[Senate Report 104-16]
[From the U.S. Government Publishing Office]



                                                        Calendar No. 34
104th Congress                                                   Report
                                 SENATE

 1st Session                                                     104-16
_______________________________________________________________________


 
  PERMANENT EXTENSION OF DEDUCTION FOR HEALTH INSURANCE COSTS OF SELF-
                          EMPLOYED INDIVIDUALS

                                _______


   March 20 (legislative day, March 16), 1995.--Ordered to be printed

_______________________________________________________________________


  Mr. Packwood, from the Committee on Finance, submitted the following

                              R E P O R T

                             together with

                            ADDITIONAL VIEWS

                        [To accompany H.R. 831]

      [Including cost estimate of the Congressional Budget Office]
    The Committee on Finance, to which was referred the bill 
(H.R. 831) to amend the Internal Revenue Code of 1986 to 
permanently extend the deduction for the health insurance costs 
of self-employed individuals, to repeal the provision 
permitting nonrecognition of gain on sales and exchanges 
effectuating policies of the Federal Communications Commission, 
and for other purposes, having considered the same, reports 
favorably thereon with an amendment in the nature of a 
substitute and recommends that the bill as amended do pass.
                                CONTENTS

                                                                   Page
  I. Legislative Background...........................................9
 II. Summary..........................................................9
III. Explanation of Provisions.......................................10
        A. Permanently Extend and Increase Deduction For Health      10
            Insurance Costs of Self-Employed Individuals.
        B. Repeal Special Rules Applicable to FCC-Certified Sales    11
            of Broadcast Properties.
        C. Prohibit Nonrecognition of Gain on Involuntary            18
            Conversions in Certain Related-Party Transactions; 
            Application of Section 1033 to Certain Microwave 
            Relocation Transactions.
        D. Deny Earned Income Tax Credit for Taxpayers With More     20
            Than $2,450 of Investment Income.
        E. Impose Tax on U.S. Citizens Who Relinquish Citizenship    21
 IV. Budget Effects..................................................27
  V. Votes of the Committee..........................................30
 VI. Regulatory Impact...............................................31
VII. Changes in Existing Law Made by the Bill........................32
VIII.
     Additional Views................................................34

    The amendment to the bill is as follows:
SECTION 1. PERMANENT EXTENSION AND INCREASE OF DEDUCTION FOR HEALTH 
                    INSURANCE COSTS OF SELF-EMPLOYED INDIVIDUALS.

  (a) Permanent Extension.--Subsection (l) of section 162 of 
the Internal Revenue Code of 1986 (relating to special rules 
for health insurance costs of self-employed individuals) is 
amended by striking paragraph (6).
  (b) Increase in Deduction.--Paragraph (1) of section 162(l) 
of the Internal Revenue Code of 1986 is amended by striking 
``25 percent'' and inserting ``30 percent''.
  (c) Effective Dates.--
          (1) Extension.--The amendment made by subsection (a) 
        shall apply to taxable years beginning after December 
        31, 1993.
          (2) Increase.--The amendment made by subsection (b) 
        shall apply to taxable years beginning after December 
        31, 1994.

SEC. 2. REPEAL OF NONRECOGNITION ON FCC CERTIFIED SALES AND EXCHANGES.

  (a) In General.--Subchapter O of chapter 1 of the Internal 
Revenue Code of 1986 is amended by striking part V (relating to 
changes to effectuate FCC policy).
  (b) Conforming Amendments.--Sections 1245(b)(5) and 
1250(d)(5) of the Internal Revenue Code of 1986 are each 
amended--
          (1) by striking ``section 1071 (relating to gain from 
        sale or exchange to effectuate polices of FCC) or'', 
        and
          (2) by striking ``1071 and'' in the heading thereof.
  (c) Clerical Amendment.--The table of parts for such 
subchapter O is amended by striking the item relating to part 
V.
  (d) Effective Date.--
          (1) In general.--The amendments made by this section 
        shall apply to--
                  (A) sales and exchanges on or after January 
                17, 1995, and
                  (B) sales and exchanges before such date if 
                the FCC tax certificate with respect to such 
                sale or exchange is issued on or after such 
                date.
          (2) Binding contracts.--
                  (A) In general.--The amendments made by this 
                section shall not apply to any sale or exchange 
                pursuant to a written contract which was 
                binding on January 16, 1995, and at all times 
                thereafter before the sale or exchange, if the 
                FCC tax certificate with respect to such sale 
                or exchange was applied for, or issued, on or 
                before such date.
                  (B) Sales contingent on issuance of 
                certificate.--A contract shall be treated as 
                not binding for purposes of subparagraph (A) if 
                the sale or exchange pursuant to such contract, 
                or the material terms of such contract, were 
                contingent, at any time on January 16, 1995, on 
                the issuance of an FCC tax certificate. The 
                preceding sentence shall not apply if the FCC 
                tax certificate for such sale or exchange is 
                issued on or before January 16, 1995.
          (3) FCC tax certificate.--For purposes of this 
        subsection, the term ``FCC tax certificate'' means any 
        certificate of the Federal Communications Commission 
        for the effectuation of section 1071 of the Internal 
        Revenue Code of 1986 (as in effect on the day before 
        the date of the enactment of this Act).

SEC. 3. SPECIAL RULES RELATING TO INVOLUNTARY CONVERSIONS.

  (a) Replacement Property Acquired by Corporations From 
Related Persons.--
          (1) In general.--Section 1033 of the Internal Revenue 
        Code of 1986 (relating to involuntary conversions) is 
        amended by redesignating subsection (i) as subsection 
        (j) and by inserting after subsection (h) the following 
        new subsection:
  ``(i) Nonrecognition Not To Apply if Corporation Acquires 
Replacement Property From Related Person.--
          ``(1) In general.--In the case of a C corporation, 
        subsection (a) shall not apply if the replacement 
        property or stock is acquired from a related person. 
        The preceding sentence shall not apply to the extent 
        that the related person acquired the replacement 
        property or stock from an unrelated person during the 
        period described in subsection (a)(2)(B).
          ``(2) Related person.--For purposes of this 
        subsection, a person is related to another person if 
        the person bears a relationship to the other person 
        described in section 267(b) or 707(b)(1).''
          (2) Effective date.--The amendment made by paragraph 
        (1) shall apply to involuntary conversions occurring on 
        or after February 6, 1995.
  (b) Application of Section 1033 to Certain Sales Required for 
Microwave Relocation.--
          (1) In general.--Section 1033 of the Internal Revenue 
        Code of 1986 (relating to involuntary conversions), as 
        amended by subsection (a), is amended by redesignating 
        subsection (j) as subsection (k) and by inserting after 
        subsection (i) the following new subsection:
  ``(j) Sales or Exchanges To Implement Microwave Relocation 
Policy.--
          ``(1) In general.--For purposes of this subtitle, if 
        a taxpayer elects the application of this subsection to 
        a qualified sale or exchange, such sale or exchange 
        shall be treated as an involuntary conversion to which 
        this section applies.
          ``(2) Qualified sale or exchange.--For purposes of 
        paragraph (1), the term `qualified sale or exchange' 
        means a sale or exchange before January 1, 2000, which 
        is certified by the Federal Communications Commission 
        as having been made by a taxpayer in connection with 
        the relocation of the taxpayer from the 1850-1990MHz 
        spectrum by reason of the Federal Communications 
        Commission's reallocation of that spectrum for use for 
        personal communications services. The Commission shall 
        transmit copies of certifications under this paragraph 
        to the Secretary.''
          (2) Effective date.--The amendment made by paragraph 
        (1) shall apply to sales or exchanges after March 14, 
        1995.

SEC. 4. DENIAL OF EARNED INCOME CREDIT FOR INDIVIDUALS HAVING MORE THAN 
                    $2,450 OF INVESTMENT INCOME.

  (a) In General.--Section 32 of the Internal Revenue Code of 
1986 is amended by redesignating subsections (i) and (j) as 
subsections (j) and (k), respectively, and by inserting after 
subsection (h) the following new subsection:
  ``(i) Denial of Credit for Individuals Having More Than 
$2,450 of Investment Income.--
          ``(1) In general.--No credit shall be allowed under 
        subsection (a) for the taxable year if the aggregate 
        amount of disqualified income of the taxpayer for the 
        taxable year exceeds $2,450.
          ``(2) Disqualified income.--For purposes of paragraph 
        (1), the term `disqualified income' means--
                  ``(A) interest which is received or accrued 
                during the taxable year (whether or not exempt 
                from tax),
                  ``(B) dividends to the extent includible in 
                gross income for the taxable year, and
                  ``(C) the excess (if any) of--
                          ``(i) gross income from rents or 
                        royalties not derived in the ordinary 
                        course of a trade or business, over
                          ``(ii) the sum of--
                                  ``(I) expenses (other than 
                                interest) which are clearly and 
                                directly allocable to such 
                                gross income, plus
                                  ``(II) interest expenses 
                                properly allocable to such 
                                gross income.''
  (b) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 1995.

SEC. 5. REVISION OF TAX RULES ON EXPATRIATION.

  (a) In General.--Subpart A of part II of subchapter N of 
chapter 1 of the Internal Revenue Code of 1986 is amended by 
inserting after section 877 the following new section:

``SEC. 877A. TAX RESPONSIBILITIES OF EXPATRIATION.

  ``(a) General Rule.--For purposes of this subtitle, if any 
United States citizen relinquishes his citizenship during a 
taxable year--
          ``(1) except as provided in subsection (f)(2), all 
        property held by such citizen at the time immediately 
        before such relinquishment shall be treated as sold at 
        such time for its fair market value, and
          ``(2) notwithstanding any other provision of this 
        title, any gain or loss shall be taken into account for 
        such taxable year.
Paragraph (2) shall not apply to amounts excluded from gross 
income under part III of subchapter B.
  ``(b) Exclusion for Certain Gain.--The amount which would 
(but for this subsection) be includible in the gross income of 
any individual by reason of subsection (a) shall be reduced 
(but not below zero) by $600,000.
  ``(c) Property Treated as Held.--For purposes of this 
section, except as otherwise provided by the Secretary, an 
individual shall be treated as holding--
          ``(1) all property which would be includible in his 
        gross estate under chapter 11 were such individual to 
        die at the time the property is treated as sold,
          ``(2) any other interest in a trust which the 
        individual is treated as holding under the rules of 
        subsection (f)(1), and
          ``(3) any other interest in property specified by the 
        Secretary as necessary or appropriate to carry out the 
        purposes of this section.
  ``(d) Exceptions.--The following property shall not be 
treated as sold for purposes of this section:
          ``(1) United states real property interests.--Any 
        United States real property interest (as defined in 
        section 897(c)(1)), other than stock of a United States 
        real property holding corporation which does not, on 
        the date the individual relinquishes his citizenship, 
        meet the requirements of section 897(c)(2).
          ``(2) Interest in certain retirement plans.--
                  ``(A) In general.--Any interest in a 
                qualified retirement plan (as defined in 
                section 4974(c)), other than any interest 
                attributable to contributions which are in 
                excess of any limitation or which violate any 
                condition for taxfavored treatment.
                  ``(B) Foreign pension plans.--
                          ``(i) In general.--Under regulations 
                        prescribed by the Secretary, interests 
                        in foreign pension plans or similar 
                        retirement arrangements or programs.
                          ``(ii) Limitation.--The value of 
                        property which is treated as not sold 
                        by reason of this subparagraph shall 
                        not exceed $500,000.
  ``(e) Relinquishment of Citizenship.--For purposes of this 
section, a citizen shall be treated as relinquishing his United 
States citizenship on the earliest of--
          ``(1) the date the individual renounces his United 
        States nationality before a diplomatic or consular 
        officer of the United States pursuant to paragraph (5) 
        of section 349(a) of the Immigration and Nationality 
        Act (8 U.S.C. 1481(a)(5)),
          ``(2) the date the individual furnishes to the United 
        States Department of State a signed statement of 
        voluntary relinquishment of United States nationality 
        confirming the performance of an act of expatriation 
        specified in paragraph (1), (2), (3), or (4) of section 
        349(a) of the Immigration and Nationality Act (8 U.S.C. 
        1481(a)(1)-(4)),
          ``(3) the date the United States Department of State 
        issues to the individual a certificate of loss of 
        nationality, or
          ``(4) the date a court of the United States cancels a 
        naturalized citizen's certificate of naturalization.
Paragraph (1) or (2) shall not apply to any individual unless 
the renunciation or voluntary relinquishment is subsequently 
approved by the issuance to the individual of a certificate of 
loss of nationality by the United States Department of State.
  ``(f) Special Rules Applicable to Beneficiaries' Interests in 
Trust.--
          ``(1) Determination of beneficiaries' interest in 
        trust.--For purposes of this section--
                  ``(A) General rule.--A beneficiary's interest 
                in a trust shall be based upon all relevant 
                facts and circumstances, including the terms of 
                the trust instrument and any letter of wishes 
                or similar document, historical patterns of 
                trust distributions, and the existence of and 
                functions performed by a trust protector or any 
                similar advisor.
                  ``(B) Special rule.--In the case of 
                beneficiaries whose interests in a trust cannot 
                be determined under subparagraph (A)--
                          ``(i) the beneficiary having the 
                        closest degree of kinship to the 
                        grantor shall be treated as holding the 
                        remaining interests in the trust not 
                        determined under subparagraph (A) to be 
                        held by any other beneficiary, and
                          ``(ii) if 2 or more beneficiaries 
                        have the same degree of kinship to the 
                        grantor, such remaining interests shall 
                        be treated as held equally by such 
                        beneficiaries.
                  ``(C) Constructive ownership.--If a 
                beneficiary of a trust is a corporation, 
                partnership, trust, or estate, the 
                shareholders, partners, or beneficiaries shall 
                be deemed to be the trust beneficiaries for 
                purposes of this section.
                  ``(D) Taxpayer return position.--A taxpayer 
                shall clearly indicate on its income tax 
                return--
                          ``(i) the methodology used to 
                        determine that taxpayer's trust 
                        interest under this section, and
                          ``(ii) if the taxpayer knows (or has 
                        reason to know) that any other 
                        beneficiary of such trust is using a 
                        different methodology to determine such 
                        beneficiary's trust interest under this 
                        section.
          ``(2) Deemed sale in case of trust interest.--If an 
        individual who relinquishes his citizenship during the 
        taxable year is treated under paragraph (1) as holding 
        an interest in a trust for purposes of this section--
                  ``(A) the individual shall not be treated as 
                having sold such interest,
                  ``(B) such interest shall be treated as a 
                separate share in the trust, and
                  ``(C)(i) such separate share shall be treated 
                as a separate trust consisting of the assets 
                allocable to such share,
                  ``(ii) the separate trust shall be treated as 
                having sold its assets immediately before the 
                relinquishment for their fair market value and 
                as having distributed all of its assets to the 
                individual as of such time, and
                  ``(iii) the individual shall be treated as 
                having recontributed the assets to the separate 
                trust.
        Subsection (a)(2) shall apply to any income, gain, or 
        loss of the individual arising from a distribution 
        described in subparagraph (B)(ii).
  ``(g) Termination of Deferrals, Etc.--On the date any 
property held by an individual is treated as sold under 
subsection (a), notwithstanding any other provision of this 
title--
          ``(1) any period during which recognition of income 
        or gain is deferred shall terminate, and
          ``(2) any extension of time for payment of tax shall 
        cease to apply and the unpaid portion of such tax shall 
        be due and payable at the time and in the manner 
        prescribed by the Secretary.
  ``(h) Rules Relating to Payment of Tax.--
          ``(1) Imposition of tentative tax.--
                  ``(A) In general.--If an individual is 
                required to include any amount in gross income 
                under subsection (a) for any taxable year, 
                there is hereby imposed, immediately before the 
                individual relinquishes United States 
                citizenship, a tax in an amount equal to the 
                amount of tax which would be imposed if the 
                taxable year were a short taxable year ending 
                on the date of such relinquishment.
                  ``(B) Due date.--The due date for any tax 
                imposed by subparagraph (A) shall be the 90th 
                day after the date the individual relinquishes 
                United States citizenship.
                  ``(C) Treatment of tax.--Any tax paid under 
                subparagraph (A) shall be treated as a payment 
                of the tax imposed by this chapter for the 
                taxable year to which subsection (a) applies.
          ``(2) Deferral of tax.--The provisions of section 
        6161 shall apply to the portion of any tax attributable 
        to amounts included in gross income under subsection 
        (a) in the same manner as if such portion were a tax 
        imposed by chapter 11.
  ``(i) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary or appropriate to carry out the 
purposes of this section, including regulations providing 
appropriate adjustments to basis to reflect gain recognized by 
reason of subsection (a) and the exclusion provided by 
subsection (b).
  ``(j) Cross Reference.--

          ``For termination of United States citizenship for tax 
        purposes, see section 7701(a)(47).''

  (b) Definition of Termination of United States Citizenship.--
Section 7701(a) of the Internal Revenue Code of 1986 is amended 
by adding at the end the following new paragraph:
          ``(47) Termination of united states citizenship.--An 
        individual shall not cease to be treated as a United 
        States citizen before the date on which the 
        individual's citizenship is treated as relinquished 
        under section 877A(e).''
  (c) Conforming Amendment.--Section 877 of the Internal 
Revenue Code of 1986 is amended by adding at the end the 
following new subsection:
  ``(f) Application.--This section shall not apply to any 
individual who relinquishes (within the meaning of section 
877A(e)) United States citizenship on and after February 6, 
1995.''
  (d) Clerical Amendment.--The table of sections for subpart A 
of part II of subchapter N of chapter 1 of the Internal Revenue 
Code of 1986 is amended by inserting after the item relating to 
section 877 the following new item:

                                    ``Sec. 877A. Tax responsibilities 
                                    of expatriation.''
  (e) Effective Date.--
          (1) In general.--The amendments made by this section 
        shall apply to United States citizens who relinquish 
        (within the meaning of section 877A(e) of the Internal 
        Revenue Code of 1986, as added by this section) United 
        States citizenship on or after February 6, 1995.
          (2) Due date for tentative tax.--The due date under 
        section 877A(h)(1)(B) of such Code shall in no event 
        occur before the 90th day after the date of the 
        enactment of this Act.
                       I. LEGISLATIVE BACKGROUND

    H.R. 831 was passed by the House of Representatives on 
February 21, 1995, by a vote of 381 to 44. As passed by the 
House of Representatives, H.R. 831 would: (1) extend 
permanently the 25-percent deduction for health insurance costs 
of self-employed individuals; (2) repeal the provision (Code 
section 1071) permitting nonrecognition of gain on sales and 
exchanges effectuating policies of the Federal Communications 
Commission (``FCC''); (3) provide that the nonrecognition of 
gain on involuntary conversions is not to apply if replacement 
property is acquired from a related person (Code section 1033); 
and (4) deny the earned income tax credit (``EITC'') to 
individuals who have more than $3,150 of taxable interest and 
dividend income and phase out the EITC for individuals with 
more than $2,500 of taxable interest and dividend income. 
1
    \1\ For a description of H.R. 831 as reported by the House 
Committee on Ways and Means, see H. Rept. No. 104-32, 104th Cong., 1st 
Sess. (1995).
---------------------------------------------------------------------------
    On March 7, 1995, the Committee on Finance held a public 
hearing on the application of Internal Revenue Code section 
1071 under the FCC's tax certificate program. On February 8, 
1995, the Committee on Finance held a public hearing on the 
revenue provisions in the President's fiscal year 1996 budget 
proposal, which includes provisions relating to the EITC and 
tax treatment of U.S. citizens who relinquish their 
citizenship.
    On March 15, 1995, the Committee on Finance held a markup 
of H.R. 831, and ordered the bill to be reported with 
modifications (a committee amendment in the nature of a 
substitute for H.R. 831 as passed by the House).

                              II. SUMMARY

    As reported by the Committee on Finance, H.R. 831 would:
    (1) Provide a 25-percent deduction for health insurance 
expenses of self-employed individuals for taxable years 
beginning in 1994, and a 30-percent deduction for taxable years 
beginning in 1995 and thereafter.
    (2) Repeal Code section 1071, generally effective for sales 
or exchanges on or after January 17, 1995, and sales or 
exchanges before that date if the FCC tax certificate with 
respect to the sale or exchange is issued on or after that 
date.
    (3) Modify Code section 1033 to provide that, in the case 
of a C corporation, deferral of gain is not available when 
replacement property or stock is purchased from a related 
party. This provision is effective with respect to involuntary 
conversions occurring on or after February 6, 1995. Also, 
provide that sales or exchanges that are certified by the FCC 
as made by a taxpayer in connection with a microwave relocation 
from the 1850-1990MHz spectrum by reason of the FCC's 
reallocation of that spectrum for use for personal 
communications services (``PCS'') would be treated as an 
involuntary conversion to which section 1033 applies. This 
provision applies to sales or exchanges occurring before 
January 1, 2000.
    (4) Deny the earned income tax credit to taxpayers if the 
aggregate amount of interest income (whether or not exempt from 
tax), dividend income, net rental income and royalties exceeds 
$2,450, effective for taxable years beginning after December 
31, 1995.
    (5) Provide that U.S. citizens who relinquish their 
citizenship are required to recognize, and pay income tax on, 
unrealized and deferred gains with respect to property held 
immediately prior to the expatriation. This provision is 
effective for U.S. citizens who relinquish citizenship on or 
after February 6, 1995. Provided that the revenues raised from 
the provision to tax gains on property held by U.S. citizens 
who relinquish their citizenship will be reserved for deficit 
reduction, and will not be used to offset the tax relief 
provisions of the bill or any subsequent legislation.
                     III. EXPLANATION OF PROVISIONS

A. Permanently Extend and Increase Deduction For Health Insurance Costs 
of Self-Employed Individuals (sec. 1 of the bill and sec. 162(l) of the 
                                 Code)

                              Present Law

    Under present law, the tax treatment of health insurance 
expenses depends on whether the taxpayer is an employee and 
whether the taxpayer is covered under a health plan paid for by 
the employee's employer. An employer's contribution to a plan 
providing accident or health coverage for the employee and the 
employee's spouse and dependents is excludable from an 
employee's income. The exclusion is generally available in the 
case of owners of a business who are also employees.
    In the case of self-employed individuals (i.e., sole 
proprietors or partners in a partnership) no equivalent 
exclusion applies. However, prior law provided a deduction for 
25 percent of the amount paid for health insurance for a self-
employed individual and the individual's spouse and dependents. 
The 25-percent deduction was available with respect to the cost 
of a self-insured plan as well as commercial insurance. 
However, in the case of self-insurance, the deduction was not 
available unless the self-insured plan was in fact insurance 
(e.g., there is appropriate risk shifting) and not merely a 
reimbursement arrangement. The 25-percent deduction was not 
available for any month if the taxpayer was eligible to 
participate in a subsidized health plan maintained by the 
employer of the taxpayer or the taxpayer's spouse. In addition, 
no deduction was available to the extent that the deduction 
exceeded the taxpayer's earned income. The amount of expenses 
paid for health insurance in excess of the deductible amount 
could be taken into account in determining whether the 
individual was entitled to an itemized deduction for medical 
expenses. The 25-percent deduction expired for taxable years 
beginning after December 31, 1993.
    For purposes of these rules, more than 2-percent 
shareholders of S corporations are treated the same as self-
employed individuals. Thus, they were entitled to the 25-
percent deduction.
    Other individuals who purchase their own health insurance 
(e.g., someone whose employer does not provide health 
insurance) can deduct their insurance premiums only to the 
extent that the premiums, when combined with other unreimbursed 
medical expenses, exceed 7.5 percent of adjusted gross income.

                           Reasons for Change

    The 25-percent deduction for health insurance costs of 
self-employed individuals was added by the Tax Reform Act of 
1986 to reduce the disparity between the tax treatment of 
owners of incorporated and unincorporated businesses. The 
provision was enacted on a temporary basis, and has been 
extended several times since enactment.
    The Committee believes it is appropriate to continue to 
reduce the disparity between the tax treatment of health 
insurance expenses of owners of incorporated and unincorporated 
businesses. Further, the Committee believes that the pattern of 
allowing the deduction to expire and then extending it creates 
unneeded uncertainty for taxpayers. Thus, the Committee 
believes the deduction should be made permanent.
    In addition, because the Committee believes that self-
employed individuals should be entitled to a deduction for 
their health insurance expenses in the same manner as owners of 
incorporated businesses, the Committee finds it appropriate to 
increase the level of the deduction from 25 to 30 percent, 
beginning in 1995.

                        Explanation of Provision

    The bill retroactively reinstates for 1994 the deduction 
for 25-percent of health insurance costs of self-employed 
individuals and extends the deduction permanently. For years 
beginning after December 31, 1994, the deduction is increased 
to 30 percent.

                             Effective Date

    The provision is generally effective for taxable years 
beginning after December 31, 1993. The increase in the 
deduction to 30 percent of health insurance costs is effective 
for taxable years beginning after December 31, 1994.
B. Repeal Special Rules Applicable to FCC-Certified Sales of Broadcast 
       Properties (sec. 2 of the bill and sec. 1071 of the Code)

                       Present Law and Background

Tax treatment of a seller of broadcast property

            General tax rules
    Under generally applicable Code provisions, the seller of a 
business, including a broadcast business, recognizes gain to 
the extent the sale price (and any other consideration 
received) exceeds the seller's basis in the property. The 
recognized gain is then subject to the current income tax 
unless the gain is deferred or not recognized under a special 
tax provision.
            Special rules under Code section 1031
    Under Code section 1031, no gain or loss is recognized if 
property held for productive use in a trade or business or for 
investment is exchanged for property of a ``like kind'' that is 
to be held for productive use in a trade or business or for 
investment. The nonrecognition rules do not apply to an 
exchange of one class or kind of property for property of a 
different class or kind.2 The different classes of 
property are: (1) depreciable tangible personal property; (2) 
intangible personal property; and (3) real property.3 
Corporate stock or partnership interests do not qualify as 
like-kind replacement property.
    \2\ Treas. Reg. sec. 1.1031(a)-1(b).
    \3\ Treas. Reg. sec. 1.1031(a)-2.
---------------------------------------------------------------------------
    If an exchange consists not only of like-kind property, but 
also of other property or money, then gain from the transaction 
is recognized to the extent of the money and the fair market 
value of the other property, and no loss from the transaction 
may be recognized. The basis of property received in a like-
kind transaction generally is the same as the basis of any 
property exchanged, decreased by the amount of money received 
or loss recognized on the exchange and increased by the amount 
of gain recognized on the exchange. Special rules apply to 
exchanges between related persons, which generally require the 
parties to the transaction to hold the exchanged property for 
at least two years after the exchange.
            Special rules under Code section 1033
    Under Code section 1033, gain realized by a taxpayer from 
certain involuntary conversions of property is deferred to the 
extent the taxpayer purchases property similar or related in 
service or use to the converted property. The replacement 
property may be acquired directly or by acquiring control of a 
corporation (generally, 80 percent of the stock of the 
corporation) that owns replacement property. The taxpayer's 
basis in the replacement property generally is the same as the 
taxpayer's basis in the converted property, decreased by the 
amount of any money or loss recognized on the conversion, and 
increased by the amount of any gain recognized on the 
conversion.
    Only involuntary conversions that result from destruction, 
theft, seizure, or condemnation (or threat or imminence 
thereof) are eligible for deferral under Code section 1033. In 
addition, the term ``condemnation'' refers to the process by 
which private property is taken for public use without the 
consent of the property owner but upon the award and payment of 
just compensation, according to a ruling by the Internal 
Revenue Service (IRS).4 Thus, for example, an order by a 
Federal court to a corporation to divest itself of ownership of 
certain stock because of anti-trust rules is not a condemnation 
(or a threat or imminence thereof), and the divestiture is not 
eligible for deferral under this provision.5 Under another 
IRS ruling, the ``threat or imminence of condemnation'' test is 
satisfied if, prior to the execution of a binding contract to 
sell the property, ``the property owner is informed, either 
orally or in writing by a representative of a governmental body 
or public official authorized to acquire property for public 
use, that such body or official has decided to acquire his 
property, and from the information conveyed to him has 
reasonable grounds to believe that his property will be 
condemned if a voluntary sale is not arranged.'' 6 
However, under this ruling, the threatened taking also must 
constitute a condemnation, as defined above.
    \4\ Rev. Rul. 58-11, 1958-1 C.B. 273.
    \5\ Id.
    \6\ Rev. Rul. 74-8, 1974-1 C.B. 200.
---------------------------------------------------------------------------
            Special rules under Code section 1071
    Under Code section 1071, if the FCC certifies that a sale 
or exchange of property is necessary or appropriate to 
effectuate a change in a policy of, or the adoption of a new 
policy by, the FCC with respect to the ownership and control of 
``radio broadcasting stations,'' a taxpayer may elect to treat 
the sale or exchange as an involuntary conversion. The FCC is 
not required to determine the tax consequences of certifying a 
sale or to consult with the IRS about the certification 
process. 7 No other provision of the Internal Revenue Code 
grants a Federal agency or any other party the type of complete 
discretion conveyed to the FCC by Code section 1071.
    \7\ The FCC allows sellers applying for FCC certificates in cable 
transactions to delete both the sales price and the number of 
subscribers from the transaction documents submitted with the request 
for the certificates.
---------------------------------------------------------------------------
    Under Code section 1071, the replacement requirement in the 
case of FCC-certified sales may be satisfied by purchasing 
stock of a corporation that owns broadcasting property, whether 
or not the stock represents control of the corporation. In 
addition, even if the taxpayer does not reinvest all the sales 
proceeds in similar or related replacement property, the 
taxpayer nonetheless may elect to defer recognition of gain if 
the basis of depreciable property that is owned by the taxpayer 
immediately after the sale or that is acquired during the same 
taxable year is reduced by the amount of deferred gain.
Tax treatment of a buyer of broadcast property

    Under generally applicable Code provisions, the purchaser 
of a broadcast business, or any other business, acquires a 
basis equal to the purchase price paid. In an asset 
acquisition, a buyer must allocate the purchase price among the 
purchased assets to determine the buyer's basis in these 
assets. In a stock acquisition, the buyer generally takes a 
basis in the stock equal to the purchase price paid, and the 
business retains its basis in the assets. This treatment 
applies whether or not the seller of the broadcast property has 
received an FCC certificate exempting the sale transaction from 
the normal tax treatment.

FCC tax certificate program

            Multiple ownership policy
    The FCC originally adopted multiple ownership rules in the 
early 1940s.8 These rules prohibited broadcast station 
owners from owning more than one station in the same service 
area, and, generally, more than six high frequency (radio) or 
three television stations. Owners wishing to acquire additional 
stations had to divest themselves of stations they already 
owned in order to remain in compliance with the FCC's rules.
    \8\ 5 Fed. Reg. 2382 (June 26, 1940) (multiple ownership rules for 
high frequency broadcast stations); 5 Fed. Reg. 2284 (May 6, 1941) 
(multiple ownership rules for television stations).
---------------------------------------------------------------------------
    In November 1943, the FCC adopted a rule that prohibited 
duopolies (ownership of more than one station in the same 
city).9 After these rules were adopted, owners wishing to 
acquire additional stations in excess of the national ownership 
limit had to divest themselves of stations they already owned 
in order to remain in compliance with the FCC's rules. After 
Code section 1071 was adopted in 1943, in some cases, parties 
petitioned the FCC for tax certificates pursuant to Code 
section 1071 when divesting themselves of stations. These 
divestitures were labeled ``voluntary divestitures'' by the 
FCC. When the duopoly rule was adopted, 35 licensees that held 
more than one license in a particular city were required by the 
rule ``involuntarily'' to divest themselves of one of the 
licenses.10
    \9\ 8 Fed. Reg. 16065 (Nov. 23, 1943).
    \10\ FCC Announces New Policy Relating to Issuance of Tax 
Certificates, 14 FCC2d 827 (1956).
---------------------------------------------------------------------------
            Minority ownership policy
    In 1978, the FCC announced a policy of promoting minority 
ownership of broadcast facilities by offering an FCC tax 
certificate to those who voluntarily sell such facilities 
(either in the form of assets or stock) to minority individuals 
or minority-controlled entities.11 The FCC's policy was 
based on the view that minority ownership of broadcast stations 
would provide a significant means of fostering the inclusion of 
minority views in programming, thereby serving the needs and 
interests of the minority community as well as enriching and 
educating the non-minority audience. The FCC subsequently 
expanded its policy to include the sale of cable television 
systems to minorities as well.12
    \11\ Minority Ownership of Broadcasting Facilities, 68 FCC2d 979 
(1978).
    \12\ Minority Ownership of Cable Television Systems, 52 R.R.2d 1469 
(1982).
---------------------------------------------------------------------------
    ``Minorities,'' within the meaning of the FCC's policy, 
include ``Blacks, Hispanics, American Indians, Alaska Natives, 
Asians, and Pacific Islanders.'' 13 As a general rule, a 
minority-controlled corporation is one in which more than 50 
percent of the voting stock is held by minorities. A minority-
controlled limited partnership is one in which the general 
partner is a minority or minority-controlled, and minorities 
have at least a 20-percent interest in the partnership.14 
The FCC requires those who acquire broadcast properties with 
the help of the FCC tax certificate policy to hold those 
properties for at least one year.15 An acquisition can 
qualify even if there is a pre-existing agreement (or option) 
to buy out the minority interests at the end of the one-year 
holding period, providing that the transaction is at arm's-
length.
    \13\ 52 R.R.2d at n. 1.
    \14\ Commission's Policy Regarding the Advancement of Minority 
Ownership in Broadcasting, Policy Statement, and Notice of Proposed 
Rulemaking, 92 FCC2d 853-855 (1982).
    \15\ See Amendment of Section 73.3597 of the Commission's Rules 
(Applications for Voluntary Assignments or Transfers of Control), 57 
R.R.2d 1149 (1985). Anti-trafficking rules require cable properties to 
be held for at least three years (unless the property is sold pursuant 
to a tax certificate).
---------------------------------------------------------------------------
    In 1982, the FCC further expanded its tax certificate 
policy for minority ownership. At that time, the FCC decided 
that, in addition to those who sell properties to minorities, 
investors who contribute to the stabilization of the capital 
base of a minority enterprise would be entitled to a tax 
certificate upon the subsequent sale of their interest in the 
minority entity.16 To qualify for an FCC tax certificate 
in this circumstance, an investor must either (1) provide 
start-up financing that allows a minority to acquire either 
broadcast or cable properties, or (2) purchase shares in a 
minority-controlled entity within the first year after the 
license necessary to operate the property is issued to the 
minority. An investor can qualify for a tax certificate even if 
the sale of the interest occurs after participation by a 
minority in the entity has ceased. In these situations, the 
status of the divesting investor and the purchaser of the 
divested interest is irrelevant, because the goal is to 
increase the financing opportunities available to minorities.
    \16\ Commission Policy Regarding the Advancement of Minority 
Ownership in Broadcasting, 92 FCC2d 849 (1982).
            Personal communications services ownership policy
    In 1993, Congress provided for the orderly transfer of 
frequencies, including frequencies that can be licensed 
pursuant to competitive bidding procedures.17 The FCC has 
adopted rules to conduct auctions for the award of more than 
2,000 licenses to provide personal communications services 
(``PCS''). PCS will be provided by means of a new generation of 
communication devices that will include small, lightweight, 
multi-function portable phones, portable facsimile and other 
imaging devices, new types of multi-channel cordless phones, 
and advanced paging devices with two-way data capabilities. The 
PCS auctions (which began last year) will constitute the 
largest auction of public assets in American history and are 
expected to generate billions of dollars for the United States 
Treasury.18
    \17\ Omnibus Budget Reconciliation Act of 1993, P.L. 103-66, Title 
VI.
    \18\ Fifth Report and Order, 9 FCC Rcd 5532 (1994).
---------------------------------------------------------------------------
    The FCC has designed procedures to ensure that small 
businesses, rural telephone companies and businesses owned by 
women and minorities have ``the opportunity to participate in 
the provision'' of PCS, as Congress directed in 1993.19 To 
help minorities and women participate in the auction of the PCS 
licenses, the FCC took several steps including up to a 25-
percent bidding credit, a reduced upfront payment requirement, 
a flexible installment payment schedule, and an extension of 
the tax certificate program for businesses owned by minorities 
and women. 20
    \19\ Omnibus Budget Reconciliation Act of 1993, P.L. 103-66, 
section 6002(a).
    \20\ Installment payments are available to small businesses and 
rural telephone companies.
---------------------------------------------------------------------------
    The FCC will employ the tax certificate program in three 
ways: (1) initial investors (who provide ``start-up'' financing 
or purchase interests within the first year after license 
issuance) in minority and woman-owned PCS businesses will be 
eligible for FCC tax certificates upon the sale of their 
investments; (2) holders of PCS licenses will be able to obtain 
FCC tax certificates upon the sale of the business to a company 
controlled by minorities and women; and (3) a cellular operator 
that sells its interest in an overlapping cellular system to a 
minority or a woman-owned business to come into compliance with 
the FCC PCS/cellular cross-ownership rule will be eligible for 
a tax certificate. In addition, as discussed below, the FCC 
will issue tax certificates for PCS to encourage fixed 
microwave operators voluntarily to relocate to clear a portion 
of the spectrum for PCS technologies.
            Microwave relocation policy
    PCS can operate only on frequencies below 3GHz. However, 
because that frequency range is currently occupied by various 
private fixed microwave communications systems (such as 
railroads, oil pipelines, and electric utilities), there are no 
large blocks of unallocated spectrum available to PCS. To 
accommodate PCS, the FCC has reallocated the spectrum; the 
1850-1990MHz spectrum will be used for PCS, and the microwave 
systems will be required to move to higher frequencies. Current 
occupants of the 1850-1990MHz spectrum allocated to PCS must 
relocate to higher frequencies not later than three years after 
the close of the bidding process.21 In accordance with FCC 
rules, these current occupants have the right to be compensated 
for the cost of replacing their old equipment, which can 
operate only on the 1850-1990MHz spectrum, with equipment that 
will operate at the new, higher frequency. At a minimum, the 
winners of the new PCS licenses must pay for and install new 
facilities to enable the incumbent microwave operators to 
relocate. The amount of these payments and characteristics of 
the new equipment will be the subject of negotiation between 
the incumbent microwave operators and the PCS licensees; thus, 
the nature of the compensation (i.e., solely replacement 
equipment, or a combination of replacement equipment plus a 
cash payment) is unknown at present. If no agreement is reached 
within the 3-year voluntary negotiation period, the microwave 
operators will be required by the FCC to vacate the spectrum; 
however, the timing of such relocation is uncertain because the 
relocation would take place only after completion of a formal 
negotiation process in which the FCC would be a participant.
    \21\ The PCS auctions for the 1850-1990MHz spectrum commenced in 
December, 1994.
---------------------------------------------------------------------------
    The FCC will employ the tax certificate program for PCS to 
encourage fixed microwave operators voluntarily to relocate 
from the 1850-1990MHz band to clear the band for PCS 
technologies.22 Tax certificates will be available to 
incumbent microwave operators that relocate voluntarily within 
three years following the close of the bidding process. Thus, 
the certificates are intended to encourage such occupants to 
relocate more quickly than they otherwise would and to clarify 
the tax treatment of such transactions.23
    \22\ See, Third Report and Order and Memorandum Opinion and Order, 
8 FCC Rcd 6589 (1993).
    \23\ The transaction between the PCS licensee and the incumbent 
microwave operator might qualify for tax-free treatment as a like kind 
exchange under Code section 1031 or as an involuntary conversion under 
Code section 1033. However, the availability of deferral under these 
Code provisions may be uncertain in certain circumstances. For example, 
it may be unclear whether the transaction would qualify as an 
involuntary conversion under currently applicable IRS standards.
Congressional appropriations rider

    Since fiscal year 1988, in appropriations legislation, the 
Congress has prohibited the FCC from using any of its 
appropriated funds to repeal, to retroactively apply changes 
in, or to continue a reexamination of its comparative 
licensing, distress sale and tax certificate policies.24 
This limitation has not prevented an expansion of the existing 
program.25 The current rider will expire at the end of the 
1995 fiscal year, September 30, 1995.
    \24\ Pub. L. No. 100-202 (1987).
    \25\ The appropriations restriction ``does not prohibit the agency 
from taking steps to create greater opportunity for minority 
ownership.'' H. Rept. No. 103-708 (Conf. Rept.), 103d Cong. 2d Sess. 40 
(1994).
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee, in its review of the administration and 
operation of Code section 1071, found serious tax policy 
problems with this provision. As an initial matter, the 
standards pursuant to which the FCC will issue tax certificates 
have evolved far beyond what Congress originally contemplated. 
Congress originally intended Code section 1071 to alleviate the 
burden of taxpayers who had been forced to sell their radio 
stations under difficult wartime circumstances. The FCC has 
interpreted the provision to permit the FCC to grant unlimited 
tax benefits for routine and voluntary sales of a wide range of 
communication properties.
    In addition, the FCC's standards for issuing tax 
certificates have been so vague that the program appears to 
have been subject to significant abuse. For example, the FCC's 
definition of ``control'' for purposes of its minority 
ownership policies provides little guarantee that a minority 
will effectively manage a broadcast property after the sale of 
property has been certified. In addition, because the FCC 
generally requires only one year of minority ownership or 
control to qualify for a tax certificate, section 1071 has 
frequently resulted in only transitory minority ownership of 
broadcast properties, i.e., in many cases the granting of the 
tax certificate has not resulted in achieving the objective of 
minority ownership or control.
    Further, the FCC's interpretation and administration of the 
tax certificate program has not been supervised or subject to 
any systematic review by the IRS, or any other government body 
that could evaluate the tax cost of the program. In granting 
tax certificates, the FCC does not take into account or request 
any information regarding the size of the potential tax benefit 
involved. The FCC also does not request any showing or 
representation that the amount of the tax benefits, which at 
least initially accrue to the non-minority seller generally, is 
in any way reflected in the form of a lower purchase price to 
the minority-owned or controlled purchaser. As a result, it is 
possible that, in many cases, the entire tax benefit accrues to 
the non-minority seller.
    From a tax policy perspective, the Committee found serious 
deficiencies in section 1071. No other provision of the 
Internal Revenue Code conveys the level of discretion to a 
Federal government agency comparable to the discretion conveyed 
on the FCC by section 1071. Thus, section 1071 grants the 
authority to the FCC to administer what is, in effect, an open-
ended entitlement program with no constraints imposed to limit 
the extent to which the FCC may utilize the provision.
    As a result of these considerations, the Committee 
concluded that the tax cost of the FCC tax certificate program 
far outweighs any demonstrated benefit of the program. The 
Committee also concluded that the section is inconsistent with 
sound tax policy. The Committee therefore is repealing the 
provision.

                        Explanation of Provision

    The bill repeals Code section 1071. Thus, a sale or 
exchange of broadcast properties would be subject to the same 
tax rules applicable to all other taxpayers engaged in the sale 
or exchange of a business.

                             Effective Date

    The repeal of section 1071 is effective for (1) sales or 
exchanges on or after January 17, 1995,26 and (2) sales or 
exchanges before that date if the FCC tax certificate with 
respect to the sale or exchange is issued on or after that 
date. The provision does not apply to taxpayers who have 
entered into a binding written contract (or have completed a 
sale or exchange pursuant to a binding written contract) before 
January 17, 1995, and who have applied for an FCC tax 
certificate by that date. A contract is treated as not binding 
for this purpose if the sale or exchange pursuant to the 
contract (or the material terms of the contract) were 
contingent on January 16, 1995, on issuance of an FCC tax 
certificate. A sale or exchange would not be contingent on 
January 16, 1995, on issuance of an FCC tax certificate if the 
tax certificate had been issued by the FCC by that date.
    \26\ On January 17, 1995, House Committee on Ways and Means 
Chairman Archer issued a press release announcing that the Committee on 
Ways and Means would immediately review the operation of section 1071 
to explore possible legislative changes to section 1071, including the 
possibility of repeal. The press release stated that any changes to 
section 1071 may apply to transactions completed, or certificates 
issued by the FCC, on or after the date of the announcement.
   C. Prohibit Nonrecognition of Gain on Involuntary Conversions in 
  Certain Related-Party Transactions; Application of Section 1033 to 
Certain Microwave Relocation Transactions (sec. 3 of the bill and sec. 
                           1033 of the code)

                              Present Law

    As described above (Part III.B.), under Code section 1033, 
gain realized by a taxpayer from certain involuntary 
conversions of property is deferred to the extent the taxpayer 
purchases property similar or related in service or use to the 
converted property within a specified period.
    Under rulings issued by the IRS to taxpayers, property 
(stock or assets) purchased from a related person may, in some 
cases, qualify as property similar or related in service or use 
to the converted property.27 Thus, in certain 
circumstances, related taxpayers may obtain significant (and 
possibly indefinite or permanent) tax deferral without any 
additional cash outlay to acquire new properties. In cases in 
which a taxpayer purchases stock as replacement property, 
section 1033 permits the taxpayer to reduce basis of stock, but 
does not require any reduction in the basis of the underlying 
assets. Thus, the reduction in basis of stock does not result 
in reduced depreciation deductions.
    \27\ See, e.g., PLR 8132072, PLR 8020069. Private letter rulings do 
not have precedential authority and may not be relied upon by any 
taxpayer other than the taxpayer receiving the ruling but are some 
indication of IRS administrative practice.
---------------------------------------------------------------------------

                           Reasons for Change

    In the course of its deliberations, the Committee also 
became aware of problems with the operation of Code section 
1033. Under interpretations issued by the IRS, taxpayers are 
able to purchase replacement property from a related party, 
thereby avoiding the need to buy ``new'' replacement property 
and, sometimes, effectively resulting in a total tax 
forgiveness for the transaction. The Committee intends that, in 
the future, corporate taxpayers be required to buy replacement 
property only from unrelated persons in order to receive the 
special tax treatment under section 1033.
    In addition, the Committee sought to ensure tax-free 
treatment for transactions between PCS licensees and the 
incumbent microwave operators in connection with the relocation 
of the microwave operators from the 1850-1990MHz spectrum by 
reason of the FCC's reallocation of that spectrum for use for 
PCS. (See description of present law, Part III.B.) Thus, the 
Committee intends that such transactions constitute involuntary 
conversions under Code section 1033. However, no inference is 
intended with respect to the nature or appropriate tax 
treatment of any other transactions.

                        Explanation of Provision

Related-party transactions

    Under the bill, subchapter C corporations are not entitled 
to defer gain under Code section 1033 if the replacement 
property or stock is purchased from a related person. A person 
is treated as related to another person if the person bears a 
relationship to the other person described in Code section 
267(b) or 707(b)(1). An exception to the general rule provides 
that a taxpayer could purchase replacement property or stock 
from a related person and defer gain under Code section 1033 to 
the extent the related person acquired the replacement property 
or stock from an unrelated person within the period prescribed 
under Code section 1033. Thus, property acquired from outside 
the group within the period prescribed by section 1033 and 
retransferred to the taxpayer member of the group within the 
prescribed time period, will qualify in the hands of the 
taxpayer to the extent that the property's basis or other net 
tax consequences to the group do not change as a result of the 
transfer.

Microwave relocation transactions

    The bill provides that sales or exchanges that are 
certified by the FCC as having been made by a taxpayer in 
connection with the relocation of the taxpayer from the 1850-
1990MHz spectrum by reason of the FCC's reallocation of that 
spectrum for use for PCS would be treated as involuntary 
conversions to which Code section 1033 applies.

                             Effective Date

    The provision prohibiting the purchase of qualified 
replacement property from a related party applies to 
involuntary conversions occurring on or after February 6, 1995.
    The provision treating certain microwave relocation 
transactions as involuntary conversions applies to sales or 
exchanges occurring before January 1, 2000.
D. Deny Earned Income Tax Credit for Taxpayers With More Than $2,450 of 
     Investment Income (sec. 4 of the bill and sec. 32 of the Code)

                              Present Law

    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. For taxpayers with earned income (or 
adjusted gross income, 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 adjusted gross 
income, if greater) in excess of the phaseout threshold. The 
credit is not allowed if earned income (or adjusted gross 
income, if greater) exceeds the phaseout limit. There is no 
additional limitation on the amount of unearned income that the 
taxpayer may receive.
    The parameters for the EITC depend upon the number of 
qualifying children the taxpayer claims. For 1995 the 
parameters are as follows:

------------------------------------------------------------------------
                    Two or more                                         
                     qualifying       One qualifying     No qualifying  
                     children--          child--           children--   
------------------------------------------------------------------------
Credit rate (in                                                         
 percent)......              36.00              34.00               7.65
Phaseout rate                                                           
 (in percent)..              20.22              15.98               7.65
Earned income                                                           
 threshold.....             $8,640             $6,160             $4,100
Maximum credit.             $3,110             $2,094               $314
Phaseout                                                                
 threshold.....            $11,290            $11,290             $5,130
Phaseout limit.            $26,673            $24,396             $9,230
------------------------------------------------------------------------

    The earned income threshold and the phaseout threshold are 
indexed for inflation; because the phaseout limit depends on 
those amounts, the phaseout rate, and the credit rate, the 
phaseout limit will also increase if there is inflation. Earned 
income consists of wages, salaries, other employee 
compensation, and net self-employment income.
    The credit rates and phaseout rates for the EITC change 
over time under present law. For 1996 and after, the credit 
rate will be 40.00 percent and the phaseout rate will be 21.06 
percent for taxpayers with two or more qualifying children. The 
credit rate and the phaseout rate for taxpayers with one 
qualifying child or no qualifying children will be the same as 
those listed in the table above.
    To claim the EITC, a taxpayer must either have a qualifying 
child or must meet other requirements. A qualifying child must 
meet a relationship test, an age test, and a residence test. In 
order to claim the EITC without a qualifying child, a taxpayer 
must not be a dependent and must be over age 24 and under age 
65.

                           Reasons for Change

    Under present law, a taxpayer may have relatively low 
earned income, and therefore may be eligible for the EITC, 
despite also having significant unearned income. The Committee 
believes that the EITC should be targeted to families with the 
greatest need. Therefore, the Committee believes that it is 
inappropriate to allow an EITC to taxpayers with significant 
unearned income.

                        Explanation of Provision

    Under the bill, a taxpayer is not eligible for the EITC if 
the aggregate amount of disqualified income of the taxpayer for 
the taxable year exceeds $2,450. Disqualified income is the sum 
of:
          (1) interest (whether or not subject to tax) received 
        or accrued in the taxable year,
          (2) dividends to the extent includible in gross 
        income for the taxable year, and
          (3) net income (if greater than zero) from rents and 
        royalties not derived in the ordinary course of 
        business.
Disqualified income would not include interest accrued during 
the taxable year on a United States savings bond issued at 
discount under 31 U.S.C. 3105 for which a cash-basis taxpayer 
has not made the election under Code section 454(a) to treat 
such accrued interest as received in the taxable year.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 1995.
 E. Impose Tax on U.S. Citizens Who Relinquish Citizenship (sec. 5 of 
                  the bill and sec. 877A of the Code)

                              Present Law

    U.S. citizens and residents generally are subject to U.S. 
income taxation on their worldwide income (sec. 61 of the Code 
and Treas. Reg. sec. 1-1.1(b)). The U.S. tax may be reduced or 
offset by a credit allowed for foreign income taxes paid with 
respect to foreign income (secs. 901-907). Nonresident aliens 
are taxed at a flat rate of 30 percent (or a lower treaty rate) 
on certain types of passive income derived from U.S. sources, 
and at regular graduated rates on net profits derived from a 
U.S. business (sec. 871).
    The United States imposes tax on gains recognized by 
foreign persons that are attributable to dispositions of 
interests in U.S. real property (secs. 897, 1445, 6039C, and 
6652(f), known as the Foreign Investment in Real Property Tax 
Act (``FIRPTA'')). 28 Such gains generally are subject to 
tax at the same rates that apply to similar income received by 
U.S. persons. The Code imposes a withholding obligation when a 
U.S. real property interest is acquired from a foreign person 
(sec. 1445). The amount required to be withheld on the sale by 
a foreign investor of a U.S. real property interest is 
generally 10 percent of the amount realized (gross sales price) 
(sec. 1445(a)). However, the amount withheld generally will not 
exceed the transferor's maximum tax liability if a certificate 
for reduced withholding is issued by the Internal Revenue 
Service (IRS) (sec. 1445(c)(1)).
    \28\ Under the FIRPTA provisions, tax is imposed on gains from the 
disposition of an interest (other than an interest solely as a 
creditor) in real property (including an interest in a mine, well, or 
other natural deposit) located in the United States or the U.S. Virgin 
Islands. Also included in the definition of a U.S. real property 
interest is any interest (other than an interest solely as a creditor) 
in any domestic corporation unless the taxpayer establishes that the 
corporation was not a U.S. real property holding corporation (USRPHC) 
at any time during the five year period ending on the date of the 
disposition of the interest (sec. 897(c)(1)(A)(ii)). A USRPHC is any 
corporation, the fair market value of whose U.S. real property 
interests equals or exceeds 50 percent of the sum of the fair market 
values of (i) its U.S. real property interests, (ii) its interests in 
foreign real property, plus (iii) any other of its assets which are 
used or held for use in a trade or business (sec. 897(c)(2)).
---------------------------------------------------------------------------
    Distributions, including lump-sum distributions, that 
foreign persons receive from qualified U.S. retirement plans 
generally are subject to U.S. tax at a 30-percent rate. 
However, to the extent these distributions represent 
contributions with respect to services performed in the United 
States after 1986, the distributions are subject to U.S. tax at 
graduated rates. The U.S. tax is frequently reduced or 
eliminated under applicable U.S. income tax treaties.
    A U.S. citizen who relinquishes U.S. citizenship with a 
principal purpose to avoid Federal tax may be subjected to an 
alternative taxing method for 10 years after expatriation (sec. 
877). A special rule applies with respect to the burden of 
proving the existence or nonexistence of U.S. tax avoidance as 
one of the principal purposes of the expatriation. Under this 
provision, the Treasury Department may establish that it is 
reasonable to believe that the expatriate's loss of U.S. 
citizenship would, but for the application of this provision, 
result in a substantial reduction in the U.S. tax based on the 
expatriate's probable income for the taxable year (sec. 877(e)) 
. If this reasonable belief is established, then the expatriate 
must carry the burden of proving that the loss of citizenship 
did not have as one of its principal purposes the avoidance of 
U.S. income, estate or gift taxes.
    Under this alternative method, the expatriate generally is 
taxed on his U.S. source income (net of certain deductions), as 
well as on certain business profits, at rates applicable to 
U.S. citizens and residents. Solely for this purpose, gains on 
the sale of property located in the United States and stocks 
and securities issued by U.S. persons also are treated as U.S. 
source income (sec. 877(c)). The alternative method applies 
only if it results in a higher U.S. tax liability than the 
amount otherwise determined for nonresident aliens.
    The United States imposes its estate tax on the worldwide 
estates of persons who were citizens or domiciliaries of the 
United States at the time of death (secs. 2001, 2031), and on 
certain property belonging to nondomiciliaries of the United 
States which is located in the United States at the time of 
their death (secs. 2101, 2103). The U.S. gift tax is imposed on 
all gifts made by U.S. citizens and domiciliaries, and on gifts 
of property made by nondomiciliaries where the property is 
located in the United States at the time of the gift (sec. 
2501).

                           Reasons for Change

    The Committee has been informed that a small number of very 
wealthy individuals each year relinquish their U.S. citizenship 
for the purpose of avoiding U.S. income, estate, and gift 
taxes. By so doing, such individuals reduce their annual U.S. 
income tax liability and eliminate their eventual U.S. estate 
tax liability.
    The Committee recognizes that citizens of the United States 
have a basic right not only to physically leave the United 
States to live elsewhere, but also to relinquish their U.S. 
citizenship. The Committee does not believe that the Internal 
Revenue Code should be used to stop U.S. citizens from 
expatriating; however, the Committee also does not believe that 
the Code should provide a tax incentive for expatriating.
    The Committee is concerned that present law, which bases 
the application of the alternative method of taxation under 
section 877 on proof of a tax-avoidance purpose, has proven 
difficult to administer. In addition, the Committee is 
concerned that the alternative method can be avoided by 
postponing the realization of U.S. source income for 10 years. 
The Committee believes that section 877 is largely ineffective 
to tax U.S. citizens who expatriate with a principal purpose to 
avoid tax.
    The Committee believes that the alternative tax system of 
section 877 should be replaced by a tax regime that applies to 
expatriates who remove large amounts of appreciated assets out 
of U.S. tax jurisdiction, but does not rely on establishing a 
tax-avoidance motive. Inasmuch as U.S. citizens who retain 
their citizenship are subject to income tax on accrued 
appreciation when they dispose of their assets, as well as 
estate tax on the full value of assets that are held until 
death, the Committee believes it fair and equitable to tax 
expatriates on the appreciation of their assets when they 
relinquish their U.S. citizenship. The Committee is informed, 
however, that most U.S. citizens who relinquish their U.S. 
citizenship do not avoid large amounts of U.S. tax by so doing. 
Therefore, the Committee believes that an expatriation tax 
should not apply to expatriates who remove only modest amounts 
of appreciated assets out of U.S. tax jurisdiction.
    The Committee approved the provision in order to reduce the 
Federal budget deficit. The Committee does not intend that the 
revenue raised from this provision be used to offset the tax-
relief provisions of the bill or of any subsequent legislation.

                        Explanation of Provision

In general

    Under the bill, a U.S. citizen who relinquishes citizenship 
generally is treated as having sold all of his property at fair 
market value immediately prior to the expatriation. Gain or 
loss from the deemed sale is recognized at that time, generally 
without regard to other provisions of the Code.29
     29 See the discussion of the application of the Code's income 
exclusions under ``Other special rules'' below.
---------------------------------------------------------------------------
    Net gain on the deemed sale is recognized under the bill 
only to the extent it exceeds $600,000 ($1.2 million in the 
case of married individuals filing a joint return, both of whom 
expatriate).

Property taken into account

    Property treated as sold by an expatriating citizen under 
the provision includes all items that would be included in the 
individual's gross estate under the Federal estate tax if such 
individual were to die on the day of the deemed sale, plus 
certain trust interests that are not otherwise includible in 
the gross estate (discussed below under ``Interests in 
trusts''), and other interests that may be specified by the 
Treasury Department in order to carry out the purposes of the 
provision.
    The bill provides that certain types of property, although 
includable in the gross estate were the expatriate to die while 
subject to U.S. estate tax, are not taken into account for 
purposes of determining the expatriation tax. U.S. real 
property interests, which remain subject to U.S. taxing 
jurisdiction in the hands of nonresident aliens, generally are 
not taken into account.30 Also not taken into account are 
interests in qualified retirement plans, other than interests 
attributable to excess contributions or contributions that 
violate any condition for tax-favored treatment. In addition, 
under regulations, interests in foreign pension plans and 
similar retirement plans or programs are not taken into account 
up to a maximum amount of $500,000.
    \30\ The exception would apply to all U.S. real property interests, 
as defined in section 897(c)(1), except the stock of a U.S. real 
property holding corporation that does not satisfy the requirements of 
section 897(c)(2) on the date of the deemed sale.
---------------------------------------------------------------------------

Interests in trusts

    Under the bill, an expatriate who is a beneficiary of a 
trust is deemed to own a separate trust consisting of the 
assets allocable to his share of the trust, in accordance with 
his interest in the trust (discussed below). The separate trust 
is treated as selling its assets for fair market value 
immediately before the beneficiary relinquishes his 
citizenship, and distributing all resulting income and corpus 
to the beneficiary. The beneficiary is treated as subsequently 
recontributing the assets to the trust. Consequently, the 
separate trust's basis in the assets will be stepped up and all 
assets held by the separate trust will be treated as corpus.
    The bill provides that a beneficiary's interest in a trust 
is determined on the basis of all facts and circumstances. 
These include the terms of the trust instrument itself, any 
letter of wishes or similar document, historical patterns of 
trust distributions, the role of any trust protector or similar 
advisor, and anything else of relevance. The Committee expects 
that the Treasury Department will issue regulations to provide 
guidance as to the determination of trust interests for 
purposes of the expatriation tax. The Committee intends that 
such regulations disregard de minimis interests in trusts, such 
as an interest of less than a certain percentage of the trust 
as determined on an actuarial basis, or a contingent remainder 
interest that has less than a certain likelihood of occurrence.
    In the event that any beneficiaries' interests in the trust 
cannot be determined on the basis of the facts and 
circumstances, the beneficiary with the closest degree of 
family relationship to the settlor would be presumed to hold 
the remaining interests in the trust. The beneficiaries would 
be required to disclose on their respective tax returns the 
methodology used to determine that beneficiary's interest in 
the trust, and whether that beneficiary knows (or has reason to 
know) that any other beneficiary of the trust uses a different 
method.
    The Committee intends that the special rule for interests 
in a trust not apply to a grantor trust. The bill follows the 
grantor trust rules in treating a grantor of a grantor trust as 
the owner of the trust assets for tax purposes. Therefore, a 
grantor who expatriates is treated as directly selling the 
assets held by the trust for purposes of computing the tax on 
expatriation. Similarly, a beneficiary of a grantor trust who 
is not treated as an owner of a portion of the trust under the 
grantor trust rules is not considered to hold an interest in 
the trust for purposes of the expatriation tax.
Date of relinquishment of citizenship

    Under the bill, a U.S. citizen who renounces his U.S. 
nationality before a diplomatic or consular officer of the 
United States pursuant to section 349(a)(5) of the Immigration 
and Nationality Act (8 U.S.C. section 1481(a)(5)) is treated as 
having relinquished his citizenship on that date, provided that 
the renunciation is later confirmed by the issuance of a 
certificate of loss of nationality by the U.S. Department of 
State. A U.S. citizen who furnishes to the State Department a 
signed statement of voluntary relinquishment of U.S. 
nationality confirming the performance of an expatriating act 
specified in section 349(a)(1)-(4) of the Immigration and 
Nationality Act (8 U.S.C. section 1481(a)(1)-(4)) is treated as 
having relinquished his citizenship on the date such statement 
is so furnished, provided that the voluntary relinquishment is 
later confirmed by the issuance of a certificate of loss of 
nationality by the U.S. Department of State. Any other U.S. 
citizen to whom the Department of State issues a certificate of 
loss of nationality is treated as having relinquished his 
citizenship on the date that such certificate is issued to the 
individual. A naturalized citizen is treated as having 
relinquished his citizenship on the date a court of the United 
States cancels his certificate of naturalization. If any 
individual is described in more than one of the above 
categories, the individual is treated as having relinquished 
his citizenship on the earliest of the applicable dates.
    The Committee anticipates that an individual who has either 
renounced his citizenship or furnished a signed statement of 
voluntary relinquishment but has not received a certificate of 
loss of nationality from the Department of State by the date on 
which he is required to file a tax return covering the year of 
expatriation will file his U.S. tax return as if he 
expatriated. The Committee further anticipates that such an 
individual will amend his return for that year in the event 
that the Department of State fails to confirm the expatriation 
by issuing a certificate of loss of nationality.

Administrative requirements

    Under the bill, an individual who is subject to the tax on 
expatriation is required to pay a tentative tax equal to the 
amount of tax that would have been due based on a hypothetical 
short tax year that ended on the date the individual 
relinquished his citizenship.31 The tentative tax is due 
on the 90th day after the date of relinquishment. The Committee 
expects that Treasury regulations (under the authority of sec. 
6011) will require that the expatriate file a tax return at 
such time. The individual also is required to file a full-year 
tax return for the tax year during which he expatriated 
reporting all of his taxable income for the year, including 
gain attributable to the deemed sale of assets on the date of 
expatriation. The individual's U.S. Federal income tax 
liability for such year will be reduced by the tentative tax 
paid with the filing of the hypothetical short-year return.
    \31\ Thus, the tentative tax is based on all the income, gain, 
deductions, loss and credits of the individual for the year through the 
date of relinquishment, including amounts realized from the deemed sale 
of property. The tentative tax is treated as imposed immediately before 
the individual relinquishes citizenship.
---------------------------------------------------------------------------
    The bill provides that the time for the payment of the tax 
on expatriation may be extended for a period not to exceed 10 
years at the request of the taxpayer, as provided by section 
6161. The Committee expects that a taxpayer's interest in non-
liquid assets such as an interest in a closely-held business 
interest (as defined in sec. 6166(b)) will be taken into 
account in determining reasonable cause for the extension of 
time to pay the tax on expatriation.
    In the event that the expatriating individual and the 
Treasury Department agree to defer payment of the tax on 
expatriation for a period that extends beyond the filing date 
for the full-year tax return for the year of expatriation, the 
bill provides that the individual would not be required to pay 
a tentative tax. The entire gain on the deemed sale of property 
on the date of expatriation would be included in the 
individual's full-year tax return for that year, and would be 
paid in accordance with the provisions of the deferred-tax 
agreement under section 6161. The Committee expects that the 
Treasury Department will not agree to defer payment of the tax 
on expatriation unless the taxpayer provides adequate assurance 
that all amounts due under the agreement will be paid.
    The Committee expects that the Department of State will 
notify the IRS of the name and taxpayer identification number 
of any U.S. citizen who relinquishes U.S. citizenship promptly 
after the date of relinquishment, as defined in the 
provision.32 In addition, the Committee anticipates that 
the Department of State will request of any expatriating 
citizen, at the time of relinquishment of citizenship, 
appropriate information to assist the IRS in enforcing the 
requirements of the provision.
    \32\ That is, without waiting for the issuance of a certificate of 
loss of nationality.
---------------------------------------------------------------------------

Other special rules

    As noted above, the tax on expatriation applies generally 
notwithstanding other provisions of the Code. For example, gain 
that would be eligible for nonrecognition treatment if the 
property were actually sold is treated as recognized for 
purposes of the tax on expatriation. In addition, for example, 
bona fide residence in a U.S. possession or commonwealth does 
not affect the application of the expatriation tax.33 
However, the bill provides that the portions of the gain 
treated as realized under the provisions of the expatriation 
tax are not recognized to the extent they are treated as 
excluded under the specific income exclusions of sections 101-
137 (Subtitle A, Chapter 1B, Part III) of the Code.
    \33\ Because there is no meaningful concept of citizenship of a 
U.S. territory or possession, the Committee intends that the provision 
not be ``mirrored'' for application in the U.S. territories and 
possessions that employ the mirror code.
---------------------------------------------------------------------------
    Other special rules of the Code may affect the 
characterization of amounts treated as realized under the 
expatriation tax. For example, in the case of stock in a 
foreign corporation that was a controlled foreign corporation 
at any time during the five-year period ending on the date of 
the deemed sale, the gain recognized on the deemed sale is 
included in the shareholder's income as a dividend to the 
extent of certain earnings of the foreign corporation (see sec. 
1248).
    The bill provides that any period during which recognition 
of income or gain is deferred will terminate on the date of the 
relinquishment, causing any deferred U.S. tax to be due and 
payable at the time specified by the Treasury Department. For 
example, where an individual has disposed of certain property 
(e.g., property that qualifies for like-kind exchange under 
sec. 1031 or as a principal residence under sec. 1034) but has 
not yet acquired replacement property, the relevant period to 
acquire any replacement property is deemed to terminate and the 
individual is taxed on the gain from the original sale.
    The bill authorizes the Treasury Department to issue 
regulations to permit a taxpayer to allocate the taxable gain 
(net of any applicable exclusion) to the basis of assets taxed 
under this provision, thereby preventing double taxation if the 
assets remain subject to U.S. tax jurisdiction.

                             Effective Date

    The provision is effective for U.S. citizens who relinquish 
their U.S. citizenship (as determined under the bill) on or 
after February 6, 1995. The tentative tax will not be required 
to be paid until 90 days after the date of enactment of the 
bill.
    Present law will continue to apply to U.S. citizens who 
relinquished their citizenship prior to February 6, 1995.
                           IV. BUDGET EFFECTS

                         A. Committee Estimates

    In compliance with paragraph 11(a) of rule XXVI of the 
Standing Rules of the Senate, the following statement is made 
concerning the estimated budget effects of the bill (H.R. 831) 
as amended and reported by the Committee on Finance.
    The bill as amended is estimated to have the following 
effects on budget receipts and outlays for fiscal years 1995-
2000:

                                    ESTIMATED REVENUE EFFECTS OF H.R. 831 AS REPORTED BY THE SENATE FINANCE COMMITTEE                                   
                                                        [By fiscal years, in millions of dollars]                                                       
--------------------------------------------------------------------------------------------------------------------------------------------------------
                     Provision                       Effective    1995      1996      1997      1998      1999      2000     1995-00   2001-05   1995-05
--------------------------------------------------------------------------------------------------------------------------------------------------------
1. Extend self-employed health deduction: 25% for   12/31/93        -514      -482      -527      -587      -649      -708    -3,467    -4,520    -7,987
 1994 and 30% thereafter.                                                                                                                               
2. Repeal section 1071 (FCC tax certificate         1/17/95          334       411       135       135       170       201     1,386     1,465     2,849
 program).                                                                                                                                              
3. Modify section 1033 for corporations with        2/6/95             5         9        23        33        47        67       184       689       873
 transition rule for microwave relocation                                                                                                               
 previously entitled to section 1071 (non-                                                                                                              
 recognition of gain on involuntary conversions                                                                                                         
 not to apply to acquisitions from related                                                                                                              
 persons).                                                                                                                                              
4. Deny earned income tax credit to individuals     1/1/96      ........        21       415       465       501       540     1,941     3,372     5,313
 with interest, dividends, tax-exempt interest                                                                                                          
 income and net rental and royalty income over                                                                                                          
 $2,450 (the $2,450 threshold is not indexed for                                                                                                        
 inflation) \1\.                                                                                                                                        
5. Revise tax treatment of renouncers of            2/6/95            47       144       197       257       322       392     1,359     2,274     3,633
 citizenship \2\.                                                                                                                                       
                                                               -----------------------------------------------------------------------------------------
      Net totals..................................                  -128       103       243       303       391       492     1,403     3,280     4,681
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Included in this estimate are decreases in EITC outlays of $17 million for FY 1996, $334 million for FY 1997, $375 million for FY 1998, $409 million
  for FY 1999, $439 million for FY 2000, $468 million for FY 2001, $504 million for FY 2002, $540 million for FY 2003, $579 million for FY 2004, and    
  $622 million for FY 2005.                                                                                                                             
\2\ Modified version of Administration's revenue proposal.                                                                                              
                                                                                                                                                        
Note.--Details may not add to total due to rounding.                                                                                                    
                                                                                                                                                        
Source: Joint Committee on Taxation.                                                                                                                    

                B. Budget Authority and Tax Expenditures

Budget authority

    In compliance with Section 308(a)(1) of the Budget Act, the 
Committee states that the bill as reported involves decreased 
budget authority (reduction in outlays) for the reduction in 
the refundable portion of the earned income tax credit 
attributable to the change in eligibility relating to certain 
unearned income (amounts are shown above in the table in Part 
IV.A).

Tax expenditures

    In compliance with Section 308(a)(2) of the Budget Act, the 
Committee states that the revenue reduction attributable to the 
extension of the deduction for health insurance costs for self-
employed individuals involves increased tax expenditures, and 
that the revenue-increasing provisions of the bill involve a 
reduction in tax expenditures (amounts are shown above in the 
table in IV.A).

            C. Consultation with Congressional Budget Office

    In accordance with Section 403 of the Budget Act, the 
Committee advises that the Congressional Budget Office has 
reviewed the Committee's budget estimates. The Congressional 
Budget Office submitted the following statement:

                                     U.S. Congress,
                               Congressional Budget Office,
                                    Washington, DC, March 17, 1995.
Hon. Bob Packwood,
Chairman, Committee on Finance,
U.S. Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office and the 
Joint Committee on Taxation (JCT) have reviewed H.R. 831, as 
ordered reported by the Senate Committee on Finance on March 
15, 1995. The JCT estimates that this bill would increase the 
deficit by $0.128 billion in fiscal year 1995 and decrease the 
deficit by $1.404 billion over fiscal years 1995 through 2000.
    H.R. 831 would restore the 25 percent deduction for health 
insurance costs of self-employed individuals for 1994, and 
would increase it permanently to 30 percent thereafter. The 25 
percent deduction expired after December 31, 1993.
    The bill includes several provisions to offset the revenue 
loss from extending the deduction. First, H.R. 831 would repeal 
the provision of the Internal Revenue Code that permits 
nonrecognition of gain on sales and exchanges effectuating 
policies of the Federal Communications Commission and would 
prohibit nonrecognition of gain on involuntary conversions in 
certain related-party transactions. Also, the bill would deny 
the earned income tax credit (EITC) to individuals with 
interest, dividends, tax-exempt interest income and net rental 
and royalty income over $2,450. Finally, H.R. 831 should revise 
the tax treatment of individuals who renounce their 
citizenship. The budget effects of the bill are shown below:

                                           BUDGET EFFECTS OF H.R. 831                                           
                                    [By fiscal years, in billions of dollars]                                   
----------------------------------------------------------------------------------------------------------------
                                                   1995       1996       1997       1998       1999       2000  
----------------------------------------------------------------------------------------------------------------
Revenues:                                                                                                       
    Projected revenues under current law......   1355.213   1417.720   1475.496   1546.405   1618.306   1697.488
    Proposed changes..........................     -0.128      0.086     -0.091     -0.072     -0.018      0.053
    Projected revenues under H.R. 831.........   1355.085   1417.806   1475.405   1546.333   1618.288   1697.541
Outlays:                                                                                                        
    Projected EITC outlays under current law..     17.260     20.392     22.904     23.880     24.938     25.982
    Proposed changes..........................          0     -0.017     -0.334     -0.375     -0.409     -0.439
    Projected EITC outlays under H.R. 831.....     17.260     20.375     22.570     23.505     24.529     25.543
----------------------------------------------------------------------------------------------------------------

    Section 252 of the Balanced Budget and Emergency Deficit 
Control Act of 1985 sets up pay-as-you-go procedures for 
legislation affecting receipts or direct spending through 1998. 
Because H.R. 831 would affect receipts, pay-as-you-go 
procedures would apply to the bill. These effects are 
summarized in the table below:

                      PAY-AS-YOU-GO CONSIDERATIONS                      
                [By fiscal years, in billions of dollars]               
------------------------------------------------------------------------
                                 1995       1996       1997       1998  
------------------------------------------------------------------------
Changes in receipts.........     -0.128      0.086     -0.091     -0.072
Changes in outlays..........          0     -0.017     -0.334     -0.375
------------------------------------------------------------------------

    If you wish further details, please feel free to contact me 
or your staff may wish to contact Melissa Sampson.
            Sincerely,
                                              James L. Blum
                                   (For June E. O'Neill, Director).
                       V. VOTES OF THE COMMITTEE

    In compliance with paragraph 7(b) of rule XXVI of the 
Standing Rules of the Senate, the following is a tabulation of 
the votes taken during Committee markup of the bill (H.R. 831).

Motion to report the bill as amended

    The bill (H.R. 831), as amended, was ordered favorably 
reported by a voice vote (13 Members were present for this 
voice vote).

Votes on amendments

    The Committee approved a motion (12 yeas and 8 nays) by 
Senator Roth to (1) repeal Code section 1071, effective January 
17, 1995 (as provided in the Chairman's mark), (2) modify the 
EITC, and (3) use the savings to increase the deduction for 
health insurance costs for self-employed individuals to 30 
percent beginning in 1995. (This amendment was a second-degree 
substitute for an original amendment by Senator Moynihan, which 
would have (1) made the repeal of Code section 1071 effective 
on or after March 15, 1995, with exceptions for investors 
contributing start-up financing to a minority enterprise before 
March 15, 1995, (2) applied the section 1033 change effective 
for involuntary conversions occurring on or after March 15, 
1995, and (3) set the limit on unearned income for EITC 
eligibility at $2,450.
    Yeas--Packwood, Dole (proxy), Roth, Chafee, Grassley, 
Hatch, Simpson (proxy), Pressler (proxy), D'Amato, Murkowski, 
Nickles, Bradley.
    Nays--Moynihan, Baucus, Pryor, Rockefeller (proxy) Breaux, 
Conrad, Graham, Moseley-Braun.
    The Committee defeated a motion (9 yeas and 11 nays) by 
Senator Moynihan to: (1) strike repeal of section 1071 and 
provide for a 2-year moratorium on Code section 1071; (2) add a 
provision to preclude tax avoidance through renunciation of 
U.S. citizenship; (3) increase the self-employed health 
deduction to 30 percent in 1995 and thereafter; (4) permit the 
State of New York to continue operating inpatient hospital 
reimbursement system; (5) exempt from excise tax diesel dyeing 
rules those States exempt from the Clean Air Act diesel dyeing 
rules under EPA regulations; (6) provide special rules for 
marina operators that sell and recreational boaters who buy 
dyed diesel fuel; (7) apply the section 1033 change effective 
for involuntary conversions occurring on or after March 15, 
1995; and (8) set the limit on unearned income for EITC 
eligibility at $2,450. The roll call vote was as follows:
    Yeas--Moynihan, Baucus, Bradley, Pryor, Rockefeller 
(proxy), Breaux, Conrad, Graham, Moseley-Braun.
    Nays--Packwood, Dole (proxy), Roth, Chafee, Grassley, 
Hatch, Simpson (proxy), Pressler (proxy), D'Amato, Murkowski, 
Nickles.
    The Committee defeated a motion (10 yeas and 10 nays) by 
Senator Bradley to limit the deduction for health insurance 
costs for self-employed individuals to 25 percent and to use 
the savings for deficit reduction. The roll call vote was as 
follows:
    Yeas--Packwood, Chafee, Simpson, Moynihan, Bradley, 
Rockefeller (proxy), Breaux, Conrad, Graham, Moseley-Braun.
    Nays--Dole (proxy), Roth, Grassley, Hatch, Pressler, 
D'Amato, Murkowski, Nickles, Baucus, Pryor.
    The Committee defeated a second-degree substitute motion (7 
yeas and 13 nays) by Senator Moseley-Braun to the above Bradley 
amendment. The Moseley-Braun amendment would delete the 
retroactive dates in the previous Roth amendment, and make the 
dates prospective. The roll call vote was as follows:
    Yeas--Moynihan, Pryor, Rockefeller (proxy), Breaux, Conrad, 
Graham, Moseley-Braun.
    Nays--Packwood, Dole (proxy), Roth, Chafee, Grassley, Hatch 
(proxy), Simpson (proxy), Pressler (proxy), D'Amato (proxy), 
Murkowski (proxy), Nickles (proxy), Baucus, Bradley.
    The Committee approved a motion (voice vote) by Senator 
Bradley (cosponsored by Senators Conrad and Moseley-Braun) to 
(1) impose a tax on people who relinquish their U.S. 
citizenship and (2) use the revenues for deficit reduction (13 
Members were present for this voice vote.)
                         VI. REGULATORY IMPACT

    Pursuant to paragraph 11(b) of rule XXVI of the Standing 
Rules of the Senate, the Committee makes the following 
statement concerning the regulatory impact that might be 
incurred in carrying out the bill (H.R. 831) as reported.

Impact on individuals and businesses

    Section 1 of the bill as reported reinstates the 25-percent 
deduction for health insurance costs for self-employed 
individuals for 1994 and permanently extends the deduction at 
30 percent for 1995 and thereafter. Expeditious enactment of 
this provision will allow self-employed individuals to be able 
to file their 1994 income tax returns with certainty concerning 
the deduction and not have to file amended tax returns.
    Section 2 of the bill as reported repeals Code section 1071 
(relating to nonrecognition of gain on certain broadcast 
properties under the FCC tax certificate program), generally 
effective for sales or exchanges on or after January 17, 1995, 
and for sales or exchanges before that date if the FCC tax 
certificate with respect to the sale or exchanges is issued on 
or after that date. Thus, a sale or exchange of broadcast 
properties is subject to the same general tax rules applicable 
to other taxpayers engaged in the sale or exchange of a 
business.
    Section 3 of the bill as reported modifies Code section 
1033 to provide that, in the case of a C corporation, deferral 
of gain is not available when replacement property or stock is 
purchased from a related party, effective for involuntary 
conversions occurring on or after February 6, 1995. Also, the 
bill provides that sales or exchanges involving microwave 
relocation transactions that are certified by the FCC as having 
been made in connection with the relocation of the taxpayer 
from the 1850-1990MHz spectrum by reason of the FCC's 
reallocation of that spectrum for use for personal 
communications services (PCS) will be treated as involuntary 
conversions under section 1033. The microwave relocation 
provision applies to sales or exchanges occurring before 
January 1, 2000.
    Section 4 of the bill as reported denies the earned income 
tax credit (EITC) to taxpayers if the aggregate amount of 
interest income (taxable and exempt), dividend income, net 
rental income and royalties exceeds $2,450 for taxable years 
beginning after 1995.
    Section 5 of the bill as reported provides that U.S. 
citizens who relinquish their citizenship will be required to 
recognize, and pay income tax on, unrealized and deferred gains 
with respect to property held immediately prior to the 
expatriation. The provision is effective for U.S. citizens 
relinquishing citizenship on or after February 6, 1995.

Impact on personal privacy and paperwork

    Section 4 of the bill as reported will involve an 
additional calculation by taxpayers who may be eligible for the 
EITC to determine if they are subject to the $2,450 limit on 
unearned income.
    Section 5 of the bill as reported will involve increased 
reporting of information to the Federal Government for U.S. 
citizens who relinquish their citizenship and the filing of 
additional tax forms to comply with the provision.

              VII. CHANGES IN EXISTING LAW MADE BY THE BILL

    In the opinion of the Committee, it is necessary in order 
to expedite the business of the Senate, to dispense with the 
requirements of paragraph 12 of rule XXVI of the Standing Rules 
of the Senate (relating to the showing of changes in existing 
law made by the provision of H.R. 831 as reported by the 
Committee).
                         VIII. ADDITIONAL VIEWS

        ADDITIONAL VIEWS OF SENATORS MOYNIHAN AND MOSELEY-BRAUN

    During the Finance Committee's consideration of H.R. 831, 
Senator Moynihan offered amendments that would have eliminated 
the retroactive repeal of Internal Revenue Code section 1071 
from the bill. Section 1071 authorizes the Federal 
Communications Commission to provide tax deferral to sellers of 
broadcast properties when such sales effectuate FCC policies, 
including sales to minority purchasers to foster program 
diversity. The Chairman's mark proposed to use the revenue 
generated from retroactive repeal of section 1071 to pay for 
the permanent extension of the 25 percent deduction for health 
insurance costs of the self-employed.
    Senator Moynihan's amendment proposed instead an 
alternative source to raise the same revenue: a proposal from 
the Administration's Fiscal Year 1996 Budget designed to 
prevent tax avoidance by U.S. citizens who renounce their 
citizenship. This amendment accomplished the primary objective 
of H.R. 831, that is, to act expeditiously on the 25 percent 
health insurance deduction for the self-employed prior to the 
filing deadline for the 1994 tax year. Retroactive repeal of 
section 1071 was not necessary to accomplish this objective. 
With modest changes to the earned income tax credit (EITC) 
provision in the Chairman's mark, the amendment provided 
sufficient revenue to allow a permanent extension of the self-
employed health insurance deduction at an increased level of 30 
percent.
    Valid questions have been raised about the way that section 
1071 is currently being administered. Recognizing this fact, 
the amendment would have provided a moratorium of up to two 
years on the provision. The Administration is undertaking a 
comprehensive review of all federal affirmative action 
programs. The moratorium would provide adequate time for the 
Congress to review section 1071 and affirmative action policies 
generally, consider the Administration's recommendations and 
develop a reform proposal. During the moratorium period, no FCC 
tax certificates would be issued and applications for tax 
certificates would not be processed by the FCC. Section 1071 
was enacted more than 50 years ago, in 1943, and its 
application to sales to minority purchasers has been in place 
for 17 years, since 1978. It is only reasonable to expend more 
than a few weeks when making significant changes to the 
provision. The necessity of acting quickly on the extension of 
the self-employed health insurance deduction precludes that 
kind of deliberation.
    The amendment would also have eliminated the retroactive 
aspect of the repeal of section 1071. The Committee is aware of 
at least 19 transactions that were negotiated in reliance on 
the existence of section 1071 and had FCC tax certificate 
applications pending at the time the House voted to 
retroactively repeal the provision. In many of these cases, the 
parties had signed definitive purchase agreements (subject only 
to issuance of an FCC tax certificate), filed applications for 
FCC tax certificates, and expended hundreds of thousands (in 
some cases, millions) of dollars in negotiation costs. All done 
in reliance on an FCC policy that had been in place for 17 
years and had been expressly reaffirmed by Congress in each 
annual appropriations bill for the FCC since 1987, most 
recently in appropriations legislation passed in August 1994. 
In the case of the sale of certain cable TV systems by Viacom, 
a transaction that has received much press attention, we are 
advised that negotiations with the buyer had commenced in July 
1994, more than 6 months before there was any indication that 
section 1071 might be modified. The Chairman of the Ways & 
Means Committee announced in a press release on January 17, 
1995 that section 1071 might be modified, and that any changes 
later decided on by the Ways & Means Committee would be 
retroactive to the date of the press release. By the time of 
the press release, we are advised that the parties to the 
Viacom transaction had expended more than $15 million in 
negotiation costs, and that the definitive terms of the $2.3 
billion transaction had been settled--which is amply evidenced 
by the signing of the agreement on January 20, 1995, a mere 
three days after the release. Eighteen other transactions were 
proceeding in similar reliance on the law in effect on January 
17--at least that is the number of which we are currently 
aware.
    Businesses cannot plan, cannot negotiate, and cannot 
compete on a fair basis under the threat of this kind of 
retroactive reversal of the law. The critical issues are 
adequate notice and justified reliance. We believe that the 
affected parties justifiably relied on the law in effect when 
they entered into their transactions, and that the notice they 
received was not adequate. This kind of retroactive legislating 
should not be done.
    In addition to paying for an extension of the self-employed 
health insurance deduction without resort to a retroactive 
repeal of section 1071, the amendment contained two additional 
time sensitive provisions.
    First, the amendment included a measure providing that the 
diesel fuel dyeing requirements for tax administration 
purposes, enacted in 1993, would not apply in any State that is 
exempted from the fuel dyeing requirements of the Clean Air 
Act. Alaska currently has such an exemption, due to the fact 
that over 90 percent of the diesel fuel used in that state is 
used off-road and not subject to the Clean Air Act 
requirements. Similarly, over 90 percent of the diesel fuel 
used in Alaska is used for nontaxable purposes. Conforming the 
fuel dyeing rules for environmental and tax purposes is 
justified, and needs to be accomplished expeditiously. In 
addition, the amendment would have permitted the use of dyed 
diesel fuel for recreational boating purposes during calendar 
year 1995, so long as the diesel tax is collected at the retail 
level.
    Second, the amendment contained another provision of a 
time-sensitive nature related to health care. The amendment 
would have permitted the State of New York to continue 
operating an inpatient hospital reimbursement system that has 
been in place since 1983. The reimbursement system, in which 
all payers except Medicare participate, provides substantial 
support to hospitals for the cost of care to the uninsured by 
imposing a surcharge on each inpatient hospital bill. This 
reimbursement system is being challenged in the Federal courts 
as impermissible state regulation of employer group health 
plans. A statutory provision covering this reimbursement system 
was added by Senator Moynihan to the Omnibus Budget 
Reconciliation Act of 1993, but will expire on May 12 of this 
year. The amendment would have provided an exemption for the 
reimbursement system through 1996.
    In summary, the Moynihan amendments addressed the time-
sensitive need to extend the self-employed health insurance 
deduction in advance of the 1994 tax filing deadline without 
embroiling that issue in the twin controversies of precipitous 
repeal of the minority broadcast tax preference program or of 
retroactive tax provisions. We regret that it did not pass.

                                   Daniel Patrick Moynihan.
                                   Carol Moseley-Braun.