Senate Report 104-279 - ADOPTION PROMOTION AND STABILITY ACT OF 1996

[Senate Report 104-279]
[From the U.S. Government Publishing Office]

104th Congress Report
SENATE

2d Session 104-279
_______________________________________________________________________

ADOPTION PROMOTION AND STABILITY ACT OF 1996

_______

June 13, 1996.--Ordered to be printed

_______________________________________________________________________

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

R E P O R T

[To accompany H.R. 3286]

The Committee on Finance, to which was referred the bill
(H.R. 3286) to help families defray adoption costs, and to
promote the adoption of minority children, having considered
the same, reports favorably thereon with amendments and
recommends that the bill as amended do pass.

CONTENTS

Page
I. LEGISLATIVE BACKGROUND AND SUMMARY...............................1
A. Legislative Background.............................. 1
B. Summary............................................. 2
II. EXPLANATION OF THE BILL..........................................2
A. Tax Credit and Exclusion for Adoption Expenses...... 2
B. Removal of Barriers to Interethnic Adoptions........ 5
C. Revenue Offsets..................................... 6
1. Treatment of bad debt deductions of thrift
institutions................................... 6
2. Depreciation under the income forecast method... 16
III. BUDGET EFFECTS OF THE BILL......................................20
A. Committee Estimates................................. 20
B. Budget Authority and Tax Expenditures............... 22
C. Consultation with Congressional Budget Office....... 22
IV. VOTE OF THE COMMITTEE...........................................22
V. REGULATORY IMPACT AND OTHER MATTERS.............................22
A. Regulatory Impact................................... 22
B. Information Relating to Unfunded Mandates........... 23
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED...........24

I. LEGISLATIVE BACKGROUND AND SUMMARY

A. Legislative Background

The Senate Committee on Finance marked up H.R. 3286
(``Adoption Promotion and Stability Act of 1996'') on June 12,
1996. The Committee on Finance amended Titles, I, II, and IV of
the bill.
H.R. 3286 was passed by the House of Representatives on May
10, 1996. As passed by the House, title I of the bill would
provide a tax credit for certain adoption expenses and an
exclusion for certain employer-provided adoption expenses;
title II of the bill would remove certain barriers to
interethnic adoptions; Title III of the bill would modify child
custody proceedings affected by the Indian Child Welfare Act of
1978; and Title IV of the bill would provide two revenue
offsets: (1) remove business exclusion for energy subsidies
provided by public utilities, and (2) modify treatment of
foreign trusts.
The Committee on Finance ordered the bill, as amended,
favorably reported by voice vote on June 12, 1996. The bill is
to be referred to the Senate Committee on Indian Affairs for a
period of 10 legislative days for consideration of Title III of
the bill.

B. Summary

H.R. 3286, as amended by the Committee on Finance,
provides: (1) a tax credit for certain adoption expenses and an
exclusion for amounts received by an employee for certain
adoption expenses under an employer adoption assistance program
(Title I); (2) removal of barriers to interethnic adoptions
(Title II); and (3) revenue offsets for the bill (repeal of bad
debt deduction for certain thrift institutions and modification
of the depreciation rules under the income forecast method of
accounting). The Committee on finance only acted on titles I,
II, and IV of the bill. Title III (relating to child custody
proceedings affected by the Indian Child Welfare Act of 1978)
will be referred to the Committee on Indian Affairs for a
period of 10 legislative days.

II. EXPLANATION OF THE BILL

A. Tax Credit and Exclusion for Adoption Expenses (Sec. 101 of the Bill
and New Secs. 23 and 137 of the Code)

Present law

Under present law, the Federal Adoption Assistance program
(a Federal outlay program) provides financial assistance for
the adoption of certain special needs children. In general, a
special needs child is defined as a child who (1) according to
a State determination, could not or should not be returned to
the home of the natural parents and (2) on account of a
specific factor or condition (such as ethnic background, age,
membership in a minority or sibling group, medical conditions,
or physical, mental or emotional handicap), could not
reasonably be expected to be adopted unless adoption assistance
is provided. Specifically, the program provides assistance for
adoption expenses for those special needs children receiving
Federally assisted adoption assistance payments as well as
special needs children in private and State-funded programs.
The maximum Federal reimbursement is $1,000 per special needs
child. Reimbursable expenses include those nonrecurring costs
directly associated with the adoption process such as legal
costs, social service review, and transportation costs.
Present law provides no specific Federal tax benefits to
encourage adoption.

Reason for change

The Committee believes that the financial costs of the
adoption process should not be barrier to adoption. In
addition, the Committee wishes to encourage further the
adoption of special needs children, as defined under present
law section 473(c) of the Social Security Act. Therefore in the
case of special needs adoptions, the maximum tax credit is
increased from $5,000 to $6,000, and it is not subject to the
sunset. Similarly, the allowable exclusion under an employer
adoption assistance program is increased from $5,000 to $6,000
in the case of a special needs adoption
The Committee believes that encouraging adoptions in an
efficient manner requires a continuous effort to improve the
delivery of Federal subsidies. For this reason, the Committee
believes that a Treasury Department study is necessary to
determine whether the adoption credit and exclusion are an
efficient Federal subsidy.

Explanation of provision

Tax credit
The bill provides taxpayers with a maximum nonrefundable
credit against income tax liability of $5,000 per child for
qualified adoption expenses paid or incurred by the taxpayer.
In the case of a special needs adoption, the maximum credit
amount is $6,000. Any unused adoption credit may be carried
forward by the taxpayer for up to five years. Qualified
adoption expenses are reasonable and necessary adoption fees,
court costs, attorneys' fees, and other expenses that are
directly related to the legal adoption of an eligible child.
All reasonable and necessary expenses required by a State as a
condition of adoption and qualified adoption expenses. For
example, expenses may include the cost of construction,
renovations, alterations of purchases specifically required by
the State to meet the needs of the child. In the case of an
adoption of a child who is not a citizen or a resident of the
United States (foreign adoption), the credit is not available
unless the adoption is finalized. In the case of otherwise
qualified expenses that are incurred in an adoption that is not
yet identified as either a domestic or a foreign adoption, the
credit would not be available until the expenses are identified
as either relating to a domestic adoption (whether or not
finalized) or to a finalized foreign adoption. In some
instances that may require the filing of an amended tax return.
An eligible child is an individual (1) who has not attained age
18 or (2) who is physically or mentally incapable of caring for
himself or herself. After December 31, 2000, the credit will be
available only for special needs adoptions. No credit is
allowed for expenses incurred (1) in violation of State or
Federal law, (2) in carrying out any surrogate parenting
arrangement, (3) in connection with the adoption assistance
program or otherwise. The credit is phased out ratably for
taxpayers with modified adjusted gross income (AGI) above
$75,000, and is fully phased out at $115,000 of modified AGI.
The $5,000 limit is a per child limit, not an annual
limitation. For example, if in the case of an attempt to adopt
a child a taxpayer incurs $3,000 of qualified adoption expenses
in year one and $3,000 of qualified adoption expenses in year
two, then the taxpayer would receive a $3,000 credit in year
one and a $2,000 credit in year two. To illustrate further, if
a taxpayer incurs $1,000 of otherwise qualified adoption
expenses at each of three agencies in unsuccessful attempts to
adopt a child before incurring $4,000 of otherwise qualified
adoption expenses in a successful domestic adoption, the
taxpayer's maximum adoption credit is $5,000, not $7,000.
To avoid a double benefit, the bill denies the credit to
taxpayers to the extent the taxpayer may use otherwise
qualified adoption expenses as the basis of another credit or
deduction. Similarly, the credit is not allowed for any
expenses for which a grant is received under any Federal,
State, or local program. This denial of the credit also applies
in the case of special needs adoptions.
The bill provides that individuals who are married at the
end of the taxable year must file a joint return to receive the
credit unless they lived apart from each other for the last six
months of the taxable year and the individual claiming the
credit (1) maintained as his or her home a household for the
child for more than one-half of the taxable year and (2)
furnished over one-half of the cost of maintaining that
household in that taxable year. Further, the bill provides that
an individual legally separated from his or her spouse under a
decree of divorce or separate maintenance is not considered
married for purposes of this provision.
Exclusion from income
The bill provides a maximum $5,000 exclusion from the gross
income of an employee for qualified adoption expenses (as
defined above) paid by the employer. The $5,000 limit is a per
child limit, not an annual limitation. In the case of a special
needs adoption, the maximum exclusion from income is $6,000. No
exclusion is allowed for expenses paid by an employer after
December 31, 2000. In order for the exclusion to apply, the
expenses would have to be paid under an adoption assistance
program in connection with an adoption of an eligible child (as
described above) by an employee.
An adoption assistance program is a nondiscriminatory plan
of an employer under which the employer provides employees with
adoption assistance. Also, not more than 5 percent of the
benefits under the program for any year may benefit a class of
individuals consisting of more than 5-percent owners of the
employer and the spouses or dependents of such more than 5-
percent owners. An adoption assistance program is not required
to be funded but must provide reasonable notification of the
availability and terms of the program to eligible employees. An
adoption reimbursement program operated under section 1052 of
title 10 of the U.S. Code (relating to the armed forces) or
section 514 of title 14 of the U.S. Code (relating to members
of the Coast Guard) is treated as an adoption assistance
program for these purposes. Adoption assistance is a qualified
benefit under a cafeteria plan. The exclusion is phased out
ratably for taxpayers with modified AGI above $75,000 and is
fully phased out at $115,000 of modified AGI. Employees are not
entitled to claim the adoption tax credit with respect to
excludable adoption expenses paid or reimbursed under an
employer's adoption assistance program.
Under the bill, the Secretary has the authority to issue
regulations to carry out these provisions, including
regulations treating unmarried individuals as one taxpayer with
respect to the same child.
Treasury study
The Secretary of the Treasury is directed to prepare a
study of the effects of the tax credit and exclusion on both
non-special needs adoptions and special needs adoptions, to be
submitted to the House Committee on Ways and Means and the
Senate Committee on Finance by January 1, 2000.

Effective date

The provision is effective for taxable years beginning
after December 31, 1996.

B. Removal of Barriers to Interethnic Adoptions (Sec. 201 of the Bill
and Secs. 471(a) and 474 of the Social Security Act)

Present law

State law governs adoption and foster care placement. Many
States permit race matching of foster and adoptive parents with
children either by regulation, statute, policy, or practice.
The Howard M. Metzenbaum Multiethnic Placement Act of 1994,
Public Law 103-382 (``Metzenbaum Act''), permits States to
consider race and ethnicity in selecting a foster care or
adoptive home, but States cannot delay or deny the placement of
the child solely on the basis of race, color, or national
origin.
Noncompliance with the Metzenbaum Act is deemed a violation
of Title VI of the Civil Rights Act of 1964.

Reasons for change

The Committee is concerned that Public Law 103-382 was not
having the intended effect of facilitating the adoption of
minority children. In addition, Public Law 103-382 lacked an
enforcement provision backed by serious penalties. As a result,
the law was ineffective in promoting the best interests of
children by decreasing the length of time they wait to be
adopted.
Under the terms of the Committee bill, ``race, color or
national origin'' cannot be used to delay or deny the placement
of a child into a foster or adoptive placement. The Committee
agreed that any delay is clearly not in the child's best
interest and must not be tolerated for the purposes of race-
matching. The major concern of the Committee is to ensure that
States that can be shown to pursue policies that lead to any
delay in the adoption of any child be subjected to the penalty
terms of this legislation.

Explanation of provision

Under the bill, ``race, color or national origin'' cannot
be used to delay or deny the placement of a child into a foster
or adoptive placement. Under the bill, section 558 of the
Metzenbaum Act is repealed. In addition, the bill amends the
State plan requirements of section 471 of the Social Security
Act to prohibit a State or other entity that receives Federal
assistance from denying to any person the opportunity to become
an adoptive or a foster parent on the basis of the race, color,
or national origin of the person or of the child involved.
Similarly, no State or other entity receiving Federal funds can
delay or deny the placement of a child for adoption or foster
care in making a placement decision, on the basis of the race,
color, or national origin of the adoptive or foster parent or
the child involved.
Section 474 of the Social Security Act is amended to
require the Secretary of Health and Human Services (``HHS'') to
reduce the amount of Federal foster care and adoption funds
provided to the State through Title IV-E if the State program
is found in violation of this provision as a result of a review
conducted under section 1123 of the Social Security Act. States
found to be in violation will have their quarterly funds
reduced by 2 percent for the first violation, by 5 percent for
the second violation, and by 10 percent for the third or
subsequent violation.
The bill clarifies that the Secretary of HHS shall apply
penalties in conformance with section 1123 procedures. The bill
clarifies that penalties will be assessed on a fiscal year
basis. The bill limits to 25 percent the maximum amount the
Secretary of HHS can reduce a State's grant in a quarter.
Private entities found to be in violation of this provision
for a quarter will be required to return to the Secretary of
HHS all federal funds received from the State during the
quarter.
Any individual who is harmed by a violation of this title
of the bill could seek redress in any United States District
Court. An action under this title could not be brought more
than two years after the alleged violation occurred.
Noncompliance with Title II of the bill will constitute a
violation of Title VI of the Civil Rights Act of 1964. The
Indian Child Welfare Act of 1978 will not be affected by
changes made by the bill.

Effective date

The provisions related to civil rights enforcement are
effective upon enactment. The provisions related to State plan
requirements are effective on January 1, 1997.

C. Revenue Offsets

1. Treatment of bad debt deductions of thrift institutions (sec. 401 of
the bill and sec. 593 of the Code)

Present law and background

Reserve method of accounting for bad debts of thrift
institutions
Generally, a taxpayer engaged in a trade or business may
deduct the amount of any debt that becomes wholly or partially
worthless during the year (the ``specific charge-off'' method
of sec. 166). Certain thrift institutions (building and loan
associations, mutual savings banks, or cooperative banks) are
allowed deductions for bad debts under rules more favorable
than those granted to other taxpayers (and more favorable than
the rules applicable to other financial institutions).
Qualified thrift institutions may compute deductions for bad
debts using either the specific charge-off method or the
reserve method of section 593. To qualify for this reserve
method, a thrift institution must meet an asset test, requiring
that 60 percent of its assets consist of ``qualifying assets''
(generally cash, government obligations, and loans secured by
residential real property). This percentage must be computed at
the close of the taxable year, or at the option of the
taxpayer, as the annual average of monthly, quarterly, or
semiannual computations of similar percentages.
If a thrift institution uses the reserve method of
accounting, it must establish and maintain a reserve for bad
debts and charge actual losses against the reserve, and is
allowed a deduction for annual additions to restore the reserve
to its permitted balance. Under section 593, a thrift
institution annually may elect to calculate its addition to its
bad debt reserve under either (1) the ``percentage of taxable
income'' method applicable only to thrift institutions, or (2)
the ``experience'' method that also is available to small
banks.
Under the ``percentage of taxable income'' method, a thrift
institution generally is allowed a deduction for an addition to
its bad debt reserve equal to 8 percent of its taxable income
(determined without regard to this deduction and with
additional adjustments). Under the experience method, a thrift
institution generally is allowed a deduction for an addition to
its bad debt reserve equal to the greater of: (1) an amount
based on its actual average experience for losses in the
current and five preceding taxable years, or (2) an amount
necessary to restore the reserve to its balance as of the close
of the base year. For taxable years beginning before 1988, the
``base year'' was the last taxable year before the most recent
adoption of the experience method (i.e., generally, the last
year the taxpayer was on the percentage of taxable income
method). For taxable years beginning after 1987, the base year
is the last taxable year beginning before 1988. Prior to 1988,
computing bad debts under a ``base year'' rule allowed a thrift
institution to claim a deduction for bad debts for an amount at
least equal to the institution's actual losses that were
charged off during the taxable year.
Bad debt methods of commercial banks
A small commercial bank (i.e., one with adjusted bases of
assets of $500 million or less) may use the experience method
or the specific charge-off method for purposes of computing its
deduction for bad debts. A large commercial bank only may use
the specific charge-off method of section 166. If a small bank
becomes a large bank, it must recapture its existing bad debt
reserve (i.e., include the amount of the reserve in income)
through one of two elective methods. Under the 4-year recapture
method, the bank generally includes 10 percent of the reserve
in income in the first taxable year, 20 percent in the second
year, 30 percent in the third year, and 40 percent in the
fourth year. Under the cut-off method, the bank generally
neither restores it bad debt reserve to income nor may it
deduct losses relating to loans held by the bank as of the date
of the required change in the method of accounting. Rather, the
amount of such losses are charged against and reduce the
existing bad debt reserve, any losses in excess of the reserve
are deductible. Any reserve balance in excess of the balance of
related loans is included in income.
Recapture of bad debt reserves by thrift institutions
If a thrift institution becomes a commercial bank, or if
the institution fails to satisfy the 60-percent qualified asset
test, it is required to change its method of account for bad
debts and, under proposed Treasury regulations,\1\ is required
to recapture its bad debt reserve. The percentage-of-taxable-
income portion of the reserve generally is included in income
ratably over a 6-taxable year period. The experience method
portion of the reserve is not restored to income if the former
thrift institution qualifies as a small bank. If the former
thrift institution is treated as a large bank, the experience
method portion of the reserve is restored to income ratably
over a 6-taxable year period, or under the 4-year recapture
method or the cut-off method described above.
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\1\ Prop. Treas. reg. sec. 1.593-13.
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In addition, a thrift institution may be subject to a form
of reserve recapture even if the institution continues to
qualify for the percentage of taxable income method.
Specifically, if a thrift institution distributes to its
shareholders an amount in excess of its post-1951 earnings and
profits, such excess is deemed to be distributed from the non-
experience portion of the institution's bad debt reserve and is
restored to income. In the case of any distribution in
redemption of stock or in partial or complete liquidation of an
institution, the distribution is treated as first coming from
the nonexperience portion of the bad debt reserves of the
institution (sec. 593(e)).
Financial accounting treatment of tax reserves of bad debts
of thrift institutions
The recapture of a bad debt reserve for Federal income tax
purposes may have significant financial and regulatory
accounting implications for a thrift institution. In general,
for financial accounting purposes, a corporation must record a
deferred tax liability with respect to items that are deducted
for tax purposes in a period earlier than they are expensed for
book purposes. The deferred tax liability signifies that,
although a corporation may be reducing its current tax expense
because of the accelerated tax deduction, the corporation will
become liable for tax in a future period when the timing item
``reverses'' (i.e., when the item is expensed for book purposes
but for which the tax deduction had already been allowed).
Under the applicable accounting standard (Accounting Principles
Board Opinion 23), deferred tax liabilities generally were not
required for pre-1988 tax deductions attributable to the bad
debt reserve method of thrift institutions because the
potential reversal of the bad debt reserve was indefinite
(i.e., generally, a reversal only would occur by operation of
sec. 593(e), a condition within the control of a thrift
institution). However, the establishment of 1987 as a base year
increased the likelihood of bad debt reserve reversals with
respect to post-1987 additions to the reserve and it appears
that thrift institutions generally have recorded additional
deferred tax liabilities for these additions under the current
generally accepted accounting principles.\2\
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\2\ For taxable years beginning before 1988, the base year balance
of a thrift institution was the reserve balance whenever the
institution changed from one bad debt method to another (e.g., from the
percentage of taxable income method to the experience method). How the
establishment of 1987 as a permanent base year changed the nature of
the bad debt reserves of thrift institutions between pre-1988 years and
post-1987 years (which, in turn, contributed to the change in the
financial accounting treatment of such reserves) can be illustrated by
the following example:
Assume that a thrift institution (``T'') always had used the
percentage of taxable income (``PTI'') method to deduct bad debts
through 1986 when its reserve balance was $10,000. Further assume that
in 1987, T: (1) has insufficient taxable income to use the PTI method,
(2) has actual bad debt losses of $1,000, and (3) under the six-year
average formula of the experience method, would be allowed a deduction
of $900. Under these facts, T would be allowed a bad debt deduction of
$1,000 (rather than $900) in 1987 because $1,000 is the amount
necessary to restore the reserve to its base year (PTI) level.
Specifically, in 1987, T would charge the year-end 1986 reserve of
$10,000 for the $1,000 actual loss and then add (and deduct) $1,000 to
the reserve so that the balance of the reserve at year end 1987 is once
again $10,000. Thus, T's former PTI deductions, which gave rise to the
$10,000 reserve balance, generally would not be restored to income
(unless subject to sec. 593(e)).
Further assume that in 1988, T has sufficient taxable income to be
allowed a PTI deduction of $1,500, increasing the balance of the
reserve to $11,500 at year-end 1988. Further assume that in 1989, T:
(1) again has insufficient taxable income to use the PTI method, (2)
has actual bad debts of $2,500, and (3) under the six-year average
formula of the experience method would be allowed a deduction of $900.
Under these facts, T would be allowed a deduction of $1,000 (i.e., the
amount necessary to restore the reserve to its base year (year-end
1987) level). Specifically, T would charge the year-end 1988 reserve
balance of $11,500 for the $2,500 actual loss and then add (and deduct)
$1,000 to the reserve to restore the balance to the $10,000 base year
amount. Thus, T's post-1987 PTI deduction of $1,500 is restored to
income (i.e., T actually had losses of $2,500 in 1989, but only was
allowed to deduct $1,000).
The Committee also understands that a thrift institution may record
a current or deferred tax liability in cases where the institution's
deduction for bad debts may be limited under section 585(b)(2)(B)(ii)
because the amount of institution's loans outstanding diminished from
the close of the base year to the close of the current year.
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Under proposed Treasury regulations, if a thrift
institution becomes a commercial bank (or is otherwise
ineligible to use the bad debt reserve method of sec. 593), the
institution would be required to recapture all or a portion of
its bad debt reserve. As described in detail below, it appears
that such recapture would require the institution immediately
to record, for financial accounting purposes, a current or
deferred tax liability for the amount of bad debt recapture for
which liabilities previously had not been recorded (generally,
with respect to the pre-1988 reserves), regardless of when such
recapture is taken into account for Federal income tax
purposes. To the extent regulatory accounting principles follow
these financial accounting principles, the recording of this
liability generally would decrease the regulatory capital of
the institution.

Reasons for change

The Committee believes that the reserve method of bad debts
accorded to qualified thrift institutions under present law
results in a mismeasurement of economic income and provides
those institutions with a tax benefit not provided to
similarly-situated depository institutions.
The Committee also believes that whenever a taxpayer
changes its method of accounting, it is appropriate to
implement the change in a manner so that items of income or
expense are not taken into account twice--once under the old
method and again under the new method. Thus, under present law,
most accounting method changes are implemented under section
481 which requires the calculation of an adjustment that
reflects the cumulative effect of the method change and is
restored to income over a specified period of time.
Specifically, under present law, whenever a thrift institution
no longer qualifies for the reserve method of accounting for
bad debts, the bad debt reserve of the thrift institution must
be restored to income.
The Committee believes that, in order to provide treatment
to similarly-situated depository institutions, the special bad
debt reserve methods available to qualified thrift institutions
should be repealed. However, the Committee understands that
requiring full recapture of the bad debt reserves of thrift
institutions in implementing this change in accounting method
may impose significant financial accounting and regulatory
capital burdens on institutions that have not recorded the
appropriate amount of deferred tax liabilities with respect to
such recapture. Thus, the Committee believes it is appropriate
to provide relief from the recapture of the portion of the bad
debt reserves that arose prior to 1988. The Committee believes
that this relief should not directly benefit the shareholders
of the institutions in a manner similar to the way in which
present-law section 593(e) provides a limitation on the direct
enjoyment of the benefits of section 593 by shareholders of
thrift institutions.
Further, because of the thrift industry's traditional role
as home mortgage lenders, the Committee is concerned that the
repeal of section 593 may result in a temporary shortage in the
availability of mortgage loans in some regions. The Committee
bill addresses this issue by providing an incentive for
institutions to continue to provide a level of residential
mortgage financing for a period of time.

Explanation of provision

Repeal of section 593
The bill repeals the section 593 reserve method of
accounting for bad debts by thrift institutions, effective for
taxable years beginning after 1995. Thrift institutions that
would be treated as small banks \3\ are allowed to utilize the
experience method applicable to such institutions, while thrift
institutions that are treated as large banks are required to
use only the specific charge-off method. Thus, the percentage
of taxable income method of accounting for bad debts is no
longer available for any financial institution. The bill also
repeals the following present-law provisions that only apply to
thrift institutions to which section 593 applies: (1) the
denial of a portion of certain tax credits to a thrift
institution (sec. 50(d)(1)); (2) the special rules with respect
to the foreclosure of property securing loans of a thrift
institution (sec. 595); (3) the reduction in the dividends
received reduction of a thrift institution (sec. 596); and (4)
the ability of a thrift institution to use a net operating loss
to offset its income from a residual interest in a REMIC (sec.
860E(a)(2)).
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\3\ Under present-law section 581, the definition of a ``bank''
includes a thrift institution.
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Treatment of recapture of bad debt reserves
In general.--A thrift institution required to change its
method of computing reserves for bad debts will treat such
change as a change in a method of accounting, initiated by the
taxpayer, and having been made with the consent of the
Secretary of the Treasury.\4\ Any section 481(a) adjustment
required to be taken into account with respect to such change
generally with be determined solely with respect to the
``applicable excess reserves'' of the taxpayer. The amount of
applicable excess reserves shall be taken into account ratably
over a six-taxable year period, beginning with the first
taxable year beginning after 1995, subject to the residential
loan requirement described below. In the case of a thrift
institution that becomes a ``large bank'' (as determined under
sec. 585(c)(2)), the amount of the institution's applicable
excess reserves generally is the excess of (1) the balance of
its reserves described in section 593(c)(1) other than its
supplemental reserve for losses on loans (i.e., its reserve for
losses on qualifying real property loans and its reserve for
losses on nonqualifying loans) as of the close of its last
taxable year beginning before January 1, 1996, over (2) the
balance of such reserves (i.e., its reserve for losses on
qualifying real property loans and its reserve for losses on
nonqualifying loans) as of the close of its last taxable year
beginning before January 1, 1988 (i.e., the ``pre-1988
reserves'').\5\ Thus, a thrift institution that is treated as a
large bank generally is required to recapture its post-1987
additions to its bad debt reserves, whether such additions are
made pursuant to the percentage of taxable income method or the
experience method. The timing of this recapture may be delayed
for a one- or two-year period to the extent the residential
loan requirement described below applies.
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\4\ The provisions of the bill will apply to a thrift institution
that has a taxable year that begins after December 31, 1995, even if
such taxable year is a short taxable year that comes to a close because
the thrift institution is acquired by a non-thrift institution.
In addition, a thrift institution that uses a reserve method
described in section 593 will be deemed to have changed its method of
computing reserves for bad debts even though such institution will be
allowed to use the reserve method of section 585. Similarly, a large
thrift institution will be deemed to have changed its method of
computing reserves for bad debts even through such institution used the
experience-method portion of section 593 in lieu of the percentage-of-
taxable-income method of section 593.
\5\ The balance of a taxpayer's pre-1988 reserves is reduced if the
taxpayer's loan portfolio had decreased since 1988. The permitted
balance of a taxpayer's pre-1988 reserves is reduced by multiplying
such balance by the ratio of the balance of the taxpayer's loans
outstanding at the close of the last taxable beginning before 1996, to
the balance of the taxpayer's loans outstanding at the close of the
last taxable beginning before 1988. This reduction is required for both
large and small banks.
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In the case of a thrift institution that becomes a ``small
bank'' (as determined under sec. 585(c)(2)), the amount of the
institution's applicable excess reserves will be the excess of
(1) the balance of its reserves described in section 593(c)(1)
as of the close of its last taxable year beginning before
January 1, 1996, over (2) the greater of the balance of: (a)
its pre-1988 reserves or (b) what the institution's reserves
would have been at the close of its last taxable year beginning
before January 1, 1996, had the institution always used the
experience method described in section 585(b)(2)(A) (i.e., the
six-year average method). For purposes of the future
application of section 585, the beginning balance of the small
bank's reserve for its first taxable year beginning after
December 31, 1995, will be the greater of the two amounts
described in (2) in the preceding sentence, and the balance of
the reserve at the close of the base year (for purposes of sec.
585(b)(2)(B)) will be the amount of its pre-1988 reserves. The
residential loan requirement described below also applies to
small banks. If such small bank later becomes a large bank, any
section 481(a) adjustment amount required to be taken into
account under section 585(c)(3) will not include any portion of
the bank's pre-1988 reserve. Similarly, if the bank elects the
cut-off method to implement its conversion to large bank
status, the amount of the reserve against which the bank
charges its actual losses will not include any portion of the
bank's pre-1988 reserve and the amount by which the pre-1988
reserve exceeds actual losses will not be included in gross
income.
The balance of the pre-1988 reserves is subject to the
provisions of section 593(e), as modified by the bill
(requiring recapture in the case of certain excess distribution
to, and redemptions of, shareholders. Thus, section 593(e) will
apply to an institution regardless of whether the institution
becomes a commercial bank or remains a thrift institution. In
addition, the balances of the pre-1988 reserve and the
supplemental reserve will be treated as tax attributes to which
section 381 applies. The Committee expects that Treasury
regulations will provide rules for the application of section
593(e) in the case of mergers, acquisitions, spin-offs, and
other reorganizations of thrift and other institutions.\6\ The
Committee believes that any such regulation should provide
that, if the stock of an institution with a pre-1988 reserve is
acquired by another depository institution, the pre-1988
reserve will not be restored to income by reason of the
acquisition. Similarly, if an institution with a pre-1988
reserve is merged or liquidated tax-free into a bank, the pre-
1988 reserve should not be restored to income by reason of the
merger or liquidation. Rather, the bank will inherit the pre-
1988 reserve and the post-1951 earnings and profits of the
former thrift institution and section 593(e) will apply to the
bank as if it were a thrift institution. That is, the pre-1988
reserve will be restored into income in the case of any
distribution in redemption of the stock of the bank or in
partial or complete liquidation of the bank following the
merger of liquidation. In the case of any other distribution,
the pre-1988 reserve will not be restored to income unless the
distribution is in excess of the sum of the post-1951 earnings
and profits inherited from the thrift institution and the post-
1913 earnings and profits of the acquiring bank.\7\ The
Committee expects that Treasury regulations will address the
case where the shareholders of an institution with a pre-1988
reserve are ``cashed out'' in a taxable merger of the
institution and a bank. Such regulations may provide that the
pre-1988 reserve may be restored to income if such redemption
represents a concealed distribution from the former thrift
institution. For example, cash received by former thrift
shareholders pursuant to a taxable reverse merger may represent
a concealed distribution if, immediately preceding the merger,
the acquiring bank had no available resources to distribute and
its existing debt structure, indenture restrictions, financial
condition, or regulatory capital requirements precluded it from
borrowing money for purposes of making the cash payment to the
former thrift shareholders. No inference is intended by the
Committee as to the application of section 593(e) to these and
similar transactions under present law.
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\6\ The Committee expects that in the case of the merger,
acquisition, spin-off, or other reorganization involving only thrift
institutions, section 593(e) as modified by the bill, will continue to
be applied in a manner similar to the way section 593(e) is applied
under present law. However, guidance will be needed in the case of
transactions where one of the parties to the transaction is not a
thrift institution. For example, the issue of whether section 593(e)
applies in the case where a thrift institution is merged into a bank
generally does not arise under present law because such merger results
in a charter change and, under proposed Treasury regulations, requires
full bad debt reserve recapture.
\7\ If the acquiring bank is a former thrift institution itself and
the pre-1988 reserves of neither institution are restored to income
pursuant to the merger, the Committee expects that the pre-1988
reserves and the post-1951 earnings and profits of the two institutions
will be combined for purposes of the continued application of section
593(e) with respect to the combined institution.
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Further, if a taxpayer no longer qualifies as a bank (as
defined by sec. 581), the balances of the taxpayer's pre-1988
reserve and supplemental reserves are restored to income
ratably over a six-year period, beginning in the taxable year
the taxpayer no longer qualifies as a bank.
Residential loan requirement.--Under a special rule, if the
taxpayer meets the ``residential loan requirement'' for a
taxable year, the recapture of the applicable excess reserves
otherwise required to be taken into account as a section 481(a)
adjustment for such year will be suspended. A taxpayer meets
the residential loan requirement if, for the taxable year, the
principal amount of residential loans made by the taxpayer
during the year is not less than its base account. The
residential loan requirement is applicable only for taxable
years that begin after December 31, 1995, and before January 1,
1998, and must be applied separately with respect to each such
year. Thus, all taxpayers are required to recapture their
applicable excess reserves within six, seven or eight years
after the effective date of the provision.
The ``base amount'' of a taxpayer means the average of the
principal amounts of the residential loans made by the taxpayer
during the six most recent taxable years beginning before
January 1, 1996. At the election of the taxpayer, the base
amount may be computed by disregarding the taxable years within
that six-year period in which the principal amounts of loans
made during such years were highest and lowest. This election
must be made for the first taxable year beginning after
December 31, 1995, and applies to the succeeding taxable year
unless revoked with the consent of the Secretary of the
Treasury or his delegate.
For purposes of the residential loan requirement, a loan
will be deemed to be ``made'' by a financial institution to the
extent the institution is, in fact, the principal source of the
loan financing. Thus, any loan only can be ``made'' once. The
Committee expects that loans ``made'' by a financial
institution may include, but are not limited to, loans (1)
originated directly by the institution through its place of
business or its employees, (2) closed in the name of the
institution, (3) originated by a broker that acts as an agent
for the institution, and (4) originated by another person
(other than a financial institution) and that are acquired by
the institution pursuant to a pre-existing, enforceable
agreement to acquire such loans. In addition, Treasury
regulations also may provide that loans ``made'' by a financial
institution may include loans originated by another person
(other than a financial institution) acquired by the
institution soon after origination if such acquisition is
pursuant to a customary practice of acquiring such loans from
such person. A loan acquired by a financial institution from
another financial institution generally will be considered to
be made by the transferor rather than the transferee of the
loan; however, such loan may be completely disregarded if a
principal purpose of the transfer was to allow the transferor
to meet the residential loan requirement. A loan may be
considered to be made by a financial institution even if such
institution has an arrangement to transfer such loan to the
Federal National Mortgage Association or the Federal Home Loan
Mortgage Corporation.
For purposes of the residential loan requirement, a
``residential loan'' described in section 7701(a)(19)(C)(v)
(generally, loans secured by residential real and church
property and certain mobile homes),\8\ but only to the extent
the loan is made to the owner of the property to acquire,
construct, or improve the property. Thus, mortgage refinancings
and home equity loans are not considered to be residential
loans, except to the extent the proceeds of the loan are used
to acquire, construct, or improve qualified residential real
property. The Committee understands that pursuant to the Home
Mortgage Disclosure Act, financial institutions are required to
disclose the purpose for which loans are made. The Committee
further understands that for purposes of this disclosure,
institutions are required to classify loans as home purchase
loans, home improvement loans, refinancings, and multifamily
dwelling loans (whether for purchase, improvement or
refinancing of such property). The Committee expects that
taxpayers (and the Secretary of the Treasury in promulgating
guidance) may take such reporting into account, and make such
adjustments as are appropriate,\9\ in determining: (1) whether
or not a loan qualifies as a ``residential loan'' and (2)
whether the institution ``made'' the loan. A taxpayer must use
consistent standards for determining whether loans qualify as
residential loans made by the institution both for purposes of
determining its base amount and for purposes of determining
whether it met the residential loan requirement for a taxable
year.
---------------------------------------------------------------------------
\8\ For this purpose, as under present law, if a multifamily
structure securing a loan is used in part for nonresidential purposes,
the entire loan will be deemed a residential real property loan if the
planned residential use exceeds 80 percent of the property's planned
use (determined as of the time the loan is made). In addition, loans
made to finance the acquisition or development of land will be deemed
to be loans secured by an interest in residential real property if,
under regulations prescribed by the Secretary of the Treasury, there is
a reasonable assurance that the property will become residential real
property within a period of three years from the date of acquisition of
the land.
\9\ For example, adjustments will be required with respect to the
reporting of multifamily dwellings in order to distinguish home
purchase, home improvement, and refinancing loans.
---------------------------------------------------------------------------
The residential loan requirement is determined on a
controlled group basis. Thus, for example, if a controlled
group consists of two thrift institutions with applicable
excess reserves that are wholly-owned by a bank, the
residential loan requirement will be met (or not met) with
respect to both thrift institutions by comparing the principal
amount of the residential loans made by all three members of
the group during the taxable year to the group's base amount.
The group's base amount will be the average principal amount of
residential loans made by all three members of the group during
the base period. The election to disregard the high and low
taxable years during the 6-year base period also would be
applied on a controlled group basis (i.e., generally by
treating the members of the group as one taxpayer so that all
members of the group must join in the election, and the same
corresponding years of each member would be so disregarded).
Treasury regulations may provide rules for the application
of the residential loan requirement in the case of mergers,
acquisitions, and other reorganizations of thrift and other
institutions. For example, the balance of a taxpayer's
applicable excess reserve will be treated as a tax attribute to
which section 381 applies. Thus, if an institution with an
applicable excess reserve is acquired in a tax-free
reorganization, the Committee expects that balance of such
reserve will not be immediately restored to income but will
continue to be subject to the residential loan requirement in
the hands of the acquirer. The Committee further expects that
if a financial institution joins or merges into (or leaves) a
group of financial institutions, the base amount of the
acquiring (or remaining) group will be appropriately adjusted
to reflect the base amount of the acquired (or departing)
institution for purposes of determining whether the group meets
the residential loan requirement for the year of the
acquisition (or departure) and subsequent years. Similarly, if
a controlled group of institutions had made an election to
disregard its high and low years in computing its base amount,
it is anticipated that such election shall be binding on any
institution that subsequently joins the group and the election
shall be applied to the new member by disregarding the high and
low years of the new member even if such years do not
correspond to the years applicable to the other members of the
group.
Treatment of conversions to credit unions
The bill provides that if a thrift institution to which the
repeal of section 593 applies becomes a credit union, the
credit union will be treated as an institution that is not a
bank and any section 481(a) adjustment required to be included
in gross income will be treated as derived from an unrelated
trade or business. Thus, if a thrift institution becomes a
credit union in its first taxable year beginning after December
31, 1995, the entire balance of the institution's bad debt
reserve will be included in income, and subject to tax, over a
six-year period beginning with such taxable year. No inference
is intended as to the Federal income tax treatment of any other
aspect of the conversion of a financial institution to a credit
union.

Effective date

The repeal of section 593 is effective for taxable years
beginning after December 31, 1995. The repeal of section 595 is
effective for property acquired in taxable years beginning
after December 31, 1995. The amendment to section 860E does not
apply to any residual interest in a REMIC held by the taxpayer
on October 31, 1995, and at all times thereafter.
The amendment to section 593(e)(1)(B) does not apply to any
distributions with respect to preferred stock (including
redemptions of such stock) if: (1) such stock was issued and
outstanding as of November 1, 1995, and at all times thereafter
before the distribution and (2) such distribution is made
within the later of (a) one year after the date of enactment of
this Act or (b) if the stock is redeemable by the issuer or a
related party, 30 days after the date such stock first may be
redeemed. For this purpose, the first date a preferred stock
may be redeemed is the day upon which the issuer or a related
party has the right to call the stock, regardless of the amount
of call premium.

2. depreciation under the income forecast method (sec. 402 of the bill
and sec. 167 of the Code)

Present law

In general
A taxpayer generally must capitalize the cost of property
used in a trade or business and is allowed to recover such cost
over time through allowances for depreciation or amortization.
Depreciation allowances for tangible property generally are
determined under the modified Accelerated Cost Recovery System
(``MACRS'') of section 168, which provides that depreciation is
computed by applying specific recovery periods, placed-in-
service conventions, and depreciation methods to the cost of
various types of depreciable property. Intangible property
generally is amortized under section 197, which provides a 15-
year recovery period and the straight-line method to the cost
of applicable property.
Treatment of film, video tape, and similar property
MACRS does not apply to certain property, including any
motion picture film, video tape, or sound recording or to other
any property if the taxpayer elects to exclude such property
from MACRS and the taxpayer applies a unit-of-production method
or other method of depreciation not expressed in a term of
years. Section 197 does not apply to certain intangible
property, including property produced by the taxpayer or any
interest in a film, sound recording, video tape, book or
similar property not acquired in transaction (or a series of
related transactions) involving the acquisition of assets
constituting a trade or business or substantial portion
thereof. Thus, the recovery of the cost of a film, video tape,
or similar property that is produced by the taxpayer or is
acquired on a ``stand-alone'' basis by the taxpayer may not be
determined under either the MACRS depreciation provisions or
under the section 197 amortization provisions. The cost of such
property may be determined under section 167, which allows a
depreciation deduction for the reasonable allowance for the
exhaustion, wear and tear, or obsolescence of the property.
The ``income forecast'' method is an allowable method for
calculating depreciation under section 167 for certain
property. Under the income forecast method, the depreciation
deduction for a taxable year for a property is determined by
multiplying the cost of the property \10\ (less estimated
salvage value) by a fraction, the numerator of which is the
income generated by the property during the year and the
denominator of which is the total forecasted or estimated
income to be derived from the property during its useful life.
The income forecast method has been held to be applicable for
computing depreciation deductions for motion picture films,
television films and taped shows, books, patents, master sound
recording and video games.\11\ The total forecasted or
estimated income to be derived from a property is to be based
on the conditions known to exist at the end of the period for
which depreciation is claimed. This estimate can be revised
upward or downward at the end of a subsequent taxable period on
additional information that becomes available after the last
prior estimate. These revisions, however, do not affect the
amount of depreciation claimed in a prior taxable year.
---------------------------------------------------------------------------
\10\ In Transamerica Corp. v. U.S., 999 F.2d 1362, (9th Cir. 1993),
the Ninth Circuit overturned the District Court and held that, for
purposes of applying the income forecast method to a film, the ``cost
of a film'' includes ``participation'' and ``residual'' payments (i.e.,
payments to producers, writers, directors, actors, guilds, and others
based on a percentage of the profits from the film) even though these
payments were contingent on the occurrence of future events. It is
unclear to what extent, if any, the Transamerica decision applies to
amounts incurred after the enactment of the economic performance rules
of Code section 461(h), as contained in the Deficit Reduction Act of
1984.
\11\ See, e.g., Rev. Rul. 60-358, 1960-2 C.B. 68; Rev. Rul. 64-273,
1964-2 C.B. 62; Rev. Rul. 79-285, 1979-2 C.B. 91; and Rev. Rul. 89-62,
1989-1 C.B. 78. Conversely, the courts have held that certain tangible
personal property was not of a character to which the income forecast
method was applicable. See, e.g., ABC Rentals of San Antonio v. Comm.,
68 TCM 1362 (1994) (consumer durable property subject to short-term,
``rent-to-own'' leases not eligible) and Carland, Inc. v. Comm., 90
T.C. 505 (1988), affd. on this issue, 909 F.2d 1101 (8th Cir. 1990)
railroad rolling stock subject to a lease not eligible).
---------------------------------------------------------------------------
In the case of a film, income to be taken into account
under the income forecast method means income from the film
less the expense of distributing the film, including estimated
income from foreign distribution or other exploitation of the
film.\12\ In the case of a motion picture released for
theatrical exhibition, income does not include estimated income
from future television exhibition of a film (unless an
arrangement for domestic television exhibition has been entered
into before the film has been depreciated to its reasonable
salvage value). In the case of a series or a motion picture
produced for television exhibition, income does not include
estimated income from domestic syndication of a series or the
film (unless an arrangement for syndication has been entered
into before the series or film has been depreciated to its
reasonable salvage value).\13\ The Internal Revenue Service
also has ruled that income does not include net merchandising
revenue received from the exploitation of film characters.\14\
---------------------------------------------------------------------------
\12\ Rev. Rul. 60-358, 1960-2 C.B. 68.
\13\ Rev. Proc. 71-29, 1971-2 C.B. 568.
\14\ Private letter ruling 7918012, January 24, 1979. 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

The Committee believes that, in theory, the income forecast
method is an appropriate method for matching the capitalized
cost of certain property with the income produced by such
property. However, the Committee believes that the application
of the income forecast method under present law does not meet
the theoretical objective. In addition, the Committee
recognizes that the reliance of the operation of the income
forecast method upon estimated income may result in a mismatch
between income and depreciation deductions when future income
is over- or under-estimated. The Committee bill attempts to
address these issues.

Explanation of provision

The bill makes several amendments to the income forecast
method of determining depreciation deductions.
Determinations of estimated income
First, the bill provides that income to be taken into
account under the income forecast method includes all estimated
income generated by the property. In applying this rule, a
taxpayer generally need not take into account income expected
to be generated after the close of the tenth taxable year after
the year the property was placed in service. In the case of a
film, television show, or similar property, such income
includes, but is not necessarily limited to, income from
foreign and domestic theatrical, television, and other releases
and syndications; and video tape releases, sales, rentals, and
syndications.
Pursuant to a special rule, in the case of television and
motion picture films, the income from the property shall
include income from the financial exploitation of characters,
designs, scripts, scores, and other incidental income
associated with such films, but only to the extent the income
is earned in connection with the ultimate use of such items by,
or the ultimate sale of merchandise to, persons who are not
related to the taxpayer (within the meaning of sec. 267(b)). As
an example of this special rule, assume a taxpayer produces a
motion picture the subject of which is the adventures of a
newly-created fictional character. If the taxpayer produces
dolls or T-shirts using the character's image, income from the
sales of these products by the taxpayer to consumers would be
taken into account in determining depreciation for the motion
picture under the income forecast method. Similarly, if the
taxpayer enters into any licensing or similar agreement with an
unrelated party with respect to the use of the image, such
licensing income would be taken into account in determining
depreciation for the motion picture. However, if the taxpayer
uses the character's image to promote a ride at an amusement
park that is wholly-owned by the taxpayer, no portion of the
admission fees for the amusement park are to be taken into
account under the income forecast method with respect to the
motion picture.
In addition, pursuant to another special rule, if a
taxpayer produces a television series and initially does not
anticipate syndicating the episodes from the series, the
forecasted income for the episodes of the first three years of
the series need not take into account any future syndication
fees (unless the taxpayer enters into an arrangement to
syndicate such episodes during such period).
The 10th-taxable-year rule, the financial exploitation
rule, and the syndication rule apply for purposes of the look-
back method described below.
Determination and treatment of costs of property
The adjusted basis of property that may be taken into
account under the income forecast method only will include
amounts that satisfy the economic performance standard of
section 461(h).\15\ For this purpose, if the taxpayer incurs a
noncontingent liability to acquire property subject to the
income forecast method from another person, economic
performance will be deemed to occur with respect to such
noncontingent liability when the property is provided to the
taxpayer. In addition, the recurring item exception of section
461(h)(3) will apply in a manner similar to the way such
exception applies under present law. Thus, expenditures that
relate to an item of property that are incurred in the taxable
year following the taxable year in which the property is placed
in service may be taken into account in the year the property
is placed in service to the extent such expenditures meet the
recurring item exception for such year.
---------------------------------------------------------------------------
\15\ No inference is intended as to the proper application of
section 461(h) to the income forecast method under present law.
---------------------------------------------------------------------------
Any costs that are taken into account after the property is
placed in service are treated as a separate piece of property
to the extent (1) such amounts are significant and are expected
to give rise to a significant increase in the income from the
property that was not included in the estimated income from the
property, or (2) such costs are incurred more than 10 years
after the property was placed in service. To the extent costs
are incurred more than 10 years after the property was placed
in service and give rise to a separate piece of property for
which no income is generated, such costs may be written off and
deducted they are incurred. For example, assume a taxpayer
places a property subject to the income forecast method in
service during a taxable year and all income from the property
is generated in the following four-year period. If the taxpayer
incurs additional costs with respect to that property more than
10 years later (e.g., a payment pursuant to a deferred
contingent compensation arrangement to a person that produced
the property), such costs may be deducted in the year incurred
provided no more income is generated with respect to such costs
or the original property.
Any costs that are not recovered by the end of the tenth
taxable year after the property was placed in service may be
taken into account as depreciation in such year.
Look-back method
Finally, taxpayers that claim depreciation deductions under
the income forecast method are required to pay (or would
receive) interest based on the recalculation of deprecation
under a ``look-back'' method.\16\ The ``look-back'' method is
applied in any ``recomputation year'' by (1) comparing
depreciation deductions that had been claimed in prior periods
to depreciation deductions that would have been claimed had the
taxpayer used actual, rather than estimated, total income from
the property; (2) determining the hypothetical overpayment or
underpayment of tax based on this recalculated depreciation,
and (3) applying the overpayment rate of section 6621 of the
Code.
---------------------------------------------------------------------------
\16\ The ``look-back'' method of the provision resembles the look-
back method applicable to long-term contracts accounted for under the
percentage-of-completion method of present-law sec. 460.
---------------------------------------------------------------------------
Except as provided in Treasury regulations, a
``recomputation year'' is the third and tenth taxable year
after the taxable year the property was place in service,
unless the actual income from the property for each taxable
year ending with or before the close of such years was within
10 percent of the estimated income from the property for such
years. The Secretary of the Treasury has the authority to allow
a taxpayer to delay the initial application of the look-back
method where the taxpayer may be expected to have significant
income from the property after the third taxable year after the
taxable year the property was placed in service (e.g., the
Treasury Secretary may exercise such authority where the
depreciable life of the property is expected to be longer than
three years).
In applying the look-back method, any cost that is taken
into account after the property was placed in service may be
taken into account by discounting (using the Federal mid-term
rate determined under sec. 1274(d) as of the time the costs
were taken into account) such cost to its value as of the date
the property was place in service.
Property that had an unadjusted basis of $100,000 or less
is not subject to the look-back method. For this purpose,
``unadjusted basis'' means the total capitalized cost of a
property as of the close of a recomputation year.
The provision provides a simplified look-back method for
pass-through entities.

Effective date

The provision is effective for property placed in service
after September 13, 1995, unless produced or acquired pursuant
to a binding written contract in effect on such date and all
times thereafter. For this purpose, the binding contract
exception may apply to a written contract in effect on the
relevant dates if that contract binds a taxpayer to produce
property that will be used by the other party to the contract
once the property is produced.
The provision may apply to property place in service in
taxable years that ended before the date of enactment of this
Act. The provision waives additions to tax imposed under
sections 6654, 6655, and 6662(d) for any underpayments of tax
or estimated tax for any taxable year ending before the date of
enactment of this Act to the extent the underpayment was
created or increased by the changes made to the income forecast
method of depreciation by the provision. The application of the
provision (including the look-back method) is not waived for
any taxable year that ends after the date of enactment of this
Act.

III. BUDGET EFFECTS OF THE BILL

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 revenue
provisions of the bill as reported.

ESTIMATED BUDGET EFFECTS OF THE REVENUE PROVISIONS OF H.R. 3286, THE ``ADOPTION PROMOTION AND STABILITY ACT OF 1996,'' AS REPORTED BY THE COMMITTEE ON FINANCE, FISCAL YEARS 1996-2005
[In millions of dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Provision Effective 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 1996-00 2001-05 1996-05
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1. $5,000 credit and exclusion for tyba 12/31/96.......... ........ -33 -329 -351 -375 -342 -108 -108 -104 -101 -1,088 -762 -1,850
employer-provided assistance for
regular adoption expenses, $6,000
for special needs adoptions; sunset
employer assistance exclusion and
non-special needs credit after 2000.
2. Repeal section 593-deduction for tyba 12/31/95.......... 47 111 216 280 277 272 260 247 111 36 931 926 1,857
bad debt reserves for thrift
institutions.
3. Corporate accounting--reform of ppisa 9/13/95.......... 32 69 29 13 14 16 19 22 28 31 157 116 273
income forecast method.
---------------------------------------------------------------------------------------------------------------------------------
Net totals..................... ....................... 79 147 -84 -58 -84 -54 171 161 35 -34 ........ 280 280
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Details may not add to totals due to rounding.
Legend for ``Effective'' column: ppisa = property placed in service after, tyba = taxable years beginning after.

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 revenue provisions of the bill as
reported involve no new or increased budget authority. Title II
(interethnic adoptions) will have a negligible effect on budget
outlays and budget authority.

Tax expenditures

In compliance with section 308(a)(2) of the Budget Act, the
Committee states that the adoption credit and exclusion
provisions of Title I involve new tax expenditures (see revenue
table in Part III. A., above), and that the revenue offset
provisions of Title IV involve reduced tax expenditures (see
Part III, A., above).

C. Consultation with Congressional Budget Office

In accordance with section 403 of the Budget Act, the
Committee advises that the Congressional Budget Office has not
yet submitted a statement on this bill at the time of filing
this report.

IV. VOTE OF THE COMMITTEE

In compliance with paragraph 7(b) of rule XXVI of the
Standing Rules of the Senate, the following statement is made
concerning the vote on the motion to report the bill. The bill
(H.R. 3286) was ordered favorably reported, as amended by the
Chairman's proposed substitute amendment to Titles I, II, and
IV, by unanimous voice vote on June 12, 1996. A quorum was
present for the vote. (The bill is to be referred to the Senate
Committee on Indian Affairs for a period of 10 legislative days
for consideration of Title III of the bill.)

V. REGULATORY IMPACT AND OTHER MATTERS

A. 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 as reported.

Impact on individuals and businesses

Title I of the bill as reported provides for a new tax
credit and exclusion for certain adoption expenses. This will
defray part of the cost of adoption. There is a $5,000 per
child limit on the credit and exclusion ($6,000 for adoption of
a special needs child).
Title II of the bill will remove bureaucratic barriers to
interethnic adoptions by providing that not later than January
1, 1997, States receiving funds from the Federal Government for
adoption or foster care placements may not deny any person the
opportunity to become an adoptive or foster parent on the basis
of race, color, or national origin of the person or of the
child, nor may the State delay or deny the placement of a child
for adoption or into foster care on the basis of race, color,
or national origin of the adoptive or foster parent or of the
child. Noncompliance with Title II of the bill would constitute
a violation of Title VI of the Civil Rights Act of 1964.
The Committee action does not address Title III of the bill
(relating to Indian child custody and adoptions).
Title IV provides two revenue offsets for the bill: (1)
repeal of Code section 593 reserve method of accounting for bad
debts by thrift institutions and (2) revision of the income
forecast method of determining depreciation deductions.

Impact on personal privacy and paperwork

The revenue provisions of the bill (Titles I and IV) will
have little, if any, impact on personal privacy and little
impact on taxpayer paperwork. The adoption tax credit will
cause individual taxpayers to keep track of all eligible
adoption expenses for the credit.

B. Information Relating to Unfunded Mandates

This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995 (Public Law 104-4).
The Committee has determined that two of the revenue
provisions of the bill contain Federal mandates on the private
sector: (1) The provision relating to treatment of bad debt
deductions of thrift institutions (repeal of Internal Revenue
Code section 593); and (2) the provision to reform the income
forecast method of accounting. In general, the first provision
repeals a special rule regarding the treatment of bad debt
reserves by thrift institutions and conforms the treatment of
such reserves to the manner in which such reserves are required
to be treated by banks. The second provision makes several
changes to the income forecast method of determining
depreciation deductions. These provisions will increase the
Federal tax liabilities of certain taxpayers.
The cost required to comply with each mandate generally is
no greater than the revenue estimate for the provision.
Benefits from the provisions include improved administration of
the Federal income tax laws and a more accurate measurement of
gross income for Federal income tax purposes. The Committee
believes that the benefits of the provisions are greater than
the cost required to comply with the mandates.
The provision relating to bad debt reserves of thrift
institutions corrects a present-law provision that results in a
mismeasurement of economic income and provides thrift
institutions with a tax benefit not provided to similarly
situated depository institutions. The provision to reform the
income forecast method of accounting results in a better
matching between income and depreciation deductions with
respect to certain types of depreciable property.
These revenue-raising provisions are used to offset the
cost of providing a tax credit to individuals who adopt a
child. This tax credit furthers the social policy goal of
ensuring that families who desire to adopt a child have the
financial resources to do so. The revenue-raising provisions
are critical to achieving this goal.
The revenue provisions of the bill do not contain any
intergovernmental mandates.
The revenue-raising provisions of the bill affect
activities that are only engaged in by the private sector and,
thus, do not affect the competitive balance between State,
local, or tribal governments and the private sector. Because
the adoption tax credit and exclusion for employer-provided
adoption expenses provide a larger benefit in the case of
special needs adoptions, it may encourage more adoptions
through State or local agencies and thus affect the competitive
balance between State, local, or tribal governments and the
private sector.

VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

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 bill as reported by the Committee).