
(i) the adjustment under section
743(b)(1) shall, with respect to the
transferor partner, be treated as a
sale of the partnership assets for
purposes of applying this section, and
(ii) with respect to the transferee
partner, the partnership's holding
period for purposes of this section in
such assets shall be treated as
beginning on the date of such
adjustment.
(2) S corporations.--In the case of an S corporation,
the adjustment made under subsection (a) at the
corporate level shall be passed through to the
shareholders. This section shall not apply for purposes
of determining the amount of any tax imposed by section
1374 or 1375.
(3) Common trust funds.--In the case of a common
trust fund, the adjustment made under subsection (a) at
the trust level shall be passed through to the
participants.
(4) Indexing adjustment disregarded in determining
loss on sale of interest in entity.--Notwithstanding
the preceding provisions of this subsection, for
purposes of determining the amount of any loss on a
sale or exchange of an interest in a partnership, S
corporation, or common trust fund, the adjustment made
under subsection (a) shall not be taken into account in
determining the adjusted basis of such interest.
(g) Dispositions Between Related Persons.--
(1) In general.--This section shall not apply to any
sale or other disposition of property between related
persons except to the extent that the basis of such
property in the hands of the transferee is a
substituted basis.
(2) Related persons defined.--For purposes of this
section, the term ``related persons'' means--
(A) persons bearing a relationship set forth
in section 267(b), and
(B) persons treated as single employer under
subsection (b) or (c) of section 414.
(h) Transfers To Increase Indexing Adjustment.--If any person
transfers cash, debt, or any other property to another person
and the principal purpose of such transfer is to secure or
increase an adjustment under subsection (a), the Secretary may
disallow part or all of such adjustment or increase.
(i) Special Rules.--For purposes of this section--
(1) Treatment of improvements, etc.--If there is an
addition to the adjusted basis of any tangible property
or of any stock in a corporation during the taxable
year by reason of an improvement to such property or a
contribution to capital of such corporation--
(A) such addition shall never be taken into
account under subsection (c)(1)(A) if the
aggregate amount thereof during the taxable
year with respect to such property or stock is
less than $1,000, and
(B) such addition shall be treated as a
separate asset acquired at the close of such
taxable year if the aggregate amount thereof
during the taxable year with respect to such
property or stock is $1,000 or more.
A rule similar to the rule of the preceding sentence
shall apply to any other portion of an asset to the
extent that separate treatment of such portion is
appropriate to carry out the purposes of this section.
(2) Assets which are not indexed assets throughout
holding period.--The applicable inflation ratio shall
be appropriately reduced for periods during which the
asset was not an indexed asset.
(3) Treatment of certain distributions.--A
distribution with respect to stock in a corporation
which is not a dividend shall be treated as a
disposition.
(4) Acquisition date where there has been prior
application of subsection (a)(1) with respect to the
taxpayer.--If there has been a prior application of
subsection (a)(1) to an asset while such asset was held
by the taxpayer, the date of acquisition of such asset
by the taxpayer shall be treated as not earlier than
the date of the most recent such prior application.
(5) Collapsible corporations.--The application of
section 341(a) (relating to collapsible corporations)
shall be determined without regard to this section.
(j) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out the
purposes of this section.
* * * * * * *
PART III--COMMON NONTAXABLE EXCHANGES
* * * * * * *
SEC. 1035. CERTAIN EXCHANGES OF INSURANCE POLICIES.
(a) General Rules.--No gain or loss shall be recognized on
the exchange of--
(1) * * *
* * * * * * *
(3) an annuity contract for an annuity contract[.];
or
(4) a contract of life insurance or an endowment or
annuity contract for a long-term care insurance
contract (as defined in section 7702B(b)).
* * * * * * *
SEC. 1044. ROLLOVER OF PUBLICLY TRADED SECURITIES GAIN INTO SPECIALIZED
SMALL BUSINESS INVESTMENT COMPANIES.
(a) * * *
* * * * * * *
(c) Definitions and Special Rules.--For purposes of this
section--
(1) Publicly traded securities.--The term ``publicly
traded securities'' means securities which are traded
on an established securities market.
[(2) Purchase.--The term ``purchase'' has the meaning
given such term by section 1043(b)(4).]
(2) Purchase.--The taxpayer shall be considered to
have purchased any property if, but for subsection (d),
the unadjusted basis of such property would be its cost
within the meaning of section 1012.
(d) Basis Adjustments.--If gain from any sale is not
recognized by reason of subsection (a), such gain shall be
applied to reduce (in the order acquired) the basis for
determining gain or loss of any common stock or partnership
interest in any specialized small business investment company
which is purchased by the taxpayer during the 60-day period
described in subsection (a). [This subsection shall not apply
for purposes of section 1202.]
* * * * * * *
Subchapter P--Capital Gains and Losses
* * * * * * *
PART I--TREATMENT OF CAPITAL GAINS
Sec. 1201. Alternative tax for corporations.
[Sec. 1202. 50-percent exclusion for gain from certain small
business stock.]
Sec. 1202. Capital gains deduction.
* * * * * * *
[SEC. 1201. ALTERNATIVE TAX FOR CORPORATIONS.
[(a) General rule.--If for any taxable year a corporation has
a net capital gain and any rate of tax imposed by section 11,
511, or 831(a) or (b) (whichever is applicable) exceeds 35
percent (determined without regard to the last sentence of
section 11(b)(1)), then, in lieu of any such tax, there is
hereby imposed a tax (if such tax is less than the tax imposed
by such sections) which shall consist of the sum of--
[(1) a tax computed on the taxable income reduced by
the amount of the net capital gain, at the rates and in
the manner as if this subsection had not been enacted,
plus
[(2) a tax of 34 percent of the net capital gain.
[(b) Cross References.--
For computation of the alternative tax--
[(1) in the case of life insurance companies, see
section 801(a)(2),
[(2) in the case of regulated investment companies
and their shareholders, see section 852(b)(3)(A) and
(D), and
[(3) in the case of real estate investment trusts,
see section 857(b)(3)(A).]
SEC. 1201. ALTERNATIVE TAX FOR CORPORATIONS.
(a) General Rule.--If for any taxable year a corporation has
a net capital gain, then, in lieu of the tax imposed by
sections 11, 511, and 831(a) and (b) (whichever is applicable),
there is hereby imposed a tax (if such tax is less than the tax
imposed by such sections) which shall consist of the sum of--
(1) a tax computed on the taxable income reduced by
the amount of the net capital gain, at the rates and in
the manner as if this subsection had not been enacted,
plus
(2) a tax of 25 percent of the net capital gain.
(b) Transitional Rule.--
(1) In general.--In the case of any taxable year
ending after December 31, 1994, and beginning before
January 1, 1996, subsection (a)(2) shall be applied as
if it read as follows:
``(2)(A) a tax of 25 percent of the lesser of--
``(i) the net capital gain for the taxable
year, or
``(ii) the net capital gain taking into
account only gain or loss properly taken into
account for the portion of the taxable year
after December 31, 1994, plus
``(B) a tax of 35 percent of the excess (if any)
of--
``(i) the net capital gain for the taxable
year, over
``(ii) the amount of net capital gain taken
into account under subparagraph (A).''
(2) Special rule for pass-thru entities.--Section
1202(e)(2) shall apply for purposes of paragraph (1).
(c) Cross References.--
For computation of the alternative tax_
(1) in the case of life insurance companies, see
section 801(a)(2),
(2) in the case of regulated investment companies and
their shareholders, see section 852(b)(3)(A) and (D),
and
(3) in the case of real estate investment trusts, see
section 857(b)(3)(A).
[SEC. 1202. 50-PERCENT EXCLUSION FOR GAIN FROM CERTAIN SMALL BUSINESS
STOCK.
[(a) 50-Percent Exclusion.--In the case of a taxpayer other
than a corporation, gross income shall not include 50 percent
of any gain from the sale or exchange of qualified small
business stock held for more than 5 years.
[(b) Per-Issuer Limitation on Taxpayer's Eligible Gain.--
[(1) In general.--If the taxpayer has eligible gain
for the taxable year from 1 or more dispositions of
stock issued by any corporation, the aggregate amount
of such gain from dispositions of stock issued by such
corporation which may be taken into account under
subsection (a) for the taxable year shall not exceed
the greater of--
[(A) $10,000,000 reduced by the aggregate
amount of eligible gain taken into account by
the taxpayer under subsection (a) for prior
taxable years and attributable to dispositions
of stock issued by such corporation, or
[(B) 10 times the aggregate adjusted bases of
qualified small business stock issued by such
corporation and disposed of by the taxpayer
during the taxable year.
For purposes of subparagraph (B), the adjusted basis of any
stock shall be determined without regard to any addition to
basis after the date on which such stock was originally issued.
[(2) Eligible gain.--For purposes of this subsection,
the term ``eligible gain'' means any gain from the sale
or exchange of qualified small business stock held for
more than 5 years.
[(3) Treatment of married individuals.--
[(A) Separate returns.--In the case of a
separate return by a married individual,
paragraph (1)(A) shall be applied by
substituting ``$5,000,000'' for
``$10,000,000''.
[(B) Allocation of exclusion.--In the case of
any joint return, the amount of gain taken into
account under subsection (a) shall be allocated
equally between the spouses for purposes of
applying this subsection to subsequent taxable
years.
[(C) Marital status.--For purposes of this
subsection, marital status shall be determined
under section 7703.
[(c) Qualified Small Business Stock.--For purposes of this
section--
[(1) In general.--Except as otherwise provided in
this section, the term ``qualified small business
stock'' means any stock in a C corporation which is
originally issued after the date of the enactment of
the Revenue Reconciliation Act of 1993, if--
[(A) as of the date of issuance, such
corporation is a qualified small business, and
[(B) except as provided in subsections (f)
and (h), such stock is acquired by the taxpayer
at its original issue (directly or through an
underwriter)--
[(i) in exchange for money or other
property (not including stock), or
[(ii) as compensation for services
provided to such corporation (other
than services performed as an
underwriter of such stock).
[(2) Active business requirement; etc.--
[(A) In general.--Stock in a corporation
shall not be treated as qualified small
business stock unless, during substantially all
of the taxpayer's holding period for such
stock, such corporation meets the active
business requirements of subsection (e) and
such corporation is a C corporation.
[(B) Special rule for certain small business
investment companies.--
[(i) Waiver of active business
requirement.--Notwithstanding any
provision of subsection (e), a
corporation shall be treated as meeting
the active business requirements of
such subsection for any period during
which such corporation qualifies as a
specialized small business investment
company.
[(ii) Specialized small business
investment company.--For purposes of
clause (i), the term ``specialized
small business investment company''
means any eligible corporation (as
defined in subsection (e)(4)) which is
licensed to operate under section
301(d) of the Small Business Investment
Act of 1958 (as in effect on May 13,
1993).
[(3) Certain purchases by corporation of its own
stock.--
[(A) Redemptions from taxpayer or related
person.--Stock acquired by the taxpayer shall
not be treated as qualified small business
stock if, at any time during the 4-year period
beginning on the date 2 years before the
issuance of such stock, the corporation issuing
such stock purchased (directly or indirectly)
any of its stock from the taxpayer or from a
person related (within the meaning of section
267(b) or 707(b)) to the taxpayer.
[(B) Significant redemptions.--Stock issued
by a corporation shall not be treated as
qualified business stock if, during the 2-year
period beginning on the date 1 year before the
issuance of such stock, such corporation made 1
or more purchases of its stock with an
aggregate value (as of the time of the
respective purchases) exceeding 5 percent of
the aggregate value of all of its stock as of
the beginning of such 2-year period.
[(C) Treatment of certain transactions.--If
any transaction is treated under section 304(a)
as a distribution in redemption of the stock of
any corporation, for purposes of subparagraphs
(A) and (B), such corporation shall be treated
as purchasing an amount of its stock equal to
the amount treated as such a distribution under
section 304(a).
[(d) Qualified Small Business.--For purposes of this
section--
[(1) In general.--The term ``qualified small
business'' means any domestic corporation which is a C
corporation if--
[(A) the aggregate gross assets of such
corporation (or any predecessor thereof) at all
times on or after the date of the enactment of
the Revenue Reconciliation Act of 1993 and
before the issuance did not exceed $50,000,000,
[(B) the aggregate gross assets of such
corporation immediately after the issuance
(determined by taking into account amounts
received in the issuance) do not exceed
$50,000,000, and
[(C) such corporation agrees to submit such
reports to the Secretary and to shareholders as
the Secretary may require to carry out the
purposes of this section.
[(2) Aggregate gross assets.--
[(A) In general.--For purposes of paragraph
(1), the term ``aggregate gross assets'' means
the amount of cash and the aggregate adjusted
bases of other property held by the
corporation.
[(B) Treatment of contributed property.--For
purposes of subparagraph (A), the adjusted
basis of any property contributed to the
corporation (or other property with a basis
determined in whole or in part by reference to
the adjusted basis of property so contributed)
shall be determined as if the basis of the
property contributed to the corporation
(immediately after such contribution) were
equal to its fair market value as of the time
of such contribution.
[(3) Aggregation rules.--
[(A) In general.--All corporations which are
members of the same parent-subsidiary
controlled group shall be treated as 1
corporation for purposes of this subsection.
[(B) Parent-subsidiary controlled group.--For
purposes of subparagraph (A), the term
``parent-subsidiary controlled group'' means
any controlled group of corporations as defined
in section 1563(a)(1), except that--
[(i) ``more than 50 percent'' shall
be substituted for ``at least 80
percent'' each place it appears in
section 1563(a)(1), and
[(ii) section 1563(a)(4) shall not
apply.
[(e) Active Business Requirement.--
[(1) In general.--For purposes of subsection (c)(2),
the requirements of this subsection are met by a
corporation for any period if during such period--
[(A) at least 80 percent (by value) of the
assets of such corporation are used by such
corporation in the active conduct of 1 or more
qualified trades or businesses, and
[(B) such corporation is an eligible
corporation.
[(2) Special rule for certain activities.--For
purposes of paragraph (1), if, in connection with any
future qualified trade or business, a corporation is
engaged in--
[(A) start-up activities described in section
195(c)(1)(A),
[(B) activities resulting in the payment or
incurring of expenditures which may be treated
as research and experimental expenditures under
section 174, or
[(C) activities with respect to in-house
research expenses described in section
41(b)(4),
assets used in such activities shall be treated as used in the
active conduct of a qualified trade or business. Any
determination under this paragraph shall be made without regard
to whether a corporation has any gross income from such
activities at the time of the determination.
[(3) Qualified trade or business.--For purposes of
this subsection, the term ``qualified trade or
business'' means any trade or business other than--
[(A) any trade or business involving the
performance of services in the fields of
health, law, engineering, architecture,
accounting, actuarial science, performing arts,
consulting, athletics, financial services,
brokerage services, or any trade or business
where the principal asset of such trade or
business is the reputation or skill of 1 or
more of its employees,
[(B) any banking, insurance, financing,
leasing, investing, or similar business,
[(C) any farming business (including the
business of raising or harvesting trees),
[(D) any business involving the production or
extraction of products of a character with
respect to which a deduction is allowable under
section 613 or 613A, and
[(E) any business of operating a hotel,
motel, restaurant, or similar business.
[(4) Eligible corporation.--For purposes of this
subsection, the term ``eligible corporation'' means any
domestic corporation; except that such term shall not
include--
[(A) a DISC or former DISC,
[(B) a corporation with respect to which an
election under section 936 is in effect or
which has a direct or indirect subsidiary with
respect to which such an election is in effect,
[(C) a regulated investment company, real
estate investment trust, or REMIC, and
[(D) a cooperative.
[(5) Stock in other corporations.--
[(A) Look-thru in case of subsidiaries.--For
purposes of this subsection, stock and debt in
any subsidiary corporation shall be disregarded
and the parent corporation shall be deemed to
own its ratable share of the subsidiary's
assets, and to conduct its ratable share of the
subsidiary's activities.
[(B) Portfolio stock or securities.--A
corporation shall be treated as failing to meet
the requirements of paragraph (1) for any
period during which more than 10 percent of the
value of its assets (in excess of liabilities)
consists of stock or securities in other
corporations which are not subsidiaries of such
corporation (other than assets described in
paragraph (6)).
[(C) Subsidiary.--For purposes of this
paragraph, a corporation shall be considered a
subsidiary if the parent owns more than 50
percent of the combined voting power of all
classes of stock entitled to vote, or more than
50 percent in value of all outstanding stock,
of such corporation.
[(6) Working capital.--For purposes of paragraph
(1)(A), any assets which--
[(A) are held as a part of the reasonably
required working capital needs of a qualified
trade or business of the corporation, or
[(B) are held for investment and are
reasonably expected to be used within 2 years
to finance research and experimentation in a
qualified trade or business or increases in
working capital needs of a qualified trade or
business,
shall be treated as used in the active conduct of a qualified
trade or business. For periods after the corporation has been
in existence for at least 2 years, in no event may more than 50
percent of the assets of the corporation qualify as used in the
active conduct of a qualified trade or business by reason of
this paragraph.
[(7) Maximum real estate holdings.--A corporation
shall not be treated as meeting the requirements of
paragraph (1) for any period during which more than 10
percent of the total value of its assets consists of
real property which is not used in the active conduct
of a qualified trade or business. For purposes of the
preceding sentence, the ownership of, dealing in, or
renting of real property shall not be treated as the
active conduct of a qualified trade or business.
[(8) Computer software royalties.--For purposes of
paragraph (1), rights to computer software which
produces active business computer software royalties
(within the meaning of section 543(d)(1)) shall be
treated as an asset used in the active conduct of a
trade or business.
[(f) Stock Acquired on Conversion of Other Stock.--If any
stock in a corporation is acquired solely through the
conversion of other stock in such corporation which is
qualified small business stock in the hands of the taxpayer--
[(1) the stock so acquired shall be treated as
qualified small business stock in the hands of the
taxpayer, and
[(2) the stock so acquired shall be treated as having
been held during the period during which the converted
stock was held.
[(g) Treatment of Pass-Thru Entities.--
[(1) In general.--In any amount included in gross
income by reason of holding an interest in a pass-thru
entity meets the requirements of paragraph (2)--
[(A) such amount shall be treated as gain
described in subsection (a), and
[(B) for purposes of applying subsection (b),
such amount shall be treated as gain from a
disposition of stock in the corporation issuing
the stock disposed of by the pass-thru entity
and the taxpayer's proportionate share of the
adjusted basis of the pass-thru entity in such
stock shall be taken into account.
[(2) Requirements.--An amount meets the requirements
of this paragraph if--
[(A) such amount is attributable to gain on
the sale or exchange by the pass-thru entity of
stock which is qualified small business stock
in the hands of such entity (determined by
treating such entity as an individual) and
which was held by such entity for more than 5
years, and
[(B) such amount is includible in the gross
income of the taxpayer by reason of the holding
of an interest in such entity which was held by
the taxpayer on the date on which such
passthrough entity acquired such stock and at
all times thereafter before the disposition of
such stock by such pass-thru entity.
[(3) Limitation based on interest originally held by
taxpayer.--Paragraph (1) shall not apply to any amount
to the extent such amount exceeds the amount to which
paragraph (1) would have applied if such amount were
determined by reference to the interest the taxpayer
held in the passthru entity on the date the qualified
small business stock was acquired.
[(4) Pass-thru entity.--For purposes of this
subsection, the term ``pass-thru entity'' means--
[(A) any partnership,
[(B) any S corporation,
[(C) any regulated investment company, and
[(D) any common trust fund.
[(h) Certain Tax-Free and Other Transfers.--For purposes of
this section--
[(1) In general.--In the case of a transfer described
in paragraph (2), the transferee shall be treated as--
[(A) having acquired such stock in the same
manner as the transferor, and
[(B) having held such stock during any
continuous period immediately preceding the
transfer during which it was held (or treated
as held under this subsection) by the
transferor.
[(2) Description of transfers.--A transfer is
described in this subsection if such transfer is--
[(A) by gift,
[(B) at death, or
[(C) from a partnership to a partner of stock
with respect to which requirements similar to
the requirements of subsection (g) are met at
the time of the transfer (without regard to the
5-year holding period requirement).
[(3) Certain rules made applicable.--Rules similar to
the rules of section 1244(d)(2) shall apply for
purposes of this section.
[(4) Incorporations and reorganizations involving
nonqualified stock.--
[(A) In general.--In the case of a
transaction described in section 351 or a
reorganization described in section 368, if
qualified small business stock is exchanged for
other stock which would not qualify as
qualified small business stock but for this
subparagraph, such other stock shall be treated
as qualified small business stock acquired on
the date on which the exchanged stock was
acquired.
[(B) Limitation.--This section shall apply to
gain from the sale or exchange of stock treated
as qualified small business stock by reason of
subparagraph (A) only to the extent of the gain
which would have been recognized at the time of
the transfer described in subparagraph (A) if
section 351 or 368 had not applied at such
time. The preceding sentence shall not apply if
the stock which is treated as qualified small
business stock by reason of subparagraph (A) is
issued by a corporation which (as of the time
of the transfer described in subparagraph (A))
is a qualified small business.
[(C) Successive application.--For purposes of
this paragraph, stock treated as qualified
small business stock under subparagraph (A)
shall be so treated for subsequent transactions
or reorganizations, except that the limitation
of subparagraph (B) shall be applied as of the
time of the first transfer to which such
limitation applied (determined after the
application of the second sentence of
subparagraph (B)).
[(D) Control test.--In the case of a
transaction described in section 351, this
paragraph shall apply only if, immediately
after the transaction, the corporation issuing
the stock owns directly or indirectly stock
representing control (within the meaning of
section 368(c)) of the corporation whose stock
was exchanged.
[(i) Basis Rules.--For purposes of this section--
[(1) Stock exchanged for property.--In the case where
the taxpayer transfers property (other than money or
stock) to a corporation in exchange for stock in such
corporation--
[(A) such stock shall be treated as having
been acquired by the taxpayer on the date of
such exchange, and
[(B) the basis of such stock in the hands of
the taxpayer shall in no event be less than the
fair market value of the property exchanged.
[(2) Treatment of contributions to capital.--If the
adjusted basis of any qualified small business stock is
adjusted by reason of any contribution to capital after
the date on which such stock was originally issued, in
determining the amount of the adjustment by reason of
such contribution, the basis of the contributed
property shall in no event be treated as less than its
fair market value on the date of the contribution.
[(j) Treatment of Certain Short Positions.--
[(1) In general.--If the taxpayer has an offsetting
short position with respect to any qualified small
business stock, subsection (a) shall not apply to any
gain from the sale or exchange of such stock unless--
[(A) such stock was held by the taxpayer for
more than 5 years as of the first day on which
there was such a short position, and
[(B) the taxpayer elects to recognize gain as
if such stock were sold on such first day for
its fair market value.
[(2) Offsetting short position.--For purposes of
paragraph (1), the taxpayer shall be treated as having
an offsetting short position with respect to any
qualified small business stock if--
[(A) the taxpayer has made a short sale of
substantially identical property,
[(B) the taxpayer has acquired an option to
sell substantially identical property at a
fixed price, or
[(C) to the extent provided in regulations,
the taxpayer has entered into any other
transaction which substantially reduces the
risk of loss from holding such qualified small
business stock.
For purposes of the preceding sentence, any reference to the
taxpayer shall be treated as including a reference to any
person who is related (within the meaning of section 267(b) or
707(b)) to the taxpayer.
[(k) Regulations.--The Secretary shall prescribe such
regulations as may be appropriate to carry out the purposes of
this section, including regulations to prevent the avoidance of
the purposes of this section through splitups, shell
corporations, partnerships, or otherwise.]
SEC. 1202. CAPITAL GAINS DEDUCTION.
(a) General Rule.--If for any taxable year a taxpayer other
than a corporation has a net capital gain, 50 percent of such
gain shall be a deduction from gross income.
(b) Estates and Trusts.--In the case of an estate or trust,
the deduction shall be computed by excluding the portion (if
any) of the gains for the taxable year from sales or exchanges
of capital assets which, under sections 652 and 662 (relating
to inclusions of amounts in gross income of beneficiaries of
trusts), is includible by the income beneficiaries as gain
derived from the sale or exchange of capital assets.
(c) Coordination With Treatment of Capital Gain Under
Limitation on Investment Interest.--For purposes of this
section, the net capital gain for any taxable year shall be
reduced (but not below zero) by the amount which the taxpayer
takes into account as investment income under section
163(d)(4)(B)(iii).
(d) Special Rule For Collectibles.--
(1) In general.--At the election of the taxpayer, the
rate of tax imposed by section 1 shall not exceed 28
percent on the excess of--
(A) the amount which would be the net capital
gain for the taxable year without regard to the
application of section 1222(12) to collectibles
specified in such election, over
(B) the net capital gain for such year.
(2) Election.--Any election under this subsection,
and any specification therein, once made, shall be
irrevocable.
(3) Coordination with indexing.--Any collectible
specified in such an election shall be treated as not
being an indexed asset for purposes of section 1022.
(e) Transitional Rule.--
(1) In general.--In the case of a taxable year which
includes January 1, 1995--
(A) the amount taken into account as the net
capital gain under subsection (a) shall not
exceed the net capital gain determined by only
taking into account gains and losses properly
taken into account for the portion of the
taxable year on or after January 1, 1995, and
(B) if the net capital gain for such year
exceeds the amount taken into account under
subsection (a), the rate of tax imposed by
section 1 on such excess shall not exceed 28
percent.
(2) Special rules for pass-thru entities.--
(A) In general.--In applying paragraph (1)
with respect to any pass-thru entity, the
determination of when gains and losses are
properly taken into account shall be made at
the entity level.
(B) Pass-thru entity defined.--For purposes
of subparagraph (A), the term ``pass-thru
entity'' means--
(i) a regulated investment company,
(ii) a real estate investment trust,
(iii) an S corporation,
(iv) a partnership,
(v) an estate or trust, and
(vi) a common trust fund.
* * * * * * *
PART II--TREATMENT OF CAPITAL LOSSES
* * * * * * *
SEC. 1211. LIMITATION ON CAPITAL LOSSES.
(a) * * *
(b) Other Taxpayers.--In the case of a taxpayer other than a
corporation, losses from sales or exchanges of capital assets
shall be allowed only to the extent of the gains from such
sales or exchanges, plus (if such losses exceed such gains) the
lower of--
(1) $3,000 ($1,500 in the case of a married
individual filing a separate return), or
[(2) the excess of such losses over such gains.]
(2) the sum of--
(A) the excess of the net short-term capital
loss over the net long-term capital gain, and
(B) one-half of the excess of the net long-
term capital loss over the net short-term
capital gain.
SEC. 1212. CAPITAL LOSS CARRYBACKS AND CARRYOVERS.
(a) * * *
(b) Other Taxpayers.--
(1) * * *
[(2) Treatment of amounts allowed under section
1211(b)(1) or (2).--
[(A) In general.--For purposes of determining
the excess referred to in subparagraph (A) or
(B) of paragraph (1), there shall be treated as
a short-term capital gain in the taxable year
an amount equal to the lesser of--
[(i) the amount allowed for the
taxable year under paragraph (1) or (2)
of section 1211(b), or
[(ii) the adjusted taxable income for
such taxable year.]
(2) Special rules.--
(A) Adjustments.--
(i) For purposes of determining the
excess referred to in paragraph (1)(A),
there shall be treated as short-term
capital gain in the taxable year an
amount equal to the lesser of--
(I) the amount allowed for
the taxable year under
paragraph (1) or (2) of section
1211(b), or
(II) the adjusted taxable
income for such taxable year.
(ii) For purposes of determining the
excess referred to in paragraph (1)(B),
there shall be treated as short-term
capital gain in the taxable year an
amount equal to the sum of--
(I) the amount allowed for
the taxable year under
paragraph (1) or (2) of section
1211(b) or the adjusted taxable
income for such taxable year,
whichever is the least, plus
(II) the excess of the amount
described in subclause (I) over
the net short-term capital loss
(determined without regard to
this subsection) for such year.
(B) Adjusted taxable income.--For purposes of
subparagraph (A), the term ``adjusted taxable
income'' means taxable income increased by the
sum of--
(i) the amount allowed for the
taxable year under paragraph (1) or (2)
of section 1211(b), and
(ii) the deduction allowed for such
year under section 151 or any deduction
in lieu thereof.
For purposes of the preceding sentence, any excess of
the deductions allowed for the taxable year over the
gross income for such year shall be taken into account
as negative taxable income.
(3) Transitional rule.--In the case of any amount
which, under paragraph (1) and section 1211(b) (as in
effect for taxable years beginning before January 1,
1996), is treated as a capital loss in the first
taxable year beginning after December 31, 1995,
paragraph (1) and section 1211(b) (as so in effect)
shall apply (and paragraph (1) and section 1211(b) as
in effect for taxable years beginning after December
31, 1995, shall not apply) to the extent such amount
exceeds the total of any net capital gains (determined
without regard to this subsection) of taxable years
beginning after December 31, 1995.
* * * * * * *
PART III--GENERAL RULES FOR DETERMINING CAPITAL GAINS AND LOSSES
* * * * * * *
SEC. 1222. OTHER TERMS RELATING TO CAPITAL GAINS AND LOSSES.
For purposes of this subtitle--
(1) * * *
* * * * * * *
(12) Special rule for collectibles.--
(A) In general.--Any gain or loss from the
sale or exchange of a collectible shall be
treated as a short-term capital gain or loss
(as the case may be), without regard to the
period such asset was held. The preceding
sentence shall apply only to the extent the
gain or loss is taken into account in computing
taxable income.
(B) Treatment of certain sales of interest in
partnership, etc.--For purposes of subparagraph
(A), any gain from the sale or exchange of an
interest in a partnership, S corporation, or
trust which is attributable to unrealized
appreciation in the value of collectibles held
by such entity shall be treated as gain from
the sale or exchange of a collectible. Rules
similar to the rules of section 751(f) shall
apply for purposes of the preceding sentence.
(C) Collectible.--For purposes of this
paragraph, the term ``collectible'' means any
capital asset which is a collectible (as
defined in section 408(m) without regard to
paragraph (3) thereof).
* * * * * * *
PART IV--SPECIAL RULES FOR DETERMINING CAPITAL GAINS AND LOSSES
* * * * * * *
SEC. 1245. GAIN FROM DISPOSITIONS OF CERTAIN DEPRECIABLE PROPERTY.
(a) General Rule.--
(1) * * *
* * * * * * *
[(3) Section 1245 property.--For purposes of this
section, the term ``section 1245 property'' means any
property which is or has been property of a character
subject to the allowance for depreciation provided in
section 167 (or subject to the allowance of
amortization provided in and is either--]
(3) Section 1245 property.--For purposes of this
section, the term ``section 1245 property'' means any
property which is or has been property of a character
subject to the allowance for depreciation provided in
section 167 and is either--
(A) personal property,
* * * * * * *
SEC. 1248. GAIN FROM CERTAIN SALES OR EXCHANGES OF STOCK IN CERTAIN
FOREIGN CORPORATIONS.
(a) General Rule.--If--
(1) a United States person sells or exchanges stock
in a foreign corporation[, or if a United States person
receives a distribution from a foreign corporation
which, under section 302 or 331, is treated as an
exchange of stock], and
(2) such person owns, within the meaning of section
958(a), or is considered as owning by applying the
rules of ownership of section 958(b), 10 percent or
more of the total combined voting power of all classes
of stock entitled to vote of such foreign corporation
at any time during the 5-year period ending on the date
of the sale or exchange when such foreign corporation
was a controlled foreign corporation (as defined in
section 957),
then the gain recognized on the sale or exchange of such stock
shall be included in the gross income of such person as a
dividend, to the extent of the earnings and profits of the
foreign corporation attributable (under regulations prescribed
by the Secretary) to such stock which were accumulated in
taxable years of such foreign corporation beginning after
December 31, 1962, and during the period or periods the stock
sold or exchanged was held by such person while such foreign
corporation was a controlled foreign corporation. For purposes
of this section, a United States person shall be treated as
having sold or exchanged any stock if, under any provision of
this subtitle, such person is treated as realizing gain from
the sale or exchange of such stock.
* * * * * * *
(e) Sales or Exchanges of Stock in Certain Domestic
Corporations.--Except as provided in regulations prescribed by
the Secretary, if--
(1) a United States person sells or exchanges stock
of a domestic corporation[, or receives a distribution
from a domestic corporation which, under section 302 or
331, is treated as an exchange of stock], and
* * * * * * *
(f) Certain Nonrecognition Transactions.--Except as provided
in regulations prescribed by the Secretary--
(1) In general.--If--
(A) a domestic corporation satisfies the
stock ownership requirements of subsection
(a)(2) with respect to a foreign corporation,
and
(B) such domestic corporation distributes
stock of such foreign corporation in a
distribution to which section 311(a), 337, [or
361(c)(1)] 355(c)(1), or 361(c)(1) applies,
then, notwithstanding any other provision of
this subtitle, an amount equal to the excess of
the fair market value of such stock over its
adjusted basis in the hands of the domestic
corporation shall be included in the gross
income of the domestic corporation as a
dividend to the extent of the earnings and
profits of the foreign corporation attributable
(under regulations prescribed by the Secretary)
to such stock which were accumulated in taxable
years of such foreign corporation beginning
after December 31, 1962, and during the period
or periods the stock was held by such domestic
corporation while such foreign corporation was
a controlled foreign corporation. For purposes
of subsections (c)(2), (d), and (h), a
distribution of stock to which this subsection
applies shall be treated as a sale of stock to
which subsection (a) applies.
* * * * * * *
(i) Treatment of Certain Indirect Transfers.--
[(1) In general.--If any shareholder of a 10-percent
corporate shareholder of a foreign corporation
exchanges stock of the 10-percent corporate shareholder
for stock of the foreign corporation, for purposes of
this section, the stock of the foreign corporation
received in such exchange shall be treated as if it had
been--
[(A) issued to the 10-percent corporate
shareholder, and
[(B) then distributed by the 10-percent
corporate shareholder to such shareholder in
redemption or liquidation (whichever is
appropriate).]
(1) In general.--If any shareholder of a 10-percent
corporate shareholder of a foreign corporation
exchanges stock of the 10-percent corporate shareholder
for stock of the foreign corporation, such 10-percent
corporate shareholder shall recognize gain in the same
manner as if the stock of the foreign corporation
received in such exchange had been--
(A) issued to the 10-percent corporate
shareholder, and
(B) then distributed by the 10-percent
corporate shareholder to such shareholder in
redemption or liquidation (whichever is
appropriate).
The amount of gain recognized by such 10-percent
corporate shareholder under the preceding sentence
shall not exceed the amount treated as a dividend under
this section.
* * * * * * *
SEC. 1250. GAIN FROM DISPOSITIONS OF CERTAIN DEPRECIABLE REALTY.
(a) * * *
* * * * * * *
(e) Holding Period.--For purposes of determining the
applicable percentage under this section, the provisions of
section 1223 shall not apply, and the holding period of section
1250 property shall be determined under the following rules:
(1) * * *
* * * * * * *
[(4) Qualified low-income housing.--The holding
period of any section 1250 property acquired which is
described in subsection (d)(8)(E)(i) shall include the
holding period of the corresponding element of section
1250 property disposed of.]
* * * * * * *
PART V--SPECIAL RULES FOR BONDS AND OTHER DEBT INSTRUMENTS
Subpart A--Original Issue Discount
* * * * * * *
SEC. 1274. DETERMINATION OF ISSUE PRICE IN THE CASE OF CERTAIN DEBT
INSTRUMENTS ISSUED FOR PROPERTY.
(a) * * *
(b) Imputed Principal Amount.--For purposes of this section--
(1) * * *
* * * * * * *
(3) Fair market value rule in potentially abusive
situations --
(A) * * *
(B) Potentially abusive situation defined.--
For purposes of subparagraph (A), the term
``potentially abusive situation'' means--
(i) a tax shelter (as defined in
[section 6662(d)(2)(C)(ii)] section
6662(d)(2)(C)(iii)), and
* * * * * * *
SEC. 1274A. SPECIAL RULES FOR CERTAIN TRANSACTIONS WHERE STATED
PRINCIPAL AMOUNT DOES NOT EXCEED $2,800,000.
(a) * * *
* * * * * * *
(c) Election To Use Cash Method Where Stated Principal Amount
Does Not Exceed $2,000,000.--
(1) In general.--In the case of any cash method debt
instrument--
(A) section 1274 shall not apply, and
(B) interest on such debt [instument]
instrument shall be taken into account by both
the borrower and the lender under the cash
receipts and disbursements method of
accounting.
* * * * * * *
PART VI--TREATMENT OF CERTAIN PASSIVE INVESTMENT COMPANIES
* * * * * * *
Subpart C--General Provisions
* * * * * * *
SEC. 1297. SPECIAL RULES.
(a) * * *
* * * * * * *
(d) Treatment of Certain Leased Property.--For purposes of
this part--
(1) * * *
[(2) Determination of adjusted basis.--]
(2) Amount taken into account.--
(A) In general.--[The adjusted basis of any
asset] The amount taken into account under
section 1296(a)(2) with respect to any asset to
which paragraph (1) applies shall be the
unamortized portion (as determined under
regulations prescribed by the Secretary) of the
present value of the payments under the lease
for the use of such property.
* * * * * * *
(e) Special Rules for Certain Intangibles.--For purposes of
this part--
(1) Research expenditures.--The adjusted basis of the
total assets of a controlled foreign corporation shall
be increased by the research or experimental
expenditures (within the meaning of section 174) paid
or incurred by such foreign corporation during the
taxable year and the preceding 2 taxable years. Any
expenditure otherwise taken into account under the
preceding sentence shall be reduced by the amount of
any reimbursement received by the controlled foreign
corporation with respect to such expenditure.
* * * * * * *
Subchapter S--Tax Treatment of S Corporations and Other Shareholders
* * * * * * *
PART II--TAX TREATMENT OF SHAREHOLDERS
* * * * * * *
SEC. 1367. ADJUSTMENTS TO BASIS OF STOCK OF SHAREHOLDERS, ETC.
(a) General Rule.--
(1) * * *
(2) Decreases in basis.--The basis of each
shareholder's stock in an S corporation shall be
decreased for any period (but not below zero) by the
sum of the following items determined with respect to
the shareholder for such period:
(A) * * *
* * * * * * *
(E) the amount of the shareholder's deduction
for depletion for any oil and gas property held
by the S corporation to the extent such
deduction does not exceed the proportionate
share of the adjusted basis of such property
allocated to such shareholder under [section
613A(c)(13)(B)] section 613A(c)(11)(B).
* * * * * * *
Subchapter U--Designation and Treatment of Empowerment Zones,
Enterprise Communities, and Rural Development Investment Areas
* * * * * * *
PART II--TAX-EXEMPT FACILITY BONDS FOR EMPOWERMENT ZONES AND ENTERPRISE
COMMUNITIES
* * * * * * *
SEC. 1394. TAX-EXEMPT ENTERPRISE ZONE FACILITY BONDS.
(a) * * *
* * * * * * *
(e) Penalty for Ceasing to Meet Requirements.--
(1) * * *
(2) Loss of deductions where facility ceases to be
qualified.--No deduction shall be allowed under this
chapter for interest on any financing provided from any
bond to which subsection (a) applies with respect to
any facility to the extent such interest accrues during
the period beginning on the first day of the calendar
year which includes the date on which--
[(i)] (A) substantially all of the facility
with respect to which the financing was
provided ceases to be used in an empowerment
zone or enterprise community, or
[(ii)] (B) the principal user of such
facility ceases to be an enterprise zone
business (as defined in subsection (b)).
* * * * * * *
PART III--ADDITIONAL INCENTIVES FOR EMPOWERMENT ZONES
* * * * * * *
Subpart C--General Provisions
* * * * * * *
SEC. 1397B. ENTERPRISE ZONE BUSINESS DEFINED.
(a) * * *
* * * * * * *
(d) Qualified Business.--For purposes of this section--
(1) * * *
* * * * * * *
(5) Certain businesses excluded.--The term
``qualified business'' shall not include--
(A) any trade or business consisting of the
operation of any facility described in section
144(c)(6)(B), and
(B) any trade or business the principal
activity of which is farming (within the
meaning of subparagraphs (A) or (B) of section
2032A(e)(5)), but only if, as of the close of
the [preceding] taxable year, the sum of--
(i) * * *
* * * * * * *
CHAPTER 2--TAX ON SELF-EMPLOYED INCOME
* * * * * * *
SEC. 1402. DEFINITIONS.
(a) * * *
* * * * * * *
(i) Special Rules for Options and Commodities Dealers.--
(1) In general.--Notwithstanding subsection
(a)(3)(A), in determining the net earnings from self-
employment of any options dealer or commodities dealer,
there shall not be excluded any gain or loss (in the
normal course of the taxpayer's activity of dealing in
or trading section 1256 contracts) from section 1256
contracts or property related to such contracts, and
the deduction provided by section 1202 shall not apply.
* * * * * * *
CHAPTER 3--WITHHOLDING OF TAX ON NONRESIDENT ALIENS AND FOREIGN
CORPORATIONS
Subchapter A--Nonresident Aliens and Foreign Corporations
* * * * * * *
SEC. 1445. WITHHOLDING OF TAX ON DISPOSITIONS OF UNITED STATES REAL
PROPERTY INTERESTS.
(a) * * *
* * * * * * *
(e) Special Rules Relating to Distributions, Etc., by
Corporations, Partnerships, Trusts, or Estates.--
(1) Certain domestic partnerships, trusts, and
estates.--In the case of any disposition of a United
States real property interest as defined in section
897(c) (other than a disposition described in paragraph
(4) or (5)) by a domestic partnership, domestic trust,
or domestic estate, such partnership, the trustee of
such trust, or the executor of such estate (as the case
may be) shall be required to deduct and withhold under
subsection (a) a tax equal to [35 percent (or, to the
extent provided in regulations, 28 percent)] 25 percent
(or, to the extent provided in regulations, 19.8
percent) of the gain realized to the extent such gain--
(A) is allocable to a foreign person who is a
partner or beneficiary of such partnership,
trust, or estate, or
(B) is allocable to a portion of the trust
treated as owned by a foreign person under
subpart E of part I of subchapter J.
(2) Certain distributions by foreign corporations.--
In the case of any distribution by a foreign
corporation on which gain is recognized under
subsection (d) or (e) of section 897, the foreign
corporation shall deduct and withhold under subsection
(a) a tax equal to [35 percent] 25 percent of the
amount of gain recognized on such distribution under
such subsection.
(3) Distributions by certain domestic corporations to
foreign shareholders.--If a domestic corporation which
is or has been a United States real property holding
corporation (as defined in section 897(c)(2)) during
the applicable period specified in section
897(c)(1)(A)(ii) distributes property to a foreign
person in a transaction to which section 302 or part II
of subchapter C applies, such corporation shall deduct
and withhold under subsection (a) a tax equal to 10
percent of the amount realized by the foreign
shareholder. The preceding sentence shall not apply if,
as of the date of the distribution, interests in such
corporation are not United States real property
interests by reason of section 897(c)(1)(B). Rules
similar to the rules of the preceding provisions of
this paragraph shall apply in the case of any
distribution to which section 301 applies and which is
not made out of the earnings and profits of such a
domestic corporation.
* * * * * * *
Subchapter B--Application of Withholding Provisions
* * * * * * *
SEC. 1463. TAX PAID BY RECIPIENT OF INCOME.
If--
(1) any person, in violation of the provisions of
this chapter, fails to deduct and withhold any tax
under this chapter, and
(2) thereafter the tax against which such tax may be
credited is paid, the tax so required to be deducted
and withheld shall not be collected from such person;
but [this subsection] this section shall in no case
relieve such person from liability for interest or any
penalties or additions to the tax otherwise applicable
in respect of such failure to deduct and withhold.
* * * * * * *
CHAPTER 6--CONSOLIDATED RETURNS
Subchapter A--Returns and Payment of Tax
* * * * * * *
SEC. 1503. COMPUTATION AND PAYMENT OF TAX.
(a) * * *
* * * * * * *
(e) Special Rule for Determining Adjustments to Basis.--
(1) In general.--Solely for purposes of determining
gain or loss on the disposition of intragroup stock and
the amount of any inclusion by reason of an excess loss
account, in determining the adjustments to the basis of
such intragroup stock on account of the earnings and
profits of any member of an affiliated group for any
consolidated year (and in determining the amount in
such account)--
(A) such earnings and profits shall be
determined as if section 312 were applied for
such taxable year (and all preceding
consolidated years of the member with respect
to such group) without regard to subsections
(k) and (n) thereof and shall be determined
without regard to section 168(k), and
* * * * * * *
SEC. 1504. DEFINITIONS.
(a) * * *
* * * * * * *
(c) Includible Insurance Companies.--Notwithstanding the
provisions of paragraph (2) of subsection (b)--
(1) * * *
(2)(A) * * *
(B) If an election under this paragraph is in effect
for a taxable year--
(i) section 243(b)(3) and the exception
provided under section 243(b)(2) with respect
to subsections (b)(2) and (c) of this section,
* * * * * * *
Subchapter B--Related Rules
* * * * * * *
PART II--CERTAIN CONTROLLED CORPORATIONS
* * * * * * *
SEC. 1561. LIMITATIONS ON CERTAIN MULTIPLE TAX BENEFITS IN THE CASE OF
CERTAIN CONTROLLED CORPORATIONS.
(a) General Rule.--The component members of a controlled
group of corporations on a December 31 shall, for their taxable
years which include such December 31, be limited for purposes
of this subtitle to--
(1) * * *
* * * * * * *
(4) one $2,000,000 amount for purposes of computing
the tax imposed by section 59A. The amounts specified
in paragraph (1), the amount specified in paragraph
(3), and the amount specified in paragraph (4) shall be
divided equally among the component members of such
group on such December 31 unless all of such component
members consent (at such time and in such manner as the
Secretary shall by regulations prescribe) to an
apportionment plan providing for an unequal allocation
of such amounts. The amounts specified in paragraph (2)
shall be divided equally among the component members of
such group on such December 31 unless the Secretary
prescribes regulations permitting an unequal allocation
of such amounts. Notwithstanding paragraph (1), in
applying the [last sentence] last 2 sentences of
section 11(b)(1) to such component members, the taxable
income of all such component members shall be taken
into account and any increase in tax under such [last
sentence] last 2 sentences shall be divided among such
component members in the same manner as amounts under
paragraph (1). In applying section 55(d)(3), the
alternative minimum taxable income of all component
members shall be taken into account and any decrease in
the exemption amount shall be allocated to the
component members in the same manner as under paragraph
(3).
* * * * * * *
Subtitle B--Estate and Gift Taxes
* * * * * * *
CHAPTER 11--ESTATE TAX
* * * * * * *
Subchapter A--Estates of Citizens or Residents
* * * * * * *
PART I--TAX IMPOSED
* * * * * * *
SEC. 2001. IMPOSITION AND RATE OF TAX.
(a) * * *
* * * * * * *
(c) Rate Schedule.--
(1) * * *
(2) Phaseout of graduated rates and unified credit.--
The tentative tax determined under paragraph (1) shall
be increased by an amount equal to 5 percent of so much
of the amount (with respect to which the tentative tax
is to be computed) as exceeds $10,000,000 but does not
exceed [$21,040,000] the amount at which the average
tax rate under this section is 55 percent.
* * * * * * *
PART II--CREDITS AGAINST TAX
* * * * * * *
SEC. 2010. UNIFIED CREDIT AGAINST ESTATE TAX.
(a) General Rule.--A credit of [$192,800] the applicable
credit amount shall be allowed to the estate of every decedent
against the tax imposed by section 2001.
* * * * * * *
(c) Applicable Credit Amount.--For purposes of this section--
(1) In general.--The applicable credit amount is the
amount of the tentative tax which would be determined
under the rate schedule set forth in section 2001(c) if
the amount with respect to which such tentative tax is
to be computed were the applicable exclusion amount
determined in accordance with the following table:
In the case of estates of decedents The applicable
dying, and gifts made, during: exclusion amount is:
1996............................................ $700,000
1997............................................ $725,000
1998 or thereafter.............................. $750,000.
(2) Cost-of-living adjustments.--In the case of any
decedent dying, and gift made, in a calendar year after
1998, the $750,000 amount set forth in paragraph (1)
shall be increased by an amount equal to--
(A) $750,000, multiplied by
(B) the cost-of-living adjustment determined
under section 1(f)(3) for such calendar year by
substituting ``calendar year 1997'' for
``calendar year 1992'' in subparagraph (B)
thereof.
If any amount as adjusted under the preceding sentence
is not a multiple of $10,000, such amount shall be
rounded to the nearest multiple of $10,000.
[(c)] (d) Limitation Based on Amount of Tax.--The amount of
the credit allowed by subsection (a) shall not exceed the
amount of the tax imposed by section 2001.
* * * * * * *
PART III--GROSS ESTATE
* * * * * * *
SEC. 2032A. VALUATION OF CERTAIN FARM, ETC., REAL PROPERTY.
(a) Value Based on Use Under Which Property Qualifies.--
(1) * * *
* * * * * * *
(3) Inflation adjustment.--In the case of estates of
decedents dying in a calendar year after 1998, the
$750,000 amount contained in paragraph (2) shall be
increased by an amount equal to--
(A) $750,000, multiplied by
(B) the cost-of-living adjustment determined
under section 1(f)(3) for such calendar year by
substituting ``calendar year 1997'' for
``calendar year 1992'' in subparagraph (B)
thereof.
If any amount as adjusted under the preceding sentence
is not a multiple of $10,000, such amount shall be
rounded to the nearest multiple of $10,000.
* * * * * * *
Subchapter B--Estates of Nonresidents Not Citizens
* * * * * * *
SEC. 2102. CREDITS AGAINST TAX.
(a) * * *
* * * * * * *
(c) Unified Credit.--
(1) * * *
(3) Special rules.--
(A) Coordination with treaties.--To the
extent required under any treaty obligation of
the United States, the credit allowed under
this subsection shall be equal to the amount
which bears the same ratio to [$192,800] the
applicable credit amount in effect under
section 2010(c) for the calendar year which
includes the date of death as the value of the
part of the decedent's gross estate which at
the time of his death is situated in the United
States bears to the value of his entire gross
estate wherever situated. For purposes of the
preceding sentence, property shall not be
treated as situated in the United States if
such property is exempt from the tax imposed by
this subchapter under any treaty obligation of
the United States.
* * * * * * *
SEC. 2104. PROPERTY WITHIN THE UNITED STATES.
(a) * * *
* * * * * * *
(c) Debt Obligations.--For purposes of this subchapter, debt
obligations of--
(1) a United States person, or
(2) the United States, a State or any political
subdivision thereof, or the District of Columbia, owned
and held by a nonresident not a citizen of the United
States shall be deemed property within the United
States. With respect to estates of decedents dying
after December 31, 1969, deposits with a domestic
branch of a foreign corporation, if such branch is
engaged in the commercial banking business, shall, for
purposes of this subchapter, be deemed property within
the United States. This subsection shall not apply to a
debt obligation to which section 2105(b) applies or to
a debt obligation of a domestic corporation if any
interest on such obligation, were such interest
received by the decedent at the time of his death,
would be treated by reason of [subparagraph (A), (C),
or (D) of section 861(a)(1)] section 861(a)(1)(A) as
income from sources without the United States.
* * * * * * *
CHAPTER 12--GIFT TAX
* * * * * * *
Subchapter A--Determination of Tax Liability
* * * * * * *
SEC. 2503. TAXABLE GIFTS.
(a) * * *
[(b) Exclusions From Gifts.--]
(b) Exclusions From Gifts.--
(1) In general.--In the case of gifts (other than
gifts of future interests in property) made to any
person by the donor during the calendar year, the first
$10,000 of such gifts to such person shall not, for
purposes of subsection (a), be included in the total
amount of gifts made during such year. Where there has
been a transfer to any person of a present interest in
property, the possibility that such interest may be
diminished by the exercise of a power shall be
disregarded in applying this subsection, if no part of
such interest will at any time pass to any other
person.
(2) Inflation adjustment.--In the case of gifts made
in a calendar year after 1998, the $10,000 amount
contained in paragraph (1) shall be increased by an
amount equal to--
(A) $10,000, multiplied by
(B) the cost-of-living adjustment determined
under section 1(f)(3) for such calendar year by
substituting ``calendar year 1997'' for
``calendar year 1992'' in subparagraph (B)
thereof.
If any amount as adjusted under the preceding sentence
is not a multiple of $1,000, such amount shall be
rounded to the nearest multiple of $1,000.
* * * * * * *
SEC. 2505. UNIFIED CREDIT AGAINST GIFT TAX.
(a) General Rule.--In the case of a citizen or resident of
the United States, there shall be allowed as a credit against
the tax imposed by section 2501 for each calendar year an
amount equal to--
(1) [$192,800] the applicable credit amount in effect
under section 2010(c) for such calendar year, reduced
by
* * * * * * *
Subchapter D--GST Exemption
* * * * * * *
SEC. 2631. GST EXEMPTION.
(a) * * *
* * * * * * *
(c) Inflation Adjustment.--In the case of an individual who
dies in any calendar year after 1998, the $1,000,000 amount
contained in subsection (a) shall be increased by an amount
equal to--
(1) $1,000,000, multiplied by
(2) the cost-of-living adjustment determined under
section 1(f)(3) for such calendar year by substituting
``calendar year 1997'' for ``calendar year 1992'' in
subparagraph (B) thereof.
If any amount as adjusted under the preceding sentence is not a
multiple of $10,000, such amount shall be rounded to the
nearest multiple of $10,000.
* * * * * * *
CHAPTER 14--SPECIAL VALUATION RULES
SEC. 2701. SPECIAL VALUATION RULES IN CASE OF TRANSFERS OF CERTAIN
INTERESTS IN CORPORATIONS OR PARTNERSHIPS.
(a) Valuation Rules.--
(1) * * *
* * * * * * *
(3) Valuation of rights to which paragraph applies.--
(A) * * *
(B) Valuation of certain qualified
payments.--If--
(i) any applicable retained interest
confers a distribution right which
consists of the right to a qualified
payment, and
* * * * * * *
(C) Valuation of qualified payments where no
liquidation, etc. rights.--In the case of an
applicable retained interest which is described
in subparagraph (B)(i) but not subparagraph
(B)(ii), the value of the distribution right
shall be determined without regard to this
section.
(4) Minimum valuation of junior equity.--
(A) * * *
(B) Definitions.--For purposes of this
paragraph--
(i) Junior equity interest.--The term
``junior equity interest'' means common
stock or, in the case of a partnership,
any partnership interest under which
the rights as to income and capital
(or, to the extent provided in
regulations, the rights as to either
income or capital) are junior to the
rights of all other classes of equity
interests.
* * * * * * *
(b) Applicable Retained Interests.--For purposes of this
section--
(1) * * *
(2) Control.--For purposes of paragraph (1)--
(A) * * *
* * * * * * *
(C) Applicable family member.--For purposes
of this subsection, the term ``applicable
family member'' includes any lineal descendant
of any parent of the transferor or the
transferor's spouse.
(c) Distribution and Other Rights; Qualified Payments.--For
purposes of this section--
(1) Distribution right.--
(A) * * *
(B) Exceptions.--The term ``distribution
right'' does not include--
[(i) a right to distributions with
respect to any junior equity interest
(as defined in subsection
(a)(4)(B)(i)),]
(i) a right to distributions with
respect to any interest which is junior
to the rights of the transferred
interest,
* * * * * * *
(3) Qualified payment.--
(A) * * *
(C) Elections.--
[(i) Waiver of qualified payment
treatment.--A transferor or applicable
family member may elect with respect to
payments under any interest specified
in such election to treat such payments
as payments which are not qualified
payments.]
(i) In general.--Payments under any
interest held by a transferor which
(without regard to this subparagraph)
are qualified payments shall be treated
as qualified payments unless the
transferor elects not to treat such
payments as qualified payments.
Payments described in the preceding
sentence which are held by an
applicable family member shall be
treated as qualified payments only if
such member elects to treat such
payments as qualified payments.
(ii) Election to have interest
treated as qualified payment.--[A
transferor or any applicable family
member may elect to treat any
distribution right as a qualified
payment, to be paid in the amounts and
at the times specified in such
election.] A transferor or applicable
family member holding any distribution
right which (without regard to this
subparagraph) is not a qualified
payment may elect to treat such right
as a qualified payment, to be paid in
the amounts and at the times specified
in such election. The preceding
sentence shall apply only to the extent
that the amounts and times so specified
are not inconsistent with the
underlying legal instrument giving rise
to such right.
(iii) Elections irrevocable.--Any
election under this subparagraph with
respect to an interest shall, once
made, be irrevocable.
(d) Transfer Tax Treatment of Cumulative But Unpaid
Distributions.--
(1) In general.--If a taxable event occurs with
respect to any distribution right to which [subsection
(a)(3)(B)] subsection (a)(3) (B) or (C) applied, the
following shall be increased by the amount determined
under paragraph (2):
(A) The taxable estate of the transferor in
the case of a taxable event described in
paragraph (3)(A)(i).
(B) The taxable gifts of the transferor for
the calendar year in which the taxable event
occurs in the case of a taxable event described
in paragraph (3)(A)(ii) or (iii).
* * * * * * *
(3) Taxable events.--For purposes of this
subsection--
(A) In general.--The term ``taxable event''
means any of the following:
(i) The death of the transferor if
the applicable retained interest
conferring the distribution right is
includible in the estate of the
transferor.
(ii) The transfer of such applicable
retained interest.
(iii) At the election of the
taxpayer, the payment of any qualified
payment after the period described in
paragraph (2)(C), but only with respect
to [the period ending on the date of]
such payment.
(B) Exception where spouse is transferee.--
(i) * * *
(ii) Lifetime transfers.--A transfer
to the spouse of the transferor shall
not be treated as a taxable event under
subparagraph (A)(ii) if such transfer
does not result in a taxable gift by
reason of--
(I) any deduction allowed under
section 2523, or the exclusion under
section 2503(b), or
* * * * * * *
(4) Special rules for applicable family members.--
(A) Family member treated in same manner as
transferor.--For purposes of this subsection,
an applicable family member shall be treated in
the same manner as the transferor with respect
to any distribution right retained by such
family member to which [subsection (a)(3)(B)]
subsection (a)(3) (B) or (C) applied.
(B) Transfer to applicable family member.--In
the case of a taxable event described in
paragraph (3)(A)(ii) involving the transfer of
an applicable retained interest to an
applicable family member (other than the spouse
of the transferor), the applicable family
member shall be treated in the same manner as
the transferor in applying this subsection to
distributions accumulating with respect to such
interest after such taxable event.
(C) Transfer to transferors.--In the case of
a taxable event described in paragraph
(3)(A)(ii) involving a transfer of an
applicable retained interest from an applicable
family member to a transferor, this subsection
shall continue to apply to the transferor
during any period the transferor holds such
interest.
(5) Transfer to include termination.--For purposes of
this subsection, any termination of an interest shall
be treated as a transfer.
(e) Other Definitions and Rules.--For purposes of this
section--
(1) * * *
* * * * * * *
[(3) Attribution rules.--
[(A) Indirect holdings and transfers.--An
individual]
(3) Attribution of indirect holdings and transfers.--
An individual shall be treated as holding any interest
to the extent such interest is held indirectly by such
individual through a corporation, partnership, trust,
or other entity. If any individual is treated as
holding any interest by reason of the preceding
sentence, any transfer which results in such interest
being treated as no longer held by such individual
shall be treated as a transfer of such interest.
[(B) Control.--For purposes of subsections
(b)(1), an individual shall be treated as
holding any interest held by the individual's
brothers, sisters, or lineal descendants.]
(4) Effect of adoption.-- A relationship by legal
adoption shall be treated as a relationship by blood.
(5) Certain changes treated as transfers.--Except as
provided in regulations, a contribution to capital or a
redemption, recapitalization, or other change in the
capital structure of a corporation or partnership shall
be treated as a transfer of an interest in such entity
to which this section applies if the taxpayer or an
applicable family member--
(A) receives an applicable retained interest
in such entity pursuant to [such contribution
to capital or such redemption,
recapitalization, or other change] such
transaction, or
(B) under regulations, otherwise holds,
immediately after [the transfer] such
transaction, an applicable retained interest in
such entity. This paragraph shall not apply to
any transaction (other than a contribution to
capital) if the interests in the entity held by
the transferor, applicable family members, and
members of the transferor's family before and
after the transaction are substantially
identical.
(6) Adjustments.--Under regulations prescribed by the
Secretary, if there is any subsequent transfer, or
inclusion in the gross estate, of any applicable
retained interest which was valued under the rules of
subsection (a), appropriate adjustments shall be made
for purposes of chapter 11, 12, or 13 to reflect the
increase in the amount of any prior taxable gift made
by the transferor or decedent by reason of such
valuation or to reflect the application of subsection
(d).
* * * * * * *
SEC. 2702. SPECIAL VALUATION RULES IN CASE OF TRANSFERS OF INTERESTS IN
TRUSTS.
(a) Valuation Rules.--
(1) * * *
* * * * * * *
(3) Exceptions.--
(A) In general.--This subsection shall not
apply to any transfer--
(i) [to the extent] if such transfer
is an incomplete [transfer] gift, [or]
(ii) if such transfer involves the
transfer of an interest in trust all
the property in which consists of a
residence to be used as a personal
residence by persons holding term
interests in such trust[.], or
(iii) to the extent that regulations
provide that such transfer is not
inconsistent with the purposes of this
section.
(B) [Incomplete transfer] Incomplete gift.--
For purposes of subparagraph (A), the term
``incomplete [transfer] gift'' means any
transfer which would not be treated as a gift
whether or not consideration was received for
such transfer.
* * * * * * *
SEC. 2704. TREATMENT OF CERTAIN LAPSING RIGHTS AND RESTRICTIONS.
(a) * * *
* * * * * * *
(c) Definitions and Special Rules.--For purposes of this
section--
(1) * * *
* * * * * * *
(3) Attribution.--The rule of [section 2701(e)(3)(A)]
section 2701(e)(3) shall apply for purposes of
determining the interests held by any individual.
* * * * * * *
Subtitle C--Employment Taxes
* * * * * * *
CHAPTER 23--FEDERAL UNEMPLOYMENT TAX ACT
* * * * * * *
SEC. 3306. DEFINITIONS.
(a) * * *
* * * * * * *
(k) Agricultural Labor.--For purposes of this chapter, the
term ``agricultural labor'' has the meaning assigned to such
term by subsection (g) of section 3121, except that for
purposes of this chapter subparagraph (B) of paragraph (4) of
such subsection (g) shall be treated as reading:
``(B) in the employ of a group of operators
of farms (or a cooperative organization of
which such operators are members) in the
performance of service described in
subparagraph (A), but only if such if such
operators produced more than one-half of the
commodity with respect to which such service is
performed;''.
* * * * * * *
CHAPTER 24--COLLECTION OF INCOME TAX AT SOURCE ON WAGES
Subchapter A--Withholding from Wages
SEC. 3401. DEFINITIONS.
(a) Wages.--For purposes of this chapter, the term ``wages''
means all remuneration (other than fees paid to a public
official) for services performed by an employee for his
employer, including the cash value of all remuneration
(including benefits) paid in any medium other than cash; except
that such term shall not include remuneration paid--
(1) for active service performed in a month for which
such employee is entitled to the benefits of section
112 (relating to certain [combat pay] combat zone
compensation of members of the Armed Forces of the
United States); or
* * * * * * *
SEC. 3405. SPECIAL RULES FOR PENSIONS, ANNUITIES, AND CERTAIN OTHER
DEFERRED INCOME.--
(a) * * *
* * * * * * *
(e) Definitions and Special Rules.--For purposes of this
section--
(1) * * *
* * * * * * *
(12) Failure to provide correct tin.--If--
(A) a payee fails to furnish his TIN to the
payor in the manner required by the Secretary,
or
(B) the Secretary notifies the payor before
any payment or distribution that the TIN
furnished by the payee is incorrect, -no
election under subsection (a)(2) or [(b)(3)]
(b)(2) shall be treated as in effect and
subsection (a)(4) shall not apply to such
payee.
* * * * * * *
Subtitle D--Miscellaneous Excise Taxes
* * * * * * *
CHAPTER 31--RETAIL EXCISE TAXES
* * * * * * *
Subchapter A--Luxury Passenger Automobiles
SEC. 4001. IMPOSITION OF TAX.
(a) * * *
* * * * * * *
[(e) Inflation Adjustment.--
[(1) In general.--If, for any calendar year, the
excess (if any) of--
[(A) $30,000, increased by the cost-of-living
adjustment for the calendar year, over
[(B) the dollar amount in effect under
subsection (a) for the calendar year,
[is equal to or greater than $2,000, then the $30,000 amount
in subsection (a) and section 4003(a) (as previously adjusted
under this subsection) for any subsequent calendar year shall
be increased by the amount of such excess rounded to the next
lowest multiple of $2,000.
[(2) Cost-of-living adjustment.--For purposes of
paragraph (1), the cost-of-living adjustment for any
calendar year shall be the cost-of-living adjustment
under section 1(f)(3) for such calendar year,
determined by substituting ``calendar year 1990'' for
``calendar year 1992'' in subparagraph (B) thereof.]
(e) Inflation Adjustment.--
(1) In general.--The $30,000 amount in subsection (a)
and section 4003(a) shall be increased by an amount
equal to--
(A) $30,000, multiplied by
(B) the cost-of-living adjustment under
section 1(f)(3) for the calendar year in which
the vehicle is sold, determined by substituting
``calendar year 1990'' for ``calendar year
1992'' in subparagraph (B) thereof.
(2) Rounding.--If any amount as adjusted under
paragraph (1) is not a multiple of $2,000, such amount
shall be rounded to the next lowest multiple of $2,000.
* * * * * * *
CHAPTER 36--CERTAIN OTHER EXCISE TAXES
* * * * * * *
Subchapter A--Harbor Maintenance Tax
* * * * * * *
SEC. 4462. DEFINITIONS AND SPECIAL RULES.
(a) * * *
(b) Special Rule for Alaska, Hawaii, and Possessions.--
(1) In general.--No tax shall be imposed under
section 4461(a) with respect to--
(A) * * *
* * * * * * *
(D) cargo loaded on a vessel in Alaska,
Hawaii, or a possession of the United States
and unloaded in the State or possession in
which loaded, or passengers transported on
United States flag vessels operating solely
within the State waters of Alaska or Hawaii and
adjacent international waters.
* * * * * * *
Subchapter B--Transportation by Water
Sec. 4471. Imposition of tax.
Sec. 4472. Definitions [and special rules].
* * * * * * *
CHAPTER 43--QUALIFIED PENSIONS, ETC., PLANS
* * * * * * *
SEC. 4973. TAX ON EXCESS CONTRIBUTIONS TO INDIVIDUAL RETIREMENT
ACCOUNTS, CERTAIN SECTION 403(B) CONTRACTS, AND
CERTAIN INDIVIDUAL RETIREMENT ANNUITIES.
(a) * * *
(b) Excess Contributions.--For purposes of this section, in
the case of individual retirement accounts or individual
retirement annuities, the term ``excess contributions'' means
the sum of
(1) the excess (if any) of--
(A) the amount contributed for the taxable year to
the accounts or for the annuities (other than a
rollover contribution described in [sections 402(c)]
section 402(c), 403(a)(4), 403(b)(8), or 408(d)(3)),
over
* * * * * * *
SEC. 4975. TAX ON PROHIBITED TRANSACTIONS.
(a) * * *
* * * * * * *
(d) Exemptions.--The prohibitions provided in subsection (c)
shall not apply to--
(1) * * *
* * * * * * *
(13) any transaction which is exempt from
section 406 of such Act by reason of section
408(e) of such Act (or which would be so exempt
if such section 406 applied to such
transaction) or which is exempt from section
406 of such Act by reason of [section 408(b)]
section 408(b)(12) of such Act;
* * * * * * *
SEC. 4977. TAX ON CERTAIN FRINGE BENEFITS PROVIDED BY AN EMPLOYER.
(a) * * *
* * * * * * *
(c) Effect of Election on Section 132(a).--If--
(1) an election under this section is in effect with
respect to an employer for any calendar year, and
(2) at all times on or after January 1, 1984, and
before the close of the calendar year involved,
substantially all of the employees of the employer were
entitled to employee discounts on goods or services
provided by the employer in 1 line of business, for
purposes of paragraphs (1) and (2) of section 132(a)
(but not for purposes of section [section 132(i)(2)]
section 132(h)), all employees of any line of business
of the employer which was in existence on January 1,
1984, shall be treated as employees of the line of
business referred to in paragraph (2).
* * * * * * *
SEC. 4978. TAX ON CERTAIN DISPOSITIONS BY EMPLOYEE STOCK OWNERSHIP
PLANS AND CERTAIN COOPERATIVES.
(a) * * *
(b) Amount of Tax.--
(1) * * *
(2) Limitation.--The amount realized taken into
account under paragraph (1) shall not exceed that
portion allocable to qualified securities acquired in
the sale to which section 1042 applied determined as if
such securities were disposed of--
(A) first, from section 133 securities (as
defined in section 4978B(e)(2)) acquired during
the 3-year period ending on the date of such
disposition, beginning with the securities
first so acquired[.],
(B) second, from section 133 securities (as
so defined) acquired before such 3-year period
unless such securities (or proceeds from the
disposition) have been allocated to accounts of
participants or beneficiaries[.''],
(C) third, from qualified securities to which
section 1042 applied acquired during the 3-year
period ending on the date of the disposition,
beginning with the securities first so
acquired, and
(D) then from any other employer securities.
If subsection (d) or section 4978B(d) applies
to a disposition, the disposition shall be
treated as made from employer securities in the
opposite order of the preceding sentence.
* * * * * * *
SEC. 4980A. TAX ON EXCESS DISTRIBUTIONS FROM QUALIFIED RETIREMENT
PLANS.
(a) * * *
* * * * * * *
(e) Retirement Distributions.--For purposes of this section--
(1) In general.--The term ``retirement distribution''
means, with respect to any individual, the amount
distributed during the taxable year under--
(A) any qualified employer plan with respect
to which such individual is or was the
employee, and
(B) any individual retirement plan other than
an ADS account (as defined in section 408A(b)).
* * * * * * *
SEC. 4980B. FAILURE TO SATISFY CONTINUATION COVERAGE REQUIREMENTS OF
GROUP HEALTH PLANS.
(a) * * *
* * * * * * *
(f) Continuation Coverage Requirements of Group Health
Plans.--
(1) * * *
(2) Continuation coverage.--For purposes of paragraph
(1), the term ``continuation coverage'' means coverage
under the plan which meets the following requirements:
(A) * * *
(B) Period of coverage.--The coverage must
extend for at least the period beginning on the
date of the qualifying event and ending not
earlier than the earliest of the following:
(i) Maximum required period.--
(I) * * *
* * * * * * *
[(V) Qualifying event
involving medicare
entitlement.--In the case of an
event described in paragraph
(3)(D) (without regard to
whether such event is a
qualifying event), the period
of coverage for qualified
beneficiaries other than the
covered employee for such event
or any subsequent qualifying
event shall not terminate
before the close of the 36-
month period beginning on the
date the covered employee
becomes entitled to benefits
under title XVIII of the Social
Security Act. In the case of a
qualified beneficiary who is
determined, under title II or
XVI of the Social Security Act,
to have been disabled at the
time of a qualifying event
described in paragraph (3)(B),
any reference in subclause (I)
or (II) to 18 months with
respect to such event is deemed
a reference to 29 months, but
only if the qualified
beneficiary has provided notice
of such determination under
paragraph (6)(C) before the end
of such 18 months.]
(V) Medicare entitlement
followed by qualifying event.--
In the case of a qualifying
event described in paragraph
(3)(B) that occurs less than 18
months after the date the
covered employee became
entitled to benefits under
title XVIII of the Social
Security Act, the period of
coverage for qualified
beneficiaries other than the
covered employee shall not
terminate under this clause
before the close of the 36-
month period beginning on the
date the covered employee
became so entitled.
* * * * * * *
(9) Continuation of long-term care coverage not
required.--A group health plan shall not be treated as
failing to meet the requirements of this subsection
solely by reason of failing to provide coverage under
any long-term care insurance contract (as defined in
section 7702B(b)).
* * * * * * *
CHAPTER 51--DISTILLED SPIRITS, WINES, AND BEER
* * * * * * *
Subchapter A--Gallonage and Occupational Taxes
* * * * * * *
PART I--GALLONAGE TAXES
* * * * * * *
Subpart C--Wines
SEC. 5041. IMPOSITION AND RATE OF TAX.
(a) * * *
* * * * * * *
(c) Credit for Small Domestic Producers.--
(1)
[(6) Regulations.--The Secretary may prescribe such
regulations as may be necessary to prevent the credit
provided in this subsection from benefiting any person
who produces more than 250,000 wine gallons of wine
during a calendar year and to assure proper reduction
of such credit for persons producing more than 150,000
wine gallons of wine during a calendar year.]
(6) Credit for transferee in bond.--If--
(A) wine produced by any person would be
eligible for any credit under paragraph (1) if
removed by such person during the calendar
year,
(B) wine produced by such person is removed
during such calendar year by any other person
(hereafter in this paragraph referred to as the
`transferee') to whom such wine was transferred
in bond and who is liable for the tax imposed
by this section with respect to such wine, and
(C) such producer holds title to such wine at
the time of its removal and provides to the
transferee such information as is necessary to
properly determine the transferee's credit
under this paragraph,
then, the transferee (and not the producer) shall be
allowed the credit under paragraph (1) which would be
allowed to the producer if the wine removed by the
transferee had been removed by the producer on that
date.
(7) Regulations.--The Secretary may prescribe such
regulations as may be necessary to carry out the
purposes of this subsection, including regulations--
(A) to prevent the credit provided in this
subsection from benefiting any person who
produces more than 250,000 wine gallons during
a calendar year, and
(B) to assure proper reduction of such credit
for persons producing more than 150,000 wine
gallons of wine during a calendar year.
* * * * * * *
Subpart E--General Provisions
SEC. 5061. METHOD OF COLLECTING TAX.
(a) * * *
(b) Exceptions.--Notwithstanding the provisions of subsection
(a), any taxes imposed on, or amounts to be paid or collected
in respect of, distilled spirits, wines, and beer under--
(1) section 5001(a)(4), (5), or (6),
(2) section 5006(c) or (d), (3) section 5041(e),
[(3) section 5041(e),]
(3) section 5041(f),
* * * * * * *
Subpart F--Nonbeverage Domestic Drawback Claimants
* * * * * * *
SEC. 5134. DRAWBACK.
(a) * * *
(c) Allowance of Drawback Even Where Certain Requirements Not
Met.--
(1) * * *
* * * * * * *
(3) Penalty treated as tax.--The penalty imposed by
paragraph (2) shall be assessed, collected, and paid in
the same manner as taxes, as provided in [section
6662(a)] section 6665(a).
* * * * * * *
SEC. 5206. CONTAINERS.
(a) * * *
* * * * * * *
(f) Cross References.--
(1) For other provisions relating to regulation of containers
of distilled spirits, see section 5301.
(2) For provisions relating to labeling containers of
distilled spirits of one gallon or less for nonindustrial uses,
see [section 5(e)] section 105(e) of the Federal Alcohol
Administration Act (27 U.S.C. 205(e)).
* * * * * * *
Subchapter F--Bonded and Taxpaid Wine Premises
* * * * * * *
PART II--OPERATIONS
* * * * * * *
SEC. 5354. BOND.
The bond for a bonded wine cellar shall be in such form, on
such conditions, and with such adequate surety, as regulations
issued by the Secretary shall prescribe, and shall be in a
penal sum not less than the tax on any wine or distilled
spirits possessed or in transit at any one time (taking into
account the appropriate amount of credit with respect to such
wine under section 5041(c)), but not less than $1,000 nor more
than $50,000; except that where the tax on such wine and on
such distilled spirits exceeds $250,000, the penal sum of the
bond shall be not more than $100,000. Where additional
liability arises as a result of deferral of payment of tax
payable on any return, the Secretary may require the proprietor
to file a supplemental bond in such amount as may be necessary
to protect the revenue. The liability of any person on any such
bond shall apply whether the transaction or operation on which
the liability of the proprietor is based occurred on or off the
proprietor's premises.
* * * * * * *
Subtitle F--Procedure and Administrative
* * * * * * *
CHAPTER 61--INFORMATION AND RETURNS
* * * * * * *
Subchapter A--Returns and Records
* * * * * * *
Part IX. Designation for reduction of public debt.
* * * * * * *
PART II--TAX RETURNS OR STATEMENTS
* * * * * * *
Subpart B--Income Tax Returns
* * * * * * *
SEC. 6018. ESTATE TAX RETURNS.
(a) Returns by Executor.--
(1) Citizens or residents.--In all cases where the
gross estate at the death of a citizen or resident
exceeds [$600,000] the applicable exclusion amount in
effect under section 2010(c) (as adjusted under
paragraph (2) thereof) for the calendar year which
includes the date of death, the executor shall make a
return with respect to the estate tax imposed by
subtitle B.
* * * * * * *
PART III--INFORMATION RETURNS
Subpart A--Information Concerning Persons Subject to Special Provisions
* * * * * * *
SEC. 6033. RETURNS BY EXEMPT ORGANIZATIONS.
(a) * * *
* * * * * * *
(e) Special Rules Relating to Lobbying Activities.--
(1) Reporting requirements.--
(A) * * *
(B) Organizations to which subsection
applies.--
(i) In general.--This subsection
shall apply to any organization which
is exempt from taxation under [this
subtitle] section 501 other than an
organization described in section
501(c)(3).
(ii) Special rule for in-house
expenditures.--This subsection shall
not apply to the in-house expenditures
(within the meaning of section
162(e)(5)(B)(ii)) of an organization
for a taxable year if such expenditures
do not exceed $2,000. In determining
whether a taxpayer exceeds the $2,000
limit under this clause, there shall
not be taken into account overhead
costs otherwise allocable to activities
described in subparagraphs (A) and (D)
of section 162(e)(1).
(iii) Coordination with section
527(f).--This subsection shall not
apply to any amount on which tax is
imposed by reason of section 527(f).
* * * * * * *
SEC. 6038. INFORMATION WITH RESPECT TO CERTAIN FOREIGN CORPORATIONS
(a) Requirement.--
(1) In general.--Every United States person shall
furnish, with respect to any foreign corporation which
such person controls (within the meaning of subsection
(e)(1)), such information as the Secretary may
prescribe by regulations relating to--
(A) * * *
* * * * * * *
(E) a description of the various classes of
stock outstanding, and a list showing the name
and address of, and number of shares held by,
each United States person who is a shareholder
of record owning at any time during the annual
accounting period 5 percent or more in value of
any class of stock outstanding of such foreign
corporation[, and].
[(F) such information as the Secretary may
require for purposes of carrying out the
provisions of section 453C. The Secretary may
also require the furnishing of any other
information which is similar or related in
nature to that specified in the preceding
sentence or which the Secretary determines to
be appropriate to carry out the provisions of
this title.]
* * * * * * *
[(e)] (f) Cross References.--
(1) For provisions relating to penalties for violations of
this section, see section 7203.
(2) For definition of the term ``United States person'', see
section 7701(a)(30).
SEC. 6038A. INFORMATION WITH RESPECT TO CERTAIN FOREIGN-OWNED
CORPORATIONS.
(a) * * *
(b) Required Information.--For purposes of subsection (a),
the information described in this subsection is such
information as the Secretary may prescribe by regulations
relating to--
(1) * * *
(2) the manner in which the reporting corporation is
related to each person referred to in paragraph (1),
and
(3) transactions between the reporting corporation
and each foreign person which is a related party to the
reporting corporation[, and].
[(4) such information as the Secretary may require
for purposes of carrying out the provisions of section
453C.]
* * * * * * *
(e) Enforcement of Requests for Certain Records.--
(1) * * *
* * * * * * *
(4) Judicial proceedings.--
(A) * * *
* * * * * * *
(D) Suspension of statute of limitations.--If
the reporting corporation brings an action
under subparagraph (A) or (B), the running of
any period of limitations under section 6501
(relating to assessment and collection of tax)
or under section 6531 (relating to criminal
prosecutions) with respect to [any transaction
to which the summons relates] any affected
taxable year shall be suspended for the period
during which such proceeding, and appeals
therein, are pending. In no event shall any
such period expire before the 90th day after
the day on which there is a final determination
in such proceeding. For purposes of this
subparagraph, the term ``affected taxable
year'' means any taxable year if the
determination of the amount of tax imposed for
such taxable year is affected by the treatment
of the transaction to which the summons
relates.
* * * * * * *
Subpart B--Information Concerning Transactions With Other Persons
Sec. 6041. Information at source.
* * * * * * *
Sec. 6043. Liquidating[;], etc., transactions.
* * * * * * *
Sec. 6050Q. Certain long-term care benefits.
* * * * * * *
SEC. 6043. LIQUIDATING[;], ETC., TRANSACTIONS.
(a) Corporate Liquidating, Etc., Transactions.--Every
corporation shall--
(1) Within 30 days after the adoption by the
corporation of a resolution or plan for the dissolution
of the corporation or for the liquidation of the whole
or any part of its capital stock, make a return setting
forth the terms of such resolution or plan and such
other information as the Secretary shall by forms or
regulations prescribe; and
* * * * * * *
SEC. 6050B. RETURNS RELATING TO UNEMPLOYMENT COMPENSATION.
(a) * * *
* * * * * * *
(c) Definitions.--For purposes of this section--
(1) Unemployment compensation.--The term
``unemployment compensation'' has the meaning given to
such term by [section 85(c)] section 85(b).
* * * * * * *
SEC. 6050Q. CERTAIN LONG-TERM CARE BENEFITS.
(a) Requirement of Reporting.--Any person who pays long-term
care benefits shall make a return, according to the forms or
regulations prescribed by the Secretary, setting forth--
(1) the aggregate amount of such benefits paid by
such person to any individual during any calendar year,
and
(2) the name, address, and TIN of such individual.
(b) Statements To Be Furnished to Persons With Respect to
Whom Information Is Required.--Every person required to make a
return under subsection (a) shall furnish to each individual
whose name is required to be set forth in such return a written
statement showing--
(1) the name of the person making the payments, and
(2) the aggregate amount of long-term care benefits
paid to the individual which are required to be shown
on such return.
The written statement required under the preceding sentence
shall be furnished to the individual on or before January 31 of
the year following the calendar year for which the return under
subsection (a) was required to be made.
(c) Long-Term Care Benefits.--For purposes of this section,
the term ``long-term care benefit'' has the meaning given such
term by section 91(c).
* * * * * * *
PART IX--DESIGNATION FOR REDUCTION OF PUBLIC DEBT
Sec. 6097. Designation.
SEC. 6097. DESIGNATION.
(a) In General.--Every individual with adjusted income tax
liability for any taxable year may designate that a portion of
such liability (not to exceed 10 percent thereof) shall be used
to reduce the public debt.
(b) Manner and Time of Designation.--A designation under
subsection (a) may be made with respect to any taxable year
only at the time of filing the return of tax imposed by chapter
1 for the taxable year. The designation shall be made on the
first page of the return or on the page bearing the taxpayer's
signature.
(c) Adjusted Income Tax Liability.--For purposes of this
section, the term ``adjusted income tax liability'' means
income tax liability (as defined in section 6096(b)) reduced by
any amount designated under section 6096 (relating to
designation of income tax payments to Presidential Election
Campaign Fund).
* * * * * * *
Subchapter B--Miscellaneous Provisions
* * * * * * *
SEC. 6103. CONFIDENTIALITY AND DISCLOSURE OF RETURNS AND RETURN
INFORMATION.
(a) * * *
* * * * * * *
(e) Disclosure to Persons Having Material Interest.--
(1) In general.--The return of a person shall, upon
written request, be open to inspection by or disclosure
to--
(A) in the case of the return of an
individual--
(i) * * *
* * * * * * *
(iv) the child of that individual (or
such child's legal representative) to
the extent necessary to comply with the
provisions of [section 1(g) or 59(j);]
section 1(g) or 59(j);
* * * * * * *
Subtitle F--Procedure and Administration
* * * * * * *
CHAPTER 61--INFORMATION AND RETURNS
* * * * * * *
Subchapter B--Miscellaneous Provisions
* * * * * * *
SEC. 6109. IDENTIFYING NUMBERS.
(a) * * *
* * * * * * *
[(f)] (g) Access to Employer Identification Numbers by
Federal Crop Insurance Corporation for purposes of the Federal
Crop Insurance Act.--
(1) * * *
* * * * * * *
CHAPTER 62--TIME AND PLACE FOR PAYING TAX
* * * * * * *
Subchapter B--Extensions of Time for Payment
* * * * * * *
SEC. 6166. EXTENSION OF TIME FOR PAYMENT OF ESTATE TAX WHERE ESTATE
CONSISTS LARGELY OF INTEREST IN CLOSELY HELD
BUSINESS.
(a) * * *
* * * * * * *
(k) Cross references.--
(1) * * *
* * * * * * *
[(6) Payment of estate tax by employee stock ownership plan or
eligible worker-owned cooperative.--For provision allowing plan
administrator or eligible worker-owned cooperative to elect to
pay a certain portion of the estate tax in installments under
the provisions of this section, see section 2210(c).]
* * * * * * *
CHAPTER 63--ASSESSMENT
* * * * * * *
Subchapter B--Deficiency Procedures in the Case of Income, Estate,
Gift, and Certain Excise Taxes
* * * * * * *
SEC. 6214. DETERMINATIONS BY TAX COURT.
(a) * * *
* * * * * * *
[(e) Cross references.--
[(1) For provision giving Tax Court jurisdiction to determine
whether any portion of deficiency is a substantial underpayment
attributable to tax motivated transactions, see section
6621(c)(4).
[(2) For provision giving Tax Court jurisdiction to order a
refund of an overpayment and to award sanctions, see section
6512(b)(2).]
(e) Cross Reference.--
For provision giving Tax Court jurisdiction to order a refund
of an overpayment and to award sanctions, see section
6512(b)(2).
* * * * * * *
CHAPTER 64--COLLECTION
Subchapter A--General Provisions
* * * * * * *
SEC. 6302. MODE OR TIME OF COLLECTION.
(a) * * *
* * * * * * *
(g) Deposits of Social Security Taxes and Withheld Income
Taxes.--If, under regulations prescribed by the Secretary, a
person is required to make deposits of taxes imposed by
chapters 21, 22, and 24 on the basis of eight-month periods,
such person shall make deposits of such taxes on the 1st
banking day after any day on which such person has $100,000 or
more of such taxes for deposit.
* * * * * * *
CHAPTER 65--ABATEMENTS, CREDITS, AND REFUNDS
* * * * * * *
Subchapter B--Rules of Special Application
* * * * * * *
SEC. 6416. CERTAIN TAXES ON SALES AND SERVICES.
(a) * * *
(b) Special Cases in Which Tax Payments Considered
Overpayments.--Under regulations prescribed by the Secretary,
credit or refund (without interest) shall be allowed or made in
respect of the overpayments determined under the following
paragraphs:
(1) Price readjustments.--
(A) In general.--Except as provided in
subparagraph (B) or (C), if the price of any
article in respect of which a tax, based on
such price, is imposed by [chapter 32 or by
section 4051] chapter 31 or 32, is readjusted
by reason of the return or repossession of the
article or a covering or container, or by a
bona fide discount, rebate, or allowance,
including a readjustment for local advertising
(but only to the extent provided in section
4216(e)(2) and (3)), the part of the tax
proportionate to the part of the price repaid
or credited to the purchaser shall be deemed to
be an overpayment.
* * * * * * *
CHAPTER 66--LIMITATIONS
Subchapter A--Limitations on Assessment and Collection
SEC. 6501. LIMITATIONS ON ASSESSMENT AND COLLECTION.
(a) * * *
* * * * * * *
[(m) Deficiency Attributable to Election Under Section 43 or
44B.--The period for assessing a deficiency attributable to any
election under section 43 of 44B (or any revocation therof)
shall not expire before the date 1 year after the date on which
the Secretary is notified of such elction (or revocation).]
[(n)] (m) Deficiencies attributable to election of certain
credits.--The period for assessing a deficiency attributable to
any election under [section 40(f) or 51(j)] section 30(d)(4),
40(f), 43, 45B, or 51(j) (or any revocation thereof) shall not
expire before the date 1 year after the date on which the
Secretary is notified of such election (or revocation).
[(o)] (n) Cross references.--
(1) For period of limitations for assessment and collection in
the case of a joint income return filed after separate returns
have been filed, see section 6013(b)(3) and (4).
(2) For extension of period in the case of partnership items
(as defined in section 6231(a)(3)), see section 6229.
* * * * * * *
SEC. 6503. SUSPENSION OF RUNNING OF PERIOD OF LIMITATION.
(a) * * *
* * * * * * *
[(k)] (j) Extension in Case of Certain Summonses.--
(1) In general.--If any designated summons is issued
by the Secretary with respect to any return of tax by a
corporation, the running of any period of limitations
provided in section 6501 on the assessment of such tax
shall be suspended--
(A) * * *
* * * * * * *
[(l)] (k) Cross references.--
* * * * * * *
CHAPTER 67--INTEREST
* * * * * * *
Subchapter A--Interest on Underpayments
* * * * * * *
SEC. 6601. INTEREST ON UNDERPAYMENT, NONPAYMENT, OR EXTENSIONS OF TIME
FOR PAYMENT, OF TAX.
(a) * * *
* * * * * * *
(j) 4-percent Rate on Certain Portion of Estate Tax Extended
Under Section 6166.--
(1) * * *
(2) 4-percent portion.--For purposes of this
subsection, the term ``4-percent portion'' means the
lesser of--
(A) [$345,800] the applicable limitation
amount reduced by the amount of the credit
allowable under section 2010(a); or
(B) the amount of the tax imposed by chapter
11 which is extended as provided in section
6166.
(3) Applicable limitation amount.--
(A) In general.--For purposes of paragraph
(2), the applicable limitation amount is the
amount of the tentative tax which would be
determined under the rate schedule set forth in
section 2001(c) if the amount with respect to
which such tentative tax is to be computed were
$1,000,000.
(B) Inflation adjustment.--In the case of
estates of decedents dying in a calendar year
after 1998, the $1,000,000 amount contained in
subparagraph (A) shall be increased by an
amount equal to--
(i) $1,000,000, multiplied by
(ii) the cost-of-living adjustment
determined under section 1(f)(3) for
such calendar year by substituting
``calendar year 1997'' for ``calendar
year 1992'' in subparagraph (B)
thereof.
If any amount as adjusted under the preceding
sentence is not a multiple of $10,000, such
amount shall be rounded to the nearest multiple
of $10,000.
[(3)] (4) Treatment of payments.--If the amount of
tax imposed by chapter 11 which is extended as provided
in section 6166 exceeds the 4-percent portion, any
payment of a portion of such amount shall, for purposes
of computing interest for periods after such payment,
be treated as reducing the 4-percent portion by an
amount which bears the same ratio to the amount of such
payment as the amount of the 4-percent portion
(determined without regard to this paragraph) bears to
the amount of the tax which is extended as provided in
section 6166.
* * * * * * *
Subchapter C--Determination of Interest Rate; Compounding of Interest
* * * * * * *
SEC. 6621. DETERMINATION OF RATE OF INTEREST.
(a) * * *
* * * * * * *
(c) Increase in Underpayment Rate for Large Corporate
Underpayments.--
(1) * * *
(2) Applicable rate.--For purposes of this
subsection--
(A) In general.--The applicable date is the
30th day after the earlier of--
(i) the date on which the 1st letter
of proposed deficiency which allows the
taxpayer an opportunity for
administrative review in the Internal
Revenue Service Office of Appeals is
sent, or
(ii) the date on which the deficiency
notice under section 6212 is sent.
The preceding sentence shall be applied without
regard to any such letter or notice which is
withdrawn by the Secretary.
(B) Special rules.--
(i) Nondeficiency procedures.--In the
case of any underpayment of any tax
imposed by [this subtitle] this title
to which the deficiency procedures do
not apply, subparagraph (A) shall be
applied by taking into account any
letter or notice provided by the
Secretary which notifies the taxpayer
of the assessment or proposed
assessment of the tax.
* * * * * * *
CHAPTER 68--ADDITIONS TO THE TAX, ADDITIONAL AMOUNTS, AND ASSESSABLE
PENALTIES
* * * * * * *
Subchapter A--Additions to the Tax and Additional Amounts
* * * * * * *
PART I--GENERAL PROVISIONS
Sec. 6651. Failure to file tax return or pay taxes.
* * * * * * *
[Sec. 6662. Applicable rules.]
* * * * * * *
Subchapter B--Assessable Penalites
* * * * * * *
PART I--GENERAL PROVISIONS
Sec. 6671. Rules for application of assessable penalties.
* * * * * * *
Sec. [6714.] 6715. Dyed fuel sold for use or used in taxable
use, etc.
* * * * * * *
SEC. 6655. FAILURE BY CORPORATION TO PAY ESTIMATED INCOME TAX.
(a) * * *
* * * * * * *
(g) Definitions and Special Rules.--
(1) * * *
* * * * * * *
(3) Certain tax-exempt organizations.--For purposes
of this section--
(A) * * *
* * * * * * *
(C) Any reference to taxable income shall be
treated as including a reference to unrelated
business taxable income or net investment
income (as the case may be).
In the case of any organization described in subparagraph (A),
subsection (b)(2)(A) shall be applied by substituting ``5th
month'' for ``3rd month''[, and, except in the case of an
election under subsection (e)(2)(C), subsection (e)(2)(A) shall
be applied by substituting ``2 months'' for ``3 months'' and in
clause (i)(I), by substituting ``4 months'' for ``5 months'' in
clause (i)(II), by substituting ``7 months'' for ``8 months''
in clause (i)(III), and by substituting ``10 months'' for ``11
months'' in clause (i)(IV).], subsection (e)(2)(A) shall be
applied by substituting ``2 months'' for ``3 months'' in clause
(i)(I), the election under clause (i) of subsection (e)(2)(C)
may be made separately for each installment, and clause (ii) of
subsection (e)(2)(C) shall not apply.
* * * * * * *
Subchapter B--Assessable Penalties
PART I--GENERAL PROVISIONS
* * * * * * *
SEC. [6714.] 6715. DYED FUEL SOLD FOR USE OR USED IN TAXABLE USE, ETC.
(a) Imposition of penalty.--If--
(1) any dyed fuel is sold or held for sale by any
person for any use which such person knows or has
reason to know is not a nontaxable use of such fuel,
* * * * * * *
PART II--FAILURE TO COMPLY WITH CERTAIN INFORMATION REPORTING
REQUIREMENTS
* * * * * * *
SEC. 6724. WAIVER; DEFINITIONS AND SPECIAL RULES.
(a) * * *
* * * * * * *
(d) Definitions.--For purposes of this part--
(1) Information return.--The term ``information
return'' means--
(A) * * *
(B) any return required by--
(i) * * *
* * * * * * *
(ix) section 6050Q (relating to
certain long-term care benefits),
[(ix)] (x) section 6052(a) (relating
to reporting payment of wages in the
form of group-life insurance),
[(x)] (xi) section 6053(c)(1)
(relating to reporting with respect to
certain tips),
[(xi)] (xii) subsection (b) or (e) of
section 1060(b) (relating to reporting
requirements of transferors and
transferees in certain asset
acquisitions),
[(xii)] (xiii) subparagraph (A) or
(C) of subsection (c)(4), or section
4093 (relating to information reporting
with respect to tax on diesel and
aviation fuels), [or]
[(xiii)] (xiv) section 4101(d)
(relating to information reporting with
respect to fuels taxes)[.], or
[(xiv)] (xv) subparagraph (C) of
section 338(h)(10) (relating to
information required to be furnished to
the Secretary in case of elective
recognition of gain or loss).
Such term also includes any form, statement, or
schedule required to be filed with the Secretary with
respect to any amount from which tax was required to be
deducted and withheld under chapter 3 (or from which
tax would be required to be so deducted and withheld
but for an exemption under this title or any treaty
obligation of the United States).
(2) Payee statement.--The term ``payee statement''
means any statement required to be furnished under--
(A) * * *
* * * * * * *
(Q) section 6050Q(b) (relating to certain
long-term care benefits),
[(Q)] (R) section 6051 (relating to receipts
for employees),
[(R)] (S) section 6052(b) (relating to
returns regarding payment of wages in the form
of group-term life insurance),
[(S)] (T) section 6053(b) or (c) (relating to
reports of tips), or
[(T)] (U) section 4093(c)(4)(B) (relating to
certain purchasers of diesel and aviation
fuels).
Such term also includes any form, statement, or
schedule required to be furnished to the recipient of
any amount from which tax was required to be deducted
and withheld under chapter 3 (or from which tax would
be required to be so deducted and withheld but for an
exemption under this title or any treaty obligation of
the United States).
(3) Specified information reporting requirement.--The
term ``specified information reporting requirement''
means--
(A) * * *
* * * * * * *
(E) any requirement under [section 6109(f)]
section 6109(h) that--
(i) a person include on his return
the name, address, and TIN of another
person, or
(ii) a person furnish his TIN to
another person.
* * * * * * *
CHAPTER 72--LICENSING AND REGISTRATION
* * * * * * *
Subchapter B--Registration
* * * * * * *
SEC. 7012. CROSS REFERENCES.
(1) * * *
* * * * * * *
(3) For provisions relating to registration in relation to the
[production or importation of gasoline] taxes on gasoline and
diesel fuel, see section 4101.
[(4) For provisions relating to registration in relation to
the manufacture or production of lubricating oils, see section
4101.
[(5)] (4) For penalty for failure to register, see section
7272.
[(6)] (5) For other penalties for failure to register with
respect to wagering, see section 7262.
* * * * * * *
CHAPTER 75--CRIMES, OTHER OFFENSES, AND FORFEITURES
Subchapter A--Crimes
* * * * * * *
PART II--PENALTIES APPLICABLE TO CERTAIN TAXES
Sec. 7231. Failure to obtain license for collection foreign
items.
Sec. 7232. Failure to register, or false statement by
manufacturer or producer of gasoline, [lubricating
oil,] diesel fuel, or aviation fuel.
* * * * * * *
SEC. 7232. FAILURE TO REGISTER, OR FALSE STATEMENT BY MANUFACTURER OR
PRODUCER OF GASOLINE, [LUBRICATING OIL,] DIESEL
FUEL, OR AVIATION FUEL.
Every person who fails to register as required by section
4101, or who in connection with any purchase of gasoline,
[lubricating oil,] diesel fuel, or aviation fuel falsely
represents himself to be registered as provided by section
4101, or who willfully makes any false statement in an
application for registration under section 4101, shall, upon
conviction thereof, be fined not more than $5,000, or
imprisoned not more than 5 years, or both, together with the
costs of prosecution.
* * * * * * *
CHAPTER 76--JUDICIAL PROCEEDINGS
* * * * * * *
Subchapter C--The Tax Court
* * * * * * *
PART II--PROCEDURE
* * * * * * *
SEC. 7454. BURDEN OF PROOF IN FRAUD, FOUNDATION MANAGER, AND TRANSFEREE
CASES.
(a) * * *
(b) Foundation Managers.--In any proceeding involving the
issue whether a foundation manager (as defined in section
4946(b)) has ``knowingly'' participated in an act of self-
dealing (within the meaning of section 4941), participated in
an investment which jeopardizes the carrying out of exempt
purposes (within the meaning of section 4944), or agreed to the
making of a taxable expenditure (within the meaning of section
4945), or whether the trustee of a trust described in section
501(c)(21) has ``knowingly'' participated in an act of self-
dealing (within the meaning of section 4951) or agreed to the
making of a taxable expenditure (within the meaning of section
4952), or whether an organization manager (as defined in
[section 4955(e)(2)] section 4955(f)(2)) has ``knowingly''
agreed to the making of a political expenditure (within the
meaning of section 4955), or whether an organization manager
(as defined in section 4912(d)(2)) has ``knowingly'' agreed to
the making of disqualifying lobbying expenditures within the
meaning of section 4912(b), the burden of proof in respect of
such issue shall be upon the Secretary.
* * * * * * *
CHAPTER 77--MISCELLANEOUS PROVISIONS
* * * * * * *
SEC. 7518. TAX INCENTIVES RELATING TO MERCHANT MARINE CAPITAL
CONSTRUCTION FUNDS.
(a) * * *
* * * * * * *
(g) Tax Treatment of Nonqualified Withdrawals.--
(1) * * *
* * * * * * *
(6) Nonqualified withdrawals taxed at highest
marginal rate.--
(A) In general.--In the case of any taxable
year for which there is a nonqualified
withdrawal (including any amount so treated
under paragraph (5)), the tax imposed by
chapter 1 shall be determined--
(i) by excluding such withdrawal from
gross income, and
(ii) by increasing the tax imposed by
chapter 1 by the product of the amount
of such withdrawal and the highest rate
of tax specified in section 1 (section
11 in the case of a corporation).
With respect to the portion of any nonqualified
withdrawal made out of the capital gain account [during
a taxable year to which section 1(h) or 1201(a)
applies], the rate of tax taken into account under the
preceding sentence shall not exceed [28 percent (34
percent] 19.8 percent (25 percent in the case of a
corporation).
* * * * * * *
CHAPTER 78--DISCOVERY OF LIABILITY AND ENFORCEMENT OF TITLE
Subchapter A--Examination and Inspection
* * * * * * *
SEC. 7611. RESTRICTIONS ON CHURCH TAX INQUIRIES AND EXAMINATIONS.
(a) * * *
* * * * * * *
(h) Definitions.--For purposes of this section--
(1) * * *
* * * * * * *
(7) Appropriate high-level Treasury official.--The
term ``[approporiate] appropriate high-level Treasury
official'' means the Secretary of the Treasury or any
delegate of the Secretary whose rank is no lower than
that of a principal Internal Revenue officer for an
internal revenue region.
* * * * * * *
CHAPTER 79--DEFINITIONS
Sec. 7701. Definitions.
* * * * * * *
Sec. 7702B. Treatment of long-term care insurance.
* * * * * * *
SEC. 7702B. TREATMENT OF LONG-TERM CARE INSURANCE.
(a) In General.--For purposes of this title--
(1) a long-term care insurance contract shall be
treated as an accident and health insurance contract,
(2) amounts (other than policyholder dividends, as
defined in section 808, or premium refunds) received
under a long-term care insurance contract shall be
treated as amounts received for personal injuries and
sickness and shall be treated as reimbursement for
expenses actually incurred for medical care (as defined
in section 213(d)),
(3) any plan of an employer providing coverage under
a long-term care insurance contract shall be treated as
an accident and health plan with respect to such
coverage,
(4) except as provided in subsection (d)(3), amounts
paid for a long-term care insurance contract providing
the benefits described in subsection (b)(2)(A) shall be
treated as payments made for insurance for purposes of
section 213(d)(1)(D), and
(5) a long-term care insurance contract shall be
treated as a guaranteed renewable contract subject to
the rules of section 816(e).
(b) Long-Term Care Insurance Contract.--For purposes of this
title--
(1) In general.--The term ``long-term care insurance
contract'' means any insurance contract if--
(A) the only insurance protection provided
under such contract is coverage of qualified
long-term care services,
(B) such contract does not pay or reimburse
expenses incurred for services or items to the
extent that such expenses are reimbursable
under title XVIII of the Social Security Act or
would be so reimbursable but for the
application of a deductible or coinsurance
amount,
(C) such contract is guaranteed renewable,
(D) such contract does not provide for a cash
surrender value or other money that can be--
(i) paid, assigned, or pledged as
collateral for a loan, or
(ii) borrowed,
other than as provided in subparagraph (E) or
paragraph (2)(C), and
(E) all refunds of premiums, and all
policyholder dividends or similar amounts,
under such contract are to be applied as a
reduction in future premiums or to increase
future benefits.
(2) Special rules.--
(A) Per diem, etc. payments permitted.--A
contract shall not fail to be described in
subparagraph (A) or (B) of paragraph (1) by
reason of payments being made on a per diem or
other periodic basis without regard to the
expenses incurred during the period to which
the payments relate.
(B) Special rules relating to medicare.--
(i) Paragraph (1)(B) shall not apply
to expenses which are reimbursable
under title XVIII of the Social
Security Act only as a secondary payor.
(ii) No provision of law shall be
construed or applied so as to prohibit
the offering of a long-term care
insurance contract on the basis that
the contract coordinates its benefits
with those provided under such title.
(C) Refunds of premiums.--Paragraph (1)(E)
shall not apply to any refund on the death of
the insured, or on a complete surrender or
cancellation of the contract, which cannot
exceed the aggregate premiums paid under the
contract. Any refund on a complete surrender or
cancellation of the contract shall be
includible in gross income to the extent that
any deduction or exclusion was allowable with
respect to the premiums.
(c) Qualified Long-Term Care Services.--For purposes of this
section--
(1) In general.--The term ``qualified long-term care
services'' means necessary diagnostic, preventive,
therapeutic, curing, treating, mitigating, and
rehabilitative services, and maintenance or personal
care services, which--
(A) are required by a chronically ill
individual, and
(B) are provided pursuant to a plan of care
prescribed by a licensed health care
practitioner.
(2) Chronically ill individual.--
(A) In general.--The term ``chronically ill
individual'' means any individual who has been
certified by a licensed health care
practitioner as--
(i) being unable to perform (without
substantial assistance from another
individual) at least 2 activities of
daily living for a period of at least
90 days due to a loss of functional
capacity or to cognitive impairment, or
(ii) having a level of disability
similar (as determined by the Secretary
in consultation with the Secretary of
Health and Human Services) to the level
of disability described in clause (i).
Such term shall not include any individual
otherwise meeting the requirements of the
preceding sentence unless within the preceding
12-month period a licensed health care
practitioner has certified that such individual
meets such requirements.
(B) Activities of daily living.--For purposes
of subparagraph (A), each of the following is
an activity of daily living:
(i) Eating.
(ii) Toileting.
(iii) Transferring.
(iv) Bathing.
(v) Dressing.
(vi) Continence.
Nothing in this section shall be construed to
require a contract to take into account all of
the preceding activities of daily living.
(3) Maintenance or personal care services.--The term
``maintenance or personal care services'' means any
care the primary purpose of which is the provision of
needed assistance with any of the disabilities as a
result of which the individual is a chronically ill
individual (including the protection from threats to
health and safety due to severe cognitive impairment).
(4) Licensed health care practitioner.--The term
``licensed health care practitioner'' means any
physician (as defined in section 1861(r)(1) of the
Social Security Act) and any registered professional
nurse, licensed social worker, or other individual who
meets such requirements as may be prescribed by the
Secretary.
(d) Treatment of Coverage Provided as Part of a Life
Insurance Contract.--Except as otherwise provided in
regulations prescribed by the Secretary, in the case of any
long-term care insurance coverage (whether or not qualified)
provided by a rider on a life insurance contract--
(1) In general.--This section shall apply as if the
portion of the contract providing such coverage is a
separate contract.
(2) Application of 7702.--Section 7702(c)(2)
(relating to the guideline premium limitation) shall be
applied by increasing the guideline premium limitation
with respect to a life insurance contract, as of any
date--
(A) by the sum of any charges (but not
premium payments) against the life insurance
contract's cash surrender value (within the
meaning of section 7702(f)(2)(A)) for such
coverage made to that date under the contract,
less
(B) any such charges the imposition of which
reduces the premiums paid for the contract
(within the meaning of section 7702(f)(1)).
(3) Application of section 213.--No deduction shall
be allowed under section 213(a) for charges against the
life insurance contract's cash surrender value
described in paragraph (2), unless such charges are
includible in income as a result of the application of
section 72(e)(10) and the rider is a long-term care
insurance contract under subsection (b).
(4) Portion defined.--For purposes of this
subsection, the term ``portion'' means only the terms
and benefits under a life insurance contract that are
in addition to the terms and benefits under the
contract without regard to the coverage under a long-
term care insurance contract.
* * * * * * *
CHAPTER 80--GENERAL RULES
* * * * * * *
Subchapter C--Provisions Affecting More Than One Subtitle
* * * * * * *
SEC. 7872. TREATMENT OF LOANS WITH BELOW-MARKET INTEREST RATES.
(a) Treatment of Gift Loans and Demand Loans.--
(1) In general.--For purposes of this title, in the
case of any below-market loan to which this section
applies and which is a gift loan or a demand loan, the
[foregone] forgone interest shall be treated as--
(A) transferred from the lender to the
borrower, and
(B) retransferred by the borrower to the
lender as interest.
(2) Time when transfers made.--Except as otherwise
provided in regulations prescribed by the Secretary,
any [foregone] forgone interest attributable to periods
during any calendar year shall be treated as
transferred (and retransferred) under paragraph (1) on
the last day of such calendar year.
* * * * * * *
(e) Definitions of Below-Market Loan and [Foregone] Forgone
Interest.--For purposes of this section--
(1) * * *
(2) [Foregone] Forgone interest.--The term
``[foregone] forgone interest'' means, with respect to
any period during which the loan is outstanding, the
excess of--
(A) the amount of interest which would have
been payable on the loan for the period if
interest accrued on the loan at the applicable
Federal rate and were payable annually on the
day referred to in subsection (a)(2), over
(B) any interest payable on the loan properly
allocable to such period.
* * * * * * *
Subtitle I--Trust Fund Code
CHAPTER 98--TRUST FUND CODE
Subchapter A--Establishment of Trust Funds
Sec. 9501. Black Lung Disability Trust Fund.
* * * * * * *
Sec. 9512. Public Debt Reduction Trust Fund.
* * * * * * *
SEC. 9502. AIRPORT AND AIRWAY TRUST FUND.
(a) * * *
(b) Transfer to Airport and Airway Trust Fund of amounts
equivalent to certain taxes.--There is hereby appropriated to
the Airport and Airway Trust Fund--
(1) amounts equivalent to the taxes received in the
Treasury after August 31, 1982, and before January 1,
1996, under subsections (c) and (e) of section 4041
(taxes on aviation fuel) and under sections 4261 and
4271 (taxes on transportation by air);
(2) amounts determined by the Secretary of the
Treasury to be equivalent to the taxes received in the
Treasury after August 31, and before 1982, and before
January 1, 1996, under section 4081 (to the extent of
14 cents per gallon), with respect to gasoline used in
aircraft;
* * * * * * *
SEC. 9512. PUBLIC DEBT REDUCTION TRUST FUND.
(a) Creation of Trust Fund.--There is established in the
Treasury of the United States a trust fund to be known as the
``Public Debt Reduction Trust Fund'', consisting of any amount
appropriated or credited to the Trust Fund as provided in this
section or section 9602(b).
(b) Transfers to Trust Fund.--There are hereby appropriated
to the Public Debt Reduction Trust Fund amounts equivalent to
the amounts designated under section 6097 (relating to
designation for public debt reduction).
(c) Expenditures.--Amounts in the Public Debt Reduction Trust
Fund shall be used by the Secretary of the Treasury for
purposes of paying at maturity, or to redeem or buy before
maturity, any obligation of the Federal Government included in
the public debt (other than an obligation held by the Federal
Old-Age and Survivors Insurance Trust Fund, the Civil Service
Retirement and Disability Fund, or the Department of Defense
Military Retirement Fund). Any obligation which is paid,
redeemed, or bought with amounts from the Public Debt Reduction
Trust Fund shall be canceled and retired and may not be
reissued.
* * * * * * *
Subtitle J--Coal Industry Health Benefits
CHAPTER 99--COAL INDUSTRY HEALTH BENEFITS
* * * * * * *
Subchapter B--Combined Benefit Fund
* * * * * * *
PART III--ENFORCEMENT
* * * * * * *
SEC. 9707. FAILURE TO PAY PREMIUM.
(a) * * *
* * * * * * *
(d) Limitations on Amount of Penalty.--
(1) In general.--No penalty shall be imposed by
subsection (a) on any failure during any period for
which it is established to the satisfaction of the
Secretary of the Treasury that none of the persons
responsible for such failure knew, or exercising
reasonable diligence[,] would have known, that such
failure existed.
* * * * * * *
----------
SECTION 121 OF THE SOCIAL SECURITY AMENDMENTS OF 1983
SEC. 121. TAXATION OF SOCIAL SECURITY AND TIER 1 RAILROAD RETIREMENT
BENEFITS.
(a) * * *
* * * * * * *
(e) Transfers to Trust Funds.--
(1) In general.--[(A)] There are hereby appropriated
to each payor fund amounts equivalent to [(i)] the
aggregate increase in tax liabilities under chapter 1
of the Internal Revenue Code of 1986 which is
attributable to the application of sections 86 and
871(a)(3) of such Code (as added by this section) to
payments from such payor fund [, less (ii) the amounts
equivalent to the aggregate increase in tax liabilities
under chapter 1 of the Internal Revenue Code of 1986
which is attributable to the amendments to section 86
of such Code made by section 13215 of the Revenue
Reconciliation Act of 1993.
[(B) There are hereby appropriated to the hospital
insurance trust fund amounts equal to the increase in
tax liabilities described in subparagraph (A)(ii). Such
appropriated amounts shall be transferred from the
general fund of the Treasury on the basis of estimates
of such tax liabilities made by the Secretary of the
Treasury. Transfers shall be made pursuant to a
schedule made by the Secretary of the Treasury that
takes into account estimated timing of collection of
such liabilities].
(2) Transfers.--The amounts appropriated by paragraph
(1)[(A)] to any payor fund shall be transferred from
time to time (but not less frequently than quarterly)
from the general fund of the Treasury on the basis of
estimates made by the Secretary of the Treasury of the
amounts referred to in such paragraph. Any such
quarterly payment shall be made on the first day of
such quarter and shall take into account social
security benefits estimated to be received during such
quarter. Proper adjustments shall be made in the
amounts subsequently transferred to the extent prior
estimates were in excess of or less than the amounts
required to be transferred.
(3) Definitions.--For purposes of this subsection--
(A) Payor fund.--The term ``payor fund''
means any trust fund or account from which
payments of social security benefits are made.
[(B) Hospital insurance trust fund.--The term
``hospital insurance trust fund'' means the
fund established pursuant to section 1817 of
the Social Security Act''.
[(C)] Social security benefits.--The term
``social security benefits'' has the meaning
given such term by section 86(d)(1) of the
Internal Revenue Code of 1954.
* * * * * * *
----------
REVENUE RECONCILIATION ACT OF 1993
* * * * * * *
TITLE XIII--REVENUE, HEALTH CARE, HUMAN RESOURCES, INCOME SECURITY,
CUSTOMS AND TRADE, FOOD STAMP PROGRAM, AND TIMBER SALE PROVISIONS
CHAPTER 1--REVENUE PROVISIONS
SEC. 13001. SHORT TITLE; ETC.
(a) Short Title.--This chapter may be cited as the ``Revenue
Reconciliation Act of 1993''.
* * * * * * *
CHAPTER 1--REVENUE PROVISIONS
* * * * * * *
Subchapter A--Training and Investment Incentives
* * * * * * *
PART II--INVESTMENT INCENTIVES
* * * * * * *
Subpart B--Capital Gain Provisions
[SEC. 13113. 50-PERCENT EXCLUSION FOR GAIN FROM CERTAIN SMALL BUSINESS
STOCK.
[(a) General Rule.--Part I of subchapter P of chapter 1
(relating to capital gains and losses) is amended by adding at
the end thereof the following new section:
[``SEC. 1202. 50-PERCENT EXCLUSION FOR GAIN FROM CERTAIN SMALL BUSINESS
STOCK.
[``(a) 50-Percent Exclusion.--In the case of a taxpayer other
than a corporation, gross income shall not include 50 percent
of any gain from the sale or exchange of qualified small
business stock held for more than 5 years.
[``(b) Per-Issuer Limitation on Taxpayer's Eligible Gain.--
[``(1) In general.--If the taxpayer has eligible gain
for the taxable year from 1 or more dispositions of
stock issued by any corporation, the aggregate amount
of such gain from dispositions of stock issued by such
corporation which may be taken into account under
subsection (a) for the taxable year shall not exceed
the greater of--
[``(A) $10,000,000 reduced by the aggregate
amount of eligible gain taken into account by
the taxpayer under subsection (a) for prior
taxable years and attributable to dispositions
of stock issued by such corporation, or
[``(B) 10 times the aggregate adjusted bases
of qualified small business stock issued by
such corporation and disposed of by the
taxpayer during the taxable year.
For purposes of subparagraph (B), the adjusted basis of
any stock shall be determined without regard to any
addition to basis after the date on which such stock
was originally issued.
[``(2) Eligible gain.--For purposes of this
subsection, the term `eligible gain' means any gain
from the sale or exchange of qualified small business
stock held for more than 5 years.
[``(3) Treatment of married individuals.--
[``(A) Separate returns.--In the case of a
separate return by a married individual,
paragraph (1)(A) shall be applied by
substituting `$5,000,000' for `$10,000,000'.
[``(B) Allocation of exclusion.--In the case
of any joint return, the amount of gain taken
into account under subsection (a) shall be
allocated equally between the spouses for
purposes of applying this subsection to
subsequent taxable years.
[``(C) Marital status.--For purposes of this
subsection, marital status shall be determined
under section 7703.
[``(c) Qualified Small Business Stock.--For purposes of this
section--
[``(1) In general.--Except as otherwise provided in
this section, the term `qualified small business stock'
means any stock in a C corporation which is originally
issued after the date of the enactment of the Revenue
Reconciliation Act of 1993, if--
[``(A) as of the date of issuance, such
corporation is a qualified small business, and
[``(B) except as provided in subsections (f)
and (h), such stock is acquired by the taxpayer
at its original issue (directly or through an
underwriter)--
[``(i) in exchange for money or other
property (not including stock), or
[``(ii) as compensation for services
provided to such corporation (other
than services performed as an
underwriter of such stock).
[``(2) Active business requirement; etc.--
[``(A) In general.--Stock in a corporation
shall not be treated as qualified small
business stock unless, during substantially all
of the taxpayer's holding period for such
stock, such corporation meets the active
business requirements of subsection (e) and
such corporation is a C corporation.
[``(B) Special rule for certain small
business investment companies.--
[``(i) Waiver of active business
requirement.--Notwithstanding any
provision of subsection (e), a
corporation shall be treated as meeting
the active business requirements of
such subsection for any period during
which such corporation qualifies as a
specialized small business investment
company.
[``(ii) Specialized small business
investment company.--For purposes of
clause (i), the term `specialized small
business investment company' means any
eligible corporation (as defined in
subsection (e)(4)) which is licensed to
operate under section 301(d) of the
Small Business Investment Act of 1958
(as in effect on May 13, 1993).
[``(3) Certain purchases by corporation of its own
stock.--
[``(A) Redemptions from taxpayer or related
person.--Stock acquired by the taxpayer shall
not be treated as qualified small business
stock if, at any time during the 4-year period
beginning on the date 2 years before the
issuance of such stock, the corporation issuing
such stock purchased (directly or indirectly)
any of its stock from the taxpayer or from a
person related (within the meaning of section
267(b) or 707(b)) to the taxpayer.
[``(B) Significant redemptions.--Stock issued
by a corporation shall not be treated as
qualified business stock if, during the 2-year
period beginning on the date 1 year before the
issuance of such stock, such corporation made 1
or more purchases of its stock with an
aggregate value (as of the time of the
respective purchases) exceeding 5 percent of
the aggregate value of all of its stock as of
the beginning of such 2-year period.
[``(C) Treatment of certain transactions.--If
any transaction is treated under section 304(a)
as a distribution in redemption of the stock of
any corporation, for purposes of subparagraphs
(A) and (B), such corporation shall be treated
as purchasing an amount of its stock equal to
the amount treated as such a distribution under
section 304(a).
[``(d) Qualified Small Business.--For purposes of this
section--
[``(1) In general.--The term `qualified small
business' means any domestic corporation which is a C
corporation if--
[``(A) the aggregate gross assets of such
corporation (or any predecessor thereof) at all
times on or after the date of the enactment of
the Revenue Reconciliation Act of 1993 and
before the issuance did not exceed $50,000,000,
[``(B) the aggregate gross assets of such
corporation immediately after the issuance
(determined by taking into account amounts
received in the issuance) do not exceed
$50,000,000, and
[``(C) such corporation agrees to submit such
reports to the Secretary and to shareholders as
the Secretary may require to carry out the
purposes of this section.
[``(2) Aggregate gross assets.--
[``(A) In general.--For purposes of paragraph
(1), the term `aggregate gross assets' means
the amount of cash and the aggregate adjusted
bases of other property held by the
corporation.
[``(B) Treatment of contributed property.--
For purposes of subparagraph (A), the adjusted
basis of any property contributed to the
corporation (or other property with a basis
determined in whole or in part by reference to
the adjusted basis of property so contributed)
shall be determined as if the basis of the
property contributed to the corporation
(immediately after such contribution) were
equal to its fair market value as of the time
of such contribution.
[``(3) Aggregation rules.--
[``(A) In general.--All corporations which
are members of the same parent-subsidiary
controlled group shall be treated as 1
corporation for purposes of this subsection.
[``(B) Parent-subsidiary controlled group.--
For purposes of subparagraph (A), the term
`parent-subsidiary controlled group' means any
controlled group of corporations as defined in
section 1563(a)(1), except that--
[``(i) `more than 50 percent' shall
be substituted for `at least 80
percent' each place it appears in
section 1563(a)(1), and
[``(ii) section 1563(a)(4) shall not
apply.
[``(e) Active Business Requirement.--
[``(1) In general.--For purposes of subsection
(c)(2), the requirements of this subsection are met by
a corporation for any period if during such period--
[``(A) at least 80 percent (by value) of the
assets of such corporation are used by such
corporation in the active conduct of 1 or more
qualified trades or businesses, and
[``(B) such corporation is an eligible
corporation.
[``(2) Special rule for certain activities.--For
purposes of paragraph (1), if, in connection with any
future qualified trade or business, a corporation is
engaged in--
[``(A) start-up activities described in
section 195(c)(1)(A),
[``(B) activities resulting in the payment or
incurring of expenditures which may be treated
as research and experimental expenditures under
section 174, or
[``(C) activities with respect to in-house
research expenses described in section
41(b)(4),
assets used in such activities shall be treated as used
in the active conduct of a qualified trade or business.
Any determination under this paragraph shall be made
without regard to whether a corporation has any gross
income from such activities at the time of the
determination.
[``(3) Qualified trade or business.--For purposes of
this subsection, the term `qualified trade or business'
means any trade or business other than--
[``(A) any trade or business involving the
performance of services in the fields of
health, law, engineering, architecture,
accounting, actuarial science, performing arts,
consulting, athletics, financial services,
brokerage services, or any trade or business
where the principal asset of such trade or
business is the reputation or skill of 1 or
more of its employees,
[``(B) any banking, insurance, financing,
leasing, investing, or similar business,
[``(C) any farming business (including the
business of raising or harvesting trees),
[``(D) any business involving the production
or extraction of products of a character with
respect to which a deduction is allowable under
section 613 or 613A, and
[``(E) any business of operating a hotel,
motel, restaurant, or similar business.
[``(4) Eligible corporation.--For purposes of this
subsection, the term `eligible corporation' means any
domestic corporation; except that such term shall not
include--
[``(A) a DISC or former DISC,
[``(B) a corporation with respect to which an
election under section 936 is in effect or
which has a direct or indirect subsidiary with
respect to which such an election is in effect,
[``(C) a regulated investment company, real
estate investment trust, or REMIC, and
[``(D) a cooperative.
[``(5) Stock in other corporations.--
[``(A) Look-thru in case of subsidiaries.--
For purposes of this subsection, stock and debt
in any subsidiary corporation shall be
disregarded and the parent corporation shall be
deemed to own its ratable share of the
subsidiary's assets, and to conduct its ratable
share of the subsidiary's activities.
[``(B) Portfolio stock or securities.--A
corporation shall be treated as failing to meet
the requirements of paragraph (1) for any
period during which more than 10 percent of the
value of its assets (in excess of liabilities)
consists of stock or securities in other
corporations which are not subsidiaries of such
corporation (other than assets described in
paragraph (6)).
[``(C) Subsidiary.--For purposes of this
paragraph, a corporation shall be considered a
subsidiary if the parent owns more than 50
percent of the combined voting power of all
classes of stock entitled to vote, or more than
50 percent in value of all outstanding stock,
of such corporation.
[``(6) Working capital.--For purposes of paragraph
(1)(A), any assets which--
[``(A) are held as a part of the reasonably
required working capital needs of a qualified
trade or business of the corporation, or
[``(B) are held for investment and are
reasonably expected to be used within 2 years
to finance research and experimentation in a
qualified trade or business or increases in
working capital needs of a qualified trade or
business,
shall be treated as used in the active conduct of a
qualified trade or business. For periods after the
corporation has been in existence for at least 2 years,
in no event may more than 50 percent of the assets of
the corporation qualify as used in the active conduct
of a qualified trade or business by reason of this
paragraph.
[``(7) Maximum real estate holdings.--A corporation
shall not be treated as meeting the requirements of
paragraph (1) for any period during which more than 10
percent of the total value of its assets consists of
real property which is not used in the active conduct
of a qualified trade or business. For purposes of the
preceding sentence, the ownership of, dealing in, or
renting of real property shall not be treated as the
active conduct of a qualified trade or business.
[``(8) Computer software royalties.--For purposes of
paragraph (1), rights to computer software which
produces active business computer software royalties
(within the meaning of section 543(d)(1)) shall be
treated as an asset used in the active conduct of a
trade or business.
[``(f) Stock Acquired on Conversion of Other Stock.--If any
stock in a corporation is acquired solely through the
conversion of other stock in such corporation which is
qualified small business stock in the hands of the taxpayer--
[``(1) the stock so acquired shall be treated as
qualified small business stock in the hands of the
taxpayer, and
[``(2) the stock so acquired shall be treated as
having been held during the period during which the
converted stock was held.
[``(g) Treatment of Pass-Thru Entities.--
[``(1) In general.--If any amount included in gross
income by reason of holding an interest in a pass-thru
entity meets the requirements of paragraph (2)--
[``(A) such amount shall be treated as gain
described in subsection (a), and
[``(B) for purposes of applying subsection
(b), such amount shall be treated as gain from
a disposition of stock in the corporation
issuing the stock disposed of by the pass-thru
entity and the taxpayer's proportionate share
of the adjusted basis of the pass-thru entity
in such stock shall be taken into account.
[``(2) Requirements.--An amount meets the
requirements of this paragraph if--
[``(A) such amount is attributable to gain on
the sale or exchange by the pass-thru entity of
stock which is qualified small business stock
in the hands of such entity (determined by
treating such entity as an individual) and
which was held by such entity for more than 5
years, and
[``(B) such amount is includible in the gross
income of the taxpayer by reason of the holding
of an interest in such entity which was held by
the taxpayer on the date on which such pass-
thru entity acquired such stock and at all
times thereafter before the disposition of such
stock by such pass-thru entity.
[``(3) Limitation based on interest originally held
by taxpayer.--Paragraph (1) shall not apply to any
amount to the extent such amount exceeds the amount to
which paragraph (1) would have applied if such amount
were determined by reference to the interest the
taxpayer held in the pass-thru entity on the date the
qualified small business stock was acquired.
[``(4) Pass-thru entity.--For purposes of this
subsection, the term `pass-thru entity' means--
[``(A) any partnership,
[``(B) any S corporation,
[``(C) any regulated investment company, and
[``(D) any common trust fund.
[``(h) Certain Tax-Free and Other Transfers.--For purposes of
this section--
[``(1) In general.--In the case of a transfer
described in paragraph (2), the transferee shall be
treated as--
[``(A) having acquired such stock in the same
manner as the transferor, and
[``(B) having held such stock during any
continuous period immediately preceding the
transfer during which it was held (or treated
as held under this subsection) by the
transferor.
[``(2) Description of transfers.--A transfer is
described in this subsection if such transfer is--
[``(A) by gift,
[``(B) at death, or
[``(C) from a partnership to a partner of
stock with respect to which requirements
similar to the requirements of subsection (g)
are met at the time of the transfer (without
regard to the 5-year holding period
requirement).
[``(3) Certain rules made applicable.--Rules similar
to the rules of section 1244(d)(2) shall apply for
purposes of this section.
[``(4) Incorporations and reorganizations involving
nonqualified stock.--
[``(A) In general.--In the case of a
transaction described in section 351 or a
reorganization described in section 368, if
qualified small business stock is exchanged for
other stock which would not qualify as
qualified small business stock but for this
subparagraph, such other stock shall be treated
as qualified small business stock acquired on
the date on which the exchanged stock was
acquired.
[``(B) Limitation.--This section shall apply
to gain from the sale or exchange of stock
treated as qualified small business stock by
reason of subparagraph (A) only to the extent
of the gain which would have been recognized at
the time of the transfer described in
subparagraph (A) if section 351 or 368 had not
applied at such time. The preceding sentence
shall not apply if the stock which is treated
as qualified small business stock by reason of
subparagraph (A) is issued by a corporation
which (as of the time of the transfer described
in subparagraph (A)) is a qualified small
business.
[``(C) Successive application.--For purposes
of this paragraph, stock treated as qualified
small business stock under subparagraph (A)
shall be so treated for subsequent transactions
or reorganizations, except that the limitation
of subparagraph (B) shall be applied as of the
time of the first transfer to which such
limitation applied (determined after the
application of the second sentence of
subparagraph (B)).
[``(D) Control test.--In the case of a
transaction described in section 351, this
paragraph shall apply only if, immediately
after the transaction, the corporation issuing
the stock owns directly or indirectly stock
representing control (within the meaning of
section 368(c)) of the corporation whose stock
was exchanged.
[``(i) Basis Rules.--For purposes of this section--
[``(1) Stock exchanged for property.--In the case
where the taxpayer transfers property (other than money
or stock) to a corporation in exchange for stock in
such corporation--
[``(A) such stock shall be treated as having
been acquired by the taxpayer on the date of
such exchange, and
[``(B) the basis of such stock in the hands
of the taxpayer shall in no event be less than
the fair market value of the property
exchanged.
[``(2) Treatment of contributions to capital.--If the
adjusted basis of any qualified small business stock is
adjusted by reason of any contribution to capital after
the date on which such stock was originally issued, in
determining the amount of the adjustment by reason of
such contribution, the basis of the contributed
property shall in no event be treated as less than its
fair market value on the date of the contribution.
[``(j) Treatment of Certain Short Positions.--
[``(1) In general.--If the taxpayer has an offsetting
short position with respect to any qualified small
business stock, subsection (a) shall not apply to any
gain from the sale or exchange of such stock unless--
[``(A) such stock was held by the taxpayer
for more than 5 years as of the first day on
which there was such a short position, and
[``(B) the taxpayer elects to recognize gain
as if such stock were sold on such first day
for its fair market value.
[``(2) Offsetting short position.--For purposes of
paragraph (1), the taxpayer shall be treated as having
an offsetting short position with respect to any
qualified small business stock if--
[``(A) the taxpayer has made a short sale of
substantially identical property,
[``(B) the taxpayer has acquired an option to
sell substantially identical property at a
fixed price, or
[``(C) to the extent provided in regulations,
the taxpayer has entered into any other
transaction which substantially reduces the
risk of loss from holding such qualified small
business stock.
For purposes of the preceding sentence, any reference
to the taxpayer shall be treated as including a
reference to any person who is related (within the
meaning of section 267(b) or 707(b)) to the taxpayer.
[``(k) Regulations.--The Secretary shall prescribe such
regulations as may be appropriate to carry out the purposes of
this section, including regulations to prevent the avoidance of
the purposes of this section through split-ups, shell
corporations, partnerships, or otherwise.''
[(b) One-Half of Exclusion Treated as Preference for Minimum
Tax.--
[(1) In general.--Subsection (a) of section 57
(relating to items of tax preference) is amended by
adding at the end thereof the following new paragraph:
[``(8) Exclusion for gains on sale of certain small
business stock.--An amount equal to one-half of the
amount excluded from gross income for the taxable year
under section 1202.''
[(2) Conforming amendment.--Subclause (II) of section
53(d)(1)(B)(ii) is amended by striking ``and (6)'' and
inserting ``(6), and (8)''.
[(c) Penalty for Failure To Comply With Reporting
Requirements.--Section 6652 is amended by inserting before the
last subsection thereof the following new subsection:
[``(k) Failure To Make Reports Required Under Section 1202.--
In the case of a failure to make a report required under
section 1202(d)(1)(C) which contains the information required
by such section on the date prescribed therefor (determined
with regard to any extension of time for filing), there shall
be paid (on notice and demand by the Secretary and in the same
manner as tax) by the person failing to make such report, an
amount equal to $50 for each report with respect to which there
was such a failure. In the case of any failure due to
negligence or intentional disregard, the preceding sentence
shall be applied by substituting `$100' for `$50'. In the case
of a report covering periods in 2 or more years, the penalty
determined under preceding provisions of this subsection shall
be multiplied by the number of such years.''
[(d) Conforming Amendments.--
[(1)(A) Section 172(d)(2) (relating to modifications
with respect to net operating loss deduction) is
amended to read as follows:
[``(2) Capital gains and losses of taxpayers other
than corporations.--In the case of a taxpayer other
than a corporation--
[``(A) the amount deductible on account of
losses from sales or exchanges of capital
assets shall not exceed the amount includable
on account of gains from sales or exchanges of
capital assets; and
[``(B) the exclusion provided by section 1202
shall not be allowed.''
[(B) Subparagraph (B) of section 172(d)(4) is amended
by inserting ``, (2)(B),'' after ``paragraph (1)''.
[(2) Paragraph (4) of section 642(c) is amended to
read as follows:
[``(4) Adjustments.--To the extent that the amount
otherwise allowable as a deduction under this
subsection consists of gain described in section
1202(a), proper adjustment shall be made for any
exclusion allowable to the estate or trust under
section 1202. In the case of a trust, the deduction
allowed by this subsection shall be subject to section
681 (relating to unrelated business income).''
[(3) Paragraph (3) of section 643(a) is amended by
adding at the end thereof the following new sentence:
``The exclusion under section 1202 shall not be taken
into account.''.
[(4) Paragraph (4) of section 691(c) is amended by
striking ``1201, and 1211'' and inserting ``1201, 1202,
and 1211''.
[(5) The second sentence of paragraph (2) of section
871(a) is amended by inserting ``such gains and losses
shall be determined without regard to section 1202
and'' after ``except that''.
[(6) The table of sections for part I of subchapter P
of chapter 1 is amended by adding after the item
relating to section 1201 the following new item:
[``Sec. 1202. 50-percent exclusion for gain from certain small business
stock.''
[(e) Effective Date.--The amendments made by this section
shall apply to stock issued after the date of the enactment of
this Act.]
* * * * * * *
PART IV--INCENTIVES FOR INVESTMENT IN REAL ESTATE
Subpart A--Extension of Qualified Mortgage Bonds and Low-Income Housing
Credit
* * * * * * *
SEC. 13142. LOW-INCOME HOUSING CREDIT.
(a) * * *
(b) Modifications.--
(1) * * *
* * * * * * *
(6) Effective dates.--
(A) * * *
[(B) Waiver authority and prohibited
discrimination.--The amendments made by
paragraphs (3) and (4) shall take effect on the
date of the enactment of this Act.]
(B) Full-time students, waiver authority, and
prohibited discrimination.--The amendments made
by paragraphs (2), (3), and (4) shall take
effect on the date of the enactment of this
Act.
(C) HOME assistance.--The amendment made by
[paragraph (2)] paragraph (5) shall apply to
periods after the date of the enactment of this
Act.
* * * * * * *
Subchapter B--Revenue Increases
PART I--PROVISIONS AFFECTING INDIVIDUALS
Subpart A--Rate Increases
* * * * * * *
SEC. 13206. PROVISIONS TO PREVENT CONVERSION OF ORDINARY INCOME TO
CAPITAL GAIN.
(a) Interest Embedded in Financial Transactions.--
(1) * * *
(2) Clerical amendment.--The table of sections for
part IV of subchapter P of chapter 1 is amended by
adding at the end thereof the following new item:
``Sec. 1258. Recharacterization of gain from certain financial
transactions.''
(3) Effective date.--The amendments made by [this
section] this subsection shall apply to conversion
transactions entered into after April 30, 1993.
* * * * * * *
SEC. 13215. SOCIAL SECURITY AND TIER 1 RAILROAD RETIREMENT BENEFITS.
(a) * * *
* * * * * * *
(c) Transfers to the Hospital Insurance Trust Fund.--
(1) In general.--Paragraph (1) of section 121(e) of
the Social Security Amendments of 1983 ([Public Law 92-
21] Public Law 98-21) is amended by--
(A) * * *
* * * * * * *
PART VI--TREATMENT OF INTANGIBLES
SEC. 13261. AMORTIZATION OF GOODWILL AND CERTAIN OTHER INTANGIBLES.
(a) * * *
* * * * * * *
(g) Effective Date.--
(1) * * *
(2) Election to have amendments apply to property
acquired after july 25, 1991.--
(A) In general.--If an election under this
paragraph applies to the taxpayer--
(i) * * *
(iii) in applying subsection (f)(9)
of such section, with respect to any
property acquired [by the taxpayer] by
the taxpayer or a related person on or
before the date of the enactment of
this Act, only holding or use on July
25, 1991, shall be taken into account.
* * * * * * *
PART II--CREDIT FOR CONTRIBUTIONS TO CERTAIN COMMUNITY DEVELOPMENT
CORPORATIONS
SEC. 13311. CREDIT FOR CONTRIBUTIONS TO CERTAIN COMMUNITY DEVELOPMENT
CORPORATIONS.
(a) * * *
* * * * * * *
(e) Selected Community Development Corporations.--
(1) * * *
(2) Only 20 corporations may be selected.--The
Secretary of Housing and Urban Development may select
20 corporations for purposes of this section, subject
to the availability of eligible corporations. Such
selections may be made only before July 1, 1994. At
least 8 of the operational areas of the corporations
selected must be rural areas (as defined by [section
1393(a)(3)] section 1393(a)(2) of such Code).
* * * * * * *
----------
SECTION 607 OF THE MERCHANT MARINE ACT, 1936
Sec. 607. (a) * * *
* * * * * * *
(h) Tax Treatment of Nonqualified Withdrawals.
(1) * * *
* * * * * * *
(6) Nonqualified withdrawals taxed at highest
marginal rate.--
(A) In general.--In the case of any taxable
year for which there is a nonqualified
withdrawal (including any amount so treated
under paragraph (5)), the tax imposed by
chapter 1 of the Internal Revenue Code of 1986
shall be determined--
(i) by excluding such withdrawal from
gross income, and
(ii) by increasing the tax imposed by
chapter 1 of such Code by the product
of the amount of such withdrawal and
the highest rate of tax specified in
section 1 (section 11 in the case of a
corporation) of such Code.
With respect to the portion of any
nonqualified withdrawal made out of the capital
gain account [during a taxable year to which
section 1(h) or 1201(a) of such Code applies],
the rate of tax taken into account under the
preceding sentence shall not exceed [28 percent
(34 percent] 19.8 percent (25 percent in case
of a corporation).
* * * * * * *
----------
SOCIAL SECURITY ACT
* * * * * * *
TITLE II--FEDERAL OLD-AGE, SURVIVORS, AND DISABILITY INSURANCE BENEFITS
* * * * * * *
REDUCTION OF INSURANCE BENEFITS
maximum benefits
Sec. 203. (a) * * *
* * * * * * *
Months to Which Earnings Are Charged
(f) For purposes of subsection (b)--
(1) * * *
* * * * * * *
(8)(A) * * *
* * * * * * *
[(D) Notwithstanding any other provision of this
subsection, the exempt amount which is applicable to an
individual who has attained retirement age (as defined
in section 216(l)) before the close of the taxable year
involved--
[(i) shall be $333.33\1/3\ for each month of
any taxable year ending after 1977 and before
1979,
[(ii) shall be $375 for each month of any
taxable year ending after 1978 and before 1980,
[(iii) shall be $416.66\2/3\ for each month
of any taxable year ending after 1979 and
before 1981,
[(iv) shall be $458.33\1/3\ for each month of
any taxable year ending after 1980 and before
1982, and
[(v) shall be $500 for each month of any
taxable year ending after 1981 and before
1984.]
(D)(i) Notwithstanding any other provision of this
subsection, the exempt amount which is applicable to an
individual who has attained retirement age (as defined
in section 216(1)) before the close of the taxable year
involved shall be--
(I) for the taxable year beginning after 1995
and before 1997, $1,250.00,
(II) for the taxable year beginning after
1996 and before 1998, $1,583.33\1/3\,
(III) for the taxable year beginning after
1997 and before 1999, $1,916.66\2/3\,
(IV) for the taxable year beginning after
1998 and before 2000, $2,250.00, and
(V) for the taxable year beginning after 1999
and before 2001, $2,500.00.
(ii) For purposes of subparagraph (B)(ii)(II), the
increase in the exempt amount provided under clause
(i)(V) shall be deemed to have resulted from a
determination which shall be deemed to have been made
under subparagraph (A) in 1999.
* * * * * * *
DISABILITY INSURANCE BENEFIT PAYMENTS
disability insurance benefits
Sec. 223.(a) * * *
* * * * * * *
definition of disability
(d)(1) * * *
* * * * * * *
(4)(A) The Secretary shall by regulations prescribe the
criteria for determining when services performed or earnings
derived from services demonstrate an individual's ability to
engage in substantial gainful activity. No individual who is
blind shall be regarded as having demonstrated an ability to
engage in substantial gainful activity on the basis of earnings
that do not exceed [the exempt amount under section 203(f)(8)
which is applicable to individuals described in subparagraph
(D) thereof] an amount equal to the exempt amount which would
have been applicable under section 203(f)(8), to individuals
described in subparagraph (D) thereof, if section 501 of the
Contract With America Tax Relief Act of 1995 had not been
enacted. Notwithstanding the provisions of paragraph (2), an
individual whose services or earnings meet such criteria shall,
except for purposes of section 222(c), be found not to be
disabled. In determining whether an individual is able to
engage in substantial gainful activity by reason of his
earnings, where his disability is sufficiently severe to result
in a functional limitation requiring assistance in order for
him to work, there shall be excluded from such earnings an
amount equal to the cost (to such individual) of any attendant
care services, medical devices, equipment, prostheses, and
similar items and services (not including routine drugs or
routine medical services unless such drugs or services are
necessary for the control of the disabling condition) which are
necessary (as determined by the Secretary in regulations) for
that purpose, whether or not such assistance is also needed to
enable him to carry out his normal daily functions; except that
the amount to be excluded shall be subject to such reasonable
limits as the Secretary may prescribe.
* * * * * * *
----------
REVENUE RECONCILIATION ACT OF 1990
* * * * * * *
TITLE XI--REVENUE PROVISIONS
H4 deg.SEC. 11001. SHORT TITLE; ETC.
(a) Short Title.--This title may be cited as the ``Revenue
Reconciliation Act of 1990''.
* * * * * * *
Subtitle B--Excise Taxes
* * * * * * *
PART II--USER-RELATED TAXES
* * * * * * *
SEC. 11212. IMPROVEMENTS IN ADMINISTRATION OF GASOLINE EXCISE TAX.
(a) * * *
* * * * * * *
(e) Technical and Conforming Amendments.--
(1) [Paragraph (1) of section 6724(d)] Subparagraph
(B) of section 6724(d)(1) is amended by striking ``or''
at the end of clause (x), by striking ``, or subsection
(e),'' in clause (xi), by striking the period at the
end of clause (xi) and inserting ``, or'', and by
inserting after clause (xi) the following new clause:
``(xii) section 4101(d) (relating to
information reporting with respect to
fuels taxes).''
* * * * * * *
Subtitle G--Tax Technical Corrections
* * * * * * *
SEC. 11701. AMENDMENTS RELATED TO REVENUE RECONCILIATION ACT OF 1989.
(a) Amendments Related to Section 7108.--
(1) * * *
* * * * * * *
[(11) Paragraph (2) of section 7108(r) of the Revenue
Reconciliation Act of 1989 is amended by inserting
before the period ``but only with respect to bonds
issued after such date''.]
* * * * * * *
(f) Amendment Related to Section 7401.--Paragraph (2) of
section 6038(e) (relating to definitions) is amended by adding
at the end thereof the following new sentence: ``In the case of
a specified foreign corporation (as defined in section 898),
the taxable year of such corporation shall be treated as its
annual accounting period.''
* * * * * * *
----------
SECTION 1317 OF THE TAX REFORM ACT OF 1986
SEC. 1317. TRANSITIONAL RULES FOR SPECIFIC FACILITIES.
(1) * * *
* * * * * * *
(3) Sports facilities.--A bond issued as part of an issue 95
percent or more of the net proceeds of which are to be used to
provide sports facilities (within the meaning of section
103(b)(4)(B) of the 1954 Code) shall be treated as an exempt
facility bond for purposes of part IV of subchapter B of
chapter 1 of the 1986 Code if such facilities are described in
any of the following subparagraphs:
(A) A facility is described in this subparagraph if
it is a domed stadium--
(i) * * *
* * * * * * *
The aggregate face amount of bonds to which this subparagraph
applies shall not exceed $200,000,000. A facility shall not
fail to be treated as described in this subparagraph by reason
of an assignment (or an agreement to an assignment) by the
governmental unit on whose behalf the bonds are issued of any
part of its interest in the property financed by such bonds to
another governmental unit.
* * * * * * *
----------
EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974
* * * * * * *
TITLE I--PROTECTION OF EMPLOYEE BENEFIT RIGHTS
* * * * * * *
Part 6--Group Health Plans
* * * * * * *
SEC. 602. CONTINUATION COVERAGE.
For purposes of section 601, the term ``continuation
coverage'' means coverage under the plan which meets the
following requirements:
(1) * * *
(2) Period of coverage.--The coverage must extend for
at least the period beginning on the date of the
qualifying event and ending not earlier than the
earliest of the following:
(A) Maximum required period.--
(i) * * *
* * * * * * *
[(v) Qualifying event involving
medicare entitlement.--In the case of
an event described in section 603(4)
(without regard to whether such event
is a qualifying event), the period of
coverage for qualified beneficiaries
other than the covered employee for
such event or any subsequent qualifying
event shall not terminate before the
close of the 36-month period beginning
on the date the covered employee
becomes entitled to benefits under
title XVIII of the Social Security
Act.]
(v) Medicare entitlement followed by
qualifying event.--In the case of a
qualifying event described in section
603(2) that occurs less than 18 months
after the date the covered employee
became entitled to benefits under title
XVIII of the Social Security Act, the
period of coverage for qualified
beneficiaries other than the covered
employee shall not terminate under this
subparagraph before the close of the
36-month period beginning on the date
the covered employee became so
entitled.
* * * * * * *
TITLE II--AMENDMENTS TO THE INTERNAL REVENUE CODE RELATING TO
RETIREMENT PLANS
* * * * * * *
Part 2--Certain Other Provisions Relating to Qualified Retirement Plans
* * * * * * *
SEC. 1022. MISCELLANEOUS PROVISIONS.
(a) * * *
* * * * * * *
(l) Qualified Football Coaches Plan.--For purposes of
determining the qualified plan status of a qualified football
coaches plan, section 3(37)(F) shall be treated as part of this
title and a qualified football coaches plan shall be treated as
a multiemployer collectively bargained plan for purposes of the
Internal Revenue Code of 1986.
* * * * * * *
----------
SECTION 2202 OF THE PUBLIC HEALTH SERVICE ACT
SEC. 2202. CONTINUATION COVERAGE.
For purposes of section 2201, the term ``continuation
coverage'' means coverage under the plan which meets the
following requirements:
(1) * * *
(2) Period of coverage.--The coverage must extend for
at least the period beginning on the date of the
qualifying event and ending not earlier than the
earliest of the following:
(A) Maximum required period.--
(i) * * *
* * * * * * *
[(iv) Qualifying event involving
medicare entitlement.--In the case of
an event described in section 2203(4)
(without regard to whether such event
is a qualifying event), the period of
coverage for qualified beneficiaries
other than the covered employee for
such event or any subsequent qualifying
event shall not terminate before the
close of the 36-month period beginning
on the date the covered employee
becomes entitled to benefits under
title XVIII of the Social Security
Act.]
(iv) Medicare entitlement followed by
qualifying event.--In the case of a
qualifying event described in section
2203(2) that occurs less than 18 months
after the date the covered employee
became entitled to benefits under title
XVIII of the Social Security Act, the
period of coverage for qualified
beneficiaries other than the covered
employee shall not terminate under this
subparagraph before the close of the
36-month period beginning on the date
the covered employee became so
entitled.
* * * * * * *
----------
OMNIBUS BUDGET RECONCILIATION ACT OF 1989
* * * * * * *
TITLE VI--MEDICARE, MEDICAID, MATERNAL AND CHILD HEALTH, AND OTHER
HEALTH PROVISIONS
* * * * * * *
Subtitle E--Provisions With Respect to COBRA Continuation Coverage
PART 1--EXTENSION OF COVERAGE FOR DISABLED EMPLOYEES
SEC. 6701. EXTENSION, UNDER INTERNAL REVENUE CODE, OF COVERAGE FROM 18
TO 29 MONTHS FOR THOSE WITH A DISABILITY AT TIME OF
TERMINATION OF EMPLOYMENT.
(a) In General.--Paragraph (2)(B) of section 4980B(f) of the
Internal Revenue Code of 1986, as added by section 3011(a) of
the Technical and Miscellaneous Revenue Act of 1988 (Public Law
100-647), (relating to maximum required period of continuation
coverage), is amended--
(1) in clause (i) by adding after and below
[subclause (IV)] subclause (V) the following new
sentence:
``In the case of a qualified
beneficiary who is determined, under
title II or XVI of the Social Security
Act, to have been disabled at the time
of a qualifying event described in
paragraph (3)(B), any reference in
subclause (I) or (II) to 18 months with
respect to such event is deemed a
reference to 29 months, but only if the
qualified beneficiary has provided
notice of such determination under
paragraph (6)(C) before the end of such
18 months.''; and
* * * * * * *
TITLE VII--REVENUE MEASURES
SEC. 7001. SHORT TITLE; ETC.
(a) Short Title.--This title may be cited as the ``Revenue
Reconciliation Act of 1989''.
* * * * * * *
Subtitle C--Employee Benefit Provisions
PART I--EMPLOYEE STOCK OWNERSHIP PLANS
* * * * * * *
SEC. 7304. REPEAL OF CERTAIN PROVISIONS RELATING TO EMPLOYEE STOCK
OWNERSHIP PLANS.
(a) Estate Tax Deduction.--
(1) * * *
(2) Conforming amendments.--
(A) * * *
* * * * * * *
(D) Section 4979A is amended--
(i) * * *
(ii) by striking ``or section
2057(d)'' in subsection (c)[(2)].
* * * * * * *
Subtitle F--Miscellaneous Provisions
* * * * * * *
PART V--OTHER PROVISIONS
* * * * * * *
SEC. 7646. REPORTING OF POINTS ON MORTGAGE LOANS.
(a) * * *
(b) Technical Amendments.--
(1) Subparagraph (B) of [section 6050H(b)(1)] section
6050H(b)(2) is amended by inserting ``(other than
points)'' after ``such interest''.
* * * * * * *
Subtitle G--Revision of Civil Penalties
* * * * * * *
PART II--REVISION OF ACCURACY-RELATED PENALTIES
SEC. 7721. REVISION OF ACCURACY-RELATED PENALTIES.
(a) * * *
* * * * * * *
(c) Technical and Conforming Amendments.--
(1) * * *
* * * * * * *
(10) Subparagraph (C) of section 461(i)(3) is amended
by striking ``[section 6662(b)(2)(C)(ii)] section
6661(b)(2)(C)(ii)'' and inserting ``section
6662(d)(2)(C)(ii)''.
* * * * * * *
Subtitle H--Technical Corrections
* * * * * * *
PART I--AMENDMENTS RELATED TO TECHNICAL AND MISCELLANEOUS REVENUE ACT
OF 1988
SEC. 7811. AMENDMENTS RELATED TO TITLE I OF THE 1988 ACT.
(a) * * *
* * * * * * *
(i) Amendments Related to Section 1012 of the 1988 Act.--
(1) * * *
* * * * * * *
(3) Subparagraph (A) of section 954(c)(3) is
amended--
(A) by striking ``is created'' the first
place it appears in clause (i) and inserting
``is a corporation created'',
* * * * * * *
PART IV--MISCELLANEOUS CHANGES
SEC. 7841. MISCELLANEOUS CHANGES.
(a) * * *
* * * * * * *
(d) Miscellaneous Clerical Changes.--
(1) * * *
* * * * * * *
(10) Paragraph (27) of [section 381(a)] section
381(c) (relating to credit under section 53) is
redesignated as paragraph (26).
* * * * * * *
PART V--AMENDMENTS RELATED TO PENSION PROVISIONS
* * * * * * *
Subpart A--Amendments Related To Tax Reform Act of 1986
SEC. 7861. AMENDMENTS RELATED TO TITLE XI OF THE REFORM ACT.
(a) * * *
* * * * * * *
(c) Amendments Related to Section 1140 of the Reform Act.--
(1) * * *
(2) Section 1140(c) of the Reform Act is amended by
striking all after ``the first plan year beginning''
the second place it appears and inserting ``after the
later of--
``(1) December 31, 1988, or
``(2) the earlier of--
``(A) December 31, 1990, or
``(B) the date on which the last of such
collective bargaining agreements terminate
(without regard to any extension after February
28, 1986).''
* * * * * * *
VII. DISSENTING VIEWS
----------
DISSENTING VIEWS OF THE DEMOCRATIC MEMBERS, COMMITTEE ON WAYS AND MEANS
The Republican's tax policy reflected in H.R. 1215 is
fiscally irresponsible, economically unsound, distributionally
inequitable, and politically dishonest. We are unable in good
conscience to support it.
The Republican tax bill would mortgage our children's
future--again--by exploding the Federal budget deficit at the
very time we should be paying it down. And, the Republicans are
neither paying for nor acknowledging the full size of that
debt. This is the ultimate unfunded mandate.
Fiscal Irresponsibility
When you find yourself in a deep hole and it is hard to
climb out, the last thing you need to do is dig the hole
deeper. Despite considerable Republican rhetoric about fiscal
responsibility, balancing the budget, and making government
honest, the tax provisions in this bill represent the largest
increase in the deficit in history except for the frenetic tax-
cutting episode in 1981.
This tax bill would lose almost $200 billion over the first
5 years. And these tax cuts are insidious--they would lose
vastly more in the years beyond the budget window. The 10-year
revenue loss would approach $700 billion. Chart #1 illustrates
this explosion of the revenue loss.
This not only reflects a cavalier attitude toward the
deficit, it is the epitome of irresponsibility. An increase in
the deficit now means a larger burden on future generations.
Our grandchildren can count on a lower standard of living if
these tax cuts are enacted. This is the worst kind of
selfishness--wanting to ``have it now,'' even at the certain
expense of our children and grandchildren. It is undisguised
``me-ism.''
Tax Cuts Not Paid For.--The Republicans tell us that they
intend to pay for these tax cuts with spending cuts. The
Republicans tell us that the cuts will not come from Social
Security, defense, or interest on the public debt. We know that
means other programs will have to be cut by almost one-third--
even more if they intend to protect anything else. Mostly, the
Republicans haven't told us much at all about the spending cuts
that they say will pay for tax cuts. We haven't heard much
about the specifics of where they will get the $100 billion
they will need after they cut women and children from
government assistance. What else do they intend to do to pay
for these cuts and reduce the deficit?
This Committee has recently reported out a welfare reform
bill, and other committees have considered legislation in this
area, too. We suspect this is one of the ways the Republicans
intend to pay for these tax cuts. We oppose paying for tax cuts
by making children vulnerable. We have expressed our strong
opposition to the Repbublican welfare bill. It is cruel to
children and of little help to their parents. Making life
harder for millions of needy children and using the savings to
provide tax cuts for the privileged is offensive to us. We
strenuously reiterate our opposition to this.
In fact, the Republicans don't intend to tell us how they
will pay for these tax cuts because they don't know. The very
day after the Committee markup, Speaker Gingrich said, ``You
don't have to have specific cuts. If you lower the caps, that's
equivalent to specific cuts.'' Of course it's not! Cutting the
discretionary spending caps is nothing more than a promise to
spend less in the future than you're spending now. Why will it
be any easier for future appropriators to find palatable
specific cuts if today's appropriators cannot? And if they
cannot, how tempting will it be to ``adjust'' the caps in order
to cut less? Why should we believe that they will keep this
promise, when they have broken so many in the past? Do they
really intend to increase the deficit by $700 billion and
expect us to take it on faith that future cuts will be
forthcoming? Reporting this bill without identifying the
required spending cuts is an historic act of irresponsibility.
For more than a decade, this Committee has consistently
paid for any new benefits that it has approved. That risk is
never easy, but we assumed that responsibility when we were
elected to Congress and when we chose to serve our constituents
as Members of the Committee on Ways and Means. We cannot in
good conscience approve these broad tax reductions without
knowing that fair and equitable spending reductions will be
found to pay for this tax cut and to reduce the deficit.
Why are the Republicans making the job of balancing the
budget so much harder than it already is? If they manage to
come up with $200 billion in spending cuts--or, more honestly,
$700 billion--they will only be running in place. They will
have done nothing to reduce the current deficit. Where will
they find additional cuts of as much as $1 trillion in order to
balance the budget by 2002?
Budget Gimmicks.--One of the reasons for the exploding
deficit increases in the years beyond the usual 5-year budget
period is the budget trickery that the Republicans resort to in
order to keep the early years' costs at ``only'' $200 billion.
The bill contains a variety of gimmicks that artificially
reduce its short-term revenue loss while exploding out-year
costs. The following are examples of provisions contained in
the bill which were deliberately designed to reduce their
short-term revenue loss without regard to their long-term
revenue loss:
The Republican bill changes the original proposal to index
capital gains for inflation that was contained in the Contract
With America in several ways. One of the changes limits
indexing to newly-acquired property with an election to mark-
to-market property held on the effective date. This change
results in a one-time revenue pickup of $11.2 billion during
the first 2 years but increases its long-term costs. Another
change adds a 3-year holding period, thus resulting in no
revenue loss for the first 3 years. Even with additional
cutbacks in the original Contract proposal, such as
disqualifying corporate taxpayers, the 5th-year cost of
indexing in the Committee bill exceeds the 5th-year cost of the
more broadly available proposal in the original Contract by
$2.2 billion.
The ``neutral'' cost recovery (depreciation) provisions in
the bill reduce its cost by approximately $19 billion over 5
years. In fact, the Joint Committee on Taxation has estimated
that these expanded deductions for business would cost almost
$97 billion over the following 5 years. This provision is
neither neutral nor equitable cost recovery. The provision
attempts to replicate expensing which would have substantial
short-term costs. Instead of simply including a provision
allowing expensing, the Republican plan includes this extremely
complicated depreciation scheme in order to defer the cost.
(See Chart #2.)
--``The American Dream Savings Account'' proposal is
equivalent on a present-value basis to a fully deductible IRA.
However, unlike fully deductible IRAs which would cost at least
$30 billion over 5 years, the American Dream Savings Account
proposal purports to save $2 billion over 5 years. However, the
10-year revenue loss is approximately $24 billion and
dramatically increases virtually every year thereafter.
Increases in the deficit are clearly not part of any American
dream. (See Chart #3.)
These budgetary gimmicks shift revenue into the first few
years of the budget period because they assume that taxpayers
will be willing to increase voluntarily the tax they owe in the
short term in exchange for large tax reductions in the more
distant future. Taxpayers would be willing to do this only if
they are convinced that the income tax system will be in place
in the more distant future. It is ironic that the Republican
tax bill would rely on these gimmicks at a time when the
Chairman of the Committee on Ways and Means and the House
Republican Leadership are calling for total repeal of the
current income tax system.
Once again the Republicans are being inconsistent. They
call for deficit reduction but support large tax reductions.
They say they support spending cuts but fail to identify them.
They call for repeal of the present income tax system but
reduce the short-term revenue loss of their tax cuts with
gimmicks that will only work if taxpayers are convinced that
the current system will be retained for the indefinite future.
The cost of the capital gain reductions in the Republican bill
is reduced by the additional revenues assumed to result from
taxpayers' response to the lower rates. The lower rates will
encourage taxpayers to realize additional capital gains. These
induced realizations will not occur if taxpayers actually
believe that the Republicans will be successful in their
announced program of eliminating the income tax system. It is
time for the Republicans to lay out their entire program to the
American public.
Economic Unsoundness
This kind of budget irresponsibility has other, more
immediate costs, too. If the financial markets doubt the
government's credibility, interest rates will rise. If
consumers and businesses have this windfall of additional
dollars to spend at a time when the economy is charging along
at full capacity, inflation will increase. If incentives are
increased to shelter income, to merge companies simply because
of the tax consequences, and to invest unwisely, then bad
economic decisions will be made.
The memory of the 1981 Reagan tax cuts looms large. That
bill gave away the store in a passion of unfunded tax-cutting,
and thus encouraged the growth of tax shelters. We were
promised spending cuts that never materialized. The deficit
soared. The economy crashed. We experienced the deepest
recession in this century short of the Great Depression. At the
same time, the overly-generous tax cuts spurred over-investment
in certain sectors of the economy, creating excesses that we
are still trying to rid ourselves of today. If we make the same
mistake this year as the one we made in 1981, then our
contribution will be a weakened economy, investment
distortions, and complexity.
Distributional Inequity
These tax proposals are not equitable. They would
disproportionately favor a privileged few upper-income
taxpayers. Is that a noble cause for the government to engage
in--helping those who have and ignoring those who have not?
The Republicans strenuously protest the claim that they are
helping wealthy Americans with these tax cuts. Indeed, at times
it seems they protest too much. One-half of the total benefit
of this bill and three quarters of the capital gains tax cut
will go to those with incomes of $100,000 or more. The broken
promise of partial refundability of the family credit means
that families with incomes of $20,000 or less will get only 2
percent of the benefit of that provision, and that is about all
they will get from the total bill.
On average, those with incomes of $200,000 or more would
enjoy tax cuts of $11,270, while those with incomes between
$30,000 and $50,000 would receive $570 and those with incomes
between $50,000 and $75,000 will get about $1,000, a mere one-
eleventh of what the wealthy will get. Chart #4 shows these
dramatic differences.
The average cut in taxes resulting from the capital gains
provisions would be almost $7,800 for each family that realizes
gains and has income of $200,000 or more; for a comparable
family with income between $30,000 and $50,000 and lucky enough
to have a capital gain, the tax cut would be about $650.
Middle-income families will get small tax cuts, a bigger
deficit, and a bleaker future for their children. The
Republicans know this. They put forth this bill knowingly and
without the interest or the commitment to help those who are
shortchanged by it.
Political Dishonesty
The Republicans campaigned on the Contract With America
last year. They won the majority of seats in the House of
Representatives. They say they are fervent in their
determination to fulfill the Contract With America and to
adhere to its associated themes. H.R. 1215 is a breach of this
promise.
Breach of Contract.--H.R. 1215 denies the family tax credit
to many working families with children. Virtually all of those
families pay more Social Security tax than income tax, and the
lower-income ones among them pay more Social Security tax than
they get back in earned income tax credits. Previous versions
of the Contract With America would have allowed families to use
the family tax credit to offset any Social Security taxes they
paid in excess of their earned income tax credit. The
legislation that represented the Contract last September when
it was first announced would have helped these families. H.R.
6, introduced only two months ago at the beginning of this
Congress, would have helped them, too. H.R. 6 included
refundability and a technical fix to ensure that refundability
by making available a permanent appropriation for the refunds.
It was only at the last moment, in H.R. 1215, introduced on
Monday, March 13, 1995, that these families were dropped from
the promise--all 10 million of them.
By not including partial refundability in H.R. 1215, the
Republicans are breaking their contract with the American
people and are reducing the tax relief that they promised
working families by $13 billion over 5 years. Two-thirds of
this reduction will come from families with incomes of less
than $50,000. There are 23.2 million families with children who
earn less than $50,000 per year. On average, these families pay
$1,725 in Social Security tax out of their own paychecks and a
total of $3,450 when the employer portion of Social Security
tax is counted. Why should these families be shortchanged so
that America's largest corporations can be given relief from
tax?
The following examples show the effects of this contractual
breach on hard-working moderate-income families.
EXAMPLES OF FAMILIES WHO WOULD GET SMALLER FAMILY TAX CREDITS UNDER THE
REPUBLICAN BILL THAN UNDER THE ORIGINAL CONTRACT WITH AMERICA
Relative to the original Contract With America, H.R. 1215
makes the $500-per-child family tax credit nonrefundable. This
means that many working families who would have received
credits under the original Contract will receive much smaller
credits under the Republican bill. The Republican bill takes
$13 billion from America's working families. In fact, two-
thirds of that cutback from the original Contract will come
from families with less than $50,000. (Examples are for 1996.)
Example #1: Young Couple With Their First Child.--Family of
3, 1 Child, $15,000 per year.
Under the original Contract With America, this family would
receive a family credit of $500.
Under the Republican bill, this family would receive a
family tax credit of $90.
Relative to the original Contract, this family will lose
$410.
Example #2: Middle-Aged Divorced Mother Back In the
Workforce.--Family of 4, 3 Children, $20,000 per year.
Under the original Contract With America, this family would
receive a family credit of $1,500.
Under the Republican bill, this family would receive a
family tax credit of $585.
Relative to the original Contract, this family will lose
$915.
Example #3: Family With One High-School-Educated Worker.--
Family of 5, 3 Children, $22,000 per year.
Under the original Contract With America, this family would
receive a family credit of $1,500.
Under the Republican bill, this family would receive a
family tax credit of $375.
Relative to the original Contract, this family will lose
$1,125.
Erosion of State Tax Bases.--The Republicans speak about
returning government to the people and the Statehouses. The
welfare reform debate in this Committee rang with the cry of
``state flexibility.'' This tax bill will significantly
circumscribe the ability of State Government to deliver
services because it puts their revenue base at risk. Many
States may be forced to raise real property taxes to find
additional revenues. This would be especially burdensome to the
middle class.
Many States use Federal tax concepts when defining taxable
income for State income tax purposes. This results in
substantial simplification for taxpayers who are not required
to compute their income separately for Federal and State income
tax purposes. A study by the Institute on Taxation and Economic
Policy indicates that the depreciation and capital gain
provisions contained in the Committee bill would create
enormous revenue losses for States unless they cease to conform
with Federal tax concepts. It is not surprising that the study
indicates that 72 percent of the revenue loss is attributable
to individuals with incomes over $200,000. If States cease to
conform with Federal concepts, the result would be a
substantial increase in complexity as taxpayers would have to
compute basic concepts, such as depreciation and basis,
differently for Federal and State tax purposes. The following
chart shows the dramatic amounts of revenue involved.
SUMMARY OF POTENTIAL REVENUE LOSSES IN 15 STATES FROM THE CONTRACT
DEPRECIATION & CAPITAL GAINS TAX CUTS
[Totals for calendar years 1995-2005, in millions of dollars]
------------------------------------------------------------------------
Corporate Individual Total
------------------------------------------------------------------------
California....................... (\1\) -13,420 -13,420
Connecticut...................... -710 -930 -1,640
Georgia.......................... -510 -1,370 -1,880
Iowa............................. -210 -610 -820
Kentucky......................... -310 -600 -910
Maine............................ -60 -310 -370
Minnesota........................ -510 -1,900 -2,410
Missouri......................... -300 -910 -1,210
New Jersey....................... -1,090 -1,990 -3,090
New York......................... -2,310 -7,480 -9,790
Oregon........................... -160 -1,440 -1,600
Pennsylvania..................... -1,680 -1,350 -3,040
Rhode Island..................... -70 -210 -280
Vermont.......................... -30 -130 -150
Wisconsin........................ -470 -150 -620
--------------------------------------
Total, 15 States........... -8,430 -32,810 -41,240
------------------------------------------------------------------------
\1\ California does not follow federal depreciation rules for
corporations.
Source: Institute on Taxation and Economic Policy.
Had it been possible to engage our Republican colleagues in
realistic discussion of any issues regarding the Contract With
America or the version of the Contract embodied in H.R. 1215 or
to consider alternative formulations of any of the provisions
in the bill, we would have preferred to address this problem
and to help the States avoid these large revenue losses.
Democratic Priorities
Democrats are not opposed to tax cuts. We do believe that
the unfunded Republican tax cuts in the current fiscal and
economic environment are folly. We also believe that the
Republican tax cuts are unfairly structured.
Sadly, the Republican bill missed a major opportunity to
correct inequities and to reduce the deficit. Democrats,
therefore, believe that H.R. 1215 will not restore the American
dream, reinforce families, provide equity for senior citizens,
or create jobs and enhance the wages of the middle class.
Had the Republicans been willing to listen to potential
improvements in their bill, instead of voting in lock-step and
soldier-like precision at the command of their Leadership, they
would have been able to consider improvements that we, the
Committee Democrats, would have been pleased to offer in a
spirit of bipartisanship and to support unanimously. Some of
the flaws of this legislation are described below.
Partial Refundability of the Family Tax Credit.--As
mentioned above, H.R. 1215 denies the family tax credit to many
working families with children even though those families
typically pay more in Social Security taxes than in income
taxes and, for the lower-income families, more than they
receive in earned income tax credits. Previous versions of this
part of the Contract With America would have helped these
families by providing the family credit to families with Social
Security liability in excess of their earned income tax credit.
It is very difficult for the Republicans to argue, as they are
now doing, that this limited refundability was not intended.
We strongly support refundability of the family credit
against Social Security taxes, so that lower-income working
families can benefit as well. We would have preferred to
restore the partial refundability promised to working Americans
in all previous versions of the Contract With America.
Meaningful Relief of Marriage Tax Penalties.--The so-called
marriage penalty relief in H.R. 1215 is nothing less than an
empty box. It is wholly inadequate. It would help only 14
million of the 30 million couples who experience marriage
penalties each year. It purports to alleviate marriage
penalties and yet it provides a maximum benefit of only $145
per couple, even though the average size of marriage penalties
is large even in low- and middle-income groups: $260 for
couples in the $30,000-$40,000 income range; $1,540 for couples
in the $75,000-$100,000 range. It is not difficult for two
working professionals, for example two school teachers, to have
combined income in these ranges.
The Republican proposal is capped in order that the total
revenue loss not exceed $4 billion per year. While revenue
constraint is important, it makes this a false promise. At
best, it will be discouraging to those who suffer marriage
penalties of several hundreds or several thousands of dollars,
and in a tax system in which marriage penalties may total as
much as $30 or $40 billion per year. Capping the proposal at
$145 per couple means that for well above 90 percent of all
couples, the size of the relief will be unrelated to the size
of the penalty they experience. These working Americans should
not be promised relief that will not be forthcoming. Increased
expectations will only be dashed and taxpayer disillusioned.
The provision in the Republican bill requires a
complicated, meaningless calculation. A couple would have to
compute and compare two hypothetical tax liabilities, neither
of which will bear any resemblance whatsoever to their actual
tax liability or any other number on their tax return. The
overwhelming majority of those couples will only get $145 in
relief, regardless of the calculation, because their
``hypothetical'' marriage penalty exceeds this capped amount.
Why should we make them or the Treasury Department go through
the complexity and confusion of such a calculation?
We are assured that the process of figuring out the credit
will be streamlined for taxpayers because the IRS will include
a ``look-up'' table in the tax return instruction packet. This
is unlikely to be less confusing when the numbers in the table
are meaningless to the taxpayer. Besides, is the look-up table
really just a way of preventing taxpayers from calculating
their marriage penalties themselves and realizing how big their
penalty is and how paltry the Republican relief of $145 would
be?
A much better approach would be to reinstate a two-earner
deduction similar to the one that existed from 1982 to 1986.
This method of addressing the problem of marriage penalties
would help all 30 million two-earner families in a simple,
straightforward way that would relate the size of the relief to
the size of the penalty they face. Why not provide simple,
sensible tax relief instead of an arbitrary, somewhat stingy,
overly complicated credit?
Assistance With Educational Expenses.--We strongly believe
that investments in both human capital and physical capital are
necessary for a strong economy in this country. The Republican
bill completely ignores the need to improve the skills of our
workers. Without investment in the skills of our workforce,
real wages of American workers will continue to decline. In
1981, the Republicans provided extraordinary subsidies for
physical capital without any attempt to increase the skills of
our workers. The result was an explosion of tax shelters,
investments that made sense only because of the tax incentives,
and a continued decline in real wages. Democrats have learned
from that mistake. We prefer providing help to hard-working
families who need assistance in meeting the dramatically
increasing costs of education for their children.
Prevent a Raid on the Medicare Trust Fund.--We are very
concerned about the impact of the bill on the Medicare Part A
Hospital Insurance Trust Fund. Over the past several years, the
Congress has been successful in strengthening the solvency of
the Medicare Part A Hospital Insurance Trust Fund. Previous
estimates of the Trustees of the Hospital Insurance Trust Fund
anticipated that the Trust Fund would become insolvent in 1991.
Today the Trust Fund is estimated by the Trustees to remain
solvent until the year 2001.
H.R. 1215 would halt the progress made on Part A Trust Fund
solvency and actually speed the day when the Trust Fund will
become insolvent. The bill will take billions of dollars from
the Medicare Part A Trust Fund to pay for the Contract With
America. As estimated by the CBO, the Medicare Part A Trust
Fund would experience a reduction of $23 billion in direct
receipts over the first 5 years ($26.6 billion when accounting
for lost accrued interest). By the year 2005, the Part A Trust
Fund would lose $87.3 billion in direct receipts and accrued
interest.
We believe that the Medicare Trust Fund, on which so many
of our seniors depend, should not be raided under any
circumstances. We wish it had been possible for the Committee
to agree to keep the Trust Fund whole.
Add Consumer Protections to Provisions Regarding
Accelerated Death Benefits.--We strongly believe in favorable
tax treatment for accelerated death benefits paid to the
terminally ill. After all, this was originally a Democratic
proposal and introduced bill. Our strong support was
demonstrated through the inclusion of such a provision in our
Committee-reported health care reform legislation last year.
The health care reform legislation, developed by the Committee
Democrats last year and reported by the Committee, contained
critical consumer protections with respect to accelerated death
benefits.
We have great reservations about the Republican's proposal
in this bill, however, because these consumer protections are
missing. These consumer protections are necessary to ensure
that the terminally ill are not exploited in their time of
desperate financial need by opportunistic profiteers.
We are also greatly distressed that this favorable tax
treatment has been extended to benefits paid by an unregulated
industry--the viatical industry--without these consumer
protections. Testimony before this Committee earlier this year
established that viatical companies pay the insured a
substantially lower percentage of the value of their insurance
contract. These companies make a great profit at the expense of
the very individuals this provision was intended to help. The
extension of favorable tax treatment to the products of
viatical companies makes the inclusion of these consumer
protections even more critical in achieving the intended
results of this provision.
Add Consumer Protections for Long-Term Care Insurance
Provisions.--It is equally unfortunate that this bill does
nothing to deal with the abusive practices of some insurance
companies in selling long-term care insurance. Providing
favorable tax treatment for long-term care insurance policies
that do not provide the promised protection makes no sense
whatsoever. The Republican proposal does nothing to curb the
unfair practice of selling coverage without a non-forfeiture
benefit or inflation protection. Coverage bought today may be
worthless by the time it is needed. Consumer protection against
these and other abuses should have been included as part of
this proposal. In addition, the very low loss ratios of these
long-term care insurance policies may mean that the tax
incentives of this legislation will simply end up as higher
profits in the hands of the already profitable insurance
companies. As a result, as the experts told the Committee in
testimony, the Republican proposal is an extremely inefficient
approach to providing long-term care coverage to those in need.
Alternative Minimum Tax Reform for Corporations.--It has
been our position that the present corporate alternative
minimum tax should be reformed. During the hearings earlier
this year, we made our position clear that the minimum tax
adversely affected certain industries. This was not a new
position for us as evidenced by the improvements to the
alternative minimum tax contained in the 1993 Omnibus Budget
Reconciliation Act. However, the Republican bill results in a
total repeal of the alternative minimum tax for corporations
and permits the current accumulation of alternative minimum tax
credits to offset up to 90 percent of a corporation's regular
tax liability. These changes, when combined with the egregious
neutral cost recovery provisions contained in H.R. 1215, will
result in many corporations being able to eliminate most of
their Federal income tax liability. We believe this is unwise
and irresponsible.
Neutral Cost Recovery System.--We strenuously oppose the
neutral cost recovery provisions contained in the Republican's
bill. As explained above, these provisions function largely as
a budget gimmick to reduce the 5-year cost of the bill. We are
particularly concerned that neutral cost recovery combined with
debt-financing, would actually result in a negative tax--a
negative tax that no business representative requested during
the public hearings on this proposal. This would create the
potential for widescale tax shelter activity. As a result, the
corporate income tax would be effectively repealed for capital-
intensive companies. Many companies would have excess
depreciation deductions. These excess deductions would
inevitably lead to tax-motivated leasing transactions and
provide substantial tax incentives for mergers of capital-
intensive companies with companies which have high effective
tax rates. The large tax benefits associated with neutral cost
recovery could create tax-motivated transactions with little or
no economic justifications. The large overbuilding in real
estate which occurred in the 1980s was partially caused by the
unduly generous tax benefits provided in the 1981 Tax Act. We
have all seen the adverse consequences resulting from that
experiment in providing unduly generous depreciation rules. We
should not repeat that experiment again.
Indexing of Capital Gains.--The Republican's bill makes
substantial improvements to the indexing provisions that were
contained in the Contract With America. These changes
appropriately addressed the potential for indexing to be used
to create artificial capital and ordinary losses. However,
indexing will continue to be the source of substantial
complexity for taxpayers. In circumstances where there have
been increases to basis of property after its original
acquisition, indexing would require separate adjustments for
each basis increase. For example, if the taxpayer held a mutual
fund and reinvested its quarterly dividends for 10 years before
selling, the taxpayer would be required to compute 41 separate
inflation adjustments in determining his gain or loss on the
sale of his investment in that fund. Taxpayers would be
required to maintain substantially more elaborate records than
those required under existing law. In addition, since many
States will not be able to sustain the revenue loss that would
result if they allow indexing for State income tax purposes,
taxpayers might be required to compute capital gains separately
for Federal and State income tax purposes.
Social Security Earnings Test.--The Committee bill raises
the earnings exemption under the Social Security earnings test
to $30,000 by the year 2000. The bill specifically limits this
provision to the elderly and excludes the blind from its
benefits. In 1977 Congress, on a bipartisan basis, linked the
earnings limit for the blind and the elderly. Now the
Republicans are reversing that decision. They are robbing the
blind of the equitable treatment they have received for almost
20 years.
Conclusion
The Republican tax bill is fatally flawed. We regret that
the process in the Committee did not accommodate genuine
attempts, by both Republicans and Democrats, to improve the
bill and create sound tax policy. Strict adherence to the
original Contract With America appears to have been the goal.
Although this Republican bill breaches the original Contract in
certain respects, it does not offer a better alternative.
The real Contract that America wants to have with its
government is one that is fair; one that is honest; one that
does not explode the deficit, jeopardize the economy, and
promise to pay for it all later. Americans do not want a
government in which there is a hidden agenda, internal
contradictions, budget gimmickry, and enormous end-of-the-road
costs.
The Republicans believe that they have a Contract With
Americans. But Americans don't want these tax cuts at this
cost. Americans don't want to make working families and their
children suffer while corporations and wealthy individuals
benefit. Americans want deficit reduction and a sound economy.
They want us to climb out of the hole, not to dig it deeper.
The Contract With America has become nothing more than a
hollow symbol--a contract the Republicans have with themselves
to march forward with this legislation regardless of its
contents or its effects.
Sam M. Gibbons.
Harold Ford.
William J. Coyne.
Pete Stark.
L.F. Payne.
Andy Jacobs, Jr.
Jim McDermott.
Gerald D. Kleczka.
Richard E. Neal.
Barbara B. Kennelly.
Sander Levin.
Robert T. Matsui.
Charles B. Rangel.
Benjamin L. Cardin.
John Lewis.
ADDITIONAL DISSENTING VIEWS OFFERED BY REP. PETE STARK, REP. SAM
GIBBONS, REP. BENJAMIN CARDIN, REP. JIM MCDERMOTT, REP. GERALD KLECZKA,
REP. JOHN LEWIS, REP. CHARLES RANGEL, REP. BARBARA KENNELLY, REP.
WILLIAM COYNE, AND REP. RICHARD NEAL TO H.R. 1215 (`CONTRACT ON
AMERICA' TAX PROVISIONS)
Opposition to the Raid on the Medicare Part A Hospital Insurance Trust
Fund
Raiding the Medicare Trust Fund is no way to fund a tax
bill, particularly one that favors the wealthy over middle and
lower income Americans.
H.R. 1215, if enacted, will take $26 billion out of the
Medicare Part A Hospital Insurance Trust Fund over five years
($87 billion over ten years). These funds are taken out in
order to finance a tax cut for the wealthiest 13 percent of
seniors.
According to the Health Care Finance Administration Office
of the Actuary, if the Medicare Trust is to be made whole from
the provisions in H.R. 1215, the payroll tax on working
Americans would need to be raised by 0.31 percent effective
January 1, 1996. This would increase the HI payroll tax from
the current level of 2.9 percent to 3.21 percent. The effect of
doing so would be to increase the tax burden on all working
Americans in order to pay for a tax cut for a small group of
seniors who have an average annual income of $73,000.
In 1993, under the leadership of President Clinton,
Congressional Democrats passed the Omnibus Budget
Reconciliation Act of 1993. This bill strengthened the solvency
of the Part A Trust Fund. In 1994, the Ways and Means Committee
passed health reform legislation that strengthened further the
solvency of the Medicare Part A Trust Fund. These improvements
in the Trust Fund solvency were achieved by either reducing the
draws on the Trust Fund or increasing the revenues into the
Trust Fund. Neither bill had a single Republican supporter.
It is disappointing that the Republican Majority is now
reversing these efforts and potentially saddling working
Americans with a future tax increase, particularly when 87
percent of seniors--those with an average annual income of
$18,000--receive no benefit from this tax cut.
While the Republicans seem to believe they have devised a
contract that meets the political whims of the day, Democrats
made a commitment--a contract--with Americans in 1965 when we
enacted Medicare. We plan to keep that commitment.
Need for Consumer Protections in Long-Term Care Insurance
The Tax Relief Act of 1995 induces people to buy long-term
care insurance (LTC) by providing favorable tax treatment for
premiums on those policies. Yet the bill does nothing to
protect consumers from the abuses that are present in the
market. The recent past president of National Association of
Insurance Commissioners has stated, ``Some consumer abuses are
so severe as to raise questions about the very viability of
this product.''
In testimony before the health subcommittee, 8 of the 14
witnesses testified as to the need for consumer protections.
That testimony came from groups as diverse as the Health
Insurance Association of America, the Partnership States of
California, New York, and Connecticut, Consumers Union and The
Coalition of LTC Financing. As Kevin Mahoney, Project Director
of the California Partnership for LTC stated, ``* * * [T]he
standards the partnership policies must meet are key * * *
Unless policies provide adequate coverage and inflation
protection, purchases run a significant chance of still ending
up on Medicaid.'' The dizzying array of policies and riders to
policies and the confusing terminology make an effective choice
of a policy almost impossible for the consumer.
Last year during health care reform, this Committee
developed a bipartisan, consensus position that would have
placed strong consumer protection standards on LTC policies.
This year the new Majority on the Committee has chosen to
ignore the consumer. If the Federal government is going to
encourage individuals to purchase LTC insurance through tax
incentives, then it has an obligation to the public to ensure
that the policies purchased will meet certain minimum
standards.
Need for Consumer Protections in Accelerated Death Benefits
The Tax Relief Act of 1995 provides favorable tax treatment
for accelerated payments on life insurance contracts paid by
insurance carriers or viatical companies. Yet the bill does
little to protect terminally and chronically ill individuals
from abuse. Last year during health care reform, the Committee
developed a bipartisan, consensus position that would have
placed consumer protections on accelerated death benefits. This
year the new Majority on the Committee has chosen not to
protect the interests of the terminally and chronically ill. If
the Federal government is going to encourage individuals to
accelerate payments on their life insurance contracts through
favorable tax treatment, then it has an obligation to put the
interests of the terminally and chronically ill ahead of those
who profit from their misfortune.
Pete Stark.
Ben Carden.
Gerald Kleczka.
Charles B. Rangel.
William J. Coyne.
Sam M. Gibbons.
Jim McDermott.
John Lewis.
Barbara B. Kennelly.
Richard Neal.
ADDITIONAL DISSENTING VIEWS OFFERED BY REPRESENTATIVE BARBARA B.
KENNELLY TO H.R. 1215 (CONTRACT ON AMERICA TAX PROVISIONS)
Concern about potential abuse in long-term care provision
The Ways and Means Committee is one where great attention
has always been paid to the details. The fine print does
matter. As a Committee, we have always tried to ensure that
legislation we enacted worked as intended, didn't distort
marketplace consequences, and tried to prevent abuses where we
knew about them.
As a long time supporter of tax incentives for long-term
care, I am concerned that the bill contains a potential abuse
involving single premium long-term care insurance. It appears
to allow tax-free rollovers from IRAs and 401(k) plans and
contains no safeguards against single premium policies. That
means an individual could wait until a spouse becomes disabled,
rollover his/her IRA into a single premium long-term care
policy and effectively convert a taxable IRA income stream into
a non-taxable long-term care income stream with no insurance
risk. In addition, there is also the potential to get a medical
expense deduction depending on income and medical expenses.
Last year during health care reform, this Committee
developed a bipartisan, consensus position on long-term care
insurance that would have included a twenty pay or life
expectancy requirement. Such a requirement would go a long way
toward preventing abuse of this nature. However, the new
Majority on the Committee has deemed such a requirement
necessary. Such abuses should be prevented before they are
allowed to proliferate.
Barbara B. Kennelly.